New Wisconsin tax breaks will let factory owners pay less income tax than Taco Bell workers?

To spark his underdog campaign for Congress, Democrat Mark Harris is steering attention to his GOP opponent, state Sen. Glenn Grothman.

And doing so with an attack that compares how much factory owners and Taco Bell workers pay in state income taxes.

The winner of the Nov. 4, 2014 election will succeed retiring Fond du Lac Republican Tom Petri, who was first elected to the east-central Wisconsin seat in 1979.

In doing an interview with Harris on Sept. 2, 2014, John "Sly" Sylvester, a liberal radio talk show host in the Madison area, argued that Gov. Scott Walker’s administration has provided "corporate welfare" and that the Legislature "has been sort of a rubber stamp."

Harris, who is the Winnebago County executive, referred to Walker’s 2011-’13 state budget in giving this response:

"Well, even in the first Walker budget, Mr. Grothman pushed through tax credits for manufacturing and agriculture," Harris said. "And he did it in the last day of the Joint Finance Committee, when there really wasn't time for anyone to scrutinize what was happening. And they basically passed credits that all but eliminate income tax on manufacturers and on agricultural operations."

He continued:

"And, you know, it's not fair to have someone that owns a factory that produces millions in income pay less tax than their nephew would if he worked full time at Taco Bell for minimum wage. But that's exactly what Glenn Grothman passed, and it's phasing in gradually."

That’s an eye-opener.

Did Grothman push through credits that, over time, would enable a factory owner earning millions to pay less state income tax than a worker earning minimum wage?

The credits

In June 2011, Grothman helped lead an effort to add manufacturing and agriculture tax credits to Walker’s state budget. The credits apply to the production income of the businesses, not to income such as royalties and investments.

The measure gave businesses that are assessed as manufacturing or agricultural for property tax purposes a dollar-for-dollar credit on income from manufacturing or agricultural production on their 2013 tax bill. The credit, which began in 2013, rises annually until reaching 7.5 percent in 2016.

Businesses organized as, for example, limited liability companies -- where an owner pays the firm's tax as personal income tax -- can reduce their state income tax rate from as much as 7.75 percent to 0.25 percent or less.

In other words, come 2016, the 7.5 percent credit could eliminate a large share of a factory owner’s tax liability.

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The Legislative Fiscal Bureau estimates the credits will mean $359.7 million less in tax revenues for the state over its first five years, and $128.7 million a year once it is fully phased in starting in 2016.

The value  

Harris, who formerly practiced as a certified public accountant and a lawyer, provided figures on the state’s income tax rates and on the 2016 tax credits.

The figures support his claim in that the credits would wipe away all of a factory owner’s state income tax liability -- on factory production income only -- for the first $2.4 million in production income.

We consulted two accounting professors: the University of Wisconsin-Whitewater’s William Raabe, whose specialties include state taxation; and Stacie LaPlante, chair in accounting at the University of Wisconsin-Madison Business School.

They agreed that a full-time minimum-wage worker ($7.25 per hour for 2,000 hours per year) claiming the standard deduction ($9,930) and exemption ($700) would owe about $170 in state income tax.

They also agreed that the factory owner wouldn’t owe more than that on production income until after earning roughly $2.6 million in production income -- a figure even higher than the one Harris cited.

But the professors added some caveats under which the owner could pay more state income tax than the Taco Bell worker.

"Qualified production income" is a specific type of business income. Not all of the net income from a factory would necessarily qualify for the tax credits, which would mean the owner would be paying additional taxes.

Once the factory owner's production income exceeds roughly $2.6 million, he would pay more income tax than the Taco Bell worker. 

Harris said Grothman pushed through tax credits so that when they are phased in, "someone that owns a factory that produces millions in income" will pay "less tax than their nephew would if he worked full time at Taco Bell for minimum wage."

Once the credits pushed by Grothman are fully phased in, in 2016, some factory owners who earn up to roughly $2.5 million from production income from the factory will owe less in state income tax on that production income than a full-time worker earning minimum wage.

But factory owners earning above that amount from production income would pay more than the minimum-wage worker, and more on any other income that doesn’t come from production.

The statement is accurate but needs clarification, our definition of Mostly True.

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This item was changed on Sept. 15, 2014 to clarify that the tax rate on production income above roughly $2.6 million is effectively 0.15 percent.