Trump Tax Plan’s $10 Billion Impact on State

Janesville Congressman Paul Ryan, speaker of the U.S. House, said this last week about the tax-reform package President Donald Trump and Republican leaders like him hope to pass by the end of the year:

“For fixing our broken tax code, what is our promise to you? More jobs, fairer taxes, and bigger paychecks for Americans, especially middle-class families, who bear the majority of the tax burden.”

Until the fine-print details of those tax-code changes are made public, predictions of how the package would help or hurt Wisconsin taxpayers are provisional at best.

But the Internal Revenue Service’s state-by-state summary of federal taxes paid in 2015 documents what’s potentially at stake for Wisconsin taxpayers in Washington’s tax-reform machinations.

In 2015, Wisconsin residents filed 2.84 million federal income taxes and reported total adjusted gross incomes of $174.43 billion. So, the average Wisconsin filer reported taxable income of about $61,400 that year. How might they be affected by these major changes in the tax-code package President Trump sent Ryan?:

Repeal tax deductions for state income taxes paid. In 2015, 801,740 Wisconsin taxpayers – or 28 percent of all taxpayers – claimed deductions for state income taxes that totaled $6.22 billion, the IRS reported. Taxpayers with adjusted gross incomes of more than $100,000 claimed $4.85 billion for state incomes taxes they paid, or 77 percent of that total.

Repeal tax deduction for property taxes paid. In 2015, 809,640 Wisconsin taxpayers – also 28 percent of the total – reported paying $3.78 billion in property taxes. That’s a per-taxpayer average of $4,673 in property taxes paid, although that average is distorted by the total – $2 billion – claimed by taxpayers with adjusted gross incomes of more than $100,000.

Wisconsin has the 13th highest per-capita property tax in the nation, according to the Lincoln Institute of Land Policy.

End the alternative minimum tax (AMT). This was enacted to ensure that the wealthiest pay at least some federal taxes. In 2015, 63,380 taxpayers – 2 percent of all Wisconsin taxpayers – reported paying $370.5 million in AMT. Their average AMT payment was $5,846.

Almost doubling the individual standard deduction, raising it from $6,350 to $12,000, and family standard deduction, increasing it from $12,700 to $24,000.

What would these changes mean for Wisconsin taxpayers?

Andrew Reschovsky, an emeritus UW professor of public affairs and economics who is now a research fellow at the Lincoln Institute, offered some theories:

“Doubling of the standard deduction will be combined with the elimination of the personal exemptions, so the impact of the doubling of the standard deduction will be smaller than expected. However, many taxpayers with modest incomes would become non-itemizers — i.e. they would take the standard deduction, as a result of the loss of the state and local tax deduction.

“The average itemized deduction for taxpayers with incomes in the $100,000 to $200,000 range is $22,920, with more than half of that total attributable to the state and local tax deductions. This suggests that many Wisconsin taxpayers with incomes in that range will switch to being non-itemizers, and thus benefit in terms of tax saving from the combination of the standard deduction change and the elimination of the state and local tax deduction.

“Taxpayers with incomes above $200,000 are likely to remain itemizers, but end up with smaller total itemized deductions and an increase in their federal tax liability – depending on what happens to [tax] rates.

“Wisconsin taxpayers who had been subject to the AMT won’t face higher taxes because of the loss of the state and local deduction.

Reschosky also warned of another consequence: Losing the deduction for property taxes could mean that fewer local referendums – to support public schools, hire more police officers or borrow money – will pass. Economists call it the “tax-price of public services,” he added.

His example: “In a world without state and local tax deductions, a $10 increase in property taxes per capita will cost the taxpayer an extra $10… [But] if that extra $10 in property taxes per capita is deductible (and assuming that federal taxpayer faces a federal marginal tax rate of 30 percent), the extra $3 will reduce the taxpayers’ federal tax bill by $3.”

Reschovsky said that could lead to major changes: “Some referenda that would have passed will now go down to defeat, and candidates who favor additional public services will be defeated by candidates emphasizing lower taxes…Opinions will vary about whether these are desirable or undesirable consequences.”

Steven Walters is a senior producer with the nonprofit public affairs channel WisconsinEye. Contact him at stevenscwalters@gmail.com