AB872: Bill Text

LRB-3911/2

MES&JK:jld:jf

2013 - 2014 LEGISLATURE

2013 Assembly BILL 872

March 17, 2014 - Introduced by Representatives C. Taylor, Berceau, Hebl, Hesselbein, Pope, Sargent and Ohnstad. Referred to Committee on Ways and Means.

AB872,2,8 An Act to repeal 71.05 (6) (a) 25., 71.06 (1q), 71.06 (2) (i), 71.06 (2) (j), 71.07 (5n), 71.07 (9e) (aj), 71.10 (4) (cr), 71.21 (4) (b), 71.255 (6) (bm), 71.26 (2) (a) 11., 71.26 (4) (b), 71.28 (5n), 71.30 (3) (dn), 71.34 (1k) (m), 71.45 (4) (b), 71.54 (1) (g) and 71.54 (2) (b) 4.; to renumber and amend 71.26 (4) (a) and 71.45 (4) (a); to amend 71.01 (14), 71.03 (2) (a) 1., 71.05 (6) (b) 9., 71.05 (6) (b) 9m., 71.05 (6) (b) 25., 71.05 (6) (b) 47. b., 71.05 (6) (b) 47. c., 71.05 (8) (b), 71.05 (23) (b) 1., 71.05 (25) (b), 71.06 (1p) (intro.), 71.06 (1p) (a), 71.06 (1p) (b), 71.06 (1p) (c), 71.06 (2) (g) (intro.), 71.06 (2) (g) 1., 71.06 (2) (g) 2., 71.06 (2) (g) 3., 71.06 (2) (h) (intro.), 71.06 (2) (h) 1., 71.06 (2) (h) 2., 71.06 (2) (h) 3., 71.06 (2e) (a), 71.06 (2e) (b), 71.06 (2m), 71.06 (2s) (d), 71.07 (9e) (af) (intro.), 71.125 (1), 71.125 (2), 71.17 (6), 71.255 (2m) (d), 71.255 (6) (a), 71.36 (1m) (a), 71.54 (1) (f) (intro.), 71.54 (2) (b) 3., 71.54 (2m), 71.64 (9) (b) (intro.), 71.67 (5) (a) and 71.67 (5m); and to create 71.05 (23) (be) of the statutes; relating to: reducing and increasing certain individual income tax rates and expanding the number of brackets to what existed before the enactment of 2013 Wisconsin Act 20, disregarding a taxpayer's election to include another in its combined group, disallowing certain carry-forward amounts for combined reporting purposes, repealing the income and franchise tax credit for qualified production activities income, repealing the changes made to the earned income tax credit in 2011 Wisconsin Act 32, increasing the personal exemption for certain individuals, restoring indexing provisions to the homestead tax credit, and eliminating the individual income tax exclusion for long-term capital gains other than for farm assets.

Analysis by the Legislative Reference Bureau

Combined reporting

Under current law, a taxpayer may elect to include in its combined group, for income and franchise tax reporting purposes, every corporation in its commonly controlled group, regardless of whether such corporations are engaged in the same unitary business of the taxpayer. Under current law, the Department of Revenue (DOR) may not disallow such an election, or disregard its effect. Under this bill, if DOR determines that such an election has the effect of tax avoidance, DOR must disregard the election's tax effect or disallow the election.

Under current law, for each taxable year that a corporation that is a member of a combined group has net business loss carry-forward from a taxable year beginning before January 1, 2009, the corporation may, for 20 taxable years, use up to 5 percent of the net business loss carry-forward to offset the income of all other members of the combined group. The bill eliminates this provision.

Qualified production activities income credit

Under the federal Internal Revenue Code, a taxpayer may claim a deduction equal to 9 percent of the taxpayer's qualified production activities income in the taxable year or 9 percent of the taxpayer's total taxable income, whichever is less. For federal tax purposes, qualified production activities income is, generally, the amount of the taxpayer's domestic production gross receipts that exceed the sum of the cost of goods sold and other expenses, losses, or deductions. Domestic production gross receipts are, generally, gross receipts derived from property that was manufactured, produced, grown, or extracted in the United States.

