Wisconsin Legislature Passes Major State Income Tax Reform


 Tom Larson  |    July 03, 2013
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As part of the 2013-15 state budget, the Wisconsin legislature passed a major tax reform package that includes one of the biggest income tax cuts in our state’s history. The package includes approximately $651 million in income tax cuts over two years, a reduction in the number of income tax brackets from five to four, the elimination of numerous tax credits, and the removal of inconsistencies between state and federal tax codes. These changes are intended to reduce the tax burden for Wisconsinites, simplify Wisconsin’s tax code and make Wisconsin more attractive for job growth and economic development. This article provides a summary of the major provisions in the tax reform package and the changes that will directly impact real estate. 

Background

In 1911, Wisconsin became the first state in the country to create a state income tax. Since that time, Wisconsin’s reliance on income tax has grown and now makes up 24 percent of the state and local taxes paid by Wisconsin residents. Wisconsin collects over $6 billion in income tax revenues each year, with the average income tax liability averaging $3,189. Revenues from the state income tax go into the state’s general fund, which is used primarily to fund four main programs — school aids, the UW system, corrections and medical assistance. 

Over the years, Wisconsin’s income tax code has grown more complex and confusing, with five different tax brackets, over 20 different income tax credits, and numerous differences from the federal tax code. In comparison to other states with income taxes, Wisconsin is often regarded as a “high tax” state, ranking 13th in income taxes. (Wisconsin also ranks 9th in property taxes and 35th in sales taxes.) Many believe that high tax rankings hurt Wisconsin’s ability to attract jobs and economic development opportunities to the state. 

As part of his 2013-15 state budget, Gov. Walker proposed cutting state income taxes by $343 million through, among other things, lowering the income tax rate in Wisconsin’s three lowest tax brackets. However, Rep. Dale Kooyenga (R-Brookfield) and other members of the legislature’s Joint Finance Committee want to cut income taxes even further and eventually pass an income tax reform package that cut taxes by $651 million, almost doubling the tax cuts proposed by Gov. Walker. 

Tax reform package

The tax reform proposal includes the following changes to Wisconsin’s income tax code and several changes to the law affecting property taxes and fees: 

Income tax brackets and rates: Reduces the number of income tax brackets from five to four and reduces the tax rate in each of the tax brackets. 

Depreciation: Make Wisconsin’s depreciation laws consistent with federal law. While the federal tax code and Wisconsin tax code generally treat the depreciation of commercial property the same, the federal code currently allows bonus depreciation of 50 percent of qualified leasehold improvements in the year the improvements are placed into service. Note: the federal bonus depreciation is set to expire on January 1, 2014.

Capital losses: Make Wisconsin’s treatment of capital losses consistent with federal law. Wisconsin currently limits the amount of capital losses (the losses that are realized when real estate/asset is sold) that may be used to offset ordinary income to $500 annually. Federal law allows up to $3000 in capital losses to be deducted annually, and allows any unused losses to be carried forward until used up.
Historic preservation tax credits: Increases Wisconsin’s tax credit for historic rehabilitation credits from 5 to 10 percent of the improvements made to rehabilitate certified historic structures. 

Appeal of municipal fees: Allows property owners to appeal the reasonableness of local fees to the Tax Appeals Commission and shifts the burden of proof to the municipality to show that the fees are reasonable. Municipalities and counties are allowed to charge fees for a variety of services, and the cost of such fees may not exceed the actual cost to provide those services. Currently, any appeal regarding such fees must be made to the municipality, where the fees are presumed to be reasonable. Thirty days after the appeal to the municipality, the property owner may appeal to circuit court. 

Tax credits: Eliminates over 15 income tax credits for items such as dairy manufacturing facility investment, meat processing facility investment, film production services and investment, super research and development, post-secondary education, dairy and livestock farm investment, Internet equipment, relocated business, research facilities and community development finance.
Estate taxes: Sunset Wisconsin’s estate tax statutes for deaths occurring after December 31, 2012. 

What next? 

The tax reform package, along with other provisions in the state budget, recently passed both houses of the state legislature and was signed into law by Gov. Walker in late June.

For more information on the tax reform package and the state budget, please contact Tom Larson at the WRA at tlarson@wra.org or at 608-240-8254.

Tom Larson is Vice President of Legal and Public Affairs for the WRA.

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