Governor Tony Evers and the Republicans in the state legislature have shown how they have highlighted tax cuts in the Wisconsin budget for 2021-23. Even if the state income tax rate falls, workers will not automatically take home an increase in their wages. That’s because the governor used his partial veto to remove the budget language that instructed the Wisconsin Treasury Department to update the tax source tables immediately.
“This is the strangest thing I’ve ever seen. I have no idea why he did this,” said John Witte, a University of Wisconsin-Madison professor emeritus who specializes in tax and fiscal policy.
Withholding tax tables are used to estimate the amount of income tax an employee is likely to owe the state. A paper prepared by the Legislative Fiscal Bureau states: “The income tax withholding tables were last updated on April 1, 2014. The currently valid tables are therefore based on the tax rate and the tax class structure that applied to the 2014 tax year. ”
Income taxes in Wisconsin have been cut several times since 2014, and the changes in 2021 lowered tax rates in the third tier from 6.27% to 5.3%, which is an estimated $ 2.36 billion for taxpayers over the next two years will save. The third tier applies to wages between $ 23,930 and $ 263,480 for individuals, which means that most of the tax savings will go to wealthy earners.
The fact that the withholding tax tables are not updated means people are paying more tax than they need to, but that money is what they get back when they file their income tax returns. Analysis by the Legislative Fiscal Bureau provided a detailed example of what this might look like.
For an individual with taxable income of $ 24,000 in tax year 2021, all income would be taxed within the first two income tax brackets under applicable law. However, according to the current withholding tax tables, part of this individual’s income would be subject to income tax deduction in accordance with the third class of income tax. In addition, the income tax rates of the lower two groups according to the withholding tax tables (4.0% and 5.84%) are higher than the rates under applicable law (3.54% and 4.65%). As the state withholding tax is based on the individual income tax rules applicable for the 2014 tax year, the withholding tax amounts are generally higher than if the withholding tax is based on the applicable legislation.
In his veto message, Evers indicated that he would like to keep this money in case the state has to spend it elsewhere.
“I refuse to require the Treasury Department to make these withholding tax adjustments at a cost of about $ 700 million while other critical priorities have not been adequately funded by lawmakers. This veto does not increase anyone’s tax liability compared to who what the legislature has decided, ”wrote Evers.
When income taxes are withheld and paid to the state year-round, that money is used to finance general business operations. The Fiscal Bureau wrote, “The main disadvantage of adjusting the withholding tax tables is the significant one-time charge to the general government fund. It should be noted that without other changes to the tax law, this one-time charge will continue to increase each year without other changes to the tax law as the tables will not be adjusted.”
Witte said there is speculation that Evers vetoed the change in withholding tax tables as the governor hopes the Democrats will take control of the legislature and lift the tax cuts in the 2022 elections. If you didn’t change the withholding tax tables, most taxpayers would not notice a difference, they say.
“If he changes the tables, the tax cuts would be permanent,” said Witte.
“I can definitely suppress that,” said Peter Barca, Secretary of the Treasury. “The governor has no intention of reversing these tax cuts.”
Barca said it was no surprise to him that Evers vetoed the provision.
“Almost any governor would have vetoed it. We already have the power to do this (change the withholding tax tables),” said Barca.
The Legislative Fiscal Bureau wrote what the law of the state prescribes: “The Department (of Revenue) is required ‘from time to time’ to adjust these withholding tax tables to reflect legal changes in individual income tax rates and classes.”
The seven years since the last update show a flexible formulation “from time to time”.
Barca said Evers ‘objection had more to do with lawmakers’ October 1 deadline for the changes to be implemented. He said it was common for governors to veto legislative schedules.
“Don’t tell us what to do and when,” said Barca.
Barca expect the Treasury Department to adjust the tax withholding tables over the next year.
“We check it out, people get the (tax) relief no matter when we do it,” he said.
According to Barca, a middle-income family of four with a household income of around $ 110,000 will see a tax cut of $ 683 in 2021 due to the tax cuts. Adjusting the withholding tax tables would earn them an additional $ 57 per month as take-home salary.
Employees can change their tax withholding at any time by adjusting their W-4 statement and increasing or decreasing their tax withholding as needed. Barca noted that most employees prefer to overpay and get a tax refund rather than underpay and owe money at tax time.
“Just in general, if you got $ 100 back instead of owing $ 100, people would rather get the $ 100 back,” he said.
Witte agreed with this opinion, even if he thinks it’s a bad idea.
“It’s stupid to pay more taxes and get it back in the end,” he said. “It’s the wrong strategy, but the vast majority of people in the United States are doing it and relying on these refunds to make big purchases.”