Under current law, an individual taxpayer may claim a state income tax credit equal to the taxpayer's qualified production activities income derived from manufacturing property and agricultural property, multiplied by a certain percentage. A corporation or insurer may claim a state income and franchise tax credit equal to the lesser of its taxable income apportioned to this state or its qualified production activities income derived from manufacturing property or agricultural property located in this state, multiplied by a certain percentage. The percentage of qualified production activities income that a taxpayer may claim as a credit is 1.875 percent for 2013, 3.75 percent for 2014, 5.526 percent for 2015, and 7.5 percent for 2016 and for each year thereafter.

The bill eliminates the tax credit for qualified production activities income.

Changes to rates and brackets

Under current law, there are four income tax brackets for single individuals, certain fiduciaries, heads of households, and married persons. The brackets are indexed for inflation. The rate of taxation under current law for the lowest bracket for single individuals, certain fiduciaries, heads of households, and married persons is 4.40 percent of taxable income; the rate for the second bracket is 5.84 percent; the rate for the third bracket is 6.27 percent; and the rate for the highest bracket is 7.65 percent. Before applying bracket indexing, the four brackets for individuals, certain fiduciaries, and heads of households, to which the above rates apply, are as follows: taxable income from $0 to $7,500; taxable income exceeding $7,500 but not exceeding $15,000; taxable income exceeding $15,000 but not exceeding $225,000; and taxable income exceeding $225,000. This rate and bracket structure first applies to taxable year 2013, and was enacted in 2013 Wisconsin Act 20, the state budget bill.

This bill repeals the changes made to the rates and brackets in 2013 Wisconsin Act 20 and, for taxable years 2013 and thereafter, reduces and restores certain rates and restores the brackets that existed before the budget bill was enacted. Under the former law and this bill, which will take effect retroactively to taxable year 2013 once the bill is enacted, there are five income tax brackets for single individuals, certain fiduciaries, heads of households, and married persons. The brackets are indexed for inflation. The rate of taxation under former law for the lowest bracket for single individuals, certain fiduciaries, heads of households, and married persons is 4.60 percent of taxable income; the rate for the second bracket is 6.15 percent; the rate for the third bracket is 6.50 percent; the rate for the fourth bracket is 6.75 percent; and the rate for the highest bracket is 7.75 percent. This bill lowers the rates of taxation for the three lowest brackets to 4.0 percent, 5.84 percent, and 6.27 percent.

With regard to taxable year 2012, before indexing for inflation for 2013, for single individuals, certain fiduciaries, and heads of households, for example, the lowest bracket applies to taxable income of over $0 up to $10,570; the second bracket applies to taxable income over $10,570 up to $20,360; the third bracket applies to taxable income over $20,360 up to $158,500; the fourth bracket applies to taxable income over $158,500 up to $232,660; and the fifth, or top, bracket applies to taxable income over $232,660.

Personal exemptions

Under current law, an individual income tax personal exemption exists in the amount of $700 for each taxpayer who is required to file an income tax return and $700 for the taxpayer's spouse, except if the spouse is filing separately or as a head of household. A taxpayer may also claim a $700 exemption for each dependent for whom he or she is entitled to claim an exemption under the Internal Revenue Code. In general, an additional exemption of $250 may be claimed by a taxpayer, and spouse, who has reached the age of 65 before the close of the taxable year to which his or her tax return relates.

This bill increases the personal exemption amount for certain taxpayers starting with taxable year 2014. Under the bill, if a single individual has Wisconsin adjusted gross income (WAGI) of less than $12,000, his or her personal exemption is $4,310. The personal exemption amount for such an individual phases down to approximately $700 as his or her WAGI increases from $12,000 to the maximum income threshold of $60,000. If such an individual's WAGI is more than the maximum income threshold, the individual calculates his or her exemption under current law.

