Preliminary figures from the nonpartisan Legislative Fiscal Bureau on Wednesday show that both Republican and Democratic plans to cut taxes for the middle class would largely rely on tapping the state's budget reserves.
The divergent tax cut plans — neither of which may become law in their current forms — are at the center of the latest policy spat in Wisconsin's new divided government.
Democrats and Republicans agree that a tax cut for middle class residents would be nice. They disagree, however, on how to pay for it. Republicans want to fund the cut entirely with the state's budget reserves. Democrats say that route is not sustainable and want to partially fund the cut by raising taxes on some manufacturers.
According to the LFB, which is set to release an analysis of the plans Thursday, the Democratic proposal would also rely on substantial amounts of budget reserve money.
The current Democratic plan would draw $348.2 million from budget reserves over its first two years. The Republican plan would draw $495.6 million from that same pot of money over the same period, a difference of $147.4 million, according to the LFB's preliminary analysis.
Though both parties speak of finding common ground on the issue, lawmakers on the right and the left doubled down on their priorities during a legislative hearing Tuesday. They are scheduled to debate the measures again during a Joint Finance Committee meeting Thursday.
The middle-class tax cut is a promise from Gov. Tony Evers' campaign. It is one he has maintained must be funded in a sustainable, long-term way. The Republican plan, he and other Democrats argue, does not do that.
Evers has signaled he would veto the current Republican plan if it is sent to his desk.
The governor supports a Democratic bill that cuts taxes for middle class workers but funds it, in part, by rolling back the state's Manufacturing and Agriculture Tax Credit, a Republican creation that Democrats have been trying to curtail for years.
"More than half of the governor's plan is funded by capping a tax credit for millionaires," said Evers' spokeswoman Melissa Baldauff on Wednesday. "The governor's plan to provide responsible tax relief for hard-working families will be included — and funded —in his budget."
Assembly Speaker Robin Vos, R-Burlington, said Tuesday that rolling back that tax credit is a nonstarter.
"If (Evers) is a man of his word, we're going to send him a tax cut proposal utilizing what he asked to have as the criteria. There is absolutely no need for us to raise taxes on anybody," Vos said.
Peter Barca, Evers' secretary-designee of the Department of Revenue, said Tuesday that the administration is still open to finding a compromise.
"Really, we're not that far off in terms of who it is we're seeking to help. Of course we believe the Evers plan is a little more generous ... but I think that's reconcilable," Barca said. "If they come forward with a plan that would make it sustainable, I know the governor would be open minded enough to consider that as long as it's not on the backs of the middle class."
So what's the rub and what could happen from here? Here are some questions and answers.
What is the Republicans' plan?
The Republican proposal would cut individual income taxes by using a budget surplus to expand the maximum standard deduction by 20.6 percent for single people making less than $127,000 and for joint filers making less than $155,000. Their bill would fund the tax cut solely with the state's reserve money. As of June 30, the state's primary spending account had a positive balance of $588.5 million, according to the nonpartisan LFB. That surplus is projected to grow to $691.5 million by the end of this fiscal year, based on cash accounting.
What is the Democrats' plan?
The Democrats' plan also cuts taxes for middle-class earners by 10 percent. They do this by creating a new individual income tax credit for individuals beginning in 2019. Their plan ties the creation of that credit to a decrease in the state's Manufacturing and Agriculture tax credit for certain manufacturers. That credit currently shields manufacturers and farmers from paying state income tax. Republicans say it has been a tremendous asset in creating jobs and attracting new companies to the state. Democrats largely deride it as an expensive benefit for the state's richest and argue that it does not have enough accountability mechanisms to ensure that those who claim it are actually creating or sustaining jobs.
The current Democratic plan caps the amount of income for which manufacturers claim the credit at $300,000 (there is no cap in its current form) and further limits the credit for partnerships and limited liability corporations. It does not change the credit for farmers. Their plan would also expand the state's Earned Income Tax Credit for low income individuals.
What is the key point of disagreement?
The main point of disagreement between Democrats and Republicans is how their respective plans would be funded.
Republicans want to tap into budget reserves to fully fund the tax credit for the next two years. Democrats want funding for their plan to be tied to narrowing the Manufacturing and Agriculture Tax Credit, which would effectively raise taxes on some manufacturers and redistribute that money to pay for the individual income tax cut. Democrats argue that relying on budget reserves to fund the whole individual income tax cut is irresponsible and argue that reducing a tax credit to pay for a new one is a more sustainable route.
Republicans say that effectively raising taxes on some manufacturers to reduce taxes for others is unnecessary and a deal breaker. They argue that there are enough budget reserves to both cut taxes for the middle class and maintain a low tax burden on all manufacturers and farmers.
How much would each plan actually cost?
The cost of the tax credit under both plans is calculated over a two-year period because the state budgets in two-year chunks.
According to preliminary figures from the LFB on Wednesday, the Republican plan would cost the state $152.1 million in the first year it would take effect and $343.5 million in its second year.
Over a two-year period their plan would cost the state a total of $495.6 million. If Republicans got their way, all of that money would be taken out of the state's reserves.
The Democrats' plan would cost the state $144.4 million in its first year and $203.9 million in its second year, according to a preliminary analysis by the LFB. Over a two year period the Democratic plan would cost the state $348.2 million, which would likely come from the state's budget reserves, just like the GOP plan.
Overall, the approximate cost difference between the two plans is $147.4 million in reserve money. Either way, the state would tap its reserves to pay for the cut, it's just a matter of how much and if another state tax credit is altered in the process.
Do we really have a reserve surplus, though?
It depends on what kind of accounting method you use. The state generally uses a method called "cash accounting" rather than the type of accounting used by publicly traded companies. Under cash accounting, the state has a substantial surplus, which means there is money available to be spent.
If you go by the accounting method used by public companies, called GAAP (generally accepted accounting principles), the state has a longstanding deficit.
According to the Wisconsin Policy Forum, under "cash accounting," state expenses are typically not counted until the state actually makes a payment on that purchase. The state constitution requires each two-year budget to be balanced under cash accounting. According to this method, the state had a surplus of $588.5 million at the end of the 2018 fiscal year.
Under the second method, GAAP: financial commitments are recorded when the state makes them, even if the payment is not made until later. Using this approach, the state's primary fund has run a deficit every year going back to 1990, according to the Wisconsin Policy Forum.
What's the next step in this fight?
Lawmakers are scheduled to discuss both plans Thursday at 10 a.m. at a Joint Finance Committee meeting. The committee must approve a plan before it advances to the Assembly and Senate floors. Then both chambers must approve a plan before it would be sent to Gov. Evers' desk. If he vetoes the bill, the Legislature could override his veto only if some Democrats join Republicans in supporting their plan. Wisconsin is one of 36 states that requires a two-thirds vote from both of its legislative chambers to override a veto.