Milwaukee Accountant | Call Edie Christian CPA
Wisconsin State income tax proposal could be very good for married couples
Gov. Scott Walker’s next budget to be unveiled in February could have a valentine for married couples.
In a budget request sent to the Republican governor this week, his Department of Revenue says the state should make the state income tax fairer for married couples, with savings options running from $63 million up to a maximum of a whopping $1 billion over two years.
The range of proposals to make marriage a little sweeter fit within one of Walker’s top goals: cutting the state income tax. But with the state’s budget picture uncertain, the governor isn’t letting on whether he’ll back a proposal that could add to the fiscal pressures.
“Agency requests are just the first step – each of them will be considered in the scope of the entire state budget,” Walker spokesman Cullen Werwie said.
The Revenue Department said that in the 2013-’15 state budget it wanted to lessen a so-called marriage penalty that next year is expected to affect 51% of the married taxpayers in Wisconsin who file joint income tax returns. Provisions like the state property tax credit mean that some married couples filing jointly pay more income tax than they would if they were single and filing taxes separately.
During his successful recall campaign this year and afterward, Walker has said he would like to pass a broad income tax cut. But he has studiously avoided saying how large he wants to make it or how he would like to see it applied.
The Revenue Department request provides Walker with a range of possibilities for doing that, though they would need to be included in the governor’s budget bill and approved by legislators before they could become law.
The higher taxes for some married couples are a result of a complicated mix of factors and can be harder to resolve than some taxpayers might expect, said Dale Knapp, research director for the Wisconsin Taxpayers Alliance.
A study this year by the alliance showed the size of the problem by looking at three hypothetical couples: an unmarried pair, a married couple and a separated married couple, who all make a combined $80,000 a year.
The combined taxes owed by the unmarried couple are $3,240. The married couple’s taxes are $3,706 and the separated couple’s taxes are $3,953.
The study said that gives happy couples a financial incentive to not marry and separated couples an incentive to divorce.
Knapp said factors in those higher taxes include certain tax credits that are lower for married couples than the combined tax credits for two single taxpayers. Another factor is that the tax brackets for married couples are not twice as large as the tax brackets for single taxpayers, meaning that couples can end up paying higher tax rates on their income once they combine it.
The state’s married couple credit, worth up to $480, was designed to even up the tax score, but it isn’t tied to inflation and so has been gradually losing its impact, Knapp said.
To fix that, the Revenue Department offered several possibilities, including:
Allowing the married couple credit to count against retirement income, which would save taxpayers and cost the state $63 million over two years.
Widen the income tax brackets for married couples, which would amount to $459 million over two years.
Double the standard deduction for married couples, worth $639 million over two years.
Double the standard deduction and widen the income tax brackets for married couples, worth nearly $1.1 billion over two years.
Reaction to the proposal was cautious.
Knapp said he would need more time to work through all the possible implications of the various fixes.
Jon Peacock, research director of the Wisconsin Council on Children and Families, said the idea was interesting and the goal of helping married couples was worthwhile. But he pointed out that eligibility standards for state benefits such as Medicaid also can effectively penalize couples who get married, not just the tax system.
He also noted that the tax cuts would have to be balanced out in the state’s budget and questioned whether that would impact social programs.
“If you’re offsetting it with cuts, what’s that going to mean for Wisconsin families?” Peacock said.