State Budget and Other Business Issues Analysis
Last week in the Capitol we saw the passage of legislation increasing corporate income taxes by more than $200 million, and the introduction of the State Budget Bill that includes more than $1 billion in personal income and business tax hikes.
The tax increases will be used to fund an overall spending increase of more than 10 percent over the previous two-year biennium.
In addition, the bill contains numerous policy proposals that will have a significant impact on Wisconsin business, economic growth, and future job creation. The Legislature is also moving swiftly to enact a series of separate bills that will increase and index the minimum wage; place a priority lien against an employer’s assets equal to the number of employees, multiplied by $10,950; and mandate an additional $100 million in health insurance coverages for fully insured health plans.
On a more positive note, the business community has developed a set of proposals and ideas designed to position Wisconsin to lead the way out of the current recession. The Moving Wisconsin Forward Plan is a vision for economic renewal which, if adopted, could set the stage for a prosperous future for our families and our communities. Some of the recommendations have been incorporated into the Governor’s Budget including: tax credits for research and development; tax credits for venture capital; a capital gains exclusion for investment in Wisconsin companies; and reforming and consolidating various economic development programs and credits. Most of these credits take effect in 2012 and, therefore, do not have a fiscal effect in this biennium. The two credits that do become effective in 2011 will reduce taxes on targeted investments by $12 million. Unfortunately, the benefits appear to be more than offset by the more than $1 billion in higher taxes on business and investors that take effect as early as tax year 2009.
A complete outline of the current business related legislative initiatives is provided below. We welcome your comments and encourage you to express your views on these proposals with your legislators.
Wisconsin “Stimulus Package” – SB 62
The Wisconsin “Stimulus Package” was introduced on February 16 and passed both houses of the legislature without a public hearing, and was signed into law by Governor Doyle on February 19. The bill includes the following tax provisions:
- Combined Reporting
Wisconsin law currently uses separate entity reporting, and imposes corporate franchise or income taxes on each separate corporation doing business in Wisconsin. SB 62 imposes combined tax reporting, which requires that two or more related entities engaged in business inside and outside of Wisconsin calculate their tax burden as a single unit under the apportionment formula. ($215 million tax increase 2009-2011)
- Streamlined Sales and Use Tax Agreement
Wisconsin’s Sales and Use Tax Code generally taxes tangible personal property (unless exempt) and services only if listed. SB 62 makes Wisconsin a member of the Streamlined Sales and Use Tax Agreement, adopting common definitions for various products and services, and allowing Wisconsin to collect tax on certain internet sales. SB 62 would also tax the custom software determined to be exempt in DOR v. Menasha Corp. ($70.7 million tax increase)
- Angel Investor and Early Seed Credits
Wisconsin has an angel investor credit program which provides refundable tax credits for venture investors and start-up companies. SB 62 would increase the angel credit cap, per business, from $4 million to $8 million, and increase total funding for both programs by $25 million. ($7 million tax decrease in the 2009-2011 biennium)
- Hospital Assessment
The bill established an assessment on the gross receipts of Wisconsin hospitals. It is likely to be imposed at the rate of 1.4 percent of gross patient revenues. Two-thirds of the new money will be used to leverage federal Medicaid reimbursement to increase hospital income from this program sufficiently to more than offset the assessment. ($649 million tax increase for 2009-2011)
Biennial State Budget Bill – AB 75
The Governor’s Biennial State Budget Bill was introduced on February 17. It will be reviewed and revised by the Legislature over the next four months, and is expected to pass and be signed into law before the close of the current biennium on June 30, 2009. As introduced by the Governor, the Budget Bill contains the following provisions (fiscal effects are biennial numbers unless otherwise noted):
To view the the tax chart, click here (pdf file).
