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Capitol Update

By Senator Howard Marklein
July 14, 2017
I'm Glad We Didn't Finish the Budget Yet

I’m glad we haven’t finished the state budget yet because the state of Illinois delivered a $51 million bill to us on July 6, 2017.
Illinois has been without a budget for two years.  They have a $6.2 billion deficit and backlogged bills of $14.7 billion. As their legislature further debated the budget, public universities risked losing their accreditation, social service providers were nearly forced to close their doors and layoffs of road construction workers were imminent.
In addition, the prospect of a downgrade could have spiked the cost of borrowing credit, which would have spooked investors. As it is, Illinois has a near junk bond credit rating with nearly $272 billion in outstanding bills and unfunded pensions.
In an effort to finish their budget, the Democrat-controlled Illinois House approved a 32% income-tax hike and a $36 billion spending plan by overriding Governor Bruce Rauner’s veto. Their tax legislation increases the personal income tax rate from 3.75 percent to just under 5 percent, while corporations would pay 7 percent instead of 5.25 percent.
These changes have created an estimated $51 million bill for Wisconsin.
According to the non-partisan Legislative Fiscal Bureau (LFB), Wisconsin has had an income tax reciprocity agreement with Illinois since 1973.  This agreement allows residents of each state to file one income tax return and pay taxes on that income only in their state of residence. The agreement then requires a state to pay the other state when the net foregone revenues of one state exceed those of the other state. This was done for simplification and streamlining.
To date, there have always been more Wisconsin residents earning income in Illinois than vice versa.  Taxes forgone by Illinois always have exceeded the taxes foregone by Wisconsin; therefore Wisconsin has always made a payment to Illinois each year based on the estimated difference.
In the budget we are currently working on, we had estimated Wisconsin’s tax reciprocity payment to Illinois to be $66 million in 2017-18 and $67.7 million in 2018-19 based on Illinois’ former rates. According to the LFB and the Wisconsin Department of Revenue (DOR), “the recently enacted Illinois tax provisions are expected to adversely affect Wisconsin’s general fund position by $51 million in the 2017-19 biennium.”
Wisconsin is one of two states that doesn’t limit the credit we provide for taxes paid in other states.  For example, if a Wisconsin resident pays income taxes to California, but also files in Wisconsin, we provide a credit for the amount of income tax they paid to California without a cap.  If California increases its income taxes, our Wisconsin resident does not pay any additional income taxes, but other Wisconsin taxpayers pay for the additional California income tax. Therefore, we are providing tax credits in amounts that we cannot control.
I have proposed a reform in the current budget that would limit Wisconsin’s exposure to tax policies of which we have no input or control. I have proposed to limit the Wisconsin credit to a predictable amount so that we are not as exposed to the other states’ unpredictable tax policies.
Unfortunately, this change would not impact what we owe to Illinois since we have a reciprocity agreement with them.  However, protecting our state from the whims of other states is an important, necessary reform and necessary.
As we continue to work on Wisconsin’s budget, I am glad that we have not finished so that we can plan for this significant reciprocity bill. We have been challenged by this budget cycle, but the grass is definitely not greener to the south. We will be able to absorb this bill and continue to make progress on our own priorities.
To view the memo from the LFB that outlines the tax reciprocity issue, please follow this link:
For more information and to connect with me, visit my website http://legis.wisconsin.gov/senate/17/marklein and subscribe to my weekly E-Update by sending an email to Sen.Marklein@legis.wisconsin.gov.  Do not hesitate to call 800-978-8008 if you have input, ideas or need assistance with any state-related matters.