Wisconsin Gov. Scott Walker’s proposal for more than $500 million tax cut proposal will get a hearing and vote as it comes before the Legislature’s budget committee Wednesday. Credit: Associated Press

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Madison — Republicans reached a compromise late Tuesday on Gov. Scott Walker's more than $500 million tax cut proposal, agreeing to $38 million in spending cuts in the final piece of a deal that paves the way for a key committee vote on Wednesday.

Along with two other modest changes, the cuts to take place in the next budget beginning in July 2015 were enough to win over a remaining Senate GOP holdout who had balked at passing tax cuts that would leave the state in a worse financial position in the future. The deal will preserve all of the property and income tax cuts that Walker proposed after new projections last month found the current state budget would finish in June 2015 with a $1 billion surplus.

A spokeswoman for Walker and Assembly Speaker Robin Vos (R-Rochester) both confirmed the deal late Tuesday, making clear the proposal had the GOP votes needed to pass the Legislature and be signed into law in the coming weeks.

"We want to move forward and return the surplus to the people who earned it through significant property and income tax cuts," Walker spokeswoman Jocelyn Webster said.

The Assembly, controlled by conservative Republicans, sought to approve the two-year tax cuts bill as it was proposed by Walker. But Vos said late Tuesday night that he agreed to the spending cut that he had called a "gimmick" because it will allow Walker's tax cuts to emerge from the Legislature intact.

"We have negotiated in good faith with the Senate. We got some things which we thought were important, and they got some things that they thought were important," Vos said.

The deal would also keep a chunk of the surplus— more than $100 million — in the state's main account rather than shifting it to a rainy-day fund. It would also drop a proposed sales tax exemption added by Assembly Republicans last week for construction companies doing work for local governments and churches.

The agreement will come before the Joint Finance Committee on Wednesday, which is scheduled to hold a hearing and vote on Walker's proposal starting at 10 a.m. Approval of the deal by GOP lawmakers on the budget committee would send it to the Senate, which could take up the proposal on March 4, an aide to Senate Majority Leader Scott Fitzgerald (R-Juneau) said.

By Tuesday morning, the number of GOP holdouts in the Senate had come down to Sen. Rob Cowles (R-Allouez), who backed Walker's tax cuts but was seeking an additional $38 million cut in state spending in the next budget to help pay for them.

"Rob's on board with everything," Fitzgerald said Tuesday morning of the tax cuts. "It comes down to a ($38) million lapse."

A lapse is a technical term in the state budget. It would amount to requiring agencies in the Walker administration to return that amount of money to the state's main account during the fiscal year ending in June 2016.

The agencies could do that by dialing back their authorized spending or takingcash from separate pots of money that have built up over time.

Fitzgerald said the Walker administration was initially reluctant about the lapse, which can make it more difficult for agencies to budget because it introduces a level of uncertainty about what their actual spending will be.

Democrats, who have sought to undo past cuts to education, are unlikely to embrace using the surplus as an occasion to further cut state spending. Senate Minority Leader Chris Larson (D-Milwaukee) said Tuesday he wanted more details on the proposal before weighing in.

Republicans hold an 18-15 advantage in the Senate, but Sen. Dale Schultz (R-Richland Center) and all Senate Democrats are widely seen as no votes on the tax cuts. If they vote against the tax cuts, Cowles and every other GOP senator must vote for the bill to assure its passage.

For weeks, Fitzgerald and Senate President Mike Ellis (R-Neenah) have sought to keep a chunk of the surplus in the state's main account rather than shifting it to a rainy-day fund. That's little more than a question of accounting, though Fitzgerald pointed out it would make the money somewhat easier for lawmakers to draw on in the event of an emergency.

The move — and the additional $38 million cut — would also lower the shortfall expected in the 2015-'17 state budget under one way of estimating what is known as the structural deficit.

Before the new projections of unexpected new tax money last month, that shortfall had been estimated at about $707 million for the next two-year budget. Walker's proposal would increase that projected shortfall by roughly $100 million to $807 million.

With the additional $38 million cut, the package would lower the expected shortfall to less than $660 million for the next budget.

Walker and conservatives in the Assembly have pointed out that the structural deficit calculation doesn't account for expected increases in both state taxes and state spending through forces such as economic growth and inflation. That means there's less reason for alarm about the projected shortfall for the next budget, they argue.

The Assembly voted 62-37 last week to approve the property and income tax cuts and plunk $117 million into the state's rainy-day fund.

Walker's plan for the surplus prioritizes the tax cuts and a roughly $320 million overhaul of income tax withholding over calls from Democrats to pay down debt, strengthen the state budget and offset past cuts to schools.

Under Walker's bill, the average income tax filer would receive a tax cut of $46 in April 2015 and the typical homeowner would save $131 over the existing law on this December's bills, according to the fiscal bureau.

Also, the governor has had his administration alter income tax withholding rates so workers have less taken out of each paycheck — about $520 a year for a married couple making a total of $80,000 a year — starting in April.

The bill would also lower income taxes for factory and farm owners by $36.8 million over the current two-year budget and $91.3 million over the following two years.

Mary Burke, a former state commerce secretary and bicycle company executive running against Walker, has said the state should use about half of the surplus to set aside more money in the rainy-day fund and reduce the state's $2 billion in new borrowing through June 2015. She would use the remainder for property tax relief and worker training programs.

Burke's plan for property tax relief and a separate plan put forward by Assembly Democrats would both funnel more money toward a state credit for parcels with a home or business on them. That would ensure low- and middle-income homeowners see bigger tax cuts than they would under Walker's plan, even if the overall size of her tax cut would be smaller.

Vos has said the existing tax credit provides no relief to those who own undeveloped land and could draw a legal challenge to the credit if it is increased again.

Patrick Marley of the Milwaukee Journal Sentinel staff contributed to this report.