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Surveying State Tax Policy Changes Thus Far in 2016


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With the exception of New Jersey, the dust has now settled on most state legislatures' 2016 tax policy debates.  Many of the conversations that took place in 2016 were quite different than those that occurred over the last few years.  Specifically, the tax cutting craze sparked by the election of many anti-tax lawmakers in November 2010 has subsided somewhat—at least for now.  For every state that enacted a notable tax cut in 2016, there was another that took the opposite path and opted to raise taxes.  And contrary to what you may expect, the distinction between tax-cutting and tax-hiking states did not always break down along traditional partisan lines.

The most significant theme of 2016 was one we've written about before: the plight of energy-dependent states whose budgets have been battered by falling oil and gas prices as well as the growing cost of tax cuts enacted during the "boom" years. In conservative-leaning energy states such as Louisiana, Oklahoma, and West Virginia, lawmakers raised taxes to help deal with these issues in the short-term, but long-term solutions are still needed.

Tax increases elsewhere were enacted to fund health programs (California), raise teacher salaries (South Dakota), and expand tourism subsidies (Oregon).  In Pennsylvania, meanwhile, a significant but flawed tax package was enacted to cope with a large general fund revenue shortfall.

On the tax cutting side, the "tax shift" craze was less pronounced than usual this year. Again, however, New Jersey lawmakers may be the exception as they continue to debate a shift toward gas taxes and away from some combination of income, estate, and sales taxes.  Moreover, some of the tax cuts that were enacted this year may ultimately set the stage for future "tax shifts," as lawmakers in states such as Mississippi and Tennessee search for ways to fund tax cuts whose full cost won't be felt for many years.

Looking ahead, debates over tax increases in Alaska and Illinois are likely to resume once the November elections have passed.  On the other hand, lawmakers in Arkansas, Mississippi, Nebraska, and elsewhere are already positioning themselves for tax cut debates in 2017.  But before that happens, there are also a significant number of revenue raising ballot proposals to be voted on in California, Colorado, Maine, Massachusetts, Missouri, Oklahoma, and Oregon.

Below is our summary of 2016 state tax happenings, as well as a brief look ahead to 2017.

Tax Increases

Louisiana: Tax increases of varied sorts were among the strategies lawmakers employed this year to address billion dollar deficits for FY16 and FY17. The most significant was a one cent increase to the sales tax, a regressive hike that gives the state the highest combined state and local sales tax rate in the country. Given the severity of Louisiana's revenue shortfall, much of the appeal of this approach came from the fact that it could be implemented quickly. But while a higher sales tax will generate hundreds of million of dollars in needed revenue, it is also set to expire in July 2018 and is not a permanent solution to the state's fiscal stress. Over the course of two special sessions, lawmakers also: increased cigarette and alcohol excise taxes; extended, expanded, or reinstated taxes on telecommunications, hotel, and auto rentals; cut vendor discounts; limited deductions and credits that benefit businesses; and increased a tax on the health insurance premiums of managed care organizations. All of these incremental changes buy the state some time in the short-term, but the need for more substantive reform remains.

Oklahoma: To fill the state's $1.3 billion shortfall, Oklahoma lawmakers enacted a number of policy changes that will harm the state's poorest residents and set the state on an unsustainable fiscal path. Oklahoma's 2016-17 budget relied heavily on one-time funds. Lawmakers opted to change the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, meaning that poor families earning too little to owe state income taxes will now be ineligible for the credit. While this will have a noticeable impact on those families' abilities to make ends meet, the $29 million saved as a result of this policy change is a drop in the bucket compared to the $1 billion in revenue lost every year from repeated cuts to the state's income tax. Thankfully, though, cuts to the state’s sales tax relief credit and the child tax credit were prevented, and full elimination of the state EITC was avoided. Lawmakers also capped rebates for the state's "at-risk" oil wells, saving the state over $120 million. On another positive note, Oklahoma lawmakers eliminated a nonsensical law, the state's "double deduction," that allowed Oklahomans to deduct their state income taxes from their state income taxes. 

Pennsylvania: Pennsylvania lawmakers avoided broad-based tax changes, largely relying instead on regressive tax options, dubious revenue raisers, and one-time funds—most of which fall hardest on the average Pennsylvanian—to fill the state’s $1.3 billion revenue shortfall. The state’s revenue package draws primarily from expanded sales and excise taxes. In particular, it includes a $1 per pack cigarette tax increase and a tax on smokeless tobacco, electronic cigarettes, and other vaping devices along with changes to the state's sale of wine and liquor. State lawmakers also opted to include digital downloads in the sales tax base and put an end to the “vendor discount”—an unnecessary sales tax giveaway that allowed retailers to keep a portion of the tax they collected from their customers.

West Virginia: Lawmakers in West Virginia punted, for the most part, on solving their fiscal problems this year. Instead, they addressed the state’s $270 million shortfall with budget cuts, tobacco tax increases, and one-time funds. The state increased cigarette taxes by $0.65 per pack and will tax electronic cigarettes and vaping liquids. Even with this $98 million revenue gain, shortfalls are not last year’s news. Ill-advised tax cuts and low energy prices will again put pressure on the state’s budget in 2017.

South Dakota: South Dakota lawmakers enacted a half-penny sales tax increase, raising the rate from 4 to 4.5 percent. The increase will fund a pay raise for the state's teachers, who are currently the lowest-paid in the nation. Though they rejected a less regressive plan to raise the same amount of funding by raising the sales tax rate a whole cent and introducing an exemption for grocery purchases, progressive revenue options are very limited in states like South Dakota that lack an income tax, and lawmakers can be applauded for listening to public opinion that consistently favors raising revenues to fund needs like education.

California: This past session, California lawmakers were able to drum up the two-thirds majority support needed to extend and expand the state's health tax levy on managed care organizations. The prior tax expired on July 1, 2016 and was deemed too narrow to continue to comply with federal requirements. By extending the tax to all managed care organizations, California lawmakers were able to preserve access to over $1 billion in federal match money used to fund the state's Medicaid program.

Oregon: Lawmakers approved an increase to Oregon's tourist lodging tax from 1 to 1.8 percent in order to generate more revenue for state tourism funds, specifically to subsidize the World Track and Field Championships to be held in the state in 2021.

Vermont: Vermont’s 2016 revenue package included a few tax changes and a number of fee increases. Tax changes included a 3.3 percent tax on ambulance providers and the conversion of the tax on heating oil, kerosene, and propane to an excise tax of 2 cents per gallon of fuel. The move from a price-based tax to one based on consumption was meant to offset the effect of record low fuel prices.

Tax Cuts

Mississippi: Mississippi lawmakers made some of the most irresponsible fiscal policy decisions in the country this year. For one, they opted to plug their growing transportation funding shortfall with borrowed money rather than raising the necessary revenue. And at the same time, despite those funding needs and the fact that tax cuts enacted in recent years caused a revenue shortfall and painful funding cuts this very session, legislators enacted an extremely costly new round of regressive tax cuts and delayed the worst of the impacts for several years. By kicking these two cans down the road at once, lawmakers have avoided difficult decisions while putting future generations of Mississippians and their representatives in a major fiscal bind.

Tennessee: Tennessee legislators, who already oversee one of the most regressive tax structures in the nation, nonetheless opted to slash the state's Hall Tax on investment and interest income. The Hall Tax is one of the few progressive features of its tax system. After much debate over whether to reduce, eliminate, or slowly phase out the tax, an unusual compromise arose that will reduce the rate from 6 to 5 percent next year and repeal the tax entirely by 2022. While the stated "legislative intent" of the bill is to implement the phase-out gradually, no specific schedule has been set, essentially ensuring five more years of similar debates and/or a difficult showdown in 2021.

New York: New York lawmakers approved a personal income tax cut that will cost approximately $4 billion per year. The plan, which is geared toward couples earning between $40,000 and $300,000 a year, will drop tax rates ranging from 6.45 to 6.65 percent down to 5.5 percent. The tax cut will be phased-in between 2018 and 2025. Gov. Andrew Cuomo said that the plan “is not being paid for” since its delayed start date pushes its cost outside of the current budget window.

Florida: The legislative session in the Sunshine State began with two competing $1 billion tax-cut packages and ended with a much more modest result. In the end, the state made permanent a costly-but-sensible sales tax exemption for manufacturing equipment, reduced its sales tax holiday down to three days, and updated its corporate income tax to conform with federal law, along with several other minor changes. Ultimately, the plan is expected to reduce state revenues by about $129 million. The legislature also increased state aid to schools, which is expected to reduce local property taxes and bring the total size of the tax cuts to $550 million if those local reductions are included.

North Carolina:  Billed as a "middle-class" tax cut, North Carolina lawmakers enacted an increase in the state's standard deduction from $15,500 to $17,500 (married couples).  This new cut comes on top of four years of tax changes that are slowly but surely moving the state away from relying on its personal income tax and towards a heavier reliance on consumption taxes. 

Rhode Island: While an increase in the state's Earned Income Tax Credit (EITC) from 12.5 to 15 percent of the federal credit was a bright spot in Rhode Island this year, lawmakers also found less than ideal ways to cut taxes. Specifically, they pared back the corporate minimum tax to $400, down from $450 in 2016 and $500 the year before. The state will also now provide a tax break for pension/annuity income for retirees who have reached their full Social Security age. It exempts the first $15,000 of income for those earning up to $80,000 or $100,000, depending on filing status.

Hawaii: Hawaii legislators made changes to their state's Child and Dependent Care Tax Credit this year, slightly expanding the credit by altering the method for determining the percentage of qualifying child care expenses.

Oregon: Lawmakers increased the state's Earned Income Tax Credit from 8 to 11 percent for families with dependents under 3 years old. Qualifying families will be able to claim this larger credit starting in tax year 2017.

Arizona: There was much talk of tax reform in Arizona this year. Gov. Doug Ducey expressed interest in a tax shift that would phase out the income tax over time and replace it with a regressive hike in the state's sales tax. That plan, thankfully, did not come to fruition this year. Rather, state lawmakers enacted a grab bag of (mostly business) tax cuts, including an expansion of bonus depreciation and sales and use tax exemptions for manufacturing.

Stalled Tax Debates Likely to Resume in 2017

Alaska: Faced with a multi-billion revenue hole, state lawmakers weighed and ultimately punted on a range of revenue raising options—including, most notably, the reinstatement of a personal income tax for the first time in 35 years. Notably, however, Gov. Bill Walker did scale back the state's Permanent Fund dividend payout through the use of his veto pen.                                         

Georgia: Ambitious plans to flatten or even eliminate Georgia's income tax ultimately stalled as advocates showed (PDF) these measures would have amounted to enormous giveaways to the state's wealthiest residents, drained $2 billion in funding for state services over five years, and even threatened the state's AAA bond rating.

Idaho: Lawmakers in the House enthusiastically passed a bill that cut the top two income tax rates and gave the grocery credit a small bump, but the bill stalled in the Senate where lawmakers were more interested in addressing education funding than a tax break for the state's wealthiest residents.

Illinois: After a year of gridlock, Illinois lawmakers passed a stopgap budget. Unfortunately, this "budget" amounts to no more than a spending plan as it is untethered from actual revenue figures or projections. Its main purpose is to delay the work of much needed revenue reform until after the November election.

Indiana: An effort to address long-standing needs for infrastructure improvement in Indiana resulted in lawmakers abandoning all proposals to raise new revenue, relying instead on a short-term plan of shifting general revenue to the state highway fund. Over the next two years this change will generate some $230 million in "new money" for transportation projects at the expense of other critical public services.

Maryland: Maryland lawmakers rejected two tax packages that included more bad elements than good. While the plans included an innovative expansion of the state's Earned Income Tax Credit (EITC) for childless low- and middle-income working families, this valuable reform would have been paired with income tax cuts that would have unnecessarily benefitted the very wealthiest.

What Lies Ahead?

Key Tax-Related Measures on the Ballot in November

California: State officials have announced that seventeen (and possibly more) initiatives will appear on California's ballot this November. Among them are several tax initiatives, including extending the current income tax rates on high-income earners, raising the cigarette tax by $2 per pack, and the implementation of state, and potentially local, taxation on the sale of marijuana if legalized.

Colorado: A campaign is underway to gather the signatures required to place a proposal to raise tobacco taxes on the ballot this November. The measure would raise the tax on cigarettes from $0.84 to $2.59 per pack and increase the tax on other tobacco products by 22 percent. If approved, the proposal would raise $315 million each year for disease prevention and treatment and other health initiatives.

Maine: The Stand up for Students campaign is behind a ballot measure in Maine that would enact a 3 percent income tax surcharge on taxable income above $200,000.  If approved, the additional tax would bring in well over $150 million annually to boost support for K-12 classroom instruction.

Missouri: Three tax-related questions will be posed to Missouri voters in November.  Two are competing tobacco tax increase measures of 23 and 60 cents per pack.  The third measure would prevent state lawmakers from reforming their sales tax by expanding its base to include services in addition to currently taxed tangible goods.

Oklahoma: Oklahoma state question 779, to increase Oklahoma's sales tax 1 cent to fund teacher pay increases and other educational expenses, will appear on the state's ballot this November.

Oregon: Voters in Oregon will have the final say on a proposal to increase taxes on corporations this fall. Measure 97 (previously known as IP-28) 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 tax on income (6.6 percent on income up to $1 million and 7.6 percent on income above $1 million) or a minimum tax on sales ($150 to $100,000). Measure 97 would eliminate the $100,000 cap on the sales-based portion of corporate minimum tax and apply a 2.5 percent rate to sales above $25 million.  If passed the measure would generate $3 billion in new revenue earmarked specifically to education, health care, and services for senior citizens.

Laying the Groundwork for Significant Tax Cuts, Tax Shifts, and Tax Reform in 2017:

The saying "after the calm comes the storm" may prove true for state tax policy debates next year.  Lawmakers in more than 20 states have already begun to lay the groundwork for major tax changes in 2017, most with an eye towards cutting personal income taxes and possibly increasing reliance on consumption taxes.  Lawmakers in energy dependent states including Alaska, Louisiana, West Virginia and New Mexico will need to continue to find long-term revenue solutions to their growing revenue problems.  Illinois and Washington lawmakers will also be debating significant revenue raising options.  Governors in Nebraska, Arkansas, Kentucky, Ohio, Arizona and Maryland will take the lead on tax cutting (and possibly income tax elimination) proposals.   Mississippi lawmakers are currently meeting to discuss ways to shift the state's reliance on income taxes towards "user- based" taxes (i.e. regressive consumptions taxes).  And, Kansas lawmakers will likely revisit the disastrous tax changes under Governor Brownback.  


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 

 


State Rundown 12/22: Looking Ahead to 2016


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As the year comes to a close, several tax bills are already being debated in states across the country. ITEP is closely following those proposals because they will likely dominate state headlines in 2016. In the new year we will write more about state tax policy trends for 2016, but in the meantime, here are some of the big state tax policy developments happening now:

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There are bright signs on the horizon in Alaska. Gov. Bill Walker recently proposed a progressive income tax to address the state’s budget implosion, brought on by declining oil and gas revenues. Alaska has not had a personal income tax since 1980, when massive oil deposits were discovered on state land. Walker’s proposal would set the state income tax at six percent of what Alaskans pay in federal income taxes. The governor would also raise the state’s gasoline tax, which has not increased in 45 years. To learn more, check out this post on the Tax Justice Blog.

Florida Gov. Rick Scott will continue to push his $1 billion hodge-podge of tax cuts, though even legislators from his side of the aisle balk at the price. The package includes sales tax holidays for back-to-school shopping and hurricane preparedness and a tax break for college students’ textbooks. But those measures are mere leaves for the massive corporate tax cuts at the core of the proposal: corporate income tax cuts worth $770 million annually and a sales tax break on commercial rents that will cost $339 million over the biennium. House Speaker Steve Crisafulli says the governor’s plan may not be possible in its entirety. The state will post a one-time surplus of $635 million next year, but much of that money will go to support public education. Furthermore, a one-time cash infusion won’t pay for tax cuts that recur year after year.

Louisiana Gov.-elect John Bel Edwards will push to double the state’s EITC as part of his plan to reduce poverty in the state. As we outlined in a previous blog post, the move by Edwards is one of a number of encouraging signs for tax justice advocates. The governor-elect also appointed a moderate Republican, former Lt. Gov. Jay Dardenne, to be the state’s budget chief. Dardenne could have the skills to get a revenue-raising tax reform through the legislature since he was able to do so in the early 2000s. Louisiana faces a $1 billion deficit next fiscal year.

Mississippi lawmakers are set to push for tax cuts again next year after a failed attempt to pare back and even eliminate the personal income and corporate franchise taxes in 2015. While the Mississippi Economic Council for Transportation is calling on lawmakers to raise close to $400 million through the gas tax to pay for a long list of transportation infrastructure projects, Gov. Phil Bryant has said “any tax increase must be offset by corresponding tax cuts."  Given the nature of the tax cuts proposed last year, such a plan would likely result in a significant tax reduction for the state’s wealthiest residents and a hike on low- and moderate-income working families.

Virginia Gov. Terry McAuliffe’s budget proposal unveiled this month includes corporate and personal income tax cuts.  The governor wants to cut the state’s corporate income tax rate from 6 percent to 5.75 percent. The proposal would cost $64 million in state revenues. McAuliffe claims that these changes are necessary to compete with neighboring North Carolina, which has repeatedly slashed its corporate tax rate in recent years. But an analysis by The Commonwealth Institute says these claims are false. They point out that two-thirds of Virginia corporations pay no income tax despite record profits, and that the governor’s proposed tax break would help a few large companies while providing no benefits for small businesses and families. They also note that recent history does not provide much reason to be optimistic about the Governor’s plan: a 2009 tax break for manufacturers, for example, failed to spur job growth in that sector. The governor also wants to cut the personal income tax through slightly increasing the size of the personal and dependent exemptions.  Such a proposal will only cut taxes by a little more than $20 million a year and ITEP found that more than a quarter of taxpayers, primarily low- and moderate-income working families, will see no benefit from the proposal. 

 


State Rundown 12/3: Who Needs A Budget?


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Pennsylvania leaders have again pledged that a budget deal is in reach, despite the collapse of a recent compromise (and, of course, the compromises before that). The state is also in its sixth month of stalemate. Gov. Tom Wolf says that negotiations are down to “details and language,” with revenue raising measures being a sticking point. Legislative leaders have ruled out a broad-based tax increase so negotiators are working on a way to raise $600 million without a sales tax rate increase. Rather, a wider range of goods and services will be subjected to sales tax, including admission to museums, amusement parks, and golf courses. A proposed property tax reduction is no longer under consideration. Both houses of the legislature plan to work through the weekend on reaching a deal.

Mississippi leaders will push forward with tax cuts next legislative session even though revenue collections are sluggish enough to threaten mid-year budget cuts. Gov. Phil Bryant and Lt. Gov. Tate Reeves, both recently reelected, will try again to push tax cuts after being defeated during the last session. A likely target is the state’s business franchise tax, which is a levy on a business’s property used, invested, or employed. Eliminating the tax, which brings in $245 million annually, is a prime item on both men’s agenda, and bigger Republican majorities in the legislature make it a possibility. House Republicans are just on vote shy of the 3/5 supermajority required to pass a tax cut. Mississippi’s Legislative Black Caucus warned that the state would be unable to afford a deep tax cut like the ones proposed by leaders last session.

Florida Gov. Rick Scott has never met a tax cut he doesn’t like, and if he has his way the upcoming legislative session will give him plenty to love. Scott wants the legislature to pass $1 billion in tax cuts aimed at businesses to fulfill a campaign promise. So far, leaders in the Senate have balked at the hefty price tag, arguing that the governor shouldn’t push business tax cuts at the same time he wants to rely on property tax increases for more school funding. Budget officials estimate that Florida will see a surplus of $635 million this fiscal year, but some argue it would be irresponsible to use that one-time money for permanent cuts. In a rare move, Scott appeared before a House panel to argue that his tax cuts would be good for the state’s economy. A recent editorial in the Sun-Sentinel pushed back on the governor’s claims, saying that eliminating corporate income taxes for manufacturers and retailers won’t address Florida’s problems. 

