Tax Issues by State News


Taxing the Gig Economy


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Our ever-changing economy demands that lawmakers update our tax laws to keep pace.

Take, for example, the growth of online sales. As recently as six years ago, Amazon, the nation’s biggest online retailer, only collected sales tax on consumer purchases in five states. This meant that state treasuries were missing critical sales tax revenue, a problem destined to grow as more consumers shifted their shopping habits from brick and mortar stores to online purchases.

But Amazon’s tax collection habits have improved over the last few years, in part because Amazon changed the way it does business, but also because state lawmakers became increasingly frustrated by the sales tax revenue gap created by e-retail and decided to press for change. While online sales tax evasion remains a problem today, progress is being made.

Now, states are facing another challenge as the on-demand or “gig economy” grows. Companies such as Uber and Airbnb are presenting regulatory challenges and the growth of these services has outpaced lawmakers’ ability to update state and local tax codes. A new ITEP report explores tax policy issues related to the on-demand economy and recommends that state and local tax systems treat these companies in a manner similar to their competitors, especially taxis and hotels.

As background, most states exempt a broad range of services from their sales tax bases because of a historical accident. The revenue loss resulting from these exemptions—on services ranging from lawn care to haircuts—has grown substantially as the service sector has expanded, but lawmakers have been slow to update sales tax bases to reflect the shift toward a more service-oriented economy.

Taxi rides are one service that has long been among those typically exempt from most state and local sales taxes, but there are more than half a dozen states that apply their sales taxes to taxis and similar services. In the context of the on-demand economy, this matters because Uber and other transportation network companies (TNCs) are providing a service nearly identical to taxi rides. But their tax treatment has not always reflected this fact.

In Rhode Island, for example, taxis began collecting sales tax under a law enacted in 2012, but Uber delayed doing so until 2015, claiming the law was ambiguous. Today, the company has taken an even more confrontational stance in Georgia, urging its riders to tell lawmakers that the sales tax, which has long been collected on taxi rides, should not apply to Uber’s services. ITEP’s report indicates that a similar battle could soon come to Ohio, where taxis also collect sales taxes but where Uber appears not to be doing so. Uber has recently received negative publicity on a variety of fronts, ranging from allegations of sexual harassment among its engineers to reports of software designed to impede police investigations into its business in jurisdictions where it may have been operating illegally. Disputes over sales tax collection may seem bland by comparison, but they are important nonetheless.

Airbnb has taken a different approach to state and local tax collection. The company has often been willing to collect and remit lodging taxes (which range up to 15 percent) in exchange for regulations (or a lack thereof) favorable to its business model. Affordable housing advocates concerned about the loss of residential housing, and frustrated neighbors living next to what they call “neighborhood hotels,” by contrast, would like to see tighter restrictions on renting homes via Airbnb. Meanwhile, others have noted (PDF) the enforcement problems created by the high level of secrecy surrounding most Airbnb tax collection agreements.

Partly because of these ongoing debates, Airbnb’s tax collection practices are a patchwork. The company is collecting some state and/or local-level lodging taxes in 26 states, but in many of those states the company’s scope of collection is far from comprehensive. Hundreds of millions of dollars in lodging taxes are being lost each year as visitor preferences shift away from traditional hotels (which collect the applicable taxes) to Airbnb rentals (which often do not). For the time being, many of Airbnb’s customers are allowed to pay less than guests of traditional hotels for the public services they enjoy during their visits.

These issues are likely to remain a work in progress for some time to come. The regulatory questions that are often tied to these tax debates are far from trivial. And even if the tax laws related to these services are updated to reflect today’s economy, there is little doubt that new on-demand services with unforeseen tax policy implications will arise in the years ahead.

Nonetheless, the stakes are too high for lawmakers to delay action any longer. Both tax fairness and fiscal responsibility demand that states and localities update their tax codes to better reflect the realities of these on-demand services. Amazon and the e-retail industry are moving in that direction, though universal sales tax collection remains elusive. As a similar debate unfolds regarding the gig economy, states should move even more quickly to recognize change and update their sales tax practices accordingly.

Read Taxes and the on-Demand Economy.


What to Watch in the States: Further Attempts to Weaken or Eliminate Progressive Taxes


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This is the third installment of our six-part series on 2017 state tax trends. The introduction to this series is available here.

As we described last week, many states are gearing up for challenging budget debates this year. But the need to address revenue shortfalls has not stopped lawmakers in many states from pursuing harmful tax policies that will drain critical revenues from state coffers and make upside-down state and local tax systems more regressive, leaving low- and middle-income earners paying more to finance tax cuts for the wealthy. At the same time, however, lawmakers in a handful of states are exploring meaningful income tax reforms that could improve the fairness and sustainability of their tax systems.

Efforts to Eliminate State Personal Income Taxes 

Debates over personal income tax elimination are gearing up in both Michigan and West Virginia this year. Repealing this vital revenue source would impede these states' ability to balance their budgets in the long run, and would make their tax systems more regressive. This is particularly problematic because both states already have upside-down tax systems under which the highest effective tax rates are levied on the lowest-income taxpayers.

State personal income taxes are a powerful counterbalance to the regressive nature of most other state and local taxes. As revealed in our Fairness Matters chart book, states without personal income taxes tend to be "high tax" for poor people despite their reputations as being "low tax" states.

Two bills to eliminate Michigan's personal income tax may be at play this legislative session. In the House, a bill has been filed that would reduce the current income tax rate from 4.25 percent to 3.9 percent in 2018 and then phase down the rate by 0.1 percentage point each year over the next 40 years, well after all of the state's current elected officials have left office (Michigan prevents any individual from serving more than 14 years in the legislature). A state senator has also indicated that he will introduce a bill that eliminates the personal income tax within a five-year period. Neither proposal is coupled with tax increases to replace the $9 billion (more than one third of the state's total tax revenue) currently generated through the personal income tax.

West Virginia's Senate created a select committee to examine state taxes and explore comprehensive tax reform. According to the committee's chairman, the legislature is exploring steps to eliminate West Virginians state personal income tax. The committee announced this despite a projected deficit of nearly $500 million that is expected to grow to $700 million by 2019.

A Push Toward Flat Rate Personal Income Taxes

Graduated-rate income taxes allow states to collect more revenues from high-income taxpayers that often face the lowest overall state and local tax rates. The revenue these taxes generate from the wealthy also typically allow states to levy lower rates on low- and moderate-income families less able to afford a higher tax bill, as ITEP’s chart book shows. Yet despite these benefits, lawmakers in Alabama, Arizona, Iowa, Kentucky, Maine, Maryland, Ohio, and South Carolina are considering converting their graduated income taxes to a single flat rate under the guise of tax fairness. In reality, there's nothing fair about a flat tax.



The Task Force on Budget Reform in Alabama has not released its findings and may not do so for another year, but it has reportedly discussed flattening or even eliminating the state's income tax. Arizona lawmakers, heeding recommendations from the state's Joint Task Force on Income Tax Reform, continue to strive toward condensing their moderately progressive, five bracket income tax to a flat rate tax. In Georgia, it remains to be seen whether an attempt to flatten or eliminate the state's income tax will resurface this year after advocates defeated two such proposals last year. Tax reform is also a topic likely to be broached by lawmakers in Kentucky this year, with efforts to flatten or otherwise reduce the personal income tax playing a central role in that discussion. And in South Carolina, a House Tax Policy Review Committee has been looking into a potential 5 percent flat tax.

The main proposals under consideration range from outright tax cuts to revenue neutral swaps or shifts that would change what most income groups pay in taxes. In most cases, "tax shifts" are designed to transfer revenues away from progressive forms of taxation and toward more regressive options, leaving low- and middle-income earners paying more to finance tax cuts for the wealthy.

Maine's Gov. Paul LePage has proposed shifting the state to a flat rate personal income tax of 5.75 percent by 2020.  Moving to a flat rate is an egregious move on its own, but the governor's plan also effectively eliminates the 3 percent surcharge on taxable income above $200,000 voters approved at the ballot box just months ago. How? His plan first calls for a flat rate of 2.75 percent and then redesigns that 3 percent surcharge to apply to all taxable income, for a combined overall rate of 5.75 percent. The biggest beneficiaries, by far, of his flat tax plan are the state's wealthiest residents. In fact, the average lower-income taxpayer will pay more in taxes under this plan because it also increases the sales tax.

In Ohio, a joint committee of the Ohio General Assembly has been tasked with recommending how the state can transition to a flat personal income tax rate of 3.5 or 3.75 percent. Policy Matters Ohio recently released a report using ITEP data, Flat tax would mean more taxes for most, that finds that three-quarters of Ohioans would pay more under a flat tax while the affluent would receive the resulting windfall. Gov. John Kasich's recently released budget proposal does not go quite this far, but it does condense the state's personal income tax brackets and reduces rates across the board. Ultimately, the plan flattens the state's income tax and results in a tax shift away from income taxes and toward the sales tax.

Cutting Taxes at All Costs 

Many states are taking steps to cut their personal income taxes despite revenue deficiencies. Arkansas lawmakers, for example, recently passed Gov. Asa Hutchinson's plan to cut $50 million in taxes for those with taxable incomes under $21,000 despite the fact that revenues are under forecast for the first 6 months of this fiscal year. To achieve balance, the governor's budget proposal includes very optimistic revenue projections, relying on assumptions of robust 4.4 percent growth in general revenues absent any tax increases.

Iowa is another state where income tax cuts are at the top of the agenda for many in the state's new Republican majority despite a budget shortfall caused largely by prior tax cuts and warnings from the nation's longest-serving governor that the state cannot afford them.

But cutting taxes when revenues are already down is often unappealing since doing so would exacerbate painful budget cuts. Recently, however, some lawmakers have developed a slick workaround. Instead of proposing cuts that would result in an immediate revenue loss and require offsetting reduction in public services, they instead offer up proposals with triggers or phase-ins – delaying the need to identify what services will be eliminated to fund the tax cut until some later date (perhaps even a date when the lawmakers voting for that tax cut have already left office).

Oklahoma may be the poster child of tax triggers gone awry. Just last year an income tax rate reduction was triggered despite the presence of a budget shortfall and an official "revenue failure." Reasonably, lawmakers have since questioned the merits of maintaining the trigger.

In Nebraska, despite projected shortfalls of $900 million and $1.2 billion in the state's next two budget cycles, Gov. Pete Ricketts has proposed to slash taxes for the state's wealthiest, but delay implementation and slowly phase them in each time the state hits arguably arbitrary revenue targets.

And as mentioned above, Michigan lawmakers – lacking for ideas on how to fund income tax repeal – are hoping that adopting a very slow phase-in schedule may allow them to repeal the tax anyway.

Some Progressive Revenue Ideas Shine Through

While there seems to be an endless stream of proposals to chip away at state personal income taxes, proposals to strengthen the tax, or even create one from scratch, have also surfaced, along with proposals to generate meaningful revenues through other means.

For instance, last year Alaska Gov. Bill Walker proposed reinstating a personal income tax for the first time in more than 35 years to deal with a downturn in oil tax and royalty revenues. While the governor has yet to officially rerelease an income tax plan this year, he recently voiced support for an income tax yet again and there are indications that this year's fiscal debate will include meaningful discussion of the idea.

In Kansas, advocates have filed a bill to undo many of the harmful changes enacted since Gov. Sam Brownback took office in 2012. Additional tax reforms will also be under consideration by a new coalition in the legislature. The stage is set for tax reform in Louisiana as well, if the political stars can align. The Task Force on Structural Changes in Budget and Tax Policy released its final report last week, including recommendations that the state eliminate regressive exemptions, broaden the sales tax base, and lower the rate.

Governors in Montana, New York, and Washington have introduced progressive revenue-raising ideas to address their lean budgets. In Montana, Gov. Steve Bullock has proposed adding a new top bracket for taxpayers with more than $500,000 in taxable income and limiting a capital gains credit to those with incomes under $1 million. In New York, Gov. Andrew Cuomo's budget proposal includes a 3-year extension of the state's millionaires' tax. New York's Assembly Speaker Carl Heastie has taken the revenue raising potential of the tax even further, proposing to increase the rates on those earning over $5 million and $10 million annually. Gov. Jay Inslee in Washington has put forward a proposal that would generate an additional $4 billion for public education by raising business and occupation taxes on services, expanding the sales tax base, and levying new taxes on carbon and capital gains, though this ambitious proposal faces an uphill battle in the legislature.

Gearing up for 2018, advocates in Massachusetts are backing a constitutional amendment to create a 4 percent tax surcharge on incomes over $1 million. Receiving strong support in public polling, the millionaires’ tax, also known as the fair share amendment, could go before voters on the state’s 2018 ballot.


An Overview of State Tax Trends in 2017


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Since the 2007-2009 economic crisis, rising income inequality and the role our public policies play in aiding or easing this trend have been an ongoing part of the public discourse. In spite of what we know about the growing gap between the rich and the rest of us, federal and state policymakers continue to sell tax cuts that disproportionately benefit the rich as a panacea that stimulates economic growth and creates jobs. Such tax cuts almost always are touted as a way to put more money into the pockets of middle-income families, in spite of clear evidence that many tax cut proposals are top heavy with benefits that flow primarily to the wealthy. 

While federal lawmakers have signaled individual and corporate tax changes are imminent, less publicized are upcoming state legislative actions on issues as varied as major revenue shortfalls, modernizing decades-old sales and gas tax policies, and flattening or even eliminating revenue sources as vital as the personal income tax.

States’ actions can either make their tax systems fairer or ask more from those who have the least. To help inform statehouse debates, the Institute on Taxation and Economic Policy (ITEP) released a new chart book today that examines how families at different income levels are affected by state and local tax codes. The book, based on ITEP’s Who Pays? study, concludes that states should consider the most sustainable, least regressive tax reforms.

Over the coming weeks, ITEP will publish in-depth blog posts detailing key trends in state tax policy. Below is a broad overview of what we know.

Key Trends in State Tax Policy

Across the nation, more than 30 states face revenue shortfalls this year, including New York, Missouri, Oklahoma, West Virginia, Kansas and Louisiana. The outstanding question is whether lawmakers will tackle budget gaps with comprehensive revenue-raising reform or, instead, continue to kick the can down the road with one-time fixes

Lawmakers in Michigan and West Virginia will debate eliminating their personal income taxes, a move that not only would make their tax systems more regressive, but also would impede their ability to balance their budgets in the long run. Meanwhile, lawmakers in Maine, Ohio, Kentucky, Iowa, Georgia, Arizona, South Carolina and other states will consider converting their graduated income taxes to a flat rate. This move would negate the chief advantages of the income tax: its ability to improve tax fairness and adequacy by requiring people with higher incomes to pay higher rates and those with less income to pay lower rates.

Few trends in state tax policy have been as pronounced as the move to generate new revenues to fund vital infrastructure maintenance and expansion. Since 2013, nineteen states have raised or reformed their gas taxes and more than a dozen states will debate doing the same this year. Unfortunately, lawmakers in states such as Tennessee and Wisconsin are only contemplating gas tax increases as part of broader packages that would slash other taxes responsible for funding schools, public safety, and other services. 

While our economy is changing all the time, state and local sales tax laws are often slow to catch up. Recent debates over how best to collect sales tax on e-retail, the gig economy, and the growing personal service industry are certain to continue in 2017. 

Federal, state, and local fiscal policies are highly intertwined. Expansions to the federal income tax base could widen some state tax bases and revenues as well. On the other hand, new federal giveaways could flow through to the states in much the same manner. And changes in the federal tax treatment of income taxes, property taxes, sales taxes, and municipal bonds are always closely watched by state and local lawmakers.

Tax Reform the Right Way

Each of the 50 states has unique challenges and there is no singular right way to approach tax reform. But there are better practices as ITEP’s Fairness Matters chart book reveals: “Given the detrimental impact that regressive tax policies have on economic opportunity, income inequality, revenue adequacy, and long-run revenue sustainability, tax reform proponents should look to the least regressive states in crafting their proposals.”


A Visual Tour of Who Pays State & Local Taxes


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While it can be hard to look away from the important federal policy debates occurring right now in Washington D.C., state lawmakers across the country will also be debating consequential fiscal policy changes in 2017 that will deserve close scrutiny. The context of those debates will vary by state: from coping with major revenue shortfalls, to modernizing decades-old sales and gas tax policies, to flattening or even eliminating revenue sources as vital as the personal income tax. Despite the varying details, key questions about the fairness and adequacy of state tax systems will be raised in all those discussions.

To help inform 2017 statehouse debates, ITEP released a new chart book today that examines how families at different income levels are affected by state and local tax codes. The book, based on ITEP’s Who Pays? study, concludes that:

When states shy away from personal income taxes in favor of higher sales and excise taxes, high-income taxpayers benefit at the expense of low- and moderate-income families who often face above-average tax rates to pick up the slack. Given the detrimental impact that regressive tax policies have on economic opportunity, income inequality, revenue adequacy, and long-run revenue sustainability, tax reform proponents should look to the least regressive, rather than most regressive, states in crafting their proposals.

The book contains 19 charts and focuses largely on how state tax systems differ between states that chose to rely heavily on sales and excise taxes, or on income taxes, to fund public services. Some of the book’s highlights include:

Chart 4 and Chart 5: The notion that states without income taxes are automatically “low tax” is a myth. Low- and moderate-income families often face above-average tax rates in these states.

Chart 6: Wealthy people fare extraordinarily well when states refuse to levy personal income taxes. The nine lowest-tax states for the wealthy are the nine states without income taxes.

Chart 8 and Chart 9: Flat taxes are beneficial for the wealthy, but at the expense of everyone else. Both low-income and middle-income families tend to pay more in flat tax states than in states with more progressive, graduated-rate income taxes.

Chart 10 and Chart 11: When lawmakers choose to rely heavily on sales and excise taxes to fund government, the typical result is higher taxes for low- and moderate-income families.

Chart 15: The design of a state’s income tax matters hugely in determining the overall fairness of each state’s tax system. Of the 15 most regressive state and local tax systems in the nation, 10 exist in states levying either a flat income tax or no personal income tax at all. By contrast, the 15 least regressive states all utilize a graduated-rate personal income tax.

Chart 19: The large degree of income inequality in our nation is made measurably worse by state and local tax policies. Low-income families’ already meager share of total income actually shrinks after state and local taxes are taken into account.

View the chart book



New Year's Gas Tax Changes: Seven Up, Two Down


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By all indications, 2017 is shaping up to be a major year for state gas tax reform. Alaska Gov. Bill Walker has already proposed tripling his state’s gas tax. Task forces in Indiana and Louisiana have laid the groundwork for significant gas tax reforms in those states. And Tennessee Gov. Bill Haslam seems to be on the verge of releasing a gas tax proposal as well. Altogether, it appears that more than a dozen states will seriously debate gas tax changes next year.

But 2017 will also usher in a few gas tax changes before state legislative sessions even begin. Specifically, seven states will be raising gasoline tax rates while two states will be cutting them. Three of the increases (in Pennsylvania, Michigan, and Nebraska) are the result of legislation enacted by lawmakers during the last few years. The other four increases, and both of the rate cuts, are automatic adjustments based on various formulas those states use in setting their gas tax rates.

Here are the details on the changes taking place in each state:

Pennsylvania is raising its gasoline tax by 7.9 cents per gallon and its diesel tax by 10.7 cents. These are the final increases associated with legislation enacted by lawmakers in 2013, though further increases could be triggered in the years ahead if gas prices rise.

Michigan is raising its gasoline tax by 7.3 cents per gallon. The state’s diesel tax will rise by 11.3 cents to bring the two tax rates into alignment with each other. These changes are the result of legislation enacted in 2015. No further changes are expected until 2022, when the state’s gas tax rate will begin rising annually to keep pace with inflation.

Nebraska is raising its gasoline and diesel tax rates by 1.5 cents per gallon as part of a four-part, six-cent increase enacted in 2015.

Georgia’s gasoline tax will rise by 0.3 cents, and its diesel tax will rise by 0.4 cents, under a new formula linking the state’s fuel tax rates to growth in inflation and vehicle fuel efficiency.

North Carolina’s gas and diesel tax rates will rise by 0.3 cents under a new formula linking the state’s fuel tax rates to growth in population and energy prices.

Indiana’s gasoline tax rate will rise by 0.2 cents as it varies each month alongside the price of gasoline.

Florida will implement 0.1 cent gas and diesel tax rate increases because its fuel tax rates are tied to inflation.

New York will cut its gas and diesel tax rates by 0.8 cents per gallon as part of an annual adjustment based on the price of gas.

West Virginia, much like New York, will cut its gas and diesel tax rates by 1.0 cents per gallon as part of an annual adjustment based on the price of gas.

New Jersey’s diesel tax rate will rise by 15.9 cents on January 1 due to legislation enacted last year. The state will not change its gasoline tax rate on January 1, though it did implement a 22.6 cent increase in that tax on November 1, 2016.

See chart of gasoline tax rate changes 

See chart of diesel tax rate changes


Governors' Plans for State Taxes in 2017/2018


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In advance of the new year, several governors have released tax and budget proposals for their states’ next two fiscal years. Below, proposals from Montana, Washington, Alaska, Arkansas, and Oklahoma are outlined. While these proposals are not necessarily indicative of nationwide trends we expect to see in 2017, some help to set a good example of progressive solutions to raising revenue and improving tax fairness.

Montana

Montana Gov. Steve Bullock (D) released a budget proposal that aims to address a revenue gap while improving tax fairness. As highlighted by the Montana Budget & Policy Center, the governor’s budget would restore a higher tax bracket on top earners (on incomes over $500,000) and limit the preferential treatment of income earned from wealth rather than work by limiting the lower tax rate applied to capital gains income to the first $1 million of income. And it would increase parity for the treatment of income by capping the deduction for federal income tax paid for income from estates and trusts like it currently does for other types of income. Perhaps most notably, Gov. Bullock’s proposal also called for the creation of a refundable Earned Income Tax Credit (EITC).

Gov. Bullock’s plan is not all rosy. The budget includes across-the-board cuts to services and by no means flips Montana’s overall tax structure from regressive to progressive. But it is an example of how states can remedy revenue shortfalls without placing all the responsibility on low-income families.

Washington

In Washington state, Gov. Jay Inslee (D) proposed a host of revenue raising measures, largely to increase state funding for K-12 education. The state is under a court order to increase contributions to teachers’ salaries. The governor’s proposal would raise revenues beyond the court’s requirements by establishing a capital gains and carbon tax, increasing the business tax on services provided by some professionals, and eliminating several tax exemptions.

It would establish a 7.9 percent tax on some capital gains earnings, like stocks and bonds. (Homes, farms, retirement accounts, and forestry would be exempt from the new tax.) About half of the revenue from a new carbon tax of $25 per metric ton of pollution would go to K-12 education. Inslee’s proposal restores a decades-old rate cut to the business and occupation tax on professional and personal services. It would also expand the definition of business and occupation to capture revenue from certain out of state retailers that currently avoid the tax. Eliminating several state tax breaks, such as a sales tax exemption for nonresidents, would also generate significant revenue for the state. And because of the increase in state contributions to school funding, the local tax levy in most of the state’s school districts would be lowered.

As the Washington State Budget & Policy Center noted, the proposal would raise needed revenue in a forward thinking and equitable manner, but there is still more that needs to be done to create a more equitable and adequate tax system overall.

Alaska

The stated goal of the budget proposal from Gov. Bill Walker (I) is to continue cutting the size of government, restructure the state’s Permanent Fund Earnings Reserve (Permanent Fund) to make it more sustainable and provide funding for services, and generate new revenue through broad-based taxes. To that aim, the governor’s proposal re-introduced a version of a bill that passed the Senate earlier this year to restructure the state’s Permanent Fund. It would establish a formula to draw from the fund to provide funding for government services. The proposal also includes an increase to the gas tax to cover transportation expenses. Alaska currently has the lowest gas tax in the country (8 cents per gallon) so the proposed threefold increase would keep the state under the national average. The proposal did not give specific guidance on what broad-based taxes the governor hopes to utilize for new revenue. Walker departed from his strategy in the last budget of proposing to reinstate an income tax for the first time in 35 years and instead left a $890 million revenue gap that he hopes will be addressed with the help of the legislature.

Arkansas

Arkansas Governor Asa Hutchinson (R) called for a $50 million decrease in revenue from income tax cuts. This proposal follows the previous budget which included a $100 million income tax cut which the administration claims the state budget fully absorbed. (The governor has pushed back against calls from legislators for even more aggressive income tax cuts unless they are paid for by reductions in exemptions and loopholes.) While being billed as a tax cut for families earning less than $21,000 per year, an ITEP analysis shows that the proposal would only give a cut to 45 percent of taxpayers in the bottom two quintiles, with 75 percent of the tax cut going to taxpayers in the top 60 percent. To provide tax relief for low-income families, the governor would be better off proposing a targeted tax cut like a state EITC.

The governor’s budget proposal has been appropriately praised for its increased funding for critical services, such as the state’s foster care and mental health services, but it missed an opportunity to use sensible tax reform as a source for the needed revenue. Arkansas’s tax structure already suffers from a fundamental mismatch – it’s a low-tax state that’s high-tax for many low-income families – and further cutting the state income tax will not help.

Oklahoma

Oklahoma is expected to face a shortfall of more than $800 million. Gov. Mary Fallin (R) has not released a formal budget, but she has hinted at a few proposals. The first is wishful thinking that the price of oil and gas will rebound by February so the state can cash in on its oil and natural gas production tax. Another includes ideas to generate new revenue – including a cigarette tax, expanding the sales tax to services, and eliminating $8 billion in sales tax exemptions. Since Oklahoma has not met revenue projections it will not reduce its top income tax rate – yet another example contrary to the idea that tax cuts always increase revenue.


ITEP Staff Holiday Entertainment Selections 2016


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Whether you're looking for connection with loved ones over the winter holidays, escapism during trying times, or gift ideas for policy wonks and others in your life, the ITEP list has something for you! Please see below for what our staff members are into this year:

Read Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely
Who isn't in the mood for some behavioral economics this holiday season? This year I'm revisiting Ariely's work that in an entertaining, accessible manner explores human motivation–which, as he finds, is often irrational. - Aidan Russell Davis

Watch The West Wing and Listen to The West Wing Weekly Podcast
For those not keen on the incoming administration, watching The West Wing may provide a needed escape into a world of a more humorous and progressive presidential administration. If you want to dig deeper into the show, there is a new weekly podcast that provides thoughtful commentary on each episode and includes guest appearances by people who worked on the show and in politics. You might also find it interesting to skip to Season 2 Episode 20 in the TV show, where the West Wing staff run into trouble with the organization Americans for Tax Justice, a group inspired by a certain real life tax advocacy group you may be familiar with. - Richard Phillips

Watch 13TH
If you haven’t watched it already, take an hour and a half over your winter break to watch Ava Duvernay’s 13TH (a reference to the 13th Amendment of the U.S. Constitution, which outlawed slavery), a documentary film that explores mass incarceration in the United States, and its disproportionate and pernicious effect on the African American community. The film traces how the U.S. prison population exploded over the last century while simultaneously showing how federal policy funneled billions of dollars to the prison industrial complex, creating financial incentive for the U.S. to have the world’s largest prison population. For-profit prisons continue to find ways to profit from the penal system, including GPS home-based incarceration and detention centers (a euphemism for prisons) for undocumented immigrants. 13TH is available to stream on Netflix. – Jenice R. Robinson 

Listen to the 99% Invisible Podcast with Roman Mars
No matter your interests, you should be able to find at least a few episodes of this podcast about "all the thought that goes into the things we don't think about" that you'd enjoy. One of my favorites is titled U.T.B.A.P.H. – which is all about new uses for buildings that Used To Be a Pizza Hut. Other memorable episodes explore topics such as the invention of elevators, the I Heart NY trademark, and the art of naming. But I've always been particularly impressed by how the podcast manages to keep my attention even when exploring topics that I never thought I was interested in, like barcodes - Carl Davis

Listen to the Invisibilia Podcast with Lulu Miller, Hanna Rosin, and Alix Spiegel
Carl and I are apparently on parallel podcast wavelengths these days! Fans of accessible and fascinating science stories like those in Radiolab will enjoy NPR’s podcast Invisibilia if they’re not already doing so. It focuses on “the invisible forces that control human behavior – ideas, beliefs, assumptions and emotions” – and is delightfully hosted by three women (Lulu Miller, Hanna Rosin, and Alix Spiegel), who even include a dance party at the end of many episodes. Season 1 was excellent and after a long break, Season 2 was even better this year. – Dylan Grundman

Gather Wisdom from Elder Social Justice Advocates at The Veterans of Hope Project
Vincent Harding was a scholar, historian, and activist working to build an America that lived up to its own vision of itself. Among his work, he cofounded The Veterans for Hope Project — a collection of interviews with educators, religious leaders, community activists, and artists who have worked for decades to advance freedom, peace, and human rights in the U.S. and abroad. Their perspectives and wisdom can be very grounding at a time of political uncertainty.  - Lisa Christensen Gee

Read Mothership: Tales from Afrofuturism and Beyond, edited by Bill Campbell and Edward Austin Hall
Engage in some productive escapism with this collection of science fiction stories featuring minority authors, characters, and issues. Short science fiction is a genre I hadn't explored before and turned out to be just the ticket for these times. These stories challenge the reader to think flexibly in order to adjust to a wildly different setting and context for each story, a helpful exercise for those of us feeling disoriented in these trying times. With entries by Junot Diaz and many others, and a wide range from pulpy action stories to intellectual thought experiments, some of these stories are sure to stick with you well after reading. - Dylan Grundman

Listen to A Tribe Called Quest's new album, We Got it From Here... Thank You 4 Your Service
Somehow simultaneously nostalgic and prescient, Tribe's first (and last) new album in 18 years is excellent and timely. - Dylan Grundman

Listen to The Uncertain Hour, podcast from the producers of NPRs Marketplace
This six episode docupod series (one story told over many episodes, think Serial) is produced by the folks at Marketplace's Wealth and Poverty Desk. Reporter Krissy Clark takes an in-depth look at "welfare as we don't know it." In post-fact America, a podcast that is driven by the idea that we know the least about the things we feel most strongly about seems especially appropriate. Listen in order. - Misha Hill

Listen to 2 Dope Queens, podcast from comediennes Phoebe Robinson and Jessica Williams
If you want to escape from reality, but not go too far, this stand-up style podcast is for you. Phoebe and Jessica invite a rotating cast of diverse comics to perform in front of a live audience. They talk about everything from the obsession with dad bod to frustration with white people asking to touch their hair. While the range and style of comedy is broad, most of the comics manage to be socially conscious, politically aware, body positive, gender inclusive, and hilarious. But it's definitely not safe for kids. It's heavy on adult content and language. - Misha Hill

Listen to the Death, Sex and Money Podcast with Anna Sale
This podcast deals with "the big questions and hard choices that are often left out of polite conversation." You never know what to expect from week to week topic-wise, but you can always count on a thought provoking conversation that will leave you with fodder for your next dinner party conversation. It also fosters an unexpected sense of community via listener generated lists such as a google doc with favorite short stories and an "Anthems of Change" playlist and through encouraging listener input on topics and feedback on shows. - Meg Wiehe

Happy Holidays! If you enjoy any of our selections let us know! Write to jenice@itep.org or find us on twitter at @iteptweets


Rise Up Kansas Coalition Calls for Comprehensive Tax Policy Reform


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A statewide coalition is calling for the end of the Brownback tax experiment in Kansas with the release of its 2017 comprehensive plan for tax reform.

 

The “Rise Up Kansas” coalition includes advocacy organizations representing educators, transportation contractors, state employees, early childhood providers, and tax policy experts who want to see an end to the state’s budget crises and tax policies that benefit the few at the expense of critical public investments.

 

The coalition proposes the following: 

 

• End the "March to Zero," stopping the eventual elimination of the individual income tax and preventing future budget crises.

 

• Re-instate the top income bracket of 6.45% for single filers earning $40,000 a year or more ($80,000 for married couples), turning the tax code "right side up" so everyone chips in.

 

• Close the "LLC loophole," cleaning up the tax code and ensuring it's not benefiting a select number of Kansans at the expense of the common good by ending the ability for taxpayers to shield business pass thru income from taxation.

 

• Hold the Kansas Highway Fund harmless for the first time since Gov. Sam Brownback took office by temporarily diverting the 4/10 of a cent sales tax currently dedicated to the State Highway Fund to the State General Fund for a period of three years while also pairing the sweep with an equivalent increase in the state gas tax of $0.11 per gallon.

 

• Reduce the state sales tax on food by 1.5 percent, taking the rate from 6.5 percent to five percent.

 

ITEP analysis shows that the proposal would restore approximately $820 million to the state’s general revenue fund while putting $100 million back into the pockets of Kansas families by reducing taxes on groceries.

 

Gov. Brownback’s recent proposals for addressing the state’s ongoing budget shortfall have included shifting money from the transportation to the general fund, deepening cuts to higher education, K-12 public schools, and community colleges, not making required pension contributions, and selling tobacco settlement dollars.

 

In contrast, the Rise Up Kansas coalition is calling for long-term solutions to the address the state’s long-term fiscal woes, cautioning lawmakers that “[t]he only proposal lawmakers should be willing to accept is one that will restore our state’s financial stability and allow us to once again invest in our future.”


The Road Ahead for State Tax Policy


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Tax policy figured prominently during the national election and likely will be high on the agenda of President-elect Donald Trump and Congress.  And while state and local elections didn’t receive as much national media attention as the presidential race, shake-ups in statehouses will pave the way for significant tax policy debates in a number of states. Just as the election results will shape the direction of the nation’s tax policy in the coming year, it also will affect the direction of tax policy debates in a number of states next year. 

In coming weeks, ITEP will provide a comprehensive overview of state tax policy trends to anticipate in 2017 as well as a look at other states where tax policy will be a dominant issue.  For now, here’s a glance at some of the most important states to watch where the election made a mark on potential tax changes:

Kentucky

The recent election shifted the state exclusively to Republican control. The Kentucky GOP now holds the governor’s mansion, the Senate, and a supermajority of the House of Representatives. Gov. Matt Bevin has announced that Kentucky’s new Republican legislature will overhaul the state’s tax code in 2017. Specifics of what such a reform would look like are unclear, but the governor remains open to eliminating the state’s income tax, and supply-side guru Arthur Laffer is helping to shape the plan.

Alaska

After the election, lawmakers in Alaska formed a new 22-member majority caucus comprised of 17 Democrats, two Independents, and three Republicans. This newly formed majority in the House of Representatives has pledged to set aside party labels to address the state’s fiscal challenges, largely the result of declining oil revenue and legislative inaction. Their focus will be on a sustainable budget that will not abandon core state services. ITEP has weighed in on potential revenue options in two recent reports: Distributional Analyses of Revenue Options for Alaska and Income Tax Offers Alaska a Brighter Fiscal Future, both of which make the case for reinstating a personal income tax.

Iowa

Republicans in Iowa now have control of the House and Senate for the first time since 1998, in addition to the governorship. The 2016 session ended without significant tax changes and many of this year’s issues are likely to resurface when the legislature reconvenes in 2017. For example, the state has not resolved its need for water quality improvements, for which a small sales tax increase has been proposed. But the push to cut taxes for the wealthy will likely have more strength than ever. Legislative action may includeproposals to convert the state’s graduated rate structure to a flat tax, and the new legislature may demand regressive income tax cuts in exchange for funding water quality improvements. Such a compromise, of course, would further weaken the state’s historically low levels of school funding, especially if revenues continue to underperform.

Kansas

Gains by moderate Republicans and Democrats in Kansas’s legislature could usher in a new ideological majority more resistant to Gov. Brownback's tax and economic policies. Though far from the votes needed to override a gubernatorial veto, these shifts could result in a new bipartisan majority coalition that is likely to work together to raise significant revenue to address the state’s continuing revenue problems stemming from the governor’s failed supply-side tax cuts.

Montana

Incumbent Gov. Steve Bullock won re-election in a pricey contest against Republican candidate Greg Gianforte. With the election behind them, lawmakers are now preparing for the 2017 legislative session that starts in January. This week Gov. Bullock released his two-year budget plan, which includes several revenue measures to help plug the state’s revenue gap. Proposed tax cuts include tax incentives for new or expanding businesses touted on the campaign trail, as well as the creation of a state Earned Income Tax Credit (EITC) at 3 percent of the federal EITC. Proposed increases include consumption tax reforms (increased alcohol and taxing medical marijuana) and progressive reforms of adding a new top bracket and rate for income over $500,000 and limiting the tax credit for capital gains to income under $1 million. These proposals face Republican majorities in both the House and Senate.

Missouri

Missouri will go into session with both legislative chambers and the governorship in the hands of Republicans. It is unknown if a major push to cut taxes in Missouri will occur this year, however, as Missouri is one of the states that joined (in 2014) the fiscally irresponsible trend of passing tax cuts that won’t take effect until future years. Those cuts are one reason the state is already looking at revenue shortfalls in coming years, and will also make it all the more difficult to solve issues like the fact that the state’s employees are the lowest-paid in the nation. But some aspects of Missouri’s tax code are woefully out of date, and any reform efforts this year will benefit from the hard work of a special tax study commission that has been meeting all year to identify tax-related issues and options for reform.


At Amazon.com, Sales Tax Evasion is No Longer an Option for Most Shoppers


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UPDATE: A new post on this topic is available here.

This holiday season, the media will cover throes of consumers who will wait in line for door-buster specials, but a large and growing number of shoppers will opt to avoid the crowds by making their purchases over the Internet. 

For Amazon.com customers, this used to mean additional “discounts” because while shoppers have always owed sales taxes on their online purchases, the company didn’t bother to collect the tax in most states.  In fact, as recently as 2012, the bulk of American consumers lived in states where Amazon.com refused to collect sales tax.  The practical result was an automatic price advantage of around 5 or 10 percent (depending on each state’s sales tax rate) for the e-retailer, and less money in the coffers of state and local governments.

But Amazon.com’s sales tax collection practices have changed dramatically in the last five years.  As of 2016, the company collects sales tax from its customers in 29 states, including 19 of the 20 most populous states in the country.  Altogether, about 86 percent of the U.S. population lives in states where Amazon.com collects sales tax.

This change, unfortunately, isn’t due to the company seeing the error of its ways.

Thanks to a decades-old Supreme Court case, e-retailers operating outside of a state’s borders cannot be compelled to collect the sales taxes owed by their customers.  For years, Amazon.com took advantage of this provision.  In fact, in 2011, the nation’s largest e-retailer collected sales taxes from its customers in just five states, home to 11 percent of the country’s population. 

This recent change in Amazon.com’s tax collection practices is a side effect of its effort to cut down on delivery times by opening distribution centers near its customers.  As the company expanded its physical footprint to more states, it has increasingly lost the ability to hide behind its out-of-state status as a way of avoiding sales tax collection requirements.  The result is a somewhat more rational application of the sales tax in most states: today most Amazon.com shoppers are paying the same sales taxes as their neighbors who prefer to shop at local “brick and mortar” stores.

But the march toward a more reasonable sales tax is far from over.  Online shoppers can still evade the sales tax by buying from smaller e-retailers that lack a physical presence in their state.  And even Amazon.com, despite proving itself capable of collecting sales tax from the vast majority of its customers, is refusing to participate in the sales tax collection systems of 17 states where it lacks a physical presence: Alaska, Arkansas, Hawaii, Idaho, Iowa, Louisiana, Maine, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, and Wyoming.  (The company also does not collect tax in Delaware, Montana, New Hampshire, and Oregon since these states lack a state or local-level general sales tax.)

As we explain in an updated policy brief, the sales tax collection practices of e-retailers will remain a messy patchwork until the federal government gets involved.  That involvement could take the form of legislation allowing states to require sales tax collection by out-of-state e-retailers.  Or it could come through a future decision by the Supreme Court to expand the circumstances under which states can require sales tax collection.  While some holiday shoppers may not like it, either of these outcomes would bring about a major improvement in the enforcement of our state and local sales tax laws.

Read ITEP’s policy brief on the sales tax issues associated with online shopping

  1.  
    1. UPDATE: Amazon began collecting sales tax in four additional states on January 1, 2017: Iowa, Louisiana, Nebraska, and Utah. In total, the company now collects sales tax in 33 states that are collectively home to almost 90 percent of the US population. The map below has been updated to reflect these changes.

Chicago, Bay Area, and Boulder Adopt Soda Taxes


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Ballot measures to levy a tax on sugar-sweetened beverages passed in three Bay Area, Calif., cities – Albany, Oakland and San Francisco – and Boulder, Colo., on Election Day. And just two days after, the Cook County (Illinois) Board of Commissioners also decided to tax sweetened beverages. A one-cent-per-ounce tax will be levied in Bay Area cities and Cook Country, and a two-cent-per-ounce tax will apply in Boulder.

The number of U.S. residents living in localities with a soda tax law increased by almost 350 percent last week, from 1.7 million to 7.5 million (though a number of these taxes have yet to take effect). This striking increase is largely due to Cook County—the county that includes Chicago and surrounding suburbs and has a population of over 5.2 million residents. Cook County is nearly 5 times as populous as the next largest city with a soda tax on the books, Philadelphia. The recent success of the tax has spurred proponents to set their sights on Santa Fe, New Mexico, and the state of Illinois, per reporting by Politico Pro Agriculture.

Cook County Board President Toni Preckwinkle pushed the soda tax proposal primarily as a revenue- raising measure to balance the county budget and avoid further layoffs. But as we noted in our recent report, The Short and Sweet on Taxing Soda, taxing sugar-sweetened beverages is regressive and an unsustainable source of revenue. U.S. soda consumption is reaching record lows. If the tax has its intended effect, it would drive consumption even lower, meaning localities may not be able to rely on it as a consistent source of revenue.

Despite the shortcomings of soda taxes, new research suggests that on balance, taxing sugar-sweetened beverages can improve public health and reduce healthcare spending. Whether those public health benefits outweigh the fiscal shortcomings of these taxes is a matter for the public and their elected officials to decide.

Over the past few weeks we’ve written about a number of tax-related questions that voters will see on their ballots next week.

On income taxes, California voters will decide whether to continue the state’s progressive income tax rates on high earners enacted in 2012, while Maine may create a similar high-income tax bracket to help fund public schools. Colorado could implement the nation’s first universal healthcare plan, funded by a 10 percent payroll tax. Oregonians will cast their votes on a hotly debated corporate tax increase for education, health care, and senior services.

Regarding sales taxes, Oklahoma voters could approve a constitutional amendment to raise the state sales tax by a percentage point to give teachers a raise and fund other education priorities. Meanwhile, Missouri could amend its constitution to prohibit modernizing the sales tax to apply to the growing service sector.

 Other tax questions on ballots this year include soda taxes in multiple cities, cigarette tax increases in four states (California, Colorado, Missouri, and North Dakota), and marijuana legalization and taxation initiatives in five states (Arizona, California, Maine, Massachusetts, and Nevada). And following years of state tax and funding cuts affecting cities, counties, and schools, many of these local jurisdictions are asking voters to approve new or higher local taxes to fill in for lost state funding.


On Revenues and Referenda: Important Tax Questions on Local Ballots, Too


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Our “Revenues and Referenda” has so far focused on key state-level tax-related questions facing voters on Election Day. But many cities, counties, and school districts are posing questions to their residents Tuesday as well. Below we highlight some trends across states and a few of the more interesting local ballot questions.

The strongest nationwide trend in local ballots is that in many cases, local governments are asking voters to create or raise local taxes to fill in for state funding that has been cut in recent years, often largely due to short-sighted tax cuts enacted at the state level. For example, state support for K-12 schools remains below pre-recession levels in at least 23 states and the largest school funding cuts have often correlated with major income tax cuts.

Ohio is a case study in state-level tax slashing forcing costs onto localities that are now having to ask voters to approve local taxes to keep vital services afloat. The state eliminated its estate tax beginning in 2013.Eighty percent of its revenue went to cities and villages. Then the state cut its Local Government Fund in half as part of efforts to fill a budget shortfall caused by tax cuts. These and other measures have cut funding for local services by at least $1 million each in more than 70 Ohio cities. Twenty-seven Ohio cities and villages will seek local income tax increases, and most of them cite the state cuts as a primary reason. The measure in Cleveland, for example, would raise about $80 million to fund reforms in the police department and prevent layoffs.

Voters in Olympia, Washington, will consider enacting a local income tax of 1.5 percent on income over $200,000. This would raise $3 million to help local high school graduates and GED recipients attend community college or public university. The measure would also create the only income tax in Washington State.

State transportation and infrastructure funding has suffered as well, often due to failure to modernize state gas and sales taxes, and again some local entities are taking matters into their own hands. According to the Center for Transportation Excellence, “2016 will be a record-breaking year for transportation ballot measures. There will be 70 ballot measures in the United States” that could raise a combined $175 billion. Several California cities, for example, are voting on sales tax increases to pay for local transportation needs. Voters face similar questions in the Atlanta, Georgia, area.

Other localities are attempting to expand their tax bases rather than increase rates, most notably by taxing sugar-sweetened beverages. Three California cities and Boulder, Colorado, are among localities attempting to tax soda-pop.


On Revenues and Referenda: Will Maine Voters Increase Taxes on the Wealthy to Support Public Education?


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Maine voters will decide the fate of Question 2 next week, a ballot measure that increases taxes on the state’s wealthiest households and provides additional revenue for K-12 education.  If approved, a 3 percent tax surcharge would apply to taxable income above $200,000 generating more than $150 million annually for a new dedicated public instruction fund.  An ITEP analysis found that the measure would only impact Maine’s wealthiest 2 percent of households who currently pay an effective state and local tax rate lower than the other 98 percent of Mainers.

Proponents of the measure, led by Stand up for Students Maine, say that school funding has been falling short and years of tax cuts for wealthy Mainers are partially to blame.  Measure 2 would not only bring in additional revenue for K-12 spending, but it would also help to improve tax fairness by requiring the state’s wealthiest households to pay their fair share. 

Opponents argue that the new revenue generated by the measure will not solve public school inequities.  There is also concern that the three percent surcharge would make Maine’s top marginal personal income tax rate the second highest in the country behind California.

Polling results show Question 2 has strong support from potential voters.  If such support pans out at the ballot, Maine will have a more fair and adequate revenue stream for public education.


Looking Back at Four Years of Gas Tax Reforms


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While New Jersey is getting plenty of attention this week for increasing its gas tax for the first time in decades, it’s worth remembering that the Garden State is not alone in boosting its gas tax to fund infrastructure improvements. Lawmakers in nineteen states and the District of Columbia have enacted gas tax increases or reforms since 2013 and more states will very likely follow suit next year. Here’s a quick rundown of where state gas taxes have been increased or reformed since 2013:

2016 Enacted Legislation

1. New Jersey: A 23 cent per gallon increase in the gasoline tax took effect on November 1, 2016. The diesel tax will rise by a similar amount next year in two stages (on January 1 and July 1).

 

2015 Enacted Legislation

2. Georgia: A 6.7 cent increase took effect July 1, 2015. A new formula for calculating the state’s tax rate will allow for future rate increases alongside inflation and vehicle fuel-efficiency improvements. This will allow the tax to retain its purchasing power in the years ahead.

3. Idaho: A 7 cent increase took effect July 1, 2015.

4. Iowa: A 10 cent increase took effect March 1, 2015.

5. Kentucky: Falling gas prices nearly resulted in a 5.1 cent gas tax cut in 2015, but lawmakers scaled that cut back to just 1.6 cents by setting a minimum “floor” on the state’s gas tax rate. The net result was a 3.5 cent per gallon increase relative to previous law.

6. Michigan: The state’s gasoline and diesel taxes will rise by 7.3 cents and 11.3 cents, respectively,on January 1, 2017. Beginning in 2022, the state’s gas tax will begin rising annually to keep pace with inflation.

7. Nebraska: A 6 cent increase was enacted over Gov. Pete Ricketts’ veto. The gas tax rate will rise in 1.5 cent increments over four years. The first of those increases took effect on January 1, 2016.

8. North Carolina: Falling gas prices were expected to trigger a gas tax cut of 7.9 cents per gallon, but lawmakers scaled that cut down to just 3.5 cents—resulting in a 4.4 cent increase relative to previous law. Additionally, a reformed gas tax formula that takes population and energy prices into account will bring further gas tax increases in the years ahead.

9. South Dakota: A 6 cent increase took effect April 1, 2015.

10. Utah: A 4.9 cent increase took effect on January 1, 2016. Future increases will occur under a new formula that considers both fuel prices and inflation. This reform made Utah the nineteenth state to adopt a variable-rate gas tax.

11. Washington State: An 11.9 cent increase was implemented in two stages: 7 cents on August 1, 2015 and a further 4.9 cents on July 1, 2016.

 

2014 Enacted Legislation

12. New Hampshire: A 4.2 cent increase took effect July 1, 2014.

13. Rhode Island: The gas tax rate was indexed to inflation. This resulted in a 1 cent increase on July 1, 2015 and will lead to further increases in most odd-numbered years thereafter (2017, 2019, etc).

 

2013 Enacted Legislation

14. Maryland: The first stage of a significant gas tax reform, which tied the tax rate to inflation and fuel prices, took effect on July 1, 2013. Since then, the rate has increased by a total of 10 cents above its early-2013 level.

15. Massachusetts: A 3 cent increase took effect July 31, 2013.

16. Pennsylvania: The first stage of a significant gas tax reform, tying the rate to fuel prices, took effect on January 1, 2014. So far the rate has increased by 19.1 cents per gallon.

17. Vermont: A 5.9 cent increase and modest gas tax restructuring took effect May 1, 2013. Since Vermont’s gas tax rate is linked to gas prices, however, the actual rate has varied since then.