- Capital Gains Taxes
Current law excludes 60 percent of a capital gain from state income taxes. AB 75 would reduce the deduction to 40 percent. ($180.6 million tax increase)
- New Income Tax Bracket
Under current law, the top individual income tax bracket is 6.75 percent. AB 75 would create a new top bracket of 7.75 percent for individuals earning over $225,000 and joint filers over $300,000. ($318.0 million tax increase)
- Throwback Sales for Corporate Income Taxes
Current law taxes “throwback sales”, that is sales shipped from a taxable state to a non-taxable state that are given nexus in Wisconsin, at 50 percent of the normal tax rate. AB 75 would increase taxes on throwback sales to 100 percent of the normal rate. ($95.2 million tax increase)
- Decoupling IRC Domestic Production Activities
Current law codifies a federal Internal Revenue Code deduction for qualified domestic production activities. AB 75 would decouple Wisconsin from the IRC deduction for qualified production activities. ($71.1 million tax increase)
- Pass-Through Entities
Under current law, some non-resident pass-through entities are not required to make quarterly payments. AB 75 would require quarterly payments. ($38.5 million tax increase)
- Sales Tax on Transactions between Related Entities
Current law applies the sales tax to some transactions between related entities. AB 75 would specify that all transactions between affiliated entities are treated as part of a combined group will be subject to sales tax. ($40.8 million tax increase)
- Gross Receipts Tax on Oil Companies
AB 75 creates a new 3 percent tax on the gross receipts tax of oil companies, and prohibits oil companies from passing the costs of the tax through to customers. ($271.7 million tax increase)
- Cigarette Tax
Current law taxes cigarettes at a rate of $1.77 per pack. AB 75 would increase the tax by $0.75 per pack. ($290 million tax increase)
- R&D Tax Credit
AB 75 creates a new corporate income tax credit equal to the amount of qualified research and development expenses for businesses that increase such spending by more than 125 percent over their previous three-year spending average. The new credit would be available January 1, 2011. ($5 million tax decrease)
- IRC Updates
AB 75 adopts some the the myriad changes to the federal Internal Revenue Code made in the 2008 federal budget. ($46.1 million tax decrease)
- Biotech Sales Tax Exemption
AB 75 would create a new sales tax exemption for machinery and equipment purchased for biotechnology research. ($5 million tax decrease)
- Tax Appeals Commission Deference
The Supreme Court ruled in DOR v. Menasha Corp. that the Tax Appeals Commission was given controlling weight deference in any decision it makes regarding interpretations of tax statutes or DOR rules. AB 75 would give controlling weight deference to DOR in interpreting its own rules.
Under current law, school districts cannot be forced to binding arbitration to resolve a contract dispute if the district made a qualified economic offer (QEO) of at least a 3.8 percent increase in total salary and benefits. AB 75 would eliminate the QEO requirement.
- School Revenue Limit Exemptions
Current law limits increases in school district property tax levies to a per pupil amount on an annual basis. AB 75 would create exemptions to the limits for school safety expenditures, costs of hiring school nurses and transportation costs above the statewide average.
- Property Tax Caps
Current law caps municipal and county property tax increases at 2 percent, or the gain in value from net new construction. AB 75 would increase the caps to 3 percent or gain in value from new construction.
To view the tax chart, click here (pdf file).
Business Liability Issues
- Jury Instructions
The Budget Bill (AB 75) contains a provision requiring the court in all civil actions to explain to the jury the legal conclusions that will follow from the jury’s findings, and permits counsel for either party to comment on the court’s explanation. This requirement is likely to influence jurys’ findings in order to assure that plaintiffs receive some compensation for their claims.
- Joint and Several Liability
AB 75 contains a provision that will allow a plaintiff to recover all of their damages in a tort claim from a defendant who bore only one percent of the liability for the injury, so long as the person recovering has less liability for the injury. Under current law, a defendant must be at least 51 percent liable for an injury before becoming jointly and severally liable for the other defendants’ liability.
- Domestic Partner Wrongful Death
AB 75 allows a domestic partner to file an action for wrongful death, and to discharge claims of the estate in settling the domestic partner’s wrongful death claims.
- Prevailing Wage -- Private Projects
AB 75 contains a provision extending Wisconsin’s prevailing wage laws to private construction projects receiving public financing.
