The budget bill increases taxes for low-income families in two ways. First, it cuts the state Earned Income Tax Credit (EITC) for families with two or more children. Second, it will gradually reduce the Homestead property tax credit by repealing the law that adjusts the size of the credit and the eligibility standards for inflation.

The tax increases for low-income families and individuals are all the more disappointing because the budget bill cuts taxes for corporations and wealthy individuals. A short fact sheet recently prepared by the Wisconsin Budget Project summarizes the various tax cuts and increases in the budget bill, as well as tax cuts approved in other legislation enacted this year. The cut in the state EITC is expected to raise taxes for low-wage working parents by $56 million over the next two years, to the detriment of about 152,000 working families each year. To put that in perspective, the number of affected households is roughly equivalent to the total number of families in Dane and Rock counties combined.

The EITC change hits families with three or more kids the hardest. A single mom who has three children and is making the minimum wage will lose $518 per year (21 percent of her current credit). A family with two or more children would lose up to $154 per year. (Families with one child won’t be affected.)

The EITC cut could have been avoided or at least prevented from getting considerably worse in the 2013-15 budget, when a reduction in the federal credit is scheduled to take effect. A June 2nd Wisconsin Budget Project Blog post outlines the alternatives that could have prevented or ameliorated the tax hike for low-wage workers.

The Homestead Credit provides targeted property tax relief for about 250,000 low-income households, including both owners and renters. One third of the credit recipients are 66 or older and 45 percent are over age 55. Until recently, it was the only major part of the state tax code that wasn’t annually adjusted for inflation. However, in 2009 the law was changed to make annual adjustments for inflation – resulting this year in the first increase in the maximum credit in 20 years, and the first increase in the income ceiling in about 10 years.

The Governor’s budget repeals the annual adjustments, which will cut the credits by $13.6 million in the 2011-13 biennium. The cuts will average about $12 per recipient in tax year 2011 and $42 the next year. Those amounts will grow steadily in future years.

Looking ahead, we urge the Legislature to restore indexing of the Homestead tax credit and to reverse the cuts to the EITC. In 2013, the federal EITC is scheduled to decrease, which will cause another cut in the state credit, magnifying the cut in the budget bill. To mitigate that second round of state tax increases for low-wage workers, Wisconsin policymakers should make the state EITC the same percentage of the federal credit that it was prior to the cuts in the budget bill.

Jon Peacock

Tomorrow—Way #25: Child Support Enforcement

About the series: “31 Ways in 31 Days” is a series of posts to the WCCF blog exploring the recently-passed biennial budget’s impact on children and families in Wisconsin. Each day in July, we are posting a description of one way the budget will affect kids and families, with an eye toward what should be done going forward to help improve outcomes and move us closer to the goal of making Wisconsin a place where every child has the opportunity to grow up, learn, and thrive in a safe, healthy, economically secure home and community.