18. Virginia: As part of a larger transportation funding package, lawmakers raised statewide diesel taxes effective July 1, 2013, as well as gasoline taxes in the populous Hampton Roads region. Outside of Hampton Roads, gasoline taxes are 1.3 cents lower than they were before the reform, but a new formula included in the law will cause the tax rate to rise alongside gas prices in the years ahead.

19. Wyoming: A 10 cent increase took effect July 1, 2013. Gov. Matt Mead’s signature on this increase made Wyoming the first state to approve a gas tax increase in over three and a half years.

20. District of Columbia: Legislation approved in 2013 has yet to impact DC’s gas tax rate in practice, though by tying its tax rate to fuel prices the District opened the door to potential gas tax rate increases in the future.


On Revenue and Referenda: Soda Taxes


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Voters in Albany, Oakland and San Francisco, Calif., as well as Boulder, Colo., will soon decide whether their cities should tax soda and other sugar-sweetened beverages. Proponents of sugar taxes are touting these ballot measures as public health initiatives that would reduce excess consumption of sugary drinks linked to obesity, type 2 diabetes, and tooth decay. Similar taxes were enacted in Berkeley, Calif., in 2014 and in Philadelphia, Pa., earlier this year.

You can read more about the advantages and disadvantages of taxing sugary drinks in our new report, The Short and Sweet on Taxing Soda.

The ballot measures would levy an excise tax ranging from 1 to 2 cents per ounce on producers and distributors. A 12-pack of 12-ounce sodas that costs $4 now would be $5.44 after the tax in the California cities and $6.88 in Boulder. The tax would be applied to sodas, energy and sports drinks, sweetened iced teas and lemonades, and juices with added sugar. It would not apply to diet sodas, milk products, naturally sweet beverages (such as 100 percent fruit or vegetable juice), meal replacements, baby formula, drinks taken for medical purposes, or alcohol (which is subject to a separate tax).

The battle over soda taxes has drawn big money on both sides of the campaign. California leads the country in campaign contributions for ballot initiatives, and the Bay Area soda tax measures have drawn nearly $14 million to campaign initiatives. Opponents of the taxes, largely funded by the American Beverage Association, have spent $10 million on television ads, while supporters, including former New York Mayor Michael Bloomberg, spent $3.7 million in San Francisco and Oakland.

While proponents of the taxes argue that they are necessary public health measures, opponents counter that the taxes are regressive and will hurt low-income communities. They also stress the taxes will hurt small retailers who, they claim, will have to raise the price of all their products to cover the new tax. Preliminary interviews from a UC Berkeley researcher examining the impact of Berkeley’s tax did not identify any retailers who reported raising prices of non-food items to cover the beverage tax. And Albany’s measure specifies that the tax exempts “small retailers.”

Many campaigns against the taxes have framed them as a “grocery tax” and suggested that lawmakers may levy taxes on other food products later if this is enacted. This is misleading because first, taxing other groceries wouldn’t achieve the public health goals of these measures, and secondly, most states that don’t tax groceries already exclude soda from that exemption. This means soda is already subject to the alleged “grocery tax” by being included in the general sales tax base.

The public health principle behind taxing sugar-sweetened beverages is the same as taxing cigarettes or other so-called vice products. A price increase should decrease consumption, thus decreasing the negative health outcomes associated with consumption.  But the link between sugary drinks and obesity or diabetes isn’t as straightforward as the link between tobacco and cancer. Many other factors, such as family history and physical activity, determine a person’s likelihood for obesity or diabetes. Further, although sugar-sweetened beverages are responsible for most of the calories from sugar consumption and the body digests liquid sugar differently than sugars in solid foods, sugary drinks represent only a small portion of most people’s total daily caloric intake.

Despite their public health goals the ballot measures in California cities are not well targeted to reduce sugar consumption. The taxes are determined by the calorie content of drinks rather than sugar content.  If the public health goal is to reduce sugar consumption, then sugar content should determine the tax.

A similar ballot measure in 2014 failed in San Francisco. Although the measure received a majority of the vote, it fell short of the required two-thirds majority. This year’s measure will only require a simple majority vote to pass. If passed, San Francisco projects the tax will generate $15 million annually and would make it the second largest U.S. city with a tax on sugary drinks.

If all three California cities pass their ballot measures this year, more than 20 percent of Bay Area residents could expect to pay more for sugar-sweetened beverages. The measures in Albany and Oakland are expected to generate $223,000 and $6 million annually for the cities’ respective general funds. The city of Boulder estimates the tax would generate $3.8 million in revenue to be used for a variety of public health campaigns to combat obesity.

As our report outlines, soda taxes like other consumption taxes are inherently regressive. But the excess sugar content in sugary sweetened beverages have public health implications, and new research suggests soda taxes can improve public health and reduce healthcare spending. Voters will have to weigh all of this at the polls in November.

Read the Short and Sweet on Taxing Soda


On Revenues and Referenda: Colorado Voters to Decide on Universal Healthcare


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On Election Day, Colorado voters will decide whether to implement the nation’s first universal healthcare plan.

Amendment 69 would establish ColoradoCare, a healthcare financing system that would provide medical coverage to all Colorado citizens without copays, coinsurance, or deductibles. Upon full implementation, the state would pay for the plan with a 10 percent payroll tax. About 6.67 percent of the tax would be paid by employers and 3.33 percent by employees. The state taxable portion of non-payroll income, such as capital gains, rental, or pension income, would also be subject to the full 10 percent tax paid via the personal income tax. Colorado citizens who receive healthcare from Medicare, the Veteran’s Administration, Federal Employee Health Benefits Plan, TRICARE (for military and dependents), and Indian Health Services, would maintain their current coverage. ColoradoCare would replace Medicaid and the state-run ACA marketplace. Citizens could opt out of ColoradoCare and purchase private insurance, but they would still be subject to the payroll tax.

A grassroots collaborative that ultimately formed Universal Health Care for Colorado initiated the ballot initiative. Proponents argue the plan will provide comprehensive care at a lower cost not only by reducing administrative costs, fraud, and duplication, but also by increasing purchasing power for bulk drugs and medical equipment.

Opponents are more skeptical, particularly of the financing method. Many who oppose the measure argue the payroll tax is insufficient to cover rising healthcare costs and could leave the state with significant unfunded liabilities. The Colorado Health Institute estimated that the proposal would amass an $8 billion deficit after 10 years that would continue to grow. Some groups that support universal healthcare, including the Colorado Fiscal Institute (CFI) oppose Amendment 69)due in part to the unsustainability of the tax.  Opponents have also cited concerns about the lack of gubernatorial or legislative oversight of the 21-member Board of Trustees that would make plan decisions, and lack of coverage for elective abortion care.

A  CFI analysis found that ColoradoCare could result in lower healthcare costs even for those currently without insurance who pay nothing in premiums; however, low-wage earners currently receiving Medicaid could end up paying more if tax credits are not made available. Further, it is unclear if the 10 percent payroll tax would be a sufficient long-term revenue source for financing healthcare, particularly since healthcare costs have grown faster than wages and inflation.


Giving the Gas Tax a New Look in Louisiana


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It may sound strange, but there are very few tax policy issues that generate support among lawmakers quite like a gas tax hike—at least at the state level.  While the federal government may not be interested in raising its gas tax anytime soon, 19 states have enacted gas tax increases and/or reforms since 2013.  And all signs are pointing toward that number growing in the months ahead.

Louisiana is among the states that will seriously consider a gas tax increase in 2017, and for good reason.  At the start of next year, the state’s gas tax rate will officially become 27 years old.  Only five states (Alaska, Oklahoma, Mississippi, South Carolina, and Tennessee) have waited longer since last updating their tax rates.  Unsurprisingly, most of those five states will be considering gas tax increases next year as well.

Last week I had a chance to travel to Baton Rouge to speak with the Louisiana Governor’s Task Force on Transportation Infrastructure Investment.  Part of that conversation (PDF) included a look at how growth in construction costs and improvements in vehicle fuel economy have combined to erode the purchasing power of Louisiana’s gas tax by 47 percent since 1990.  And on top of that, we know with almost complete certainty that both of these developments are going to continue to impact the state’s gas tax in the years ahead.

The only way to shore up gas tax revenues for the long run in the face of inevitable inflation and fuel economy growth is to index the tax rate to inflation or some other economic measure.  This sensible reform is growing in popularity.  Five states (Maryland, Pennsylvania, Rhode Island, Utah, and Virginia) as well as the District of Columbia have adopted indexed gas taxes in just the last three years.  Today most Americans live in states with variable-rate gas taxes of some type.

My presentation (PDF) dives more deeply into some of the details—including a discussion of how volatility can be avoided under an indexed gas tax.  But it’s already clear that the big picture issues are well understood in Louisiana.  Department of Transportation and Development Secretary Shawn Wilson says that in his extensive conversations with stakeholders and citizens thus far, “we hear people say we need to invest more” in infrastructure.  And the means of generating that investment are becoming increasingly clear: “at all of the meetings there was a pretty vocal level of support for addressing the gas tax.”


On Revenues and Referenda: Marijuana Legalization and Taxation Initiatives


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Voters in Arizona, California, Maine, Massachusetts, and Nevada will vote this November on ballot initiatives that, if passed, will legalize and tax marijuana purchased for recreational use.

These states are on the path of Alaska, Colorado, Oregon, and Washington, which already allow the production, taxation, and sale of marijuana to adults for recreational purposes. Should these initiatives pass, the number of Americans living in states with legal marijuana would roughly quadruple, from about 18 million to 75 million, around 23 percent of the U.S. population.

States that already allow recreational marijuana sales have proven that while marijuana taxes are no budgetary panacea, they can raise millions in revenue. For example, as of mid-way through October 2016, Washington has collected $339 million from excise taxes on recreational marijuana since sales began in 2014. Similarly, Colorado collected about $300 million in revenue from marijuana sales between January 2014 and August 2016. For Colorado, this puts marijuana revenue at about 1 percent of the state’s general fund, which is well ahead of the amount collected on alcohol sales, yet still a bit below the revenue collected from cigarette taxes.

Here's a breakdown of each state's ballot initiative, including the potential plan to tax marijuana and what level of revenues these states could expect to collect:

Arizona

Arizona’s marijuana ballot initiative would place a 15 percent excise tax on marijuana and marijuana product sales. The revenues generated by this tax would be earmarked such that 40 percent would go to schools for education-related expenses, 40 percent would go to schools to provide full-day kindergarten services, and 20 percent would go to the Arizona Department of Health services to educate the public on the dangers of alcohol, marijuana, and other substances. The Arizona Joint Legislative Budget Committee estimates that this initiative would raise $135 million in extra revenues in fiscal years 2019 and 2020.

California

The California ballot initiative would levy excise taxes on the cultivation of marijuana flowers and leaves at $9.25 per ounce and $2.75 per ounce, respectively. The measure also places a 15 percent excise tax on the retail price of marijuana. A fiscal analysis of the initiative found that it would raise revenues in the high hundreds of millions of dollars to over $1 billion annually.

Of the revenues raised by the taxes imposed by this measure, $2 million would go to UC San Diego for the study of medical marijuana, $10 million per year for 11 years would go to California universities to research and evaluate the implementation and impact of the ballot initiative, $3 million per year for five years would go to the California Highway Patrol to develop protocols to determine whether a driver is impaired due to marijuana consumption, and $10 million, increasing each year by $10 million until reaching $50 million in 2020, would go to grants to promote employment and health and legal services in communities disproportionately affected by past federal and state drug policies. Of the remaining revenue from the measure, 60 percent would go to youth programs, 20 percent to the prevention and alleviation of environmental damage caused by illegal marijuana producers, and 20 percent to programs that reduce the negative impacts on health and safety resulting from the initiative.

Maine

Maine’s ballot initiative would levy a 10 percent excise tax on recreational marijuana. Additionally, jurisdictions can also impose privilege taxes on marijuana cultivation and manufacturing activities. Revenues raised from this tax would be deposited in the state’s General Fund and cannot be used for new state programs, except to train law enforcement personnel around marijuana retail laws and rules. The Maine Office of Fiscal and Program Review estimates that the initiative would raise $2.8 million in additional revenues in 2017 and 2018, and $10.7 in subsequent years.

Massachusetts

The Massachusetts ballot initiative would subject marijuana to the state’s 6.25 percent sales tax and retail marijuana would also be subject to a 3.75 percent excise tax, bringing the total state tax rate to 10 percent. Local municipalities would have the option of adopting an additional two percent excise tax. Medical marijuana would be exempt from these taxes. The Massachusetts Special Senate Committee on Marijuana estimates that the taxes would produce about $60 million in additional revenues. Of the $60 million, about $25 million would be set aside to fund the implementation of, enforcement of, regulation of, and local assistance for state marijuana policy, with the remainder going to the general fund.

Nevada

The Nevada ballot initiative would levy a 15 percent excise tax on marijuana. The revenues from state taxes would go to the State Distributive School Account, while revenues from local sales and use taxes would be distributed to the state and local governments in the same manner that they are currently distributed.

Aaron Mendelson, an ITEP intern, contributed to this report.


State Rundown 10/26: No More Free (Uber) Rides in Pennsylvania and a Growing Number of States Facing Revenue Challenges


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This week we are bringing you news on taxing Uber in Pennsylvania and yet more states with revenue gaps to fill in 2017. Thanks for reading the Rundown!

-- Meg Wiehe, ITEP State Policy Director, @megwiehe

  • A bill to legalize and tax ride-sharing services in Pennsylvania, such as Uber and Lyft, heads to Gov. Tom Wolf's desk for signature. The legislation would enact a 1.4 percent tax on all rides and put an end to the question of their ability to operate legally in Philadelphia. Speaking of Philadelphia, its school district will benefit from two-thirds of the revenue collected in the city.
  • From one Governor to another... West Virginia Gov. Earl Ray Tomblin says that the next governor of the Mountain State will have to raise taxes to make ends meet. 
  • In Wyoming, despite falling severance tax revenue and a confirmed $156 million shortfall, lawmakers have punted on raising new revenue. This November, voters will head to the ballot box to determine whether the state should invest more money in the stock market while the Governor is considering a withdrawal from the state's rainy day fund. 

  • Count South Dakota among the states expecting to grapple with budget problems in 2017, due to a struggling agriculture sector and high reliance on a sales tax base that is losing revenues to untaxed internet sales.

What We're Reading...

  • New Jersey Policy Perspective released a report today that explores the impact of federal expansion of the earned income tax credit (EITC) on New Jersey adults without children. 

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.


State Rundown 10/19: An Attempted Sales Tax Ban, Kansas Revenue Talk, and Ballot Measures


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This week we are bringing you news of Montana's attempt to ban statewide sales taxes, ballot measures to tax e-cigarettes (in California), efforts to enact the nation’s first carbon tax (in Washington state), an initiative to increase income taxes (in Cleveland, Ohio), budget problems in Kansas (along with possible revenue raising momentum), and efforts to address revenue shortfalls in Virginia, Nebraska, and Massachusetts. Thanks for reading the Rundown!

-- Meg Wiehe, ITEP State Policy Director, @megwiehe

  • Montana's Gov. Bullock has proposed banning a statewide sales tax. While there is no state sales tax currently levied, the constitution allows for one up to 4 percent—a possibility the governor wants to do away with. But don't expect to see any action on this in the near future. Passage requires support from two-thirds of the legislature and voter approval in the 2018 general election.
  • If voters approve Proposition 56 in a few weeks, California will become the fifth state to tax e-cigarettes, joining Kansas, Louisiana, Minnesota, and North Carolina.
  • Voters in Washington state have the chance to vote on what could be the first carbon tax in the country, a measure that has divided support even within the environmental community.
  • As a result of numerous tax cuts, Ohio cities continue to struggle. This November, Clevelanders will consider the city's first income tax increase in 35 years. To avoid deep cuts to city services, Issue 32 would increase the tax half a percent to 2.5 percent.
  • In Kansas, researchers warn that population changes will exacerbate state budget problems, Democrats and moderate Republicans are pushing for the legislature to raise revenue needed for public investments, and Gov. Brownback is making efforts to spread "good economic news" while not ruling out the possibility of a future tax increase.
  • Budget balancing measures to address Virginia's $1.5 billion revenue shortfall have commenced. Gov McAuliffe has called for budget cuts, canceling state employee pay raises, tapping reserve funds, and reconsidering the state's choice not to take part in Medicaid expansion. It remains to be seen whether revenue-raising options will be considered during the 2017 legislative session.
  • More on revenue shortfalls: Nebraska is one of many states facing a current and projected revenue shortfall. Unfortunately, it is also one of several states where some leaders think the solution to these problems is to make further cuts. In Massachusetts, a $295 million budget deficit has been identified. As a result, Gov. Baker is pursuing workforce reductions and contemplating cross-agency spending cuts. 

What We're Reading...

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.


On Revenues and Referenda: Weighing Cigarette Tax Increases


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Over the past 15 years, nearly every state has enacted a cigarette tax increase to fund health care, discourage smoking, or to help balance state budgets. While attempts to address health concerns have merit, the latter is bad public policy. This November, four states have cigarette and tobacco tax ballot measures up for consideration.  

The cigarette tax is a regressive tax that falls disproportionately on low-income taxpayers. These individuals spend more of their income on the tax than their wealthier neighbors, who also tend to be less likely to smoke. However, research has shown that cigarette taxes can be used to effectively discourage smoking, particularly among children and young adults. Every 10 percent increase in the price of cigarettes may reduce overall cigarette consumption by roughly 3 to 5 percent. This statistic is even more compelling for children and young adults who are two to three times more likely to stop smoking as a result of a price increase.

Taking a step back from the specific merits and drawbacks, the use of cigarette taxes to plug budget gaps is bad policy. Taxes exist primarily to help fund and support public services. Cigarette tax increases are often politically feasible and expedient revenue-raisers, and they can help do just that. However, there is a downside.

Aside from hitting low- and middle-income taxpayers harder than upper-income taxpayers, cigarette tax revenues grow more slowly than do most other taxes. This is partly due to the flat per-pack basis of the tax, which will not fluctuate with inflation and will remain stagnant absent policy change or a reversal of declining smoking rates. As a result, cigarette tax revenue declines over time and is unlikely to be sustainable in the long-run.

During 2016 legislative sessions, Louisiana, Pennsylvania, and West Virginia enacted cigarette tax increases to fill structural gaps and support ongoing expenses. While it was vital for these states to raise revenue amid growing shortfalls, broad-based tax changes could have provided a more stable, ongoing source of revenue.

Of the ballot measures up for consideration in California, Colorado, Missouri, and North Dakota, most are driven by health concerns and the realization of revenue savings that could result from reduced smoking rates rather than tools to raise revenue to address shortfalls or support ongoing expenditures.

Here’s a summary of the cigarette tax initiatives that taxpayers will vote on next month:

  • California Proposition 56 calls for a $2-per-pack tax increase on cigarettes, an increase from the current state tax of $0.87 to $2.87-per-pack. Revenue raised would be redirected to health care for low-income Californians.
  • Colorado Amendment 72 calls for a $1.75-per-pack tax increase on cigarettes, an increase from the current state tax of $0.84 to $2.59-per-pack. Revenue raised would fund a variety of programs, including medical research, cancer and smoking prevention, veteran health, and healthcare in rural and underserved areas.
  • Missouri has two different cigarette tax initiatives on the ballot this year, each with quite different funding objectives:

    • Constitutional Amendment 3 calls for a $0.60-per-pack increase on cigarettes in $0.15 yearly increases by 2020, an increase from the current $0.17 state tax (the lowest in the nation) to $0.77-per-pack, and a $0.67-per-pack initial rate fee on tobacco wholesalers. Revenue raised would largely fund early childhood education programs, with additional funds going toward health care facilities and smoking prevention programs.
    • Proposition A calls for a gradual $0.23-per-pack tax increase on cigarettes by 2021, an increase from $0.17 to $0.40-per-pack, and an additional 5 percent sales tax for other tobacco products. Revenue raised would be placed in the state’s transportation infrastructure fund to repair roads.
  • North Dakota Initiated Statutory Measure 4 calls for a $1.76-per-pack increase on cigarettes, an increase from the current state tax of $0.44 to $2.20-per-pack, and doubling the tax on other tobacco products from 28 percent to 56 percent. Revenue raised would be divvyed between two trust funds, one for community health and the other to support veteran health care services and programs.

For more information, read ITEP’s brief Cigarette Taxes: Issues and Options that looks at the advantages and disadvantages of cigarette taxes, and cigarette tax increases, as a source of state and local revenue.


On Revenues and Referenda: Missouri Voters Could Ban Sales Tax Modernization


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One of the measures facing Missouri voters this fall is Amendment 4, which would modify the state constitution to prohibit future expansions of state or local sales taxes to “any service or transaction” not already included in the tax base.

This amendment would severely restrict Missouri’s ability to adjust its sales tax in the future to adapt to economic changes. As we have written elsewhere, expanding the sales tax base to include consumer services is a reform needed to bring state tax codes into better alignment with the 21st century economy, improve the sustainability of sales tax revenues and the many vital services they fund, reduce upward pressure on sales tax rates and other taxes, and remove arbitrary and unfair distinctions in what’s taxed and what’s not. Banning such expansions would prevent any of these benefits from being realized in Missouri.

Most state sales taxes, including Missouri’s, apply to purchases of physical goods but not to most services. And in most cases this is simply because sales tax codes were created in the 1930s when services were neither a large part of the economy nor feasibly tracked and taxed. But while the economy has shifted substantially over time – services were 67 percent of household consumption in 2015 and technology has made it much easier to apply and enforce taxes on services – most state sales taxes have not kept up with the times. A 2007 Federation of Tax Administrators survey identified 168 services taxed in at least one state. Missouri’s sales tax came in as even more outdated than most, taxing only 26 of those services, fewer than all but 12 states.

And the stakes are not low. Sales and similar taxes are crucial revenue streams for states and local governments, making up nearly half of state tax collections nationwide in Fiscal Year 2014-2015, and 43 percent in Missouri specifically. But as currently constituted, they are an unsustainable revenue source. As the economy shifts and sales taxes like Missouri’s remain stuck in the past, state and local revenues and the services they pay for can suffer. In the words of the Missouri Municipal League, which opposes Amendment 4, its approval “could lead to a significant reduction in vital local services, such as police, fire, street maintenance, parks and more.”

To avoid such service cuts without expanding sales taxes to services, the only options are raising sales tax rates or increasing other taxes or fees. At the state level this generally means upward pressure on personal and corporate income taxes, while at the local level the only significant revenue option other than sales taxes is usually the highly unpopular property tax.

Sales taxes, including those on services, are regressive or weigh more heavily on lower-income families than those higher up the income scale. This is a crucial consideration and a strong reason to avoid relying too heavily on sales taxes, but that can be mitigated with targeted credits like the Earned Income Tax Credit and other means that benefit those lower-income families, or by using revenue gained from expanding the sales tax base to reduce the sales tax rate. It is harder to mitigate the fact that taxing goods while exempting services arbitrarily favors the consumers and providers of services over similarly situated people who just happen to purchase or sell goods. And when shrinking tax bases force sales tax rates higher, the wedge between these two groups is driven wider, exacerbating the unfairness as well as any economic distortion it may cause.

Constitutionally banning sales tax modernization in Missouri would prevent the state from matching its sales tax to the economic realities in 2016, much less keeping up with economic changes and technological advances that are yet to come. If the amendment passes, other states should consider it a cautionary tale rather than an example to follow.


On Revenues and Referenda: Will Oregon Require More from Large Businesses?


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Perhaps one of the most debated ballot measures this fall is Oregon’s Measure 97. Multiple economic analyses are circulating, millions of dollars are being spent campaigning, rotary clubs and chambers of commerce are discussing, teachers are canvasing, editorial boards and current and former state governors are weighing in, and polls are fluctuating

Measure 97 would increase the state's corporate minimum tax for businesses with annual Oregon sales over $25 million. Under current law, corporations pay the greater of a minimum tax on sales (ranging from $150 to $100,000) or a tax on profits (6.6 percent on profits up to $1 million and 7.6 percent on profits above $1 million). Measure 97 would eliminate the $100,000 cap on the corporate minimum tax and apply a 2.5 percent rate to sales above $25 million.

If passed, Measure 97 could generate $3 billion in new revenue each year—almost a third of the state’s current budget. The new revenue is earmarked for education, health care, and services for senior citizens, although the legislature would have the authority to appropriate it for other purposes. Gov. Kate Brown, who supports the measure, released a plan earlier this year indicating her priorities for new spending: more vocational and technical education; expanding the state's Earned Income Tax Credit; and reforming business taxes by creating new deductions and closing existing loopholes.

With rising costs currently projected to outpace new revenue, if Measure 97 is defeated, Oregon will face the challenge of cutting $1.35 billion in services from the 2017-2019 budget or raising additional revenue elsewhere.

Proponents argue that the measure would help stabilize the state budget and reduce the risk of budget cuts, thereby allowing for increased investments in education, more accessible health care, and in-home services for seniors. They emphasize that only one quarter of one percent of businesses registered in Oregon would be affected—primarily large and out-of-state corporations not currently paying their fair share (even businesses that don’t turn a profit benefit from infrastructure and state funded services and should contribute accordingly).

Opponents stress the unprecedented size of the tax increase in absolute terms (though the economy of course is bigger today), estimated decreases in private jobs, and the regressive nature of the tax as some portion of the increase is projected to be passed on to consumers and would account for a larger share of incomes among those with low-wages. (Though note that the economic analysis by the Legislative Research Office indicates that the impact of the tax on private job growth is small, as are the changes in incidence.)

If voters can manage to wade through it all, their choice ultimately comes down to questions of values and trust. Do they want to take significant steps towards stabilizing their budget? Do they trust that new revenues would be used to shore up important public investments? Do they believe profitable businesses that benefit from being headquartered in Oregon and having access to markets in the state should be contributing more? Do they believe the prospect of regressive effects or private job dampening are outweighed by the ability to reduce class sizes, access to technical education, and provide greater security for seniors? We look forward to finding out.

For more information on Measure 97, see the Oregon Center for Public Policy’s FAQ blog post.


On Revenues and Referenda: Oklahoma Question 779, Guest Blog Post


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This post originally appeared on OKPolicy.org and is reposted here with permission.

The Gist

SQ 779 is a constitutional amendment that would raise the state sales and use tax by one percentage point. Of the total revenue generated by the new tax, 60 percent would go to providing a salary increase of at least $5,000 for every public school teacher. The remaining funds would be divided between public schools (9.5 percent), higher education (19.25 percent), career and technology education (3.25 percent), and early childhood education (8 percent). The State Board of Equalization would be required to certify that revenues from the new tax are not being used to supplant existing funds.

Background Information

The ballot initiative is responding to concerns among educators, parents, and others about teacher salaries and education funding.

Average compensation for Oklahoma teachers has fallen to 49th in the nation, and school districts are struggling to recruit and retain enough qualified teachers. Since 2008, Oklahoma has cut state support for the school aid formula by more than $170 million, and funding for higher education and career tech has also been cut.

This year about 1,500 teaching positions and 1,300 support worker positions have been lost to budget cuts in Oklahoma schools, yet schools still report about 1,000 unfilled teaching positions. Hundreds more positions are being filled by emergency certified teachers who do not meet the state’s legal qualifications to be a classroom teacher.

SQ 779 was placed on the 2016 ballot through a successful initiative petition effort that gathered over 300,000 signatures, more than double the required number (123,725). An effort to block the initiative as a violation of the single-subject rule of the state Constitution was rejected by the Oklahoma Supreme Court.

If approved, the new sales tax would take effect July 1, 2017 and is projected to raise $615 million in its first full year.

Supporters Say…

  • Since lawmakers have made large cuts to education funding and repeatedly failed to approve a teacher pay raise, there is no other solution to the education funding crisis than passing a ballot initiative that includes a dedicated revenue source.

  • Higher teacher salaries are needed to stop the flow of teachers to other states and other professions and to ensure a high-quality education for Oklahoma children. Low-income students are being harmed most by heavy teacher turnover and would benefit most from teachers being paid competitive salaries.

  • The ballot measure includes strong constitutional safeguards to make sure the dollars will be spent as intended.

  • In addition to the $5,000 pay raise for teachers, the measure would provide funds for such worthwhile purposes as improving reading, increasing high school graduation rates, creating a merit pay system, improving college affordability, and strengthening early childhood education.

Opponents Say…

  • While teachers deserve a raise, there are ways to fund a pay raise without raising taxes and without committing to more spending on higher education and career tech.

  • The sales tax is regressive, which means that the tax increase will affect low- and moderate-income households more than wealthier households.

  • Oklahoma already has one of the highest combined state and local sales tax rates in the nation. A one percentage point increase will give Oklahoma the nation’s highest sales tax rate and push the rate above 10 percent in some areas. Cities, which are heavily reliant on the sales tax, will be hindered in their capacity to raise the sales tax for municipal priorities.

  • Even with the measure’s language preventing money from SQ 779 supplanting other funding, there is nothing to prevent the Legislature from enacting further tax cuts that will offset this increase.

Ballot Language

This measure adds a new Article to the Oklahoma Constitution. The new Article creates a limited purpose fund to improve public education. It levies a one cent sales and use tax to provide revenue for the fund. It allocates funds for specific institutions and purposes related to the improvement of public education, such as increasing teacher salaries, addressing teacher shortages, programs to improve reading in early grades, to increase high school graduation rates, college and career readiness, and college affordability, improving higher education and career and technology education, and increasing access to voluntary early learning opportunities for low-income and at-risk children. It requires an annual audit of school districts’ use of monies from the fund. It prohibits school districts’ use of these funds for administrative salaries. It provides for an increase in teacher salaries. It requires that monies from the fund not supplant or replace other education funding. The Article takes effects on the July 1 after its passage.


Links to Other Resources

Text of Measure and Background Information: Ballotpedia

Text of Initiative Petition, Legal Challenges: Secretary of State

Supporters and Opponents

Oklahoma’s Children, Our Future: Yes on SQ 779 Website

Oklahoma State School Boards Association SQ 779 Information

Vote No on SQ 779 Facebook page

Other OK Policy Information

“Our statement on the proposed initiative to fund education with 1 cent sales tax increase”: OK Policy

“The progressive case for State Question 779”: David Blatt, Journal Record

In The Media

“City of Edmond Formally Opposes Sales Tax Increase to Pay for Education”:  KOSU

“We have a moral responsibility to our children”: Rev. Ray Owens, Tulsa World

“‘Watch-Out’ Video: The Arguments For, Against the Education Sales Tax”: Oklahoma Watch

“Opponent says education tax proposal aims to return Oklahoma to its ‘Dark Ages'”: Tulsa World


Private School Tax Subsidies Blur the Line Between Charitable Gift and Money Laundering


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This post from October 2016 was updated on February 23, 2017.

When is a charitable contribution not a “donation” at all? If a taxpayer manages to turn a profit on the deal, has anything altruistic actually occurred? The clear answer is no. But an ITEP report reveals that the federal government does not always agree, at least with regard to certain gifts to private K-12 scholarship funds. Released late last year, the report’s findings may gain renewed public interest because the newly confirmed Education Secretary, Betsy DeVos, is a proponent of using public dollars for private school education and President Trump, according to reports, is considering a policy that would funnel federal dollars to private schools via federal income tax credits.

Tax incentives for charitable giving are common in the United States. More than 30 states, for example, allow a write-off for charitable donations that reduces the cost of giving by roughly 5 to 10 percent, depending on the state. A growing group of states, however, are using their tax codes to supercharge their charitable donation incentive for contributions to private K-12 scholarship funds.

In 17 states, tax credits for donations to private school scholarship funds reduce the cost of a donation by 50 percent or more. Even more remarkable is that in five states, tax credits equal to 100 percent of the donation are actually designed to wipe out the entire cost of donating to these schools. When a 100 percent tax credit is made available, the state is effectively bankrolling the entire donation at no true cost to the taxpayer that allegedly “donated” the funds. In essence, many of these policies have more in common with money-laundering schemes than they do with actual philanthropy.

But this may not even be the most unbelievable part of the arrangement. As explained in our report, certain high-income taxpayers can turn a profit by claiming a federal charitable deduction for so-called “donations” that were already reimbursed by the state. In other words, the IRS allows private school donors to enjoy a charitable deduction even when there was no charitable intent or effect behind their actions.

There are currently ten states (Alabama, Arizona, Georgia, Louisiana, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, and Virginia) where such profit-making schemes are possible. That list could soon grow, however, if states such as Arkansas, Idaho, Kentucky, Minnesota, Missouri, and Nebraska decide to move forward with similar credits currently under discussion.

These and other state tax subsidies collectively funnel more than $1 billion in public funding toward private schools every year. As our report explains, these subsidies function much like school voucher programs and have even been referred to as “neovouchers.” Relative to traditional vouchers, however, the lack of transparency in tax subsidy programs makes them better suited for skirting public opposition or even circumventing constitutional obstacles that sometimes stand in the way of spending public dollars on private schools. 

Read the report for more information on how high-income taxpayers are using neovouchers to turn a profit, and on the dubious educational benefits and general lack of accountability inherent in such programs.


A Closer Look: New Jersey's Tax Deal Increases Overall Taxes on Middle-Income New Jerseyans


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With the announcement that New Jersey leaders have finally struck a deal to modernize the state's badly outdated gas tax, work can soon finally resume to repair and maintain the state’s roads and bridges.

Unfortunately, as a New Jersey Policy Perspective (NJPP) report reveals, the deal leaves the state’s tax code in need of major repairs. Lawmakers approved a package that slashes about as much revenue as it raises while shifting taxes from the state’s wealthiest individuals to lower-income families.

The gas tax increase, which amounts to 23 cents per gallon, raises an estimated $1.2 to $1.4 billion per year. But the final package includes major tax cuts that add up to nearly as much. The package ultimately eliminates the estate tax, cuts the sales tax by 3/8 of a cent, expands an existing tax break for upper-middle-income retirees (though this expansion was reportedly scaled back Wednesday in committee), creates a new exemption for veterans, and increases the Earned Income Tax Credit for low- and middle-income working families.

An Institute on Taxation and Economic Policy analysis summarized in the NJPP report shows that, even without the estate tax cut that affects only about 3,500 of the wealthiest families each year, the package is regressive, raising taxes most on lower-middle- and middle-income New Jerseyans with incomes between $25,000 and $79,000.

And overall, if approved by the legislature Friday as expected, the package will cut about as much revenue out of the General Fund as it raises for the Transportation Trust Fund (TTF). This means that New Jersey lawmakers are effectively paying for transportation infrastructure with money taken from other areas of the budget such as schools, health care, and public servants’ pensions.

You wouldn’t tear down a school building to fill potholes with the rubble, but by shifting taxes from the General Fund (and higher-income New Jerseyans) to the TTF (and lower-income New Jerseyans), New Jersey leaders are damaging one part of their tax code to prop up another. Read the full NJPP report here.


On Revenues and Referenda: Will California Extend Higher Tax Rates on the Wealthy?


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This fall, in addition to casting their votes for elected officials, voters will also determine significant tax policies through ballot initiatives in states and localities across the country. ITEP will be highlighting a number of tax-related measures on the Tax Justice blog in the coming weeks.

Among the measures to be decided by Californians this November is Proposition 55—an extension of increases to the personal income tax rates paid by the wealthy that voters adopted in 2012.

Prior to 2012, high-income taxpayers in California all paid the same marginal rate of 9.3 percent on taxable income over $103,000 (filing jointly)—whether they had $103,000 or $103 million. In the wake of the great recession, voters approved Proposition 30, which made the personal income tax more progressive by temporarily increasing marginal tax rates on the wealthy and also increasing the sales tax by ¼ cent. Absent a change in the law, the sales tax increase will end this year and the higher marginal rates on those earning more than $526,000 (filing jointly) will expire in 2018.

Proposition 55, “Tax Extension to Fund Education and Healthcare,” asks voters whether the income tax rate increases on the wealthy should be extended through 2030. If it passes, the policy is expected to generate between $4 and $9 billion a year, revenue that would go toward meeting constitutional requirements (including public education and the state’s Medicaid program), maintaining existing services, and investing in other budgetary priorities as the funds allow. (See the CA Legislative Analyst’s full analysis of the proposition here.)

ITEP analysis shows that the income tax changes from Proposition 30 and 55 are positive steps toward a more progressive state and local tax system. Without Proposition 55, the top 1 percent of taxpayers would pay an estimated 7.8 percent of their incomes in state and local taxes—a smaller share of their incomes than taxpayers in the bottom 60 percent. With Proposition 55, the wealthy would be required to pay a more proportionate share at 8.7 percent.

Proponents of Proposition 55 emphasize the critical role revenues from the higher rates have played in stabilizing and improving the public school system and saving other services from more devastating cuts in the years following the recession. To them, maintaining these public investments through Proposition 55 by having the wealthy continue to pay their fair share is smart tax and public policy.

Opponents emphasize concerns over relying on unstable sources of income given the volatility in incomes at the top, warn of tax migration, and bemoan the temporary nature of temporary tax increases. (Though surprisingly, there hasn’t been a strong oppositional response to the measure.)

While the incomes of the wealthy do fluctuate more with broader economic conditions, additional revenues available to the state through Proposition 55 would also help shore up contributions to the state’s rainy day fund, a critical tool for smoothing spending over variable economic conditions that can reduce harmful cuts and reliance on temporary tax measures to stabilize budgets and government services.

Counter to claims that taxing the wealthy leads to a depressed economy, California has fared well in the years since the higher tax rates of Proposition 30 were adopted, with an economy that grew faster than the U.S. overall. (Compare to Kansas which infamously cut taxes during the same time period.) And, as has been repeatedly shown but confirmed once again recently by researchers at Stanford University and the Treasury Department, millionaire tax flight is of marginal statistical and socioeconomic significance, making it essentially a negligible issue when determining statewide tax policy.

Six weeks out from the election, field polls suggest strong support for Proposition 55. If such support pans out at the ballot, it will be a positive step for tax fairness and public investments in California.


Trump's Extensive Tax Breaks Highlight Flawed Economic Development Strategies


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A New York Times investigation of the extensive tax breaks that Republican presidential nominee Donald J. Trump’s business enterprises received over the past several decades is helping to bring scrutiny to the practice of local property tax abatements and other local economic incentives. Local officials consistently afforded Trump deals which allowed him to pay very little in taxes on the properties he has built and in some cases totally recoup building costs through tax forgiveness.

The article focuses on the nine construction projects Mr. Trump has overseen in New York City since his solo developer debut in 1980. According to the article, Trump’s real estate development projects have “reaped at least $885 million in tax breaks, grants, and other subsidies” in New York City alone. The largest and most detailed example the article discusses is how Trump’s Grand Hyatt Hotel, which cost an estimated $120 million to build in 1980, has received $359.3 million in forgiven or uncollected taxes to date due to a 40-year deal he struck with the city.

The New York Times’ case study on Trump’s tax treatment is just one example of bad economic development policies that state and local governments adopt all too often. A Good Jobs First study of more than 4,200 economic incentive awards in 14 states (including New York) found that 80 to 96 percent of funds went to large corporate interests. These interests, while promising to bring a plethora of well-paying jobs to communities, often do not deliver on their promises, or do so but only at a very high cost to the community.

This cost comes in the form of decreased tax revenues for the local government. Large firms have little incentive to invest in a community compared to small businesses because the success of the overall corporation depends very little on any single community. Meanwhile, the “business friendly” tax deals afforded to the companies deplete local funds for infrastructure and education, deteriorating the long-term human capital necessary to build a sustainable economy by attracting businesses that require skilled workers for high-paying jobs.

Trump is just one of many developers who use tax incentive programs intended to revitalize economic growth. Sadly, Trump’s business dealings are being reported on only because he is running for President. These developers often fall very short of their economic promises while profiting hugely from taxpayer money. Local and state governments should stop using tax incentives and other subsidies to attract businesses and encourage economic development. Instead, they should expand education opportunities and infrastructure spending to directly invest in their communities and cultivate the skills that top-ranking firms need.


State Rundown 9/28: The Quest for New Taxes


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This week we are bringing you news of proposed new (or increased) taxes in Missouri, Illinois, Louisiana, California and Oregon and the spread of ‘dark store’ tax avoidance practices across the states.  Thanks for reading the Rundown!

-- Meg Wiehe, ITEP State Policy Director, @megwiehe

  • Missouri voters will officially be considering two proposals to increase state tobacco taxes, either by 60 cents per pack over four years or 6 cents over six years. A helpful breakdown of the two proposals and how revenues would be distributed is available here.

  • In Illinois, Cook County Board President is considering adopting a tax on sugary beverages to close a $174 million budget gap.

  • Members of the Governor's Task Force for Transportation Infrastructure Investment are considering a gas tax increase as a viable way to meet Louisiana's infrastructure needs. The last time the state raised its gas tax was in 1984.

  • Cities across California may start taxing online video streaming services, following the lead of Pennsylvania, Minnesota, and Chicago.

  • Among the parties weighing in on Oregon's gross receipts tax on large businesses (Measure 97) are former Oregon governors and the unlikely tax policy adviser Kansas governor Sam Brownback.

  • The "dark store" tactic – by which big-box retailers like Lowe's are challenging their property tax valuations and undermining funding streams for schools and other local services – is spreading across the country and now hitting Alabama in a big way. Meanwhile, new Northern Michigan University-produced documentary "Boxed In" chronicles that state's fight over the issue.

What We're Reading...  

  • A new report from the Rockefeller Institute of Government warns of "slow and highly uncertain" revenue growth for states in FY 2017, which could foreshadow budget cuts ahead.

  • Pew Charitable Trusts reports that record money is being spent on state ballot campaigns across the nation in the leadup to November's election.

  • The Center for American Progress released a tax simplification plan that will "work for everyone."

  • California's Legislative Analyst's Office has released a report examining the impacts of Proposition 13—the landmark property tax limitations enacted back in 1978.
  • A new report from the Council of Economic advisors examining progress made on income inequality under President Obama includes the impact of tax policy changes such as an expansion of the Earned Income Tax Credit and a rollback of the Bush era tax cuts for the wealthiest households.

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.


State Rundown 9/21: Many States Moving in Reverse


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This week we are bringing you news about taxpayer disapproval of stadium subsidies in Nevada, more pressure to reverse tax cuts in Kansas, a move in Missouri to narrow its sales tax base, and other state tax policy developments from across the country.  Thanks for reading the Rundown!

-- Meg Wiehe, ITEP State Policy Director, @megwiehe

What We're Reading...  

  • New Jersey Policy Perspective has released a report and short video chronicling the "Notorious Nine" fateful decisions beginning in the 1990s that brought the state down from economic powerhouse to fiscal mess. Step one for states looking to recreate the New Jersey disaster? Pass unaffordable, regressive income tax cuts.
  • A new academic paper examines ownership of pass-through businesses and how much taxes they pay, finding that pass-through income is more heavily concentrated among high-earners and that many of the ownership interests are unclassified or circularly owned.

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

 


How Inflation Results in Higher State Taxes for Low-Income People


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New national data on poverty and income released this week by the U.S. Census Bureau reveals that from 2014 to 2015, median household income increased by 5.2 percent and poverty declined by 1.2 percent — good news by any measure. But these statistics don’t tell the full story.

Despite positive growth in incomes from 2014-2015, low-income earners were worse off in 2015 than they were 15 years ago because income growth has not been sufficient to keep up with inflation. Once the impact of rising prices is taken into account, incomes among the bottom 20 percent of earners in 2015 were actually 8 percent lower than they were in 2001, and incomes among the next 20 percent of earners were 4 percent lower than they were in 2001.

While low- and moderate-income taxpayers have less buying power today than they did 15 years ago, many are paying more in state taxes because too many state tax codes do not take the nuances of inflation into consideration. This phenomenon, dubbed ‘bracket creep,’ is the subject of a recent ITEP policy brief, “Indexing Income Taxes for Inflation: Why It Matters.”

State tax systems have many features that are defined as fixed dollar amounts, including the income levels at which various tax rates start to apply. If these fixed income levels aren’t adjusted periodically, taxes can go up substantially simply because of inflation. For example, in 1969 Illinois enacted a personal exemption of $1,000. If this amount had been adjusted for inflation since its enactment, taxpayers could exempt $6,550 per filer and dependent instead of the current $2,175.

Consider a hypothetical state that taxes the first $20,000 of income at 2 percent and all income above $20,000 at 4 percent. A person who earns $19,500 will only pay tax at the 2 percent tax rate (Figure 1). But over time, if this person’s salary grows at the rate of inflation, she will find herself paying at a higher rate—even though, in terms of the cost of living and ability to pay, her income hasn’t gone up at all. In this example, suppose the rate of inflation is 5 percent per year and the person gets salary raises that are exactly enough to keep up with inflation. After four years, that means a raise to $23,702. Whereas before all of this person’s income was taxed at the 2 percent rate, part of this person’s income ($3,702) will now be taxed at the higher 4 percent rate because the tax brackets haven’t also increased with inflation.  

In this way, as the ITEP report Who Pays? notes, unfair state tax systems exacerbate widening income inequality. To learn more about “bracket creep” and the importance of indexing tax policy provisions, check out the brief!


State Rundown 8/10: Avoiding a Race to the Bottom


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This week’s Rundown features a troubling multi-state trend that would help shield the country’s wealthiest taxpayers from paying state income taxes, a message from voters about the Kansas tax cut experiment, and potential special sessions in Minnesota and Alabama. Also, be sure to check out the What We’re Reading section.  Thanks for reading the Rundown! 

-- Meg Wiehe, ITEP State Policy Director, @megwiehe

  • A New York Times report shows the troubling race to the bottom between a number of states including Alaska, Delaware, Nevada, New Hampshire, Ohio, South Dakota, Tennessee, and Wyoming – to attract trust funds controlled by the wealthiest Americans. States are doing so not only by slashing  taxes on such funds, but also by putting up barriers to protect the elite from child-support claims, divorce settlements, and the attempts of other states and the federal government to collect taxes owed.
  • Tennessee officials are attempting to create marketplace fairness between online retailers and brick-and-mortar stores via a rule change that would require out-of-state sellers to collect state and local sales taxes. But opponents to the rule worry that other states will follow suit and level the playing field in their states as well – let's hope they're right! 
  • Alabama Gov. Bentley has released his proposal for a constitutional amendment creating the state’s first lottery. The amendment would create a lottery commission but would not authorize casino gaming or affect "traditional bingo." The legislature convenes Monday for a special session focused primarily on the lottery proposal, and lawmakers may also discuss the state's outdated gas tax. 
  • Recent primary elections point to a changing landscape for fiscal policy in Kansas in January 2017, as 14 supporters of Gov. Brownback's failed tax policy lost their races. Whether those seats ultimately are filled by more moderate Republicans or Democrats, the new lawmakers are not likely to be advocates of the governor's tax cuts, which presents an opportunity for the state to reverse course.
  • Minnesota may have another chance to pass critical tax and public works funding bills during a special session  if the governor and legislative leaders can reach a deal regarding metro transit. State leaders resume talks this Friday.  
  • Missouri voters will decide on two different cigarette tax increases in November after both measures were approved for the ballot this week. One is a 60-cent-per-pack increase that would raise more than $300 million, primarily for early childhood education. The other is a 23-cent increase that would raise $95-$103 million for transportation infrastructure funding.
  • After reiterating her commitment to her no-tax pledge in the face of looming revenue shortfalls last weekNew Mexico Gov. Martinez has now ordered state executive branch agencies to cut 5 percent out of their budgets and implement the cuts immediately.

What We're Reading...    

  • A Center for American Progress study found that an EITC expansion for workers without children would save billions each year by reducing crime and improving public safety.  

  • Governing magazine summarizes state efforts to tax online streaming services such ase Netflix and Hulu and looks at Kalamazoo, Michigan's turn to private donations for needed revenue. 
  • Jared Bernstein in the Washington Post debunks the faulty correlation between the size of government and economic growth. 

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Kelly Davis at kelly@itep.org. Click here to sign up to receive the Rundown via email

 


Fiscal Policy Shake-up Comes to Energy States


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The sharp decline in oil prices since summer 2014 has allowed consumers to save hundreds of dollars annually at the pump, but it also has left some energy producing states clamoring to come up with policy ideas to make up for lost revenue.

Before the recent precipitous decline in oil and other fuel prices, states that rely on the energy sector for revenue enjoyed years of fiscal bliss thanks to the high price of natural resources. Rarely fretting about ways to pay for public services, many of these states found themselves so flush with funds that they began cutting taxes and offering corporate giveaways. With energy revenues flowing, lawmakers failed to make the tough, long-term decisions needed to ensure their states had a diverse portfolio of broad-based taxes.

Now that oil prices have remained comparatively low for the last two years, and the price and demand for coal, natural gas, and other energy commodities also have taken a hit, there is no way to know for sure when the fortunes of the energy industry may rebound. This reality imposes a revenue challenge for states with budgets that are heavily dependent on energy markets.

Many of the most consequential tax debates taking place right now are in states with a significant energy sector presence. States such as Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming have been forced to find ways to fill budget holes in the past year, which in some cases has necessitated rethinking the very structure of their state tax systems.

How Did We Get Here?

To be sure, these states are reeling in part because of low-energy prices. But that is not the whole story. Most energy-reliant states celebrated “boom” times with ill-advised tax cuts and corporate giveaways. The most egregious example is Alaska’s elimination of its personal income tax some 35 years ago (Alaska is the only state to ever repeal a personal income tax). With near complete reliance on the energy sector, Alaska has no personal income tax or state sales tax to turn to in times of crisis.

Other states did not go as far as to repeal personal income taxes, but many made ill-advised tax cuts when they were awash in energy revenue. Louisiana’s decision to eliminate the “Stelly Plan” in 2008, for example, significantly reduced tax rates for the wealthy. This politically charged policy change cost the state an estimated $800 million a year. Over that same period, Gov. Bobby Jindal handed out lavish credits and rebates for corporations. As a result, this year alone the state has paid $200 million more in tax breaks than it has collected in corporate income and franchise taxes.