Similarly under the bill, the personal exemption amount for a head of household, a married couple filing jointly, and a married individual filing separately are all increased to $4,310 per person for those whose WAGI, or joint WAGI in the case of a married couple filing jointly, is less than $14,000 (head of household), $20,000 (married joint), or $10,000 (married separate). The exemption amount phases down to approximately $700 ($1,400 for a married couple filing jointly) as WAGI increases to the maximum income threshold, which is $70,000 (head of household), $100,000 (married joint), or $50,000 (married separate). If a taxpayer's WAGI is more than the maximum income threshold, the taxpayer calculates his or her, or the couple's, exemption under current law. The bill does not make any change to the current law exemption provisions for dependents or individuals who are age 65 or above.

Earned income tax credit

Under current law, as created in 2011 Wisconsin Act 32, the earned income tax credit (EITC) is reduced for claimants with two or more qualifying children. The bill repeals those provisions and restores former law. Under the bill, the EITC, as a percentage of the federal credit, would be 4 percent for claimants with one qualifying child, 14 percent for claimants with two qualifying children, and 43 percent for claimants with three or more qualifying children.

Homestead tax credit

Under current law, as created in 2011 Wisconsin Act 32, the homestead tax credit formula factors (maximum income, maximum property taxes, and income threshold) are not indexed for inflation after 2010. The bill repeals those provisions and restores former law. Under the bill, the homestead tax credit formula factors would be indexed for inflation for 2013 and beyond.

Exclusion of capital gains

Under current law, there is an income tax exclusion for individuals, fiduciaries, members of limited liability companies and partnerships, and shareholders of tax-option corporations for 30 percent of the net long-term capital gains realized from the sale of assets held more than one year and the sale of all assets acquired from a decedent, and an exclusion for 60 percent of such gains realized from the sale of farm assets held more than one year and the sale of all farm assets acquired from a decedent.

Under this bill, the exclusion of 30 percent of such net long-term capital gains, and all assets acquired from a decedent, does not apply to taxable years beginning after December 31, 2013. The bill does not affect the exclusion of the gains realized from the sale of farm assets held more than one year and the sale of farm assets acquired from a decedent.

Because this bill relates to an exemption from state or local taxes, it may be referred to the Joint Survey Committee on Tax Exemptions for a report to be printed as an appendix to the bill.

For further information see the state and local fiscal estimate, which will be printed as an appendix to this bill.

The people of the state of Wisconsin, represented in senate and assembly, do enact as follows:

AB872,1 Section 1. 71.01 (14) of the statutes is amended to read:

AB872,5,5 71.01 (14) "Wisconsin net operating loss" of persons other than corporations means "federal net operating loss" adjusted as prescribed in s. 71.05 (6) (a) and (b), (7) to (12) and (19) to (21), except s. 71.05 (6) (b) 9., except that no deductions allowable on schedule A for federal income tax purposes are allowable.

AB872,2 Section 2. 71.03 (2) (a) 1. of the statutes is amended to read:

AB872,5,17 71.03 (2) (a) 1. Every individual domiciled in this state during the entire taxable year who has a gross income at or above a threshold amount which shall be determined annually by the department of revenue. The threshold amounts shall be determined for categories of individuals based on filing status and age, and shall include categories for single individuals; individuals who file as a head of household; married couples who file jointly; and married persons who file separately. The threshold amounts shall also be determined by taking into account the exemption amounts in s. 71.05 (23) (b) 1. and 3. and (be). The department of revenue shall establish a threshold amount for each category of individual at an amount at which no individual in that category whose gross income is below that amount has a state income tax liability.

AB872,3 Section 3. 71.05 (6) (a) 25. of the statutes is repealed.

AB872,4 Section 4. 71.05 (6) (b) 9. of the statutes is amended to read:

AB872,6,12 71.05 (6) (b) 9. On assets held more than one year and on all assets acquired from a decedent, 30 percent of the capital gain as computed under the internal revenue code, not including capital gains for which the federal tax treatment is determined under section 406 of P.L. 99-514; not including amounts treated as ordinary income for federal income tax purposes because of the recapture of depreciation or any other reason; and not including amounts treated as capital gain for federal income tax purposes from the sale or exchange of a lottery prize. For purposes of this subdivision, the capital gains and capital losses for all assets shall be netted before application of the percentage. This subdivision does not apply to taxable years that begin after December 31, 2013.

