Wisconsin Considers Standard Deduction Increase, TPP Tax Reduction

Monday, a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. relief package advanced out of the Wisconsin Joint Committee on Finance and is expected to receive consideration by the full Senate and Assembly this week.

Assembly Bill 910 and companion bill Senate Bill 821 would reduce individual income taxes for low- and middle-income taxpayers by increasing the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. . In addition, this legislation would chip away at some of Wisconsin’s remaining tangible personal property (TPP) taxes by removing machinery, tools, and patterns assessed as the personal property of manufacturers from Wisconsin’s property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. base. Finally, this bill specifies circumstances under which some of the revenue from current and future budget surpluses, when not transferred to the budget stabilization fund, would be used to reduce the state’s general obligation debt.

Standard Deduction Increase

Wisconsin is among a handful of states with a distinctly progressive, sliding-scale standard deduction that phases out as income increases. To preserve its real value over time, Wisconsin’s standard deduction and its phaseout thresholds are adjusted annually for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. .

For Tax Year 2020, the maximum standard deduction is $11,050 for single filers and $20,470 for married couples filing jointly, but only a small number of taxpayers are eligible to claim the maximum amount. The deduction begins to phase out at $15,940 in Wisconsin adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” (AGI) for single filers and $23,000 for married couples and phases out completely for those with incomes above $108,023 and $126,499, respectively.

Under AB 910 and SB 821, Wisconsin’s standard deduction would maintain its current progressive sliding-scale structure but would permanently increase in value for all who are eligible to claim it. This legislation would also increase the standard deduction’s phaseout thresholds, meaning more taxpayers would be eligible to claim it.

The table below shows Wisconsin’s current standard deduction amounts and phaseout thresholds, as well as the proposed standard deduction amounts and phaseout thresholds under AB 910 / SB 821.

Wisconsin’s Standard Deduction Amounts and Phaseout Thresholds (Tax Year 2020, Current and Proposed)

Source: Wisconsin Legislative Fiscal Bureau.
	Maximum Standard Deduction	Deduction Begins to Phase Out	Deduction Phases Down to Zero
Single
Current	$11,050	$15,940	$108,024
Proposed	$12,510	$17,760	$120,361
Married Filing Jointly
Current	$20,470	$23,000	$126,500
Proposed	$23,170	$25,610	$144,670

According to the Wisconsin Legislative Fiscal Bureau, for taxpayers whose taxes would decrease under this bill, the average tax cut would be $106 per filer for a total individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. reduction of approximately $215 million in Tax Year 2020, and these tax reductions would be sustained annually thereafter.

TPP Tax Reduction

In addition to increasing the standard deduction, AB 910 and SB 821 would remove machinery, tools, and patterns assessed as the property of manufacturers from Wisconsin’s property tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . Under current law, machinery, tools, and patterns are generally exempt when assessed as the property of non-manufacturers but can be taxable when assessed as the property of manufacturers. As has been the case with other tangible items exempted from Wisconsin’s property tax over time, under this bill, the state would reimburse local taxing jurisdictions for the lost revenue, which the Wisconsin Legislative Fiscal Bureau estimates would amount to approximately $45 million annually.

Like many states, Wisconsin has reduced its reliance on TPP taxes over time. While the value of real property—including land, buildings, and fixtures—is a relatively good proxy for the value of local services received, tangible property is not, and should not be subject to local or state property taxes. By definition, tangible property is property that can be touched or moved, and levying taxes on TPP creates an incentive for affected businesses to relocate their assets to avoid the tax. TPP taxes are also complex to administer and comply with. While real property taxes are taxpayer-passive, with taxpayers receiving a tax bill from the government and then paying it, TPP taxes are taxpayer-active, requiring taxpayers to determine the depreciable value of their taxable property and calculate their own tax liability. TPP taxes are also nonneutral in that some industries, like manufacturers, tend to face higher TPP tax burdens than others due to the nature of their business.

By exempting additional classes of TPP from the property tax, this legislation would take another step in making Wisconsin’s property taxes less burdensome to businesses. State policymakers would do well to continue building on this progress in the future by exempting additional classes of TPP that remain taxable, such as boats and watercraft, office furniture and equipment, and others.

Reducing State Debt

In addition to increasing the standard deduction and reducing TPP taxes, this legislation prescribes circumstances under which a certain share of future budget surplus revenue would be used to reduce the state’s general obligation debt, issued to pay for roads and similar capital projects. For the ongoing biennium, AB 910/SB 821 proposes using $100 million of Wisconsin’s budget surplus (projected to exceed $620 million by June 30, 2021) to reduce the state’s debt.

Conclusion

When it comes to improving tax competitiveness, there is much work to be done in Wisconsin. Reducing reliance on TPP taxes would be a pro-growth improvement, and increasing the standard deduction would provide targeted tax relief to low- and middle-income earners. The proposed policy changes, while relatively modest, are consistent with the reform solutions set forth in our Wisconsin Tax Options: A Guide to Fair, Simple Pro-Growth Reform and would benefit families and job creators in the Badger State.

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