New Mexico lawmakers’ phased in cuts to the state’s top personal income tax rate, costing  an estimated $500 million in revenue per year. The damage done in the early 2000s continues to play out as the state struggles with year after year of budget challenges. Oklahoma’s shortfall was driven in large part by generous tax breaks and unaffordable, repeated cuts to the state’s income tax over the past decade. The most recent income tax rate reduction had the poorest timing of all, triggered this January despite an official “revenue failure.” Today this series of cuts comes with an annual price tag in excess of $1 billion in lost revenue.

North Dakota lawmakers slashed income tax rates for years, pushing to lower or even eliminate them as energy prices slumped. 2015 legislation alone reduced both individual and corporate income taxes across the board by 10 percent and 5 percent, respectively. While near the peak of its oil boom in 2011, voters concerned about service cuts overwhelmingly rejected a referendum to eliminate the state’s property tax.

Business tax cuts are a major contributing factor to West Virginia’s fiscal problems. The state’s elimination of its business franchise tax took full effect last year, and over the last several years the corporate income tax has been reduced as well.

State Actions This Year

Booms are followed by inevitable busts. Cutting taxes while flush with revenue is not advisable for energy-dependent states. Particularly for states with narrow tax portfolios that are highly reliant on the success of the energy sector.

To date, the tax policy changes enacted in energy states have been limited largely to regressive tax hikes, though there are indications that more meaningful tax reforms could be on the horizon. 

Tax Increases

Lawmakers in traditionally conservative states such as Louisiana, Oklahoma, and West Virginia all approved tax increases in 2016 to help address significant revenue shortfalls. Legislators in Louisiana raised $1.3 billion in new revenue through a 1-cent sales tax increase, the elimination of certain exemptions from the state sales tax base, and tax increases on beer, alcohol, wine, and tobacco. Lawmakers tried, but failed, to enact long-term personal income tax changes. A task force is now exploring comprehensive reform options for 2017. 

Tobacco tax debates were a common theme in energy states this year—West Virginia lawmakers also opted to raise tobacco taxes and Oklahoma lawmakers came close to doing the same.

While a cigarette tax increase was not ultimately enacted in Oklahoma, lawmakers did raise revenue by repealing the state’s “double deduction,” a nonsensical law that allowed Oklahomans to deduct their state income taxes from their state income taxes. In addition, they voted to change the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, a move that disproportionately affects low-income taxpayers by denying the credit to families that earn too little to owe state income taxes.

In New Mexico, Gov. Susana Martinez has reiterated her “no tax increase” pledge despite the state’s projected $600 million shortfall. Given the breadth of the revenue gap, state legislators have urged her to reconsider her position.

While major tax increases have yet to come to The Last Frontier, the significant fiscal debates that took place in Alaska this year are also worth mentioning. There, lawmakers discussed a range of options to remedy the state’s multi-billion-dollar deficit during the state’s regular legislative session and two special sessions called by Gov. Bill Walker.

Spending Cuts

In 2016, virtually every energy-reliant state cut vital public services. North Dakota saw cuts exceeding 4 percent earlier this year. That was followed by a May announcement for a total of 10 percent across-the-board cuts for the coming biennium. And the problem persists—Gov. Jack Dalrymple called a special session to address yet another shortfall.

Similarly, New Mexico lawmakers passed budget amendments early this year to cut spending across state agencies. New revenue gaps have since appeared, leading lawmakers to request that Gov. Susana Martinez call a special session. In Wyoming, Gov. Matt Mead recently announced another round of cuts, this time nearing $250 million. Those cuts and the associated loss of federal funds are expected to result in massive layoffs across the state.

Alaska, Louisiana, Oklahoma, and West Virginia accompanied their tax increases (or in Alaska’s case, proposals for tax increases) with cuts to state spending. And many additional cuts are anticipated for the coming years. For example, Texas lawmakers have asked most state agencies to lower funding requests for the coming biennium, with a call for 4 percent nearly-across-the-board cuts to many programs that are already underfunded.

Short-Term Fixes

While all of these states have made progress in closing their current budget gaps, there remains a need for revenue and structural reforms in the long run. One-time revenues were used heavily in both Oklahoma and West Virginia. In Oklahoma, 60 to 80 percent of the budget hole was filled with non-recurring revenue such as one-time bond issues and cash transfers. West Virginia filled its gap with a range of one-time funds, including a $70 million withdrawal from the state’s Rainy Day Fund.

Similarly, Louisiana’s solution was primarily dependent upon temporary tax measures. Changes to the state’s inventory tax credit and corporate franchise tax come with expiration dates attached.

And in Alaska, legislative inaction forced Gov. Bill Walker to veto large swaths of the state’s spending plan. In doing so, the governor capped next year’s Permanent Fund dividend, a flat dollar payment that most Alaskans receive each year, at $1,000. This is down more than 50 percent from the state’s 2015 dividend payout of $2,072. A restructuring of the state’s dividend program will likely be revisited next year.

Some Progress, But More Reforms Are Needed

While lawmakers in energy-sector states have taken steps to close their revenue shortfalls, not nearly enough is being done to address the structural inadequacies driving the problem. Inaction or short-term fixes were too often a theme for energy-reliant states in 2016. While partly driven by hope that energy prices will rebound, this tendency for delay is not a long-term solution. Rather than watching desperately for signs of improvement in energy markets, lawmakers should take matters into their own hands by reconsidering past tax cuts that have drained state coffers and by fundamentally rethinking the makeup of tax structures that have become over-reliant on energy revenues.


State Rundown 7/14: Pennsylvania Lawmakers Finally Agree to Raise Taxes Yet Many States Continue to Seek New Revenue


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This week we bring you tax and budget news in Alaska, Pennsylvania, New Jersey, and Massachusetts plus look at the growing trend in states turning to cigarette taxes. Check out the What We’re Reading section below for a piece on the impact tax cuts in Kansas have had on the Sunflower State’s budget. Thanks for reading the State Rundown! 

— Meg Wiehe, ITEP State Policy Director, @megwiehe  

  • Gov. Bill Walker called Alaska lawmakers back to Juneau this week for yet another special session to weigh options to fill the state's multi-billion dollar revenue gap. ITEP released a report "Income Tax Offers Alaska a Brighter Fiscal Future" to inform the debate over the merits of a personal income tax vs a general sales tax. Sneak preview: four out of every five Alaskans would pay less under an income tax. Read the report here. (PDF) 

  • Yesterday Gov. Tom Wolf signed a revenue package to fund Pennsylvania's $31.5 billion spending plan. It includes an increase to the cigarette tax ($1/pack) and other tobacco products, liquor modernization, expanded gambling, and an extension of the sales tax to digital downloads. The second half of the puzzle is now complete. Earlier this week, before the legislature reached agreement on how to fund the budget, the governor allowed the state's spending plan to become law without his veto or signature.
  • "Nonessential" road and bridge repair and construction continues to be shut down across New Jersey as lawmakers and Gov. Christie were unable to reach a gas tax deal before the end of June. They now project they can run the Department of Transportation on a shoe-string budget until the end of August, and negotiations could go that long. Lawmakers are back in session now and hoping to reach a compromise this week that restores the Transportation Trust Fund to solvency without blowing too large a tax-cut hole in the rest of the budget.  

  • More states are looking to the cigarette tax to provide fast cash while promoting public health objectives. West Virginia and Louisiana both raised their cigarette taxes during special sessions to plug budget holes. A $2 per pack increase has qualified for the ballot in California and a $1.75 per pack increase has just been proposed in Colorado. Signatures have been gathered to put a $1.76 per pack increase on the ballot in North Dakota and efforts are underway to get a 60-cent per pack increase on Missouri's ballot as well. 

  • The Massachusetts Senate Ways and Means Committee has proposed increasing the state's Earned Income Tax Credit from 23 to 28 percent of the federal benefit (the state increased the tax break for working families last year as well). They would partially pay for the improved credit by applying the state's 5.7 percent hotel tax to short-term rentals, most notably those via Airbnb. For more information, check out the Massachusetts Budget Project's brief. 

 What We're Reading...   

  • Bloomberg BNA reports on the increasing significance of capital gains income to high-income taxpayers based on 2015 IRS data. 

  • The Kansas Center for Economic Growth explains how state income tax cuts broke the budget. 

  • Arkansas Advocates for Children writes about the uncertain impact recent and potential new tax cuts could have on funding public investments.  

  • Villanova Professor Maule on potholes and the long-term financial costs to individual taxpayers when lawmakers cut, freeze, or avoid tax increases. 

Weird New Jersey Tax Debates Continue


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Since 1989, a magazine published in New Jersey called Weird N.J. has chronicled all things quirky, strange, unusual, and absurd in the Garden State. Weird N.J. could do an entire issue about the bizarre mix of tax policies floated in New Jersey this year.

The New Jersey Legislature is considering a proposal to increase the state’s gas tax but at the same time some lawmakers are insisting that that tax increase be paired with tax cuts for the wealthiest New Jerseyans. Perhaps most bizarre is that the state is considering providing a tax cut for retirement and pension income (a move that would benefit the best-off state residents) while also weighing cuts to the revenue that funds state pensions.

Gas Tax Increase?

New Jersey's antiquated gas tax has been frozen since 1990 and at 14.5 cents per gallon is the second lowest state gas tax rate in the nation. Meanwhile, cars have gotten more fuel efficient and inflation has increased the cost of building and maintaining roads and bridges. As a result, the state’s Transportation Trust Fund (TTF) is facing a serious funding shortage and lawmakers are scrambling to replenish it by finally updating the gas tax.

A proposed gas tax update would raise $1.4 billion annually to replenish the TFF and boost transportation funding. The update would add about 23 cents per gallon to the rate paid at the pump, and include a mechanism to adjust that rate in future years to always hit the $1.4 billion target by increasing the rate when fuel prices and consumption are down, or decreasing it when they are up.

Tax Cut Ideas Galore

Yes, it's absurd that the Garden State's gas tax has been locked for almost 30 years, but the even bigger absurdity is the insistence by some lawmakers that the need for additional gas tax revenue to shore up the TTF is an occasion for massively cutting other taxes and revenues. At least one lawmaker said he would only consider proposals that are “revenue neutral or better,” meaning he will only support revenue-raising proposals that do not raise revenue.

Most policymakers have not gone that far, but in all, lawmakers are weighing about $850 million worth of tax cuts, more than half the size of the revenue raised through the gas tax increase in the first place. This would be a major blow to the state's General Fund, which does not receive any gas tax revenues and has to fund important state investments such as education and health care. The current package of tax cuts being discussed includes eliminating the estate tax, increasing tax benefits for retirees, creating a new deduction for charitable contributions, and increasing the state's Earned Income Tax Credit (EITC). More on some of these individual items below:

Tax Cuts for the Wealthy

Many in New Jersey have continued to adhere to the nonsensical notion that any increase in the gas tax – which lands most heavily on low- and middle-income families – must be paired with tax cuts for the wealthiest New Jerseyans in the name of “tax fairness.” Gov. Christie has focused particularly on eliminating the state’s estate tax, which would cost the state $540 million per year and benefit only a very small number of very wealthy estates.

Give to Pensioners with One Hand, Take Away from Them with the Other

Yet another oddity in the mix is a major increase in the state’s tax benefits for retirement and pension income. This tax cut would cost about $130 million per year and does essentially nothing for the low- and middle-income New Jerseyans who will be most affected by the gas tax increase. But what’s particularly strange about this is that it targets retirees and pensioners for tax breaks while simultaneously cutting the very revenues that go toward the state’s notoriously underfunded pension fund for its retirees.

EITC

In this bizarre landscape of outlandish tax ideas, one component stands out for being so normal it’s weird: lawmakers are also discussing increasing the state’s Earned Income Tax Credit. Increasing the state EITC is a perfectly sensible way of offsetting the gas tax increase for those low-income working families who will be most affected, and it comes at a reasonable cost that does not undo a significant share of the revenue gain achieved. In fact, an ITEP analysis shows that increasing the EITC to 40 percent of the federal credit, as proposed, would on average fully offset the gas tax increase for the lowest-income fifth of New Jerseyans, while reducing the overall revenue gain by only about $130 million of the $1.4 billion total.

New Jersey legislators should embrace their sensible side this time: raise the gas tax to shore up the TTF, expand the EITC to keep their tax structure from falling even harder on low-income families than it already does, and leave the absurdities to the experts at Weird N.J.


Equitable Solution to Alaska Fiscal Gap Must Include Personal Income Tax


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Alaska is grappling with one of the most serious budget shortfalls in the nation. The state currently faces a budget gap exceeding $4 billion and current revenues are expected to cover just 25 percent of the state’s costs, despite major spending cuts enacted in recent years.

With a revenue system highly dependent on oil tax and royalty revenue, Alaska has been forced to reevaluate its revenue structure in the face of plummeting oil production and prices. For years Alaska was able to use oil revenue proceeds to fund state government, and even repeal their income tax and cut sizable annual checks to Alaskans. Faced now with a new fiscal reality, the state is considering ways in which to diversify its revenue stream.

In a new report, “Distributional Analyses of Revenue Options for Alaska,” ITEP analyzes Gov. Walker’s New Sustainable Alaska Plan and other revenue strategies to fill the gap. The report presents information on how a range of policy options would impact Alaskans at different income levels.

The New Sustainable Alaska Plan, the most ambitious proposal on the table, would institute a personal income tax in the state for the first time in 35 years, reduce the Permanent Fund dividend (a cash payment that most Alaskans receive each year) and increase taxes on a variety of industries and on purchases of alcohol, tobacco and motor fuel.

The personal income tax in the plan was specifically proposed to offset the disproportionate impact that many of these changes would have on moderate-income families. Alaska is one of just nine states that lack a broad-based personal income tax – the most equitable revenue option available to states.

According to ITEP’s research director, Carl Davis:

“The governor’s decision to include an income tax in his fiscal plan was a step forward for Alaska’s budget debate. It is simply not possible to craft an equitable solution to Alaska’s budget shortfall that does not include some level of income tax.”

While a step in the right direction, the report finds that the modest income tax structure proposed in the New Sustainable Alaska Plan is not enough to fully offset the regressive nature of other components included in the package. Low-income families could expect to see their incomes reduced by between 5.5 and 9.6 percent, while higher-income families would face declines equal to just 1.2 to 2.0 percent of their incomes. Middle income families would see declines in the range of 2.4 to 3.9 percent.

The distributional impact of the New Sustainable Alaska Plan and other proposals currently being discussed by the legislature could be improved if they were rebalanced to derive more revenue from the personal income tax and less from reductions in the dividend. ITEP’s findings show that it is not possible to close Alaska’s budget gap in an equitable way unless a robust personal income tax is enacted as part of the package.

Read the report


Cooler Heads Prevail in Georgia as Tax Cuts Fall Flat


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A few weeks ago we wrote about Tax Cut Fever in Georgia, and we have continued to monitor the high temperature of that debate since then.  We are pleased to report, however, that cooler heads ultimately prevailed as the state's legislative session has ended without passage of either of the damaging tax-cut bills that had been under consideration.

Advocates in Georgia worked tirelessly to educate lawmakers and the public about the potentially damaging impact of two bills -- HB 238 to flatten and reduce the state's income tax (PDF) and SR 756 to amend the state Constitution (PDF) to force that rate down even further over time. ITEP analysis helped show that both were heavily skewed in favor of the wealthiest Georgians and would have weakened the state's ability to fund its K-12 schools, hospitals, roads, and other services. HB 238 alone would bled the state budget of $281 million to $442 million per year, more than half of which would have gone to the wealthiest 20 percent of Georgians.

One of the strongest words of warning came from former State Auditor Russell Hinton, who advised that slashing state revenues would pose a serious threat to Georgia's AAA bond rating. In the end, Georgians can be relieved that their representatives made the fiscally healthy decision to keep the state revenue system (and bond rating) intact.


State Rundown 3/3: Some Bills Move Forward, Others Move Back


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Thanks for reading the State Rundown! Here’s a sneak peek: The Arizona House adopts an optional flat tax experiment for low-income residents. An Indiana Senate committee approves a transportation bill after removing a gas tax increase and income tax cut. Convoluted sales tax changes go into effect in North Carolina.

Check out Corporate Tax Watch, an exciting new resource that will keep you up-to-date on corporate taxes paid (or not) by profitable companies. Sign up here for occassional Corporate Tax Watch emails, just like the State Rundown!

– Carl Davis, ITEP Research Director

The Arizona House approved an optional flat tax for individuals who make less than $25,000 a year, or 660,000 tax filers. House Bill 2018 is being described as a five-year pilot project. Under the proposal, eligible filers can choose between calculating their tax liability under current law or choosing to pay a 1 percent rate on their income after taking a $10,000 standard deduction. Budget analysts believe the plan will cost the state $39 million in lost revenue, though supporters of the program hope to eventually enlarge that figure by extending the program to all tax filers. If that happens, the effects are virtually guaranteed to be regressive—Arizona's graduated rate income tax is a rare bright spot in a tax code overwhelmingly stacked in favor of the wealthy.

An Indiana Senate committee recently approved a transportation bill partially paid for with a $1-per-pack cigarette tax increase, though other tax changes were stripped out at the last moment. The original bill included an increase in the state's gasoline excise tax and indexed the tax to inflation. It also included income tax cuts added by the House. As ITEP's own Lisa Christensen Gee noted in a guest blog post for the Indiana Institute for Working Families, the combination of changes would have made the Indiana's tax system more regressive by providing income tax cuts to the wealthy in exchange for tax increases that hit working and middle-class families hardest. Ultimately, both the gas tax increase and income tax decrease were removed during the amendment process.

A number of new sales taxes went into effect in North Carolina recently, affecting services such as car repair, shoe repair, flooring installation, and appliance installation. While broader sales tax bases are generally better than narrower ones, the base expansion in this case is part of a regressive tax-shift that lowers income taxes and makes up the lost revenue through higher sales taxes. Moreover, the implementation of these base expansions has created some confusion among retailers regarding which services are taxed and which are exempted. For instance, car washes performed by an employee are now subject to the sales tax while self-service and machine car washes are not. Likewise, some home repairs and installations will be taxed but home repairs where no materials are sold will remain tax free.

If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email.

 


State Rundown OK, KS, and IN: Tax Cut Groundhog Day


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Thanks for reading this Groundhog day edition of the State Rundown. Today we are taking a close look at developments in OklahomaKansas, and Indiana.  There's a link below to an especially good editorial in The Witchita Eagle outlining  critiques of Kansas Governor Brownback's regressive tax policies. You'll also find a helpful listing of State of the State addresses happening this week. 

As always, thanks for reading. 
-- Meg Wiehe, ITEP's State Tax Policy Director

 


Oklahoma legislators fear the state could be headed for a second revenue failure before the end of the fiscal year if oil prices continue to drop, forcing spending cuts across the board for all state agencies. The state's previous revenue failure required a cut of 3 percent and the state's school superintendent says another cut might mean schools running out of money and shutting their doors. To help deal with the state's bleak fiscal situation, Gov. Mary Fallin has proposed raising significant new revenues by expanding the state's sales tax base, increasing the cigarette tax by $1.50 per pack, and eliminating the state's bizarre state income tax deduction for state income taxes paid. While describing Fallin's proposal as a "good starting point," the Oklahoma Policy Institute also observes that Oklahoma's current revenue crisis was partly brought on by the legislature's decision to allow a regressive and unaffordable income tax cut to take effect this January. Unless lawmakers reverse that decision, state revenues will decline by $147 million during the upcoming fiscal year.

An editorial in The Wichita Eagle calls out Kansas Gov. Sam Brownback and legislators for their continued reliance on regressive food taxes to shore up the budget. In 2012, when Brownback pushed through his tax cut experiment, the state sales tax on food was scheduled to drop to 5.7 percent; today, the sales tax on food is 6.5 percent. When local taxes are included, the combined rate can be as high as 10 percent -- the nation's highest. A recent study (PDF) found that "A household in the lowest income group pays anywhere from 2.7 percent to 8.4 percent more of their income in taxes on groceries than does a household in the highest income level.” Representative Mark Hutton has proposed cutting the state sales tax rate on groceries to just 2.6 percent and would make up the revenue by eliminating the state's costly and ill-targeted personal income tax exemption for all non-wage business income.

Indiana lawmakers seem to have taken a page out of South Carolina (and Michigan's) playbook in considering a transportation package pairing gas tax increases with income tax cuts. House Bill 1001 would increase the state's gasoline excise tax by 4 cents to 22 cents per gallon, the first increase in over thirteen years. The tax on diesel fuel would increase by 7 cents per gallon. House Republicans inserted a phased-in 5 percent income tax cut into the transportation package to entice Gov. Mike Pence and other lawmakers who might be on the fence to support the gas and diesel tax increases. The package also raises more than $200 million through a $1 per pack cigarette tax hike.  An ITEP analysis of the proposal found that the average taxpayer among the bottom 80 percent of earners would see a tax hike under this plan while the wealthiest 20 percent of taxpayers would benefit from a tax cut on average.

 


State of the State Addresses This Week:

Alabama Gov. Robert Bentley -- Tuesday, Feb. 2

Connecticut Gov. Dannel Malloy -- Wednesday, Feb. 3

Maryland Gov. Larry Hogan -- Wednesday, Feb. 3

New Hampshire Gov. Maggie Hassan -- Thursday, Feb. 4

Oklahoma Gov. Mary Fallin -- Monday, Feb. 1 (link here)

Rhode Island Gov. Gina Raimondo -- Tuesday, Feb. 2

Tennessee Gov. Bill Haslam -- Monday, Feb. 1 (link here)


If you like what you are seeing in the Rundown (or even if you don't) please send any feedback or tips for future posts to Sebastian Johnson at sdpjohnson@itep.org

 


January 1 Brings Gas Tax Changes: 5 Cuts and 4 Hikes


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Since 2013, eighteen states have enacted laws either increasing or reforming their gas taxes to boost funding for transportation infrastructure.  A snapshot of gas tax rate changes scheduled to occur this upcoming January 1st, however, reveals that five states will actually move in the opposite direction as 2016 gets underway.

Gas tax rates will decline in New York, North Carolina, Pennsylvania, Vermont, and West Virginia—in most cases because of gas tax rate structures that link the rate to the average price of gas (an approach similar to a traditional sales tax applied to an item’s purchase price).  But cutting gas tax rates is problematic because doing so reduces funding for economically vital transportation infrastructure investments.  And with drivers already benefiting from gas prices that have just reached a six-year low, the timing of these rate cuts is difficult to justify.

Given these realities, many states have recently taken steps to limit gas tax volatility by imposing “floors” on the minimum tax rate, limitations on how much the rate can change from one year to the next, and in some cases even moving toward entirely different formulas based on more stable (and arguably more relevant) measures of inflation. 

While five states will be forced to grapple with the consequences of reduced transportation revenue, there are four states where gas tax rates will actually rise on January 1: Florida, Maryland, Nebraska and Utah.  In addition to those increases, Washington State has a gas tax increase scheduled for July 1st and governors in states such as Alabama and Missouri have said they intend to pursue gas tax increases during their upcoming legislative sessions.  With lower gas prices having become the norm for now, lawmakers in those states that have gone years, or even decades, without raising their gas taxes should give real consideration to enacting long-overdue updates to their gas tax rates

The five states that will see their gas tax rates decline on January 1st include:

  • West Virginia (1.4 cent cut), New York (0.8 cent cut), and Vermont (0.27 cent cut) will see their gas tax rates fall because their rates are tied to the price of gas, which has been declining in recent months.
  • North Carolina (1.0 cent cut) was scheduled to see an even larger decline in its gas tax rate due to falling gas prices, but lawmakers intervened in 2015 to limit the size of the cut and its impact on the state’s ability to invest in infrastructure.  Moving forward, North Carolina will also have a somewhat more stable gas tax because of a reform that removed a linkage to gas prices and instead tied the rate to population growth and energy prices more broadly.
  • Pennsylvania (0.2 cent cut) is the only state in this group whose decline is not directly linked to falling gas prices.  A reform approved by lawmakers in 2013 included a modest tax rate cut in 2016, though notably, this cut is bookended by significantly larger increases in 2014, 2015, and 2017.

And in the four states where gas tax rates will rise:

  • Florida (0.1 cent increase) is seeing its tax rate rise due to a forward-thinking law, in place for more than two decades, that links the state’s gas tax rate to growth in a broad measure of inflation in the economy (the Consumer Price Index).
  • Maryland (0.5 cent increase) is implementing a rate increase as a result of the U.S. Congress’ failure to pass legislation empowering states to collect the sales taxes owed on purchases made over the Internet.  In 2013, Maryland lawmakers enacted a transportation funding bill that they had hoped would be partially funded by requiring e-retailers to collect sales tax.  Rather than trusting Congress to act, however, state lawmakers also built in a backup funding source: an increase in the state’s gas tax rate from 3 percent to 4 percent of gas prices this January 1st, plus a further increase to 5 percent on July 1 if Congress continues to delay action.
  • Nebraska (0.7 cent increase) and Utah (4.9 cent increase) are seeing their gas tax rates rise because of legislation enacted by each state’s lawmakers in 2015.  The Nebraska law (enacted over the veto of Gov. Pete Ricketts) scheduled 1.5 cent rate increases for each of the next four Januarys, though more than half of this year’s scheduled increase was negated by a separate provision linking the state’s gas tax rate to (currently falling) gas prices.  In Utah, the 4.9 cent increase is the first stage of a new law that could eventually raise the state’s gas tax rate by as much as 15.5 cents, depending on future inflation rates and gas prices.

Earlier this year, lawmakers in states such as Georgia, Kentucky, and North Carolina realized that allowing gas tax rates to fall would harm their ability to invest in their states’ infrastructure.  As a result, each of those states acted to limit scheduled rate cuts and curtail the volatility of their gas tax rates moving forward.  Without question, linking gas tax rates to some measure of growth (be it gas prices, inflation, or fuel-efficiency) is a valuable reform that can improve the long-run sustainability of this important revenue source.  But as the gas tax cuts taking effect next month demonstrate, that linkage should be done in a way that manages potential volatility in the tax rate.

View chart of gas tax changes taking effect January 1, 2016 

 


Connecticut Lawmakers Cave to Threats from General Electric Yet Again


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Connecticut lawmakers earlier this year passed a budget with more than $1 billion in new revenue, including increased corporate taxes, to plug a budget gap and ensure the state has resources to make needed investments in education, transportation and health care.  In late June, Gov. Dannel Mallow called lawmakers back to the capital for a special session, essentially caving to notorious tax dodger General Electric (GE) and other corporations' demand that the state pare back just enacted tax chages. The most significant change enacted in the special session was a delay in the start date for combined reporting. Combined reporting requires a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report for tax purposes. Connecticut Voices for Children puts it this way:

 “Combined reporting is an essential policy aimed at preventing corporations from using accounting gimmicks to shift profits actually earned within their borders to states and foreign countries where they will be taxed at lower rates or not at all.”

This week, the governor and legislature once again put GE’s interests over the health and well-being of the state’s residents.  Due to underperforming personal income tax collections, the state faces a projected $350 million budget shortfall for the current fiscal year and another $552 million in the next fiscal year.  To close the current year gap, the legislature voted this week to cut early-childhood programs, conservation efforts, and medical services for inmates. But, it also agreed to spend money to cut corporate taxes including modifying combined reporting requirements and changing how some corporate deductions can be claimed.

The new corporate tax changes are largely seen as an effort to keep GE headquartered in the state.  But not surprisingly GE hasn’t committed to staying put and news leaked this week they may be considering a move to Boston. Since Massachusetts also requires multinational corporations to file combined returns, this latest news would suggest that Connecticut is being played by GE executives.  


Hope in Louisiana?


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Louisiana Governor-elect John Bel Edwards may be a breath of fresh air for tax justice advocatesin Louisiana this upcoming legislative session.

Gov. Bobby Jindal prioritized policies aligned with his no new taxes pledge rather than meeting the needs of Louisianans. The outgoing governor even introduced a losing proposal that would have eliminated the state’s income tax and replaced the revenue with a broader sales tax.

But hope springs eternal for fundamental and thoughtful tax reform as way to help close the state’s projected budget gap of $370 million for the current fiscal year and a more than $1 billion budget gap for next year. The optimism for revenue raising tax reform is possible thanks to the Gov. Elect’s appointment of former Republican Lt. Gov. Jay Dardenne as the state’s commissioner of administration  (a position that is equivalent to chief budget officer). Dardenne was the architect of revenue-raising tax reform enacted but later repealed) in the early 2000s. That package lowered sales taxes and increased the state’s reliance on income taxes.  

Another bright spot--last week the governor-elect called for doubling the state EITC as part of his commitment to reduce poverty in the Pelican State. We’ll be closely following the tax debate in Louisiana in the new year.


Back to Reality: Alaska Governor Proposes Progressive Income Tax


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For years, lawmakers interested in cutting or eliminating personal income taxes have held up Alaska as aAlaska Progressive Income Tax model for what they would like to achieve.  Alaska is the only state to ever repeal a personal income tax and has been without one for 35 years.  But Alaska’s status as an anti-tax role model may not last.  Yesterday, Gov. Bill Walker proposed a plan to remedy the state’s massive revenue shortfall by, among other things, instituting an income tax equal to 6 percent of the amount that Alaskans pay in federal income taxes.

As background, Alaska’s decision to repeal its income tax always came with something of an asterisk attached.  The state’s 1980 repeal only occurred after drillers discovered North America’s largest oil field on land that happened to be owned by the state government.  During times of high oil prices, the billions of dollars in tax revenue collected from the energy sector were enough to fund 90 percent of the state’s general operations and to pay an annual dividend to Alaska residents (totaling $2,072 per person this year).

But as anybody who has driven by a gas station this year knows, these are not times of high oil prices.  Crude oil prices recently fell to just $37 per barrel and Alaska’s oil-dependent revenue streams are now raising enough to fund just 40 percent of the state’s budget, even with significant spending cuts enacted last year.  As Gov. Walker explains, “we cannot continue with business as usual and live solely off of our natural resource revenues.”

The Governor proposed revenue changes that include raising the state’s comically outdated motor fuel tax rate, boosting taxes on alcohol and tobacco, reforming the tax treatment of oil and gas producers, and paring back residents’ annual dividend.  Of course, many of these changes would impact lower- and moderate-income Alaskans more heavily, which is part of the reason why (PDF) the package also includes an income tax piggybacked on the progressive federal income tax system.  Notably, Gov. Walker’s income tax design is similar to one proposed by lawmakers from both parties during this year’s legislative session, and also resembles the structures previously in place in states such as North Dakota, Rhode Island, and Vermont.

Ultimately, the plan put forth by Gov. Walker appears to be a serious attempt to address the state’s yawning, $3.5 billion deficit.  And as Alaska Public Media explains, it would also “shift the state away from a direct reliance on oil revenue and the boom-and-bust cycle of oil prices.”

Now that the Governor has spoken out about an income tax, wild, erroneous claims about the economy-destroying nature of personal income taxes are surely on the way.  But the reality is that if Alaska can’t count on oil revenues to fund its schools and infrastructure, an income tax is the most equitable and sustainable option available. 


New Law Endangers Michigan's Fiscal Future


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Earlier today, Michigan Gov. Rick Snyder signed a package of tax changes that will eventually fund improvements to the state’s transportation infrastructure, but it comes with cuts to other services and a weakened long-term fiscal position.  When most of the law’s provisions are phased in five years from now, they will collectively drain (PDF) more than $800 million from local governments, universities, health care, and corrections every year.  Making matters worse, a modified income tax trigger could push the general fund loss to $1 billion per year within a decade and could turn this so-called “funding” package into a net revenue loser.

Below is a list of the package’s most significant components (revenue estimates are for Fiscal Year 2021):

New Revenue

  • $404 million from increasing the gasoline tax by 7.3 cents and the diesel tax by 11.3 cents on Jan. 1, 2017.  These tax rates will also be tied to inflation starting in 2022.
  • $221 million from increasing most vehicle registration fees by 20 percent and from levying higher fees on electric vehicles.

Funding Shifts

  • $600 million annually will be moved out of the general fund to be spent on transportation.  The Detroit Free Press identifies local governments as the group most likely to face funding cuts under this shift, followed by higher education, public health, and corrections.

Tax Cuts

  • $206 million in tax cuts will be distributed to Michiganders by expanding the state’s property tax credit for low- and moderate-income families.  Some features of the credit will also be indexed to inflation starting in 2021.
  • A sizeable, but uncertain revenue loss will come from cutting the state’s top income tax rate via an ill-conceived “trigger” mechanism.  Starting in 2023, the state’s income tax rate will be reduced if general revenue growth exceeds the inflation rate multiplied by 1.425.  The non-partisan House Fiscal Agency estimates (PDF) that if this law were in effect today, $593 million in revenue would be lost next year as a result of dropping the tax rate from 4.25 to 3.96 percent.  If this type of cut is combined with the property tax credit expansion, fuel tax increases, and vehicle registration fees just described, the net result of this “funding” package will be to reduce state revenues—not raise them.

Ultimately, these reforms to Michigan’s fuel taxes are long-overdue and the property tax credit expansion is a reasonably effective way of offsetting some of these taxes for lower-income families.  But the components of this package that will have the largest impact on Michigan’s budget in the years ahead are the $600 million general fund earmark for transportation, and the automatic income tax cuts scheduled to take effect long after most of today’s lawmakers have left office.


Louisiana Voters Protect State Rainy Day Fund


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Good news out of Louisiana this week. Voters defeated Amendment 1, one of four constitutional amendments on the Oct. 24 statewide primary ballot. The proposal would have put a $500 million dollar cap on the state’s Rainy Day Fund, the savings account the state relies on in the event of an unexpected drop in revenues. The amendment would have also created a transportation fund to capture any mineral revenue coming in above the new cap.

Steve Spires of the Louisiana Budget Project sums up the situation in his recent post:

“The goal of this amendment is laudable: to address Louisiana’s chronic backlog of transportation needs. Unfortunately, it would do so by weakening the state’s rainy-day savings account, which would hurt the state’s ability to react to future financial downturns and put vital state services at risk for damaging cuts.”

Even without the amendment, the fund is already subject to strict rules such as the condition that the legislature can only use one-third of its contents in any given year. A $500 million dollar cap would have limited rainy day fund infusions to just $167 million per year. In the context of Louisiana’s roughly $8 billion budget, Amendment 1 would have rendered the fund unable to cover anything beyond a 2.1 percent decline in revenues. This would have been an inadequate cushion to protect Louisiana residents from cuts to critical public services during the next economic downturn.

Size restrictions on rainy day funds limit states’ ability to grow reserves in line with their budgets. In our Primer on State Rainy Day Funds, ITEP warns against such overly restrictive caps. Louisiana voters made the right call this week by forcing lawmakers to have a real discussion about road funding, rather than weakening the state’s rainy day fund as part of a deficient package that wouldn’t have solved the problem.


Fiscal Time Bomb Quietly Advances in Michigan


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Years of debate over how to boost funding for Michigan’s roads may be nearing an end.  But somewhere along the way, that debate was hijacked in a way that few people seem to have fully noticed.

Earlier this week, the Michigan House passed a road funding package that would raise the gasoline tax by 3.3 cents per gallon, raise the diesel tax by 7.3 cents, boost vehicle registration fees by roughly 40 percent, and offset some of these regressive tax increases with an expansion of the state’s circuit breaker tax credit for low- and moderate-income homeowners and renters.

So far, so good.  But these changes aren’t the real story.

Buried beneath talk of those 3.3 extra pennies that motorists would pay for a gallon of gasoline is a provision that could eventually eliminate the state’s single largest, and fairest, source of revenue: the personal income tax.  Under SB 414, which has passed both the House and Senate in slightly different forms, income tax rate cuts would be triggered whenever general fund revenues grow faster than inflation.  Unlike recent triggers enacted in states such as Oklahoma, SB 414 does not specify a target income tax rate and thus rate cuts would continue until the tax vanishes entirely.  In the House version of the bill the first cuts could begin as early as 2019, while the Senate’s version would start the process in 2018.

There are a multitude of problems with this approach.  Among them:

  • The cost of these triggered cuts would be enormous.  The Michigan League for Public Policy (MLPP) explains that the state’s most recent budget “falls short in key areas related to economic growth and opportunity, and many investments are not on a scale that will make Michigan a comeback state for all of its residents.”  And yet, the Michigan House Fiscal Agency (HFA) explains (PDF) that if SB 414 were in effect right now, the result in 2016 would have been roughly $700 million less to invest in public services (caused by a drop in the income tax rate from 4.25 to 3.92 percent).  That revenue loss would compound as additional rate cuts are triggered.
  • Michigan already has a regressive tax system where low- and middle-income families pay 9 percent, or more, of what they earn in state and local taxes.  High-income families, meanwhile, pay just 5 percent of their incomes in tax.  As ITEP’s Who Pays? analysis shows, the state’s personal income tax is the only major tax on the books running counter to this unfairness.  Cutting or repealing the income tax would primarily benefit those wealthy individuals who already face the lowest state and local tax rates.  According to Who Pays?, four of the five states with the most regressive tax systems in the country do not to have an income tax—hardly a group that Michiganders should be eager to join.
  • SB 414 is designed to appear fiscally responsible by allowing income tax rate cuts to take effect only when overall revenue growth exceeds the rate of inflation.  In this case, inflation is measured for the cost of products typically purchased by household consumers—known as the Consumer Price Index (CPI).  But the CPI is not a reliable measure of the costs that Michigan’s state government will incur in the years ahead.  As we explain in our brief outlining Colorado’s disastrous history with a somewhat similar inflation-based formula, growth in the cost of services such as medical care, education, and infrastructure has routinely outpaced growth in the CPI.  This suggests that SB 414’s inflation measure is a poor gauge of the state’s fiscal trajectory.
  • Even if the CPI were a relevant measure of inflation for these purposes, the Michigan proposal’s vulnerability to the “ratchet effect” would still guarantee its fiscal irresponsibility.  If revenues plummet in one year because of an economic downturn and then partially recover in the following year, that modest recovery could trigger an income tax rate cut even if the state’s revenues remained far below their pre-recession levels.  In other words, every recession would lower the bar needed to trigger an income tax rate cut to the point that even an anemic recovery could be enough set it off. 
  • While an economic recovery may be the most frequent scenario in which an unaffordable income tax rate cut would take effect, it is by no means the only scenario.  The Michigan HFA, for example, explained in its analysis (PDF) of the bill that a “one-time revenue increase” caused by unusual economic events or federal tax changes could also result “in a permanent reduction in the income tax rate.”  If that happens, Michigan will find itself trying to provide the same level of services, with a lower income tax rate, even after the temporary tax windfall that triggered the rate cut is no more than a distant memory.

Michigan Rep. Jim Townsend recently called this income tax trigger proposal “the ugly conclusion to what term limits have brought us.”  This is in reference to the fact that Michigan’s fairly strict cap on the number of years that lawmakers can hold office will mean that many—if not most—of the lawmakers voting for this trigger law will no longer be in the legislature when it comes time to deal with its full budgetary consequences.

Enacting tax cuts that will not take effect for years, and even decades, in the future under the mistaken impression that SB 414 will be able to accurately gauge their affordability is a major gamble that is unlikely to pay off.  Michigan residents would be better served if their lawmakers refocused their efforts on the issue that is supposed to be at the core of their work: finding a way to fund the state’s deteriorating transportation infrastructure.


Hope Springs Eternal in Georgia


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In recent years, Georgia has been a hotbed for regressive proposals to eliminate or lower the state’sreliance on income taxes and replace that revenue with higher sales taxes.  So far each of these proposals has been rejected, though late last year voters did cap the state’s top personal income tax rate—a change that could lead to financial problems down the road and may prevent future Georgians from making needed investments.

But hope springs eternal as there are indications that during the upcoming legislative session lawmakers are interested in tax reform yet again. While one of the most serious proposals on table is a familiar sort of regressive tax shift, the Georgia Budget and Policy Institute (GBPI) has released a new report explaining that the state has a variety of tax reform options at hand that would actually improve the fairness of the state’s tax code. In “A Tax Blueprint to Strengthen Georgia,” GBPI prescribes a tax plan that provides:

“a targeted tax cut to Georgians climbing the ladder toward the middle class, while protecting the state’s most critical investments. The plan consists of three core tenets: cut income taxes from the bottom up; modernize the sales tax to fit today’s online commerce and make special tax deductions less generous.”  

An Institute on Taxation and Economic Policy (ITEP) analysis of the GBPI plan found that the overall fairness of Georgia’s tax structure would be improved under the proposal and the middle 20 percent of Georgians would see an average tax cut of $206. This blueprint for Georgia tax reform should be required reading for Georgia lawmakers.  Once the debate heats up let’s hope they also heed the words of Wesley Tharpe from GBPI who opined in the Atlanta Journal Constitution, “One thing is for sure: A drastic shift from income to sales taxes is a flawed approach to reform. Georgia can do better.”


Pennsylvania Budget Stalemate and the Hard Work Ahead


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Pennsylvania Gov. Tom Wolf and House and Senate lawmakers continue to grapple with how to balance the state’s books more than 90 days past the budget due date. The state’s fiscal year started July 1, but policymakers have yet to agree on a fiscal path forward that manages the state’s $2.3 billion deficit. 

The House voted this week against a new tax plan proposed by the governor, which, he said, provided an “opportunity to move forward and away from the failed status quo.” Conservative members of the legislature (who control the House and Senate) support a “no new taxes” solution and instead want to privatize state-run wine and liquor stores and reduce pension spending to close the gap.  The governor’s latest tax proposal was seen as an attempt to gain some conservative support for a revenue solution as he abandoned his plan to broaden the sales tax base and pared back his proposed new severance tax on natural gas extraction.   The centerpiece of his proposal was an increase in the state’s personal income tax rate from 3.07 to 3.57 paired with an increase in a tax forgiveness credit.  According to an ITEP analysis, the income tax changes would have held the state’s lowest income residents harmless while the rest of the hike was spread evenly across the income distribution. 

The Pennsylvania Budget and Policy Center notes that there is now more (and harder) work to be done:  “The weight of responsibility for guiding us to the budget Pennsylvania needs now rests more heavily than ever with the legislative majority, including with the members who, at various times, have expressed support for a severance tax, increased education funding and more investment in human services. Today they voted no. That was the easy part. The hard part will be getting to yes, to a vote for a responsible budget that invests in Pennsylvania’s schools, communities and future.”

Pennsylvania already has the sixth most unfair state tax structure in the country, so while there is harder work ahead for policymakers there are certainly clear options available that both raise money and increase the overall fairness of the state’s tax structure. 


Lessons Learned: Lawmakers in Alabama and North Carolina Limp Across their State's Budget Finish Line


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After months of budget negotiations, legislators in Alabama and North Carolina limped to the budget finish line last week. Legislators left Montgomery and Raleigh with budget agreements that represent missed opportunities, a disregard for the near-future revenue needs, and lessons about punting difficult governing decisions down the road.

Alabama: Throughout the legislative session (and two special sessions) Alabama’s Gov. Bentley proposed revenue raising packages to close a significant general fund gap. His proposals were designed to help set the state on a path toward fiscal sustainability and plug the state’s $200 million short fall while ensuring vital services that improve the quality of life for all Alabamians were protected. Yet conservative lawmakers refused to compromise or put forward a plan free of damaging spending cuts.  Ultimately, the legislature passed a cigarette excise tax of 25 cents per pack and approved a permanent shift of some use tax revenue from the Education Trust Fund to the General Fund. All told the tax hikes raised about $164 million so the state still resorted to some cuts to balance its books.

Kimble Forrester with Alabama Arise offers a thoughtful summary of learned lessons from this year’s lengthy budget debate. He appreciates that a budget deal was reached before the start of the state’s fiscal year on October 1, but cautions that lawmakers missed an opportunity.  From his editorial in The Huntsville Times:

“Avoiding disastrous cuts to Medicaid and corrections is commendable, but why stop short of level funding for other services that have endured years of cuts?“

 Clearly lawmakers didn’t go far enough to sure up the state’s coffers in anticipation of future needs, but some good may have come out of the budget debate. Forrester says that at least two lessons were learned:

1.) "There's growing support for cutting taxes at lower incomes and raising taxes at higher incomes." 2.) “Momentum is growing to modernize Alabama's upside-down tax system." Let’s hope lawmakers take these lessons to heart and come back next session read to continue on a path toward tax fairness and sustainability.

North Carolina: Lawmakers in North Carolina also finally crossed the budget finish line.  While the drawn out budget negotiations resulted in a deal that mostly walked back any significant spending cut threats for the time being (teachers’ assistants and drivers education were spared), the next time lawmakers put together a 2 year spending deal they will have $1 billion less revenue available thanks to delayed tax cuts included in the final package. Most significantly, the budget reduces the state’s personal income tax rate from 5.75 to 5.499% starting in 2017 and loosens the revenue target needed to reduce the rate for profitable corporations to 3%. Regrettably current lawmakers are able to tout that they balanced the state’s budget while also cutting taxes, but these tax cuts aren’t actually being paid for in the current budget.  

In her letter urging Governor McCrory to veto the budget last week (he regrettably signed it into law on Friday), Alexandra Sirota of the NC Budget and Tax Center argues:

 “A compromise budget shouldn’t compromise North Carolina’s future. This budget does not reflect the need for the state to serve as a partner in economic development and economic opportunity for all North Carolinians.”

It’s worth noting that these tax cuts cumulatively cost $1 billion, on top of the $1billion in tax cuts the legislature passed in 2013. Sadly, the only lesson North Carolina lawmakers seem to be learning is how to dig their budget hole deeper. 


New Poverty Data Shows 1 in 7 Americans Are Still Living in Poverty: ITEP Report Identifies State Tax Policies Needed to Help Reduce Poverty


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In conjunction with the U.S. Census Bureau’s release of new poverty data this week, ITEP has an updated report out today, State Tax Codes as Poverty Fighting Tools, that provides an overview of anti-poverty tax policies, surveys state developments in these policies in 2015, and offers recommendations that every state should consider to help families rise out of poverty.

Based on the Census data, here’s what we know. Poverty remained persistently high as the new data showed no significant change from last year or the previous three years.  In 2014, 46.7 million (or 1 in 7) Americans were living in poverty.  At 14.8 percent, the federal poverty rate remains 2.3 percentage points higher than it was 2007, just before the throes of the Great Recession indicating that recent economic gains have not yet reached all households and that there is much room for improvement. Most state poverty rates also held steady between 2013 and 2014 though twelve states experienced a decline.

In good news, the Supplemental Poverty Measure (SPM) released alongside the official measure, demonstrates that the tax code can be used as an effective poverty-fighting tool. The federal EITC and refundable portion of the Child Tax Credit alone, for example, decreased the supplemental poverty rate from 18.4 to 15.3 percent for everyone.  And, thanks in large part to those credits, the supplemental poverty rate for children is actually lower than their official poverty rate (16.7 compare to 21.5 percent). The SPM was developed in recent years to address concerns that the official measure does not produce an adequate nor accurate picture of those living in poverty.  It does a much better job of measuring the true cost of making ends meet as it includes expenses such as child care, out of pocket medical costs, and payroll and income taxes as well as policies like the Earned Income Tax Credit (EITC), the Supplemental Nutritional Assistance Program (SNAP; formerly food stamps), housing assistance and other key anti-poverty policies.

But here’s something that will be ignored this week in virtually all the chatter about poverty and policy: As much as federal tax policy plays a vital role in mitigating poverty, state tax systems actually exacerbate poverty.

While the federal tax system is overall (barely) progressive thanks to progressive income tax rates and tax credits such as the EITC and Child Tax Credit (CTC), virtually every state tax system is regressive, meaning the less you earn, the higher your effective tax rate. In fact, when all the taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than on the richest 1 percent of taxpayers. ITEP’s 2015 comprehensive report, Who Pays?, examined the tax systems of all 50 states and the District of Columbia and found the effective state and local tax rate for the poorest 20 percent is 10.9 percent, which is more than double the 5.4 percent average effective rate for the top 1 percent.

Despite the unlevel playing field states create for their poorest residents through existing policies, many state policymakers have gone backward and proposed (and in some cases enacted) tax increases on the poor under the guise of “tax reform.” During the 2015 legislative session, for example, 17 states considered or passed tax cut or tax shift packages that would lower taxes for the very rich and increase them for low- and moderate-income families.

State policymakers should take note. Right now, states are failing those who struggle with poverty and, instead, are using the tax code to favor those who don’t need any more help. Lawmakers who are serious about improving their constituent’s lives should closely examine the Census data on poverty in their states and communities and consider enacting progressive tax policies that will reduce poverty and improve families’ quality of life.

State Tax Codes As Poverty Fighting Tools recommends that states jump-start their anti-poverty efforts by enacting one or more of four proven and effective tax strategies to reduce the share of taxes paid by low- and moderate-income families: state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits.

A full copy of the report can be found here


Guest Post: Five Findings: Tax-cut plan will harm North Carolina's Competitive Position


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Thanks to Alexandra Sirota from the North Carolina Tax and Budget Center for guest posting for us about the budget debate in North Carolina. For more information we urge you to visit the North Carolina Tax and Budget Center's website

The Budget & Tax Center will release a more detailed analysis of the tax plan in the next day, so stay tuned.
The bottom line: yet again policymakers chose to cut taxes — a strategy that doesn’t address North Carolina’s real economic challenges. By doing so they undercut the foundations of what has proven to be economy-boosting public investments. Rather than debate what is needed so every child in North Carolina receives a high quality education, for example, policymakers narrowed their choices by cutting taxes to say it’s either teachers or textbooks; smart technology in the classroom or a teacher assistant; a one-time bonus or bringing teachers closer to the national average in pay.
North Carolina can’t afford to debate what a successful state looks like at the margins. The bar should be higher. We need to build on the investments that have made our state great and follow the time-tested better pathway to a strong economy that works for everyone.
Here is why the tax plan fails to meet North Carolina’s high standards of fiscal responsibility and will fail to put the state in a competitive position against our neighbors and the nation:
It’s a big revenue loser. No surprise here — but the impacts of that revenue loss aren’t fully accounted for in this two-year budget. That is because policymakers designed the tax changes to kick in down the road when future policymakers will need to contend with an even greater gap between resources and public needs, like a growing number of students and the inability to move teachers to the national average in pay.

