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When newly elected Wisconsin Gov. Scott Walker, a Republican, offered up a tax cut plan for small business, it was reasonable to expect the GOP-led Legislature to approve it with few changes.
Turns out there are many practical obstacles to turning a campaign tax promise into reality.
Republican lawmakers are considering significant changes to Walker’s proposal, with a key meeting set for Jan. 20, 2011.
Some background: In the 2010 election, Walker promised a 1 percentage point income tax-rate cut for businesses with 50 employees or fewer.
After he took office Jan. 3, 2011, he changed and trimmed the plan substantially, proposing a credit targeting businesses with less than $500,000 in gross receipts. Even that scaled-back idea carried an $80 million price tag over two years.
In touting the change, here is what Walker said in a Jan. 5 news release:
"This legislation will provide tax relief to thousands of business owners, freeing them to expand and create jobs," Walker’s office said. "98 percent of all small businesses will be eligible for tax relief under the Governor’s proposal."
That’s a broad statement.
Does virtually every small business in the state stand to benefit from tax relief? And is it enough to spur job growth, as Walker claims?
To back the claim, Walker spokesman Cullen Werwie provided us state tax-filing data showing that 98 percent of all Wisconsin businesses are under the $500,000 in gross receipts -- and therefore eligible to apply.
That number is not in dispute, but let’s drill down.
The information provided by Walker showed that in slightly more than half of tax returns, the businesses reported minimal gross sales -- somewhere between $1 and $10,000.
For that group, there would be negligible tax savings -- based on Walker’s data, it would average just over $1. That’s barely enough for a candy bar, much less a salary for a new employee.
Beyond that, there are two problems with the data provided.
First, it calculated the tax credit based on an earlier, more generous version of Walker’s current proposal. And second, it doesn’t account for businesses that don’t make a profit.
We couldn’t obtain similar data on Walker’s current proposal, but the state Department of Revenue provided another way to look at the expected size and reach of the 15 percent tax credit he proposed.
The department gave us a chart that projects the average tax credit for personal income tax filers who reported some portion of their income from business. (Most small business owners use the personal-income tax system to report their business income.) The data showed the largest group, with nearly 40 percent of those filers, was under $50,000 in income.
The average credit for that group: $37.
That’s at the low end.
The average credit tops out at $3,205 for a small group of high earners. They make up about 1 percent of those expected to qualify for the credit.
The overall average for all the 252,000 filers who could qualify for the credit -- $145. More than two-thirds would get less than $100 on average.
From both sets of statistics, it’s apparent that -- for the majority of those eligible -- the tax credit is enough to stock up on a limited supply of paper clips and printer paper, but not nearly enough to create a job.
Right off the bat that takes some wind out of Walker’s claim that the credit would quickly spur needed job creation.
The problems don’t stop there.
Businesses that don’t turn a profit in 2011 would not get a credit -- unless they make money in a future year and take it then. Walker’s plan -- set up as an offsetting credit -- kicks in when taxes are owed. It was not set up as a refundable credit; that could have allowed businesses to get it regardless of whether they made a profit.
So some percentage of small businesses may be eligible based on gross receipts but won’t qualify for a credit next year because they made no profit and therefore have no state tax liability.
How many is that?
State officials couldn’t say exactly.
But the number is apparently substantial. Walker’s information listed 335,000 business tax returns that would meet his gross-receipts test, but revenue officials said a much smaller number -- 245,000 filers -- likely would qualify to get the tax credit. They attributed some of the difference to filers who didn’t profit enough to owe taxes.
So the no-profit issue means those businesses won’t be getting a credit any time soon.
Finally, in some cases the tax credit would go to self-employed business people who have no employees. Some critics question how job creation would result from giving them a small credit.
Bill Smith, head of the state’s leading small-business membership group, likes Walker’s plan -- but not because it would propel hiring by those who get the credit.
"I’m not suggesting you’re going to have all this wonderful job creation out there," said Smith, state director of the National Federation of Independent Business.
Smith said the public should view the tax credits as a kind of indirect economic stimulus, because that $37 credit or $100 credit (or whatever amount it is) will be spent at restaurants or hardware stores or at other Main Street businesses, helping those operations during tough times.
Smith also said Walker’s tax plan, along with other measures like lawsuit limits, would boost the spirits of business owners who are pessimistic right now.
Walker’s original small-business tax cut -- the one targeted at 50-employee firms or smaller -- would have included firms with $2 million or more in gross sales, Smith said. So it would have reached a much larger group than his current plan.
Another small-business group leader, with the Independent Business Association of Wisconsin, said it’s possible that as few as 20 percent of the group’s members would fit under the $500,000 sales threshold.
Bart Adams, an accountant and IBA board member, said the group is not taking a position on Walker’s proposal.
Let’s return to the bottom line:
Walker said 98 percent of small businesses "will be eligible" for job-creating tax relief under his emergency plan to jump-start the lagging Wisconsin economy. There are that many businesses under the $500,000 threshold -- but that’s just the beginning of the story.
They may all be eligible to apply, but many won’t qualify for a tax credit of any significant size. And the number gets substantially reduced because unprofitable businesses won’t see a credit until they turn around. Even business advocates don’t contend it would help recipients create jobs, as Walker claims.
We rate Walker’s claim False.
Office of Gov. Scott Walker, press release, Jan. 5, 2011
Interview with Bill Smith, state director, National Federation of Independent Business, Jan. 14, 2011
Interview with Bart Adams, board member, Independent Business Association of Wisconsin, Jan. 13, 2011
E-mail interview with Cullen Werwie, Office of Governor Scott Walker, press secretary, Jan. 12, 2010
Interview with John Koskinen, chief economist, Wisconsin Department of Revenue, Jan. 13, 2011
Interviews with Stephanie Marquis, spokesperson, Wisconsin Department of Revenue, Jan. 13-14, 2011
E-mail interview with Jon Peacock, research director, Wisconsin Council on Children and Families, Jan. 13, 2011
Interview with Jenny Toftness, legislative aide to Rep. Robin Vos, Jan. 17, 2011
JSOnline.com, Walker outlines business tax cut, Jan. 5, 2011
Small business tax credit, proposed bill language
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