State Rep. Dale Kooyenga (R-Brookfield) recently unveiled his plan to overhaul the tax system in the State of Wisconsin. This will no doubt generate a lot of debate between the talking heads on both the left and the right, and somewhere in that process we’ll lose sight of what’s actually in the plan.
As a CPA, I have reviewed the entire plan and think there are several myths about the plan that will need to be dismissed.
Myth #1 – This is a “bold” plan
The talking heads on the right are already hailing this as a bold tax reform plan. I think that gives the plan far too much credit. The income tax rates are lowered, but by very small amounts. Changing depreciation rules and capital loss rules to mirror the Federal Government’s rules is something that many CPA’s have been calling for. Eliminating several business credits may upset the people who receive those credits and some lobbyists, but these are little used credits that about 1 percent of the taxpayers use. The plan does not touch the more widely used Homestead Credits and Earned Income Tax Credits.
The plan is only bold in the sense that it does take some courage to stick your head up and be willing to take some of the criticism the Representative is sure to get. So give the Representative some credit for coming up with a plan and presenting it.
Myth #2 – This is a tax break for the rich
The left is sure to argue that this tax proposal is a huge giveaway to the rich and I’m just not seeing it.
Any time you lower tax rates, those who pay the most taxes will get largest break in terms of absolute dollars. Let’s say you make $500,000 a year and we lower the tax rate by 1 percent. That person receives a tax cut of $5,000 whereas the person making $50,000 only gets $500. Somehow, we forget to note that if we had a flat 6 percent tax rate the same person making $500,000 would be paying $27,000 more in income taxes than the person making $50,000. Simply put, it’s hard to substantially cut your income taxes unless you are already paying a large amount of taxes.
While it will be argued that this is a huge tax break for the rich is lowering the top rate from 7.75 percent to 7.60 percent, something that’s going to cause a rich person to say, “Hey, I think I’ll relocate to Wisconsin?” To put this reduction into perspective this gives the rich person an additional $150 in tax savings for every additional $100,000 they earn.
Our income tax rate will still be higher than most of our neighboring states. Illinois has a top tax rate of 5 percent, which is a higher rate than the middle class is Wisconsin will face under this plan.
It should also be noted that almost every one of the tax increases passed by Gov. Doyle in his second term still stand, so rest assured the rich will be paying “their fair share.”
Myth #3 – This will simplify the tax code
I would say that this is half true. Changing the depreciation and capital loss rules to mirror the Federal rules does serve to simplify some things, especially for small business owners. The elimination of the Alternative Minimum Tax is helpful as well as very few Wisconsin residents actually pay this tax. That said, most taxpayers will not notice a real difference in the complexity of their tax return.
Overall, I think the plan is a good step in the right direction and I support it. However, I think much more needs to be done to make Wisconsin a true destination for business and investment.
Mike Bark is a certified public accountant at Edge Advisors LLC in West Allis.