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Do you have a exciting piece of state tax news that should be featured in the State Rundown? Send it to Sebastian at sdpjohnson@itep.org. And don't forget to sign up for the Tax Justice Digest and follow ITEP on Facebook and Twitter!


State Rundown 10/16: More Cuts, Less Funding


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The Clarion-Ledger reports that transportation funding could be a “sleeper issue” in Mississippi’s upcoming election. The state has not raised its gas tax, right now at 18.4 cents per gallon, since 1987 and road conditions reflect the lack of investment. Last fall, state highway officials were forced to tell farmers and other businesspeople that crucial bridges connecting fields and ports were off limits to heavy trucks. Many decided to flout the state’s rules and send heavy trucks across the deteriorating bridges, which have collapsed on occasion. The Department of Transportation estimates that $400 million a year in additional revenue will be needed just to maintain current road conditions.  

Low oil prices pose a challenge for state budgets in Texas and Oklahoma. Texas Comptroller Glenn Hegar lowered revenue projections by $2.6 billion from his January estimate, citing lower economic growth than anticipated and undercutting the fabled “Texas Miracle” narrative of low taxes leading to gangbusters economic expansion. Meanwhile, Oklahoma Finance Secretary Preston Doerflinger reported that general fund apportionments were below projections last month due to falling oil prices and accompanying job loss. Notably, while personal and corporate income tax revenues exceeded projections, sales and gross receipt tax revenues were far below projections. Many conservative lawmakers advocate a move from income to consumption taxes, but Oklahoma’s example indicates that such a move could be bad for budget stability.

Florida Gov. Rick Scott wants more tax cuts and additional funds for corporate tax incentives, but so far the legislature is not biting. Scott pledged during his reelection campaign last year to cut taxes by $1 billion. He is almost halfway there after lawmakers passed a $427 billion package of tax cuts during the most recent legislative session, but even conservatives have yet to endorse a further round of cuts and more corporate giveaways. Senate President Andy Gardiner says $250 more in cuts could be possible, but balked at more money for corporate incentives. Meanwhile, Senate Democratic Leader Arthenia Joyner decried new tax cuts and more “corporate welfare” as “grand abdications of the public trust.”

Florida House lawmakers are considering a different tax plan that would not cut taxes but swap revenue sources. The House Tax and Finance Committee is exploring options that would allow it to reduce property taxes by increasing sales taxes. One proposal would exempt the first $1 million of a property’s appraised value from property tax liability and cover 98 percent of property in the state. In return, the sales tax rate would have to increase by 4.93 percentage points. Some lawmakers were outraged at the proposals, as poor Floridians already pay eight times as much of their income in sales taxes as the wealthy. An editorial in The Gainesville Sun notes that “Florida already has one of the most unfair tax systems in the country, and the sales-tax plan would only make it worse. Making Florida even more reliant on the sales tax would also force greater cuts of schools, safety-net programs and other government expenses whenever the state experienced a recession.”


Fiscal Year Finish Line Part I: Tax Cuts and Tax Shifts


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This is the first installment of our three part series on 2015 state tax trends.  The next article will focus on more positive developments: working family tax credits and revenue raising.  And the final article will discuss one of the most active areas of state tax policy in 2015: transportation funding initiatives.

Thumbnail image for finishline.jpgJuly 1st marked the end of most states’ fiscal years, the traditional deadline for states to enact new spending plans and revenue changes. The 2015 legislative sessions delivered lots of tax policy changes, both big and small. Some states finished early or on time, while others straggled across the finish line after knockdown budget battles. Still others are not yet done racing, operating on continuing resolutions until an agreement is reached. As of now, four states still do not have spending plans in place for the fiscal year that started July 1st (Illinois, New Hampshire, North Carolina, and Pennsylvania.  Alabama has until October to reach a budget agreement). 

A number of states continued the troubling trend of cutting taxes for the wealthy while asking working families to pick up the tab. These tax shift proposals make state tax systems less fair and can contribute to budget shortfalls down the road. Tax shifts come in many forms, though a shift from income taxes to consumption taxes is the most common and most regressive example. Sadly, tax shifts are here to stay; Arizona, New Mexico, Georgia and West Virginia could all see new proposals surface in next year’s legislative sessions.

Several states enacted or considered tax cuts without balancing lost revenue with other tax increases. Instead, these states cut spending or used one-time surpluses to justify long-term changes. The overwhelming majority of these proposals reduce taxes for the best off while doing nothing or little for everyone else, making a regressive tax landscape even worse.

Check out the detailed lists after the jump to see which states enacted or attempted to enact new tax shifts and tax cuts this legislative session:

 

Tax Shifts

Kansas (Enacted): The tax debate in Kansas was watched more closely than in any other state this year. After promising that massive tax cuts would pay for themselves back in 2012 and 2013, Gov. Brownback and anti-taxers were forced to admit the “experiment” went too far. After high melodrama – Gov. Brownback tearfully urging lawmakers to vote for a sales tax hike, staunch anti-tax legislators breaking their anti-tax pledges, and lawmakers accusing Brownback of blackmail – state leaders passed a bill that increased taxes. Governor Brownback claimed that despite the increase, Kansans were still better off because of his earlier tax cuts. But an ITEP analysis revealed that talking point as fiction when it showed that lower-income taxpayers will be paying more than they did prior to Brownback taking office.

Ohio (Partially Enacted): Earlier in the year, Gov. Kasich proposed a large-scale tax shift which would have paid for significant personal income tax cuts with much higher sales taxes.  Legislators agreed to a budget with a net tax cut of $1.85 billion over two years focused just on cutting personal income taxes. The move is sure to make the revenue outlook worse in Ohio and will undermine investments in priority areas like education, infrastructure and healthcare. ITEP’s analysis of the compromise plan found that the top one percent of Ohio taxpayers will get half of the income tax cuts – an average annual tax break of $10,236 for those making $388,000 or more. Meanwhile, the bottom 20 percent of taxpayers will see their taxes increase by an average of $20.

Maine (Partially Enacted): Gov. Paul LePage proposed a costly, sweeping tax shift package back in January that would have resulted in a significant shift away from progressive personal income taxes and 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. Thankfully, despite its flaws the final tax reform package passed by the legislature over the governor’s veto will actually improve the state’s tax code.  Among the major tax changes it includes are: 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. Maine 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 lessens the regressivity of the state’s tax code.

Mississippi (Failed): Legislators defeated efforts to pass significant tax shifts this legislative session. Lt. Gov. Tate Reeves’s proposal to cut income and corporate franchise taxes by $555 million over 15 years died in the House, while House Speaker Philip Gunn’s plan to phase out the state income tax died in the Senate. Opponents of the cuts noted that they would sap K-12 and higher education budgets while shifting the burden of funding crucial services to the local level.

Idaho (Failed): Thanks in part to ITEP’s analyses, legislators ended the session without enacting a regressive flattening of the state’s income tax. Had that proposal passed, it would have provided an average tax cut of nearly $5,000 per year to the state’s wealthiest taxpayers while raising taxes on most middle-income families. Instead, lawmakers agreed to simply raise the state’s gas tax by 7 cents (the first increase in 19 years) and boost vehicle registration fees by $21 without a corresponding tax cut.

Michigan (Still Active): In May, voters rejected a ballot proposal that would have raised sales taxes, gasoline taxes, and vehicle registration fees to pay for improvements to the state’s deteriorating infrastructure.  Since then, the Michigan House agreed to an alternative plan that would fund roads by repealing the state’s Earned Income Tax Credit (EITC), raising diesel taxes, indexing gas and diesel taxes to inflation, and transferring money away from other public services.  Fortunately, the most regressive component of this plan—repealing the EITC—was not included in the package passed by the state Senate.  But unlike the House, the Senate would implement a tax shift whereby a regressive gasoline tax hike is paired with a cut in the state’s income tax rate that would primarily benefit high-income taxpayers.  As of this writing, it is still unclear what, if any, compromise will be reached between the House and Senate.

North Carolina (Still Active): Lawmakers have reached a budget impasse (which seems to be a yearly ritual in the Tarheel state) and had to pass a stop gap spending measure to keep government functioning while they sort out their differences.  Several spending priorities are at the center of the House and Senate standoff as well as proposed tax changes included in the Senate budget: deeper cuts to the personal income tax, adding more services to the sales tax base, slashing the business franchise tax by a third, and additional corporate income tax cuts.  It will likely take North Carolina lawmakers months to sort out their differences.

Pennsylvania (Still Active): The budget showdown between Gov. Tom Wolf and the state legislature will continue through the summer. Stating that “the math doesn’t work”, Governor Wolf vetoed the entire budget lawmakers delivered to him in the final days before the start of the fiscal year.  Governor Wolf’s preferred budget included a property tax reform measure and additional spending for education (both paid for with higher personal income and sales taxes) and a new tax on natural gas extraction.  While Republican lawmakers also favor reducing (or even eliminating) school property taxes, there is no common ground on how to achieve that goal and most are adamantly opposed to a severance tax.  Lawmakers will begin to hammer out a compromise early next week and the government will operate in a partial shutdown mode until the state has a budget in place for the new fiscal year.

South Carolina (Failed): South Carolina lawmakers spent the majority of the session exploring ways to improve the state’s crumbling infrastructure while also cutting taxes. Needless to say, this effort sparked enormous debate across the state.  Three proposals were heavily debated: the Governor’s shift away from income taxes in favor of a higher gas tax, a House-passed plan that would have combined some tax increases with a much more modest income tax cut and a Senate Finance plan which would have increased revenues without an income tax cut.  Ultimately, however, the session ended with no income tax cuts, no gas tax hikes, and no progress toward a more adequately funded transportation network. 

 

Tax Cuts 

Arkansas (Enacted): Gov. Asa Hutchinson fulfilled his campaign promise of passing a middle class tax cut. The governor’s plan introduces a new income tax rate structure for middle income Arkansans.

Florida (Enacted): The legislature approved a $400 million package of tax cuts after the resolution of a deadlock over healthcare spending; Florida is expected to lose federal aid to state hospitals, and many lawmakers were reluctant to accept Medicaid dollars offered under the Affordable Care Act. In the end, the size of the tax cuts relative to those initially proposed by Gov. Rick Scott was reduced by almost half in order to cover healthcare costs. The package of cuts includes tax cuts for cell phone and cable bills, college textbooks, and sailboat repairs that cost more than $60,000.

Montana (Failed): The legislature failed to override Gov. Steve Bullock’s vetoes of multiple bills that would have cut personal income tax rates. Opponents argued that the state already faced a $47 million deficit and that the majority of the tax cuts would have flowed to the state’s highest-income taxpayers (a fact confirmed by multiple ITEP analyses). In explaining his veto, Gov. Bullock also made clear that “the experience of other states shows that decimating your revenue base to benefit large corporations and the wealthiest individuals does not work to stimulate the economy.”

Nebraska (Failed): Despite the large number and diversity of tax cut bills circulating in Nebraska this session, no significant cut was enacted.  However, that does not mean that the proposals are off the table.  Rather, expect the tax cutting debates to carry over into next session.

North Dakota (Enacted): For the ninth straight year, North Dakota lawmakers approved cuts to the state’s personal and corporate income taxes.  Starting next year, the corporate income tax rate will drop by 5 percent, and personal income tax rates will be reduced by 10 percent across the board. 

Rhode Island (Enacted): Middle- and upper-middle income older adults will now be fully exempt from paying taxes on Social Security income.  The exemption applies to Rhode Islanders age 65 and over with income below $80,000 (single) or $100,000 (married).  This tax break will largely benefit middle- and upper-middle income older adults since low-income seniors are already exempt from paying taxes on Social Security income in the state.

Tennessee (Failed): Efforts to repeal the Hall Income Tax failed again after the legislature did not act on two repeal measures before the close of session. The Hall Tax is a 6 percent tax on income from stocks, bonds and dividends that is the state’s only tax on personal income. A significant portion of the revenues raised by the tax supports county and municipal governments. Opponents of the Hall tax won a small victory, however, as they succeeded in increasing the exemption allowed for citizens over the age of 55.

Texas (Enacted): Lawmakers passed a number of new tax cuts this year. The first change, a $10,000 increase in the homestead exemption for property taxes, has been described as “the least-worst way to under-invest” since the homestead exemption is spread evenly across taxpayers and the bill will replace local property tax revenue with more state aid to schools. The second change, a cut in the business franchise tax rate of 25 percent, will cost the state $2.6 billion in revenue in a way that decidedly favors the wealthy and corporations.

 


State Rundown 6/24: High-End Boats and Low-End Credits


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In a textbook example of a silver lining, working families in Colorado could see an Earned Income Tax Credit (EITC) enacted this year thanks in part to the state’s Taxpayer’s Bill of Rights (TABOR). Enacted in 1992, TABOR limits the amount of revenue that the state and local governments can collect and spend. Any revenue over the TABOR limit must be sent back to taxpayers through a complex set of formulas. While TABOR is inflexible and prevents the state government from responding effectively to crises, in this case it has worked to the benefit of Coloradans near the bottom of the income scale. Once the state EITC is triggered as a TABOR rebate, it becomes a permanent tax credit set at 10 percent of the federal level. The EITC will benefit 300,000 working families in the state and boost 75,000 individuals – half of them children – out of poverty.

States all along the East Coast are competing for a slice of the yacht business through hefty sales tax breaks, as reported in The Washington Post. New York recently passed a law limiting sales taxes on yacht purchases to $20,000 to counter Florida’s 2010 sales tax limit of $18,000. (For context, an owner purchasing a $2 million yacht would save $150,000 in taxes under New York law.) Florida struck back at New York by adopting a $60,000 sales tax limit on yacht repairs, and New Jersey copied their rival to the north by adopting the same $20,000 limit on purchases. While such sales tax breaks are usually justified as protecting the jobs of yacht builders, in reality the primary beneficiaries are yacht owners. As ITEP’s Matt Gardner notes in the article, "It's just a deluded approach to tax policy to say that you have to exempt these transactions or else they will move elsewhere." 

Lawmakers in Washington are facing a budget impasse ahead of their July 1 deadline. Initially, House lawmakers sought to levy a state capital gains tax on investors who earn more than $25,000 a year from investments. But the House dropped that plan this week when the state Senate refused to pass a new tax but indicated a willingness to get rid of some tax exemptions. Lawmakers have a little over a week left to agree on the budget before the state government begins a partial shutdown.

California lawmakers reached a deal with Gov. Jerry Brown, passing a $115.4 billion budget that includes a new EITC for working families. This new EITC is worth approximately $380 million and is expected to help 2 million Californians. 

 


State Rundown 6/18: Promising Gas Tax Developments, Pandering Tax Cuts


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Wisconsin lawmakers are considering eliminating the state’s Alternative Minimum Tax (AMT), a move that would send tax breaks to the rich and nothing to more than 80 percent of Wisconsinites. The AMT is meant to ensure that wealthy individuals pay a minimum level of income tax, and is therefore assessed at higher incomes. Ironically, as state lawmakers and Gov. Scott Walker slashed top marginal income tax rates for the wealthy, more of these taxpayers were subjected to the AMT. The proposal to eliminate the tax would cost more than $27 million annually in lost revenue.

The Rhode Island House of Representatives unanimously approved the 2016 budget deal on Tuesday night, sending the measure to the Senate Finance Committee for consideration. The unanimous approval cleared the House by 7:30pm, and has been touted as the quickest budget vote in at least 30 years. The $8.7 billion bill exempts Social Security income from the personal income tax for Rhode Islanders over 65 if their income is below $80,000 (single) or $100,000 (married) – a change that will benefit mostly wealthy retirees, as we’ve argued before. The plan also phases out sales taxes on utility bills for non-manufacturing businesses. On a positive note, the budget increases the states refundable Earned Income Tax Credit (EITC), a tax break for working families, from 10 to 12.5 percent.

The Florida Legislature approved a $400 million package of tax cuts on Monday, and Gov. Rick Scott is expected to sign the measure even though it reduces taxes by less than he wanted. Passage of the measure comes after the resolution of a deadlock over healthcare spending; Florida is expected to lose federal aid to state hospitals, and many lawmakers were reluctant to accept Medicaid dollars offered under the Affordable Care Act. In the end, the size of the tax cuts relative to what Scott proposed was reduced by almost half in order to cover healthcare costs. The package of cuts includes tax cuts for cellphone purchases and cable bills, college textbooks, and sailboat repairs that cost more than $60,000.

As the summer travel season heats up, lawmakers in states across the country are mulling gas tax increases as a way to boost road construction and maintenance budgets. Tennessee Gov. Bill Haslam plans to barnstorm the state to stress the need for more transportation funding, though he’s stopped short of endorsing a gas tax increase. Tennessee’s gas tax hasn’t risen in decades, and the average motorist there is paying a third less per mile for roads than a generation ago. An editorial in The New York Times, meanwhile, argues that New Jersey lawmakers must raise their state gas tax to pay for crumbling roads. At 14.5 cents a gallon, the state tax is less than a third of New York’s tax and trails Pennsylvania and Connecticut by similar margins. Meanwhile, New Jersey has 577 structurally deficient bridges and 300,000 potholes. Efforts to increase state gas taxes also received a boost from a recent study that finds gas tax increases do not result in penny-to-penny increases in the price that motorists pay at the pump.

A Delaware House committee will consider a bill that would make their income tax rate structure more progressive. Currently, the top personal income tax rate is 6.6 percent for income above $60,000. The new proposal would institute a rate of 7.1 percent for income between $125,000 and $250,000, and a rate of 7.85 percent for income above $250,000. State officials say the changes would increase revenue by $97.5 million over the next two years. 


State Rundown 4/20: State Houses Consider Cuts


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Legislators in the Pennsylvania House released an alternative to Gov. Tom Wolf’s tax reform plan last Tuesday. The House plan would increase income and sales tax rates to provide significant property tax cuts, as would the governor’s plan. One difference is that the House plan would raise the sales tax rate to 7 percent but leave the base unchanged, while Wolf’s plan would increase the sales tax rate to 6.6 percent and expand the sales tax base. The House plan also would not provide property tax rebates for renters as the governor’s plan would. While the House plan would provide even more funding for property tax cuts, ($4.9 billion vs. $3.9 billion under the governor’s plan) their package is essentially revenue neutral and does not include increased investments in public education which is a signature piece of the governor’s plan. The House Finance Committee is expected to vote on the House plan next week. Stay tuned to the Tax Justice Blog for a more in-depth analysis of tax reform efforts in Pennsylvania.

The Ohio House is set to approve Gov. John Kasich’s proposed tax cuts while nixing his proposals for new tax revenue. Kasich originally proposed $5.7 billion in income tax cuts and $5.2 billion in consumption tax increases over two years– specifically an increase in the sales tax rate from 5.75 percent to 6.25 percent, an expansion of the sales tax base, and increases in the commercial activities tax and severance tax on natural gas extraction. The House is expected to pass a smaller income tax cut and to reject all of the proposed tax increases; whereas the governor wanted to lower the top personal income tax rate to 4.1 percent, the House will likely reduce the rate to just under 5 percent. At the same time legislators blocked the governor’s proposed cuts in public school funding, a welcome but contradictory move.  Stay tuned to the Tax Justice Blog for a more in-depth analysis of tax cutting efforts in Ohio.

The South Carolina House approved a bill by a veto-proof majority that would increase the states gas tax by 10 cents and provide most residents with a modest income tax cut of $48. It is expected to generate $400 million in new revenue for road construction, tax cuts excluded. The margin of passage is important because Gov. Nikki Haley, who vowed not to increase the gas tax without significant income tax cuts, feels that the cuts passed by the House are not enough. The bill also does not contain the Department of Transportation reform measures demanded by Haley, who seeks to assert more control over road funding and construction. The Senate is also considering a road funding plan.

 

Following Up:
Florida: Senate President Andy Gardiner says the $600 million in tax cuts championed by Gov. Rick Scott and passed by the House last week are “on the shelf” until the fight over Medicaid expansion is resolved. Federal subsidies to Florida for healthcare providers who treat the poor are scheduled to expire, but the governor is resistant to expanding Medicaid coverage under Obamacare to make up for the lost revenue.