AB872,5 Section 5. 71.05 (6) (b) 9m. of the statutes is amended to read:

AB872,6,24 71.05 (6) (b) 9m. On farm assets held more than one year and on all farm assets acquired from a decedent, to the extent that they are not subtracted under subd. 9. or 10., 60 percent of the capital gain as computed under the Internal Revenue Code, not including capital gains for which the federal tax treatment is determined under section 406 of P.L. 99-514; not including amounts treated as ordinary income for federal income tax purposes because of the recapture of depreciation or any other reason; and not including amounts treated as capital gain for federal income tax purposes from the sale or exchange of a lottery prize. In this subdivision, "farm assets" means livestock, farm equipment, farm real property, and farm depreciable property. For purposes of this subdivision, the capital gains and capital losses for all assets shall be netted before application of the percentage.

AB872,6 Section 6. 71.05 (6) (b) 25. of the statutes is amended to read:

AB872,7,8 71.05 (6) (b) 25. All gains that are not excluded from taxation under subd. 9., on business assets or 9m. on assets used in farming, including shares in a corporation or trust that meets the standards under s. 182.001 (1), or both, held more than one year, that are sold or otherwise disposed of to persons who are related to the seller or transferor by blood, marriage or adoption within the 3rd degree of kinship as determined under s. 990.001 (16), as computed under the Internal Revenue Code, not including amounts treated as ordinary income for federal income tax purposes because of the recapture of depreciation or any other reason.

AB872,7 Section 7. 71.05 (6) (b) 47. b. of the statutes, as affected by 2013 Wisconsin Act 20, is amended to read:

AB872,8,6 71.05 (6) (b) 47. b. With respect to partners and members of limited liability companies, for taxable years beginning after December 31, 2010, and before January 1, 2014, for 2 consecutive taxable years beginning with the taxable year in which the partnership's or limited liability company's business locates to this state from another state or another country and begins doing business in this state, as defined in s. 71.22 (1r), and subject to the limitations provided under subd. 47. d. and e., the partner's or member's distributive share of taxable income as calculated under section 703 of the Internal Revenue Code; plus the items of income and gain under section 702 of the Internal Revenue Code, including taxable state and municipal bond interest and excluding nontaxable interest income or dividend income from federal government obligations; minus the items of loss and deduction under section 756702 702 of the Internal Revenue Code, except items that are not deductible under s. 71.21; plus guaranteed payments to partners under section 707 (c) of the Internal Revenue Code; plus the credits claimed under s. 71.07 (2dd), (2de), (2di), (2dj), (2dL), (2dm), (2dr), (2ds), (2dx), (2dy), (3g), (3h), (3n), (3p), (3q), (3r), (3rm), (3rn), (3s), (3t), (3w), (5e), (5f), (5g), (5h), (5i), (5j), (5k), (5r), (5rm), and (8r); and plus or minus, as appropriate, transitional adjustments, depreciation differences, and basis differences under s. 71.05 (13), (15), (16), (17), and (19), multiplied by the apportionment fraction determined in s. 71.04 (4) and subject to s. 71.04 (7) or by separate accounting. No amounts subtracted under this subd. 47. b. may be included in the modification under par. (b) 9. or 9m.

AB872,8 Section 8. 71.05 (6) (b) 47. c. of the statutes, as affected by 2013 Wisconsin Act 20, is amended to read:

AB872,8,19 71.05 (6) (b) 47. c. With respect to shareholders of a tax-option corporation, for taxable years beginning after December 31, 2010, and before January 1, 2014, for 2 consecutive taxable years beginning with the taxable year in which the tax-option corporation's business locates to this state from another state or another country and begins doing business in this state, as defined in s. 71.22 (1r), and subject to the limitations provided under subd. 47. d. and e., the shareholder's distributive share of the entity's net income or loss as determined under this chapter, including interest income from federal, state, and municipal government obligations, multiplied by the apportionment fraction determined in s. 71.25 (6m) and subject to s. 71.25 (9) or by separate accounting. No amounts subtracted under this subdivision may be included in the modification under par. (b) 9. or 9m.

AB872,9 Section 9. 71.05 (8) (b) of the statutes, as affected by 2013 Wisconsin Act 20, is amended to read: