Eliminating Marriage Tax Penalty Would be Bold, Notable Tax Cut

By: Brian Sikma

Governor Scott Walker this week signed a proclamation declaring it “Marriage Week” in Wisconsin. Nationally, social conservative groups have set aside this week as an opportunity to promote the social, economic and moral benefits of strong families. But more meaningful for Wisconsin families than a proclamation could be a reform to the state’s marriage tax penalty.

Wisconsin’s arcane tax code currently penalizes married couples in several ways. First, married couples filing jointly do not get a standard deduction equivalent to twice that of the individual deduction. Individual deductions are determined on a sliding scale in Wisconsin, and married couples have a joint deduction worth less than that of two unmarried individuals.

Second, the method of determining a tax rate penalizes married couples filing jointly by boosting the couple into a higher tax rate sooner than would be the case if they were filing as separate individuals. A couple will move into the next highest tax bracket once the lesser earning spouse makes 33% of what the higher earning spouse makes. Proponents of tax brackets wanted to make income taxes progressive so lower income earners would pay a smaller share of taxes. Under the current state tax system, that’s not happening for married couples.

Third, the property tax/rent reduction credit is cut in half when two individuals go from filing separately to being a married couple that files jointly. In strictly fiscal terms that means it is more advantageous for a couple to be separate individuals taking the credit on their own than to be a married couple who would then take the credit jointly.

Finally, the married couple credit instituted as a partial fix to the income tax penalty does not apply to all married couples. The credit is only available to married couples where both spouses work. The credit also does not come close to solving the inequities created by the other three penalties.

Walker has made it clear that he wants to institute a tax cut of some kind with this next budget. So far he has publicly committed to a tax cut of at least $300 million spread out over two years. According to the Governor, that would give each Wisconsin family roughly $100 extra per year.

What the Governor is proposing doesn’t come close to offsetting the payroll tax hike that the Obama Administration put into effect this year. That hike costs the average American worker, who makes $41,000 per year, $832 each year. Grant it, the sheer size of federal taxes as compared to state taxes makes it more difficult for states to positively impact the bottom line when federal tax hikes kick in, but some have argued that the $100 per year cut is paltry. 

According to an analysis by the nonpartisan Legislative Fiscal Bureau, eliminating the marriage penalty in standard deductions and tax brackets, and reducing the married couple credit (which is presently an incomplete band-aid), would create a tax cut of $734 million in the next two year budget. Completely eliminating the marriage credit would reduce that figure but still leave a hefty tax cut on the table.

At stake with such a tax cut is not just married couples, but thousands of family owned businesses and farms that file their taxes using individual income tax rates. Eliminating the disparity caused by the marriage penalty would be a boost to the types of businesses that employ thousands of Wisconsin workers.

Walker’s “Marriage Week” declaration read in part, “our citizens are committed to promoting enrichment opportunities and resources that strengthen marriages and family well-being.” Eliminating the marriage penalty would be a bold step toward putting real weight behind that rhetoric and would signal that the Governor is still willing to engage in bold reforms.

Executives in other states, like Louisiana, are preparing to introduce bold tax reform measures that threaten to obscure the small efforts of Walker. A truly bold tax cut could possibly garner support in the state legislature. When Walker first suggested his small cut, Assembly Speaker Robin Vos (R) suggested that the figure Walker used was closer to the low end of what he thought lawmakers could be convinced to pass.  

To see the Legislative Fiscal Bureau’s analysis of eliminating the marriage tax penalty see pages 2 and 3 of this PDF.

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