 

In Case You Missed It:

  • ITEP released a report on undocumented immigrants’ contributions to state and local tax systems. The report found that undocumented immigrants paid an estimated $11.84 billion in taxes in 2012. Check out this blog post for more!
  • In honor of Tax Day, the Tax Justice Blog highlighted the great work done by our state partners around tax issues.  

 


State Rundown 4/15: New Cuts and New Revenue


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Idaho legislators ended their session very early on Saturday morning without enacting a regressive flattening of the state’s income tax.  Instead, lawmakers agreed to simply raise the state’s gas tax by 7 cents (the first increase in 19 years) and boost vehicle registration fees by $21.  Unfortunately, the bill also redirects some general fund dollars away from other core public services to spend on roads and bridges instead—but that feature of the law will lapse after two years.  Assuming Governor Butch Otter signs this legislation, Idaho will become the 7th state to raise or reform its gas tax in 2015.

The Florida House passed a $690 million package of tax cuts last week that now awaits approval by the Senate. The package of cuts closely resembles the proposal floated by Gov. Rick Scott in January and includes a cut in the communications services tax as well as tax cuts targeted at “small businesses, college students, military veterans, farmers, gun clubs, school volunteers, high-tech research, widowed and disabled homeowners.” Dissenting legislators argued that the impact of the revenue losses from the tax cuts would outweigh the benefit for most Floridians.

Following Up:
Alaska: While proposals to institute an income tax face an uphill climb, Alaska’s revenue problems continue to worsen. The state’s oil production tax is set to produce the least amount of revenue in its four decade existence, and state senators voted to repeal the state’s film tax credit program to save money.  

States Starting Session This Week:
Louisiana (Monday)

States Ending Session This Week:
Maryland (Monday)

 


State Tax Policy Trends in 2015: Not All That "Trickles Down" Is Rain


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The theory that tax cuts for the affluent will eventually trickle down to everyone else is shopworn, yet supply-side adherents keep promising the public that the rich can have their tax cuts and the rest of us will eat cake too.

Despite 35 years of data showing this to be false, the notion has seduced enough policymakers to keep the lights on at Art Laffer’s house.

At least 10 states have tax cut proposals in motion that, unlike the tax shifts we reviewed previously, will not offset cuts by raising other taxes but by raiding surpluses or reducing spending. The overwhelming majority of these proposals will reduce taxes for the best off while doing nothing or little for everyone else, making a regressive tax landscape worse.  Gov. Asa Hutchinson’s overhaul of his state’s income tax and Mississippi Gov. Phil Bryant’s proposal to introduce a state Earned Income Tax Credit (EITC) would actually benefit low- and moderate-income families, but most of the other proposals would lead mainly to benefits for the wealthy.

Over time such tax cuts exacerbate income inequality and stymie opportunity for the masses. Taxes and spending are on a balance scale. Top-heavy tax cuts and their purported economic benefits do not trickle down a rolling hill; they tip the scale in favor of the rich while depriving states of necessary revenue to adequately fund basic services, including education, public safety, infrastructure health and other priorities. Below are some pending proposals:

Arkansas: Gov. Asa Hutchinson fulfilled his campaign promise of passing a middle class tax cut. The governor’s plan introduces a new income tax rate structure for middle income Arkansans. To help pay for the measure the capital gains exemption was reduced from 40 to 50 percent. Using data from ITEP, Arkansas Advocates for Children and Families explains that the taxpayers who benefit from capital gains exemptions are wealthier families.

Florida: Once again, Florida Gov. Rick Scott is pushing lawmakers to enact an unusual hodgepodge of tax cuts.  Under his proposal, taxes on cable TV and cell phone usage would drop by 3.6 percentage points, manufacturing machinery and textbooks would both be exempted from the sales tax, the corporate income tax exemption would be raised from $50,000 to $75,000, and yet another back-to-school sales tax holiday would be held this summer.  The overall cost of this package would be roughly $700 million, and while it’s too early in the session to gauge the chances of passage, there is apparently some skepticism toward the plan in the state legislature.

Idaho: The big tax shift sought by some Idaho lawmakers is off the table for now, but Gov. Butch Otter made clear all along that he prefers a straight-up cut to the state’s corporate income tax rate, and its top personal income tax rate, from 7.4 to 6.9 percent.  Our analysts recently found that such a tax cut would make Idaho’s decidedly regressive tax system even more unfair.  More than three out of every four dollars in personal income tax cuts would flow to the wealthiest 20 percent of households, and members of the top 1 percent would see an average tax cut of over $3,500 each year.  These cuts would come on top of a very similar package of regressive income tax reductions enacted in 2012.

Mississippi: Lawmakers in the Magnolia State can’t seem to get enough of tax cut proposals. In addition to the tax shift proposal passed by the House recently (and written about here), lawmakers are debating a variety of tax cutting measures, which include decreasing personal and corporate income tax rates, introducing a nonrefundable EITC, and eliminating the corporate franchise tax.

Montana: The Montana legislature has approved a bill that would cut personal income tax rates across the board and reduce state revenues by roughly $42 million per year.  ITEP analyzed similar, earlier versions of the cut and found that high-income households would be the largest beneficiaries and that low-income and middle-income taxpayers, who currently face the highest overall state and local tax rates, would receive little or no benefit.  Governor Steve Bullock is likely to veto the plan because of its impact on the state’s ability to fund vital public services.

Nebraska: With the sheer number and diversity of tax cut bills circulating in Nebraska this winter, it seems certain some cut will be enacted.  Much of the focus so far has been on reducing property taxes, a stated priority of newly elected Gov. Pete Ricketts.  Property tax proposals include creating a new refundable, targeted property tax circuit breaker credit for homeowners and renters, introducing a local income tax to reduce reliance on property taxes for school funding, hiking the sales tax rate to pay for a bump in a statewide property tax credit, and increasing personal and corporate income tax rates to pay for property tax cuts. State business leaders, however, have made it clear that income tax cuts are their main concern, and Governor Ricketts has not ruled out the possibility.  One plan being floated would reduce personal and corporate income tax rates over eight years, giving the biggest benefits by far to the richest Nebraskans.

North Carolina (updated 4/6/2015): Two years after North Carolina enacted a sweeping tax cut package, state lawmakers have returned this year with more tax cutting plans that will bust the budget to benefit wealthy residents and profitable corporations.  Senate Republicans have unveiled another round of personal income tax cuts that cost more than  $1 billion when fully enacted and would slash millions of dollars in corporate income taxes. There has also been talk of reducing taxes on capital gains income, restoring items eliminated in 2013 including a deduction for medical expenses and historic preservation tax credit.  What makes these proposals even more egregious is the state’s anticipated revenue shortfall of almost $300 million this year. Lawmakers were forced to close a $500 million revenue gap last year with deep spending cuts after underestimating the steep cost of the tax cuts passed in 2013.  

North Dakota: Just a few short months ago, North Dakota lawmakers were giddy about the idea of using booming oil and gas tax revenue to pay for an elimination or significant reduction of the state’s personal income tax.  But as gas prices plummeted, reality set in and the House approved a scaled back proposal – a 10 percent across-the-board reduction in personal and corporate income tax rates (Gov. Dalrymple also proposed a 10 percent personal income tax cut).  North Dakota lawmakers enacted similar plans in 2011 and 2013, slowly chipping away at the two taxes.

Tennessee: In what’s becoming an annual tradition, multiple Tennessee lawmakers have proposed (subscription required) repealing the state’s “Hall Tax”—a modest 6 percent income tax on interest, dividends, and capital gains income.  As we showed in our recent Who Pays? report, the Hall Tax is a rare progressive bright spot in a tax system that tilts overwhelmingly in favor of affluent households.  Fortunately, leaders in the state’s House and Senate are reportedly unenthused by the idea since Tennessee’s wealthiest households recently benefited from cuts in estate, inheritance, and gift taxes.  And while it’s discouraging that the governor isn’t making principled tax fairness arguments against these proposals, he is very skeptical that the state can afford to get rid of the Hall Tax right now.

Texas: Lawmakers in the Lone Star State hope to enact a tax cut package that would cost about $4 billion over a two year period.  Governor Greg Abbott’s top priority is cutting the business franchise tax, and he has said that he will veto any budget that does not include such a cut.  So far, the main options for reducing business franchise taxes include cutting the rate from 1 to 0.85 percent or raising the exemption from $1 million to $4 million.  The governor would also like to see school property taxes cut, and the Senate seems happy to go along with that idea.  Options currently under discussion include raising the $15,000 homestead exemption to $33,625, or converting it to equal 25 percent of home value.  As we explain in this policy brief, the percentage-based option is less fair than a flat-dollar exemption.  But it’s also important to keep in mind the context provided by Dick Lavine of the Center for Public Policy Priorities: “There’s better uses of this money … than tax cuts.”


State Rundown 3/4: Other, Less Controversial Speeches before Legislatures


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Pennsylvania Gov. Tom Wolf unveiled his budget proposal this week, delivering his state of the state address before a joint session of the state legislature. Wolf’s proposal would largely shift the responsibility for funding  public education from local property taxes to the state sales and income tax. The flat personal income tax rate would increase from 3.07 to 3.7 percent, and the sales tax rate would rise from 6 to 6.6 percent and would apply to additional goods and services. These changes would bring in an additional $3.9 billion in general fund revenue, most of which would be dedicated to reducing property tax bills by an average of $1,000 per household. About $540 million in new revenues would go to public schools and universities. Wolf also proposed a new severance tax on oil and gas extraction that would replace the state’s one-time impact fee on drilling new wells, with new revenues also earmarked to public education. In a bid to gain bipartisan support, Wolf also proposed significant corporate income tax cuts paid for by closing loopholes and continuing former Gov. Tom Corbett’s plan to phase out the state’s capital stock and franchise tax. (Stay tuned to the Tax Justice Blog for our take on the plan.)

Alabama Gov. Robert Bentley presented his budget proposal to the state legislature this week under the cloud of a $700 million deficit. The governor proposed $541 million in tax increases across eight areas, including the corporate and individual income taxes, excise taxes on tobacco products, and sales and rental taxes for cars. The cigarette tax would increase by 82.5 cents per pack, with commensurate increases for other tobacco products, bringing in $205 million in additional revenue. Increasing the tax rate on automobile sales and rentals from 2 to 4 percent would increase revenues by $231 million. The governor’s finance director assured legislators that the proposed changes would still leave Alabama near the bottom in rankings of tax revenues per capita, but Bentley’s plan will do little to address the regressive nature of the state’s tax system.  (Stay tuned to the Tax Justice Blog for our take on the plan.)

Florida Gov. Rick Scott was the third governor to give a state of the state address today, pitching a combination of tax cuts and spending increases to leery legislators. Scott touted his “Keep Florida Working” budget proposal, which includes $673 million in tax cuts from a variety of sources, including the tax on communication services, sales taxes on college textbooks, and taxes on businesses and manufacturers. The bulk of the cuts -- $470.9 million in lost revenue – come from decreasing the tax rate on communication services (cell phones, cable, and satellite television) by 3.6 percent. Scott also pushed for more education funding and a tuition freeze on postgraduate education at state universities.

A new report from the North Carolina Budget and Tax Center reveals that tax cuts pushed by Gov. Pat McCrory (who is expected to release his budget plan this week) and the state legislature have hurt economic growth by starving the state of needed revenues. According to the report, if tax levels in the state were at pre-recession levels, North Carolina would have $3.2 billion additional dollars to invest in early childhood education, access to higher education, anti-poverty measures for senior citizens, affordable health care, wage subsidy programs and court access. The Budget and Tax Center also points out that even though middle- and low-income families saw their overall tax responsibility increase, the massive cuts for wealthy individuals left the state with an annual $1 billion budget gap.

 

States Starting Session This Week:
Alabama (Tuesday)
Florida (Tuesday)

State of the State Addresses This Week:
Alabama Gov. Robert Bentley (watch here)
Florida Gov. Rick Scott (watch here)
Pennsylvania Gov. Tom Wolf (watch here)

Governors’ Budgets Released This Week:
Alabama Gov. Robert Bentley (read here)
Pennsylvania Gov. Tom Wolf (read here)
North Carolina Gov. Pat McCrory (Thursday)

 


State Rundown 2/27: Gas, Sugar and Dodgers


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Iowa lawmakers passed, and Gov. Terry Branstad signed, a measure increasing the state’s gas and diesel taxes by 10 cents this week. The increase will generate about $200 million in new revenue each year that will help cover a shortfall in transportation funding. A recent poll showed Iowans almost evenly split on the measure, though the proportion of those in favor has grown by 19 percentage points since 2011. The increase could go into effect as early as this Sunday and will result in Iowa’s gas tax rate no longer being at its all-time historic low.

Two Illinois legislators recently introduced a measure that would tax high-sugar beverages. The bill, sponsored by State Sen. Mattie Hunter and State Rep. Robyn Gabel, would introduce a penny-per-ounce excise tax on beverages with over 5 grams of sugar per 12 ounces. It would produce $600 million in new revenue each year, to be earmarked toward programs promoting healthy eating and physical activity as well as prevention services in Medicaid. If passed, the measure would be the second tax on sugary drinks in the United States; the city of Berkeley, CA introduced such a tax via a ballot measure last year.

Integrity Florida released a report on corporate tax dodgers this week using ITEP data. They found that Florida taxpayers subsidized the seventeen Fortune 500 companies headquartered in the state, via state government contracts and direct subsidies, to the tune of about $2.5 billion. Meanwhile, these same companies have paid just over $945 million in all state taxes nationwide (including taxes paid to states other than Florida). In fact, even though Florida’s state corporate income tax rate is 5.5 percent (among the lowest in the country), the most profitable Fortune 500 companies have been paying less than half that rate. The report’s authors recommend more transparency around corporate profits and tax payments.

More business owners are taking advantage of a Kansas tax feature than previously predicted, further endangering the state’s fragile revenues. State lawmakers eliminated income taxes for owners of limited-liability corporations and S corporations as a part of Gov. Sam Brownback’s tax plan in 2012. The measure was expected to benefit 191,000 business owners, but 333,000 have since claimed the loophole at a cost to the state of $206.8 million. The governor’s staff, who originally claimed the feature would spur economic growth, says the increase in filers represents new businesses opening shop. Opponents say it’s unfair to exempt business owners from income taxes while requiring their employees to pay income tax, and that the exemption should be discontinued given the state’s $700 million deficit this fiscal year.

 

Governor’s Budgets Released This Week:
New Jersey Gov. Chris Christie (read here)
Louisiana Gov. Bobby Jindal (read here

 


State Rundown 1/29: You Put a Tax Cut In, You Take a Tax Cut Out


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In the latest twist out of Arkansas, a House committee stripped Gov. Asa Hutchinson’s proposed middle-class tax cut of a capital gains tax measure added just last week in the Senate. The governor’s proposal as passed by the Senate would have reduced the exemption on capital gains from the 50 percent exclusion passed in 2013 to the 30 percent exclusion in effect previously. The House bill would restore the 50 percent exclusion for one year, and then allow the exclusion to fall to 40 percent after that. The House version of the governor’s bill will cost $9 million more each year than the Senate bill. The move is likely to further alienate progressive groups in Arkansas, who previously offered tepid support for the governor’s plan while criticizing its omission of the working poor. Progressives were further angered by the governor’s budget proposal, which did not include promised increases in funding for pre-kindergarten. Arkansas Advocates for Children and Families notes that “Even before the 2013 capital gains tax cut, Arkansas already had one of the most generous capital gains structures in the nation.”

While many politicians and businesspeople decry inverted companies as unpatriotic for avoiding their US tax liability while taking advantage of all our country has to offer, a legislator in Virginia has other ideas. Sen. Ryan McDougle recently introduced a bill that would create a $5 million corporate income tax exemption for companies that have used an inversion to lower their US tax liability. Qualifying companies would need to make a $5 million capital investment in Virginia to open a facility or other business operation, and would be eligible for the exemption each year for five years. It’s just the latest move in the depressing race to the bottom on corporate taxes.

A Maryland state senator has offered a bill that would repeal a stormwater fee he once supported. Sen. James Brochin wants to get rid of the so-called “rain tax,” a hot issue in the last gubernatorial campaign, because he claims local jurisdictions have applied the fee unevenly and put businesses at a competitive disadvantage (this aspect of the law was a part of the bill at the time the senator voted for it). Brochin also regrets supporting a bill that indexed the state’s gas tax to the Consumer Price Index (CPI), saying, “If you took the CPI idea and you had passed it in 1993, 21 years later the gas tax would be $1.86 [per gallon]." His math is a little fuzzy. Indexing MD’s gas tax to inflation (CPI) since 1993 would mean the base rate would go from 23.5 cents to 38.5 cents.  On top of that, there’s a 5 percent sales tax on gas phasing-in that would add about 12 cents a gallon to the gas tax at today’s prices, for a total gas tax of 50.5 cents, not $1.86.  For the tax rate to hit $1.86, gas prices would have to be $29.50 per gallon – which won’t happen anytime soon.

Maine Gov. Paul LePage is expected to push his tax cut package in next week’s state of the state address. Under the governor’s proposed budget, individual and corporate income tax rates would be cut, the estate tax would be eliminated, and the sales tax would be broadened and increased. The governor described his plan as a way to move the state from an income-based tax system to a “pay-as-you-go” consumption-based tax system. In other words, the state would shift the way it funds public investments from relying on a progressive personal income tax to a broad- based sales tax which falls disproportionately on low- and middle-income families.

A bill to enact a property tax circuit breaker credit in Nebraska received a hearing in the state legislature today. The proposal, offered by Sen. Kate Bolz, would offer property tax rebates up to $1,200 to couples who make under $116,000 a year or individuals making under $58,000.  It is designed to target relief to residents whose property taxes or rents are high relative to their incomes. ITEP analyzed the bill and found that two-thirds of the benefits of the property tax circuit breaker credit would go to the bottom 40 percent of Nebraskan taxpayers.

Following Up:

  • North Carolina: NC Policy Watch drew attention to a new Berkeley study that shows the federal capital gains tax cuts under President George W. Bush failed to stimulate the economy. State leaders are pushing to eliminate North Carolina’s capital gains tax to increase investment.
  • Minnesota: A Senate committee voted to consider proposals to phase out the state’s tax on Social Security benefits as part of a larger tax package yesterday. Seniors and the Minnesota AARP voiced support for the measures, while some legislators balked at the price tag.
  • Mississippi: Gov. Phil Bryant’s plan to cut taxes drew more opposition, most recently in a Clarion-Ledger op-ed: “Bryant exuded optimism that the state's economy was in the best financial condition ever. He didn't dare mention that the primary source of income for Mississippians is transfer funds–namely federal funds.”

Things We Missed:

 

 


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.


The Best and Worst State Tax Policies of 2014


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2014. It was the best of times; it was the worst of times. Our position didn’t prevail in every state, but the cause of tax justice and fairness for working families made significant gains in a number of places. Below, the best and worst tax policies of the past year:

The Best

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Washington, DC takes the number one spot for enacting a progressive tax reform package this past summer. Unlike other jurisdictions that have used the guise of “reform” to cut taxes for the wealthy, the D.C. City Council cut the personal income tax rate for middle-class residents and expanded a number of provisions to assist working families, including the property tax circuit breaker and standard deduction. The council also expanded the city’s EITC for childless workers, one of the most effective strategies for lifting workers out of poverty and a longtime ITEP recommendation. The city partially paid for these reforms by broadening the sales tax base to include more services, limiting personal exemptions for better-off citizens, and making permanent its 8.95 percent income tax bracket on high-income earners.  Many additional changes are tied to revenue triggers, ensuring that the reform measures won’t wreck the city’s finances.

Washington Gov. Jay Inslee made sustainability and fairness the centerpiece of his 2015 budget proposal, announced this month. The proposal protects education spending and important services through a 7 percent capital gains tax on capital gains earnings above $25,000 per individual and $50,000 per couple. The governor also pledged to fund the state’s working families tax credit (the state’s Earned Income Tax Credit) through his proposed tax on carbon polluters, benefiting 450,000 Washington families. The proposal is the boldest by a Washington governor in some time.

Lawmakers in Minnesota and Maryland invested in provisions to give working families a lifeline. Minnesota expanded the property tax credit for homeowners and renters and increased the working family credit (the state’s EITC) and the dependent care credit. Maryland legislators expanded the refundable portion of the EITC, from 25 percent to 28 percent.

Alaska officials saw the light and decided to let their film tax credit expire five years early. The film tax credit has been notoriously ineffective in a number of states.

Vermont legislators increased homestead property taxes by 4 mills (cents per $100 of assessed value) and non-residential property taxes by 7.5 mills, while leaving rates unchanged for low and moderate-income taxpayers.

 

The Worst

Lawmakers in Wisconsin doubled down on their tax-cut fervor, reducing the bottom personal income tax rate from 4.4 percent to 4 percent and enacting another round of state-funded property tax cuts.

Voters in Tennessee permanently banned the state from enacting a broad-based personal income tax through a ballot measure that amends the state constitution, essentially tying the hands of future lawmakers and ensuring that the state’s tax system will remain among the most regressive in the nation.  Georgia voters approved an amendment to cap the state’s top personal income tax rate where it stands as of Jan. 1, 2015, which could lead to financial problems down the road and will prevent future Georgians from making needed investments.

Lawmakers in Missouri and Oklahoma enacted personal income tax cuts dependent on the state hitting revenue targets.  Oklahoma’s top personal income tax rate would drop from 5.25 to 4.85 percent while Missouri’s top income tax rate would drop from 6 to 5.5 percent; in Missouri, a new 25 percent exemption on pass-thru business income would be implemented.

Lawmakers in a number of jurisdictions – Washington, DC, Rhode Island, Maryland, Minnesota, and New York – increased the estate tax threshold, essentially giving the wealthiest residents in those states a huge, unnecessary tax break.

Florida lawmakers passed a hodgepodge of gimmicky sales tax holidays and exemptions for car seats, cement mixers, helmets, electricity bills, college meal plans and a host of legislator’s pet causes. The legislature also reduced the business franchise tax and cut motor vehicle fees, for a total of $500 million in lost revenue. 


Tax Policy and the Race for the Governor's Mansion: Florida 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 Florida.

florida.JPGIt’s back to the future in the Sunshine State, where voters have the choice of keeping current Gov. Rick Scott (R) or reelecting former Gov. Charlie Crist (D). Crist, who left the Republican Party in 2010 and became a Democrat in 2012, is attempting to pull a Grover Cleveland and become only the second Florida governor to serve two non-consecutive terms.

Taxes have been front and center in this election, which has grown increasingly negative. Scott, who delivered on his promise to cut $500 million in taxes this year, is pledging another $1 billion tax cut if reelected. The 2014 cuts were mostly comprised of a repealed motorist fee increase approved by Crist and the state legislature in 2009, saving motorists an average of $25 per vehicle and costing the state $395 million in revenue. The other $105 million in cuts came from a so-called “patchwork of awesomeness,” and features three sales tax holidays, the elimination of taxes on college meal plans, therapeutic pet food, cement mixers, child car seats and a hodgepodge of other giveaways. Sales tax holidays are notoriously gimmicky, as reported many times on this very blog; it should also be noted that Florida already had two of the holidays in place, so those cuts were not exactly new.

Scott’s proposed $1 billion tax cut is far more ambitious. He wants a constitutional amendment to keep property taxes from rising if the value of a home stays steady or declines. The state constitution already prevents annual property tax increases over 3 percent, hampering the ability of local governments to fund schools and pay for infrastructure projects. Scott would also seek a permanent tax cut for manufacturing machinery, additional sales tax holidays, cuts on vehicle registration fees and cellphones, and would phase out the sales tax on commercial leases. His goal is to contrast his enthusiasm for tax cuts with Crist’s record of raising taxes (mostly on cigarettes and car registrations) during the economic downturn. Recent budget forecasts bring into question whether Scott's plans are even financially feasible. 

Crist, meanwhile, charges Scott with advocating tax policies that help special interests and lobbyists at the expense of small-business owners and Florida families. He’s running on his record of tax cuts from his previous term, arguing that he cut property taxes for seniors and the middle class when he approved an increase in the homestead exemption in 2008. Republicans counter that Crist increased taxes by $2.2 billion the very next year to address budget shortfalls during the recession (like almost every other governor in the country). Crist has alleged that Gov. Scott raised property taxes, but his claims have been thoroughly debunked


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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On the heels of state Earned Income Tax Credit (EITC) expansions in Iowa, Maryland, and Minnesota and heated debates in Illinois and Ohio about their own credit expansions,  the Institute on Taxation and Economic Policy released a new report today, Improving Tax Fairness with a State Earned Income Tax Credit, which shows that expanding or enacting a refundable state EITC is one of the most effective and targeted ways for states to improve tax fairness.

It comes as no surprise to working families that most state’s tax systems are fundamentally unfair.  In fact, most low- and middle-income workers pay more of their income in state and local taxes than the highest income earners. Across the country, the lowest 20 percent of taxpayers pay an average effective state and local tax rate of 11.1 percent, nearly double the 5.6 percent tax rate paid by the top 1 percent of taxpayers.  But taxpayers don’t have to accept this fundamental unfairness and should look to the EITC.

Twenty-five states and the District of Columbia already have some version of a state EITC. Most state EITCs are based on some percentage of the federal EITC. The federal EITC was introduced in 1975 and provides targeted tax reductions to low-income workers to reward work and boost income. By all accounts, the federal EITC has been wildly successful, increasing workforce participation and helping 6.5 million Americans escape poverty in 2012, including 3.3 million children.

As discussed in the ITEP report, state lawmakers can take immediate steps to address the inherent unfairness of their tax code by introducing or expanding a refundable state EITC. For states without an EITC the first step should be to enact this important credit. The report recommends that if states currently have a non-refundable EITC, they should work to pass legislation to make the EITC refundable so that the EITC can work to offset all taxes paid by low income families. Advocates and lawmakers in states with EITCs should look to this report to understand how increasing the current percentage of their credit could help more families.

While it does cost revenue to expand or create a state EITC, such revenue could be raised by repealing tax breaks that benefit the wealthy which in turn would also improve the fairness of state tax systems.

Read the full report

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.

 

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: 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.”


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


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.”


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.

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.”


States Praised as Low-Tax That Are High-Tax for Poorest Families


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Annual state and local finance data from the Census Bureau are often used to rank states as “low” or “high” tax states based on state taxes collected as a share of personal income. But focusing on a state’s overall tax revenues overlooks the fact that taxpayers experience tax systems very differently.  In particular, the poorest 20 percent of taxpayers pay a greater share of their income in state and local taxes than any other income group in all but nine states.  And, in every state, low-income taxpayers pay more as a share of income than the wealthiest one percent of taxpayers.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) took a closer look at the Census data and matched it up with data from their signature Who Pays report which shows the effective state and local tax rates taxpayers pay across the income distribution in all 50 states.  ITEP found that in six states— Arizona, Florida, South Dakota, Tennessee, Texas, and Washington —  there is an especially pronounced mismatch between the Census data and how these supposedly low tax states treat people living at or below the poverty line. 

See ITEP's companion report, State Tax Codes As Poverty Fighting Tools.

The major reason for the mismatch is that these six states have largely unbalanced tax structures.  Florida, South Dakota, Tennessee, Texas and Washington rely heavily on regressive sales and excise taxes because they do not levy a broad-based personal income tax.  Since lower-income families must spend more of what they earn just to get by, sales and excise taxes affect this group far more than higher-income taxpayers.  Arizona has a personal income tax, but like the no-income tax states, the Grand Canyon state relies most heavily on sales and excise taxes.

To learn more about how low tax states overall can be high tax states for families living in poverty, read the state briefs described below:

Arizona has the 35th highest taxes overall (9.8% of income), but the 5th highest taxes on the poorest 20 percent of residents (12.9% of income).  The top 1 percent richest Arizona residents pay only 4.7% of their incomes in state and local taxes.

Florida has the 45th highest taxes overall (8.8% of income), but the 3rd highest taxes on the poorest 20 percent of residents (13.2% of income).  The top 1 percent richest Florida residents pay only 2.3% of their incomes in state and local taxes.

South Dakota has the 50th highest taxes overall (7.9% of income- making it the “lowest” tax state), but the 11th highest taxes on the poorest 20 percent of residents (11.6% of income).  The top 1 percent richest South Dakota residents pay only 2.1% of their incomes in state and local taxes.

Tennessee has the 49th highest taxes overall (8.3% of income), but the 14th highest taxes on the poorest 20 percent of residents (11.2% of income).  The top 1 percent richest Tennessee residents pay only 2.8% of their incomes in state and local taxes.

Texas has the 40th highest taxes overall (9.1% of income), but the 6th highest taxes on the poorest 20 percent of residents (12.6% of income).  The top 1 percent richest Texas residents pay only 3.2% of their incomes in state and local taxes.

Washington has the 36th highest taxes overall (9.7% of income), but the 1st highest taxes on the poorest 20 percent of residents (16.9% of income).  The top 1 percent richest Washington residents pay only 2.8% of their incomes in state and local taxes.

Despite holding a supermajority in Missouri’s House and Senate, Republican lawmakers failed this week to muster enough votes to overturn Governor Nixon’s veto of their $700 million tax cut (which passed overwhelmingly in both chambers just a couple of months ago).  A misguided effort supporters touted as a way to keep up with neighboring Kansas, opponents of the measure accurately described it as little more than a big give away to the state’s wealthiest residents at the expense of vital public services, primarily K-12 education. Tally this one as a victory for state tax fairness and adequacy. And watch Governor Nixon, who’s getting national kudos for holding the line on this.

Florida Governor Rick Scott isn’t sure what policy agenda he wants to pursue in 2014, but he knows it has to involve more tax cuts of some kind. How’s that for original thinking?  In related news, Politifact recently chided the Governor for exaggerating the health of the state’s revenue collections, and for claiming that his policies had anything to do with the modest revenue growth Florida has seen.

The ink is barely dry on North Carolina’s regressive tax overhaul and yet lawmakers are already discussing fully eliminating the state’s personal income tax and replacing it with an even more regressive broader consumption tax in 2015. Senator Bob Rucho told a Washington Post reporter that he thinks the state will  “go to zero” with the income tax in a matter of time.  Speaker of the House and US Senate Candidate Thom Tillis agreed, “I think moving to a consumption-based model is something we all agree on.”

Wyoming lawmakers are considering raising the state’s tax on beer in order to pay for alcohol abuse programs. The 2 cent per gallon tax hasn’t been raised since 1935 and is currently the lowest in the nation.  After almost eighty years of neglect, it’s safe to say that the tax is probably in need of another look.


Congress Members' Home States Have Fiscal Stake in Immigration Reform


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We still don’t know what the U.S. House of Representatives is going to do about immigration reform. The Senate passed a bill with a solid majority, and that legislation enjoys support from the Chamber of Commerce and the labor movement, from George W. Bush and Barack Obama.  What we do know, though, is that members of the House leadership had a nice long talk about it this week because they know the pressure is on them to do something. 

Also this week, the Institute on Taxation and Economic Policy (ITEP) released a study with a bland title, Undocumented Immigrants’ State and Local Tax Contributions, that held some interesting numbers. What it shows is that once unauthorized immigrants are legalized and participating fully in the tax system, state tax revenues will go up, just as the CBO showed they would at the federal level. In fact, the report shows that state tax payments from this population are already at $10.6 billion a year, and that will rise by $2 billion under reform. The report (with a clickable map on the landing page!) shows how those tax dollars are distributed state by state.

According to reports, the following Representatives are now the key players on whatever immigration bill comes from the House. So, in hopes of informing the debate, we are sharing the total amount of estimated annual revenue each of their respective states would get in the form of tax payments from legalized immigrants following reform.

Rep. Mario Diaz-Balart, Florida: $747 million a year, up $41 million
Rep. Raul Labrador, Idaho: $32 million a year, up $5.5 million
Rep. John Boehner, Ohio:  $95 million, up $22 million
Reps Michael McCaul, John Carter and Sam Johnson, Texas: $1.7 billion, up $92 million
Rep. Jason Chaffetz, Utah: $133 million, up $31 million
Reps Eric Cantor and Bob Goodlatte, Virginia: $260 million, up $77 million
Rep. Paul Ryan, Wisconsin: $131 million, up $33 million


Ballot Measures in Eleven States Put Taxes in Voters' Hands


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California is not the only state this election season taking taxing decisions directly to the people on November 6.  The stakes will be high for state tax policy on Election Day in nine other states with tax-related issues on the ballot. With a couple of exceptions, these ballot measures would make state taxes less fair or less adequate (or both).

Arizona

  • Proposition 204 would make permanent the one percentage point sales tax increase originally approved by voters in 2010.  The increase would provide much-needed revenue for education, particularly in light of the worsened budget outlook created by a flurry of recent tax cuts.  But it’s hard not to be disappointed that the only revenue-raising option on the table is the regressive sales tax (PDF), at a time when the state’s wealthiest investors and businesses are being showered with tax cuts.
  • Proposition 117 would stop a home’s taxable assessed value from rising by more than five percent in any given year.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains (PDF), “Assessed value caps are most valuable for taxpayers whose homes are appreciating most rapidly, but will provide no tax relief at all for homeowners whose home values are stagnant or declining. As a result, assessed value caps can shift the distribution of property taxes away from rapidly appreciating properties and towards properties experiencing slow or negative growth in value - many of which are likely owned by low-income families.”

Arkansas

  • Issue #1 is a constitutional amendment that would allow for a temporary increase in the state’s sales tax to pay for large-scale transportation needs like highways, bridges, and county roads. If approved, the state’s sales tax rate would increase from 6 to 6.5 percent for approximately ten years, or as long as it takes to repay the $1.3 billion in bonds issued for the relevant transportation projects. Issue #1 would also permanently dedicate one cent of the state’s 21.5 percent gas tax (or about $20 million annually) to the State Aid Street Fund for city street construction and improvements. It’s no wonder the state is looking to increase funding for transportation projects. ITEP reports that Arkansas hasn’t increased its gas tax is ten years, and that the tax has lost 24 percent of its value during that time due to normal increases in construction costs. Governor Beebe is supporting the proposal, and his Lieutenant Governor Mark Darr recently said, “No one hates taxes more than me; however, one of the primary functions of government is to build roads and infrastructure and this act does just that. My two primary reasons for supporting Ballot Issue #1 are the 40,000 non-government jobs that will be created and/or protected and the relief of heavy traffic congestion.”

California

  • Thus far overshadowed by the competing Prop 30 and 38 revenue raising proposals, Proposition 39 would close a $1 billion corporate tax loophole that Governor Brown and other lawmakers have tried, but failed to end via the legislative process.  Currently, multi-national corporations doing business in California are allowed to choose the method for apportioning their profits to the state that results in the lowest tax bill.  If Prop 39 passes, all corporations would have to follow the single-sales factor apportionment (PDF) method.  Half of the revenue raised from the change would go towards clean energy efforts while the other half would go into the general fund.

Florida

  • Amendment 3 would create a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on revenue growth, based on an arbitrary formula that does not accurately reflect the growing cost of public services over time.  As the Center on Budget and Policy Priorities (CBPP) explains, Amendment 3 is ““wolf in sheep’s clothing” because it would phase in over several years, which obscures the severe long-term damage it would cause.  Once its revenue losses started, however, they would grow quickly. To illustrate its potential harm, we calculate that if the measure took full effect today rather than several years from now, it would cost the state more than $11 billion in just ten years.” The Orlando Sentinel's editorial board urged a No vote this week writing that voters “shouldn't risk starving schools and other core government responsibilities that are essential to competing for jobs and building a better future in Florida.”
  • Amendment 4 would put a variety of costly property tax changes into Florida’s constitution, including most notably an assessment cap (PDF) for businesses and non-residents that would give both groups large tax cuts whenever their properties increase rapidly in value.  Moreover, as the Center on Budget and Policy Priorities (CBPP) explains, “Amendment 4’s biggest likely beneficiaries would be large corporations headquartered in other states, with out-of-state owners and shareholders,” including companies like Disney and Hilton hotels.

Michigan

  • Proposal 5 would enshrine a “supermajority rule” in Michigan’s constitution, requiring two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  As we explained recently, the many flaws associated with handcuffing Michigan’s elected representatives in this way have led to a large amount of opposition from some surprising corners, including the state’s largest business groups and its anti-tax governor. Republican Governor Rick Snyder wrote an op-ed in the Lansing State Journal opposing the measure saying it was a recipe for gridlock and the triumph of special interests. Proposal 5 is also bankrolled by one man to protect his own business interests.

Missouri

  • Proposition B would increase the state’s cigarette tax by 73 cents to 90 cents a pack. The state’s current 17 cent tax is the lowest in the country.  Increasing the state’s tobacco taxes would generate between $283 million to $423 million annually. The Kansas City Star has come out in favor of Proposition B saying, “It’s not often a single vote can make a state smarter, healthier and more prosperous. But Missourians have the chance to achieve all of those things on Nov. 6 by voting yes on Proposition B.”

New Hampshire

  • Question 1 would amend New Hampshire’s constitution to permanently ban a personal income tax.  The Granite State is already among the nine states without a broad based personal income tax and proponents want to ensure that will remain the case forever. As Jeff McLynch with the New Hampshire Fiscal Policy Institute explains, a Yes vote would mean that “you’d limit the choices available to future policymakers for dealing with any circumstances, and by extension, you’re limiting choices for future voters.”

Oklahoma

  • State Question 758 would tighten an ill-advised property tax cap (PDF) even further, preventing taxable home values from rising more than three percent per year regardless of what’s happening in the housing market.  As the Oklahoma Policy Institute explains, “Oklahomans living in poor communities, rural areas, and small towns would get little to no benefit, since their home values will not increase nearly as much as homes in wealthy, suburban communities.”  And since many localities are likely to turn to property tax rate hikes to pick up the slack caused by this erosion of their tax base, those Oklahomans in poorer areas could actually end up paying more.  
  • State Question 766 would provide a costly exemption for certain corporations’ intangible property, like mineral interests, trademarks, and software.  If enacted, the biggest beneficiaries would include utility companies like AT&T, as well as a handful of airlines and railroads.  The Oklahoma Policy Institute explains that the exemption, which would mostly impact local governments, would have to be paid for with some combinations of cuts to school spending and property tax hikes on homeowners and small businesses.  And the impact could be big.  As one OK Policy guest blogger explains: “In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.”

Oregon

  • Measure 84 would gradually repeal Oregon’s estate and inheritance tax (PDF) and allow tax-free property transfers between family members.  If the measure passes, Oregon would lose $120 million from the estate tax, its most progressive source of revenue.   According to many legal interpretations of the measure, the second component - referring to inter-family transfers of property - would likely open a new egregious loophole allowing individuals to avoid capital gains taxes (PDF) on the sale of land and stock by simply selling property to family members.  Oregon’s Legislative Revenue Office released a report last week that showed 5 to 25 percent of capital gains revenue could be lost as a result of the measuring passing. The same report also found no evidence for the claim that estate tax repeal is some kind of millionaire magnet that increases the number of wealthy taxpayers in a state.
  • Measure 79, backed by the real estate industry, constitutionally bans real estate transfer taxes and fees.  However, taxes and fees on the transfer of real estate in Oregon are essentially nonexistent, prompting opponents to refer to the measure as a “solution in search of a problem.”
  • Measure 85 would eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Instead of kicking back that revenue to corporations, the excess above collections would go to the state’s General Fund to support K-12 education. Supporters of this measure acknowledge that a Yes vote will not send buckets of money to schools right away since the kicker has rarely been activated.  But, it is a much needed tax reform that will help stabilize education funding and peak interest in getting rid of the Beaver State’s more problematic personal income tax kicker.

South Dakota

  • Initiative Measure #15 would raise the state’s sales tax by one cent, from 4 to 5 percent. The additional revenue raised would be split between two funding priorities: Medicaid and K-12 public schools. As a former South Dakota teacher writes, “[w]hile education and Medicaid are important, higher sales tax would raise the cost of living permanently for everyone, hitting struggling households the hardest, to the detriment of both education and health.”  This tax increase is the only revenue-raising measure on the horizon right now; South Dakotans deserve better choices.

Washington

  • Initiative 1185 would require a supermajority of the legislature or a vote of the people to raise revenue. A similar ballot initiative, I-1053, was already determined to be unconstitutional. As the Washington Budget and Policy Center notes about this so called “son of 1053” initiative:  “Limiting our state lawmakers with the supermajority requirement is irresponsible, and serves only  to limit future opportunity for all Washington residents.”

 


Will Conservative Governors Reject the Deal of a Lifetime?


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According to one of the latest counts, officials in 30 state governments have indicated that their state plans to opt out of the Medicaid expansion that was enacted as part of health care reform, or are at least leaning in that direction. The reason many conservative state officials, like Florida Governor Rick Scott, cite for opting out (putting aside general criticism of the evils of “Obamacare”) is that participating would “strain state budgets.”

In reality, the Medicaid expansion is the deal of a lifetime for state governments. The nonpartisan Congressional Budget Office (CBO) estimates that the federal government will take on nearly 93 percent of the costs of the Medicaid expansion over its first nine years. On average, that means that states will receive over 9 additional Medicaid dollars for every 1 they spend themselves.

While this may already sound like a great deal, many states may end up actually saving money by embracing the Medicaid expansion. An in-depth study by state officials in Arkansas found that it would actually cost the state $3.4 million more to not participate in the Medicaid expansion. Similarly, a study by the Urban Institute found that health care reform overall will save state budgets between $92-129 billion dollars from 2014-2019.

In some cases, the failure of the state government to accept the Medicaid expansion may also have the side effect of putting even more strain on local budgets. Last year in Texas, for example, the decision by the Republican Governor Rick Perry and state legislators to cut Medicaid forced the El Paso County Hospital District to raise property taxes to make up for the increasing costs from nearly uninsured patients. This dynamic explains why many local officials in Texas support the Medicaid expansion, even as Governor Perry is one of its most outspoken critics.  

While many conservative governors are claiming that the Medicaid expansion would cost too much, they are at the same time continuing budget-busting tax breaks for the wealthy. Iowa Republican Governor Terry Branstad for instance has said that the Medicaid expansion would be “unaffordable” and “unsustainable”, even though its estimated cost would be less than 4 percent of the revenue that could be raised by ending the Iowa’s bizarre and regressive deduction for federal income tax payments.

Considering the generous deal that governors are being offered, many commentators believe that most if not all the states will ultimately take the deal, despite the recent election year grandstanding. The CBO is not so sure. On Tuesday, CBO released its latest cost projections of health care reform, which predicts that many states will choose to opt out of the Medicaid expansion resulting in 3 million fewer people insured.

Photo of Gov. Terry Branstad via Iowa Politics Creative Commons Attribution License 2.0

  • Louisiana is preparing to take a much closer look at the $4 billion it spends on special tax breaks each year, as the brand new Revenue Study Commission holds its first meeting this week.  The chairman of the state’s House tax-writing committee admits that “we don’t know” whether Louisiana’s tax breaks are working, even though “some of these things have been on the books for more than 80 years.”  Gov. Jindal may be the biggest obstacle to progress on this issue, as he’s said that eliminating an ineffective tax break is technically a “tax hike” that he would veto.
  • An op-ed in the Orlando Sentinel highlights the problems with Florida’s tax system, and how to fix them: “Our tax structure is inadequate to our needs, poorly matched with today's economy and unfair to average Floridians and small business owners.”  Writing for the Florida Center for Fiscal and Economic Policy, the author urges closing corporate tax loopholes and other special interest tax breaks to begin addressing these problems.
  • As we’ve pointed out before, most of Indiana gubernatorial candidate John Gregg’s tax ideas so far have been short-sighted and unaffordable.  But Gregg’s newest idea to create a child care tax credit is a good one, as has been recommended (PDF) by the Institute on Taxation and Economic Policy (ITEP).
  • The Anniston Star Editorial Board has a numbers-heavy piece explaining the problems with the state’s tax system.  In a nutshell: “Alabama may be a low-tax state for people and businesses at the upper end of the income scale, but at the lower end, Alabama’s tax system adds to people’s misery.”  ITEP has found that Alabama has one of the ten most regressive state and local tax systems in the country.

Quick Hits in State News: Florida's Tax Mess, Chris Christie's Hubris


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The Orlando Sentinel’s editorial board explains the “slow-motion disaster” that is Florida’s tax system, cataloging the lack of sales taxes on services (PDF) and online shopping taxes (PDF), and gasoline tax shortfalls (PDF), among others.

Special tax breaks for businesses frequently reward behavior that would have occurred anyway.  The most recent examples come from Florida, where Publix, CSX, TECO Energy, NextEra Energy, and Mosaic Co. are seeking millions in tax breaks for capital spending they were already planning to undertake.

Online shopping in the DC-Metro area is about to become more expensive, according to this Washington Post article.  Here’s why that’s a good thing for tax fairness, the Marketplace Fairness Act and state coffers.

Advocates for increasing the Arkansas severance tax rate on natural gas from 5 to 7 percent and eliminating exemptions turned in nearly 70,000 signatures on Friday. If the Secretary of State verifies enough signatures, the long overdue rate increase worth $250 million in annual revenues will be put on the November ballot. 

Check out New Jersey Governor’s Chris Christie talk at the Brookings Institution today on “Restoring Fiscal Integrity and Accountability”.  Christie used the first several minutes to give his view on the current tax cut standoff in the Garden State, claiming Democrats were playing politics by holding up his tax cut proposal (when in fact what they’re doing is the right thing).

  • Florida Governor Rick Scott is attending grand openings of 7-Eleven® stores but a columnist at the Orlando Sentinel observes that “if incentives and low corporate tax rates were working, Florida wouldn't rank 43rd in employment.”  It’s a common sense column worth reading.
  • As another massive tax cut for Michigan businesses continues to make its way through the legislature, the Michigan League for Human Services chimes in with a report, blog post, and testimony on why localities can’t afford to foot the bill for state lawmakers’ tax-cutting addiction.
  • Bad tax ideas abound in Indianas gubernatorial race.  Democratic candidate John Gregg wants to blast a $540 million hole in the state sales tax base by exempting gasoline; he claims he can pay for it by cutting unspecified "waste" from the budget. And Gregg’s Republican opponent, Mike Pence, doesn’t seem to have any better ideas.  So far he’s only offered a "vague proposal" to cut state income, corporate, and estate taxes – without a way to pay for those cuts.
  • Kansas lawmakers are feverishly working to meld differing House and Senate tax plans into a single piece of legislation. Governor Sam Brownback has endorsed an initial compromise which includes dropping the top income tax rate and eliminating taxes on business profits. Earlier in the week the Legislative Research Department said the plan would cost $161 million in 2018 and new state estimates say the price tag is more like $700 million in 2018.  Senate leaders have said that they aren’t likely to approve a tax plan that creates a shortfall in the long term. Stay tuned....
  • Finally, a USA Today article should give pause to lawmakers hoping that drilling and fracking for natural gas leads to a budgetary bonanza.  It explains how the volatile price of natural gas is creating headaches in energy-producing states like New Mexico, Oklahoma, and Wyoming where a dollar drop in the commodity’s price means a budget hit of tens of millions.

Last week Florida Governor Rick Scott signed into law legislation implementing a state sales tax holiday from August 3rd to the 5th even though these sales tax holidays are a real boondoggle for consumers (mostly PR for policymakers) and cost state treasuries needed revenues.

Will Missouri give tax credits to Ford for rehiring previously laid off employees? Read more about it in the Missouri Journal, which promises to follow up the story.

We’ve been closely following developments in the Kansas tax reform debate and here’s the latest update.  Last week, the conference committee began meeting to try to reconcile the differences between the House and Senate bill.  But compromise will have to wait until after spring break. The legislature adjourned and lawmakers won’t be meeting again until April 25. Read ITEP’s analysis of the Governor, House, and Senate plans.

Read here about an effort to end the Missouri Kansas tax credit border wars (a.k.a. race to the bottom).  Hoping to create jobs within their borders, both states have been “willing to pay for it with tax credits and other deal sweeteners” that businesses have exploited – without necessarily delivering on the jobs.

Photo of FL Governor Rick Scott via Gage Skidmore Creative Commons Attribution License 2.0

North Carolina’s two major newspapers, the Raleigh News and Observer and Charlotte Observer, published editorials in support of the state’s estate tax in the wake of a hearing last week called to eliminate it.  From the News and Observer: “The estate tax is hardly a burden on those few inheritors who have to pay it. It is a modest but valuable asset to government revenue, and there is nothing unfair about [it]."  And, from the Charlotte Observer: “Some Republicans support abolishing the federal estate tax. They should explain why the extremely wealthy should be able to avoid paying any taxes on unrealized capital gains.”

Washington State’s special legislative session started yesterday. The media is reporting that the session will be a contentious battle over how the state should close its $1 billion budget gap. (Hint: the answer’s in the Washington State Budget and Policy Center’s proposal to tax capital gains income. )

An article from The Miami Herald reveals some ugly details surrounding the $2.5 billion in business tax cuts just passed by the Florida legislature.  As the Herald points out, “those benefiting had plenty of lobbyists … AT&T, which has 74 Florida lobbyists, spent $1.68 million on lobbying last year, more than any other company.”  Not coincidentally, AT&T and Verizon – both champion tax dodgers – were among the biggest winners.  A last-minute amendment to the legislation could give the telecommunications industry a tax break as large as $300 million.

A great op-ed in the Kansas City Star asks why Governor Brownback wants taxes in Kansas to be like Texas, reminding Kansans that Texas ranks low in everything that really matters, from high school graduation rates to household income to crime.

Dolly Parton’s Dollywood Co. and Gaylord Entertainment Co. have struck a deal with Nashville, Tennessee Mayor Karl Dean that, if approved, would result in an estimated $5.4 million in property tax breaks for their planned water and snow park.  Ben Cunningham of the Nashville Tea Party was right to point out that the plan amounts to a “giveaway” to companies that plan to move to the city anyway and that it’s time to stop “giving in to this kind of corporate extortion.”

Photo of Dolly Parton via Eva Rinaldi Creative Commons Attribution License 2.0


Avoiding Property Taxes 'til the Cows Come Home in Florida


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What do Tom Cruise and Florida Senator Bill Nelson have in common? Both have taken advantage of a lax definition of what constitutes farming in order to reap large property tax breaks.

The Miami Herald reports that by allowing a few cows to graze on 55 acres of his land, Senator Nelson reduced his property taxes on the land from over $45,000 to just $3,696 in 2011. The reduction results from the fact that a few cows make Nelson’s property suddenly agricultural land, and as such, its value is a mere $210,000, rather than its full market residential value of $2.7 million.

Using a similar tax break in Colorado, Tom Cruise was able to pay only $400 in property taxes on his $18 million, 248 acre tract of land in Colorado by allowing sheep to graze on it for brief periods each year. The good news for Colorado taxpayers is that the state legislature has since taken a small step toward closing the loophole by valuing residences on ‘agricultural land’ at the same rate as they are on residential property.

Rather than just tightening up eligibility requirements though, lawmakers could instead replace current agricultural land valuation systems with an agricultural circuit breaker that makes property tax relief available only to real family farms. This would not only ensure that Senators and movie stars do not abuse the system, it would also better target those farmers most in need of property tax relief – the farmers for whom the tax loopholes were presumably written in the first place.

Photos of Tom Cruise and Senator Bill Nelson via Nasa HQ and Surrealistic Scenes Creative Commons Attribution License 2.0


Trending in the States: Cutting Corporate Taxes Because Lobbyists Say You Should


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Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This article takes a look at efforts to roll back business taxes in states based on the shopworn, erroneous argument that tax cuts are good for the economy.

Robust corporate income taxes ensure that large and profitable corporations that benefit from publicly subsidized services (transit that delivers customers, education that trains workers, electricity that powers industry, etc.) pay their fair share towards the maintenance of those services. But, as ITEP’s recent report, Corporate Tax Dodging in the Fifty States, 2008-2010, found, twenty profitable Fortune 500 companies paid no state corporate income taxes over the last three years, and 68 paid none in at least one of those three years, even as state budgets are stretched to the point of breaking.  

As a new legislative season gets underway, too many political leaders are bashing taxes in general and business taxes in Governor Nikki Haleyparticular.  Here are some states to watch for more bad business tax policy (followed by a few glimmers of hope).

South CarolinaSouth Carolina Governor Nikki Haley is following through on her misguided campaign promise and recently proposed eliminating the state’s corporate income tax over four years. This despite the fact that South Carolina’s corporate income taxes as a share of tax revenue are among the lowest in the country, at a mere 2.4 percent.

KentuckyState Representative Bill Farmer has filed legislation that, instead of strengthening the tax, would repeal the state’s corporate income tax entirely. Farmer worked as a “tax consultant” and has been an anti-tax crusader in the Kentucky legislature since 2003.

Nebraska – Governor Dave Heineman recently unveiled his plan to reduce the top corporate income tax rate from 7.81 to 6.7 percent (and eliminate other key state revenue sources, too).

Florida Governor Rick ScottFloridaIn his recent State of the State address, Governor Rick Scott said that taxes and regulations were “the great destroyers of capital and time for small businesses.”  And – no surprise here – he also called for lowering business taxes.

IdahoGovernor Butch Otter has called for $45 million in tax cuts but is leaving the details to the legislature.  Of course, when a lobbyist from the Idaho Chamber Alliance of businesses calls the governor’s position “manna from heaven,” there’s a good chance some of those cuts will be given to business.

A few signs of sanity. In Connecticut , the governor is looking to improve the return on tax-break investment for the Nutmeg state. Perhaps he’s learned from states like Ohio, where a recent report issued by the attorney general showed that fewer than half of all companies receiving tax subsidies actually fulfilled their commitments in terms of job creation or economic growth.   We also see combined reporting getting attention in a couple of states.  It’s smart policy that discourages companies from creating multi-state subsidiaries to shelter their profits from taxes. We will report on other positive developments as warranted – so watch this space.

Photo of Rick Scott via Gage Skidmore and Photo of Nikki Haley via Mary Austin Creative Commons Attribution License 2.0


Naughty States, Nice States: The Institute on Taxation and Economic Policy's 2011 List


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Naughty

Michigan’s legislature and Governor Snyder top the naughty list by giving away more than $1.6 billion in tax cuts for business and paying for it with tax increases on low-and middle-income working and retired families.

Florida continued to dole out more corporate pork this year, including a property tax break that happens to benefit huge commercial land owners, like Disney World and Florida Power and Light, and other corporations (that also happen to be major donors to the state’s Republican governor and legislative majority party).

Minnesota’s legislature missed an opportunity to do the right thing when it rejected a tax increase on the state’s wealthiest residents. The plan was proposed by Governor Dayton and supported by 63 percent of Minnesotans over the alternative, which was cuts to spending on education, health care and other vital public services.

Anti-tax activists in Missouri were hard at work again. This year they were collecting signatures for a ballot initiative that would eliminate the state’s personal income tax and replace it with a broadened and increased sales tax.

Nice

Connecticut’s Governor Malloy and the legislature adopted a $1.4 billion tax increase that improved tax fairness in the state and protected public investments like education and health care.  Most notably, the state added an Earned Income Tax Credit, a significant tax break for low-income working families.

District of Columbia lawmakers greatly reduced the ability of corporations to dodge their fair share of taxes by adopting combined reporting (which makes it harder to hide profits in other states) and a higher corporate minimum tax. The Council also temporarily increased taxes for individuals making more than $350,000 a year and limited itemized deductions, which are most often taken by high income filers.

Hawaii lawmakers also limited upside-down tax giveaways (itemized deductions) for their state’s richest residents and passed other tax changes to raise much needed revenue.

A Little Bit Naughty and Nice

New York’s Governor Andrew Cuomo reversed his campaign vow not to raise taxes and supported a tax increase on residents earning more than $2 million a year.   The plan, passed by the legislature, also included a tax break for those with income under $300,000.

However, New York lawmakers passed the governor’s cap on property taxes this summer, which is predictably creating crises and forcing dramatic cuts in local education, medical, and public safety services.

Illinois raised significant revenue earlier in the year through temporary personal and corporate income tax rate increases, all designed to stave off harsh spending cuts, but then turned right around and gave away hundreds of millions of dollars to Sears and CME, allegedly to keep them in the state.


Florida Governor Gives Mickey Mouse and Friends a Tax Break


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When Florida governor Rick Scott took office, he set out to dramatically slash both taxes and public services.  While his most radical proposals were very wisely rejected by the state’s slightly more reasonable legislature, he has unfortunately been partially successful in his crusade.  One of Scott's biggest tax breaks to date, SB 2142, orders the state’s five water management districts to cut property taxes by $210 million.

But it’s not the average Floridian who’s seeing a big reduction in their tax bill.  Rather it’s large corporations that are getting the big payout.  

According to the Palm Beach Post, the owner of a median priced home in Palm Beach County, for example, will receive a property tax cut of about $28 under the plan.  But some corporations, who own very large and valuable tracts of land, are due to get a tax break of hundreds of thousands of dollars, with a few even breaching the million dollar mark.

Coincidentally, or perhaps not, the biggest corporate benefactors of SB 2142 also happened to be the biggest contributors to Scott and the GOP’s 2010 election campaigns.  Florida Light & Power (FLP) and Walt Disney World were the big winners in Scott’s latest package of corporate giveaways.

FLP made contributions to the Florida GOP in the last election cycle of $1.1 million, while Disney contributed $854,364.  Now these companies are slated to receive an estimated $1.8 million and $1.3 million, respectively, worth of tax breaks each year, which is a pretty good return on investment.

This is just the latest in a string of tax cuts backed by Scott with questionable benefits, and questionable motives as well.  

Scott and the GOP would argue that tax cuts for corporations are necessary to jumpstart the economy, but the numbers don’t back that up.  In fact, a recent Ocala.com article says that Scott’s budget will lose thousands of jobs due to the steep cuts in state spending it requires.

And the public is starting to notice.  Rachel Weiner of the Washington Post noted that 6 out of 10 people surveyed in a Quinnipiac poll disapprove of the job Rick Scott is doing and 54% of respondents said the Florida budget was “unfair” to them.  The article goes on to suggest that Scott may be the most unpopular governor in the country.
 
Floridians have a clear message for Governor Rick Scott:  Mickey Mouse is doing just fine on his own.

 


A Mystery Solved: Why Florida Lawmakers Refused to Repeal the Corporate Income Tax This Year


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Less than a month ago, Florida Governor Rick Scott was still pushing his campaign proposal to repeal the state's corporate income tax. Yet his "Tea Party"-inspired promise never lit a fire under the Republican leadership in the state legislature. Republican Senate president Mike Haridopolos even noted that "I'm in my 11th session now and I've had very few people come to me and say the reason they didn't come to Florida was because of the corporate tax rate."

An Orlando Sentinel article by Scott Maxwell suggests one sensible reason why the otherwise-anti-tax GOP leadership couldn't get behind this idea: hardly anyone is paying the corporate tax to begin with.

Maxwell requested unpublished data from Florida's Department of Revenue on the number of companies that paid any corporate tax in the last decade, and found that in fiscal year 2010 just 24,112 companies paid even a dime of corporate tax. Since 218,000 companies filed corporate income tax returns in the state of Florida in that year, this means just over 10 percent of companies filing returns actually owed any tax.

It's important to recognize that there can be perfectly good reasons for this. Many of the 218,000 companies were likely unprofitable in 2010, which means they have no income to tax. But it's also likely that many of these no-tax corporations were quite profitable in reality, and managed to reduce their Florida taxable income to zero by artificially shifting profits to other states.

As a 2009 report from the Florida Center for Fiscal and Economic Policy notes, Florida lawmakers interested in fixing this problem could productively enact "combined reporting" along with a number of other reforms to make the corporate tax fairer and more sustainable.

But in the short-run, the most sensible reform option for Florida lawmakers might be to enact legislation mandating basic disclosure of which profitable companies pay no income tax, which tax breaks they use to achieve this result, and how many Florida-based jobs were created as a result of these tax breaks.

And one important lesson for advocates seeking to inform corporate tax reform debates in other states is that sometimes the only way to get this vital data is to ask state government officials, as Maxwell did.


Florida Governor Rick Scott's Anti-Tax Platform Largely Rejected


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We’ve all become accustomed to conservative lawmakers singing the praises of tax cuts nearly every time they open their mouths.  Florida Governor Rick Scott’s devotion to anti-tax dogma, however, is among the most extreme cases we’ve seen in recent memory.  Fortunately, it now appears very likely that the state’s conservative legislature will reject the vast majority of Scott’s anti-tax platform.

On Tuesday, the Florida legislature’s Republican leadership announced that they’ve come to a preliminary agreement on how to close the state’s budget gap.  The agreement is unbalanced, as it relies exclusively on spending cuts to cope with the revenue slump caused by the lingering economic downturn.  But the agreement does have one major upside: it does not include Governor Scott’s proposals to phase out the corporate income tax and drastically cut the property tax.

In recent weeks, Scott had tried to make his radical tax proposals more attractive by phasing out the corporate income tax more slowly.  This change would have allowed lawmakers to vote in favor of a massive tax cut, and to put off debating the most difficult spending cuts until some later date.  Still, even Scott’s less ambitious proposal was viewed by most Republicans legislators as too extreme.

The Republican chair of one key House committee referred to Scott’s continued insistence that the state slash taxes despite its weak fiscal situation as “just kind of odd.”  And Republican Senate President Mike Haridopolos questioned the wisdom of Scott’s “job creation” strategy,  saying “I'm in my 11th session now and I've had very few people come to me and say the reason they didn't come to Florida was because of the corporate tax rate."

Lawmakers have apparently agreed to set aside some money for corporate tax pork in an attempt to keep Scott happy enough that he won’t exercise his veto power.  But compared to the multi-billion dollar tax cut package Scott has been pushing, the size of the tax cuts currently under consideration are very small.

Still, the fact that tax cuts are being debated at all while the state cuts billions from education, health care, and other vital services demonstrates how wildly out of touch the Sunshine State's legislature is.  In the future, lawmakers should undo some of these deep cuts to public services and offset the cost by raising the state’s very low taxes. While they're at it, they can lessen the unfairness of a tax system that ITEP ranked the second most regressive in the nation.


Do Twitter and Red Lobster Need Local Tax Breaks?


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Elected officials in California and Florida face unprecedented fiscal challenges at both the state and local levels. Yet rather than working to reduce their budget shortfalls, policymakers in each state are doing their best to dig their budget holes deeper by offering new company-specific tax breaks to keep footloose corporations from moving their operations elsewhere.

A front-page article in today's New York Times offers some insights into this seemingly irrational behavior. Focusing on the battle between Kansas and Missouri lawmakers over the future headquarters of movie-theater chain AMC Entertainment, the article describes a system of extorting tax breaks that is viewed by everyone involved — from lawmakers to the beneficiaries of the tax breaks — as a pointless zero-sum game.

AMC's chief executive officer, poised to receive lavish tax handouts from the two states, wonders aloud "whether this is an appropriate role for government to be playing," and a lawyer whose job involves seeking out tax breaks for corporate clients describes it as "horrible public policy."

This situation won't be news to anyone who's followed the work of Greg LeRoy and the folks at Good Jobs First over the years. LeRoy's "Great American Jobs Scam" provides an excellent summary of the cottage industry of site location consultants that has emerged to facilitate the "economic war between the states" that the Times article describes. But the battle over AMC is only one example of egregious tax giveaways from the past week.

In Florida, Darden Restaurants (parent company of the Red Lobster and Olive Garden restaurant franchises) is pushing for new tax breaks. The Orlando Sentinel reports that this Fortune 500 company, which generated $7.1 billion in global sales during its most recent fiscal year, is pushing for legislation that would allow the millions in corporate income tax credits it already receives in Florida to be applied to its sales tax liability. This would save the company as much as $5 million.

Fortunately, the tax legislation has stalled as its key sponsor, Republican State Representative Chris Dorworth, read the ‘revelation’ in the Orlando Sentinel that his own tax break legislation would only apply to Darden Restaurants. He then decided he could not support his own legislation as written.  

Meanwhile, San-Franciso-based Twitter has played tax break hardball with city officials for months, threatening to move to Brisbane if it does not receive substantial tax breaks. Despite facing a tough $350 million deficit and dramatic cuts to health services, the San Francisco Board of Supervisors capitulated to Twitter’s demands this week, passing a $22 million payroll tax break for the company on Tuesday. Roxanne Sanchez, the president of Service Employees International Union Local 1021, opposed the measure, saying, “It’s a taxpayer handout to a $10 billion company at a time we’re cutting basic city services.”

As today's Times article reminds us, corporate tax breaks all too often create benefits for one jurisdiction at the direct expense of another, with no net benefit for the US economy overall. And tax breaks targeted to a specific company set an especially dangerous precedent. As an editorial in the San Francisco Guardian put it, “once you go down the path of caving in to corporate blackmail, it never ends.”


States Take a Knife to One of Their Major Arteries: Corporate Income Taxes


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It’s pretty evident that state corporate income taxes are especially flawed and riddled with loopholes. But, of course, that doesn’t have to be the case. In fact, there are lots of things that legislators can do (given the political will) to strengthen their corporate income taxes, including enacting combined reporting, increasing corporate tax disclosure, and closing selected loopholes.

Despite all these options to strengthen the corporate tax, lawmakers from coast to coast are doing their best to undermine this inherently progressive tax. This seems especially sort-sighted given the revenue needs of many states.

Here are some recent bad ideas regarding state corporate income taxes:

Arizona Governor Jan Brewer’s budget outline includes a proposal that would phase out the state's corporate income tax over four years.  

Florida Governor Rick Scott has proposed reducing the corporate income tax rate from 5.5 to 3 percent.

Indiana’s Senate is considering a bill to reduce the state’s corporate income tax by 20 percent. This bill recently passed the Senate Committee on Tax and Fiscal Policy.

Iowa Governor Terry Branstad has said that he would like to cut Iowa’s corporate income tax in half, despite evidence that this tax change would only benefit large corporations.

Recently, bills have been dropped in the both the Kansas House of Representatives and the Senate which would phase out the state's corporate income tax altogether.

North Carolina Governor Beverly Perdue is proposing that the corporate income tax rate be reduced to 4.9 percent from 6.9 percent.

Instead of slashing or completely eliminating the state corporate income tax, lawmakers should be working to strengthen this revenue source.


Tax Giveaways for Big Business Continue to be Sold as Economic Panacea


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Lawmakers in a handful of states are pushing tax cuts for corporations and other businesses under the guise of spurring economic growth.  Florida, Kansas, Iowa, Missouri, and Arizona all made headlines this week for proposed tax cuts of this sort.

In Florida, Governor Scott’s proposed budget plan was released on Monday, and as expected, it included enormous cuts to both corporate income taxes and property taxes.  Under Scott’s plan, which he unveiled before a crowd of tea party activists, the state’s already low corporate tax rate would fall from 5 percent to 3.5 percent.  At the same time, state spending would plummet by $4.6 billion, with pre-K through university education making up $3.1 billion of that total.  Fortunately, even the state’s conservative legislators don’t seem the least bit interested in Scott’s ultra-conservative (and exceedingly vague) ideas.

Kansas lawmakers generated similar headlines this week as bills were introduced in both the House and Senate to phase out the state’s corporate income tax.  According to the Wichita Eagle, proponents of the measure are actually claiming that phasing out this major tax would somehow increase tax revenue.  We seriously doubt it.

In Iowa, Governor Branstad’s proposal to slash the corporate income tax in half and cut business property taxes by 40 percent received renewed attention this week as the Des Moines Register attempted to summarize the absolutely massive number of tax cuts being proposed by Iowa lawmakers. 

Fortunately, Senate Majority Leader Michael Gronstal isn’t impressed, saying, “Taken as a whole, the Republican budget basically says we're going to squander the opportunities for the next generation of kids in this state — in terms of education, in terms of access to community college and training programs — we're going to push that aside and say the most important thing is to make sure corporations have tax cuts.”

Missouri lawmakers also garnered some attention this week when the state Senate endorsed legislation to repeal the state’s franchise tax on businesses over the course of the next five years.  Currently, a business must have more than $10 million in assets to be subject to the franchise tax.  The St. Louis Post-Dispatch ran an excellent editorial this week in response to the plan, noting: “Businesses were given tax breaks, tax credits, tax incentives, low corporate taxes and tort reform. So where are the jobs? Or did they just pocket the savings? … Business-friendly is one thing. Business-promiscuous is quite another.”

It probably wouldn’t change anything, but it sure would be nice if Arizona lawmakers gave the Post-Dispatch’s editorial a read before beginning debate on the business tax cut package that Governor Brewer plans to release on Monday.


Flood of Bad Tax Ideas Coming from the States


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Ill-conceived tax ideas are coming out of statehouses and governors’ mansions at a faster rate than we’ve seen in quite a while.  Here’s a quick summary on recent proposals receiving serious consideration in Arizona, Florida, Idaho, Maine, Michigan, Minnesota, New Jersey, Ohio, and Wisconsin.

Arizona: Business tax breaks and property tax breaks are being pushed by the Arizona Chamber of Commerce, and legislative leaders are taking them seriously.  The specifics have yet to be worked out, but expect at a minimum to see tax subsidies ostensibly aimed at boosting business hiring and investment.  As the Center on Budget and Policy Priorities (CBPP) has explained, however, states cannot stimulate their economies by cutting taxes.

Florida: Newly elected Governor Rick Scott continues to insist that “the way to get the state back to work is to cut property taxes and phase-out the corporate income tax, and we’re going to get that done.”  The state’s enormous budget gap has caused Senate President Mike Haridopolos to approach the issue more cautiously, though he still claims that “if we see some opportunities for tax relief that we feel absolutely confident will create more jobs and actually grow the economy, we’re open to them.”  Haridopolos is also pushing a “Taxpayer Bill of Rights” (TABOR) proposal similar to the one that decimated Colorado’s education funding stream.

Idaho: Legislators in Idaho — including the House majority leader — are preparing to revive an idea they first proposed toward the end of last year’s session: slashing the state’s corporate income tax rate from 7.6 percent to 4.9 percent.  Idaho legislators are also discussing cutting the state’s top personal income tax rate from 7.8 percent to 4.9 percent.  Each of these changes would drastically reduce the amount of revenue available to pay for vital state services, though by proposing that these changes be phased-in gradually over the course of the next decade, legislators are hoping to avoid having to spend too much time thinking about what state services will eventually have to be cut.

Maine: State Tax Notes (subscription required) reports that the chairman of Maine’s Senate tax committee plans to make cutting the state’s personal income tax rate his top priority.  Unlike the tax reform package that Maine voters recently rejected, this cut would be paid for not by broadening the state’s tax base, but by cutting spending and hoping for strong revenue growth.  Maine’s legislators are also apparently contemplating a constitutional amendment that would require supermajority support in the legislature in order to raise taxes.  A supermajority requirement of this type would result not only in lower state services, but also in more tax loopholes.  This is because such a requirement would prevent a simple majority of legislators from eliminating a tax loophole unless they also enlarged another loophole or lowered tax rates in a way that resulted in no net revenue gain.

Michigan: House and Senate leadership on both sides of the aisle in Michigan have inexplicably come to an agreement that the state’s EITC should be cut.  It’s unclear why tax increases on low-income families have suddenly become so popular in Michigan.  If Governor Rick Snyder gets his way, some of the revenue generated by taxing low-income families will likely to be used to pay for his proposed $1.5 billion cut in state business taxes.

Minnesota: The Republican leaders of Minnesota’s state legislature made clear this week that business tax cuts will be one of their top priorities.  One Senate leader has proposed cutting the state’s corporate income tax rate in half by 2017 and freezing statewide taxes on business property.  Fortunately, Minnesota Governor Mark Dayton is likely to vigorously oppose these cuts.

New Jersey: Democratic legislators are seriously considering a move to single sales factor apportionment for their corporate income tax.  The bill has already cleared the relevant committee, and will move to the full Senate soon.  See ITEP’s policy brief criticizing the single sales factor for state corporate income taxes.

Ohio: Ohio’s House and Governor have declared repealing the state's estate tax to be a top priority.  Local governments receive a majority of the revenue generated by Ohio’s estate tax, and therefore oppose its repeal.  Ohio’s House leaders would also like to create a business tax credit for hiring new employees.

Wisconsin: Governor Scott Walker has proposed a variety of business tax breaks and, as in Maine, the creation of a supermajority requirement to raise taxes.  More bad ideas are almost certain to come from Wisconsin in the weeks ahead, as Governor Walker made clear during last year’s campaign that he supports the outright repeal of Wisconsin’s corporate income tax.

For a review of the most significant state tax actions across the country this year and a preview for what’s to come in 2011, check out ITEP’s new report, The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes.

"Good" actions include progressive or reform-minded changes taken to close large state budget gaps. Eliminating personal income tax giveaways, expanding low-income credits, reinstating the estate tax, broadening the sales tax base, and reforming tax credits are all discussed.  

Among the “bad” actions state lawmakers took this year, which either worsened states’ already bleak fiscal outlook or increased taxes on middle-income households, are the repeal of needed tax increases, expanded capital gains tax breaks, and the suspension of property tax relief programs.  

“Ugly” changes raised taxes on the low-income families most affected by the economic downturn, drastically reduced state revenues in a poorly targeted manner, or stifled the ability of states and localities to raise needed revenues in the future. Reductions to low-income credits, permanently narrowing the personal income tax base, and new restrictions on the property tax fall into this category.

The report also includes a look at the state tax policy changes — good, bad, and ugly — that did not happen in 2010.  Some of the actions not taken would have significantly improved the fairness and adequacy of state tax systems, while others would have decimated state budgets and/or made state tax systems more regressive.

2011 promises to be as difficult a year as 2010 for state tax policy as lawmakers continue to grapple with historic budget shortfalls due to lagging revenues and a high demand for public services.  The report ends with a highlight of the state tax policy debates that are likely to play out across the country in the coming year.


State Transparency Report Card and Other Resources Released


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Good Jobs First (GJF) released three new resources this week explaining how your state is doing when it comes to letting taxpayers know about the plethora of subsidies being given to private companies.  These resources couldn’t be more timely.  As GJF’s Executive Director Greg LeRoy explained, “with states being forced to make painful budget decisions, taxpayers expect economic development spending to be fair and transparent.”

The first of these three resources, Show Us The Subsidies, grades each state based on its subsidy disclosure practices.  GJF finds that while many states are making real improvements in subsidy disclosure, many others still lag far behind.  Illinois, Wisconsin, North Carolina, and Ohio did the best in the country according to GJF, while thirteen states plus DC lack any disclosure at all and therefore earned an “F.”  Eighteen additional states earned a “D” or “D-minus.”

While the study includes cash grants, worker training programs, and loan guarantees, much of its focus is on tax code spending, or “tax expenditures.”  Interestingly, disclosure of company-specific information appears to be quite common for state-level tax breaks.  Despite claims from business lobbyists that tax subsidies must be kept anonymous in order to protect trade secrets, GJF was able to find about 50 examples of tax credits, across about two dozen states, where company-specific information is released.  In response to the business lobby, GJF notes that “the sky has not fallen” in these states.

The second tool released by GJF this week, called Subsidy Tracker, is the first national search engine for state economic development subsidies.  By pulling together information from online sources, offline sources, and Freedom of Information Act requests, GJF has managed to create a searchable database covering more than 43,000 subsidy awards from 124 programs in 27 states.  Subsidy Tracker puts information that used to be difficult to find, nearly impossible to search through, or even previously unavailable, on the Internet all in one convenient location.  Tax credits, property tax abatements, cash grants, and numerous other types of subsidies are included in the Subsidy Tracker database.

Finally, GJF also released Accountable USA, a series of webpages for all 50 states, plus DC, that examines each state’s track record when it comes to subsidies.  Major “scams,” transparency ratings for key economic development programs, and profiles of a few significant economic development deals are included for each state.  Accountable USA also provides a detailed look at state-specific subsidies received by Wal-Mart.

These three resources from Good Jobs First will no doubt prove to be an invaluable resource for state lawmakers, advocates, media, and the general public as states continue their steady march toward improved subsidy disclosure.


NOW THAT'S IDEOLOGICAL: Florida's Tea Partiers Oppose Taxes that Businesses Ask to Pay


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The Tea Party has always done a great job ignoring the public benefits that we all receive as a result of paying taxes.  The opposition of some Florida Tea Partiers to a tax the Florida citrus industry would like to impose on itself is perhaps the most obvious example of this yet.

In December of last year, the Florida citrus growing industry took a vote among its members to create the Citrus Research and Development Foundation, which it plans to task with studying HLB, or the “citrus greening disease.”  The disease is apparently a very serious threat to Florida’s citrus crops, with at least one industry spokesman going so far as to call it a “worldwide citrus crisis.”

In order to fund the foundation’s research, the citrus growers had to get the money from somewhere, and decided on an extremely modest 2 cent increase in the tax levied on each 90 pound box of citrus fruit.  Clearly, the industry expects that the cost of this tax will be outweighed by the benefits it hopes to receive in terms of limiting the spread of HLB.

Thankfully, Florida’s heavily Republican legislature didn’t let its “no new taxes” promise get in the way this week when it approved the industry’s decision to tax itself.  But at least one south Florida Tea Party group has come out against the decision, complaining that the state’s anti-tax legislators did not “follow through on their word” to oppose all tax increases.  It seems that even in Florida, sometimes commonsense can trump silly no-tax promises — at least when the Tea Party isn’t calling the shots.


Florida Group Focuses on Loss of Two Major Progressive Revenue Sources


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The Florida Center for Fiscal and Economic Policy (FCFEP) has released a new report detailing the effects of costly and regressive tax policy changes made by Florida lawmakers in recent years. 

The FCFEP report focuses on how the elimination of Florida’s tax on intangible property, and the repeal of the state’s estate tax, have drastically reduced Florida’s ability to provide vital public services.  Specifically, over $12 billion in revenue has been lost as a result of the disappearance of these two taxes.  Moreover, because each of these taxes was progressive, their elimination has also resulted in Florida’s tax system becoming sharply more regressive.

In this context, Governor-elect Rick Scott's proposal to eliminate the state's corporate income tax is especially alarming, because it would repeal the only progressive tax that Florida still levies.

While blogging for the Wall Street Journal’s “Wealth Report”, Robert Frank recently highlighted a new study showing that the anti-tax crowd’s claims regarding “tax-driven wealth flight and wealth destruction may be exaggerated.”  Specifically, the study shows that despite all the fear the Journal tried to whip up regarding the “self-destructive” nature of raising state income tax rates on the wealthy, all of the states typically demonized as being “high-tax” actually saw the number of millionaires’ living within their borders rise substantially between 2009 and 2010.

The new study in question was released by Phoenix Marketing International, and shows that the number of households with more than $1 million in assets increased by 8.1% between 2009 and 2010. 

The study also shows that Hawaii, Maryland, New Jersey, and Connecticut have the highest concentration of millionaires in the country.  And despite the fact that each of these states recently raised their top income tax rate, each saw the number of millionaires living within their borders rise substantially between 2009 and 2010. 

Specifically, three of those states – Hawaii, Maryland, and Connecticut – saw their millionaire population grow at a rate even faster than the 8.1% national average.  New Jersey was only very slightly below average, having experienced a 7.4% gain in the number of millionaires between 2009 and 2010. 

On the flip side, two of the states experiencing the slowest growth in the number of millionaires – Florida and Nevada – levy no state income tax at all!

With this in mind, all the outrage exhibited by the Wall Street Journal Editorial Board regarding the “self-destructive,” “soak-the-rich theology” of “dedicated class warrior” and Maryland governor Martin O’Malley seems to have been very much off target.  After re-reading the Journal’s editorials, it does at least become clear why Frank labeled the debate “increasingly emotional.”

Interestingly, this isn’t the first time that the facts have run counter to the Journal’s (or Grover Norquist's) gloom and doom predictions regarding higher taxes on the rich.  Both CTJ and ITEP have in the past taken the time to point out the Journal’s factual errors and other exaggerations on this issue.  And in fact, Frank has even helped to highlight some of ITEP’s work in this area on at least one occasion.

One can only hope that the Journal will begin reading their own bloggers’ work and begin to temper their rhetoric next time around.  After all, as Frank’s blog post explains, “that demographics and economics matter more than taxes in increasing and retaining wealth may seem like an obvious point.”  But ultimately, we wouldn’t recommend holding your breath waiting for the Journal to acknowledge it.


New 50 State ITEP Report Released: State Tax Policies CAN Help Reduce Poverty


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ITEP’s new report, Credit Where Credit is (Over) Due, examines four proven state tax reforms that can assist families living in poverty. They include refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits. The report also takes stock of current anti-poverty policies in each of the states and offers suggested policy reforms.

Earlier this month, the US Census Bureau released new data showing that the national poverty rate increased from 13.2 percent to 14.3 percent in 2009.  Faced with a slow and unresponsive economy, low-income families are finding it increasingly difficult to find decent jobs that can adequately provide for their families.

Most states have regressive tax systems which exacerbate this situation by imposing higher effective tax rates on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. Although state tax policy has so far created an uneven playing field for low-income families, state governments can respond to rising poverty by alleviating some of the economic hardship on low-income families through targeted anti-poverty tax reforms.

One important policy available to lawmakers is the Earned Income Tax Credit (EITC). The credit is widely recognized as an effective anti-poverty strategy, lifting roughly five million people each year above the federal poverty line.  Twenty-four states plus the District of Columbia provide state EITCs, modeled on the federal credit, which help to offset the impact of regressive state and local taxes.  The report recommends that states with EITCs consider expanding the credit and that other states consider introducing a refundable EITC to help alleviate poverty.

The second policy ITEP describes is property tax "circuit breakers." These programs offer tax credits to homeowners and renters who pay more than a certain percentage of their income in property tax.  But the credits are often only available to the elderly or disabled.  The report suggests expanding the availability of the credit to include all low-income families.

Next ITEP describes refundable low-income credits, which are a good compliment to state EITCs in part because the EITC is not adequate for older adults and adults without children.  Some states have structured their low-income credits to ensure income earners below a certain threshold do not owe income taxes. Other states have designed low-income tax credits to assist in offsetting the impact of general sales taxes or specifically the sales tax on food.  The report recommends that lawmakers expand (or create if they don’t already exist) refundable low-income tax credits.

The final anti-poverty strategy that ITEP discusses are child-related tax credits.  The new US Census numbers show that one in five children are currently living in poverty. The report recommends consideration of these tax credits, which can be used to offset child care and other expenses for parents.


ITEP Identifies Fundamental Mismatch in 6 State Tax Structures


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Earlier this summer the Census Bureau released data that revealed which states can be considered "low tax" states. We took a closer look at the data and found that while a handful of states could be considered low tax states overall, their taxes are not low for poor and middle-income families.

In fact, in six states — Arkansas, Arizona, Florida, Tennessee, Texas, and Washington — there is a fundamental mismatch between the Census data and how these supposed low tax states treat people living at or near the poverty line. One of the major reasons for this is that these states have largely unbalanced tax structures. Florida, Tennessee, Texas, and Washington rely heavily on property and sales taxes because they don't have a broad-based personal income tax. (For more on a Washington ballot initiative to introduce an income tax, see our Digest article below.) Despite having income taxes, Arkansas and Arizona rely heavily on sales taxes, thus making their tax structures balanced on the backs of low- and middle-income taxpayers.


Bad Tax Ideas from Five Gubernatorial Races


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In an attempt to win votes, lots of gubernatorial candidates have been promising lots of tax cuts — despite the fact that many of their states face very bleak budgetary outlooks.  Here are examples from five states:

Rhode Island — John Robitaille won the Republican nomination for governor this past Tuesday on a platform that includes amending the state constitution to cap property tax increases at 2.5 percent per year.  Massachusetts's experience with a similar cap indicates that this proposal could have a very negative impact on local government services.

Wisconsin — Scott Walker was the winner of Wisconsin's Republican primary on Tuesday.  Walker is also running on an anti-tax platform, including a property tax "freeze" that would only allow revenue growth to the extent that new construction occurs.  Democrat Tom Barrett is also running on a campaign that heavily emphasizes cutting government spending, and enacting so-called "targeted" business tax cuts to create jobs.

Michigan — Republican gubernatorial candidate Rick Snyder's proposal to cut taxes on Michigan corporations by $1.5 billion received some attention in the media this week.  Specifically, Snyder would repeal the Michigan Business Tax and replace it with a much smaller corporate tax.  Recent polling indicates that Snyder holds a substantial lead over Democrat Virg Bernero.

Florida — Some of the most absurd tax proposals we've seen in a gubernatorial race this year have come from Florida Republican Rick Scott.  In his very first year in office, Scott wants to slash both school property taxes and the corporate income tax — to the tune of $2.1 billion total in tax cuts.  Unspecified cuts in government spending would then be made to keep Florida's budget in balance.  After this, Scott claims he would focus his energy on eliminating Florida's corporate income tax entirely. Thankfully, Democrat Alex Sink is opposed to cutting the corporate income tax, though she has jumped on the job-creation tax credit bandwagon.

Maine — Both Democrat Libby Mitchell and Republican Paul LePage are running on anti-tax platforms in Maine.  Neither is open to the idea of using tax increases to balance the state's budget.  Mitchell claims that "Maine's income tax is too high and I will continue the effort to lower it."  LePage has stated that "Reducing the overall tax burden for all Maine citizens and small businesses is my vision for tax reform."

Florida is projected to have a $6 billion shortfall for FY2011. Given this deep financial hole it would probably make sense for lawmakers to investigate ways of raising taxes.

Instead, the Florida legislature has voted unanimously (115 to 0 in the House and 39 to 0 in the Senate) to increase existing tax credits and create some brand new ones. Governor Crist is expected to sign the bill into law.

The tax credits are even more audacious than what we've become accustomed to seeing from the more conservative state legislatures. The crown jewel of the package is a new tax credit that caps the sales tax on yacht purchases to $18,000. Keep in mind that the sales tax would not exceed $18,000 unless the cost of the yacht was greater than $300,000. In other words, this is a tax credit that benefits only those who purchase a yacht worth more than $300,000.

The package includes other gems, like credits for film and TV production. The total cost of the package of credits is estimated to be around $200 million over three years.

But given how difficult it can be to project the cost of tax expenditures (government subsidies provided through the tax code), that cost could easily be much more. As we reported last week, a recent State Auditor report in Missouri found that credits in that state unexpectedly cost an additional $1.1 billion (above and beyond what was originally projected) between FY2005 and FY2009.

Surely, there are better ways for the state to spend hundreds of millions of dollars, but it's likely that the yacht construction, film and television and other favored industries would disagree.


Leaving Money On the Table


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Since the passage of the 1986 Tax Reform Act, federal tax law has given state lawmakers a clear incentive to rely on income taxes, instead of sales taxes, to fund public investments. This is because state income taxes can be written off by federal taxpayers who itemize their deductions, and sales taxes generally cannot. Even with temporary legislation in place that does allow a sales tax deduction, states that rely heavily on sales taxes — and not at all on income taxes — are essentially choosing to ignore what amounts to a federal "matching grant" for states that rely heavily on progressive income taxes.

A new joint report from ITEP and United for a Fair Economy's Tax Fairness Organizing Collaborative quantifies the cost of this choice in seven states that currently have no broad-based income tax — and that make up the gap by leaning heavily on the sales tax. The report shows that collectively, these seven states could reduce the federal taxes paid by their residents by $1.7 billion a year if they enacted a revenue-neutral reform that replaces sales tax revenue with a flat-rate income tax, and that the same states could save their residents $5.5 billion a year in federal taxes by enacting a similarly revenue-neutral shift to a graduated-rate progressive income tax.

Read the report.


How to Fix State Budgets and Help the Economy


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For many states, the fiscal picture for the next year remains cloudy at best. After years of painful spending cuts, how can states balance their budgets without further damaging essential public investments? A new report from United for a Fair Economy (UFE) lays out a few important guidelines for budget reform.

Among the more interesting recommendations: States shouldn't be afraid to meet spending needs by borrowing or drawing down their rainy day funds — but should do each in a straightforward and rational manner. This means that states seeking to adequately fund public investments that benefit future generations (such as transportation spending) shouldn't feel bad about issuing general obligation debt to fund these needs, ensuring that future generations will pay part of the cost of funding these investments. (Of course, lawmakers generally don't need any help shifting costs to future generations, but it's important to remember that there is, in some areas, a sound rationale for doing so.)

On rainy day funds, the report is a reminder that when the rainy days come, the funds should be used — and that damaging cuts to education and health care spending are a far worse result than depleting state reserves.

Responding to a recent report from the Pew Center for the States that generated hysterical headlines about unfunded state pension systems, the UFE report also notes that in the short run, unfunded long-term liabilities of the sort documented in the Pew report are a far better alternative than the loss of vital public services in the present day.

As the report reminds us, virtually every state could avoid damaging spending cuts through progressive tax reform focused on the state income tax — but these other tools should also be considered before resorting to further across-the-board spending cuts.


State Tax Cuts Are Not Stimulus


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State lawmakers in Kansas, Florida, Georgia, South Carolina, and at least ten other states have attempted to advance tax cuts — frequently targeted at businesses — as a means of stimulating their economies.  In response to these types of proposals, this week the Center on Budget and Policy Priorities (CBPP) released a short report pointing out the futility of attempting to stimulate state economies by cutting taxes. The report explains:

“State balanced-budget requirements prevent states from stimulating their economies by cutting taxes. If a state cuts a tax, it generally has to make an offsetting cut to expenditures for a program or service in order to maintain balance. This spending cut is likely to reduce demand in the state just as much as the reduction in taxes may stimulate demand.  It is at best a zero-sum game, where the gains in one area are offset by the losses in another.”

Against this backdrop, there is little question that the proposals described below (as well as the proposal described in the Minnesota story from a couple weeks back) are doomed to fail, despite their political popularity among some groups.

On Tuesday, Florida Governor Charlie Crist used his State of the State address to voice his support for a 10-day sales tax holiday and a sizeable cut in corporate taxes.  The corporate tax cut Crist is seeking could include a one percent reduction in the state’s corporate tax rate.  Both of these proposals would force a reduction in state spending at the worst possible time.  And sales tax holidays, of course, have long been recognized by serious observers as little more than political gimmicks.

In Kansas, the state House of Representatives has passed an expansion of a tax break aimed at boosting employment in the state.  Of course, the revenue loss associated with expanding this break, were it to become law, would only make the legislature’s job of producing a balanced budget even more difficult.  And, as the CBPP explains quite well, the larger cuts in government services that would be needed to finance this cut would effectively cancel out any purported economic gains.

In Georgia, an op-ed by Sarah Beth Gehl of the Georgia Budget and Policy Institute (GBPI) points out the folly of another proposal that claims to offer help for the state’s economy.  Specifically, the proposal would eliminate the state’s corporate net worth tax.  As Gehl points out, “there is no evidence that ending this tax will incite businesses to come to Georgia.”

Some South Carolina lawmakers are making use of a similar logic, though their focus is on a somewhat longer-term initiative.  Their plan would phase-out the corporate income tax over the course of 20 years, with the hope of improving the state’s “economic competitiveness.”  An editorial published in The State this week points out the flaw in this plan:

“The theory is that the tax breaks will entice people to start and expand businesses and move jobs to South Carolina. ... But there's a limit to how much difference a lower tax can make when there's no market for a company's products or services. And the stimulative value is particularly questionable when the tax is relatively low to start with. That's why we never have been convinced that supply-side economics can work at the state level.”


Corporate Taxes in the News


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In at least three states, lawmakers are ignoring fiscal reality and advocating for cuts in one of the most progressive taxes levied by states -- the corporate income tax. The general consensus among experts is that most states aren't out of the woods yet when it comes to economic recovery. That means their budget gaps are going to be a problem for some time. Yet, legislators in Florida, Idaho, and Iowa are pushing the same old proposals to reduce state revenue in order to benefit corporations.

For example, Florida Governor and U.S. Senate hopeful Charlie Crist is crafting a plan that would cut the state's corporate income tax. Details remain sketchy, but he is quoted as saying that he'd "love" to reduce the tax "because I think it would help job stimulation."

Actually, any business person will tell you that he or she wants to hire workers whenever there is demand for their products. If no one is ready to buy orange juice, Tropicana is not going to create jobs regardless how many tax cuts Governor Crist throws at them. Further, there is ample evidence that corporate taxes aren't a major factor in business location decisions because those decisions are affected by numerous other factors. (For instance, Tropicana will not try growing oranges in Alaska just because Alaska offers a tax break.)

The corporate tax cut madness has popped up in other parts of the country. Idaho Representative Marv Hagedorn is proposing cutting both the personal and corporate income tax rates by a third. However, it appears that more sensible minds will prevail. The House Revenue and Tax Commmittee chairman calls the proposal "more political statements than they are reality. I just think it's a tough sell to say we're going to reduce somebody's taxes -- I don't care who it is -- when we're cutting programs left and right."

Cutting taxes is also a hot topic in the Republican primary for Iowa Governor, as the candidates attempt to outdo each other with little thought to the impact that their proposals will actually have on the services Iowans depend on. Two of the Republican candidates are reportedly open to the idea of completely eliminating the state's corporate income tax.


ITEP's "Who Pays?" Report Renews Focus on Tax Fairness Across the Nation


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This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

Read ITEP's New Report: Who Pays? A Distributional Analysis of Tax Systems in All 50 States

By an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy, according to a new study by the Institute on Taxation & Economic Policy (ITEP).

“In the coming months, lawmakers across the nation will be forced to make difficult decisions about budget-balancing tax changes—which makes it vital to understand who is hit hardest by state and local taxes right now,” said Matthew Gardner, lead author of the study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. “The harsh reality is that most states require their poor and middle-income taxpayers to pay the most taxes as a share of income.”

Nationwide, the study found that middle- and low-income non-elderly families pay much higher shares of their income in state and local taxes than do the very well-off:

-- The average state and local tax rate on the best-off one percent of families is 6.4 percent before accounting for the tax savings from federal itemized deductions. After the federal offset, the effective tax rate on the best off one percent is a mere 5.2 percent.

-- The average tax rate on families in the middle 20 percent of the income spectrum is 9.7 percent before the federal offset and 9.4 percent after—almost twice the effective rate that the richest people pay.

-- The average tax rate on the poorest 20 percent of families is the highest of all. At 10.9 percent, it is more than double the effective rate on the very wealthy.

“Fairness is in the eye of the beholder.” noted Gardner. “But virtually anyone would agree that this upside-down approach to state and local taxes is astonishingly inequitable.”



The “Terrible Ten” Most Regressive Tax Systems

Ten states—Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada, and Alabama—are particularly regressive. These “Terrible Ten” states ask poor families—those in the bottom 20% of the income scale—to pay almost six times as much of their earnings in taxes as do the wealthy. Middle income families in these states pay up to three-and-a-half times as high a share of their income as the wealthiest families. “Virtually every state has a regressive tax system,” noted Gardner. “But these ten states stand out for the extraordinary degree to which they have shifted the cost of funding public investments to their very poorest residents.”

The report identifies several factors that make these states more regressive than others:

-- The most regressive states generally either do not levy an income tax, or levy the tax at a flat rate;

-- These states typically have an especially high reliance on regressive sales and excise taxes;

-- These states usually do not allow targeted low-income tax credits such as the Earned Income Tax Credit; these tax credits are especially effective in reducing state tax unfairness.

“For lawmakers seeking to make their tax systems less unfair, there is an obvious strategy available,” noted Gardner. “Shifting state and local revenues away from sales and excise taxes, and towards the progressive personal income tax, will make tax systems fairer for low- and middle income families. Conversely, states that choose to balance their budgets by further increasing the general sales tax or cigarette taxes will make their tax systems even more unbalanced and unfair.”

Implications for State Budget Battles in 2010

“In the coming months, many states’ lawmakers will convene to deal with fiscal shortfalls even worse than those they faced last year,” Gardner said. “Lawmakers may choose to close these budget gaps in the same way that they have done all too often in the past—through regressive tax hikes. Or they may decide instead to ask wealthier families to pay tax rates more commensurate with their incomes. In either case, the path that states choose in the upcoming year will have a major impact on the wellbeing of their citizens—and on the fairness of state and local taxes.”

Earlier this week, the Georgia Supreme Court ruled in favor of the City of Columbus and against hotels.com, an online travel company (“OTCs”) that charges customers one rate for booking a hotel room but pays local governments a lodging tax based on cheaper, wholesale room rates.  The Court’s finding mirrors its decision in a case decided in June against Expedia.com.  In both instances, the Court held that the tax for which the OTCs were liable should be based on the retail room rate paid by their customers.

OTCs contract with local hotels to provide rooms for a discounted or wholesale rate.  When a customer books a room online, the OTC charges the customer a “marked-up” rate along with taxes and service fees.  Under Georgia law, municipalities may impose hotel occupancy and excise taxes on the furnishing of any room, lodging, or accommodation.  The Court noted that state law allows cities to impose a tax on the lodging charges actually collected. 

The high court’s decisions are binding across Georgia, so the two Columbus cases could affect other suits filed by governments seeking to collect the proper amount of lodging taxes from OTCs.  The cases have been remanded to the lower courts to determine how much money the online services owe in back taxes and penalties. 

Importantly, numerous other cities – including Houston, San Antonio, and Miami have sued or initiated administrative proceedings against OTCs, asserting that they owe back taxes on their price mark-ups.  While many cases have yet to be fully adjudicated, one other recent case yielded much the same verdict as Columbus’ suit against hotels.com.  In February, multiple OTCs, including Orbitz and Travelocity, were ordered to pay the city of Anaheim, California, $21 million in back taxes, fees and penalties related to the payment of hotel occupancy taxes.

Rulings such as these have motivated OTCs to seek enactment of federal legislation that would ban state and local taxation of hotel room rentals when booked by such a company.  However, as these rulings demonstrate, there is no justification for limiting the base for such a tax to the wholesale price of a hotel room, let alone eliminating taxation altogether.  Hotel taxes are consumption taxes, which should be measured by the value of the consumption to the customer.  Therefore, the tax should be imposed on the retail amount.  For more on this subject and on the OTC’s push for federal legislation, see this helpful report from the Center on Budget and Policy Priorities.


Conservative Governors of Two Southern States Approve Increasing Cigarette Tax Rates


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For over two decades, Mississippi and Florida have bucked the national trend of increasing cigarette taxes. But now, staring down massive budget deficits, Mississippi Governor Haley Barbour recently signed a 50 cent-per-pack cigarette tax increase, and Florida Governor Charlie Crist appears ready to do the same with a $1 per pack hike. Given that each is a conservative governor with at least some national aspirations, the result is a bit surprising to say the least.

In the case of Governor Barbour, his approval was especially unexpected in light of his status as a former tobacco industry lobbyist. Governor Crist's support was likewise unanticipated, largely because he has signed pledges to oppose tax increases as both a Governor and as a candidate for federal office. Crist was careful to frame his support as entirely focused on the public health aspects of cigarette tax increases, though it's hard to believe that his desire to avoid forcing a special session to balance the budget had nothing to do with his decision. Thus is the responsibility of governing. Sometimes tax increases cannot be kept off the table.


Florida Considers Key Reform to Prevent Corporate Tax Avoidance


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Some good news for proponents of sound state corporate income taxes: Florida may be on its way to shoring up its corporate levy and to putting an end to some egregious tax avoidance schemes. Earlier this month, the Senate Commerce Committee approved a measure to institute combined reporting of corporate income for tax purposes. As an ITEP policy brief on this topic explains, combined reporting is the single most effective option available to state lawmakers for preventing corporations from shifting income out of Florida and into states where they will not be taxed.