- Scope of Prevailing Wage Coverage
AB 75 contains a provision extending Wisconsin’s prevailing wage law to any project in excess of $2,000, and eliminating the current multiplier that automatically increases that threshold annually. Under current law, that threshold is $30,000 for a single public works project, and $150,000 for a public project involving multiple trades.
- Discrimination Complaints
AB 75 contains a provision making appeal of no probable cause findings in Wisconsin Fair Employment Act claims subject to appeal directly to state circuit courts, bypassing the Labor and Industry Review Commission as required under current law.
- Domestic Partner Status
AB 75 contains provisions creating a legal status for domestic partners, creating employment rights for domestic partners to be considered as dependents for purposes of distributing worker’s compensation death benefits, and providing for domestic partners eligibility for leave under the Wisconsin Family and Medical Leave Act.
- Unemployment Insurance
AB 75 redirects $1.45 million from the Wisconsin Unemployment Insurance Trust Fund to fund reemployment services to unemployment insurance recipients. The Wisconsin Unemployment Fund is currently insolvent and borrowing from the Federal Government to pay benefits.
- Training Funding Earmarks
AB 75 designates $2.6 million in employment training to Wisconsin Labor Unions.
- Increased Garbage Taxes
The budget proposes to raise the tonnage tax on garbage from its current level of $5.90 per ton to $10.30 per ton. This proposal is expected to increase garbage taxes by at least $30 million per year, or $60 million over the budget cycle.
- Air Emission Fee Increase
The Governor has proposed increasing annual air emission fees for small businesses that are not required to get an air permit under federal law. Rather than paying $35.71 per ton, businesses would instead pay a flat fee to $775 per year. Businesses that control emissions to avoid federal permitting requirements would pay $3,475. The fiscal impact of the fee increases is unknown.
- New Fees on Large Water Users
The budget proposes a series of new fees applicable to large water users based upon a facility’s capacity to pump large volumes of water, and specifically targeting large water withdrawals in the Great Lakes Basin. The proposed fees would generate just over $1 million.
- Environmental Impact Fees for Vehicles
The Budget Bill proposes to make permanent the $9 per vehicle environmental fee assessed when a new or used vehicle is titled. The fee, which generates an estimated $12.1 million per year, was scheduled to expire on December 31, 2009.
- New Ballast Water Discharge Permits
The Governor proposed a new environmental permit program to regulate the discharge of ballast water from ships 79-feet or larger. A general permit fee of $1,200, plus an annual $345 fee, is expected to generate an estimated $450,000 over the course of the budget.
- Purchase of Development Rights
The Governor has proposed a new program to borrow $12 million to purchase farmland and permanently protect it from development. The funding would be given as grants to environmental groups and local governments to purchase conservation easements in perpetuity.
Other Business Legislation
A number of other bills that will have a significant impact on business are moving rapidly through the Legislature. For example, a bill that will increase the minimum wage by more than $1 per hour, index future wage hikes to inflation, and allow local governments to enact higher minimum wages have already passed the State Senate. Other business-related legislation include:
- Minimum Wage
Senate Bill 1/AB 41 raises the Wisconsin Minimum Wage to $7.60 per hour and indexes the rate to the Consumer Price Index on September 1st of every year. In addition, the bill repeals the state preemption of local living wage ordinances in Wisconsin. The Wisconsin State minimum wage is currently scheduled to be raised to the Federal Minimum Wage rate of $6.55 per hour in July, 2009. The bill passed the Senate on February 10 on a party line vote.
- Wage Lien
Senate Bill 2/AB 40 provides a first lien priority for wage claim liens up to $10,950, over the prior liens of lenders. Current Wisconsin law provides for a wage lien priority capped at $3,000 per worker. The bill passed the Senate on February 10 on a party line vote.
- Veterans Leave
Senate Bill 11 creates a mandated day of paid leave from work for all Wisconsin veterans on Veterans Day, or on the first Monday following Veterans Day where that day falls on a Saturday.