By: Alexandra Sirota, Director North Carolina Tax and Budget Center

Due to the speed at which passage of the budget bill is moving, we’re highlighting here five important findings from our analysis of the proposed tax-cut plan.

The Budget & Tax Center will release a more detailed analysis of the tax plan in the next day, so stay tuned. 

The bottom line: yet again policymakers chose to cut taxes — a strategy that doesn’t address North Carolina’s real economic challenges. By doing so they undercut the foundations of what has proven to be economy-boosting public investments. Rather than debate what is needed so every child in North Carolina receives a high quality education, for example, policymakers narrowed their choices by cutting taxes to say it’s either teachers or textbooks; smart technology in the classroom or a teacher assistant; a one-time bonus or bringing teachers closer to the national average in pay.

North Carolina can’t afford to debate what a successful state looks like at the margins. The bar should be higher. We need to build on the investments that have made our state great and follow the time-tested better pathway to a strong economy that works for everyone.

Here is why the tax plan fails to meet North Carolina’s high standards of fiscal responsibility and will fail to put the state in a competitive position against our neighbors and the nation:

  • It’s a big revenue loser. No surprise here — but the impacts of that revenue loss aren’t fully accounted for in this two-year budget. That is because policymakers designed the tax changes to kick in down the road when future policymakers will need to contend with an even greater gap between resources and public needs, like a growing number of students and the inability to move teachers to the national average in pay.

                            

  • The wealthiest keep getting the biggest breaks. The move to cut the top state income tax rate to 5.499 percent from 5.7 percent appears to only serve the ideological commitment to income tax cuts. By design, it doesn’t address the fact that low- and middle-income taxpayers already pay more as a share of their income in state and local taxes than the wealthiest taxpayers do. That gap will even widen a bit under this plan. Just slightly more than one-third of taxpayers with income below $20,000 get a tax cut at the same time that 99 percent of those with income greater than $423,000 do.

 

  • The sales tax base expansion should not be used to pay for income tax and should include a state Earned Income Tax Credit. Increasing the goods and services subject to sales tax is important to keep up with today’s economy and provide much-needed revenue.  But relying more on the sales tax while reducing the income tax is a step in the wrong direction. It threatens the balance provided by two taxes that perform differently in different economic circumstances. In the long term North Carolina’s revenue system will be more subject to erosion in economic downturns – just when public needs tend to be the greatest. Equally important is that using an expanded sales tax to pay for costly income tax cuts fails to account for the reality that the lower one’s income the higher percentage of it they pay in sales taxes. A $500 increase in the standard deduction is insufficient to address the greater tax load that low- and middle-income taxpayers will pay. Again, the wealthiest get the biggest benefit.
  • The corporate income tax rate will definitely drop to 3 percent at some point next year. Changes to the language driving the reduction mean that revenue collections don’t have to meet the low revenue threshold set, a bar that they will likely surpass given the national economic recovery, by the end of Fiscal Year 2016. Whenever they reach that threshold, the rate will be reduced resulting in an additional $350 million in lost revenue for public schools and targeted economic development efforts beginning in the second year.  Moreover, changes to the way in which corporations profits are subject to tax will also change such that multistate corporations will only pay tax based on the share of their national profits generated from sales to North Carolina consumers and no longer need to account for their property or payroll.
  • Allocating sales tax revenue to local communities under the proposed complex formula won’t make them whole. Many questions remain about how the complicated formula for sending sales tax revenue to localities will be implemented — and how much money will be involved. Is it just the revenue anticipated from expanding the sales tax? Or could revenue generated from sales tax also be in the mix if anticipated revenue collections from broadening the sales tax fall short?  Importantly too, the roughly $84.8 million identified is unlikely to sufficiently change the dynamics in rural communities where water & sewer infrastructure needs persist, main street revitalization and support to existing businesses to expand are needed and job training and pathways require regional connections. A vision and policy agenda for rural economic development cannot be achieved with a state tax code that falls short.

The proposed tax plan proposed is not reform. It won’t help the state’s economic position. It has been proven over time that tax cuts don’t drive significant job creation or improve wages. They can’t ensure that economic activity happens in communities that are being left behind by current economic growth.

What tax cuts do is reduce the ability of the state to build a foundation for a strong economy. That is crystal clear. The harm to public schools, health, the justice system and economic development from adoption of a strategy that doesn’t work will be felt by us all.

 


Revenue Raising in Alabama: Another Opportunity


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Alabama Gov. Robert Bentley has publicly said his state has a revenue problem, not a spending problem.

Perhaps this isn’t the most profound statement, but it is remarkable coming from a Republican governor who 1.) governs a state that would require a constitutional amendment to increase its low personal income tax rate, and 2.) has signed Grover Norquist’s infamous no-tax pledge.

The governor’s resolve will once again be tested this week as Alabama lawmakers reconvene for a second special session to address the state’s projected $200 million budget gap before the start of the state’s fiscal year on Oct.1. Gov. Bentley has twice proposed revenue raising packages to help set the state on a path toward fiscal sustainability and ensure vital services that improve the quality of life for all Alabamians are protected. Yet conservative lawmakers have thus far refused to compromise or put forward a plan free of damaging spending cuts.

This week’s revenue raising discussions are being greeted with anticipation and hope by many, including the 200 groups who signed on to the Stand Tall Coalition’s letter. The letter cautions lawmakers that, “Further cuts will set our state’s health system and economy on a dangerous course.” The stakes are as high as they were during the state’s regular session, if the state fails to raise new revenue,-- rural hospitals could close, funding for quality childcare could be slashed,  and state troopers could close their jobs.

That, of course, is the crux of the problem with refusal to increase taxes, not just in Alabama but in other states. In theory, no-tax pledges often disconnect taxes from vital public services that our taxes fund. In practice, refusal to raise revenue often comes at a steep cost to the general public. So it’s refreshing that Gov. Bentley is pushing lawmakers to send him a bill that will raise enough revenue to plug the state’s budget gap without having to slash funding for vital programs and services.  

The governor vetoed a cut-filled budget in June and called lawmakers back for a special session in early August to seek a revenue solution to the state’s revenue problem.  However, the first special session fell apart when the House and Senate couldn’t agree on a way forward, thus lawmakers are back in Montgomery this week for a second special session.

The governor is once again proposing $260 million in revenue-raising measures that are similar to those he put forward during the first special session - eliminating the deduction for the Social Security portion of payroll taxes (taxpayers who itemize can currently deduct the full value of their payroll taxes an uncommon state tax policy practice), a 25-cent cigarette tax increase, and a few small business tax changes. The changes to the state deduction for payroll taxes is a long sought reform that will broaden the state’s income tax base and shore up revenues for the long term.  An ITEP analysis found that 65 percent of the revenue raised from the payroll deduction reform will be paid by the top 20 percent of taxpayers.

On Wednesday, the House Ways and Means General Fund Committee approved bills that raised $130 million in taxes on car rentals, car titles, cigarettes, and businesses. Should this package become law, the state’s car rental tax would increase from 1.5 to 2 percent, the car title fee would increase to $28 up from $15, and the tax on cigarettes would go up to 25 cents.   The full House is expected to vote on the bills Thursday.  Gov. Bentley isn’t satisfied with the House committee’s tax package, but he calls the bill a “step in the right direction” and says that more must be done. He cautions, “If the gap is not closed then they (lawmakers) will be closing down some facilities in the state.”

It remains to be seen if compromise will win the day in Montgomery and if enough revenues will be raised, but the fact that House members supported revenue raising measures for the first time this week is a positive sign.


California Pay-Per-Mile Program Will Fail if Inflation is Ignored


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The following comment was submitted to the California Road Charge Technical Advisory Committee.  The committee is advising the California Transportation Agency as it prepares to launch a pilot program taxing volunteer drivers based on each mile that they drive.

Studying the feasibility of a vehicle miles traveled tax (VMT tax) in California is a worthwhile endeavor.  If we are headed toward a future where many vehicles will use little or no gasoline, then eventually the gasoline tax will cease being a reliable way of charging drivers for their use of the roads.

The legislation creating this committee, and the committee’s online materials, both reference Oregon as a leader in VMT tax experimentation.  While this is true, it is also important to note that Oregon’s VMT tax program (called OReGO) contains a serious flaw that sharply limits its ability to raise revenue in a sustainable manner.  That flaw is a lack of planning for inflation.

Under OReGO, the tax rate applied to each mile driven is a flat 1.5 cents-per-mile.  As Oregon’s law is currently written, drivers participating in the program a decade from now will be charged the same 1.5 cent-per-mile tax that they are being charged today.  This is despite the fact that asphalt, concrete, machinery, and other construction materials are virtually guaranteed to become more expensive in the years ahead.

If construction costs grow by a modest 2 percent per year, the OReGO system’s 1.5 cent tax rate will have lost nearly a fifth of its purchasing power within the next decade.  Offsetting this loss will require raising the tax rate to 1.8 cents per mile.

The most efficient and seamless way of allowing the OReGO tax rate to keep pace with inflation is to rewrite the law so that the rate automatically updates each year according to a formula that takes inflation into consideration.  Such formulas already exist in the gas tax laws of states such as Florida, Georgia, Maryland, Rhode Island, and Utah.  And similar inflation indexing provisions are well tested in the income taxes levied by California, Oregon, and numerous other states.

The goal of a VMT tax pilot project is to find a sustainable way of funding transportation in the long-term.  If California moves ahead with a VMT tax system that does not take the inevitable impact of inflation into account, then it will have failed to achieve this goal.


Maine Tax Overhaul is a Boost for Low-Income Working Families


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Earlier this week, Maine lawmakers overrode Gov. Paul LePage’s veto of the state budget for fiscal year 2016, thus enacting a significant tax overhaul lawmakers had agreed to weeks earlier in a bipartisan fashion.  

The final tax reform package improves the state’s tax code and includes several major tax changes: lower income tax rates, a broader income tax base, new and enhanced refundable tax credits, a doubling of the homestead property tax exemption, an estate tax cut, and permanently higher sales tax rates.

With the exception of increased sales tax rates and a cut in the estate tax, the overhaul contains provisions that modestly improve the progressivity of Maine’s tax code  (see ITEP’s analysis below).

Coming to an agreement was not an easy feat. Gov. LePage’s initial tax proposal announced in January involved a costly, sweeping tax shift package, which would have resulted in a significant shift away from progressive personal income taxes toward a heavier reliance on regressive sales taxes.  While almost every Mainer would have received a tax cut under this plan, the benefits were heavily tilted in favor of the state’s wealthiest taxpayers and would have left the state with $300 million less revenue when fully enacted.

Democratic legislative leaders in Maine responded in April with a plan entitled, “A Better Deal for Maine”, the tax benefits of which would have been targeted to low- and middle-income Mainers rather than the wealthy. Finally, Republican lawmakers released their own proposal in May that would have hiked taxes on the average taxpayer with income below $89,000 while delivering a tax cut to wealthier taxpayers.

After months of debate and competing tax reform and tax cutting proposals,  lawmakers enacted the final package with a great deal of compromise between both parties of the Maine State Legislature.

Major Elements of the Final Tax Package:

  • Restructures the state’s personal income tax brackets and rates: the starting point of the top income threshold increases and the top rate lowers from 7.95% to 7.15%
  •  A significant increase in the standard deduction, which replaces the state’s zero percent bracket; the standard deduction is also phased out for upper-income taxpayers
  • All itemized deductions  are subject to the state’s cap (around $28,000; charitable contributions and medical expenses had previously been exempt from the cap); itemized deductions fully phase out for upper-income taxpayers
  • Introduces a new refundable credit for low- and middle-income Mainers to offset sales tax rate increases
  • Makes Maine’s earned income tax credit refundable at its current level (5 percent of the federal)
  • Doubles the homestead exemption for all Maine resident homeowners;
  • Maintains the current temporary 5.5% sales tax rate and the 8% tax on meals (set to drop to 5% and 7% this month)  while increasing the lodging tax to 9%;
  • Cuts the estate tax by raising exemption level to match federal level
  • Reduces local revenue sharing

While the plan includes some very good income tax base broadening measures–most notably applying all itemized deductions to the state’s cap and fully phasing out itemized deductions for upper-income taxpayers– it is still a subtle tax shift in that most of the personal income tax cuts are paid for with higher sales tax rates. As a result, the state will slightly shift its reliance away from its progressive personal income tax onto a narrow and regressive sales tax.  However, this plan is vastly different from other proposed and enacted tax shifts, as it reduces taxes for most low and moderate-income families and somewhat improves the progressivity of the tax code.

This outcome is accomplished in two main ways. First, the plan converts the state’s 5 percent nonrefundable Earned Income Tax Credit (EITC) to a refundable credit. In other words, low-income working families have the ability to receive the entire value of the credits regardless of any personal income tax liabilities, resulting in an increase of after-tax earnings for many working poor families in Maine by about $7 million to $9 million per year.

Second, the plan enacts a new refundable sales tax fairness credit, which will lessen the impact of the included sales tax rate increases on low- and moderate-income Mainers.   The credit has a maximum value of $250 and begins to phase out at $20,000 for single filers and $40,000 for married filers. The refundability of this credit ensures that taxpayers will get the full value of the credit regardless of how much tax they owe.

With the inclusion of the refundable sales tax credit as well as the refundable EITC, Maine’s new budget will direct approximately $40 million more to low- and moderate income families in the state. This is indeed a win for working families; however, threats from Gov. LePage to dismantle the income tax have not waned. In his veto letter LePage proclaimed, “Mainers deserve to have the debate over whether the income tax should be phased out. The future of our state depends on our ability to be competitive with the nation and the word. We must work aggressively each year to cut back the income tax until it's gone.”

The decrease or disappearance of income taxes would undoubtedly result in tax increases and spending cuts elsewhere. Based on LePage’s previous proposals, such changes would adversely affect low and middle-income groups. If the recent bipartisanship displayed among Maine’s legislatures is any indication of future policymaking, they will continue to remain strong in rejecting damaging proposals, while lifting up proposals benefitting Maine families.  


And That's a Wrap....the Failed Experiment in Kansas Continues


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The drama that ensued over the last few weeks in Topeka is the stuff of telenovelas. Kansas Gov. Sam Brownback got emotional when urging lawmakers to vote for a sales tax hike, even calling legislators from the hospital where his granddaughter was just born. Staunch anti-tax legislators broke their no new taxes pledge. Lawmakers accused the governor of blackmail, and the legislative session went on for an extra 23 days.

In the end, many Kansans will pay more in taxes due to an increase in sales and cigarette taxes, a freeze in income tax rates and limits for itemized deductions.

But every good soap opera deserves a twist. It’s well known that these tax increases were precipitated by irresponsible, top-heavy tax cuts championed by Gov. Brownback and passed in 2012 and 2013. An ITEP analysis of all Kansas tax changes over the last four years (including this year’s) found that the poorest 20 percent of Kansans, those with an average income of just $13,000, will pay an average of $197 more in taxes in 2015 as a result of the Gov. Brownback tax changes, and, even with the increases Gov. Brownback is expected to sign into law today, the richest 1 percent are still paying about $24,000 less.

Early on in his tax-cutting frenzy, the Governor offered that Kansas was a “real live experiment” for other states in terms of showing the positive impact of supply side economics. Those words have come back to haunt him and other supporters of trickle-down economic theories. If Kansas is an experiment, Friday’s vote makes it clear that the experiment failed.

One of the biggest and most regressive tax cuts included in the Governor’s 2012 tax cuts is its full exemption of non-wage business income. It’s the only state in the nation to fully exempt all pass-through business income. Lawmakers missed a real opportunity to fix this costly loophole.  Instead, they approved a new tax on guaranteed payments to ensure that some tax on small business income is levied, but accountants can easily manipulate the books so their clients don’t pay this new tax.

Most importantly, Kansas’s tax changes, even the provision that allegedly exempts 380,000 low-income people from income taxes, will do nothing to alter the fact that the Sunflower State earlier this year earned a spot on ITEP’s “Terrible Ten” list because it has 9th most regressive tax structure in the country.

The tax bills that barely passed the Senate (and passed the House at 4 am that same morning) included the following:

  • Income Tax Rate Freeze: Income tax rates were scheduled to fall to 2.3 and 3.9 percent, but the budget instead froze the rates at 2.6 and 4.6 percent
  • Itemized Deduction Reform: The bill limits itemized deductions  for mortgage interest and property taxes paid.  This change is expected to generate $97 million in FY2016.
  • Sales Tax Rate Hike: The sales tax rate (including groceries) increases from 6.15 to 6.55 percent. This rate increase is expected to bring in $164 million in FY2016.
  • Cigarette Tax Rate Hike: The cigarette tax increases by $0.50 per pack to $1.29 beginning July 1.  The tax hike is expected to generate $40 million in FY2016 and will almost certainly generate less in years to come.
  • Low Income Exemption: Taxpayers with taxable income less than $5,000 ($12,500 for married couples) are exempt from paying the personal income tax.
  • Guaranteed Payments: These payments, received from some types of pass-through business income, will now be taxed. This change is expected to bring in $23.7 million in FY2016.

The Kansas tax drama is over for the time being, but stay tuned. Chances are this soap opera will continue as lawmakers grapple with the impact of tax hikes in the context of unaffordable tax cuts.


Michigan House Wants Poor to Pay for Road Repairs


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There’s no doubt that Michigan needs to find additional funds to repair its rapidly deteriorating transportation network.  But the package of bills just approved by the Michigan House of Representatives represent some of the worst ideas for doing so.

The most problematic change would repeal the state’s Earned Income Tax Credit (EITC).  The EITC is a vital pro-work and anti-poverty tax credit that benefits roughly 800,000 Michigan families every year.  Just four years ago, Michigan lawmakers voted to scale back the state’s EITC by 70 percent to help fund large business tax cuts.  Rather than revisiting whether such dramatic tax cuts were prudent, the House wants to double down and repeal the modest EITC that remains.

Judging by the statements being made by some lawmakers, this decision seems to be based in part on a fundamental misunderstanding of how Michigan’s tax system works.  State Rep. Aric Nesbitt, for example, justified his vote by saying that EITC repeal “helps ensure a flat and fair system.”  In reality, repealing the EITC would only exacerbate the unfairness of a tax system already tilted against low- and moderate-income taxpayers. 

Under current law, Michigan’s wealthiest residents pay 5.1 percent of their income in state and local taxes while the state’s poorest residents pay a significantly higher 9.2 percent rate.  Repealing the EITC would have no impact on the taxes paid by the state’s more affluent taxpayers, but an ITEP analysis showed that it would raise the rate paid by the state’s low-income residents to 9.7 percent.  The result would be an even more steeply regressive tax system, and one even further from the “flat” ideal that Rep. Nesbitt says he supports.

While EITC repeal is the most troubling aspect of the House package, the lion’s share (more than $900 million out of a $1.1 billion package) of the road funding would come from simply diverting money away from other vital services such as health care, education, corrections, and economic development.  This reshuffling of funds toward roads and bridges is nothing more than a Band-Aid tactic—and one that we’ve seen create real budgetary problems in states such as Oklahoma and Utah.

The one bright spot in this plan would raise the diesel tax by four cents and would index both gasoline and diesel tax rates to inflation.  If these changes are enacted into law, Michigan would become the 17th state to raise or reform its fuel taxes since 2013.  Such reforms are vital to ensuring the long-run sustainability of gas taxes—the single most important source of transportation funding available to Michigan lawmakers. 

But despite their merits, these incremental gas tax reforms will hardly be worth celebrating if they’re accompanied by an elimination of the EITC and cuts to non-transportation areas of public investment.  Hopefully the Michigan Senate will be able to come up with some better ideas as it crafts its own transportation funding package.


Flaw in Connecticut's Budget Is Its Increase in Taxes on Working Poor- Not Corporate Tax Changes


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Connecticut’s legislature approved a two-year $40 billion budget last week with wide-ranging tax increases to help close a $1 billion budget gap. 

The changes include fully applying the sales tax to all clothes purchases and reducing a targeted property tax credit. But the two provisions that have received widespread attention are corporate tax reforms and increasing the personal income tax rate on the richest 5 percent of taxpayers.

Lawmakers included corporate tax reforms in the final budget despite objections from some of the largest corporations in the state, such as GE and Aetna.  In addition to higher taxes on computer and data processing services, the plan limits tax credits and specifies how business income can be reported.  Most significantly, Connecticut will join the majority of states in requiring corporations to file a combined report that treats subsidiaries of multistate corporations as one entity so they are taxed in aggregate.

General Electric (GE) threatened to relocate its headquarters and established an exploratory committee the day after lawmakers passed the final budget, and other major business interests have issued press releases conveying their discontent for the corporate- and personal income tax changes in the budget.  Gov. Dan Malloy has yet to sign the budget and has agreed to a sit-down meeting this week with the president of the Connecticut Business and Industry Association to discuss the corporate tax changes

GE and other corporations’ complaints have misrepresented the budget as a plan that only raises needed revenue by solely increasing taxes for the wealthy and profitable businesses. This is far from reality.  An ITEP analysis found that all income groups will pay more under this plan, and the lowest-income taxpayers in the state will experience the largest tax increase as a share of income.  Connecticut’s tax system is already upside down, and the tax changes included in the contentious budget deal would further exacerbate the gap between low-income and wealthy Connecticut taxpayers. 

Complaints about ‘combined reporting’ are also suspect considering that GE and other major corporations in Connecticut comply with the measure in almost every other state in which they currently operates.

GE is not exactly the best poster child for so-called high taxes. The company is notorious for paying low to zero corporate income taxes.  In 2014, an ITEP analysis found that GE paid an average state corporate income tax rate of negative 1.2 percent on its $5.75 billion in profits in the United States. Looking over the past five years, GE only paid a state corporate income tax rate of 1.6 percent, just about a quarter of the average weighted state corporate income tax rate of 6.25 percent.

Big business will undoubtedly continue to pressure Gov. Malloy into forgoing the good corporate tax changes included in the budget deal awaiting his signature.  The state is certainly in need of new revenue to protect critical public investments, yet if any part of the plan should give him pause it should be the tax increases on low- and moderate-income families rather than the small ask for wealthy taxpayers and profitable corporations to pay a little more.  


Sales-Tax-Free Purchases on Amazon Are a Thing of the Past for Most


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One of the main arguments used against efforts to crack down on online sales tax evasion just got a little bit weaker.  For years, e-retailers have been claiming that state and local sales tax laws are too complicated for them to bother complying with.  But Amazon.com’s decision to begin collecting sales taxes in Ohio last week belies that claim.

Effective June 1, Amazon is now collecting sales taxes in fully half the states that are collectively home to over 247 million people, or 77 percent of the country’s population.  In other words, more than three out of every four Americans now live in a state where Amazon willingly collects the sales taxes its customers owe.

 

In the shrinking number of states where Amazon is still refusing to collect the tax, the problem is clearly not that Amazon is incapable of participating in the sales tax system.  Instead, the company thinks it can retain a competitive advantage over mom and pop shops, and other brick-and-mortar stores, by continuing to offer its customers an avenue to evade state and local sales taxes.  And in at least half a dozen states (Arkansas, Colorado, Maine, Missouri, Rhode Island, and Vermont), Amazon has gone out of its way to preserve this advantage by cutting ties with local advertisers in order to dodge state-specific requirements that it collect sales tax.

As we’ve noted before, Congress could address this inequity quite simply if it were able to overcome its current gridlock and pass the Marketplace Fairness Act or similar legislation.  But until that happens, state sales tax enforcement as it applies to purchases made over the Internet will remain an inefficient and unfair patchwork. 


Kansas Considers Tax Hikes on the Poor to Address Budget Mess


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It’s been clear for more than a year that Kansas must make significant policy changes to address its severe budget shortfall. Now, legislative developments are moving quickly as Gov. Sam Brownback and lawmakers try to hammer out a plan to plug the budget gap, but so far proposals on the table would make Kansas’s already regressive tax code even more so.

On Saturday, Gov. Brownback unveiled (a second) tax proposal to fix the state’s fiscal mess, AKA a $400 million shortfall. The governor’s latest plan cuts income tax rates, changes how itemized deductions are taxed, includes a vague low-income exemption and raises both the sales tax and the cigarette tax.

“The latest proposal is asking the Kansas Legislature to repeat 2012 mistakes, proposing dramatic changes to the Kansas tax code without identifying specific statutory changes or data to show the impact those changes will have,” Annie McKay, executive director of the Kansas Center for Economic Growth said in a statement.

By now, it’s no secret that that much of this fiscal mess has its roots in the governor’s own top-heavy, unaffordable tax cuts passed in 2012 and 2013. Perhaps the copious and damaging press over the last several years around the governor’s tax cuts for the wealthy are the impetus behind Brownback’s claim that 388,000 people will not have to pay income taxes under his new plan. While ITEP hasn’t yet evaluated whether this claim is true,  an initial ITEP analysis of Brownback’s plan found that his proposal results in an average net tax hike for Kansans in the bottom 40 percent of the income distribution due in part to higher  sales and other regressive excise taxes.

As our analyses have repeatedly shown, Gov. Brownback’s 2012 and 2013 tax cuts disproportionately benefited the wealthy, collectively cost the state more than $1 billion and actually raised taxes overall on average for the bottom 20 percent of Kansans.

 


Oregon's Per-Mile Tax Contains Glaring Flaws


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On July 1, up to 5,000 Oregon residents can sign up for a program that indefinitely exempts them from the state’s gasoline tax.  Instead, these drivers will pay a flat 1.5-cent tax on each mile that they drive.

On one level, the logic behind this experiment is sound.  As electric cars and highly efficient cars become more popular, consumers need to buy less gasoline to go the same distances.  The result is less collected in per-gallon gasoline taxes, and less resources to fund maintenance and enhancements to the transportation network.  Oregon’s per-mile-tax experiment is designed to address this emerging issue.

But the plan has fundamental problems. In the short-term, this program will be a boon to the 1,500 gas guzzler owners lucky enough to score a spot in the experiment. Thirty-percent of the slots in the program can go to vehicles that get less than 17 miles per gallon, a provision intended to avoid significant revenue losses.  Toyota Prius owners, by contrast, are likely to be more hesitant to volunteer since the Oregon Department of Transportation estimates that doing so would cost them $117 in additional taxes per year.  This imbalance is a big part of the reason that just 24 percent (PDF) of people support an Oregon-style per-mile tax that does not take vehicle emissions into account.  After rewarding SUV owners and penalizing Prius owners, the net result will be a system that collects roughly the same amount of revenue overall as the current gasoline tax.

But this is not the only problematic aspect of Oregon’s pay-per-mile experiment.  Incredibly, this new tax includes the same design flaw that has plagued the state’s gasoline tax for almost a century: a stagnant, fixed tax rate that is incapable of keeping pace with inflation.

Oregon, like many other states, has recently been having trouble raising enough revenues to maintain and expand its transportation network.  Much of this trouble can be traced back to the design of the state’s gasoline tax, which cannot keep pace with the growing cost of asphalt, machinery, and other construction inputs because it is levied at a flat per-gallon rate of 30 cents per gallon.  Increasingly, states have been moving away from this “fixed-rate” model in favor of smarter, variable-rate taxes tied to inflation or other factors.

But rather than adopt this reform, Oregon lawmakers have overlooked inflation entirely and have opted to launch an experiment aimed at dealing with increasing fuel-efficiency.  The problem with this approach is that fuel-efficiency’s impact on the budget is a longer-term issue that has yet to rival inflation in terms of its practical effect.  When ITEP last examined this topic, we concluded that “construction cost growth has been 3.5 times more important than fuel-efficiency gains in eroding the purchasing power of the gas tax.”

In this light, Oregon lawmakers’ decision to launch a major pay-per-mile experiment is nothing short of bizarre.  If transportation revenue sustainability is their chief concern, indexing the gas tax rate to inflation would go much farther toward addressing this problem, and would do so much more quickly and at much less expense to taxpayers.

Once that reform is enacted, there would be a stronger case to be made that a pay-per-mile tax experiment should be conducted to prepare for the coming popularity of electric cars and highly efficient vehicles.  But even then, lawmakers will still need to be mindful of inflation.  As we explained in our 2014 report on this subject : “Lawmakers interested in adequately funding transportation on an ongoing basis should immediately index their gas tax rates to inflation, and should be aware that such indexing will also be needed under any [pay-per-mile] tax they might enact.”

As things currently stand, Oregon’s 1.5-cent-per-mile tax is exactly as vulnerable to inflation as its 30-cent-per-gallon gas tax.  Despite the hype, this experiment isn’t the leap forward in transportation funding sustainability that Oregon needs right now.


Martin O'Malley's Record on Taxes is Progressive


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At a time when many governors stubbornly rejected new revenues despite their states’ weak fiscal positions, former Maryland Gov. Martin O’Malley’s was one of only a few governors who championed tax increases to preserve his state’s public investments even during the Great Recession.

Early in his term, O'Malley made a substantial revenue increase the centerpiece of his economic agenda. The most notable piece of this package was a progressive measure, the "millionaires tax," which temporarily created a slightly higher new tax bracket applicable solely to taxpayers with taxable income in excess of $1 million. This change raised millions in much-needed revenue from the very wealthiest Marylanders—a group that could clearly afford to pay more since, at that time (PDF), the top 1 percent of taxpayers in Maryland paid just 6.2 percent of their income in state and local taxes compared to an effective tax rate of almost 10 percent for the bottom 20 percent of earners.

Unfortunately, the millionaire's tax faced substantial opposition from anti-tax conservatives who claimed that the tax was driving wealthy individuals to leave the state. In reality, these claims turned out to be entirely fallacious and were driven in large part by the Wall Street Journal’s reckless misreading of data.

Additionally, the package contained other regressive revenue raisers, which were more of a mixed bag. For example, O'Malley approved increases to the regressive sales tax and cigarette tax. He also attempted to substantially expand the sale tax base through taxing services, a smart move in terms of policy, but one that turned out to be to politically toxic.

Each of these tax increases disproportionately affected low- and middle-income taxpayers. However, these increases were part of a broadly progressive package and were critical in maintaining public services that benefit all families in the state.

Five years later, O'Malley moved to increase the sustainability and progressivity of the tax code by raising income tax rates and limiting tax exemptions for Marylanders earning more than $100,000. According to an analysis by the Institute on Taxation and Economic Policy (ITEP), these changes only affected 11 percent of Maryland taxpayers and a majority of it was borne by the wealthiest 1 percent of taxpayers in the state.

In terms of enhancing the sustainability of Maryland’s tax system, one of the best moves made by O'Malley was his push to reform Maryland's gasoline tax, which is the state's main funding source for transportation projects. Like most states throughout the country, Maryland had allowed inflation to gradually chip away at the value of the gas tax. If lawmakers failed to act, the tax was on its way to its lowest level (adjusted for inflation) in 91 years. Fortunately, O'Malley was able to usher through a reform that both raised the gas tax rate in the short term, and allows for further adjustments in the future to keep the rate in line with inflation and gas prices.

One of the more noteworthy ways that O'Malley improved his state’s tax system was with expansions of the state's Earned Income Tax Credit (EITC) in both 2007 and 2014. According to an ITEP analysis, the state's expanded EITC made the state's tax system significantly less regressive for low- and middle-income families.

O'Malley has yet to articulate a detailed vision on federal tax policy, but he recently laid out some broader progressive principles. In a recent speech at Harvard, O'Malley lambasted the failure of "supply-side economics" and called for an end to "tax policies that not only underinvest in our nation, but grossly and disproportionately benefit corporations and the ultra-wealthy."

In addition, he has recently argued in favor of raising the capital gains tax rate, which would make the tax system significantly more fair considering that capital gains receive a preferential rate compared to wages and primarily are received by wealthier Americans. This move could potentially position him to the left of Hillary Clinton, who has been mum on raising the capital gains tax rate so far this election and has expressed skepticism of increasing the rate in the past. 


Inflation Drives Federal Gas Tax Down Almost 40%


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Congress seems to be nearing agreement on a plan to extend transportation infrastructure spending for another two months, but it also appears to be at a loss for ideas on how to continue these critical investments after the fund becomes insolvent toward the end of July. 

The root cause of this recurring crisis is an obvious, easily fixable flaw in the gas tax’s design—the tax remains the same, with no adjustments for inflation unless lawmakers agree to change it.  States that recognize the economic importance of their transportation networks are increasingly taking steps to address this flaw, but federal lawmakers lack the political will to increase the gas tax and have repeatedly sidestepped the issue with 33 short-term fixes.

As with most things in our economy, the cost of building and maintaining our transportation network grows more expensive over time.  Asphalt, concrete, and machinery prices are subject to inflation in much the same way as food, furniture, and all the other products that shoppers have seen grow in cost over the years.

This is not an unusual or surprising problem.  But it does require that we pay for our transportation network with a sustainable revenue source.  Unfortunately, the federal gasoline tax (the single largest source of transportation funding in the county) does not fit this description because of a glaring flaw in its design.  Rather than growing with inflation each year, the federal gas tax has been fixed at 18.4 cents for more than 21 years.  Because of this, drivers have been paying roughly $3 in federal tax on each tank of gas for two decades, despite the fact that $3 buys significantly less maintenance and construction than it did in the 1990’s.

The nearby chart shows that if the federal gas tax rate is measured relative to growth in road construction costs, the tax has lost 38 percent of its value since Congress last increased it in 1993.  To be clear, this does not suggest that construction costs have grown in an unprecedented or unexpected way.  The problem has been a long, slow, inevitable decline in purchasing power for which lawmakers failed to plan.  If we measure the gas tax rate relative to a broader, more familiar measure of general inflation in the economy (the Consumer Price Index), the result is almost identical: a 39 percent decline.

Offsetting these decades worth of inflation would require an immediate increase in the tax rate of 11 or 12 cents per gallon.  But a one-time boost in the gas tax rate will not address the unavoidable, ongoing impact that inflation will have in the future.  For that, lawmakers should look to other parts of the tax code for inspiration.  Numerous tax brackets, exemptions, deductions, credits, and even the Alternative Minimum Tax are now tied to inflation so that they can grow modestly every year and retain their “real” value.  A very similar fix—which is growing in popularity at the state level—would put an end to these recurring funding crises for years to come, and would allow for infrastructure maintenance and expansions that are vitally important to the economy.


Sweet Sixteen: States Continue to Take On Gas Tax Reform


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UPDATE: A total of eighteen states have now taken action on the gas tax since 2013.  On July 15, Washington Gov. Jay Inslee signed legislation raising the state’s gas and diesel taxes by 11.9 cents.  The increase takes effect in two stages: 7 cents on August 1, 2015 and 4.9 cents on July 1, 2016.  Similarly, on November 10, Michigan Gov. Rick Snyder signed legislation raising the state’s gasoline tax by 7.3 cents and its diesel tax by 11.3 cents, effective January 1, 2017.  These tax rates will also grow alongside inflation in the years ahead.

In just the last three months, eight states have approved increases in their gasoline taxes to fund additional spending on infrastructure maintenance and expansion.  When taken in combination with gas tax increases or reforms enacted in 2013 and 2014, a total of sixteen states have acted to improve their gas taxes in just over two years.

These increases, many of which took place in states under Republican control and with the backing of the business community, stand in stark contrast to most state tax debates that have been decidedly anti-tax in recent years.  They also differ sharply from the approach being taken in Congress, where over twenty-one years of inaction has resulted in the federal gas tax losing almost 40 percent of its purchasing power.

2015 Actions

1. Georgia: A 6.7 cent increase will take effect July 1, 2015, and future increases will occur alongside growth in inflation and vehicle fuel-efficiency.

2. Idaho: A 7 cent increase will take effect July 1, 2015.

3. Iowa: A 10 cent increase took effect March 1, 2015.

4. Kentucky: Falling gas prices nearly resulted in a 5.1 cent gas tax cut this year, but lawmakers scaled that cut down to just 1.6 cents.  The net result was a 3.5 cent increase relative to previous law.

5. Nebraska: A 6 cent increase was enacted over Gov. Pete Ricketts’ veto.  The gas tax rate will rise in 1.5 cent increments over four years, starting on January 1, 2016.

6. North Carolina: Falling gas prices were scheduled to result in a 7.9 cent gas tax cut in the years ahead, but lawmakers scaled that cut down to just 3.5 cents.  The eventual net result will be a 4.4 cent increase relative to previous law (though now there is talk of allowing further cuts to take place and hiking drivers’ license fees to make up some of the lost gas tax revenue).  Additionally, a reformed gas tax formula that takes population and energy prices into account will result in further gas tax increases in the years ahead.

7. South Dakota: A 6 cent increase took effect April 1, 2015.

8. Utah: A 4.9 cent increase will take effect January 1, 2016, and future increases will occur as a result of a new formula that considers both fuel prices and inflation.  This reform makes Utah the nineteenth state to adopt a variable-rate gas tax.

2013 and 2014 Actions

 9. Maryland (2013): The first stage of a significant gas tax reform, tying the rate to inflation and fuel prices, took effect on July 1, 2013.  So far the gas tax rate has increased by 6.8 cents.

10. Massachusetts (2013): A 3 cent increase took effect July 31, 2013.

11.  New Hampshire (2014): A 4.2 cent increase took effect July 1, 2014.

12.  Pennsylvania (2013): The first stage of a significant gas tax reform, tying the rate to fuel prices, took effect on January 1, 2014.  So far the rate has increased by 19.3 cents per gallon.

13.  Rhode Island (2014): The gas tax rate was indexed to inflation.  This will result in a 1 cent increase on July 1, 2015 and likely further increases every other year thereafter (in 2017, 2019, etc).

14.  Vermont (2013): A 5.9 cent increase and modest gas tax restructuring took effect May 1, 2013.  Since Vermont’s gas tax rate is linked to gas prices, however, the actual rate has varied since then.

15.  Virginia (2013): As part of a larger transportation funding package, lawmakers raised statewide diesel taxes effective July 1, 2013, as well as gasoline taxes in the populous Hampton Roads region.  Outside of Hampton Roads, gasoline taxes are 1.3 cents lower than they were before the reform, but a new formula included in the law will cause the tax rate to rise alongside gas prices in the years ahead.

16.  Wyoming (2013): As the first state to approve a gas tax rate increase in over 3.5 years, Wyoming’s 10 cent increase took effect July 1, 2013.

Gas Tax Debates Continue

There is little doubt that more states will join this list in the months and years ahead.  Michigan lawmakers, for example, are considering a plan that would raise the diesel tax and then index both gasoline and diesel taxes to inflation.  Unfortunately, that plan would also scrap the state’s Earned Income Tax Credit (EITC) – a vital tool for lifting families out of poverty and offsetting regressive taxes such as the gas tax.

In South Carolina, the debate is playing out in a similarly troubling way as lawmakers discuss pairing a gas tax increase with income tax cuts that, depending on the specifics, could ultimately flow overwhelmingly to high-income taxpayers.

Following years of income tax cutting, Kansas lawmakers are reportedly considering a gas tax increase to help improve the state’s financial standing.

And in Washington State, the Senate passed an 11.7 cent gas tax increase earlier this year that may still be alive as part of the state’s ongoing special sessions.

Even if these states do not act this year, it’s clear that more gas tax increases and reforms are on the way.  Twenty states have gone a decade or more without a gas tax increase, and in many of those states (Missouri and Tennessee, for example) there is a growing recognition that outdated gas tax rates will have to be addressed sooner rather than later.


Back to the Drawing Board in Michigan


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Although Michigan voters rejected a ballot proposal Tuesday that would have raised sales taxes, gasoline taxes, and vehicle registration fees, the debate over how to boost funding for the state’s deteriorating infrastructure is far from over. 

Leading up to the election, 87 percent of likely voters said that if defeated, lawmakers should immediately begin work on a new plan to fix the state’s transportation system.  It appears voters were turned off by what The Detroit Free Press described as “one of the most complicated and confusing questions ever placed on a Michigan ballot.”  Had the measure passed, it would have triggered ten other laws that dealt with issues such as offsetting the tax increases paid by some low-income families via a boost in the state’s EITC, and reimbursing local governments for the revenue loss they would otherwise have faced under the plan.

Some voters said that lawmakers showed “cowardice” by bringing a plan to voters rather than raising revenue through the normal legislative process.  These voters are likely to get their wish in the months ahead.  Polling indicates that a straight up sales tax increase could be popular.  There is also talk about asking businesses to pay more, particularly since they saw their taxes slashed dramatically under the tax package signed by Gov. Rick Snyder in 2011.

The ballot measure was a complicated mix of tax increases and tax cuts that anti-tax advocates trumpeted as a tax increase on working people.  An ITEP analysis found that while most Michiganders would indeed pay more, the bottom fifth of Michigan taxpayers would actually receive an average tax cut of $24, and it would be the state’s highest earners that would face the largest increases.  For the vast majority of drivers, the increase would be a relative bargain given that the poor condition of the state’s roads costs most drivers over $500 per year in vehicle repairs.

Now that voters have defeated the measure, anti-tax advocates have begun spinning this election as evidence that voters are unwilling to pay higher taxes.  But the reality is that just 37 percent of Michigan residents think spending cuts alone could free up enough money to bring the state’s infrastructure up to 21st century standards.  When asked about cuts in specific programs, the results were similar.  Majorities ranging from 63 to 88 percent of voters oppose major cuts in K-12 education, universities, public safety, and health care for the poor, elderly, disabled, and children.

The hard truth is that Michigan’s roads are not going to fix themselves, and the state has to raise money some way to bring roads up to par. Gov. Snyder has conceded as much. 


ITEP Releases a Best Practices Guide on Taxing Marijuana at the State Level


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While the focus of marijuana legalization debates is rightly on the potential health and criminal justice impacts, the decision to legalize marijuana also has real implications for state and local revenue.

Over the past two decades, 23 states and the District of Columbia have enacted laws allowing the production and use of marijuana for medical purposes. Taking this one step further, Colorado, Washington, Alaska and Oregon are moving forward with systems that will permit the general production and purchase of retail marijuana. California, Maine, Nevada and others may soon follow in the coming years.

Given the increasing prominence of these issues, the Institute on Taxation and Economic Policy (ITEP) has written a new report providing a comprehensive overview of best practices for taxing marijuana and the potential impact these taxes could have on state and local revenue.

One of the central findings of the ITEP report is that predicting how much money state and local governments could raise from marijuana taxes is extremely difficult. To start, no jurisdiction in the world has legalized marijuana in modern times for a sustained period of time so there is not much historic data to go on.

Colorado and Washington have raised tens of millions in revenue from marijuana taxes, but these experiments in taxing marijuana are only a year old and the markets in both states are still evolving immensely, making it difficult to draw too many definitive lessons from either state.

The critical problem with estimating the revenue yield of marijuana taxes is that there are unpredictable factors that could work to substantially increase or decrease the revenue these taxes could yield. On the negative side for example, it's unclear whether there will be a dramatic decrease in the cost of marijuana production if legislation allows for cheaper cultivation methods, which could limit the ability of state governments to impose really dramatic excise taxes. Another significant factor that could drive marijuana tax revenue downward would be a step up in enforcement of federal laws against the production and consumption of marijuana.

One factor that could increase revenue is that legalization would likely significantly increase marijuana consumption across the United States, which would mean a bigger marijuana market to tax. In addition, bringing marijuana into the legal market would mean that individuals involved in the cultivation and sale of marijuana would be more likely to report their income from and pay taxes on these activities. Finally, states that adopt legalization early may experience a significant uptick in revenues from tourists, though this revenue could be fleeting as more states legalize marijuana.

Taking these factors all together, a recent study by the Congressional Research Service found that a $50-an-ounce tax at the state level could potentially raise about $6.8 billion annually if it were implemented across the country. Another report found that applying existing sales taxes and a 15 percent excise tax on marijuana in each state would generate just under $3.1 billion in state tax revenue. To give some context, raising somewhere between $3.1 to $6.8 billion would put marijuana taxes in the ballpark of the $6.5 billion that state and local alcohol taxes raise each year, yet put them well below the $17.6 billion raised by state and local cigarette taxes.

Read the Full Report:

Issues with Taxing Marijuana at the State Level


Who Pays for South Carolina Road Plans?


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Guest Post by John Ruoff of the Ruoff Group, Click here for orignal post

Who will pay to fix our roads? The burden, as a percentage of income, will fall hardest on those making less than $19,000 a year. Facing massive shortfalls in repairs and maintenance on our state roads and highways, the General Assembly is looking at ways to fund those needs. Everyone understands that, in the end, new revenues to fund the roads are needed. The Governor, seeing an opportunity to pull off a massive income tax cut, proposed that massive cut tied to a much more modest increase in the gas tax. Three proposals have been placed on the table: the Governor’s, a House-passed Plan that combines some tax increases with a much more modest income tax cut and a Senate Finance plan which increases revenues without an income tax cut.

In order to figure out who will pay for these changes, we asked the Institute on Taxation and Economic Policy (ITEP), a Washington, DC, based think tank that produces widely-respected tax incidence studies to model these changes. Their Who Pays? provides detailed analyses of which income groups pay what shares of their income towards various taxes. You can see the most recent analysis of South Carolina here. The ITEP modeling allows us to look at gross income, unlike the estimates from the Office of Revenue and Fiscal Affairs which are based on taxable income.

They modeled three plans:

  • Governor Haley proposes trading a 10 cent per gallon gas tax increase for an eventual reduction in marginal tax rates of 2 %. That translated, according to the SC Office of Revenue and Fiscal Affairs, to $1.7 billion reduction in General Fund Revenue by 2025.
  • The House version combines an effective 10 cent per gallon increase in the gas tax and raises the cap on sales tax for cars from $300 to $500 with a broadening of income tax brackets that produces a maximum $48 per year tax cut. Other provisions were not modeled.
  • The Senate Finance Plan contains no tax cut but increases the gas tax by 12 cents per gallon and the sales tax cap on cars to $600. Other provisions were not modeled.

The Governor’s plan creates a very large tax cut for those with higher incomes. In the Top 1 % of incomes, the tax cut,on average, is $6,893. Meanwhile, those in the lowest 20 % of incomes would face, on average, a tax increase of $34.

The House and Senate Finance plans raise taxes and revenues across the board. The House Plan, netted for a modest income tax cut, raises on average the  annual taxes for the lowest income group, which averages $12,000 a year, by $39. The Top 1 %, which averages $987,000 in income, would pay on average an additional $414.

As a share of income, the various plans hit harder on the most vulnerable. The Senate Finance Plan would cost our lowest income quintile, on average, .4 % of their income, compared to .1 %, on average, of the income of the Top 1 %. The House Plan calls on the poorest in our state to pay, on average, an additional .3 % of income while costing our wealthiest 1 % only, on average, .04 %. As percent of income, the Governor would raise taxes on taxpayers in the Lowest 20 % by .3 %, on average, while cutting them for the Top 1 % by, on average, .7 %.

Legislative debates frequently resound with arguments that the rich pay the most taxes and lower income people “don’t pay taxes”. They, of course, mean that most lower income taxpayers don’t pay income taxes. We all pay taxes and we have increasingly in South Carolina relied on regressive sales taxes that take a larger cut of poor people’s income than rich people’s. ITEP’s most recent statewide analysis of actual tax burden (Who Pays?, 5th Ed., Jan. 14, 2015) shows that in South Carolina the lowest income group pays, on average, about 7.5 % of income for all state and local taxes. The Top 1 % pay only, on average, 4.5 % of their income in state and local taxes.

Advocates of cutting taxes repeatedly argue, often to the accompaniment of anecdotes, that cutting income taxes drives in-migration of rich people who bring or start companies. The actual evidence suggests, at best, a very modest relationship between income taxes and economic development. That relationship is far outweighed by the effects of spending on things like infrastructure and education.

Recognizing both that road funding is a critical need for all of us and that gas and sales taxes hit harder on lower than upper income South Carolinians, there are additional approaches which could meliorate these effects on our most vulnerable taxpayers.

A refundable State Earned Income Tax Credit (EITC) has many desirable policy effects. Ronald Reagan and many conservative policy leaders recognize the EITC as the most effective anti-poverty measure we have. The EITC encourages personal responsibility by rewarding work, since only working people get the EITC.  In addition, a state EITC keeps money in the hands of folks who will spend it in local communities with local businesses. It’s good for the economy. An EITC pegged at 10 % of the federal EITC, would cut taxes for the Lowest 20 % receiving the credit by, on average, $262 and $331 and $190 to the next two quintiles according to another analysis by ITEP.

Rather than raising the cap on sales taxes on cars (not to mention yachts and airplanes), flipping the cap so that it was a floor would provide relief to folks who can only buy cheap cars while shifting more tax burden to those better able to afford it. That way, instead of stopping the tax when a car’s price reaches $6,000, $10,000 or $12,000, it would start at one of those points. Either of these approaches would reduce revenues for roads overall, but would make the tax system fairer.

The Governor’s Plan appears to be a nonstarter in the General Assembly. The House and Senate Finance plans are not that far apart. A critical flaw in our gas tax has been its failure to adjust for inflation and both legislative plans make provisions for indexing the gas tax (within limits) to inflation. That is a good thing.

What is absolutely clear is that something needs to be done to raise funds to ensure future economic development and safer roads. Clearly, income tax cuts are not the answer, although the House’s approach is far preferable to the Governor’s massive tax cut masquerading as a road funding plan. Equity for our poorest taxpayers needs more legislative attention, since all of these plans ask them to contribute a larger share of income to fixing the roads than their better-off fellow taxpayers.


Tax Day State Round Up


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Tax day is the perfect opportunity for legislators, the media, and taxpayers to be reminded who pays (and who doesn’t pay) taxes, how tax dollars are spent and about current tax policy debates raging in the states. The following is a compilation of tax day resources from the states:

Arizona: Through their blog, the Children’s Action Alliance wished everyone a “Happy Tax Day” and shed light on the important issue that “many corporations and higher income families owe little or no state income taxes.”

Calfornia: Right in time for Tax Day the California Budget and Policy Center released a new report Who Pays Taxes in California? The report highlighted ITEP data as well as the need to create a state Earned Income Tax Credit and better target existing credits to low income families.

Iowa: The Iowa Policy Project shared ITEP’s Who Pays? findings to shed light on the regressivity of the state’s tax structure

Georgia: The Georgia Budget and Policy Institute reminded Twitter followers to be thankful for the services that taxes pay for through #ThanksTaxes, they were interviewed by an NRP affiliate, and had their income tax materials prominently displayed on their website.

Michigan: The Michigan League for Public Policy put together this creative map showing what taxes pay for.

New Jersey: New Jersey Policy Perspective took the day to remind folks of three “takeaways” regarding taxes in the state. First, that all New Jerseyans pay taxes (with a link to ITEP’s Who Pays data), that corporations are often getting big tax breaks, and that taxes are an investment that provide opportunities.

North Carolina: The North Carolina Budget and Tax Center hosted a tax tweet on Tax Day so folks could share how their tax dollars are working in North Carolina. Followers were urged to share their thoughts using #thanktaxesnc

Texas: The Center for Public Policy Priorities (CPPP) shared this recent blog post to remind Texas taxpayers who pays state and local taxes. Also CPPP used Tax Day to shed light on a the tax debate there reminding lawmakers that Texas can’t afford tax cuts.

Washington: The Washington State Budget and Policy Center released a post It’s Tax Day! Let’s Talk About Washington’s Tax System. Since the state has the most regressive tax structure of them all, there is certainly a lot to say!

Wisconsin: The Wisconsin Budget Project creatively travelled and tweeted around the state with Casey Badger to show how tax dollars go to fund investments that Wisconsinites enjoy. They also published This Tax Day, Remember that Taxes Make Investments in a Strong Economy Possible.

We are still collecting tax day information and media. Already we know that ITEP’s Who Pays data have been cited in the Washington Post, a Dallas Morning News op-ed, an LA Times column, articles in the Topeka-Capital Journal and Mother Jones and in an editorial in the Wilmington Star (NC).


More Than 20 States Considering Detrimental Tax Proposals


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It’s not hard to sell tax cuts. Who among us would turn down extra money in our pockets by way of fewer taxes?

But state lawmakers do us all a gross disservice when they tout tax cuts to serve their political goals but fail to address the consequences or talk about who will really benefit. The adverse after-effects are often many and disproportionately fall on low- and middle-income taxpayers. This is why the trend to push for tax cuts, in some cases on top of cuts recently enacted, is worrisome. States cannot continually cut taxes and adequately pay for services that the public overwhelming wants. And it is not fair to pay for cuts to more progressive personal and corporate income taxes by heaping more taxes on those least able to pay.

Currently, lawmakers in more than 20 states are considering major tax proposals (See an ITEP summary of most proposals here and here). Much has been made about the fact that many conservative state lawmakers are considering hiking taxes this year, but with very few exceptions, these lawmakers plan to use the revenue gained from increasing one tax to cut or eliminate another.  While a handful of these tax shift proposals have provisions that would benefit working people, the vast majority would deliver the greatest benefit to wealthy taxpayers and profitable corporations, thus making state tax systems more regressive than they already are.

In Ohio, for example, Gov. Kasich has proposed further slashing personal income taxes across the board, which on the surface may sound like it will benefit all taxpayers. However, the governor’s plan recoups most of the lost revenue by raising the sales tax a full half a percent and expanding the tax to more services. The problem with this, of course, is that sales taxes are inherently regressive, which means the plan actually increases taxes on those least able to pay. An ITEP analysis of the Governor’s plan found that the top one percent of Ohio taxpayers would receive an average tax break of close to $12,000 while the average taxpayers in the bottom 60 percent would actually see their taxes go up by more than $100.

Other proposals out right cut taxes without any plans to replace the lost revenue. In North Carolina, Senate members have recently put forward a plan to slash personal and corporate income taxes which would cost the state well more than $1 billion a year, despite the fact that the state faces a $300 million budget deficit. The proposal would be the second billion-dollar tax cut in as many years. Texas lawmakers are getting closer to finalizing a more than $4 billion tax cut package that would reduce property and business taxes. 

The Cost of Tax Cuts

The problem with state politicians' dogged pursuit of tax cuts is that they don’t come without a cost. Public services such as education, public health and safety, infrastructure, etc. either must be pared back or paid for using some other source of revenue. 

ITEP along with many academics and news outlets have written extensively about the Kansas experiment. Gov. Sam Brownback promised Kansans that his top-heavy tax cuts would pay for themselves by stimulating economic growth. Widely derided three years ago, that claim has proven to be untrue and now the state is scrambling to make up lost revenue. Gov. Brownback has proposed increasing (regressive) alcohol and tobacco taxes to help partially plug a growing budget gap and House and Senate members have floated other largely regressive tax hikes. Further, the state has had to reduce funding to schools, higher education and social services. The proposed tax increases will undoubtedly hit low- and middle-income more as will the cuts in vital services that promote broader access to opportunity.

Tax cuts simply don’t work as an engine of economic growth, and it is time for governors and state legislators to stop peddling their plans as such. The truth about state tax systems is that each of them takes a greater share of income from their very poorest residents than their richest residents. The majority of pending tax cut and tax shift plans on the table would exacerbate this nationwide problem.

There is a right, progressive way for policymakers to approach tax policy. Last year, the District of Columbia broadened its sales tax base to include more services and made permanent a higher tax rate for the wealthiest residents. At the same time, it lowered taxes for middle-income earners and strengthened the Earned Income Tax Credit to put more money in the pockets of working people. Given that every state tax system requires more of its lowest-income residents than the rich, the right approach to tax reform is to focus on measures that would make corporations and the wealthy, those most able, pay their fair share.


Six States Have Raised or Reformed Their Gas Taxes This Year


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As we’ve noted previously, eight states enacted gas tax increases or reforms in 2013 and 2014 to better fund their transportation infrastructure.  So far this year, six more states have joined this list, meaning that a total of 14 states have taken action on the gas tax in just over two years’ time (Wyoming kicked off this trend in February 2013).  Here’s a quick rundown of what has been enacted this year: 

1. After years of debate, Iowa’s gasoline and diesel taxes finally rose by 10 cents per gallon on March 1 as a result of legislation enacted in February.  The increase was Iowa’s first in more than a quarter century.

2. Next door in South Dakota, lawmakers quickly followed Iowa’s lead with a law that raised gasoline and diesel taxes by 6 cents starting April 1.

3. Utah took a more long-term approach to its gas tax with a law that will hugely improve the tax’s sustainability.  In addition to raising the rate by 5 cents on January 1, 2016, the state also converted its fixed-rate gas tax into a smarter variable-rate gas tax that will initially grow alongside gas prices, and then eventually alongside the greater of gas prices or inflation.  Utah is now the 19th state to adopt a variable-rate gas tax.

4. Georgia Gov. Deal has promised to sign a transportation funding bill recently approved by the state legislature.  Under the bill, the state portion of the gas tax will rise by 6.7 cents on July 1.  Until 2018, the rate will rise each subsequent July based on growth in both vehicle fuel-efficiency and inflation, after which point the inflation factor will be dropped and the rate will be determined based on fuel-efficiency changes alone.  Georgia is the first state in the nation to tie its gas tax rate to fuel-efficiency gains: a recommendation we have made in the past.

5. Kentucky drivers received a 1.6 cent gas tax cut on April 1, far less than the 5.1 cent cut that would have taken effect if lawmakers had not acted.  This was accomplished by raising the state’s minimum gas tax level from 22.5 to 26.0 cents per gallon.  In addition to this boost in the state’s gas tax “floor,” lawmakers also reformed (PDF) the tax with an eye toward predictability by mandating that gas tax cuts brought on by falling gas prices cannot exceed 10 percent per year.

6. North Carolina drivers are also seeing their gas taxes fall, but only temporarily and not by as much as would have otherwise been the case.  Under a bill signed by Gov. Pat McCrory, gas tax rates fell by 1.5 cents on April 1 and will drop by an additional penny on both January 1 and July 1 of next year.  This gradual 3.5 cent cut is less than half the full 7.9 cent cut that otherwise would have taken effect this summer.  Additionally, lawmakers also agreed to swap out their price-based gas tax formula in favor of allowing the tax rate to grow alongside population and the general inflation rate—a change they think will generate a more substantial, predictable stream of revenue in the years ahead.

It is likely that more states will follow the lead of these half dozen states before 2015 legislative sessions come to a close.  Our earlier surveys identified eight states in particular that are also giving the idea careful consideration: Idaho, Michigan, Missouri, Nebraska, New Jersey, South Carolina, Vermont, and Washington State.


Nine States and Counting Have Raised the Gas Tax Since 2013


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This is the third post in our series outlining state tax trends being debated during 2015 legislative sessions.  Our previous two posts focused on tax shifts and tax cuts.

MARCH 19 UPDATE: The list of states has grown to ten now that a 6 cent increase was signed into law in South Dakota (taking effect April 1).  Utah is poised to become the eleventh state once Governor Herbert signs a bill raising the tax by 5 cents and tying it to gas prices (effective January 1)..

A little over a month ago, we identified a dozen states seriously considering raising their gas taxes in 2015 to better fund their deteriorating transportation infrastructure.  Since then, Iowa lawmakers enacted and implemented a 10-cent increase in gas and diesel tax rates, effective March 1.  Iowa’s step forward makes it the ninth state to either raise or reform its gas tax in just over two years.  Starting with Wyoming’s approval of a 10-cent gas tax hike in February 2013, we’ve seen gas tax increases or reforms enacted in jurisdictions as varied as Maryland, Massachusetts, New Hampshire, Pennsylvania, Rhode Island, Vermont, Virginia, the District of Columbia, and now Iowa.  We expect that this list will grow by the time states’ 2015 legislative sessions come to a close.

The Leaders: Aside from Iowa, these six states have made the most progress toward gas tax reforms or increases this year by passing a bill through at least one legislative chamber.

  • The Georgia House overwhelmingly approved a bill that reforms the gas tax by indexing it to rise alongside both inflation and fuel efficiency, as we’ve recommended in the past.  Now attention shifts to the Senate.
  • Michigan lawmakers have approved gasoline and sales tax increases, but we’ll have to wait until May 5 to see if voters sign off on those changes.
  • In North Carolina, the Senate passed a bill that would raise the state’s tax on wholesale gas prices from 7 to 9.9 percent.  The bill would also pare back a gas tax cut scheduled to take effect this July due to falling gas prices and would prevent further declines in the future.  The House, on the other hand, approved a less sustainable bill that would not raise the wholesale gas tax rate and would only put a temporary stop to scheduled gas tax rate cuts.  For his part, Gov. Pat McCrory is assuming the Senate’s permanent gas tax “floor” will take effect to help balance his proposed budget.
  • The South Dakota Senate approved the first bill filed this year (SB1), which raises the state’s gas tax by 2 cents per year.  The bill that the House is poised to vote on would put a stop to those increases after 3 years—effectively capping the increase at 6 cents per gallon.
  • In Utah, both the House and Senate passed gas tax legislation this week.  The Senate bill would raise the current fixed-rate gas tax by 9 cents per gallon, while the House prefers a more sustainable reform that would allow the tax to rise alongside gas prices in the future.
  • And in Washington State, the Senate approved an 11.7 cent gas tax hike, phased in over three years.

Other Developments: While the gas tax debate hasn’t advanced quite as far in these seven states as of yet, each still has a real shot at reform in 2015.

  • Discussions of a gas tax increase in Idaho are ongoing.
  • Kentucky lawmakers may not be talking about boosting the tax that drivers currently pay at the pump, but there is a lot of interest in stopping a 5.1 cent tax cut scheduled to take effect on April 1 as a result of falling gas prices.
  • Following Governor Jay Nixon’s urging that Missouri legislators consider raising the state’s 18 year old gas tax rate, at least two bills have been filed doing exactly that.
  • Nebraska’s unicameral legislature is giving serious thought to a 6-cent gas tax hike that’s being pushed by a lawmaker with a reputation for being a tax-cutting conservative.
  • Influential lawmakers in New Jersey are continuing to talk about raising the gas tax, but Gov. Chris Christie and some legislators are indicating that tax increases are off the table.  Not much has changed since our last post on the subject, but there is still talk that anti-tax politicians may change their tune if a gas tax hike on New Jersey drivers is paired with tax relief for heirs to large fortunes, in the form of repeal of the state’s estate tax.
  • South Carolina lawmakers are having ongoing discussions over plans to enact a flat gas tax hike, or to reform the tax to rise alongside inflation or gas prices.  Unfortunately, Gov. Nikki Haley is continuing to insist that any reform to the state’s severely outdated gas tax rate should be paired with an even larger cut in the state’s personal income tax—a rare progressive feature of a tax system that already tilts in favor of high-income taxpayers.  South Carolinians, however, appear to be less hung up on the idea of tying a personal income tax rate cut to gas tax reform.  As long as South Carolina’s gas prices stay lower than in neighboring states, most South Carolinians support raising the gas tax to fund infrastructure repairs.
  • Vermont is considering to a 2-cent gas tax increase that would help offset the costs associated with cleaning up roadway run-off into the state’s waterways.

The Procrastinators: The chances of gas tax reform this year have dimmed somewhat in at least two states that we initially saw as likely reformers.

  • A sizeable budget surplus in Minnesota has reduced the some lawmakers interest in raising the gas tax.  Minnesota House leadership now says that transportation needs can be met with existing revenues, at least this year.
  • Tennessee Gov. Bill Haslam thinks that gas tax reform is needed, but says that he won’t be ready to put in the effort needed to pursue that reform until next year. 

For more information on state gas taxes, take a look at the new gas tax section of ITEP’s website.


Netflix is a Real-Life Frank Underwood When it Comes to Tax Breaks


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Political nerds and TV binge watchers of all stripes will gather around the TV (or laptop) this weekend to watch the much anticipated release of Season 3 of the Netflix original series House of Cards. While the show follows the shadowy manipulations of Frank Underwood, the company and producers behind the show have done some manipulating of their own to get millions in generous tax breaks from the state of Maryland for the production of its third season.

Last year, the producers of House of Cards played hardball with Maryland lawmakers by threatening to “break down our stage, sets and offices and set up in another state" if they did not receive millions more in tax credits. Pairing this stick with a carrot, the House of Cards producers brought in Kevin Spacey to meet with "star-struck" lawmakers and push for the passage of more tax breaks for the TV series.

The trouble for Maryland lawmakers is and continues to be that the film tax credit program lavishing House of Cards with millions in tax breaks provides very little economic benefit to Maryland taxpayers—in fact, the entire program has cost the state $62.5 million since 2012. A recent study by the Maryland Department of Legislative Services found that the film tax credit in Maryland only brings in 10 cents for every dollar that it provides in economic benefits.

Unfortunately, the lawmakers in Maryland are reflective of lawmakers across the nation, who keep falling for the siren call of film producers and ponying up ever larger tax credits to companies in hopes of creating a lasting film industry in their state. Leading the pack, Louisiana spent over $1 billion on its film tax credit program from 2002-2012, yet the state still has very little to show in terms of permanent jobs and economic development benefits from the program.

In spite of all of the evidence against film tax credits, Maryland lawmakers, fearful of "losing" the Netflix series, decided to give in and increased the size of the credits for House of Cards, bringing the total amount of tax breaks that the show has received to a whopping $37.6 million. What makes these tax breaks particularly galling is that Netflix is already exploiting the stock option loophole to such an extent that it paid nothing in federal or state corporate income taxes on its $159 million in profits, even before it received the new cache of tax breaks.

The tax swindle that Netflix is running with the production of House of Cards would be enough to make Frank Underwood proud. 


New Analysis: Don't Scrap Idaho's Grocery Tax Credit


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Some lawmakers and advocates in Idaho have been pushing a tax swap under which Idaho’s $100 per person Grocery Credit Refund would be eliminated in favor of exempting all grocery purchases from the sales tax. But a new ITEP report shows that the biggest winners under such a plan would be high-income households.

Members of Idaho’s top 1 percent would receive an average tax cut of $234 per year under such a swap.  Low-income families, by contrast, would typically see a cut of $15 or less, and some would actually see their taxes increase.

The impact of this change is so lopsided in part because the state’s existing Grocery Credit Refund can cover most, or sometimes all, of the grocery taxes paid by a low- or moderate-income household.  For a high-income household purchasing premium brands and other high-end foods, however, a blanket exemption for all grocery purchases can be much more lucrative than the current flat credit of $100 per person.

If cutting grocery taxes is on lawmakers’ minds, ITEP’s report suggests expanding the existing Grocery Credit Refund—a move that could provide larger benefits to most households than the alternative plan to create a grocery tax exemption.

For more on sales tax exemptions and credits, check out ITEP’s policy brief on the subject.


12 States Could Raise Gas Taxes This Year


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When it comes to paying for infrastructure, the gasoline tax is the single most important source of revenue collected at both the state and federal levels.  As a result, funding large scale improvements, or maintenance, to transportation networks usually means that the gas tax rate has to go up.  In 2013, six states enacted gas tax increases or reforms (Maryland, Massachusetts, Pennsylvania, Vermont, Virginia, and Wyoming).  In 2014, two more states followed suit (New Hampshire and Rhode Island).  Now, with lower gas prices freeing up some room in drivers’ budgets, there are 12 states seriously considering  gas tax increases in 2015: Georgia, Idaho, Iowa, Michigan, Minnesota, Missouri, New Jersey, South Carolina, South Dakota, Tennessee, Utah, and Washington State.

Georgia: Georgia House Speaker David Ralston says that a gas tax increase is possible this year and lawmakers in his chamber recently introduced a bill that would do exactly that by allowing the tax rate to growth alongside improvements in vehicle fuel-efficiency.  Gov. Nathan Deal has been dropping hints that he’s open to the idea and even went so far as to call the bill a “positive step forward.”  Business leaders in the state are strong supporters of boosting funding for infrastructure and the governor has been adamant that he intends to find a way to secure that funding.

Idaho: Gov. Butch Otter has yet to propose a gas tax increase this year, but he has supported increases in the past, and there is rampant speculation that a gas tax hike could be floated soon.  Encouragingly, the governor made very clear in his State of the State address that he is not interested in taking money away from education to fund the state’s infrastructure, so it appears that additional revenues will have to be raised to satisfy the governor’s call for larger investments in transportation.

Iowa: Gov. Terry Branstad has been open to a gas tax increase for the last few years, but he has shown increased urgency this year on the need for additional infrastructure funding.  Now, even early in the legislative session, the governor is already in serious talks with legislative leaders aimed at hammering out the specifics of how a gas tax hike could be structured—including possibly allowing local governments to raise the tax.  Legislation raising the tax could be introduced within days.  Such an increase is clearly needed since, after adjusting for inflation, Iowa’s current gas tax rate is at its lowest level in the state’s history.

Michigan: This May, Michiganders will vote on a package of tax changes that would raise roughly $1.3 billion in new revenue for transportation and $300 million for education each year.  Most of the revenue would come through a 1 percentage point increase in the sales tax, though gasoline and diesel taxes would also be reformed in a way that would initially raise their rates by approximately 12 cents per gallon.  Under the reforms, vehicle registration fees would also rise.  But the package also includes an important tax cut as low-income families would see some of the gas, sales, and registration tax hikes offset by an expansion in the state’s Earned Income Tax Credit (EITC) from 6 to 20 percent of the federal credit.  Michigan legislators approved this package of changes in December and Gov. Rick Snyder signed them earlier this month, saying, “Most of you know, I’m a fairly frugal CPA. This is a smart investment to make by the citizens of the state of Michigan to invest more in the roads, schools and local government.”

Minnesota: Gov. Mark Dayton and state Senate leaders have proposed applying a 6.5 percent tax to the wholesale price of gasoline.  That reform would initially raise the gas tax rate by about 16 cents per gallon, and would put revenues on a more sustainable path by allowing for further increases in the future once gas prices begin to rise.  Opponents of the plan criticized the fact that it will “disproportionately impact poor and middle class families.”  But lawmakers don’t need to look very far for a solution to this problem.  Following the deadly I-35W bridge collapse, Minnesota lawmakers enacted a gas tax increase in 2008 that included a “low-income motor fuels tax credit” dealing with this exact issue.  Unfortunately, that credit was repealed after being in effect for only one year in order to help close a budget gap arising from the Great Recession.  But if concerns about regressivity have returned to lawmakers’ minds, a similar credit could be implemented again—ideally on a permanent basis this time.

Missouri: Gov. Jay Nixon used part of his State of the State speech to argue that a gas tax hike “is worth a very close look.”  Nixon said that “Missourians believe it’s only fair that folks who use the roads also pay for them” but explained that the state has unwisely moved away from this model as “Missouri’s gas tax hasn’t gone up a penny in nearly 20 years. It’s the fifth-lowest in the nation.”   

New Jersey: State Transportation Commissioner Jamie Fox announced that he is ramping up inspections of the state’s aging bridges as they continue to deteriorate in the face of inadequate funding.  New Jersey’s gas tax rate is the second lowest in the country and hasn’t been raised in almost a quarter century.  Legislators in both chambers have proposed raising the tax, and Gov. Chris Christie is less hostile to the idea than might be expected, saying that “I’ve made it very clear that everything is on the table.”  If a gas tax hike passes in the Garden State, there’s talk of offsetting it (in full or in part) with cuts in a different tax.  One sensible option comes from New Jersey Policy Perspective, which proposed that the state’s Earned Income Tax Credit (EITC) be expanded to offset the impact of gas taxes on low-income families.  A much less sensible alternative would involve eliminating the state’s estate tax, presumably to make it a little easier for heirs to large fortunes to afford the gas tax.

South Carolina: Gov. Nikki Haley surprised many people when she recently proposed a 10 cent increase in the gas tax after having repeatedly threatened to veto any such increase.  Unfortunately, her proposal comes with a major condition: cutting the state’s top income tax rate from 7 to 5 percent.  That change would make South Carolina’s already lopsided tax system significantly more unfair, and has been called unaffordable by The State’s editorial board.  Nonetheless, talk of raising South Carolina’s historically low gas tax rate seems to be reaching a critical mass as House lawmakers debate a plan to tax gasoline based on its price, and even the South Carolina Chamber of Commerce is backing a higher gas tax.

South Dakota: Gov. Dennis Daugaard recently proposed raising the state’s gas tax by 2 cents per gallon, per year, in order to put revenues on a more sustainable path that could keep pace with the growing cost of infrastructure maintenance and construction.  Gas taxes are on legislators’ minds as well, as the first bill filed in the South Dakota Senate this year would hike the tax by roughly 6 cents per gallon.

Tennessee: Gov. Bill Haslam is giving serious thought to proposing what would be Tennessee’s first gas tax hike in over a quarter century.  While the governor hasn’t come out with a plan yet, he seems to understand that twenty five years of gas tax procrastination have put the state on an unsustainable course, noting that “There’s no way the state can continue on the path we’re on now. The math just doesn’t work.”  State legislative leaders and local governments are reportedly interested in the idea of a gas tax hike and the Farm Bureau has softened its long-running opposition to an increase.  Add to that a new report from the comptroller outlining the benefits of the gas tax, and it appears a gas tax hike is a real possibility in the Volunteer State.

Utah: Gov. Gary Herbert says that “now is the time” to raise Utah’s gas tax, and leaders in the state House and Senate are reportedly in agreement.  Now the debate has shifted to whether the state should simply increase its fixed-rate gas tax (stuck at 24.5 cents since 1997 and currently at its lowest level ever, adjusted for inflation), or whether a long-term reform should be enacted with a more sustainable, variable-rate gas tax.  The latter option is better policy, but either could generate significant revenues for infrastructure and allow for the roll-back of raids on education money enacted in recent years.  Encouragingly, Governor Herbert supports both of these goals.

Washington State: The legislature has been debating a gas tax increase in Washington State for at least two years.  The House passed a 10.5 cent increase in 2013 and the Senate seriously considered an 11.5 cent increase in 2014, but neither of those plans ever made it to the governor’s desk.  This year, Senate transportation leaders say that a gas tax hike is still on the table, and House leaders say that bills debated over the last two years are a good starting point for further negotiations.  Gov. Jay Inslee, for his part, is well aware that more revenues are needed.

Other States: The twelve states listed above are hardly the only ones with gas taxes in need of reform.  We’re also hearing gas tax talk from legislators in Montana and Nebraska, task forces in Louisiana, research groups in Oklahoma, and media in states such as Colorado and Wisconsin.  Of course, there’s plenty of bipartisan chatter about raising the federal gas tax as well.  We’ll be following all of these stories closely as they develop, but for the moment, the twelve states listed above seem the most likely to act.


Who Pays? Report Brings out the Red Herring Brigade


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Last week, the Institute on Taxation and Economic Policy released Who Pays?, a report that examines the state and local tax system in all 50 states. The analysis concludes that every state’s tax system is regressive, meaning the lower one’s income, the higher one’s tax rate.

Not surprisingly, the report ruffled a few feathers. It’s about taxes, after all. A few critics cried foul because the study, which made clear it’s an analysis of state and local tax systems, only discussed state and local tax systems. Such a focus doesn’t paint a complete picture of all taxes people pay, they argue. Well, no kidding. Proponents of progressive taxes made a similar argument in 2012 when Mitt Romney made his widely disproven, notoriously wrong remark that 47 percent of the population doesn’t pay any taxes, based on a narrow analysis of federal income taxes.

State governors and lawmakers have a clear set of policies they can control. Federal tax laws are not among them. State and local tax systems fund all manner of public services that benefit all state residents, including public education, public health and safety, and infrastructure. How states fund these vital services and who the responsibility falls on to pay for them are precisely the questions state policymakers should be debating.  

It is indisputable that states are raising revenue in a regressive way that demands a greater share of income from those who have the least. When state lawmakers are forced to deal with difficult fiscal circumstances that may require tax hikes, what they need to know is who’s getting hit hardest to begin with. And that’s exactly what the Who Pays? report shows.

If it is easy to conclude from Who Pays? that states seeking to increase taxes should not look first to low- and middle-income families, including federal taxes makes this conclusion even more obvious. An April 2014 report from Citizens for Tax Justice shows that the lion's share of taxes paid by low- and middle-income people are state and local. Yes, our collective federal and state tax system is somewhat progressive overall, but that doesn’t mean states should be absolved from imposing an unconscionably high tax rate on Americans living at or below the poverty line. If our tax system is indirectly contributing to income inequality, state and local taxes are the main reason why.

For those who would argue that regressive state taxes are just fine because the federal system makes taxes more progressive, well, please make that argument to the low-income families in Washington state who pay an effective state tax rate of 16.8 percent while the richest 1 percent pay only 2.4 percent. And while you’re at it, make your case to the residents of Kansas who are dealing with the fallout from Gov. Sam Brownback’s failed supply-side experiment that cut state taxes for businesses and the very rich – and raised taxes on lower-income residents. It’s well documented that Kansas’s irresponsible tax cuts have left the state struggling to raise enough revenue to adequately fund basic public services.

These kinds of facts should be the starting point for tax reform debate in the states—not nuanced ideological arguments that seek to justify regressive state and local taxes because the federal system is comparatively progressive.

Those of us who advocate for just, progressive tax policies are accustomed to anti-tax advocates dangling shiny objects and trying to detract from big picture questions about how to raise revenue in a fair way. But criticizing a 50-state analysis for analyzing 50 states, not the federal system, is an obvious red herring.


New Year, New Gas Tax Rates


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Residents of 10 states will see their gasoline tax rates change on Jan. 1, but the direction of those changes is decidedly mixed.  Five states will raise their gas tax rates when the clock strikes midnight, while the other five will cut theirs, at least for the time being.

Among the states with gas tax increases are Pennsylvania (9.8 cents), Virginia (5.1 cents), and Maryland (2.9 cents).  Each of these increases is taking place as scheduled under major transportation finance laws enacted last year.

North Carolina (1 cent) and Florida (0.3 cents) are also seeing smaller gas tax increases as a result of formulas written into their laws that update their tax rates each year alongside inflation or gas prices.

The states where gas tax rates will fall are Kentucky (4.3 cents), West Virginia (0.9 cents), Vermont (0.83 cents), Nebraska (0.8 cents), and New York (0.6 cents).  Each of these states ties at least part of its gas tax rate to the price of gas, much like a traditional sales tax.  With gas prices having fallen, their gas tax rates are now falling as well.

While some drivers may be excited by the prospect of a lower gas tax, these cuts will result in less funding for bridge repairs, repaving projects, and other infrastructure enhancements that in many cases are long overdue.  Because of this, Georgia Governor Nathan Deal recently signed an executive order preventing a gas tax cut from taking effect in his state on January 1.  And Kentucky is considering following Maryland and West Virginia’s lead by enacting a law that stabilizes the gas tax during times of dramatic declines in the price of gas.

But while states such as Kentucky may struggle to fund their transportation networks in the immediate wake of these tax cuts, these types of “variable-rate” gas taxes are still more sustainable than fixed-rate taxes that are guaranteed to become increasingly outdated with every passing year.  To that point, here are the states where gas tax rates will be reaching notable milestones of inaction on Jan. 1:

  • Iowa, Mississippi, and South Carolina will see their gas tax rates turn 26 years old this January.  Each of these states last increased their gas taxes on January 1, 1989.  
  • Louisiana will watch as its gas tax rate hits the quarter-century mark.  Its gas tax was last raised on January 1, 1990.  
  • Colorado’s gas tax rate will “celebrate” its 24th birthday on New Years Day, having last been increased on January 1, 1991.
  • Delaware will become the newest addition to the 20+ year club as it “celebrates” two decades since its last gas tax increase on January 1, 1995.

Gas tax rates need to go up if our infrastructure is going to be brought into the 21st century Jan. 1 may be a mixed bag in that regard, but it’s increasingly likely that things could change soon as debates over gas tax increases and reforms get under way in states as varied as Georgia, Idaho, Iowa, Michigan, New Jersey, South Dakota, Tennessee, Utah, and Wisconsin.


Taxing Toking: The Tax Implications of Marijuana Ballot Initiatives


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In addition to a number of tax proposals on the ballot this election, voters in Alaska, Oregon, and the District of Columbia will vote on ballot initiatives that would legalize marijuana for recreational use. These measures could also have future revenue implications. If these initiatives pass, they would set these jurisdictions on the path of Colorado and Washington, which already allow production and sale of marijuana to adults for recreational as well as medical purposes.

While Colorado and Washington marijuana markets are still a work in progress, both states have proven that taxes on marijuana can generate revenue. For example, since recreational marijuana sales began in January, Colorado has collected over $45 million in revenue from marijuana taxes and fees. Washington has collected $5.5 million in excise tax revenue from July 8 (the first day of sales) through October 7.

Here's a breakdown of each state's potential plan to tax marijuana and what level of revenues these states could expect to collect:

Oregon

Oregon's marijuana ballot initiative would place a $35 per ounce excise tax on all marijuana flowers, a $10 per ounce excise tax on all marijuana leaves, and a $5 excise tax per immature marijuana plant. The revenue generated from these taxes would be earmarked such that 40 percent would go to the Common School Fund, 20 percent for mental health/alcohol/drug services, 15 percent for state police, 20 percent for local law enforcement, and 5 percent for the Oregon Health Authority. The Oregon Legislative Revenue Office estimates that this measure would raise $41 million from 2017 to 2019 , while the economic consulting firm ECONorthwest estimated that revenue would hit a much higher  $79 million over the same time period.

Alaska

Alaska's marijuana ballot initiative would place a $50 per ounce excise tax on the sale of marijuana with the option of allowing the Department of Revenue to exempt or apply lower tax rates to certain parts of the marijuana plant. While the Alaska Department of Revenue has chosen not to issue a formal revenue estimate, a Colorado-based organization, the Marijuana Policy Group, has estimated that the measure would raise $73 million  from 2016 to 2020.

District of Columbia

Unlike the initiatives in Alaska and Oregon, Washington, D.C.'s ballot initiative does not explicitly lay out a taxation regime in the initiative text. The assumption, however, is that the D.C. Council will follow-up with legislation that puts in place a regulatory and taxation system for recreational marijuana. To this end, D.C. Councilmember David Grosso has proposed the Marijuana Legalization and Regulation Act, which would place a 6 percent excise tax on medical marijuana and a 15 percent excise tax on recreational marijuana.

Although there has been no official score of the bill, an estimate of a similar hypothetical marijuana tax in D.C. predicted it could raise $8.8 million. Whatever the amount raised, the proposed D.C. legislation would direct all of it into a dedicated marijuana fund, which would fund anti-drug abuse programs across D.C. agencies. 


Tax Foundation's State Business Tax Climate Index: Is the "Tax" Silent?


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Earlier this week the Tax Foundation released its “2015 State Business Tax Climate Index,” the latest in its annual series purporting to provide a single overall ranking of business tax structures in each of the 50 states. States scoring the best on the Index have one thing in common: there is a major tax, usually the income tax, which other states levy that the “best” states don’t. But the report has two major flaws: the Index itself is constructed in a way that is arbitrary at best, and, more vitally, it essentially pretends that tax revenues aren’t used for any public investment that businesses might find valuable.

As a 2013 report from Good Jobs First explains, the report’s Tax Climate Index is arrived at by separately ranking each of the major taxes levied by state and local governments—including corporate income, personal income, sales and property taxes—and then merging those rankings together in an arbitrary way to create a single mega-ranking. There is, of course, no obviously correct way of weighting the importance of these various taxes, and in fact different types (and sizes) of businesses in any given state will likely have very different opinions of the various taxes they pay. But the single most basic flaw of the Tax Foundation report is clearly stated in its title: it purports to rank “State Business Tax Climate” as a free-standing policy choice.

The folly of this approach can be seen most obviously in two findings of the report. First, the only states receiving a perfect “10” grade on any of their specific taxes are those that simply don’t levy the tax. Alaska gets a “10” for not levying a personal income tax. Nevada and Wyoming are awarded separate “10s” for the lack of personal or corporate income taxes. The obvious implication is that from the perspective of the State Business Tax Climate Index, the perfect business tax system is one that doesn’t tax *anything*.

Of course, this is an utterly irresponsible strategy. Architects of the major tax cut pushed through by North Carolina lawmakers last year—in which the state dramatically cut the personal and corporate income tax—are facing persistent criticism that the cuts were fiscally irresponsible, forcing damaging cuts to the state’s education system and likely creating a longer-term increase in local property taxes to pay for the cuts.
Fallout from these controversial cuts is even spilling over into statewide elections in the Tarheel State this fall. In the world of the State Business Tax Climate Index, however, North Carolina’s 2013 tax changes are cheerfully rung up as “the single largest rank jump in the history of the Index.”

This disconnect exists because (as, again, the Tax Foundation makes quite clear) the report is attempting to evaluate taxes taken on their own, without evaluating the impact taxes have on vital public investments. The problem with the report’s hermetically-sealed look at business taxes is that no policymaker reading the report is going to interpret it that way. The unambiguous message sent by these rankings is simply “you should cut business taxes.” In that important sense, the “Tax” in “State Business Tax Climate Index” is silent—it’s all too easy for readers to interpret this report as a recommendation on how states should improve their business climate, full stop.

Constructing a truly useful business climate index, one which attempted to quantify the impact of the spending cuts forced upon North Carolinians by last year’s tax plan on elements of the state’s infrastructure that businesses depend on, would be a herculean task. But the Tax Foundation’s one-sided approach to this task should not be mistaken for a second-best effort at this goal. At best, the report tells readers which states do the best job of pretending public investments don’t cost anything.


Putting a Face to the Numbers


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For years we’ve been telling you about the various tax cuts that have been signed into law by Ohio governors. Governor Bob Taft (who was elected in 1999) pushed through (among other tax changes) a 21 percent across the board income tax reduction. Those tax cuts were allowed to continue under Governor Ted Strickland. Current Governor John Kasich has pushed through his own series of tax cuts.  We’ve written about and crunched numbers on these flawed plans often. Look here,hereherehere and here.

The numbers are certainly compelling. For example, ITEP found that since 2004 the various tax changes signed into law cost the state $3 billion and are currently reducing tax bills for the state’s most affluent 1 percent of taxpayers by more than $20,000 on average, while the bottom three-fifths of state taxpayers as a group are actually paying more taxes now, on average, than they would if these tax changes had not been enacted.

But the purpose of this post isn’t to rehash these dreadful numbers but to urge readers to check out the recent Rolling Stone piece: Where the Tea Party Rules. Here you’ll read about real families living in Lima, Ohio who are just trying to get by. These families put a real face to ITEP’s numbers. (Added bonus: an ITEP analysis is referred to in the piece!)


Georgians Set to Vote on Income Tax Straightjacket


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By Wesley Tharpe, Policy Analyst
Georgia Budget and Policy Institute (GBPI)

Georgians will vote Nov. 4 whether to permanently enshrine the state’s top income tax rate of 6 percent in the state constitution.

The so-called “tax-cap” amendment sounds American as apple pie. No one looks forward to the day their income tax bill comes due, and the prospect of capping the rate understandably sounds appealing at first. But Georgia voters who take a second look at the proposal will see it for what it truly is:  an attempt to keep taxes for the wealthiest Georgians low and to block future generations from meeting the needs of a rapidly growing state.

States across the country face questions of how to raise enough revenue to meet basic needs, from infrastructure to education and health care. It’s a public policy question that, unfortunately, all too often becomes a political question. Georgia would be the first state to cap income taxes through its constitution, if voters approve. But states like California, Colorado and Illinois have passed other restrictive tax measures in the past and come to regret it later. State governments need flexibility to make course corrections when their needs outweigh available funds. Georgia’s proposed amendment is one example of efforts to prevent states from doing so by tying their hands for the future. 

In the 2014 legislative session, Georgia lawmakers placed Senate Resolution 415 on the ballot for voters to decide in November. The ballot question asks, “Shall the Constitution of Georgia be amended to prohibit the General Assembly from increasing the maximum state income tax rate?” If voters approve, Georgia’s top income tax rate will never surpass its current 6 percent, barring the unlikely removal of the cap in a future vote.

Here’s the problem. Income taxes are one of the main tools for state lawmakers to meet taxpayers’ needs, and Georgia’s needs have exploded in recent decades. The state’s population more than doubled in the past half century, rising from 15th most populous in 1970 to 8th most today. If Georgia’s growth continues apace, it could break into the top five by the middle of this century. Georgia is no longer a small, sleepy, agricultural corner of the South. It is a complex modern economy that needs a qualified workforce, world-class transportation and adequate health infrastructure to compete.

Meeting these challenges requires public investments with an eye on the future, and those investments require tax revenue. Georgia’s current leadership is unwilling to confront that essential truth, choosing instead to further erode the state budget through new tax cuts and business tax breaks. Lack of public investment has consequences. Georgia today is plagued by overcrowded classrooms, congested roads and one of the most underfunded health systems in the country. That trifecta scares away high-wage businesses and makes Georgia less attractive for workers, families and entrepreneurs.

Future generations of Georgians might be willing to forge a better path. Twenty, 50 or 100 years from now, state lawmakers might want to consider, say, adding a 7 percent top rate to fund universal pre-kindergarten or a modern transportation system. They might want to temporarily raise income taxes to confront some extraordinary need like a natural disaster or deep recession. If the amendment is approved, making those choices will be off the table.

That raises the second problem. Georgia will inevitably need a way to raise more revenue in the future, but capping the state’s income tax will shield the wealthiest Georgians from paying their fair share. Other sources of revenue, such as sales taxes and fees, fall disproportionately on low-wage and middle-class workers, whereas income taxes fall more on the wealthy. That means deemphasizing income taxes will likely raise taxes on most Georgia families long-term.

It could also worsen the growing gap between the wealthiest Georgians and regular working families. The share of Georgia’s yearly income taken home by the top 1 percent nearly doubled to 18.7 percent in 2007 from 9.5 percent in 1979. And evidence already suggests that rising inequality makes it harder for states to fund the people’s business, since the wealthy are often able to shield much of their income from taxes.

Georgia voters will soon make a pivotal choice. Voting to cap the state income tax might seem like a no brainer to many. But if voters gave it more thought, they’d realize capping Georgia’s income tax does nothing to clear a path to prosperity for Georgia businesses or families. Instead, it will put future generations in a financial straightjacket, unable to solve our most pressing problems. It is a shortsighted and unnecessary restriction that could haunt Georgia down the road. 


What's the Matter with Kansas Is What Ails All 50 States


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It’s easy to hold up Kansas as the poster child for regressive tax policies gone awry.

By now it’s apparent Gov. Sam Brownback and his allies in the state legislature were wrong when they predicted lopsided tax cuts would boost the state’s economy.  The state will have trouble funding priorities such as education and services for the disabled since its revenue is hundreds of millions less than projected. And just last month, Standard & Poor’s downgraded the state’s bond rating because Brownback’s tax cuts cost far more than promised.

But make no mistake. The tax cuts, which disproportionately benefited higher-income earners and corporations, made worse an already regressive tax code. And in that sense, Kansas is not alone.

When all taxes assessed by state and local governments are taken into account, every state imposes higher effective tax rates on low-income families than the richest tax payers. On average, the lowest income households (bottom 20 percent) pay 11.1 percent of their income in state taxes, middle income households pay about 9.4 percent and the top 1 percent only pay 5.6 percent. This means state tax systems are actually making it harder for families to escape poverty.

Given a high poverty rate, stagnant wages and eroding family wealth, it’s perplexing that governors and state legislatures are getting away with selling the public the bill of goods that is trickle-down economics. We don’t all do better when the wealthy prosper at the expense of everyone else. In fact, we’re all worse for the wear and tear.

State and local data on income and poverty released today by the U.S. Census reveal, as did the national numbers, that not much has changed since the previous year and poverty remains significantly higher than before the Great Recession took hold. Most state poverty rates held steady. Three states experienced an increase in the number or share of residents living in poverty, and two states had a decline.

As I mentioned in a previous post, new Census poverty data is newsworthy more so because we’ve all become desensitized to a poverty rate that continually grew throughout the 2000s and remains higher (currently 2 percentage points) than it was before the Great Recession.

But when experts project the youngest generations may be worse off than their parents, or when median family income is 8 percent less today that it was in 2007, or when poverty is near generational highs, we all should pay attention, especially our elected officials.

The Institute on Taxation and Economic Policy today released a study, State Tax Codes as Poverty Fighting Tools, which examines four specific tax policies in each of the 50 states. The report recommends that states should enact or expand refundable Earned Income Tax Credits (EITC), offer refundable property tax credits for low-income homeowners and renters, create refundable, targeted low-income credits to help offset regressive sales and excise taxes, and increase the value of existing child- related tax credits. The full report includes state-by-state analysis of current polices.

Specifically, the report notes, “In most states, a true remedy for state tax unfairness would require comprehensive tax reform. Short of this, lawmakers should use their states’ tax systems as a means of providing affordable, effective and targeted assistance to people living in or close to poverty in their states.”

This is certainly a better approach than soaking the poor. A Standard & Poor’s study released earlier this week demonstrated that growing income inequality is a reason states are failing to collect enough revenue to meet their needs. It’s easy to surmise that, as wealth concentrates at the top and incomes stagnate for low- and middle-income people, states’ tax the poor more strategies result in flat or declining revenue and ultimately more difficulty funding priorities from education to infrastructure.

There’s a better way. A recent report from Citizens for Tax Justice reveals the average single-parent, two-child family receives a $4,550 income boost with the federal EITC, and a two-parent, two-child low-income, working household receives a boost of $5,790.  Twenty-five states and the District of Columbia offer state Earned Income Tax Credits based on the federal EITC, and a May 2014 report from ITEP outlines how this is an effective tool.

We are under no illusion that progressive taxation will solve poverty, but it can play a big role in mitigating poverty. And the harsh reality is that no state is fully living up to that promise. What is painfully clear, as Kansas tax cuts have demonstrated, is that adding more regressive tax cuts to an already unfair tax structure exacerbates poverty, shortchanges families, and starves states of funds to invest in vital services on which we all rely.


State Rundown 9/17: Virginia Gas Tax, Tesla's Sweetheart Deal


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TESLA1.jpgVirginia’s gasoline tax will increase by 45 percent on January 1, 2015 if Congress fails to pass a law (the Marketplace Fairness Act) granting states the power to collect sales tax on online purchases. The increase, passed by lawmakers as part of a 2013 transportation spending plan, will cost motorists about 5 more cents per gallon. Rep. Bob Goodlatte, a Virginia congressman and Chairman of the House Judiciary Committee, is responsible for holding up the internet sales tax legislation, allegedly due to the deep pockets of his tech company supporters. Goodlatte’s opponents have accused the congressman of backing the interests of his donors over those of his constituents.

The New York Times reports that Kansas Gov. Sam Brownback (R) faces a revolt from his base over the deep and painful tax cuts he pushed for two years ago. The article quotes staunch conservative voter Konrad Hastings: “[Brownback] is leading Kansas down. We’re going to be bankrupt in two or three years if we keep going his way.” The state’s projected budget shortfalls are in the hundreds of millions of dollars annually, and over 100 Republican state officials have endorsed Gov. Brownback’s challenger, Paul Davis (D).


Using ITEP data, financial services website Wallet Hub released its ranking of the most and least fair state tax systems of 2014. To rank the states, Wallet Hub conducted a national survey, which found that both liberals and conservatives believe a progressive tax system is most fair. Then they compared this against ITEP’s finding that the average local and state tax burden is hugely regressive. Washington took the prize as the least fair state using Wallet Hub’s methodology, while Texas and Florida had the dubious distinction of being states where the top 1 percent are most undertaxed while the bottom 20 percent are most overtaxed. Congrats, I guess?


Nevada has agreed to a $1.25 billion economic incentives package for Tesla Motors, which plans to build a high-tech battery factory outside Reno. The figure is more than double the $500 million Tesla CEO Elon Musk was asking for, and amounts to almost $200,000 per anticipated job created. The deal contains “clawbacks,” clauses that allow states to demand repayment of giveaways if the promised investment is not forthcoming, but experience shows that these clauses are rarely invoked. California Gov. Jerry Brown, who fought for the factory but resisted ponying up millions in incentives, noted that the deal would be good for his state anyway since Tesla Motors is still headquartered in Palo Alto.


 


New S&P Report Helps Make the Case for Progressive State Taxes


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The latest report from Standard & Poor’s Rating Services reminds us that progressive tax reform can help mitigate income inequality and ensure states have enough revenue to fund their basic needs.

As has been documented by everyone from the Federal Reserve Board to Thomas Piketty, the share of income and wealth accruing to the very best-off Americans has grown substantially over the past century. The problem worsened in the years immediately following the financial crisis. This trend raises important philosophical questions about whether low-income Americans really have the same opportunities to share in the American dream that the wealthiest have been granted.

But Standard & Poor’s new report finds that there’s also a more mundane, practical reason to be concerned about inequality: it can make it harder and harder for state tax systems to pay for needed services over time. The more income that goes to the wealthy, the slower a state’s revenue grows. Digging deeper, S&P also found that not all states have been affected in the same way by rising inequality. States relying heavily on sales taxes tend to be hardest hit by growing income inequality, while states relying heavily on personal income don’t see the same negative impact.

This finding shouldn’t be surprising. As we have argued before, it doesn’t make sense to balance state tax systems on the backs of those with the least income.  When the top 20 percent of the income distribution has as much income as the poorest 80 percent put together, relying disproportionately on the poorest Americans to fund state services is not the path to a sustainable, growing revenue stream. The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay—so when the richest taxpayers grow even richer, these exploding incomes hardly make a ripple in state tax collections. And when the same states see incomes stagnate or even decline at the bottom of the income distribution it has a palpable, devastating effect on state revenue.

Conversely, when states like California enact progressive personal income tax changes that require the best-off taxpayers to pay something close to the same tax rates applicable to middle-income families, growth in income inequality doesn’t appear to damage state revenue growth significantly.

But the clear trend at the state level has been exactly the opposite: regressive tax systems relying more heavily on sales tax and less on the progressive personal income tax. Far more typical of the most salient tax “reform” ideas afoot at the state level these days is Kansas Gov. Sam Brownback’s hatchet job on the state income tax. And, as a front-page New York Times article reminds us today, states considering a shift from income to sales taxes are likely to regret it. S&P and Moody’s have recently downgraded Kansas’s bond rating precisely because reckless income tax cuts have endangered the state’s ability to pay for needed public investments.

Income inequality and declining state tax revenues are both serious issues that go to the heart of our ability to provide economic opportunity for individuals and businesses. Because of growing income inequality, it is more important than ever for states to move toward a more progressive tax system. Regressive tax systems hitch their wagons to those with shrinking or stagnant incomes.  Progressive tax reform is needed to make our tax code more fair and ensure that income inequality does not do damage to states’ ability to collect adequate revenue over the long-term.


Tax Policy and the Race for the Governor's Mansion: Ohio Edition


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Ohio.

Current Ohio Governor (and former Congressman) John Kasich (R) is running for reelection against Cuyahoga County Executive Ed Fitzgerald (D). Fitzgerald’s stand on economic issues is promising, in terms of taxes he’s said “that the wealthy should pay their fair share.” It would be hard to find a sitting governor who has done more to ensure the opposite than Gov. Kasich.

Since his election in 2011 Governor Kasich has championed his own series of regressive tax cuts including income tax rate reductions and creating a special new tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families. Read about ITEP’s work analyzing Governor Kasich’s tax plans here and here.

Governor Kasich hasn’t been shy about his hopes for his next term proclaiming, “I want to work for more tax cuts.” This race isn’t likely one that will capture much attention for fans of the horserace come November, but the outcome will most certainly have a significant impact on Ohio taxpayers. 


Wisconsin Contemplates Property Tax Shift from Business to Homeowners


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No one would describe Wisconsin’s homeowner property taxes as low. So it would likely come as a surprise to many Wisconsinites that state policymakers are now considering a plan that would cut business property taxes in a way that would force homeowner’s taxes even higher. The plan was the focus of a hearing before the Wisconsin legislature’s “Steering Committee for Personal Property Tax” last week at which ITEP staff testified.

The committee hearing focused on whether Wisconsin’s local property tax should continue to apply to business machinery and equipment, as it currently does, or should be narrowed or even repealed. Wisconsin is one of more than 30 states in which the property tax base is defined to include not just “real property” such as buildings and land, but at least some of the “personal property”—potentially including motor vehicles, machinery, office furniture, and more generally any property that can be moved—owned by individuals and businesses.

It might come as news to most Americans that personal property is even taxable. This is because almost every state moved away from taxing the personal property owned by individuals (with the notable exception of motor vehicles) long ago. This gradual contraction generally makes sense—having an assessor evaluate the value of every homeowner’s paper-clip collection would impose a huge administrative burden. But, as ITEP staff testified last week, what remains of the personal property tax in most states—a tax on machinery and equipment owned by businesses—is actually pretty sensible. The property tax was originally envisioned as a fairly universal levy on wealth used to generate income, and the expensive machinery used in manufacturing certainly fits that description. As last year’s tragic explosion at a Texas fertilizer plan reminds us, business personal property imposes its own substantial costs on local governments’ fire-protection and police-protection infrastructure, and the businesses that own this property should help to defray the public costs of maintaining this infrastructure.

Moreover, cutting business personal property taxes would impose a pretty direct cost on homeowners: the Wisconsin Legislative Fiscal Bureau estimates that simply repealing the tax would result in close to a 3 percent increase in Wisconsin homeowner property taxes. And as the experience of Ohio reminds us, state legislative pledges to “hold harmless” local governments for state-imposed property taxes tend to be pie-crust promises: easily made and easily broken. There are certainly sensible ways of reforming the personal property tax where it exists: allowing a de minimis exemption, so that the first $25,000 or $50,000 of personal property is exempt, can sharply reduce the compliance costs associated with the tax. But business personal property taxes are, at the end of the day, worth keeping. 


Tax Policy and the Race for the Governor's Mansion: Arizona Edition


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Arizona.

The dust has temporarily settled in Arizona where a Republican gubernatorial candidate emerged last week out of a crowded field of six people vying for the top job in the Grand Canyon State.  Doug Ducey, currently Arizona’s state treasurer and the former CEO of Cold Stone Creamery, will be facing Fred DuVal(D) in November’s election. 

Tax policy was a key issue in the run-up to the primary with four of the six candidates promising significant tax cuts if elected and will continue to play a central role in the months leading to November.  The state budget will likely end the year $300 million short of needed revenues and a court-ruling issued last month on K-12 school financing means lawmakers will need to come up with $316 million in additional education funding next year and more than $1.6 billion over the next five years. It goes without saying that Arizona’s fiscal situation is not very pretty and whoever is elected will have his hands full from the start.

Despite this backdrop of spending and revenue pressures, Ducey wants to gradually eliminate Arizona’s personal and corporate income taxes, but has yet to say how or if he would replace the more than $4 billion the state would lose if his plan is enacted or how he would raise the needed revenues for the education court mandate. Duval says the idea of repealing the state’s income taxes is not realistic given the needs in the state and intends to make Ducey divulge more details about his tax cutting plan. 

If Ducey wins in November, he will likely lead Arizona in the direction of Kansas and North Carolina where significant tax cuts are coming up short.  In fact, revenue in both states has come in far under projections and bond rating agencies think Kansas’ poor recent fiscal management makes the state less credit-worthy. Standard and Poor’s downgraded the state’s credit rating last month, meaning that every time the state chooses to borrow money to fund long-term capital investments such as roads and bridges, it will cost the state more to do so. 


State Rundown, Sept. 2: Big Oil Wins In Alaska, Hollywood Wins in California


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Palindrillcollage.jpgOil companies won big in Alaska with a narrow defeat of Ballot Measure 1, which would have repealed the generous regime of tax breaks the legislature gave to oil companies last year. The measure’s defeat was narrow even though those who oppose the measure outspent its proponents by 25 to 1, with BP alone contributing more than $3.5 million to defeat the measure. While the effort to repeal the tax was largely spearheaded by state Democrats, Ballot Measure 1 earned the strong endorsement of former Alaska Gov. Sarah Palin (R), who advocated returning to the oil tax regime that was set in place while she was governor.

Lawmakers in California have brokered a deal that would more than triple the state's film tax credits from $100 million to $330 million annually, thus providing a massive windfall to the state film industry. The move comes in spite of warnings from the state's non-partisan Legislative Analyst Office that it would only further aggravate the race to bottom among states vying for film production and recent studies showing that the economic and fiscal benefit of film production credits have been substantially overstated.  Rather than expanding the state's film tax credit, California should follow the lead of states such as North Carolina, Florida, New Mexico and others that have been backing off their credits. 

Policy Matters Ohio released a report last week that calls the state’s recent expansion of the EITC inadequate and “out of step with nearly all other state EITCs.” Only 3 percent of Ohio’s poorest workers will benefit from the expansion, which raises the state’s capped EITC from 5 percent to 10 percent of the federal EITC, and average additional saving is just $5. Ohio’s EITC credit is also non-refundable, meaning that it can only reduce tax liability, not be put toward a tax refund. Meanwhile, Ohio Governor John Kasich (R) has pledged to use the state’s budget surplus to enact more income tax cuts, rather than increasing support for working families.

In Iowa, gubernatorial candidate Jack Hatch continues to push for an increase in the gas tax to address funding shortfalls for improvements and repairs on the state’s roads and bridges. Under Hatch’s plan, the state gas tax would increase by 2 cents a year for five years. According to an ITEP report, the purchasing power of Iowa’s gas tax (adjusted for inflation) hit an all-time low this year. 

Finally, a new report from 12billion.org reveals that “airlines get state tax breaks on more than 12 billion gallons of jet fuel through obscure tax codes,” costing states over $1 billion in revenues every year. Thanks to the tax breaks, airlines pay effective fuel tax rates that are far lower than those paid by motorists; in California, car drivers pay an average of 50 cents in taxes per gallon of fuel, while airlines pay about 27 cents. 


Cumulative Impact of Ohio Tax Changes Revealed


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Since 2004, Ohio lawmakers - from those living in the Governor’s mansion to those elected to the legislature - have pushed through numerous changes to the Buckeye state’s tax code. Since being elected in 2010, Gov. John Kasich has championed his own series of tax cuts including accelerating already scheduled income tax rate reductions and creating a special new tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families.  Now that Governor Kasich is running for reelection, informed voters ought to be asking, “What’s the cumulative impact of these changes?” After all, voters should know the impact of the tax-cut path their elected leaders have led them down.

Thanks to a new report from Policy Matters Ohio (which includes analyses from ITEP) we know the answer.  The findings in the report are pretty staggering.

The tax changes combined are costing the state $3 billion and are currently reducing tax bills for the state’s most affluent 1 percent of taxpayers by more than $20,000 on average, while the bottom three-fifths of state taxpayers as a group are actually paying more taxes now, on average, than they would if these tax changes had not been enacted. It’s worth noting that the average benefit from these tax changes by the top 1 percent of Ohioans is actually greater than the income of the poorest twenty-percent of Ohioans.

In its editorial about the Policy Matters Ohio report, the Toledo Blade makes the case that “Ohioans needs a new tax policy that works for everyone, not just the wealthiest. It needs a tax system that is fairly based on ability to pay, not one that favors the already favored.” For more on the Ohio tax debate over the years, check out our Ohio page on the Tax Justice Blog


Tobacco Industry Games Rules to Dodge Billions in Taxes


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What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.


Missouri Voters Reject Regressive Sales Tax Increase


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Yesterday voters in Missouri soundly defeated Amendment 7, a ballot measure that would have raised the sales tax by three-fourths of a cent to fund transportation needs.

Sales taxes are largely regressive, capturing a larger share of income from the poor than from more affluent people. The move to temporarily raise the state sales tax to pay for roads and bridges comes just months after the state legislature overrode Gov. Jay Nixon’s veto and passed income tax cuts that overwhelmingly benefit high-income taxpayers.

The vote defeating the sales tax increase sends a message to lawmakers to go back to the drawing board in terms of finding ways to pay for needed infrastructure. Lawmakers projected the new sales tax to generate $5.4 billion over ten years for transportation projects across the state. Now that the sales tax hike has been defeated critical work won’t begin on the more than 800 projects the Missouri Department of Transportation identified as “critical safety improvements.”

In what has been called “a study in bad behavior” the fact that lawmakers put a tax hike before the voters after just passing income tax cuts boggles the mind. Lawmakers in Jefferson City recently approved mammoth income tax cuts that overwhelmingly benefit high income taxpayers, yet seemed to have few qualms about asking voters to support a regressive sales tax hike that would have actually raised taxes on low income families. The income tax cuts that were contentiously passed this year included a drop in the top income tax rate and a new deduction for business income. ITEP found that under this legislation the poorest 20 percent of Missourians will see a tax cut averaging just $6, while the top one percent of families will enjoy an average tax cut of $7,792 once the cuts are fully phased in.

Lawmakers clearly see the need for increased transportation funding--why put a sales tax on the ballot if that isn’t so--but they arguably wouldn’t need to raise $500 million in new sales tax revenue if they hadn’t just cut an even larger amount of income tax revenue.

Lawmakers’ procrastination on this issue is the root cause of Missouri’s transportation funding shortfall. The state’s has raised it current 17-cent gas tax in 18 years, and it isn’t generating the revenue necessary to keep up with demands on Missouri’s infrastructure. If lawmakers don’t act, ITEP estimates that Missouri’s gas tax rate will reach an all-time inflation-adjusted low by 2020. In 2011, ITEP found the state’s gas tax rate would need to be increased by 9.6 cents just to return its purchasing power to the level it had when it was last raised back in 1996. Right now, Missouri’s gas tax is lower than the tax in all of its neighboring state except Oklahoma. Increasing and indexing the gas tax is a better solution for Missouri’s transportation woes because fuel taxes are a very good proxy for the wear and tear vehicles put on the road. However, the gas tax would also have a worrying impact on tax fairness that can be overcome by introducing a targeted low-income tax credit.

Given the defeat of Amendment 7 what’s to happen to Missouri’s crumbling infrastructure? Transportation commissioners are set to meet to discuss next steps. Let’s hope Missouri lawmakers also regroup and look toward other funding alternatives. Surely it’s not too much to ask that Missourians have safe bridges and quality roads that are paid for in fair and sustainable ways.


Tax Policy and the Race for the Governor's Mansion: Illinois Edition


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Illinois.

The outcome of the Governor’s race in Illinois will have major  and immediate implications on the state’s ability to provide adequate funding for education, health care, transportation and other important services.  The context for this heated race is especially important. The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. To make matters even worse, the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in January leaving the state with a $2 billion budget gap.

This year Illinois lawmakers adjourned without making the temporary income tax rate hike permanent.  The legislature also failed to enact legislation that would have allowed Illinois voters to weigh in on a ballot question in November that would amend the state’s constitution to allow a graduated income tax.  Yet, the budget passed assumes the higher 5 percent rate is allowed to continue and leads Illinois down the path of deeper program cuts if lawmakers cannot agree  to increase the rate by the end of the year.  It’s largely agreed that the budget Governor Pat Quinn signed into law was the equivalent of “kicking the can down the road” and that election year politics got in the way, with lawmakers not wanting to cast tough votes in favor of maintaining current tax rates ahead of November.   According to the Fiscal Policy Center at Voices for Illinois Children, the budget was also balanced “by borrowing and by underfunding existing obligations, which will further add to the state’s backlog of unpaid bills.”

Given this backdrop the choice between Governor Quinn and businessman Bruce Rauner couldn’t be more stark. Quinn has said that he supports making the temporary 5 percent income tax rate hike permanent. In his 2014 budget address he stressed the harm that will come if the income tax rate is allowed to expire and new revenue isn’t raised, “mass teacher layoffs, larger class sizes and higher property taxes.” Quinn has gone beyond saying that the income tax rate should be 5 percent-  he’s also been a long-time supporter of a graduated income tax.

Rauner initially proposed allowing the temporary income tax hike to immediately expire, but he changed his position once the reality set in that as governor he would need to fill the $2 billion hole created in the budget once the rate hike expired. More recently Rauner has said that he will allow the temporary tax increase to expire over four years and will keep property taxes at their current level. Rauner would make up $600 million of lost income tax revenue by broadening the sales tax base to include many business services like advertising, printing and attorney fees. Sales tax base broadening makes good sense in terms of modernizing a state’s tax structure and making it more sustainable over the long term. But Rauner’s plan is regressive and taxing business to business services is problematic. For more on applying the sales tax to services, read this ITEP brief. Stay tuned. This gubernatorial race is one to watch.


Tax Policy and the Race for the Governor's Mansion: Michigan Edition


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Michigan.

michigan.jpgThe gubernatorial race in Michigan pits incumbent Rick Snyder (R), a businessman who won election four years ago as a technocratic outsider, against challenger Mark Schauer (D), a former congressman from Battle Creek. Taxes are a contentious campaign issue – the governor and Republican legislature passed a tax package in 2011 that decreased business taxes and increased taxes on seniors and working families, and Schauer has vowed to repeal the increases. Since enacting his tax plan, Gov. Snyder has sought to move to the middle, alienating some of his more conservative supporters in the process.

The race is a dead-heat. A recent poll for NBC News found registered voters backing Snyder 46 percent to Schauer’s 44 percent, with 9 percent undecided. While the incumbent is still favored to win and will likely outspend his challenger, Gov. Snyder is in a tough spot; no poll shows him with the support of 50 or more percent of voters, and Schauer continues to gain on Snyder despite the governor’s improved job performance ratings.

Gov. Snyder’s 2011 tax-cut bill was the largest Michigan had seen in 17 years. The package eliminated the Michigan Business Tax, enacted in 2008, and replaced it with a 6 percent corporate income tax. The tax cut, estimated at $1.65 billion, benefited 100,000 Michigan businesses. To help pay for the cut, Snyder and Republican legislators increased taxes on pensioners (by eliminating the pension tax exemption for those born after 1952), middle-income families (by eliminating the Homestead Property Tax Credit for those making over $50,000 and the $600-per-child tax credit), and working families (by reducing Michigan’s Earned Income Tax Credit from 20 percent to 6 percent of the federal credit.) The net result left a $220 million hole in state revenues.

Gov. Snyder remains a traditional business-establishment Republican, but he angered state Republicans by embracing the ACA’s Medicaid expansion and Common Core, and has attempted to triangulate to shore up his reelection prospects. His proposed 2014 budget retroactively restored the Homestead Property Tax Credit for those in the $50,000 to $60,000 income range, increased education funding for K-12 and higher education, and increased state aid to local governments. Critics derided the budget as an election-year stunt that didn’t reverse the damage of his earlier tax cut, or offer relief to pensioners burdened with higher taxes.

Schauer, a former one-term congressman from Battle Creek, has forged a progressive campaign built on repealing Snyder’s 2011 tax package – nixing the tax increases on pensions, restoring the cuts to the Earned Income Tax Credit and Homestead Property Tax Credit, and bringing back the child tax credit. He also pledged to increase education and road funding and enact other measures designed to support women and working families, such as paid sick leave and increased unemployment benefits. However, he has offered few ways to pay for these proposals other than ending tax breaks for companies that outsource Michigan jobs and eliminating “wasteful spending.” He also does not want to increase the corporate income tax. The coming months will determine if he can convert his recent momentum into a lasting advantage, as no poll has shown him leading the governor.

One issue that has put Snyder and Schauer on unlikely sides of the usual partisan divide is transportation funding. Gov. Snyder has been a high-profile proponent of raising the gas tax and increasing automobile fees to fund roads and transit projects, though his proposals have not gained much traction. Schauer has flatly said he doesn’t support a hike in the gas tax, saying that he instead would insist on getting Michigan’s fair share of federal gas tax revenues and impose a higher fee on heavy commercial trucks. 


The Truth about Sales Tax Holidays


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Everyone loves a bargain, so it’s no surprise that sales tax holidays are hugely popular in the 17 states hold them.

Over the past few weekends, 13 states temporarily suspended their sales tax, and four more will do so in the coming weeks.  Most state sales tax holidays will coincide with back to school season, but a subset of these 16 states also hold separate sales tax holidays to help consumers save on purchases tied to hurricane and hunting season. State lawmakers reap public relations benefits from these “holidays”, and media tend to cover them favorably.

But taxpayers should look beyond political talking points, long lines and bargains. The truth about sales tax holidays is that they are a costly gimmick. While they may provide taxpayers some savings on necessary purchases, they are a distraction from the bigger picture problem with regressive state tax systems.

Virtually every state’s tax system takes a much greater share of income from middle- and low-income families than from wealthy families. Nationwide, the poorest 20 percent of households pay more than 11 percent of their income in state and local taxes on average, compared to just 5.6 percent for the top 1 percent. States’ heavy reliance on sales taxes exacerbates this problem.

In theory, sales tax holidays should help mitigate this problem. But temporary reprieves from taxes on back to school items aren’t well targeted. In fact, temporarily suspending sales taxes often benefits wealthy families more than low- to moderate-income families.  Better-off families are positioned to time their big purchases to occur during sales tax holidays–a luxury that often isn’t available to folks living paycheck to paycheck. One recent study found that households earning more than $30,000 per year are more likely to shift the timing of their clothing purchases to coincide with sales tax holidays than lower-income households. Further, low-income seniors and families without children who have no need to purchase “back to school” items get nothing from sales tax holidays.

Another problem is sales tax holidays often apply to an arbitrary assortment of items that may have more to do with lobbying power than consumer needs.  Maryland, for example, continues to tax wedding veils, but it exempts bridal gowns and tuxedos during its sales tax holiday.  Diapers are also exempt, but don’t expect to buy any diaper bags or receiving blankets tax-free. In New Mexico, ice skates are taxed, but not ski boots; chalkboards are taxed, but not chalk or erasers.  In Texas, golf cleats and football pads are taxed but not swim suits or tennis shoes.

Sales tax holidays will collectively cost states more than $300 million this year. This is money states can ill afford to lose. The revenue lost through sales tax holidays will ultimately have to be made up somewhere else, either through spending cuts or increasing other taxes.

Instead of expending resources planning, promoting and implementing sales tax holidays, policymakers would do better to focus on long-term solutions with real benefits for working families.  They could implement policies such as sales tax credits for low-income taxpayers, expand or implement a state earned income tax credit, or permanently reduce sales taxes rates and shift toward a progressive personal income tax.

If lawmakers really want to help families’ bottom lines, they should look to these more thoughtful and permanent reforms.


Sales Tax Holidays = Not Worth Celebrating


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Consumers in 16 states this year will be given the opportunity to participate in a sales tax holiday (most of which will happen this weekend). These so-called holidays are a temporary break on paying sales tax on purchases of clothing, computers and other select items. These holidays are normally heavily promoted, but really they aren’t worth the hype. Sales tax holidays are poorly targeted, costly and represent a lost opportunity to get tax fairness right.

Sales tax holidays are advertised as a way to give people a break from paying the sales tax. On the surface, this sounds good given that sales taxes fall most heavily on low-income families. However, a two- to three- day sales tax holiday for selected items does nothing to provide relief to low- and moderate-income taxpayers during the other 362 days of the year. In the long run, sales tax holidays leave a regressive tax system basically unchanged. For more on why sales tax holidays aren’t all they're cracked up to be, read ITEP’s brief “Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform.”


New Report on Wealth Inequality in the Great Recession Highlights Need for Asset-Building Strategies


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Three months after the publication of Thomas Piketty’s “Capital in the Twenty-First Century,” it remains an open question whether Piketty’s tome will be remembered more for its thorough documentation of the growth of global inequality or for the shabby treatment it has received from those seeking to discredit the book’s findings. That’s a shame, both because the book does marshal the best data available on the tricky topic of wealth inequality and because persistent wealth inequality is a problem worth paying attention to.

A new study (PDF) funded by the Russell Sage Foundation reminds us that growing inequality is a well-documented fact of American life. The Sage report provides a fascinating and sobering first look at how the Great Recession reshaped the levels and distribution of wealth between middle-income families and the best-off Americans. (The report also has the merit of clocking in at a mere two pages, slightly less than Piketty’s magnum opus.) The study finds that over the past decade, the net worth of the median American household has fallen, adjusted for inflation, by more than a third—even as the best-off Americans have seen double-digit growth in their real net worth. In particular, the median household saw its net worth decline from just under $88,000 in 2003 to $56,335 in 2013 (meaning that 36 percent of the median group’s real wealth vanished over this decade).  At the same time, the best-off 10 percent of American households have seen their real worth grow by almost 15 percent.

There’s a straightforward reason for this: the assets owned by the richest Americans are very different from those owned by middle-income families. While the wealth holdings of the “1%” and those in their immediate vicinity are dominated by stock and bonds, asset ownership for the vast American middle class means owning a home. And while the stock market has recovered well since the disastrous declines of the Great Recession, housing markets remain depressed relative to where they were ten years ago.

All of which highlights the importance of public policies designed to create wealth among middle- and lower income families that isn’t limited to the value of homes. The Corporation for Enterprise Development’s Assets and Opportunity Scorecard gives an encyclopedic look at the tax, and non-tax, policy strategies available to states in advancing this important goal.Policymakers can take steps to make sure that low-income families are able to save some of their income—and tax reform can play an important role in this effort. When the limited wealth of middle-income families is tied up in homes, that means these homeowners often have no other source of wealth to rely on to get them through hard times. A tax system that taxes poor people further into poverty (as ours does) makes saving more difficult, if not utterly impossible, for fixed-income families. See ITEP’s “State Tax Codes as Poverty-Fighting Tools” for a sensible overview of the ways in which state tax reform can assist, rather than undermining, other asset-building efforts, by reducing the tax load on the very poorest Americans.  


State News Quick Hits: Migration, Film Tax Credits and More


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On the same day that the New York City Independent Budget Office released a report showing that wealthy New York City residents who move are overwhelmingly choosing high-tax states to live in journalist David Cay Johnston penned an editorial in the Sacramento Bee again making the point that taxes are far from the major consideration in wealthy households’ location decisions. Examining the supposed economic destruction that never materialized as a result of California’s 2012 sales and income tax hikes, Johnston points out that quality “commonwealth amenities” like schools, law enforcement, and parks, are far better draws than low taxes.

Getting a 43 cent return on every dollar invested would seem like a bad deal to most of us, but that doesn’t seem to be the case when in comes to subsidizing the film industry in New Mexico. A new study finds that the state’s film tax breaks generated just 43 cents in tax revenue for every incentive dollar spent between 2010 and 2014. Read the full study here.

Moderate Republican lawmakers in Missouri are feeling the wrath of conservative donor Rex Sinquefield during this year’s election season. The Missouri Club for Growth, a group funded largely by Sinquefield, has thrown its support (and dollars) behind candidates running against Republican legislators who voted with Democrats this year to uphold Governor Jay Nixon’s veto of an irresponsible income tax cut package. Though the wealthy donor has thus far seen very few victories for his conservative state fiscal agenda, there is evidence that his ideas may slowly gain traction over the years as his money continues to roll in, spelling disaster for anyone concerned with fiscal responsibility and progressive taxation.

Corporate tax avoidance is back in the spotlight in the wake of an Oregon Supreme Court ruling that allows profitable companies to avoid paying the state’s minimum corporate tax.  The minimum tax, which was sensibly expanded from a trivial $10 to a higher, tiered structure due to a vote of the people in 2010, can now be reduced to zero by companies claiming certain tax credits. The problem is that the statutory language of the minimum tax does not explicitly say that tax credits can never be used to offset the minimum tax. This will likely come as unwelcome news to Oregon voters, who presumably thought that when they approved a measure “establishing a flat $150 minimum tax,” they were doing just that. But this case, led by Con-Way Inc., means that the state can anticipate a $40 million hit this year as corporations rush to amend prior years’ returns to take advantage of the loophole. The good news: the court decision is based on a technical glitch in the minimum tax statute, and glitches are easily fixed. Petitioners are now calling on state lawmakers to modify the language of the law to ensure that companies like Con-Way will pay a “minimum tax” that actually exceeds zero. 


Tax Policy and the Race for the Governor's Mansion: South Carolina Edition


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South Carolina voters should have no problem drawing distinctions this fall when it comes to their gubernatorial candidates’ visions for the state’s tax structures (or lack thereof) in a year when the issue of fairness in state taxation is likely to loom large.

Republican Gov. Nikki Haley continues to tout her income-tax elimination plan on the campaign trail, while challenger Vincent Sheheen, currently a Democratic state senator, is pushing a multifaceted recalibration of numerous state and local taxes to, as he says, restore fairness to the tax system.

The linchpin of Gov. Haley’s campaign is the eventual elimination of the state’s income tax. Her attempt to repeal South Carolina’s tax in order to “bring jobs and investment to the state” has been years in the making. In 2010, then-candidate Haley campaigned on the promise of lowering income taxes. This year, the governor’s proposed budget included eliminating the state’s 6 percent income tax bracket, which applies to income between $11,520 and $14,400 (estimated to cost $27 million for the year), a provision that state lawmakers did not approve. Haley previously signed a bill in mid-2012 reducing the tax rate on “pass-through” business income from 5 percent to 3 percent over three years.

Critics have characterized the governor’s income tax proposal as a fantasy, taking issue with the fact that Haley has given no timetable for implementation and has presented no viable options for replacing lost revenue from the tax, which is currently the source of over half of the state’s general fund revenues. Eliminating the tax outright would be catastrophic for the state’s fiscal picture and even with a pay-for mechanism, repeal would mean the loss of the state’s most progressive revenue source, exacerbating income inequality in the state.

Challenger Vincent Sheheen bookends his comments on tax reform with the word “fairness.” Sheheen’s plan seeks to preserve important revenue sources and targets multiple taxes in an attempt to rebalance the distributional effects of the overall state tax levy. He calls the state’s current tax system “a giant mess littered with special interest loopholes.”

On the topic of the income tax, Sheheen proposes to adjust the brackets (presumably by revising the thresholds upward) to create a structure appropriate for the 21st century and to reinstate a measure of balance. Sheheen would also enact a refundable Earned Income Tax Credit to reward low-income working families. The state currently lacks such a credit, a mechanism ITEP has frequently endorsed as one of the most effective ways to combat regressivity in the tax code and pull low-income families out of poverty.

Sheheen’s income tax plan is likely to come with its own significant costs, some of which may be offset via his proposal to eliminate loopholes for special interests and corporate tax breaks – revenue losers that both complicate the tax code and reduce the fairness of the overall tax system. Another reform proposed by the candidate is the broadening of the sales tax base, using revenue gains from such a move to reduce the overall state sales tax rate, currently at 6 percent. South Carolina is one of several states that currently fail to tax many services, creating unfair advantages for sellers and purchasers of goods and leading to a narrowing of the tax base over time. Sheheen’s plan would also eliminate local property taxes that go toward funding schools and institute a uniform statewide property tax in their place, which he says would allow for a lower rate, incorporate the entire state property tax base, and allow property values to be calculated in a uniform and fair way. In particular, the candidate is proposing to lower the industrial property tax rate, which he says currently disadvantages South Carolina manufacturers who pay the highest rates in the country.

The outcome of this fall’s election may determine whether South Carolina goes the way of states like Kansas and North Carolina, whose governors have placed all of their proverbial eggs in the basket of supply-side economics by implementing heavy income tax cuts and who continue to see their fiscal and economic health falter as a result.


Tax Policy and the Race for the Governor's Mansion: Iowa Edition


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog will highlight 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for governor in Iowa.

The gubernatorial race in Iowa pits veteran incumbent Terry Branstad (R) against challenger Jack Hatch (D). Branstad, 67, is asking Iowa voters to reelect him to an unprecedented sixth term as governor; if he wins, he will be the longest-serving governor in American history. In addition to his career in political office, Branstad has been an attorney, financial advisor, and president of Des Moines University. Hatch, 64, is a state senator from Des Moines and a former member of the Iowa House of Representatives. He is a real estate developer and businessman who founded Hatch Development Group, a company that builds affordable housing.

With an $850 million revenue surplus, it’s no surprise that both candidates favor tax cuts. However, the two men offer Iowans very different visions when it comes to overall tax policy. Hatch wants to target tax cuts to the middle class. His tax plan would raise Iowa’s per-child tax credit from $40 to $500, give two-earner households a credit of $1,000, and raise the filing threshold for individuals and families by $11,000. Hatch would also collapse Iowa’s eight tax brackets into four, and reduce the top rate from 8.98 percent to 8.8 percent, and eliminate Iowa’s federal deductibility provision. Iowa is one of five states that allow residents to deduct federal tax payments from their taxable income on their state returns. Hatch argues that this provision makes Iowa’s rates appear artificially high, since most Iowans pay a much lower effective rate. As ITEP has reported, the provision is also costly and regressive, and its elimination would be a huge victory for Iowa progressives. Hatch’s tax reform proposal would cost $615.3 million over two years, which he claims will be offset by the state’s existing budget surplus and future revenue growth.

Branstad, meanwhile, has not made tax policy a centerpiece on his reelection campaign. However, Branstad pushed for and signed into law the largest tax cut in Iowa’s history last year, when the legislature approved a compromise that cut property taxes for businesses, limited residential property tax increases, and expanded a number of individual credits, including the Earned Income Tax Credit (EITC). Critics of the bill point out that while low-income workers gained $35 million in tax relief from the EITC expansion, property owners gained ten times as much. They further charge that the property tax changes will strain local government budgets and hamper the ability of state officials to meet citizens’ needs. The total cost of Branstad’s property tax reform alone is $3.1 billion over ten years, to FY 2024.

Branstad has also backed efforts to enact an optional flat tax system, though he declined to endorse House Speaker Kraig Paulsen’s flat tax proposal during this year’s legislative session, bowing to political realities. Under the proposed plan, Iowans would have the option of paying a 4.5 percent flat tax without deductions (including federal deductibility), rather than using the current income tax schedule. It would overwhelmingly benefit wealthy Iowans and impair the state’s ability to fund crucial services. Opponents fear that Branstad will revive the flat tax if he wins reelection, and that his current wishy-washiness is a front.

On the issue of the gas tax and infrastructure, Hatch wants to raise Iowa’s state fuel tax by 2 cents each year for five years. He also wants to capture 20 percent of the state’s budget surplus (and 20 percent of any future surpluses) for road improvements, bridge repairs, school renovation and construction, and broadband internet infrastructure. Branstad has chosen to remain on the sidelines of the gas tax debate, declining to endorse an increase in the tax but saying he would not veto an increase either.

In a June Quinnipiac poll, Branstad led Hatch 38 percent to 14 percent, but 47 percent of voters remain undecided. The number of undecided voters has increased in recent months, after a spate of bad publicity for Branstad’s administration; it remains to be seen if Hatch can capitalize on the incumbent’s woes and reluctance to take firm policy positions, or if Branstad’s cautious campaign will win the day.


The Dilution of State Estate Taxes Spells Trouble for Tax Fairness


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The Institute on Taxation and Economic Policy published a report on Monday highlighting a disturbing trend that’s made inroads even in solidly progressive states over the past year: the weakening or complete dismantling of state estate taxes. Three states – Indiana, North Carolina, and Ohio – repealed their estate or inheritance tax in 2013, bringing the total number of states still maintaining their own estate or inheritance tax down to only 19, plus the District of Columbia. Seven other traditionally Democratic states plus D.C. sapped the potency of their tax, either seeing their exemption levels increase in 2013-2014 or passing legislation calling for future increases.

In an era when a dense economic treatise on inequality tops the New York Times bestseller list, developments like these threaten efforts to mitigate a troubling degree of wealth concentration in the United States (the wealthiest 1 percent of American households owned 35.4 percent of the nation’s wealth in 2010) – efforts made all the more important in the realm of regressive state taxation. The estate tax helps to prevent intergenerational transfers from clustering large amounts of wealth in the hands of a few – a phenomenon which has negative implications for equality in the democratic process. States’ recent changes to the tax undermine that purpose and further shift the cost of government onto lower-income taxpayers.

Two of the states (plus D.C.) taking steps to increase their exemption thresholds plan to match the federal per-spouse exemption by 2019 or later, which will top $6 million. Calling this exemption level high by historical standards is a bit of an understatement, and states adopting it effectively exempt many very wealthy households from estate taxation. The five other states raising their exemption thresholds in the past year are moving in the same direction, seeing exemption levels as high as $2 million-$4 million. This means that the overall state tax levy shifts even more toward the low- and middle-income households who already pay a higher share of their income in state taxes. And the fact that predominantly progressive states are making these changes is a step back particularly for places like D.C., which passed smart tax reform this year when it expanded its Earned Income Tax Credit.

Outright repeal in Indiana, North Carolina, and Ohio came on the heels of other ill-advised tax “reforms.” Indiana Governor Mike Pence authorized a sudden repeal of that state’s inheritance tax last year, which had been scheduled to phase out by 2022. ITEP ranked Indiana among the 10 most regressive tax states in last year’s “Who Pays?” report. The elimination of the inheritance tax will compound the fairness issue in a state which recently passed income and corporate tax cuts whose benefits will overwhelmingly accrue to wealthy taxpayers. North Carolina and Ohio similarly passed large income tax cuts last year in addition to their estate tax repeals, with North Carolina also eliminating its Earned Income Tax Credit.

All of these states would do well to heed this simple truth: failing to address large inequities in wealth isn’t good for the democratic process, nor is it good tax policy.


Art Laffer's Traveling Fiscal Circus


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He’s like the monorail man, 
except, he’s totally opposed to
public infrastructure spending

It is a truism in Washington that being wrong does not preclude one from wielding influence. There are, however, some pundits who are so egregiously wrong that it boggles the mind to find policymakers taking their advice.

Art Laffer is one of these pundits.

Laffer, an economist most famous for developing consequential fiscal policy on the back of cocktail napkins, is the father of supply-side economics. If you’re unfamiliar with the term, it basically means that cutting taxes for the wealthy will create a rising economic tide that lifts all boats. Three decades of empirical research says this notion is false.

And yet here is Art Laffer, barnstorming the country to spread the gospel of tax cuts to red-state governors, with predictably disastrous results. Not content to have started a bender of deficit spending and ill-advised tax cuts during the Reagan years, Laffer and his associates have turned their sights on state budgets. Recent news from the states that have fallen for their shenanigans tell the tale.

First up is Kansas, where Governor Sam Brownback and the legislature pushed through what is widely acknowledged to be the worst tax “reform” measure in recent years. No only did state officials follow Laffer’s advice and slash marginal tax rates, they also put Kansas on a glide path to eliminating its personal income tax altogether. And while most Kansans will pay less in taxes (though the poorest will pay considerably more), budget shortfalls have been so great that the legislature was forced to dip into reserve funds, causing a downgrade of the state’s credit rating. Ominously, the reserves are expected to run dry by the middle of next year.

Middle-class families in Kansas after the
Brownback tax cut.

Next, North Carolina. Following Laffer’s advice and promises of economic nirvana, Republican lawmakers slashed taxes for the rich and hiked them on many poor and middle-class families. The result, unsurprisingly, was a hole in the budget you could drive a semi truck through. Worse, the promised jobs and economic growth have yet to materialize, and lawmakers are left with little cash to fund much-needed priorities like teacher pay raises and healthcare for low-income families. Lawmakers have responded to the revenue shortage with a variety of gimmicks. One proposal would pay teachers’ salaries by enticing more people to play the state lottery; another idea is just hoping North Carolinians opt to pay higher income taxes voluntarily. Maybe next they can just replace all high school economics classes with Intro to Panhandling, and have the kids pay their own way.

And finally, we come to Indiana, where Governor Mike Pence recently convened a conference of “leading tax reform thinkers” to simplify Indiana’s tax code and make the state more competitive. The luminaries included Grover Norquist and Art Laffer, who delivered the keynote. Not present at the conference were members of the general public, who will bear the brunt of the draconian cuts Laffer no doubt suggested.

It remains to be seen if Indiana will follow in the footsteps of Kansas and North Carolina – in many cases, state officials are wise enough to know gutting their revenues is foolhardy public policy. A sense of self-preservation (if not public duty) is enough to prevent many governors and legislatures from adopting Laffer’s proposals. But when dealing with hardliners, you just never know.

Until his reemergence in Indiana last month, Laffer had been noticeably absent from the public stage. But lest you think a profound sense of shame had begun to weigh on him, think again! Apparently he was busy writing a book to squeeze a few more pennies from a bankrupt ideology. Old habits do indeed die hard. 


Buckeye State Tax Policy in the News


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Less than a month after Ohio Governor John Kasich signed his most recent round of tax cuts into law the reviews are less than glowing. This week Zach Schiller with Policy Matters Ohio wrote a piece very much worth reading in the Cleveland Plain Dealer. Schiller makes the important point (and one backed up by ITEP data) that most of the recent tax cuts signed into law by Kasich overwhelmingly benefit wealthy Ohioans. He rightly concludes, “Instead of reinforcing inequality with tax cuts that favor the affluent, we should use this revenue to restore funding to local governments, which have cut tens of thousands of workers.”

Kasich’s tax plan did include an increase in the state’s very limited  Earned Income Tax Credit (EITC), but the Cleveland Plain Dealer gets it right in this editorial when they argue that the expansion from five to ten percent of the federal credit wasn’t enough. This is because Ohio’s current credit is nonrefundable, meaning that families with no income tax liability but who pay a large share of their incomes in sales and property taxes do not get the credit. For those with taxable income exceeding $20,000 the already paltry credit is further limited. For more on ways that Ohio and other states can improve their EITCs read ITEP’s comprehensive report on options for expanding these vital credits. 


State News Quick Hits: Undocumented Immigrants, Tax Deform and More


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This shouldn’t be news to anyone, but undocumented immigrants do pay taxes. This week the Iowa Policy Project (IPP) released a report detailing their contributions to Iowa revenues using ITEP data. IPP found that undocumented immigrants pay an estimated $64 million in state and local taxes. Read IPP’s full findings here.

A News & Observer editorial last week lamented the revenue boom North Carolina might have enjoyed this year but for the package of steep income and corporate tax cuts passed in 2013. While numerous other states, including California, are beginning the fiscal year with healthy reserves, the N.C. Budget and Tax Center, using ITEP data, estimates that the cost of their state’s tax cuts could balloon to over $1 billion this year (almost double the reported amount of the tax cuts).

Rhode Island lawmakers recently enacted a budget for the new fiscal year which received a lot of attention for changes made to the corporate income tax (rate cut and adopting combined reporting) and cutting the state’s estate tax for a few wealthy households.  But, as Kate Brewster of the Economic Progress Institute helps to explain in this op-ed, the budget deal also quietly hiked taxes on many low- and moderate-income families by eliminating a refundable credit used to offset regressive property taxes for non-elderly homeowners and renters.  Brewster opines: “Given the struggles facing middle class Rhode Islanders — enduring unemployment, stagnant wages and a lack of affordable housing — it is hard to believe the state’s new budget includes huge giveaways for a handful of heirs while quietly taking money directly out of the pockets of low- and middle-income Rhode Islanders.

Next month Missouri voters will be asked to decide whether the state’s sales tax rate should be increased to pay for transportation improvements. The debate is raging, though no one seems to dispute Missouri has huge transportation needs. Tax justice groups like the Missouri Association for Social Welfare and even Governor Jay Nixon have argued that hiking the sales tax in the wake of income tax reductions would make the state’s tax system even more unfair. In a statement Nixon said, “This tax hike is neither a fair nor fiscally responsible solution to our transportation infrastructure needs.” It’s worth noting that the state has gone 18 years without an increase in their gas tax.


Tax Policy and the Race for the Governor's Mansion: Kansas Edition


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Kansas.

This Kansas gubernatorial election is shaping up to be a referendum on Governor Sam Brownback’s tax cuts and supply-side economics generally. Governor Brownback’s record on taxes has made national headlines. Two years ago, Brownback declared that his plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state's poorest residents), assuring the public these cuts would pay for themselves. Yet, the state ended this fiscal year $338 million short of total projected revenue amid concerns that Brownback’s income tax cut package is causing more bleeding than initially anticipated.

House Minority Leader Paul Davis is the Democrat who will most likely be challenging Brownback in November (the primary is in early August). Davis recently unveiled an economic plan which includes postponing the last round of Governor Brownback’s income tax cuts thus keeping income tax rates at their January 1, 2015 levels (though Davis has stopped short of calling to undo all of the Brownback tax cuts). He is also proposing a bipartisan tax commission to study “accountability measures within the tax code and targeted incentives for job growth” and “proposals aimed at reversing the $400 million property tax increase that has occurred during the Brownback administration.”

Perhaps no gubernatorial election this year will be as intensely focused on taxes as the contest in Kansas. Stay tuned. 


Tax Policy and the Race for the Governor's Mansion: Arkansas Edition


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where taxes are proving to be a key issue. Today’s post is about the race for Governor in Arkansas.

No matter who wins the governor’s race in November, income tax cuts are coming to Arkansas. The state finds itself in a unique position this year – because of a law imposing term limits on the governorship, neither of the 2014 gubernatorial candidates is an incumbent, yet both are attempting to fashion themselves in the image of current Democratic Governor Mike Beebe as they push long-term income tax overhauls.

Back in 2006, then-candidate Beebe made slashing the state’s historically unpopular sales tax on groceries the cornerstone of his campaign, a promise he kept as governor as he gradually reduced the rate over the course of his 8-year term from 6% to 1.5%. Beebe was commended both at home and in national policy circles for successfully implementing a common-sense tax cut which lessened the regressivity of the sales tax for low-income Arkansans while also minding the health of the state’s revenue stream – not cutting too deeply too quickly.

In the current gubernatorial race, Republican candidate Asa Hutchinson and Democratic candidate Mike Ross have both invoked Beebe’s duly cautious sales tax reduction strategy as a model for their own income tax cut proposals. But the thing is, the income tax is fundamentally different – state sales taxes are known to be highly regressive, but the income tax is a progressive tax that has the potential to increase the overall fairness of state taxes. As always, the cost of reform to the state should be no small consideration in any evaluation of the candidates’ proposals, but just as important is the extent to which broad income tax cuts would be a loss for progressivity in state taxation.

Arkansas’ current income tax brackets were designed back in 1971 and were left unchanged for 26 years until 1997, when the state legislature first began indexing the brackets to inflation, with a 3% cap. But the legislature declined to apply the indexing retroactively, meaning that bracket boundaries have only risen alongside inflation for 17 of their 43 years of existence (a problem exacerbated by recent low levels of inflation). In real terms, then, the dollar value of the state’s current bracket boundaries are stuck in the 1980s, with the top bracket starting at $34,000. This would be fine if prices and incomes were still at 1980 levels, but inflation inevitably does what it does best – inflates – and has pushed many middle-income Arkansans into unjustifiably high tax brackets.

Mike Ross has proposed a relatively simple, measured hike in the bracket thresholds that retains the tax’s original structure. Ross would lower rates across the board by 0.1% (except the top rate, which is already being lowered by the same amount as part of last year’s tax cut package) and retroactively index the tax brackets to inflation for the 26 years prior to 1997. Applying this type of broad reform, with the adjusted top bracket starting at a more reasonable $75,100, would certainly target relief toward the low- and middle-income taxpayers most affected by inflationary tax hikes under the current structure, but it would also afford unnecessary benefits to the higher end of the income ladder.

Critics have taken issue with the fact that Ross’s timetable for implementation is indeterminate, with the candidate saying only that he will “implement [the proposal] in a gradual, fiscally responsible way -- as the state can afford it.” The plan also comes with a $575 million price tag, as projected by the Arkansas Department of Finance and Administration (DFA), once it is fully phased in.

Hutchinson is pushing a more rapid timetable for his own income tax cut plan, which has some worried about unmanageable revenue impacts. The candidate is proposing immediate first-year rate cuts – namely, lowering the rate for those in the $20,400-$33,999 bracket from 6% to 5%, and from 7% to 6% for those earning $34,000 to $75,000. The phased-in portion comes via the implementation of an ill-advised rate cut for those earning more than $75,000 “as surpluses and growth allow.” Extrapolating from Hutchinson’s pledge that no one earning over $75,000 will receive a tax cut under his initial plan, the benefit of the lower rates would likely be phased out over some income range just under $75,000. The plan would target around 500,000 middle-income taxpayers, but would do nothing to lower the taxes paid by the poorest Arkansans – those earning under $20,400.

The campaign estimates the first-year cost at $100 million (the major caveat here is that the cost for the Hutchinson plan cannot be compared to the cost of the Ross plan and should not be taken as an official estimate because the Hutchinson campaign has refused to release plan details to the DFA to model). Hutchinson intends to use surplus funds to cover the cost of the cuts in 2015 and is counting on state revenue growth in future years – a tenuous strategy given the eventual $140 million per year cost of last year’s tax cut package that will be competing for new revenues.

With the price of both plans likely to be a major factor, Hutchinson’s plan at least appears to be preferable in terms of fairness, with high-income taxpayers seeing no cut. But unfortunately, the plan is a red herring. The candidate has made no bones about his end goal – the total elimination of the income tax in Arkansas. Such a move would wipe out a major piece of the state’s tax base and take away the only meaningful mechanism for reducing regressivity, and that outcome has far greater implications for both fiscal health and fairness than Ross’s across-the-board cuts.


The DC Tax Reform Story Everyone Missed


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By now, the familiar media narrative about the nation’s capitol is one of glittering condos, staggering inequality, and the fraught race relations between newcomers and older residents. The trope shapes the coverage of everything from sports to politics, education to public transportation. When it comes to our nation’s capital, every reporter is Charles Dickens.

And so it was last week, when the DC City Council passed an ambitious tax reform package. “D.C. Council votes to keep ‘yoga tax’ as part of tax-cutting budget deal,” wrote The Washington Post, portraying the deal as an epic showdown between established progressive backbenchers and ritzy health-conscious transplants. (To be fair, The Post’s coverage of the recent tax bill has been far more substantive than reporting from other outlets, which wrote about the yoga tax controversy without providing context.)

The story most people missed? Washington, D.C. managed to pass a mostly sensible and progressive tax cut package that will deliver the biggest benefits to middle- and low-income residents – and the ‘yoga tax’ is just one small part of a much larger plan. What’s more, the DC City Council largely followed the recommendations of a nonpartisan commission designed to study the issue. 

The council also voted to expand the District’s Earned Income Tax Credit (EITC) for childless workers. Working low-income taxpayers who qualify for the federal credit will receive a D.C. credit worth 100 percent of the federal benefit (increased from 40 percent of the federal).  But, the policy change actually expands upon the federal program by allowing childless workers to continue receiving the tax credit above and beyond the federal income limits.   The tax cut lowers the income tax rate for those earning $40,000 to $60,000, from 8.5 percent to 7 percent (the rate will go down to 6.5 percent if the city meets revenue targets). The measure also increases the standard deduction and personal exemption to federal levels by 2017, with interim increases going into effect in 2015.

The EITC is one of the most effective anti-poverty programs, and is an economic winner as well: The Center for Budget and Policy Priorities estimated that the EITC put about $128 million into the DC economy in 2011.  Workers receive the tax credit based on their wages. If the credit exceeds the amount of tax a worker owes, then that worker receives the difference as a refund.

Hell Frozen Over

Pictured: Hell.

Of course, cutting taxes is easy – paying for tax cuts is the difficult part. Here again, the D.C. proposal shines. Instead of relying on regressive sales tax rate increases that disproportionately hurt the lower and middle classes, as states like Kansas have done in recent years, the District took the route supported by academic research and sound policy: they broadened the sales tax base. The city expanded the sales tax to cover additional services, such as construction contracting, storage units, carwashes, health clubs and tanning salons – yes, including yoga studios. Expanding the sales tax to cover services as well as goods in an increasingly service-based economy makes a lot of sense.

The D.C. Council, known more in recent years for political tawdriness than prudent fiscal management, has made the right move for the city’s residents and the city’s fiscal future. Many of the proposed cuts are tied to future economic growth, and will not take effect if this growth doesn’t materialize.

If there’s something not to like, it’s the Council’s decision to increase the threshold for application of the estate tax from $1 million to $5.25 million (the federal threshold). This proposal will benefit a handful of families and cost the city almost $15 million in lost revenue. Even this proposal, however, is tied to future revenue increases.  Businesses also got a significant cut in rates, from 9.975 to 9.4 percent, with the goal of reaching 8.25 percent by 2019. 

So hats off to the D.C. City Council for proving that tax cuts don’t have to be a giveaway to the rich, and that tax reform doesn’t have to soak the poor. Other jurisdictions should follow their lead.


State News Quick Hits: Governors Misguidedly Oppose Progressive Taxes


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New Jersey Governor Chris Christie signed a FY15 budget on Monday after nixing Democratic bills which would have fully funded the state’s promised pension payments through a new “millionaire’s tax.” The effects of the governor’s decision to forgo making the full payments required under his much-lauded 2011 pension reform law are yet to be seen - Standard & Poor’s has threatened to downgrade the state’s debt again while a judge could still reverse Christie’s decision and require the payments to be made.

Indiana Governor Mike Pence pledged to make tax reform a priority during the next legislative session at a conference last week attended by infamous supply siders Arthur Laffer and Grover Norquist, and former Bush administration economic advisor Glenn Hubbard. Pence claims that the tax code must be simplified in order to create a better environment for economic growth, but Indiana House Minority Leader Scott Pelath argues that the language of “simplification” is really just a ruse to disguise the objective of reducing the progressive personal income tax.

Rhode Island and Indiana saw drops in their corporate tax rates Tuesday, a misguided tactic used by states to promote job creation with little proof of success. Rhode Island will drop its rate from 9 to 7 percent, while Indiana’s rate will gradually be reduced to 4.9 percent (this is on top of a gradual reduction from 8.5 to 6.5 percent enacted a few years ago).  However, at least Rhode Island lawmakers sensibly coupled the corporate rate drop with base broadening policies including mandatory combined reporting  which requires a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report.

Kansas’s June revenue collections came in $28 million under projections, according to officials. The state ends the fiscal year $338 million short of total projected revenue amid concerns that Governor Brownback’s income tax cut package is causing more bleeding than initially anticipated. Concerned that the state may be spiraling into a budget crisis, House Democratic leader Paul Davis has proposed postponing the next phase of the governor’s tax cuts.


Kansas: Repercussions of a Failing Experiment


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Two years ago, Kansas Gov. Sam Brownback declared that his plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state's poorest residents), assuring the public these cuts would pay for themselves.

But the Governor’s experiment now appears to be in meltdown mode: revenues for the last two months have come in way under projections and may leave the state short of the cash needed to pay its bills.

And, while the governor takes credit for cutting taxes at the state level, taxpayers in cities and rural areas are finding themselves paying more in local taxes. The Wichita Eagle cautions that municipalities aren’t even close to being out of the woods yet: “[t]he picture for cities, as well as counties and school districts, could darken over the next year if the state’s revenues don’t better align with projections.”

This tax shift isn’t just happening in Kansas cities. Rural areas are feeling the pinch in terms of increased property taxes. A professor from Wichita State University opined about dramatic property tax increases across the state and concludes “Brownback’s tax experiment is driving these shifts.

Need further evidence of the state’s meltdown mode? Read this superbly titled New York Times piece, “Yes, if You Cut Taxes, You Get Less Tax Revenue, Kansas Tax Cut Leaves Brownback With Less Money.”

 


State News Quick Hits: Regressive Tax Cuts Taking Toll on State Budgets


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In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, "It's like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap - a proposal which Christie has vetoed several times in the past but which is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax.  But, Gov. Brewer has made it clear she does not support such extreme ideas.  From the Arizona Daily Star:  “I think that you need a balance,” she said in an interview with Capitol Media Services.  Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”


Dear Congress: The Internet Never Was an Infant Industry That Needed Coddling


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1998 was a lifetime ago in the world of technology. E-commerce was in its infancy, Mark Zuckerberg was a 14-year-old and Napster hadn’t yet been invented. But even then, many people rightly scoffed at the notion that the Internet was an “infant industry” requiring special protection from state taxes.

Congress, however, agreed the Internet required exclusions and enacted the “Internet Tax Freedom Act” (ITFA), which placed a moratorium on state and local sales taxes on Internet access (the monthly fee consumers pay for home Internet access) and prohibited all “multiple or discriminatory” taxes on sales of items purchased over the Internet. Since the ITFA expired in fall of 2001, Congress has extended the ITFA moratorium several times, and it is now set to expire in November of 2014.

If the “infant industry” argument was highly questionable in 1998, it’s utterly absurd now. From books to airline tickets, virtually everything consumers purchased in “brick and mortar” stores in 1998 is now available online. Internet access, while not yet omnipresent is widely accessible. Many traditional retailers are going under due to competition from companies such as Amazon.com. Sixteen years later, the infant of 1998 now has the car keys to the American economy.

Nonetheless, Sens. John Thune and Ron Wyden have cosponsored the “Internet Tax Freedom Forever” act, which would turn the moratorium into a permanent ban on Internet access taxes. A glowing Wyden press release claims the bill will “giv[e] online innovators and entrepreneurs the stability they need to grow their businesses.”

While other tax bills have deadlocked Congress, the Internet Tax Freedom Forever act has garnered 50 co-sponsors in the U.S. Senate. The most likely reason is Congress is playing with other people’s money. The fiscal impact of ITFA in 2014, as in 1998, falls entirely on state and local governments. So Wyden and Thune can breezily pre-empt an entire economic sector from tax without hurting the federal budget’s bottom line. But for state and local governments, the bill would represent a real hit on their ability to balance budgets in the long term.

Besides taking a bite out of state budgets, “Internet tax freedom” is simply bad policy. A sustainable sales tax should apply to personal consumption as universally as possible—and it’s especially vital that the tax apply to sectors that are growing most rapidly. By permanently exempting Internet access from sales taxes, the Thune-Wyden bill will make it more likely that state governments will have to hike the sales tax rate on all the other items subject to the tax to make up the revenue loss.

This year’s bill goes beyond simply turning a temporary bad idea into a permanent one. It would also eliminate a “grandfather clause” that allows nine states (Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin), which had enacted taxes on Internet access before the original ITFA, to continue to levy these taxes.  So in addition to choking off future state revenues, the Thune-Wyden bill would also put an immediate hit on budgets in the nine states that have been sheltered by the grandfather clause to date.

To be sure, state sales taxes have their flaws. They’re regressive, falling most heavily on low-income families, and are littered with special-interest exemptions. As we have argued elsewhere, shifting away from sales taxes and toward the progressive personal income tax is a sensible reform strategy for states. But a federal ban on internet access taxes is not a way to move this debate forward.


State News Quick Hits: Red Ink Mounting in Tax Cutting States


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News we cannot make up from our friends at the NC Budget and Tax Center: The North Carolina Senate wants to take a sacred public trust, the education of our children, and subject it to the whims of a voluntary funding system. After frittering away precious resources for schools by giving millionaires – among the only people who have prospered much in recent years – an income tax cut they didn’t need, the Senate now wants North Carolinians to voluntarily give back part or all of their income tax refunds so teachers can get a pay raise. A better, saner solution would be for the Senate to acknowledge reality: the tax plan that it and the House passed last year and the governor signed into law is failing the people of North Carolina – and their kids. Read more about this ridiculous plan here.

Kansas lawmakers should be prepared to see lots of red ink within the next year. Former state budget director Duane Goossen has said the state simply won’t have enough money to pay its bills. One reason Kansas is going down this path is because the state no longer taxes pass-through business income, and the price tag of the deduction is largely unknown.  Perhaps this is the evidence Kansans need to prove that Governor Brownback’s experiment has failed.

Tax Fairness advocates take heart! Kudos to Missouri Gov. Jay Nixon for coming out against a sales tax hike for transportation. The governor said, “The burden of this ... sales tax increase would fall disproportionately on Missouri's working families and seniors.” The need for increased transportation funding is real, but it makes little sense to hike the sales tax almost immediately after cutting income taxes.

Perhaps South Carolina Governor Nikki Haley hasn’t closely watched the income tax elimination debate that has sputtered to a halt in other states. If she were paying attention she would see that each of these proposals has gone  nowhere, yet she is proposing that very same thing in the Palmetto State.


Keeping Score? Real Tax Reform 0. Tax Cuts 2


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Illinois lawmakers are putting the state’s bond rating and already shaky fiscal house in further disorder by failing to address the state’s temporary 5 percent tax rate, which is set to fall to 3.75 percent in 2015.

State lawmakers vigorously debated two tax proposal this legislative session to resolve the issue.The first would have allowed a ballot question in November to amend the state constitution and allow a graduated income tax, and the second would have made the 5 percent income tax rate permanent.  Illinois lawmakers adjourned without going down either path but instead agreed to a fiscal year 2015 budget that is widely viewed as “kicking the can down the road.”

Voices for Illinois Children analyzed the budget and created an infographic that shows why lawmakers' decision will be detrimental to the state: It ignores that the 5 percent income tax is temporary, relies on borrowing from other funds, and under funds state obligations. Many speculate election year politics got in the way, with lawmakers not wanting to cast tough votes in favor of maintaining current tax rates ahead of November.

Meanwhile, in Ohio ...

Lawmakers okayed a $400 million tax cut package that we told you about last week. The package includes accelerating already scheduled income tax rate reductions and increasing an existing tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families. The legislation now goes to Gov. Kasich, who is expected to sign the bill into law. For more on this legislation see Policy Matters Ohio report here.


Junk Economics: New Report Spotlights Numerous Problems with Anti-Tax Economic Model


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When anti-tax groups working in the states need a data point to help them argue in favor of their newest tax cutting idea, they often look to the Beacon Hill Institute (BHI).  BHI is housed in the economics department at Suffolk University, but its mission is more ideological than academic: providing research to voters and policymakers that promotes a “limited government” and “free market” perspective.  The cornerstone of BHI’s research is a computerized economic model it calls the State Tax Analysis Modeling Program (STAMP).

To a casual observer, STAMP may appear to be a rigorous model worthy of consideration.  But new research from the Institute on Taxation and Economic Policy (ITEP) explains in great detail the myriad ways in which STAMP is rigged to portray tax cuts as hugely beneficial to state economies, and tax increases as an inefficient drag on economic growth.

The broad ways in which STAMP fails to accurately gauge the impact of taxes on state economies include:

  • STAMP underestimates the economic importance of public services such as education and infrastructure to both the short- and long-term health of state economies.
  • STAMP assumes that workers, consumers, and businesses are hypersensitive to tax changes, causing private sector economic activity to boom (or bust) as a result of modest changes in after-tax incomes and prices.
  • STAMP depicts tax changes as having an instantaneous impact on the economy, even when that impact involves long-run issues such as migration, property value changes, and business formation.
  • STAMP assumes a simplistic, perfectly efficient marketplace where everybody who wants a job already has one.  This assumption simplifies the math behind the model, but is a poor reflection of the economy that actually exists today.

ITEP’s report also describes a number of instances where STAMP’s findings have been contradicted by academic researchers and state revenue officials.  In one particularly implausible analysis, for example, STAMP actually found that cutting Rhode Island’s sales tax rate by more than half would not only benefit the state’s economy—it would actually raise $61 million in tax revenue.

In another analysis, STAMP predicated that roughly 40,000 jobs would be created by a tax cut enacted in Kansas.  Since that analysis was released, Kansas’ economy has underperformed and the state actually saw its credit rating downgraded because of slow economic growth and lagging tax revenues.

As ITEP’s report explains: “STAMP’s flimsy foundation, biased assumptions, and highly questionable results are ample reason to avoid using it as a tool for understanding how changes to a state’s tax system will affect its economy.”

Read the report:

STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes


Just in Time for Memorial Day: Primers on Federal and State Gasoline Taxes


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The summer driving season is kicking off this weekend, so our colleagues at the Institute on Taxation and Economic Policy (ITEP) have released a pair of updated policy briefs explaining everything you need to know about the federal and state gasoline taxes that pay for our roads and transit systems.

The federal brief explains that the nation’s 18.4 cent gas tax has been stuck in neutral for over 20 years, and that construction cost inflation and fuel efficiency gains have steadily chipped away at the value of the tax.  Since 1997 (the year in which the gas tax was rededicated exclusively to transportation spending), the federal gas tax has lost 28 percent of its value as a result of these two factors.

The state brief is slightly more optimistic, noting that while most states still levy stagnant fixed-rate gas taxes similar to the federal tax, the clear trend is toward a more sustainable, variable-rate design where the tax rate can grow over time alongside inflation or gas prices.

Read the briefs

The Federal Gas Tax: Long Overdue for Reform

State Gasoline Taxes: Built to Fail, But Fixable


State News Quick Hits: How to Tax Twix and Much More


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The Illinois Fiscal Policy Center just unveiled its new Earned Income Tax Credit (EITC) website called EITC Works! The site allows users to plug in an address and learn the number of households in their House district currently receiving the credit, the number of children who benefit, and the economic benefits of the credit. Policymakers should be especially interested in this new resource because it also shows the impact of doubling the credit to 20 percent of the federal. The site is a great tool for anyone interested in understanding the local impact of this successful anti-poverty policy.

File this under things that make you go, “hmm.” Did you know that in some states plain Hershey bars are subject to the sales tax, but Twix bars are not because Twix contain flour?  Here’s an interesting read on the intricacies of taxing food, specifically take-and-bake pizzas. The piece affirms the importance of the Streamlined Sales Tax Governing Board and its goal “To assist states as they administer a simpler and more uniform sales and use tax system.”

Why would voters be inclined to vote for local referenda that raise taxes, but seem less supportive of state or national efforts to raise taxes? Read about the central Louisiana experience that may help answer this question here.

On the heels of the Missouri state legislature’s override of Governor Jay Nixon’s veto of a costly income tax cut package, a proposal that would increase the state sales tax to fund transportation projects is looking increasingly unlikely. Calling the proposed hike “hypocritical” in the face of the newly passed income tax cuts, which will largely benefit higher-income individuals, House Democrats are beginning to withdraw their support. Read about it here.


States' Failed Tax Policies Have Some Governors Throwing Red Herrings


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Two years ago as part of the fiscal cliff deal, members of Congress sensibly allowed a subset of the Bush tax cuts for the wealthy to expire, including an increase in taxes on capital gains. Many wealthy investors, who have the benefit of tax advisors, chose to sell stocks in 2012 rather than wait for potentially higher federal income tax rates in 2013. The result was a boost in federal and state income tax collections in fiscal year 2013.

To be clear, the fiscal cliff deal’s anticipated tax hikes on the investor class didn’t increase the amount of revenue from capital gains income—it just shifted that income from fiscal year 2014 to fiscal year 2013. This meant that state lawmakers needed to plan for an extra shot of revenue in 2013, and an equivalent amount of missing revenue in 2014.

Most states planned accordingly. In states such as California, this basic budgeting matter hardly caused a ripple: the Golden State experienced a surge in personal income tax revenues in April 2013 and a large decline this year.  But, they saw the decline coming and when the dust cleared, the state actually brought in more money from personal income taxes than expected in April.

A handful of other states, however, didn’t plan as well and are attempting to blame their failed tax policies on the fiscal cliff deal. Kansas is a prime example.

Two years ago, Kansas Gov. Sam Brownback declared that his plan to repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two successive tax cuts that disproportionately benefited the richest Kansans, assuring the public these cuts would pay for themselves. Now he is facing a barrage of criticism over growing evidence that state tax revenues are declining in the wake of these cuts.

The pressure seems to be getting to the Brownback administration: earlier this month, Brownback’s revenue secretary, faced with a 45 percent decline in April tax revenues relative to the same month in 2013, called the month’s revenue slide “an undeniable result of President Obama’s failed economic policies.”

Kansas experienced the same revenue bubble in 2013, and the same trough in 2014, as did California and many other states. The state Department of Revenue’s April 2014 tax report notes that April 2013 revenues “increased dramatically from the previous year, about 53 percent,” due to accelerated capital gains encouraged by the fiscal cliff deal. In that context, the reported 45 percent decline in April 2014 is not only predictable, it sounds like a pretty good deal.

So why is Gov. Brownback’s administration citing this income-tax timing shift as evidence that President Obama’s policies have caused “lower income tax collections and a depressed business environment?” And why are governors in New Jersey and North Carolina making similar claims? In both Kansas and the Tarheel State, the governor is under pressure to defend the affordability of recently enacted income tax cuts.

Pinning the blame for revenue shortfalls on the fiscal cliff deal deflects scrutiny from state tax cuts costing more than advertised. In New Jersey, as the Tax Foundation has noted, Gov. Christie has been accused of using wildly optimistic revenue forecasts as part of his 2013 reelection campaign, and now he has some explaining to do about why his projections were so wrong. Once again, the Obama Administration serves as a convenient scapegoat for poor fiscal management decisions by state leaders.

But the news is not all bad out of Kansas: in a rhetorical flourish that would make North Korea envious, just one month before the Kansas Department of Revenue blamed President Obama for April’s decline in tax revenues, they explained a March increase in tax revenues as evidence that “ [w]e’re seeing the Kansas economic engine running.”

Kansas is, by all accounts, in a real fiscal jam. The ballooning cost of Brownback’s tax cuts and a recent state Supreme Court mandate that Kansas spend additional money on schools has made the task of a balanced budget very difficult for state lawmakers. But if Kansas lawmakers are in a fiscal hole, they need look no further than the state capitol to determine who is wielding a shovel.


What's the Matter with Kansas (and Missouri, and ...)


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An anti-tax, Republican super majority in the Missouri Legislature claimed victory yesterday in a year-long battle with Gov. Jay Nixon over taxes by voting to override Nixon’s veto of a $620 million income tax cut. This comes one year after Gov. Nixon’s veto was enough to stop a similar measure from becoming law.

The new law, Senate Bill 509, will gradually drop the top income tax rate from 6 to 5.5 percent and create a new tax break for “pass through” business income. Besides blowing a hole in the state’s budget, the tax cut will also make Missouri’s already-unfair tax system even worse: a Missouri Budget Project report, using data from our partners at the Institute on Taxation and Economic Policy (ITEP), found that the poorest 20 percent of Missourians will see a tax cut averaging just $6, while the top one percent of families will enjoy an average tax cut of $7,792.

Throughout this bruising battle, Missouri lawmakers made it clear that similar income tax cuts enacted by neighboring Kansas in 2012 and 2013 were a motivating factor in dropping Missouri’s tax rates. Clearly these lawmakers did not read news stories last week when Moody’s lowered Kansas’s bond rating due, in part, to the fiscal crunch created by that state’s income tax cuts.

But it shouldn’t take a bond downgrade to convince lawmakers that unfunded tax cuts can have a devastating effect on a state’s economy. What has just happened in Missouri and recently in Kansas is a symptom of a larger problem. Anti-tax proponents across the country are pushing a message that taxes are inherently bad without regard to what less revenue does to basic public services, from infrastructure to education. This fallacious messaging has allowed a number of states in the last few years to push through tax cuts that disproportionately benefit the wealthy.

For many states, it’s too soon to tell the long-term impact. But it is likely that other states could experience the same negative consequences as Kansas, including cuts in public services and downgraded bond ratings. Just last week, North Carolina lawmakers (who enacted a massive tax cut package last year) got word that revenues are coming in more than $445 million below projection in the current fiscal year and are likely to be down next year as well thanks in large part to under valuing the impact of their regressive tax cuts. 

Fortunately, Missouri tax cuts won’t begin to phase in until 2017, and even then are contingent on future economic growth. But in the long run, Governor Nixon’s bleak assessment of the bill’s impact—that it’s an “unfair, unaffordable and dangerous scheme that would defund our schools, weaken our economy, and destabilize the strong foundation of fiscal discipline that we’ve worked so long and hard to build” may prove prophetic.  

Results from Governor Brownback’s “real live experiment” (the passage of two rounds of extreme tax cuts under the guise of stimulating the economy) are trickling in and they aren’t good.  The Kansas City Star is reporting that the state’s “plummeting revenues” and increased need are some of the reasons why the state’s bond rating is now down from the firm’s second highest rating of Aa1 to Aa2.

Regrettably, Florida lawmakers just approved those “super-sized” sales sales tax holidays we told you about a few weeks ago. Read why sales tax holidays are a bad deal for both consumers and the Sunshine State in the Institute on Taxation and Economic Policy’s (ITEP) policy brief.

We offer our congratulations to former President George H.W. Bush on being awarded the Profile in Courage Award for raising taxes in 1990 despite his “Read my lips: no new taxes” pledge.  John Sununu, the President’s chief of staff, said, “George Bush did the right thing for the country, and it’s nice to see people are beginning to appreciate it.”

Calls for the Texas legislature to remedy a state tax law that has allowed commercial properties to be assessed at an (often large) discount are still being heard, loud and clear. An opinion piece in the Dallas News calls the lower property tax bills that many businesses have been receiving “unfair,” and cites examples of some of the state’s largest commercial buildings being assessed at a 35-40% discount.

 


Plan to Make Illinois Tax System More Progressive Stalls


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At a time when many states have toyed with the idea of paring back their progressive income taxes, Illinois policymakers this year showed real interest in a progressive change.

The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. A proposal (The Fair Tax) would have authorized lawmakers to devise a progressive, graduated income tax structure with higher rates applied to higher income levels. (Note: this Fair Tax proposal is very different from the so-called “fair tax” proposals in other states designed to dismantle state tax systems by eliminating income taxes and replacing their revenue with increased sales taxes.)

Unfortunately, the Senate adjourned Tuesday without voting on this transformative proposal. Lawmakers had appeared poised to take up legislation that, if passed by a supermajority in both the House and Senate, would have allowed voters to amend the state’s constitution to permit a more progressive tax structure.

This battle led by Sen. Don Harmon was especially timely because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. In fact, Sen. Harmon went one step beyond just urging lawmakers to cast their vote in favor of a graduated income tax and actually developed his own proposal whereby taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxable income over $180,000 would be taxed at 6.9 percent. 94 percent of Illinoisans would not see their taxes go up under his plan, and no Illinoisan with income under $200,000 would see a tax increase.

In the wake of this setback, progressive policymakers and advocates are now setting their sights on 2016 as the next opportunity to put the Fair Tax proposal before voters. The campaign for the Fair Tax was spearheaded by a A Better Illinois Coalition . The Coalition released a statement saying that despite their obvious disappointment, “the fight for a Fair Tax – which enjoys the support of 77% of Illinois voters – is far from over.  Our statewide grassroots campaign, including more than 250,000 petition signatures and the support of more than 750 small businesses, faith leaders, labor and education groups, and civic and community organizations from every corner of the state brought us closer to implementing a Fair Tax in Illinois than ever before.”

Despite this setback there is, in fact, plenty Illinois lawmakers can do right now to raise needed revenues in a fair way. Preserving temporary income tax increases, possibly with low-income offsets, can achieve the same goals as the stalled effort at constitutional reform.

Tax justice advocates should take these words of Abraham Lincoln to heart: “Always bear in mind that your own resolution to succeed, is more important than any other one thing.” The Illinois tax reform debate is hardly over and this week’s activities should only act to encourage and shore up the resolve of advocates in Illinois and elsewhere.

The natural gas extraction industry’s free ride in Pennsylvania may finally be coming to an end. Five years after natural gas companies entered the state to take advantage of the Marcellus Shale, legislators are considering an extraction tax (aka, a severance tax) to make up for lower than expected revenues and an otherwise tight budget. Drillers currently face what’s called an “impact fee,” but it raises little revenue, especially when compared with other energy-producing states. While a severance tax is still far from becoming law (the Governor still needs to be convinced, for example), some savvy observers are convinced the coming debate will not just be idle talk.

For years, state lawmakers have been falling all over themselves trying to get Hollywood to come to their states to make movies.  But even Virginia, which has a film tax credit, recognizes that not every potential tax credit deal is a good investment for their economy.  When Maryland decided not to expand its film tax credit, Netflix’s “House of Cards” began looking into whether it should film somewhere else.  But Virginia’s Film Office thinks the show is asking for too many incentives without offering enough in return.

John Archibald of the Birmingham News had a great column last week on Alabama’s tragic policy of taxing the poor deeper into poverty. As he explains, “We like to imagine Alabama a low-tax state…. But it's not a low tax state if you're broke.” This is because Alabama relies heavily on the regressive sales tax, making the state’s tax system one of the most upside-down in the country. Archibald’s column comes a few weeks after a similarly powerful editorial in the Montgomery Advertiser, arguing that while state taxes may be low, public investments are suffering as a result.

Starting Thursday May 1, Amazon.com will finally begin collecting sales taxes on purchases made by Florida residents.  As a result, the percentage of Americans living in a state where Amazon must collect sales tax will increase from 60 to 65 percent.  Until the U.S. House of Representatives acts on the Marketplace Fairness Act, however, enforcement of state sales taxes on purchases made over the Internet will not be possible on a comprehensive basis.


State News Quick Hits: Tax Breaks for Expensive Artwork and Apple Inc.


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Have you recently purchased a multimillion dollar piece of artwork (say, a $142 million Francis Bacon)? If the answer is yes, we have a great tax loophole for you. Rather than immediately bringing the piece of art home with you -- in which case you would be expected to pay use or sales tax on the purchase -- first loan it for a few months to a museum in a state that doesn’t have a use or sales tax. Museums in these states aren’t complaining about this “first use” exemption, which is found in many state tax codes, but taxpayers across the country should be. The buyer of the aforementioned Bacon painting will likely save $11 million in Nevada use tax by loaning it for 15 weeks to a museum in Oregon.

The most recent development in the income tax fight in Illinois comes from Chicago Mayor Rahm Emanuel, who ruled out a city income tax last week. Emanuel faces serious pension gaps in his municipal budget, which is why he is pushing for a $250 million increase in property taxes. But some, including Chicago Tribune columnist Eric Zorn and Center for Tax and Budget Accountability Executive Director Ralph Martire, think the mayor’s position is misguided and that a city income tax is worth considering. Regular Quick Hit readers will find Zorn’s and Martire’s arguments familiar: unlike property taxes, income taxes can be easily targeted at those most able to pay. ITEP’s own Matt Gardner was quoted in Zorn’s column, rebuffing arguments on the other side that a city income tax will drive people out of the city and kill jobs.

Arizona Governor Jan Brewer signed a pair of business tax cuts into law last week. In addition to a sales tax exemption for electricity used by manufacturers, she also signed a $5 million tax break that many expect will only benefit Apple, Inc. Regular readers may recall that Apple currently has billions of dollars stashed in foreign tax havens.

Oklahoma lawmakers have gone over a quarter century without approving an increase in their state’s gasoline tax, and have instead opted to fund transportation by redirecting money away from other areas of the budget. But that redirection of funds may have gone too far, as the Oklahoma Policy Institute explains that “Oklahoma’s transportation spending has grown considerably at a time when almost every other area of public services has seen cuts or flat funding.” Now lawmakers, at the urging of 25,000 Oklahomans who recently rallied at the state capitol, are considering legislation that would boost funding for schools by scaling back the amount of general fund money being spent on transportation.


Kansas Lawmakers Compliance With Supreme Court Decision Proves Difficult


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Kansas lawmakers just passed legislation to comply with the recent state Supreme Court ruling mandating increased K-12 funding to poor school districts, but it didn’t come easy.

The Kansas City Star notes that “[l]awmakers discussed taking the money out of the state’s reserve fund, but those dollars are needed just to keep the lights on in state government. They talked about taking from some educational funds to give to others. They considered shaking out pockets looking for spare change. At one point, senators were reduced to eying the $2 million in the problem gambling fund.”

These difficult choices are a direct result of the last two years of radical tax cuts. Governor Sam Brownback’s supply-side promises notwithstanding, his regressive income tax cuts show no sign of paying for themselves anytime soon, which means lawmakers must look under cushions to meet their court-mandated funding obligations.

The current budget is balanced precariously. As the Kansas City Star reminds us, “Right now, the budget is balanced only by dipping into reserve funds. If current revenue and spending trends continue, it will go underwater in 2016. After that, a state that is shortchanging its universities and disabled citizens will have to start cutting more deeply; forecasters estimate $962 million in cuts by the 2019 fiscal year. Kansas already is raiding its highway fund to pay for transportation of school students and even a chunk of the debt service for the recently completed statehouse reconstruction. Part of the teachers’ pension funds are coming from gambling revenues, in apparent violation of state statute.”

Having found $129 million in new money for poor school districts, the legislature clearly felt the need to dispel any illusion on the part of voters that they actually value public schools, and added legislative measures to undermine them. Kansas is now the latest state to enact “neo-vouchers,” corporate tax credits for companies making contributions to private schools. As we’ve explained in the past, this back-door approach to school vouchers erodes corporate tax revenues, takes money away from already-strapped public schools, and limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. In other words, having grudgingly given new revenue to public schools with one hand, they now will be taking it away with the other.


State News Quick Hits: Maine Cracks Down on Tax Havens and More


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Maine legislators are poised to crack down on corporations that use foreign tax havens to hide income from state tax authorities. The legislation, which has now been passed by both the House and Senate but still faces further votes, requires multinationals doing business in Maine to declare income otherwise attributed to more than thirty countries known to be popular tax havens (like the Cayman Islands and Bermuda, not to mention the Bailiwick of Guernsey, which turns out to be an island off the coast of France). Analysts estimate that such a change would increase state revenue by $10 million over the next two years. And U.S. PIRG, among other public interest organizations, has been beating the drum for this sensible reform, which we discussed in our recent report: 90 Reasons We Need State Corporate Tax Reform. Oregon and Montana already have similar laws on their books.

Thanks to a refundable tax credit included in New York’s budget this year, theater companies who launch their productions in upstate New York will enjoy having taxpayers foot the bill for 25 percent of the cost of “their so-called tech periods, the weeks long process in which a production gathers the costumes, tests the sets and choreography and establishes the lighting and musical cues.” Despite the credit’s extreme generosity, we’re still not sure it would have been enough to save Spider-Man.

Tax swap proposals that would trade income rate reductions for sales tax increases have been all the rage in conservative states in recent years. But what if your state doesn’t even have an income tax to begin with? Not wanting to be left out of the tax swap craze, Republican candidate for Texas Comptroller Glenn Hegar has a solution: completely replace property taxes with an increased sales tax. Texas already has a horribly regressive state tax system (PDF), but eliminating the property tax -- which is at least close to proportional in its distribution across income groups -- would only make matters worse. And while it is “easy to hate” the property tax, without it Texas would need to drastically cut services or more than double the sales tax. Such a trade could also mean less autonomy for localities (PDF) and a revamped school financing system.

Grover Norquist and the Koch brothers’ Americans for Prosperity are continuing to push for eliminating income taxes on investors in Tennessee, and there’s a chance they may succeed.  The state’s tax-writing committees will be voting this week on whether or not to gradually repeal Tennessee’s “Hall Tax” on dividends, interest, and some capital gains.  But repeal would be steeply regressive, as our partners at the Institute on Taxation and Economic Policy (ITEP) showed in a report cited by The Tennessean.  And on top of that, a spokesman for Governor Bill Haslam explains that “we’re in the middle of dealing with difficult budget realities … and this legislation would automatically put the issue above other priorities when revenues come back.”


Cuomo Gets His Election-Year, Tax Cut Wish


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New York Governor Andrew Cuomo got his election-year wish: a $2 billion tax cut package that doles out goodies to Wall Street banks and rich homeowners. Cuomo, a Democrat who likely has presidential ambitions, sold the tax cuts under the false promise that they would help New York businesses “thrive.” Tax cuts have become something of an obsession for Cuomo, despite the fact that important public investments have been neglected by five consecutive years of austerity budgets.

Here’s a run-down of the tax changes in the budget deal:

Property tax: A three-year property tax rebate program will cut homeowners’ taxes by $1.5 billion by “freezing” the amount many currently pay. But the cuts won’t be evenly distributed and generally won’t target those most in need of relief. For those living in local jurisdictions that comply with a 2 percent property tax cap and working to consolidate services with neighboring jurisdictions, the state will send homeowners (only those with household income under $500,000 qualify) a check for the amount of any increase in property taxes over the prior year (the checks are conveniently scheduled to be sent out for right before the November elections). For those living in New York City, which is not subject to the tax cap, low-income homeowners and renters will be eligible for a small, refundable property tax circuit breaker credit which will cost $85 million a year. Unfortunately, an expanded circuit breaker tax credit available to homeowners across the state-- one of the best ways to provide targeted property tax reductions-- was dropped from the final bill.

Business taxes: Corporations will get more than $500 million in tax cuts, including a permanent across-the-board corporate income tax rate cut from 7.1 percent to 6.5 percent. Manufacturers will be zeroed out from paying the corporate income tax altogether and will also receive a new property tax credit. Though Cuomo has heralded his business cuts as a boon to manufacturers, they in fact already pay very low rates (Our recent state corporate tax study found that Corning, for example, paid only a 0.3% state tax rate on $3.5 billion in profits over the past five years) and the primary beneficiaries are predominantly Wall Street banks.  The package eliminates the state’s bank tax, subjecting banks instead to the corporate income tax, and also allows them to pay only 8 percent of their income from qualified financial instruments (securities) under the assumption that 92 percent of their income from these sales comes from customers outside of New York.

Estate tax: Though there had been talk of also lowering rates, legislators ultimately agreed to cut the state’s estate tax by increasing the exemption from $1 million to $5.25 million, the threshold currently used at the federal level.

We’ll let others analyze the budget as a whole, which is worth $138 billion and includes important provisions on charter schools, pre-K, and campaign finance. But on the tax front, the bill falls far short of the type of targeted, progressive reform that is so badly needed.


Good and Bad Tax Policy in Maryland


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The estate tax, Earned Income Tax Credit (EITC), and film tax credits were all major topics of debate in Maryland this year.  Now that the state’s legislative session has ended, here’s a quick look at what happened on each of these issues.

Estate tax:  Despite having the highest concentration of millionaires in the country, Maryland lawmakers say they’re very concerned the estate tax may be driving wealthy residents out of the state.  Because of this, both the House and Senate approved a bill benefiting estates worth more than $1 million.  Assuming the governor signs the bill, which seems likely, Maryland’s estate tax exemption will increase from $1 million to more than $5.3 million by the end of the decade.  This is unfortunate since, as CTJ explained in testimony before both of Maryland’s tax-writing committees, an estate tax cut will reduce the adequacy and fairness of the state’s tax system without producing any economic benefit.

Earned Income Tax Credit:  In better news, Maryland lawmakers unanimously agreed to expand the state’s EITC.  Maryland currently allows taxpayers to choose between a refundable EITC equal to 25 percent of the federal credit, or a 50 percent nonrefundable EITC.  Legislation approved on Monday will gradually increase the refundable portion of the credit to 28 percent, which means low-income taxpayers who earn too little to owe personal income taxes will receive a somewhat larger refund to help offset the significant amounts (PDF) of sales and property taxes they pay each year.

Film tax credit:  A couple months ago, the producers of Netflix’s “House of Cards” threatened to leave the state unless lawmakers gave them more taxpayer dollars through the state’s film tax credit program.  Despite trying mightily to comply with their demand, the legislature ultimately failed to reach an agreement on a bill that would have shelled out an extra $3.5 million to the filmmakers.  Less encouraging, however, is that the show could still collect another $15 million in tax credits—on top of the millions it has already received.


ITEP Predicts Illinois Tax Reform Debate...and Then Puts Crystal Ball Away


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Earlier this year our partners at the Institute on Taxation and Economic Policy predicted Illinois would be a state “taking on real tax reform.” Policymakers in Illinois are making our crystal ball look very reliable as a bevy of tax reform measures are being seriously discussed. The pressure is on Illinois lawmakers to do something to enhance revenue because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. The following is a roundup of some of the proposals being discussed.

Last week, Gov. Pat Quinn delivered his budget address. During the speech he discussed “comprehensive tax reform [that] protects children, working families and seniors while preventing radical cuts to critical services.” The governor’s proposal includes making permanent the temporary income tax hike, doubling the state’s small Earned Income Tax Credit (EITC), providing a new $500 refundable tax credit for homeowners, and new tax cuts for businesses.

The day before Gov. Quinn’s address, Sen. Don Harmon released his own version of tax reform that would increase the progressivity of the state’s income tax by introducing a graduated rate structure. Taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxpayers with taxable income over $180,000 would see that income taxed at 6.9 percent. No Illinoisan with income under $200,000 would see a tax hike under this plan.

Since the Illinois constitution mandates a single income tax rate, Senator Harmon’s plan would require a 3/5th majority vote in the House and Senate, as well as a vote of the people. Illinois Voices for Children rightly argues that Senator Harmon’s proposal (or one like it) is necessary to create a more equitable tax structure.

But Harmon and Quinn’s plans are hardly the only ones under discussion. Late last week, House Speaker Michael Madigan put forward his own constitutional amendment that levies a 3 percent surcharge on Illinois millionaires. The proposal was approved by the House Revenue Committee. Speaker Madigan admits his plan wouldn’t solve the state’s budget woes noting that this is especially true if the current income tax rate is allowed to expire, “We’ll still struggle with a budget for the state of Illinois because there will be a great loss of revenue unless we extend the increase in the income tax.” That same House committee voted down a proposal that would eliminate the state’s current flat rate income tax and replace it with graduated rates and brackets. Let’s hope there is more debate on this important issue.

We aren’t going to press our luck again and dust off our crystal ball to predict what the outcome of this debate will be. But tax justice advocates everywhere should be heartened to hear that real reform is being discussed in a state where there is a desperate need for it. The Illinois tax structure is one of the ten worst in the nation in terms of fairness, and income tax reform could go a long way to improving this grim situation.


How Long Has it Been Since Your State Raised Its Gas Tax?


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State gas tax policies have changed a lot in recent months, which makes two new fact sheets from the Institute on Taxation and Economic Policy (ITEP) especially useful in understanding where states stand on this issue.

The first fact sheet shows that 24 states have gone a decade or more without increasing their gas tax rate, and that 16 states have gone two decades or more.  This lack of action has allowed for a significant drop in the purchasing power of these states’ gas tax dollars as the cost of construction and maintenance has increased.  The worst gas tax procrastinators are Alaska (43.9 years), Virginia (27.3 years), Oklahoma (26.9 years), Iowa (25.3 years), Mississippi (25.3 years), and South Carolina (25.3 years). 

The fact sheet also shows that four states are “celebrating” gas tax anniversaries this week.  As of April 1st, it has been exactly 18 years since Idaho and Missouri raised their gas tax rates, while South Dakota and Wisconsin have gone 15 and 8 years, respectively.  The only state raising its gas tax this April 1st is Vermont, where the rate is rising by less than a tenth of a penny per gallon.

The second fact sheet from ITEP puts a spotlight on those 18 states, plus the District of Columbia, that actually levy a smarter gas tax.  Rather than going years on end without a change in their gas tax rates, these states allow for modest increases in their tax rates each year through the use of a “variable-rate” tax that rises with inflation or gas prices. 

As a result of reforms enacted in four states last year, a majority of the country’s population now lives in a state where the gas tax rate is “indexed” in this way.  This isn’t a radical idea.  More states, and the federal government, should take a serious look at switching to a variable-rate gas tax.

Read the fact sheets:

How Long Has it Been Since Your State Raised Its Gas Tax?

Most Americans Live in States with Variable-Rate Gas Taxes

 


State News Quick Hits: State Lawmakers Not Getting the Message


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Less than a year after enacting a significant (and progressive) revenue raising tax package, Minnesota Governor Mark Dayton signed off last week on more than $400 million of tax cuts. The new legislation repeals several changes put into place last year including removing warehouse storage and 2 other primarily business services from the sales tax base and eliminating a new gift tax. The tax cuts also include reductions in the personal income tax via aligning the state’s tax code more closely to federal rules. Low- and moderate-income working families will also see a small benefit from two changes made to the state’s Working Families Credit (Minnesota’s version of a state Earned Income Tax credit (EITC).

A mother of two in Kentucky has made an impassioned plea to her state legislators to support the creation of a state Earned Income Tax Credit (EITC). More than half of all states have enacted such a credit, which is proven to increase workforce participation and improve health outcomes for children. As Jeanie Smith writes in her op-ed, “I know that we could have put that tax credit to good use. We could have used it toward the textbooks for my husband, or to take the stress out of a month's bills.” There are lots of strong arguments for adding a state EITC to Kentucky’s quite regressive tax code (PDF), and the Governor has proposed establishing a state EITC as part of his tax reform plan. Hopefully, Jeanie’s articulation of what a state EITC would mean for her and other families like hers will persuade those not yet on board.

The Montgomery Advertiser recently ran a very powerful editorial about the problems with low taxes. Lawmakers should give careful thought to one of the questions the editors pose in the piece: “We don’t pay a lot in taxes in Alabama and historically have taken a perverse pride in that. But is this really a bargain, or is it a fine example of false economy, of short-changing public investment to the detriment of our people?”

Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have long been critical of gimmicky sales tax holidays that provide little help to the poor or the economy. But Florida lawmakers don’t appear to have gotten the message, as the state House’s tax-writing committee recently advanced four “super-sized” sales tax holidays for purchases as varied as school supplies and gym memberships. Altogether, the package would drain $141 million from the state’s budget that could otherwise be been spent on education, infrastructure, and other public investments.

Newspapers in Oregon and North Carolina published editorials using data from ITEP and CTJ’s latest report on state corporate income taxes to highlight the need for corporate tax reform in their states. Check out The Oregonian’s editorial, “Extremes of Corporate Tax System Show Need for Reform” and one from the Greensboro News & Record, “Next to Nothing.”


Grover Norquist cares a lot about Tennessee taxes. You should too.


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(Blog Post Originally Appeared in The Hill)

It’s not breaking news that partisanship has gridlocked Congress these last few years, and most policy change has occurred at the state level. State legislatures have debated and enacted laws affecting issues as varied as minimum wage, infrastructure investment, education, environmental protection, and voting rights.

National groups seeking to cut taxes for the wealthy are well aware that policy change in states may be their best bet right now, and they’ve set their sights high. Grover Norquist’s Americans for Tax Reform, as well as Koch brothers-backed Americans for Prosperity and other conservative groups, continue to advocate for full repeal of state income taxes, with an eye toward setting a national trend in motion.

So far, most proposals to do away with state income taxes have run into a brick wall called reality after legislators learned that repeal would mean damaging cuts in public investments and significant tax hikes on the poor and middle-class. Proposals for income tax repeal recently failed in Louisiana, Missouri, Nebraska, North Carolina, and Oklahoma. The only state in U.S. history to repeal its personal income tax is Alaska, which threw out the tax in the 1980s when it was awash in newfound oil tax revenues.

Now it seems anti-tax proponents have found a test case in Tennessee. The Volunteer State has a regressive tax code built mainly around the sales tax. Unlike most states, it doesn’t have a general income tax on salaries and wages. But it does levy the Hall Tax, a modest 6 percent assessment on investment income that largely falls on wealthy Tennesseans with large stock portfolios. In recent months, a number of right-wing groups have spent significant resources backing a bill that would repeal this tax.

These groups are toeing their typical line, saying repeal will make Tennessee “economically competitive.” But the mediocre experiences of states that have recently cut income taxes don’t support that assertion.

Moreover, the vast majority of Tennesseans don’t pay the Hall Tax. The law exempts business income, wages, pensions, Social Security, and most other types of income Tennesseans earn. Only people with more than $2,500 in dividends, interest, and certain capital gains pay anything at all. Low- and moderate-income residents over age 65 are entirely exempt.

Given the Hall Tax’s limited scope, it generates only about 1 percent of the state’s revenue, making it low-hanging fruit for tax repeal advocates who have met with failure in states where personal income taxes generate significantly more revenue. 

While repealing the Hall Tax could yield fruit for the no-tax agenda, it’s not in Tennesseans’ best interest. My colleagues and I at the Institute on Taxation and Economic Policy produced an analysis that found the top 5 percent of earners would receive a whopping 63 percent of the benefits of the tax cut. Another 23 would go to the federal government because residents who pay the tax would no longer be able to write-off those payments on their federal tax returns. The remaining 14 percent of revenue lost by the cut would be spread thinly among the bottom 95 percent of households.

Although most ordinary working Tennesseans would see no benefit to their pocketbooks, they certainly would see the effect on state and local budgets. The $260 million revenue loss resulting from Hall Tax repeal would require Tennessee to scale back investments in education, infrastructure, and other services vitally important to the state’s success. Local communities would be hit particularly hard since more than one out of every three dollars generated by the tax goes to local government budgets. And if communities respond to this revenue loss by increasing property taxes, many Tennesseans could see their overall tax bills rise under this so-called “tax cut.”

The vagaries of Tennessee legislation may seem inconsequential for people outside the Volunteer State. But anyone concerned about how states and local governments fund basic services should be worried that national anti-tax groups have set their sights on repealing the Hall Tax. Tennessee isn’t this train’s first stop, and it won’t be the last.


Tax Cuts Fall Flat in Idaho


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Tax cuts for corporations and wealthy individuals were on the table in Idaho this year, but lawmakers ultimately decided that adequately funding education is more important.  Governor Butch Otter started the year by trying to couple income and property tax cuts with an increase in education funding, but the legislature opted to drop the tax cuts entirely and double his education funding proposal.  Far from being upset at the development, Otter conceded that “I think that they found a better use for the money than tax relief this year.”

Idaho’s big business lobby reacted very differently, complaining that lawmakers didn’t “truly do what’s right for business.”  In their eyes, it’s more important to eliminate the property tax on large businesses’ equipment and machinery, despite the fact that the largest beneficiary of that plan (IDACorp) is already managing to avoid paying anything in state corporate income taxes.

The other major tax cut ideas under discussion were reducing the state’s corporate income tax rate, as well as its top personal income tax rate.  But in a report we issued last week, we showed that many companies are already paying very little in state corporate income tax thanks to “copious loopholes, lavish giveaways and crafty accounting.”  And when the Institute on Taxation and Economic Policy (ITEP) analyzed the impact of an earlier cut in the state’s top personal income tax rate, we found that most of the tax cuts flowed to the state’s top 1 percent of earners, and that the vast majority of Idahoans received no benefit.

Idahoans should feel relieved that none of these regressive ideas were enacted into law this year.


State News Quick Hits: To Cut or Not to Cut?


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A battle over New York Governor Andrew Cuomo’s proposed property tax cuts is heating up, with protesters pouring into the New York State Capitol in Albany last week, a new TV ad hitting the airwaves, and the introduction of alternative tax cut plans from the Assembly and Senate. The governor’s plan would “freeze” property tax increases over the next two years by giving a refundable tax credit to homeowners for the amount of any increase in taxes over the prior year (and only to those living in jurisdictions complying with a 2 percent property tax cap and showing an effort to consolidate services with neighboring jurisdictions). In the third year, the freeze would be replaced with an expanded homeowner circuit breaker property tax credit and new renter’s tax credit. State legislators and many local leaders have voiced unease with the proposal. The Assembly’s plan would skip the freeze altogether and simply offer the homeowner and renter circuit breaker credits with less restrictions.

Illinois House Speaker Michael Madigan has called for a state constitutional amendment (PDF) to charge millionaires a tax surcharge and use the resulting $1 billion in revenue to fund public education. The proposal is likely the first of many attempts by both political parties to define the electoral turf prior to the gubernatorial election in November, which the Chicago Tribune has dubbed the “governor's race of a generation.” Current Governor Pat Quinn is running for re-election against Republican Bruce Rauner, who happens to be a multimillionaire. Even if the constitutional amendment doesn’t make it on the ballot (it would first have to be approved by supermajorities in the House and Senate), voters will face a stark choice on taxes: the state’s temporary income tax rate increase is set to decrease in 2015, and the two candidates will likely have different views on how to make up the lost revenue.

Most Oklahomans don’t want lawmakers to enact the income tax cut approved by the state Senate last month. A new poll reveals that when voters are told about the Institute on Taxation and Economic Policy’s finding that much of the tax cut will flow to the state’s wealthiest residents, 61 percent of voters oppose the plan compared to just 29 percent in support. Even among voters who aren’t told about this lopsided impact, less than half support the rate cut, and fewer people support the cut than did so last year.

Colorado spends roughly $2 billion per year on special tax breaks and a new law just signed by Governor John Hickenlooper (backed by the Colorado Fiscal Institute, among others) ensures that basic information about those breaks will continue to be made public going forward. Colorado’s Department of Revenue published the state’s first comprehensive tax expenditure report in 2012, and now the department is required to update that information every two years. Our partners at the Institute on Taxation and Economic Policy (ITEP) explain that “a high-quality tax expenditure report is a bare minimum requirement for even beginning to bring tax expenditures on a more even footing with other areas of state budgets.”


State News Quick Hits: Don't Expect Much from Congress


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Reuters reports that state lawmakers shouldn’t expect Congress to act anytime soon to close the enormous hole in their sales tax bases created by online shopping. Sales tax enforcement on purchases made over the Internet is a messy patchwork right now because states can only require retailers with a store or other “physical presence” within their borders to collect the tax. (Amazon, for example, is only required to collect the tax in 20 states). This uneven treatment of online retailers versus brick-and-mortar stores is nothing new, but the chairman of the House Judiciary Committee insists that more debate is needed before his chamber will act on the bipartisan bill passed by the Senate last spring.

 

Hawaii lawmakers are giving serious consideration to enhancing a number of tax credits for low-income working families, but the state’s worsening revenue outlook is going to make paying for the credits a bit more difficult. Moreover, Honolulu Civil Beat reports that lawmakers are also debating whether to give out more tax credits for things like charter school donations, backup generators, and building renovations. But reducing the very high state and local tax rate being paid by Hawaii’s poor should be a higher priority than these initiatives.

Last year’s trend toward raising state gasoline taxes seems to be continuing this year. In just the last week, the Kentucky House approved a 1.5 cent per gallon increase and the New Hampshire Senate gave preliminary approval to a 4 cent increase. These increases would allow for valuable investments in both states’ infrastructure, and would reduce the likelihood that lawmakers will eventually cut other areas of the budget to fund those investments.

This week the Wisconsin General Assembly approved Governor Scott Walker’s tax cut proposal which includes $404 million in across-the-board property tax cuts and $133 million in income tax cuts that result from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax. The legislation is now sent to Governor Walker’s desk where it is all but guaranteed he will sign the bill into law. For more on the flaws of this bill check out this Wisconsin Budget Project’s blog post.

