The Wisconsin Legislative Bureau said the recently-passed income tax hike in Illinois will cost Wisconsin more than $50 million in revenue over the next two years. Why?
Illinois and Wisconsin have an income tax reciprocity agreement.
Without it, residents of one state who work in the other would have to first file in the state where they earn income, pay taxes on that income, and then file again in the state where they reside, claiming a credit for taxes already paid to the first state.
With the agreement, people only file and pay taxes once, in their state of residence. The taxes foregone by the other state are to be made up by an annual payment, based on an agreed-upon benchmark.
Representative Amy Loudenbeck’s 31st Assembly District sits right on the border with Illinois. The Republican from Clinton, Wisconsin said the agreement is a convenience for both states, and a real benefit to the people affected. “The worker doesn’t have to pay taxes in Illinois and then file for a refund," she said, "and then file their taxes in Wisconsin and have an underpayment.”
Since more Wisconsin residents work in Illinois than the other way around, the net difference in foregone taxes means Wisconsin has for decades made such ‘reciprocity payments’ to Illinois. Those payments are included in Wisconsin’s two-year budget.
The current proposed budget for 2017-2019 estimated annual payments of about $66 million and $68 million. But the nonpartisan Legislative Bureau told lawmakers in a July 11 letter that the income tax hike, along with other tax changes passed in Illinois, make those estimates obsolete.
The Bureau now calculates the payment will be $2 million less than estimated the first year, but nearly $23 million more the second.
On top of that, the Bureau said, Wisconsin residents will now be able to claim larger credits for taxes paid to other states. It estimates individual income tax collections in Wisconsin will be down nearly $13 million in the first year, and more than $17 million the next, compared to earlier projections.
The net result, according to the Bureau: an additional $51 million hit to Wisconsin’s general fund that now has to be figured into the state’s 2017-19 budget.
Loudenbeck says it’s better to know that now, while her state's budget is still being hammered out, rather than in bits and pieces after the fact, when making adjustments would be more problematic.