- Compensatory and Punitive Damages
Senate Bill 20/Assembly Bill 31 creates unlimited compensatory and punitive damages for claims of workplace discrimination under the Wisconsin Fair Employment Act. Employers would still need to defend themselves against a discrimination claim before the Department of Workforce Development’s Equal Rights Division on the merits of a claim, but would then have to go before a Wisconsin State circuit court to determine the damages sustained.
- Criminal Penalties for Employment Discrimination
Assembly Bill 22 creates the penalty of a Class I felony to be applied to employers who violate the fair employment rights of job applicants or employees on the basis of the applicant or employee’s arrest or conviction record.
- Computer Monitoring
Assembly Bill 30 creates restrictions on employers’ ability to monitor their employees’ computer usage, and prohibits employers from monitoring employees using work computers in union organizing activities in the workplace.
- Autism Healthcare Insurance Mandate
Senate Bill 3 (SB 3) mandates all fully-insured employers and individual plans to pay for the cost of treating autism, Asperger’s Syndrome, and “pervasive developmental disorder not otherwise specified.” It would mandate coverage for treatment by a psychiatrist, psychologist, social worker licensed to practice psychology, a paraprofessional practicing under the supervision of one of the aforementioned providers, a professional working under the supervision of an outpatient mental health clinic, a speech-language pathologist, or an occupational therapist. SB 3 and AB 15, as introduced, will raise government employee healthcare costs by up to $10.3 million annually. Using the Group Insurance Board’s consulting actuary’s conclusions, private-sector employee healthcare costs will increase by up to $87 million annually. The bill has been voted out of committee and is available for scheduling.
Issue Paper (March 31, 2009):
Budget Bill -- New Higher Top Income Tax Bracket
Assembly Bill 75 (AB 75), Governor Doyle’s biennial budget proposal, would increase the top individual income tax bracket from 6.75 percent to 7.75 percent for married couples earning over $300,000 and single taxpayers earning over $225,000.
This would be the first increase in the income tax rate since 1971. In efforts to deal with Wisconsin’s historically high taxes, rates have actually been reduced several times since they were last increased.
While this provision would increase taxes on many high earning individual taxpayers, it would also be a significant tax increase for many small businesses. Businesses organized as pass-through entities – Sub. S-Corps, LLCs, sole proprietorships, etc. – pay the individual income tax, not the corporate income tax. Nationally, Sub. S-Corps now outnumber C-Corporations by more than 3 to 2, meaning many small and medium sized businesses will see tax increases.
$175.6 million in FY10 and $136.2 million in FY11. A total tax increase of $311.8 million.
Governor Doyle has included this provision in his biennial budget bill. It awaits action by the Joint Committee on Finance and the full legislature.
WMC opposes this tax increase.
- Wisconsin already has the 11th highest total state and local tax burden in the nation. This tax increase alone would likely push Wisconsin back into the top ten highest taxed states. In a state with such a high tax burden, public debate should be focused on tax cuts, not tax increases.
- AB 75 would make Wisconsin’s top rate the 11th highest of the 50 states.
- Taxing “high earners” taxes income that becomes capital – capital that can no longer be reinvested in Wisconsin’s economy. This recession, with capital markets as tight as they have been in decades, is the worst possible time to tax capital.
- The combination of two tax increases in the budget bill – lowering the exclusion for capital gains and creating a new top bracket – will result in a 70 percent tax increase on capital gains above $300,000.
- The current national recession is largely the result of financial market conditions resulting in extremely tight capital markets. A 70 percent increase in taxes on realized gains, which is in effect capital, will only serve to exacerbate the problem.
- The non-partisan Tax Foundation’s State Business Tax Climate Index ranks Wisconsin’s business climate only the 38th best, or 13th worst or of all 50 states. The study’s sub-index on the individual income tax is ranks Wisconsin 7th worst, due to Wisconsin’s already complicated bracketing and high rates. Increasing the top rate would worsen Wisconsin’s rankings on these competitive indices.