MILWAUKEE — A new report released Wednesday lists the states with a marriage penalty on citizens’ income taxes.
The Tax Foundation lists 15 states that penalize couples for being married.
Wisconsin is one of those states. North Dakota and Minnesota join the state as a bloc in punishing marriage financially.
The “marriage penalty” means a married couple pays more in taxes than they would if the husband and wife could each file individually and pay the tax on his or her own income.
The problem comes from the fact that combined higher incomes pay a higher rate of tax. On top of that, married couples receive less in deductions than single filers.
The Tax Foundation’s website describes the overall impact: “This is discriminatory and has serious business ramifications. The top-earning 20 percent of taxpayers is dominated (85 percent) by married couples.”
The disparity in treatment of married couples also threatens the future of businesses, the Foundation says, “This same 20 percent also has the highest concentration of business owners of all income groups. Because of these concentrations, marriage penalties have the potential to affect a significant share of pass-through businesses,” which means they pay a disproportionate amount of taxes.
The marriage penalties affect the three-quarters of pass-through businesses that are sole proprietorships.
These businesses do not directly send part of their profits to the Internal Revenue Service (IRS).
The profit is “passed through” the business onto the personal tax returns of the business owners. And those are subject to the marriage penalty in Wisconsin.
Economist John Phelan at the Center of the American Experiment in Minnesota said that eliminating the marriage penalty on income tax is a modest reform that could help boost any state’s economy. Seventeen states already provide remedies for tax brackets that would otherwise discriminate against marriage.
Earned income tax credit
But Wisconsin has an additional marriage disadvantage for lower-income families. That comes from the state’s Earned Income Tax Credit (EITC).
The Wisconsin EITC is based on the federal one, but at a reduced rate. The program provides a significant tax credit for families based on income and the number of children.
The Badger Institute, a free market-oriented think tank in Milwaukee, has researched Wisconsin’s EITC and proposed a solution. Currently there is a bias as seen in an example provided in one of the group’s policy reports.
The report suggests a single parent with two children is working and earning $18,000 annually. “She receives a state credit of $629 because she has minor children, and the credit helps stretch those modest wages further. Suppose the unmarried father of these children is earning $25,000 – he does not have custody of children, so he receives no state EITC.”
The unmarried couple loses out. “What happens if they choose to marry, but nothing else changes in their economic circumstances? Their state credit is cut by $433, to $196. Does that make sense?”
For a solution, the Institute suggests a honeymoon clause in the state EITC’s budget. “Such a policy would hold families harmless for the first three years of their marriage when determining their state EITC benefit.”
The couple could take the credit they would have gotten had they not married, or the credit they normally would receive for married filers. The proposal, Badger says, would only cost the state budget a modest $1.5 million annually.