 


Indiana Lawmakers Shower More Breaks on Low-Tax Corporations


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The state corporate tax study Citizens for Tax Justie and the Institute on Taxation and Economic Policy released today shows that three very profitable Fortune 500 companies headquartered in Indiana paid an effective corporate income tax rate ranging from just 0.4 to 1.5 percent over the last five years.  Eli Lilly, NiSource, and WellPoint earned a total of over $35 billion in profits between 2008 and 2012, but thanks to a variety of tax avoidance techniques none of these companies even came close to paying the statutory 8.5 percent rate that was in effect in Indiana for most of this five-year period.  Despite this fact, Indiana lawmakers inexplicably decided last week to enact yet another corporate income tax rate cut, as well as a property tax break for business equipment.

Less than three years ago, former Governor Mitch Daniels signed into law a bill gradually lowering the state’s corporate tax rate from 8.5 percent to 6.5 percent.  The final stage of that tax cut is still over a year away, and yet Governor Pence says he’s “pleased” with the fact that the current legislature just sent him another corporate tax bill that will eventually lower the rate to 4.9 percent.  The Institute on Taxation and Economic Policy (ITEP), notes: “When some of Indiana’s most successful corporations are paying such a small fraction of their profits in state income taxes to states around the country, it raises serious questions about whether reducing the corporate income tax is a worthwhile priority.”

But this corporate tax rate cut isn’t the only giveaway for big business that Governor Mike Pence will soon be signing into law.  The same legislation containing the corporate tax rate cut also grants localities the option to begin a race-to-the-bottom by eliminating their property taxes on new business equipment.  A report (PDF) from the Indiana Fiscal Policy Institute explains that giving localities this option is unlikely to draw any new businesses into the state, though it may reshuffle existing businesses around within the state’s borders.  And the president of the Institute explains that “I’m a little worried about the nature of allowing local governments to adopt this when some counties depend so much on business personal property tax and some don’t.”

Indiana’s largest and most successful companies already enjoy a shockingly low tax rate, and that rate is about to get a lot lower.  Hopefully next session lawmakers will turn their attention toward initiatives that could actually benefit ordinary Indiana residents—like improving the state’s education system and infrastructure.


Film Tax Credit Arms Race Continues


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Tax credits for the film industry are receiving serious attention in at least nine states right now. Alaska’s House Finance Committee cleared a bill this week that would repeal the state’s film tax credit, and Louisiana lawmakers are coming to grips with the significant amount of fraud that’s occurred as a result of their tax credit program. Unfortunately for taxpayers, however, the main trend at the moment is toward expanding film tax credits. North Carolina and Oklahoma are looking at whether to extend their film tax credits, both of which are scheduled to expire this year. And California, Florida, Maryland, Pennsylvania, and Virginia lawmakers are all discussing whether they should increase the number of tax credit dollars being given to filmmakers.

The best available evidence shows that film tax credits just aren’t producing enough economic benefits to justify their high cost. While some temporary, relatively low-wage jobs may be created as a result of these credits, the more highly compensated (and permanent) positions in the film industry are typically filled by out-of-state residents that work on productions all over the country, and the world. And with film tax credits having proliferated in recent years, lawmakers who want to lure filmmakers to their states with tax credits are having to offer increasingly generous incentives just to keep up.

Saying “no” to Hollywood can be a difficult thing for states, but here are a few examples of lawmakers and other stakeholders questioning the dubious merits of these credits within the last few weeks:

North Carolina State Rep. Mike Hager (R): “I think we can do a better job with that money somewhere else. We can do a better job putting in our infrastructure … We can do a better of job of giving it to our teachers or our Highway Patrol.”

Richmond Times Dispatch editorial board: [The alleged economic benefits of film tax credits] “did not hold up under scrutiny. Subsidy proponents inflated the gains from movie productions – for instance, by assuming every job at a catering company was created by the film, even if the caterer had been in business for years. The money from the subsidies often leaves the state in the pockets of out-of-state actors, crew, and investors. And they often subsidize productions that would have been filmed anyway.”

Oklahoma State Rep. James Lockhart (D): According to the Associated Press, Lockhart “said lawmakers were being asked to extend the rebate program when the state struggles to provide such basic services as park rangers for state parks.” “How else would you define pork-barrel spending?”

Alaska State Rep. Bill Stoltze (R): “Some good things have happened from this subsidy but the amount spent to create the ability for someone to be up here isn't justified. And it's a lot of money … Would they be here if the state wasn't propping them up?”

Sara Okos, Policy Director at the Commonwealth Institute: “How you spend your money reveals what your priorities are. By that measure, Virginia lawmakers would rather help Hollywood movie moguls make a profit than help low-wage working families make ends meet.”

Maryland Del. Eric G. Luedtke (D): Upon learning that Netflix’s “House of Cards” will cease filming in Maryland if lawmakers do not increase the state’s film tax credit: “This just keeps getting bigger and bigger … And my question is: When does it stop?”

Picture from Flickr Creative Commons

With pothole season well under way, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has been in the news quite a bit recently for its research on the need for more sustainable federal and state gasoline taxes. USA Today ran a story this week featuring quotes from ITEP staff and six different infographics based on ITEP data that explain where state gas taxes are, and aren’t, being raised.  In addition, ITEP’s Carl Davis appeared on both CBNC and NPR’s Marketplace to talk about the gas tax.

The Missouri legislature is poised to offer Kansas a truce in the never-ending battle to shower Kansas City-area companies with tax credits. Both the Missouri Senate and House recently passed similar bills that would ban state tax incentives for companies that agree to move from the Kansas side of the Kansas City border (Wyandotte, Johnson, Douglas, or Miami counties) to the Missouri side (Jackson, Clay, Platte, or Cass counties). It seems Missouri has finally realized that tax breaks used to lure companies across the border — otaling $217 million between both states in recent years by one estimate — don’t actually create new jobs for the region’s residents and would be better spent on much needed public services. The one catch: the Missouri bill would only go into effect if Kansas agrees to a similar ceasefire within the next two years.

Perhaps this is the year that Utah will establish a state Earned Income Tax Credit (EITC). A bill creating the much-heralded working family tax credit was passed out of the House Revenue and Taxation Committee last month. Last year, a similar bill was passed by the full House, but stalled in the Senate. This year’s bill, which is again sponsored by Representative Hutchings, would give over 200,000 low-income Utahns a refundable tax credit worth 5 percent of the federal EITC, or roughly $113 on average. But one change from last year’s bill is that the credit will not go into effect until Utah is allowed to start collecting sales tax from online shoppers — something that won’t happen until Congress passes legislation granting the states that power. Such a bill has already passed the U.S. Senate and is supported by President Obama, but it is still pending in the U.S. House.

While a full solution to the problem of uncollected sales taxes on online shopping will have to come from the federal government, Hawaii’s House of Representatives wants to chip away at the problem by expanding the number of online retailers that have to collect sales tax right now. Under a bill backed by the state Chamber of Commerce, retailers partnering with Hawaii-based companies to solicit sales would have to collect sales taxes on purchases made by their Hawaii customers.  This move to apply the state’s sales tax laws more uniformly to both online retailers and traditional brick-and-mortar stores would be one step toward a more modern sales tax in the Aloha State.


Kansas Supreme Court Case Shows Public Services Suffer When Tax Breaks for Wealthy Take Priority


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Far too often, lawmakers use tax cuts to score political points and throw around phrases such as “more effective government” to gloss over the lasting, negative effects of starving public investments.

In the case of Kansas, public schools are paying the price. The state Supreme Court ruled last Friday that the state Legislature hasn’t allocated enough money to poorer school districts but must do so by July 1. Although the Court didn’t designate a specific dollar amount, state Department of Education officials have estimated that complying with the Court ruling will cost at least $129 million.

Unfortunately, state political leaders have already signaled their intention to skirt the Court’s decision. Quoted in the New York Times, state Rep. Kasha Kelly, the Republican chair of the House Education Committee, said the legislative branch has the “power of the purse.” And Gov. Sam Brownback lauded the Court for not declaring a dollar amount, stating that equity is more about equality of opportunity rather than dollars spent.

Such rhetoric has no basis in reality. Indeed, state lawmakers have a responsibility to be stewards in the public interest. This means deciding how to raise revenue as well as spend revenue. Too often, lawmakers interested in backing the narrow interests of an elite few discuss taxes in a vacuum as though they are unrelated to how states fund critical priorities. This makes it easier to push through tax cuts under the guise of stimulating the economy without talking at the same time about long-term implications of less revenue for basic public services—or, in the case of Kansas, equitable funding for public schools.

Gov. Brownback has led the way in a recent wave of governors advocating for large tax cuts for the affluent under the misguided premise that tax cuts pay for themselves.

In Kansas, recent state budget cuts have meant increased classroom sizes and fewer resources for extra-curricular activities, not to mention cuts in other public services.  State funding per student has dropped since the economic recession from $4,400 five years ago to a reported $3,838 today. Kansas lawmakers initially claimed they had to cut funding for K-12 education due to the lingering effects of the recession. But even as state revenue rebounded, legislative leaders astonishingly moved to cut income taxes rather than restore funding for public education and other services.  In fact, the Legislature enacted two rounds of major tax cuts that disproportionately benefit the wealthiest Kansans. The first round, in 2012, dropped the top tax rate from 6.45 to 4.9 percent and exempted all “pass-through” business income from the personal income tax.

The next round, enacted in 2013, doubled down by dropping the top tax rate even further, to 3.9 percent, and setting the income tax on track for complete elimination if, as Gov. Brownback has said, the state meets revenue targets. The long-term fiscal impact of these tax cuts in Kansas will be a whopping $1.1 billion.

If, as Gov. Brownback says, he is for equality of opportunity, he should concede that overcrowded classrooms and reduced services are not the way to achieve this. Lawmakers would be wise to consider rolling back some of Gov. Brownback’s tax cuts by not allowing the top income tax rate to fall further and by eliminating the costly deduction for pass through business income.


Wisconsin Lawmakers Move Forward with Tax Cuts


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This week Wisconsin’s Senate followed the lead of the General Assembly and approved Governor Scott Walker’s $537 million (over two years) in property and income tax cuts. Governor Walker proposed the tax cuts as a way to “return the state’s surplus to the people who earned it” and his signature on the legislation is all but guaranteed. The cuts include $404 million in across the board property tax cuts and $133 million in income tax cuts that result from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax.

It’s worth noting that the tax cuts are permanent yet the state’s “surplus” is not guaranteed to last. According to the Wisconsin Budget Project, the tax cuts will mean that “the next state budget will be $658 million in the red before budget deliberations even begin.”

Too bad lawmakers weren’t persuaded by editorial boards at the Milwaukee Journal Sentinel and the Wisconsin State Journal that both (rightly) responded to Governor Walker’s tax cut proposals by encouraging lawmakers to instead use the one-time surplus to help curb the state’s growing structural deficit, or use it towards serious problems like poverty reduction and enhancing K-12 education.


State News Quick Hits: Tax Breaks for NASCAR and House of Cards


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Tax cut one-upmanship continues to be a major theme in the race to be Maryland’s next governor. As of right now, at least two gubernatorial candidates want to completely eliminate the state’s personal income tax–a revenue source that funds about half of the state’s spending on schools, hospitals, and various other services. In terms of how to pay for this massive cut, the best that Harford County Executive David Craig could come up with is a 3 percent across-the-board spending cut (that math seems a little fishy to us), while businessman and candidate Charles Loller seems to have bought into Arthur Laffer’s wild claims that tax cuts pay for themselves. But even if the cost of repeal weren’t an issue, it’s still the case that the personal income tax is an essential element of any fair and sustainable tax system, and should not be on the chopping block in any state.

Lawmakers in Iowa are poised to give NASCAR a $9 million tax rebate. The bill (PDF), which passed a key Senate subcommittee last week, would extend a five percent rebate for all sales tax collected at Iowa Speedway, a racetrack located about 30 miles outside of Des Moines. The sweetheart deal had originally required that the track be owned at least 25 percent by Iowans, but the Florida-based NASCAR company bought the track last year, prompting legislators to scramble to amend the law. (Racetrack owners are already the beneficiary of a notorious federal tax break, which is part of the group of tax “extenders” currently languishing in Congress.) It is unclear why NASCAR, a profitable company in its own right, needs the handout. It already owns the facility and has plans to host four races there in 2014. Some in the state are hoping that the rebate will be used to upgrade the track so that it can host a lucrative Sprint Cup race, but NASCAR has made no such promise.

Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have seen a lot of attention directed toward their analysis of an Oklahoma proposal to cut the state’s top income tax rate–including two opinion pieces, a front-page news story, and a paid advertisement (PDF) taken out by the state’s former Governor. While the top rate cut proposed by current Governor Mary Fallin is extremely lopsided (contrast a $29 tax cut for a middle-income family with a $2,000+ tax cut at the top), it appears that the Senate has some interest in improving upon the bill. Rather than simply cutting the top tax rate and slashing public investments, the Senate’s tax-writing committee recently advanced a bill that pairs the cut with a very sensible expansion of the state’s income tax base: eliminating the nonsensical state income tax deduction for state income taxes paid.

House of Cards–a Netflix show about politicians making bad decisions–is trying to get Maryland’s politicians to make some bad decisions in real life. The Media Rights Capital production company says they’ll shoot the third season of their program elsewhere unless lawmakers direct more taxpayer dollars their way in the form of an expanded film tax credit. Upon learning of the threat, lawmakers on both sides of the aisle had some entirely appropriate reactions: “Is it possible that they would just leave after we gave them $31 million?” “We’re almost being held for ransom.” “When does it stop?”


State Tax Breaks Pile Up


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Denver and Baton Rouge are 1,200 miles apart (not to mention some steep elevation change), but state lawmakers in these distinct capitals are grappling with a similar challenge: a tax code increasingly clogged with special interest tax breaks.

In Colorado, legislators have proposed a “bumper crop” of tax credits this year. The legislature has already had to beat back a bill that would have provided $11.6 million in tax credits for parents who send their children to private schools, but dozens more are awaiting consideration. Tim Hoover, communications director for the Colorado Fiscal Institute, has compared the atmosphere at the Capitol to a recording of “Oprah”: “Tax incentives are handed out the way Oprah gives away cars to her audience members. You get a tax credit! You get a tax credit. Everybody gets a tax credit."

In 2009, Colorado lost $2.7 billion to various tax credits, exemptions, and deductions. The only reason we’re even able to put a number on these otherwise hidden tax provisions is because the state recently joined most of the rest of the country by publishing a tax expenditure report (PDF). The good news is that some Colorado legislators are now trying to make this report a regular feature of the state’s budgeting process, published every two years. The bad news (other than all the new breaks that lawmakers are trying to pile on) is that the report does nothing to show if the state’s tax breaks are having their intended effect. This is one reason why Colorado was ranked as “trailing behind” in the pursuit of evidence-based tax policy by the Pew Center on the States.

While Louisiana is ranked higher by Pew as a result of having evaluated at least some of its tax breaks, its tax code is similarly jam-packed with special interest giveaways. But thanks to Louisiana State House Speaker Chuck Kleckley, the effectiveness of these exemptions will be the subject of a new, independent tax study this year, with recommendations to be released next spring. Don’t get too excited, though. In 2012, Louisiana created the Legislature's Revenue Study Commission which recommended better monitoring of tax exemptions, but that recommendation has yet to have much of a tangible impact.

Colorado and Louisiana, like most states, still have a long way to go in making regular evaluation of their tax breaks a reality, but if they’re looking for a little inspiration they may want to direct their attention toward the progress being made in Rhode Island.  The Ocean State now requires that state analysts determine the number of jobs actually created by certain “economic development” tax breaks, and that the Governor make recommendations on those tax breaks in his or her budget proposal.


Either Way - Reducing Ohio's Top Income Tax Rate to 4 or 5 Percent is a Bad Idea


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Ohio Governor John Kasich is expected to unveil his latest tax cut proposal soon and it doesn’t take a deep understanding of Ohio politics to know that the Governor’s plan will likely include large across the board income tax rate reductions. Last week he mentioned wanting to lower the top income tax rate to below 4 percent after persistently advocating in recent months for reducing the top rate to less than 5 percent (the current top income tax rate is 5.333 percent).

In anticipation of the governor’s latest proposal, Policy Matters Ohio (PMO) released a new report, using ITEP data,“Income-tax cut would favor well-to-do”, which shows the impact of an across the board income tax rate reduction that lowers the top income tax rate to just under 5 percent. The biggest beneficiaries of this proposal are by far the wealthiest Ohioans. In fact, 69 percent of the benefits go to Ohioans in the top 20 percent of the income distribution.

We often don’t get to talk about tax policy as it relates to pizza, but PMO finds “that the across-the-board cut in rates needed to [get the top rate to below 5 percent] may allow low-income Ohioans to buy a slice of pizza a year, on average. Middle-income Ohioans could purchase a cheap pizza maker. For the state’s most affluent taxpayers, on average it would cover round-trip airfare for two to Italy, with some money left over to pay the hotel bill and buy some real Italian pizza.”

If the Governor aggressively pushes getting the top rate below 4 percent the benefits to the wealthy will be even greater and could mean a second trip to Italy with a stop over in France to pick up a bottle of wine. Either way, reducing the top income tax rate below 4 or 5 percent would enhance the unfairness already apparent in Ohio’s tax structure and makes it more difficult for the state to fund necessary services.


The Tax Foundation's Summary of Economic Growth Studies is Misleading


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Whenever it’s trying to justify cutting taxes (or not raising them), the Tax Foundation likes to direct readers toward one of its reports from 2012, in which it concluded that “nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal finds that tax increases harm economic growth.”  As it turns out, this conclusion is simply wrong.

In a new report just released this week, the Center on Budget and Policy Priorities (CBPP) digs more deeply into the literature and finds that “12 of the 26 studies that the Tax Foundation cites do not support its flat assertion that tax increases harm growth.”  To take just one example, the Tax Foundation selectively cited a 1997 study in order to obscure its finding that tax increases could actually improve economic growth if they were used to fund education or deficit reduction.

Equally damning is CBPP’s finding that the 26 studies the Tax Foundation cited are hardly the only research on this topic, noting that “the Tax Foundation’s review omitted dozens of relevant studies published in major journals or edited compilations since 2000.”  This is a serious shortcoming given that the Tax Foundation claims to possess insights into the findings of “nearly every empirical study of taxes and economic growth,” and that it says it’s discovered a “consensus among experts” about the negative economic impacts of taxes.

Unsurprisingly, many of the studies omitted by the Tax Foundation contradict its claims about the disastrous effects of higher taxes—and some directly contradict the exact studies that the Tax Foundation chose to cite.

This CBPP study, as well as an earlier one looking just at the state-level studies included in the Tax Foundation report, reveal that the Tax Foundation’s so-called “literature review” is more spin than substance.


Missouri: Done Deal? Let's Hope Not


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Last year, Missouri Governor Jay Nixon, a Democrat, vetoed a regressive tax cut package passed by Republican lawmakers that would have cost the state $700 million annually. In his veto message the Governor called the legislation an “ill-conceived, fiscally irresponsible experiment that would inject far-reaching uncertainty into our economy, undermine our state’s fiscal health and jeopardize basic funding for education and vital public services.” In a victory for tax justice advocates, his veto withstood an attempted override by the legislature.

But, last week, Nixon reached a flawed tentative agreement with Republican State Senator Will Kraus to reduce the top individual income tax rate by half of one percentage point, but only if certain budget conditions are met. Half of the tax cut is contingent on the state bringing in $200 million in revenue growth and fully funding the state’s schools. The other half would be triggered by legislation that lowers the cap on two tax credits: one for low-income housing development and the other for historic building preservation. If all the contingencies are met, the Governor’s proposal would cut taxes by roughly $400 million a year, less than half of what Republicans in the legislature are asking for ($928 million a year when fully phased in), but still a significant tax cut.

In terms of fairness, an Institute on Taxation and Economic Policy (ITEP) analysis published in a brief from the Missouri Budget Project (MBP) found that reducing the top rate to 5.5 percent overwhelmingly benefits the wealthiest Missourians. In fact, ITEP found that 76 percent of the tax reduction would fall to the wealthiest 20 percent of Missourians. The impact by income group of this tax cut clearly illustrates that the wealthier do better under this proposal, Missourians in the top 1 percent, those with average incomes over $1.094 million – would receive a tax cut averaging $3,779 per year. In contrast, the average Missouri family with incomes from $33,000 - $52,000 would receive just a $47 tax cut per year, about enough to buy one hamburger each month. And the lowest income Missourians, those with incomes under $18,000, would get zero benefit.

In terms of adequacy, MBP rightly notes that over the long term there is no guarantee that school funding won’t be cut, “there are no ongoing protections for funding of public education.” There is a long history of states promising to hold services harmless and failing to do so.

Of course, there is a better way. Missouri’s Governor and lawmakers could work together to cut taxes for those who can least afford them and further invest in schools, healthcare and transportation by asking the wealthy to pay more. Let’s certainly hope this “deal” isn’t done.


State News Quick Hits: Party With Boeing, Targeted Tax Cuts and More


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It’s an age-old question: How do you thank legislators who give your profitable company an $8.7 billion tax subsidy? Most etiquette experts agree that a handwritten note just won’t do. But a lavish party thrown in your benefactors’ honor — that’s more like it. Recently, Boeing threw a party for Washington state lawmakers to thank them for the record amount of taxpayer money they delivered to the company in a special legislative session late last year. The reception was conveniently held across the street from the Capitol. Thankfully for Boeing, the cost of the party will likely be written off as a business expense on next year’s taxes.

Indiana lawmakers are looking in all the wrong places for a way to boost their state’s economy. The Indiana Senate has passed a bill eliminating the business equipment tax for companies with less than $25,000 worth of equipment, while the House version would give localities the option of eliminating the tax entirely for new machinery. But a new report (PDF) from the Indiana Fiscal Policy Institute explains that localities are in no position to deal with yet another cut in their property tax bases, and that giving localities the option of eliminating this tax is unlikely to draw any new businesses into the state (though it may reshuffle existing businesses around within the state’s borders).

The Arizona Daily Star reports that “a bid to enact a flat income-tax rate in Arizona is dead.” State Representative J.D. Mesnard had hoped to begin flattening one of the state’s only major progressive revenue sources by reducing the number of income tax brackets from five to three, but he appears to have abandoned that effort after failing to gather any support. But income tax cuts are hardly off the agenda. Mesnard still wants to funnel any new sales tax revenue collected from cracking down on online sales tax evasion into income tax cuts that are likely to benefit the rich. Much more reasonable, however, is his proposal to index the state’s tax brackets to inflation—a change that would actually help retain the progressivity of Arizona’s income tax over time.

Michigan Governor Rick Snyder has a better tax-cutting plan than his colleagues in the legislature. Rather than rewarding wealthy taxpayers with a cut in the state’s income tax rate, Snyder wants to provide targeted property tax relief to middle-income families through an expansion of the state’s circuit breaker program. The expansion would help offset a reduction in the circuit breaker passed in 2011 to help pay for a massive business tax cut sought by the Governor. But while Snyder’s plan is an improvement over plans to cut the income tax rate, the Michigan League for Public Policy notes that Snyder’s plan is hardly perfect: “a critical omission [from Snyder’s budget] was the failure to restore cuts in the state’s Earned Income Tax Credit, the best tool for helping families with the lowest wages.” And there are also serious questions about whether Michigan lawmakers should be discussing tax cuts at all—a new poll shows that in terms of their top priorities, voters rank tax cuts a “distant third” behind spending on schools and roads.


Say it Ain't So: Kentucky's Missed Opportunity


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Kentucky Governor Steve Beshear has unveiled a 22-point tax reform plan that includes a new refundable state earned income tax credit (EITC), limits on the generous $41,110 pension exclusion and expanding the sales tax base to include a wider range of services. The plan is based in part on the recommendations of the Governor’s Blue Ribbon Commission on Tax Reform, which were released in 2012. Beshear’s plan also includes a cut in the personal and corporate income tax rates and an increase in the cigarette tax. In total the proposal increases state revenues by $210 million a year.

The proposal is a mixed bag.  While it raises much needed revenue and includes several reform-minded options, it falls short of improving the fairness of the state’s tax structure. The introduction of an EITC and limiting the current pension exclusion are a good start, but changing the corporate income tax apportionment formula to single sales factor and lowering personal and corporate income tax rates are costly ideas that benefit wealthier Kentuckians.

The Kentucky Center for Economic Policy (KCEP) issued a brief containing an Institute on Taxation and Economic Policy (ITEP) analysis showing that Governor Beshear’s proposal doesn’t improve tax fairness in any meaningful way. KCEP concludes that “the combined impact of the tax increases and tax cuts in Governor Beshear's reform proposal would not help improve the regressive nature of Kentucky’s tax system.”  This is because the new revenue raised from the Governor’s plan comes almost entirely from regressive changes to the sales tax base and hiking cigarette taxes.

Governor Beshear deserves some credit for proposing tax reform despite this being an election year, but he missed an opportunity to truly reform the state’s tax structure by making it more fair and adequate. Let’s hope that Kentucky legislators follow KYCEP’s advice and “build on the good parts of the plan while making improvements.”


The States Taking on Real Tax Reform in 2014


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Note to Readers: This is the fifth post of a five-part series on tax policy prospects in the states in 2014. Over the course of several weeks, The Institute on Taxation and Economic Policy (ITEP) highlighted tax proposals that were gaining momentum in states across the country. This final post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax policy proposals are not all bad news this year.  There are some promising efforts underway that would fix the structural problems with state tax codes and improve tax fairness for low- and middle-income families. All eyes are on Illinois as lawmakers grapple with how to raise much needed revenue after their temporary income tax hike expires. Many are hoping the timing is now right for a real debate about a graduated income tax. Washington DC’s Tax Revision Commission has proposed a number of sensible reforms. And, lawmakers in Hawaii and Utah are expected to seriously debate ways to improve their states’ tax fairness.

Illinois - Though there has been much legislative activity in Springfield about corporate tax breaks, the arguably more important issue facing lawmakers is the state’s temporary income tax rate increase that is set to decrease in 2015. Given this upcoming rate reduction, lawmakers and the public are weighing in on alternative ways to fund vital services, including the merits of a progressive income tax.

District of Columbia - DC’s Tax Revision Commission set the stage for real tax reform this Spring when it recommended expanding the sales tax base, enhancing the city’s Earned Income Tax Credit (EITC) for childless workers, boosting the personal exemption and standard deduction, reforming the District’s income tax brackets, and phasing-out the value of personal exemptions for high-income taxpayers. The Commission’s proposal is hardly perfect: it includes an expensive giveaway for people with estates worth over $1 million, as well as a slight cut in the city’s top income tax rate (in exchange for making that temporary rate permanent).  But the plan still contains a lot of good ideas worthy of the word “reform.”

Hawaii - Hawaii levies the fourth highest state and local taxes on the poor in the entire country, but some lawmakers would like to change that.  Proposals to enact an Earned Income Tax Credit (EITC) managed to pass both chambers of the legislature last year before eventually being abandoned, and lawmakers gave serious consideration to other low-income tax credit changes as well.  The Hawaii Appleseed Center’s recent report (PDF) on enhancing low-income tax credits, and options to pay for those enhancements, provides a wealth of information for the many lawmakers and advocates who intend to pick up where they left off last year.

Utah - Last year’s effort to improve Utah’s regressive tax system (PDF) by enacting an Earned Income Tax Credit (EITC) ultimately fell short, though a bill that would have created such a credit did make it out of the state’s House of Representatives.  That push will be resumed this year.


Is Tax Reform Coming to the District?


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This week the DC Council will be hearing tax reform recommendations from the experts they appointed to study the District’s tax system. While far from perfect, the DC Tax Revision Commission’s suggested changes include many sensible reforms. Here’s a quick overview of what’s being discussed.

The Commission recommends expanding the District’s Earned Income Tax Credit (EITC) for workers without children—the one group for whom this important anti-poverty and pro-work program currently provides little benefit.

Some middle-income taxpayers would benefit from lowering the middle tax bracket’s rate from 8.5 to 6.5 percent. And both lower- and middle-income families would benefit from a substantially increased personal exemption and standard deduction.

In order to partially fund these targeted low- and middle-income tax cuts, the Commission also recommends phasing out (PDF) the District’s personal exemption for high-income taxpayers, and making permanent the city’s temporary top tax bracket on incomes over $350,000 (albeit at a reduced rate).

And as with many tax reform efforts, the DC Commission’s plan also includes a long-overdue expansion of the District’s sales tax to include more personal services. Haircuts, tanning studios, car washes, and various other services (PDF) would finally be included in the sales tax base.

Among the more troubling aspects of the Commission’s plan is its price tag. The Commission wants to cut into the District’s revenues by $48.8 million, despite the fact that the DC Council only set aside $18 million to fund the Commission’s recommendations. And not all of the tax cuts contained in the Commission’s proposal are justified. A $15.8 million estate tax cut is unlikely to benefit (PDF) the District’s economy, and a $57 million corporate and business tax rate cut won’t do any good, either.

Against this backdrop, the Commission’s decision to recommend increasing the sales tax rate from 5.75 to 6 percent is an odd one. The $22 million in revenue raised by this regressive tax increase could easily be generated in a fairer way by scaling back the estate and corporate tax cuts, and/or by retaining the 8.95 percent rate on incomes over $350,000, as opposed to the lower 8.75 percent rate the Commission suggests.

Overall, the Commission’s proposal is a good starting point, but there’s still plenty of room for the DC Council to improve upon it before enacting any reforms into law.


State News Quick Hits: EITC Awareness, Grover Norquist's New Target and More


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Community organizations, state tax departments, and editorial pages across the country celebrated National EITC Awareness Day last Friday. Roughly 80% of those eligible for the federal Earned Income Tax Credit take advantage of it each year, a higher participation rate than most other social programs. But keeping this figure high -- and ensuring that busy, working people are also aware of state and local EITCs they may qualify for -- requires continued vigilance. One way to boost participation, and to save beneficiaries from wasting their refund on paid tax preparers, is by joining the volunteer income tax assistance (VITA) program. We also need anti-poverty advocates on the front lines fighting plans in some states to eliminate or weaken their state EITC, as North Carolina did last year.

Like many Americans, Grover Norquist is apparently sick of Congressional gridlock (despite having played no small part in causing it through his inflexible no-new-taxes pledge).  But rather than sit around while federal tax reform continues to stall, Grover has turned his sights toward Tennessee.  Grover wants to see Tennessee repeal one of the few bright spots of its staggeringly regressive tax system (PDF): its “Hall Tax” on investment income.  The Massachusetts native and current DC resident is signaling his intention to push lawmakers to repeal the tax, according to The Tennessean.

With an election just a few months away, Florida Governor Rick Scott has made clear that he wants tax cuts, yet again, to be a top priority in the Sunshine State.  His newest list of ideas includes cutting motor vehicle taxes, cutting sales taxes on commercial rent, cutting business taxes, and cutting business filing fees.  He’d also like to give shoppers a couple of sales tax holidays — a perennial favorite among politicians that like their tax cuts to be as high-profile as possible.

Check out the Kansas Center for Economic Growth’s new blog! Their latest post makes the salient point that two rounds of radical income tax cuts “have failed to create prosperity and are leaving low- and middle- income Kansas families struggling to make ends meet.”


Gas Tax Remains High on Many States' Agendas for 2014


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Note to Readers: This is the fourth installment of a five-part series on tax policy prospects in the states in 2014.  This series, written by the staff of the Institute on Taxation and Economic Policy (ITEP), highlights state proposals for “tax swaps,” tax cuts, and tax reforms.  This post focuses specifically on proposals to increase or reform state gasoline taxes.

Six states and the District of Columbia enacted long-overdue gas tax increases or reforms last year, despite the tough politics involved in raising the price drivers pay at the pump.  Will 2014 bring the same level of legislative activity on the gas tax?  Maybe not; but there are a number of states where the issue is receiving serious attention.

Delaware: Governor Jack Markell of Delaware is pushing for a 10 cent increase in his state’s gas tax, which hasn’t been raised in over 19 years.  The idea faces an uphill battle in the legislature, but without the increase the Delaware Department of Transportation’s capital budget will have to be slashed by about 33 percent next year.  Delaware’s House Minority leader would rather raid the state’s general fund budget (most of which goes toward education and health care) as opposed to addressing the state’s transportation revenue problems directly through reforming the gas tax.

Iowa: Governor Terry Branstad isn’t going to lead the fight for a gas tax increase, but he won’t veto one, either, if it makes it to his desk. Last week, an Iowa House subcommittee unanimously passed a 10 cent gas tax hike just a few hours before Branstad made clear his intention to remain on the sidelines during this important election-year tax debate.

Kentucky: Governor Steve Beshear wants to reverse a 1.5 cent gas tax cut that went into effect last month as a result of falling gas prices (Kentucky is one of eighteen states where the tax rate changes alongside either gas prices or inflation).  Doing so would raise about $45 million in additional funds to invest in the state’s transportation infrastructure.  And putting a “floor” on the gas tax to prevent further declines in the tax rate could avoid up to $100 million in funding cuts in the next two years.

New Hampshire: The chair of New Hampshire’s Senate Transportation Committee wants to raise the gas tax and index it to inflation.  The tax has been stuck at 18 cents per gallon for over twenty-two years, and the commissioner of the state’s Department of Transportation is optimistic that could finally change this year.  Governor Maggie Hassan hasn’t been a major player in the push for a higher gas tax, but it seems likely she would sign an increase if it made it to her desk.

Utah: Utah Senate President Wayne Niederhauser is rightly concerned about the fact that “more and more money is coming out of the state's general fund for transportation,” and would like to reform the state’s gas tax to provide transportation with a sustainable revenue stream of its own.  Familiar concerns about not wanting to hike the gas tax in an election year have been raised, but Governor Gary Herbert seems to realize that some kind of change to the gas tax is needed.  To provide some context to this debate, we recently found that Utah’s gas tax is currently at an all-time low, after adjusting for inflation.

Washington: Last year’s unsuccessful push to raise the gas tax in Washington State has spilled over into the current legislative session.  Governor Jay Inslee still supports raising the tax, and House and Senate leaders have spent a significant amount of time trying to cobble together an acceptable compromise.

But while these six states are the most likely to act this year, they’re hardly the only places where the gas tax is generating a lot of interest.  In Oklahoma, both of the state’s largest newspapers have urged lawmakers to consider gas tax reform, as has the Oklahoma Policy Institute and the Oklahoma Academy.  In Minnesota, the commissioner of the Department of Transportation wants to see the gas tax rise on a yearly basis, and a coalition has been formed seeking more revenue for transportation.  The chairman of the South Carolina Senate Finance Committee supports a gas tax hike, as does the chair of New Mexico’s Transportation and Public Works Committee, some members of New Jersey’s legislature, and the editorial boards of both New Mexico’s and New Jersey’s largest newspapers.  And in Michigan, Governor Snyder’s laudable attempt to raise the gas tax last year has stalled, though it remains a topic of discussion in the Wolverine State.

Altogether, thirty-two states levy unsustainable flat-rate gas taxes, twenty-four states have gone a decade or more without raising their gas tax, and sixteen of those states have gone two decades or more without an increase.  With so many states reliant on outdated gas tax structures, there’s little doubt that reforming the tax will remain a major topic of discussion for the foreseeable future.

Photo via herzogbr Creative Commons Attribution License 2.0 


A New Wave of Tax Cut Proposals in the States


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Note to Readers: This is the third of a five-part series on tax policy prospects in the states in 2014.  Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on proposals to cut personal income, business, and property taxes.

Tax cut proposals are by no means a new trend.  But, the sheer scope, scale and variety of tax cutting plans coming out of state houses in recent years and expected in 2014 are unprecedented.  Whether it’s across the board personal income tax rate cuts or carving out new tax breaks for businesses, the vast majority of the dozen plus tax cut proposals under consideration this year would heavily tilt towards profitable corporations and wealthy households with very little or no benefit to low-income working families.  Equally troubling is that most of the proposals would use some or all of their new found revenue surpluses (thanks to a mostly recovering economy) as an excuse to enact permanent tax cuts rather than first undoing the harmful program cuts that were enacted in response to the Great Recession.  Here is a brief overview of some of the tax cut proposals we are following in 2014:

Arizona - Business tax cuts seem likely to be a major focus of Arizona lawmakers this session.  Governor Jan Brewer recently announced that she plans to push for a new tax exemption for energy purchased by manufacturers, and proposals to slash equipment and machinery taxes are getting serious attention as well.  But the proposals aren’t without their opponents.  The Children’s Action Alliance has doubts about whether tax cuts are the most pressing need in Arizona right now, and small business groups are concerned that the cuts will mainly benefit Apple, Intel, and other large companies.

District of Columbia - In addition to considering some real reforms (see article later this week), DC lawmakers are also talking about enacting an expensive property tax cap that will primarily benefit the city’s wealthiest residents.  They’re also looking at creating a poorly designed property tax exemption for senior citizens.  So far, the senior citizen exemption has gained more traction than the property tax cap.

Florida - Governor Rick Scott has made clear that he intends to propose $500 million in tax cuts when his budget is released later this month.  The details of that cut are not yet known, but the slew of tax cuts enacted in recent years have been overwhelmingly directed toward the state’s businesses.  The state legislature’s more recent push to cut automobile registration fees this year, shortly before a statewide election takes place, is the exception.

Idaho - Governor Butch Otter says that his top priority this year is boosting spending on education, but he also wants to enact even more cuts to the business personal property tax (on top of those enacted last year), as well as further reductions in personal and corporate income tax rates (on top of those enacted two years ago). Idaho’s Speaker of the House wants to pay for those cuts by dramatically scaling back the state’s grocery tax credit, but critics note that this would result in middle-income taxpayers having to foot the bill for a tax cut aimed overwhelmingly at the wealthy.

Indiana - Having just slashed taxes for wealthy Hoosiers during last year’s legislative session, Indiana lawmakers are shifting their focus toward big tax breaks for the state’s businesses.  Governor Mike Pence wants to eliminate localities’ ability to tax business equipment and machinery, while the Senate wants to scale back the tax and pair that change with a sizeable reduction in the corporate income tax rate. House leadership, by contrast, has a more modest plan to simply give localities the option of repealing their business equipment taxes.

Iowa - Leaders on both sides of the aisle are reportedly interested in income tax cuts this year. Governor Terry Branstad is taking a more radical approach and is interested in exploring offering an alternative flat income tax option. We’ve written about this complex and costly proposal here.

Maryland - Corporate income tax cuts and estate tax cuts are receiving a significant amount of attention in Maryland—both among current lawmakers and among the candidates to be the state’s next Governor.  Governor Martin O’Malley has doubts about whether either cut could be enacted without harming essential public services, but he has not said that he will necessarily oppose the cuts.  Non-partisan research out of Maryland indicates that a corporate rate cut is unlikely to do any good for the state’s economy, and there’s little reason to think that an estate tax cut would be any different.

Michigan - Michigan lawmakers are debating all kinds of personal income tax cuts now that an election is just a few months away and the state’s revenue picture is slightly better than it has been the last few years.  It’s yet to be seen whether that tax cut will take the form of a blanket reduction in the state’s personal income tax, or whether lawmakers will try to craft a package that includes more targeted enhancements to provisions like the Earned Income Tax Credit (EITC), which they slashed in 2011 to partially fund a large tax cut (PDF) for the state’s businesses. The Michigan League for Public Policy (MLPP) explains why an across-the-board tax cut won’t help the state’s economy.

Missouri - In an attempt to make good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year, House Republicans are committed to passing tax cuts early in the legislative session. Bills are already getting hearings in Jefferson City that would slash both corporate and personal income tax rates, introduce a costly deduction for business income, or both.

Nebraska - Rather than following Nebraska Governor Dave Heineman into a massive, regressive overhaul of the Cornhusker’s state tax code last year, lawmakers instead decided to form a deliberative study committee to examine the state’s tax structure.  In December, rather than offering a set of reform recommendations, the Committee concluded that lawmakers needed more time for the study and did not want to rush into enacting large scale tax cuts.  However, several gubernatorial candidates as well as outgoing governor Heineman are still seeking significant income and property tax cuts this session.

New Jersey - By all accounts, Governor Chris Christie will be proposing some sort of tax cut for the Garden State in his budget plan next month.  In November, a close Christie advisor suggested the governor may return to a failed attempt to enact an across the board 10 percent income tax cut.  In his State of the State address earlier this month, Christie suggested he would be pushing a property tax relief initiative.  

New York - Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Governor Cuomo unveiled a tax cutting plan in his budget address that will cost more than $2 billion a year when fully phased-in. His proposal includes huge tax cuts for the wealthy and Wall Street banks through raising the estate tax exemption and cutting bank and corporate taxes.  Cuomo also wants to cut property taxes, first by freezing those taxes for some owners for the first two years then through an an expanded property tax circuit breaker for homeowners with incomes up to $200,000, and a new tax credit for renters (singles under 65 are not included in the plan) with incomes under $100,000.  

North Dakota - North Dakota legislators have the year off from law-making, but many will be meeting alongside Governor Jack Dalrymple this year to discuss recommendations for property tax reform to introduce in early 2015.  

Oklahoma - Governor Mary Fallin says she’ll pursue a tax-cutting agenda once again in the wake of a state Supreme Court ruling throwing out unpopular tax cuts passed by the legislature last year.  Fallin wants to see the state’s income tax reduced despite Oklahoma’s messy budget situation, while House Speaker T.W. Shannon says that he intends to pursue both income tax cuts and tax cuts for oil and gas companies.

South Carolina - Governor Nikki Haley’s recently released budget includes a proposal to eliminate the state’s 6 percent income tax bracket. Most income tax payers would see a $29 tax cut as a result of her proposal. Some lawmakers are also proposing to go much farther and are proposing a tax shift that would eliminate the state’s income tax altogether.


State News Quick Hits: Transformers and Tax Breaks for the Rich in Disguise


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Editorial boards at the Milwaukee Journal Sentinel and the Wisconsin State Journal have both (rightly) responded to Governor Walker’s property and income tax cut proposals by encouraging lawmakers to instead curb the state’s growing structural deficit, or put any surplus revenue toward serious problems like poverty reduction and enhancing K-12 education. Perhaps the editorial boards were persuaded by Institute on Taxation and Economic Policy (ITEP) findings that wealthier folks benefit more from the tax cuts than low-and middle-income families. For more on ITEP’s analysis read this Milwaukee Journal Sentinel piece.

Idaho’s House Speaker has proposed dramatically scaling back the state’s grocery tax credit in exchange for a regressive $70-80 million cut to the individual and corporate income tax rates. But economist Mike Ferguson of the Idaho Center for Fiscal Policy points out that the Speaker’s plan would amount to a giveaway to the rich, while further squeezing the middle class.  An Idahoan making $50,000 per year, for example, could expect to see about $305 tacked on to their state tax bill under this change. Governor Butch Otter has been saying the right things about taking a break from tax cuts (kind of) and instead making education spending a priority this year. But the Governor recently said he was open to the Speaker’s idea, and the Idaho Statesman provided a partial endorsement. Idaho legislators should tread carefully: raising taxes on the middle class to pass another trickle-down tax cut is bad public policy and even worse politics.

A Wichita Eagle editorial, “Pressure on sales tax”, shares our concerns about one of the major consequences of the tax cuts and “reforms” enacted in Kansas over the past two years.  With the gradual elimination of the state’s personal income tax and pressure on local governments to raise revenue, it is inevitable that the state’s sales tax rate will continue to rise at the detriment of low- and moderate-income working families who are stuck footing the bill. And, in order to have sufficient revenue to fund services over the long-run, Kansas lawmakers will need to make the politically difficult decision to broaden the sales tax base, something they’ve shown little stomach for so far. The editorial states, “as Kansas strains to deal with declining tax collections and reserves according to Brownback’s plan to become a state without an income tax, the sales tax will be one of the only places to go for more revenue.”

Indiana lawmakers want to get a better handle on whether their tax incentives for economic development are actually doing any good.  Last week, the House unanimously passed legislation that will require every economic development tax break to be reviewed ov

er the course of the next five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recommends that all states implement these kinds of ongoing evaluations.

Illinois Governor Pat Quinn is pushing back against a string of bad publicity regarding film tax credits. Quinn says that an entertainment boom is occurring in Illinois in part because of the Illinois Film Services Tax Credit, an uncapped, transferable credit that was extended in 2011. What Governor Quinn fails to mention, however, is how much taxpayers lost in the process. The credit costs roughly $20 million a year, requiring higher taxes or fewer public services than would otherwise be the case. Research from other states indicates that only a small fraction of that amount would be recouped via higher tax receipts. Moreover, film subsidies often waste money on productions that would have located in the state anyway and are unlikely to do much good in the long-term since the industry is so geographically mobile. Indeed, one of the producers of Transformers 3 admitted that he would have filmed in Chicago even without the credit, which cost taxpayers $6 million. Instead, the decision was based on “the skyline, the architecture and the skilled crews here, among other factors.”

After some high-quality investigative journalism from the Orlando Sentinel last year, prominent state lawmakers in Florida are setting their sights on sunsetting or redesigning a poorly tailored tax break for companies that locate in high-crime areas. The tax provision at issue — the Urban High-Crime Area Job Tax Credit Programallows cities to draw expansive (and unalterable) borders around purported “high crime areas” that are anything but. Companies benefiting from the loophole include Universal Orlando, which has received over $8 million from the program since the provision’s adoption sixteen years ago. Universal is planning to cash in again this year with the opening of its second Harry Potter-themed amusement park (prompting one columnist to ask jokingly if being chased by an imaginary dragon constitutes attempted murder). Dubious corporate subsidies are nothing new in Florida, and the value of this credit is not about to break the bank ($500 to $1,500 per employee and capped statewide at $5 million each year). But by highlighting these abuses, the Sentinel has provided a healthy reminder that even well-meaning corporate tax breaks often create unintended, negative consequences and should be eliminated.

Despite failing to win over the legislature with his tax swap proposal last year, Nebraska’s Governor Heineman is back to hawking large reductions in the personal income tax. While it’s true that Nebraska is sitting on a budget surplus, the legislature's Tax Modernization Committee held hearings last year and recently recommended only minor changes. Perhaps some middle ground comes in the form of two tax proposals introduced by legislators this month that target relief to low- and middle-income families (imagine that!). Senator Conrad (D-Lincoln) has called for an increase in the state Earned Income Tax Credit (EITC). And Senator Bolz (D-Lincoln) is proposing an increase in the state’s child care tax credit for middle income families. Conrad’s legislation would increase the refundable state EITC from 10% of the federal credit to 13%, which would make a substantial difference in the lives of Nebraska’s working poor. For a family with three children earning the maximum EITC benefit in 2014, such a change would put more than $180 back in their pockets. Bolz’s bill would increase the child care credit for those making more than $29,000 from 25% of the federal credit to 28%. Unlike the federal government, Nebraska already makes its child care tax credit partially refundable (for those making less than $29,000 a year), an admirable feature of the state’s tax code. Bolz’s proposal wouldn’t change the refundability equation and could be better targeted at low-income families, but, like Conrad’s EITC bill, is a step in the right direction.

The Baltimore Sun has rightly poured cold water on an idea from some Maryland legislators to gut the state’s estate tax. House Speaker Michael Busch and Senate President Mike Miller have proposed increasing the value of an estate that can be passed on tax-free from $1 million to $5.25 million (more information on the mechanics of state estate and inheritance taxes can be found here).  The state comptroller has also signed onto the idea.  But the Sun editorial points out that supporters’ reasoning — that Maryland has become an inhospitable place for rich people to die — is faulty.  According to a recent study, 7.7 percent of Maryland households are millionaires — the highest percentage of any state — and only 2.8 percent of Maryland estates pay any state tax under the current regime.  Maryland policymakers — including Governor O’Malley, who has not yet committed either way hould resist this election-year giveaway to the rich.

Wisconsin Governor Scott Walker learned last week that the state is expecting a $912 million surplus. The Governor is expected to propose both property and income tax cuts.  But the Wisconsin Budget Project (WBP) rightly cautions that tax cuts aren’t necessarily the best way to spend the surplus.  WBP argues that this revenue “gives lawmakers an excellent opportunity to invest in Wisconsin’s economic future and to put the state on a sounder fiscal footing by filling budget holes.”


Beware of the Tax Shift (Again)


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Note to Readers: This is the second of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on tax shift proposals.

The most radical and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate state income taxes and replace some or all of the lost revenue by expanding or increasing consumption taxes. These “tax swap” proposals appeared to gain momentum in a number of states last year, but ultimately proposals by the governors of Louisiana and Nebraska fell flat in 2013. Despite this, legislators in several states have reiterated their commitment to this flawed idea and may attempt to inflict it on taxpayers in 2014. Here’s a round-up of where we see tax shifts gaining momentum:

Arkansas - The Republican Party in Arkansas is so committed to a tax shift that they have included language in their platform vowing to “[r]eplace the state income tax with a more equitable method of taxation.” While the rules of Arkansas’ legislative process will prevent any movement on a tax shift this year, leading Republican gubernatorial candidate Asa Hutchinson has made income tax elimination a major theme of his campaign.  

Georgia - The threat of a radical tax shift proposal was so great in the Peach State that late last year the Georgia Budget and Policy Institute published this report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated their income tax and replaced the revenue with sales taxes. This report seems to have slowed the momentum for the tax shift, but many lawmakers remain enthusiastic about this idea.

Kansas – In each of the last two years, Governor Sam Brownback has proposed and signed into law tax-cutting legislation designed to put the state on a “glide path” toward income tax elimination.  Whether or not the Governor will be able to continue to steer the state down this path in 2014 may largely depend on the state Supreme Court’s upcoming decision about increasing education funding.

New Mexico - During the 2013 legislative session a tax shift bill was introduced in Santa Fe that would have eliminated the state’s income tax, and reduced the state’s gross receipts tax rate to 2 percent (from 5.125 percent) while broadening the tax base to include salaries and wages. New Mexico Voices for Childre