State Families May Lose $31 Million in Tax Refunds

Working families with low incomes could get an economic boost from a tax cut included in the federal COVID-19 package — but in order for them to get the full benefit, state lawmakers need to take action to tweak Wisconsin’s tax code. By not acting, the Legislature will deny parents $31 million dollars to protect their families from the impacts of the pandemic.

At the end of 2020, Congress passed legislation aimed at lessening the economic harm of the pandemic. The package included an extension of unemployment benefits, additional direct stimulus payments, rent assistance, and other provisions to help hard-hit families make ends meet. The package also temporarily modified the federal Earned Income Tax Credit, to avoid reducing tax refunds for families whose incomes decreased in 2020.

The Earned Income Tax Credit is a tax cut that acts as an efficient means of letting low-income families keep more of what they have earned. The EITC helps parents afford the car repairs they need to get to work, pay for their children’s school supplies, catch up on utility bills, and pay for other costs important to family functioning. The EITC also partly counteracts the effects of racial wage discrimination faced by workers of color in the form of lower wages for comparable work to that of white workers.

The federal COVID-19 package allows parents to choose between using their 2019 and their 2020 incomes when calculating their 2020 federal EITC amount. Parents can use whichever year’s income results in a larger tax credit. Without this change, low-income working parents who earned less in 2020 because of the pandemic might get smaller tax refunds than they otherwise would. (As a way of helping make work pay, the EITC amount increases as income increases, up to a point.)

Wisconsin tax filers can claim a state version of the EITC. In other years, working parents in Wisconsin simply calculated their state EITC as a share of the federal credit. Unlike the federal approach, Wisconsin legislators have not changed the tax code to allow families the possibility of using either their 2019 income or their 2020 income to calculate the state credit amount. Instead, the state is requiring families to use their 2020 income when calculating their state EITC amount.

Changing Wisconsin’s state EITC to be consistent with the federal approach of allowing either 2019 or 2020 income to be used requires the Legislature to act. Governor Tony Evers’ administration has advocated for bringing the state EITC in line with the federal credit, and helping low-income families make ends meet. But it is up to the Wisconsin Legislature to amend the tax code in a way that would allow this to happen. If the legislature does not act, working families will miss out on $31 million in tax refunds, according to the Wisconsin Department of Revenue.

A bill has been put forth that would bring Wisconsin’s EITC into line with the federal credit, but it’s not clear if the bill will get the Republican support it needs to pass the legislature. If not, Wisconsin working families with low incomes will have $31 million less in their pockets to help get through the pandemic.