As a recent report from the FloridaCenter for Fiscal and Economic Policy documents, the need for combined reporting is clear. Florida loses in excess of $375 million per year to the sort of legal and accounting ploys that combined reporting would prevent.

While passage of the measure is not assured, Florida could join Wisconsin as the second state to adopt combined reporting this year. Senate President Jeff Atwater has expressed support for this critical reform and public interest groups like the League of Women Voters are actively promoting it.


Gas Tax Increases: An Increasingly Popular Idea


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At the state level, the usual response to recommendations that taxes be increased to preserve vital state services has generally been: "Now is not the time". The most notable exception to this trend so far has been with the cigarette tax, as we've explained before. Increasingly, however, policymakers appear to be coming around to the idea of boosting gas tax rates in order to raise the revenue needed to maintain our nation's infrastructure. Given that most state gas taxes haven't been increased for quite a few years, and that during that time inflation has significantly eroded the value of most gas tax rates, our only response can be, "It's about time."

In Maryland, for example, the Senate President recently expressed an interest in raising the gas tax, urging that "there's got to be an increase in the transportation trust fund somewhere, and there's got to be a way we can find people with the political will to make it happen". Numerous governors have echoed this call as of late, most recently in Massachusetts, and Idaho.

In Idaho, especially, the Governor was able to hit the nail on the head with his observation that, "[we last raised] the fuel tax... 13 years ago. And now here we are trying to accomplish 2009 goals with 1996 dollars. Everyone in this room or listening to me throughout Idaho today -- everyone who has a household budget or runs a business -- knows that just doesn't work".

In response to this problem, Idaho Governor "Butch" Otter has recommended bumping the gas tax upward by 2 cents in each of the next 5 years. Addressing the root of the problem even more directly, Wisconsin Governor Jim Doyle has proposed indexing the gas tax rate to inflation -- a practice that had existed in Wisconsin up until 2006. Maine and Florida continue to index their gas tax rates today, with very favorable results in terms of providing each state with a somewhat more adequate and sustainable source of transportation revenue.

Importantly, the federal gas tax is not indexed to inflation, meaning that the Federal Highway Trust Fund is suffering from many of the same problems we see plaguing the states mentioned above. The federal gas tax has not been increased in over 15 years. President Obama's new Energy Secretary, Steven Chu, has previously gone on the record as supporting raising the gasoline tax. The views of Transportation Secretary Ray LaHood are not yet clear. What is clear, however, is that something will have to be done at the federal, as well as the state level, if gas tax revenues are to be restored to their previous purchasing power.

Of course, the gas tax is not perfect. Aside from the long-term issues arising out of improved fuel efficiency (which we need to begin planning for now), the regressivity of the tax is very worrisome, especially in these difficult times. Fortunately, low-income gas tax credits, as we've advocated on multiple occasions, are very capable of remedying this shortcoming.

Washington state residents are in for a heap of trouble if Governor Christine Gregoire has her way when it comes to balancing the state's budget. To remedy their budget shortfall, Governor Gregoire has proposed this week to slash valuable state services, and has expressed no interest whatsoever in increasing any taxes. $6 billion worth of cuts in children's health care, unemployment benefits, education, and other key services have been put on the chopping block. The Washington Times reports that some of the Governor's cuts would even "violate voter-approved initiatives and previously negotiated labor contracts."

Thankfully, the Washington-based Economic Opportunity Institute presented more responsible ideas this week that add a much-needed progressive voice to the otherwise bleak landscape. Among their proposals are a variety of expansions in the state's sales tax base, a tax on high-income earners, and a tax on oil companies' profits.

Along similar lines, as Florida's budget situation continues to worsen, Republican legislative leaders have announced a special January session to deal with a $2.3 billion budget deficit for the current year. Options on the table include spending cuts and raiding trust funds -- but tax hikes have been explicitly ruled out by legislative leaders. Democratic lawmakers are showing renewed interest in hiking the state's cigarette tax -- even though the projected yield of such a hike has fallen dramatically in the last year. One editorial observer points out that avoiding sensible tax-raising solutions amounts to "eating the seed corn."

While reports such as those out of Iowa and Virginia (see "Budget Fixes Worth Embracing", in this week's Digest) highlight some of the best ways for states to dig themselves out of their current budgetary nightmares, in many cases it appears that the cigarette tax is continuing to hold on to its title as the single most popular tax to increase among the states. Policy advocates and even many legislators are often careful to frame their support of cigarette tax hikes in terms of fighting smoking or reducing health care costs, but in times as desperate as these, it's hard not to suspect that revenue needs may be the driving force. The fact is that revenue from the cigarette tax is almost never sustainable over time because the U.S. smoking population is constantly on the decline. It's therefore difficult to get excited about the cigarette tax as a budget-fix for any period of time beyond the very short-term -- and even then, states should never be excited about raising revenue through such a regressive tax. But in states that have held their cigarette taxes constant at low levels for a number of years, it's also hard to get too upset over such proposals. Five states in particular made news this week in their debates over the cigarette tax: Florida, Mississippi, Oregon, South Carolina, and Utah.

The three states with the most intense cigarette tax debates at the moment are Florida, Mississippi, and Oregon. Florida and Mississippi haven't increased their cigarette tax rates in 18 and 23 years, respectively, and therefore have some of the lowest cigarette tax rates in the nation. Hikes in the range of 50 cents to $1 per pack are being proposed in Florida, while Mississippi's debate appears to be over a range of 24 cents to $1 per pack. In Oregon, the governor recently proposed a 60 cent hike as part of his budget. The intent of that hike is use the new revenue as part of a package to expand health care in the state -- such an arrangement is likely to result in tensions down the road as cigarette revenues fall and health costs continue to rise.

South Carolina provides another example of a state with a cigarette tax debate worth following. In this past year's session, the legislature approved a cigarette tax hike, only to eventually be vetoed by the governor, ostensibly out of concern over linking such an unsustainable revenue source to a permanent expansion of Medicaid. As the appearance of a recent op-ed praising the benefits of hiking SC's lowest-in-the-nation rate suggests, this debate is not yet over.

Utah provides another example of a potential budding cigarette tax debate. With the American Cancer society enthusiastically seeking to capitalize on what appears to be a favorable climate for a cigarette tax hike, one has to expect the idea to pick up steam during discussions over how to close the state's looming budget gap.


The Elephant in the Room


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As the fiscal contagion spreads among the states, policymakers are clearly casting about for ways to close large and growing budget deficits. In Nevada, Governor Jim Gibbons may be open to tax increases in light of a shortfall that is projected to reach $1.8 billion over the next two and half years, but he has also floated the idea of 'voluntary' payroll reductions of 5 percent. New Hampshire faces an approximately $600 million budget gap over the same period, with lawmakers weighing such options as selling state properties, legalizing gambling, or deferring needed payments to the state pension fund. Florida may have to confront an eye-popping deficit of $6 billion over just 18 months, driving elected officials to think about raiding a variety of trust funds and imposing a 4 percent across-the-board cut in agency budgets.

Of course, these three states have more in common than difficult days ahead. They also share a steadfast refusal to levy a personal income tax. Rather than continue to cast about for half-measures and temporary fixes -- or, worse, policies that would undermine working families' already precarious economic situations -- policymakers in states like Nevada, New Hampshire, Florida, Washington, and Tennessee need to acknowledge the elephant in the room and consider whether the tax policies that brought them to this point are the ones that will carry them to a better future.

Recently, the Tax Foundation released its annual ranking of state business tax climates. As always, there are more than a few good reasons to be skeptical of the results contained in the report. But aside from the traditional methodological criticisms of any ranking of this type, this year's report includes at least one assertion that should turn the head of even the most casual state tax policy observer.

Florida, a state with one of the most obviously unfair and criticized tax systems in the nation, ranks 5th in overall business tax climate. According to the authors of the report:

"[Florida is] one of just four states to rank in the top half on all five tax-specific indices. Even Florida's much-maligned property tax system ranks fairly well, scoring 19th out of 50 states. Of course, improvements can be made to any state's tax code... but Florida is in a better position than most states to be content with the tax code it has."

A property tax that ranks "fairly well"? Content with the tax code it has? These assertions should come as a great surprise to anyone familiar with Florida's tax system. As has been documented at length in previous Digest articles, Florida's tax system is both unfair and inadequate.

Multiple rounds of budget cuts have become the norm each year in the state. Oddities with the property tax system have forced neighbors with similar homes to pay vastly different amounts in property tax. And all the while, the rich have been let off the hook despite vast income inequality in Florida.

In large part as a direct result of some of the abovementioned flaws with its tax code, a number of problems are immediately visible in Florida's quality of life. According to the Florida Center for Fiscal and Economic Policy, Florida ranks:

  • 50th in per capita funding for higher education

  • 49th in all education funding per capita

  • 41st in state health rankings

  • 49th in percent covered by health insurance

  • 46th in Medicaid spending per child

  • 2nd highest in percentage of uninsured children

  • 48th in progressiveness of major state & local taxes

It's hard to imagine unhealthy and poorly educated workers being good for the state's "business climate". A tax system that fails to adequately fund these services should not be ranked among the best in the nation for business. In reality, Florida has an even longer and tougher road to travel than most states before it should be "content with the tax code it has".


Ballot Update: Florida Supreme Court Ensures Property-Sales Tax Swap Won't Make the Ballot


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The Florida Circuit Court ruling we reported on last month was upheld by the state's Supreme Court this week. As a result, the ill-conceived ballot proposal seeking to slash school property taxes will not be presented to Florida voters this November. The body that put the measure on the ballot -- The Taxation and Budget Reform Commission -- is not scheduled to meet again for another twenty years. That means the only option for enacting a property tax cut of the kind Florida has been stubbornly pursuing is to go through the Florida legislature. While it's not yet clear what the results of traveling down that path will be, it's fair to say that the cut, as proposed by the Commission, will not be adopted. Former state Senate President John McKay believes that "the effort, as it's currently conceived, is dead". The cries for property tax cuts aren't likely to face a similar demise anytime soon, however, and new developments from Florida seem inevitable in the coming weeks and months.


Budget Update: "How Many Times Can We Say No to Taxes?"


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Four of the nation's most populous states, together home to more than one out of every four Americans, are facing serious budget problems. Important new developments occurred in each of those states this week, the theme of which is perhaps best conveyed through California Republican Mike Villines' question: "How many times can we say no to taxes?" State residents will soon learn that this is really saying "no" to keeping alive public services like education, transportation and health care that families depend on.

See the following posts on the budget situations in California, Florida, New York, and Virginia.


Florida: It's Even Worse Than We Thought


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Late last week, the official estimates of general fund revenue collections in Florida during each of the next two years were reduced by 7% and 8%, respectively. For the current fiscal year, this means that the state is expected to have $1.8 billion less in funds than was thought in March. Slowing sales tax collections are the primary culprit.

Raising taxes to help fill this shortfall appears to be completely out of the question. The likely solution will involve some combination of:

-Relying on the $300 million the legislature set aside last year.
-Making permanent Governor Crist's order to cut state agency budgets by 4%, saving up to $1 billion.
-Tapping into reserves contained in the hurricane recovery fund (apparently ignoring the potential costs of Tropical Storm Fay) and health care endowment, which have about $1.6 billion available.

Lawmakers could, of course, also convene in a special legislative session to make the needed adjustments, though election-year politics make that option extremely unlikely.

Perhaps more important than how Florida will fix its budget this year, however, is how it will address the inevitable shortfall looming next year. State economists are projecting revenues to be $2.2 billion lower than was originally thought. Tapping into reserves this year will only reduce the number of options available next year, and with cuts in vital programs already having gone quite deep, that option will undoubtedly be even more painful next year. Perhaps the dire situation on the ground in Florida will eventually begin to loosen the seemingly unshakeable grip of anti-tax advocates in the state. On a somewhat encouraging note, the Orlando Sentinel this week even ran an editorial suggesting something previously unheard of in Florida... an income tax!


Tentative Victory in Florida: Narrow Escape from a Disaster Twenty Years in the Making?


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Late this week, Florida Circuit Court Judge John Cooper ordered that the amendment set to appear on the November ballot repealing most state-required school property taxes be removed because of the misleading nature of both the title and the summary of the proposal that voters would read. This comes a little over a week after Florida Governor Charlie Crist offered his full support for the proposal.

From a policy perspective, the proposal is extremely poorly targeted and overly expensive. Judge Cooper's opinion, however, highlights some more technical, though extremely important, reasons for why this proposal shouldn't make the ballot. First, the title of the proposal speaks only of school property taxes and replacement funds, but makes no mention of the fact that non-school property taxes would also be limited with a 5% cap on increases in the assessed value of non-homestead properties. Second, and more importantly, nothing in the title or summary of the proposal makes clear that the amendment's mandate that local school funding be held harmless applies only to the 2010-2011 fiscal year. After that time there is no guarantee that schools will not have to suffer through spending cuts as a result of this gutting of Florida's property tax system.

Unfortunately, the decision to keep this deceiving and poorly-conceived proposal off the ballot is not yet final. The state is virtually certain to appeal the ruling very soon.

Most business groups, including the Florida Chamber of Commerce, are pleased that this proposal may not make it to the ballot. The Chamber has, however, used this opportunity to advocate a variety of irresponsible property tax cuts it would like to see enacted without an accompanying sales tax hike. Realtors and Governor Crist, on the other hand, are much less excited by the verdict. Referring to the possibility of the verdict being overturned upon appeal, Crist said that Judge Cooper's verdict"doesn't mean anything. What really matters is what the last ruling is."

Hopefully, though, that last ruling will be the same as the first.


New ITEP Report: State Tax Policy a Poor Match for Economic Reality in Key States


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Earlier this week, the Institute on Taxation and Economic Policy (ITEP) released a brief report using IRS data and revealing that the most unequal states in the country also happen to be states that lack the type of progressive tax provisions that could reduce this inequality and raise badly needed revenue. The most unequal states either don't have a personal income tax or have one in need of improvement. Consequently, these states are left with tax systems that, on the whole, are unsustainable, inadequate, and unfair over the long-run.

The IRS data show that, in 2006, ten states -- Wyoming, New York, Nevada, Connecticut, Florida, the District of Columbia, California, Massachusetts, Texas, and Illinois -- have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Yet, the tax systems in these states generally ignore that very important reality. Of those ten states, four lack a broad-based personal income tax and three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner. Three do use a graduated rate structure, but of these, two have cut income taxes for their most affluent residents substantially over the past two decades.

Given this mismatch, it should not be too surprising that over half of these states face severe or chronic budget shortfalls. After all, the lack of an income tax, the lack of a graduated rate structure, or moves to make the income tax less progressive all mean that a state's revenue system will not completely reflect the concentration of income among the very wealthy and therefore will not yield as much revenue.

Case in point: New York. As the Fiscal Policy Institute observes, over the last 30 years, the state has reduced its top income tax rate by more than 50 percent. Most recently, in 2005, it allowed to lapse a temporary top rate of 7 percent on taxpayers with incomes above $500,000 per year. Today, the state must confront a budget deficit of more than $6 billion for the coming year and more than $20 billion over the next three. New York residents seem to understand the disconnect between the enormous disparities of wealth in their state -- where the richest 1 percent of taxpayers account for 28.7 percent of reported income -- and the state's fiscal woes. A poll released this week shows that nearly 4 out of 5 people surveyed support increasing the state's income tax for millionaires. Hopefully, Governor David Paterson is listening. As it stands, he'd rather cap property taxes than ensure that millionaires pay taxes in accordance with their inordinate share of New York's economic resources.


Florida Governor Finds Any Tax Cut Too Irresistible To Pass Up


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After months of offering only lukewarm support (or in some cases, even "accidental" opposition) for a November ballot proposal that seeks to eliminate a substantial portion of school property taxes, Florida Governor Charlie Crist finally said this week that he would actively work to help secure the measure's passage. This announcement comes just days before state economists' are set to issue their revised projection of the state's looming budget deficit which one economist has already warned, "is going to be big". Unfortunately, unprecedented budget cuts have already been made in education, social services, and most other government functions, leaving Florida with few reasonable options for filling this additional gap. With revenues in such sad shape, there's even less reason now for Florida to move towards becoming more reliant on unpredictable sales taxes -- which this ballot measure proposes to do.

Previous Digest articles have already detailed the flaws with the plan Governor Crist now supports. (See Florida: Tax Swap or Tax Flop?; Florida: Good Thing We Don't Have To Do This Again For Twenty Years; and Florida Tax Commission Charges Ahead With Unfair and Fiscally Irresponsible Plan.) In short, it's regressive, inadequate, unsustainable, and does nothing to fix the "brokenness" of Florida's property tax system.

An article that ran in the Sun Sentinel this week provides some additional evidence on these points. One state economist has said that "the amendment's language isn't clear in some areas and creates uncertainty and multiple options." This, the Sentinel notes, means that "because economists don't know what offsetting tax increases will be imposed... there's no real way to gauge the economic impact of the property-tax cuts. In other words, nobody's certain who'd pay less taxes and who'd pay more."

Nonetheless, Governor Crist is now touting the measure as a "significant stimulant to Florida's economy". While the degree of disconnect here between rhetoric and reality is unsettling, it unfortunately has become the norm for any Florida tax debate. As things stand right now, voters appear about evenly split over the measure, though a sizeable 20% of those polled in a recent survey were undecided on the issue. Hopefully, Governor Crist's endorsement of the measure won't alter these numbers too significantly.

Check out the Florida Center for Fiscal and Economic Policy's website for more information as the November election approaches.


"Back-to-School" Sales Tax Holidays


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As parents gear up to send children back to school this fall and economic uncertainty looms overhead, several states are reconsidering their August sales tax holidays. Despite their political appeal, back-to-school sales tax holidays are inherently flawed. Low-income taxpayers often do not have the luxury to time their purchases around these holidays. This is probably even more true during a period of higher gas prices, inflation and a faltering economy. States not only lose a great deal of income but must also work closely with retailers to ensure that the complicated provisions are carried out smoothly and correctly.

The Massachusetts legislature voted this week to continue the recent tradition of a back-to-school sales tax holiday for August 16th and 17th. Although initially reluctant to do so in the face of a faltering economy, lawmakers justified their approval of the holiday by continually calling it a "shot in the arm" for small business. But the fact is, a large majority of these purchases will be made regardless of the sales tax break. Back-to-school shopping occurs year in and year out; a weekend-long incentive is not going to change that nor is it going to stimulate the economy. And the cost to the state will amount to an estimated $16 million at a time when Massachusetts, like so many other states, faces a budget shortfall. A recent Boston Globe editorial blasted lawmakers for making such an irresponsble choice.

Floridamade a rare responsible policy decision in choosing not to have a sales tax holiday this year. State lawmakers acknowledged that because their tax system is in such sad shape, they cannot afford the annual back-to-school sales tax holiday and have decided not to enact it this year. Rep Keith Fitzgerald (D-Sarasota) explains that the "little holiday amounts to a significant amount of money" that is not available in the Sunshine state's already atrocious budget. Meanwhile, many retailers are competing to offer generous mark-downs, knowing that parents will go back-to-school shopping regardless of a tax break and that business will not be harmed by the scrapping of the holiday


Regressive Tax Proposals on the Ballot This November


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It's that time again. Right-wing activists, unable to convince lawmakers to gut their tax systems, are asking voters to do it themselves through the ballot. This update explains that ballot initiatives to enact regressive tax policies died in Michigan and Montana, but survived to secure spots on the ballot in Arizona, Florida, Massachusetts and Oregon.

The Good News: Two Regressive Proposals Did Not Make It onto the Ballot

Michigan "Fair "Tax": The Michigan Fair Tax proposal, a highly regressive measure that was anything but fair, failed to make it onto the November ballot. The proposal would have eliminated both the Michigan Business Tax and the personal income tax, raised the state sales tax to 9.75% and expanded it to include services, food, prescription drugs and out-of-pocket health care expenses.

Montana Property Tax Limitations: CI-99, a measure that would have capped property tax increases at no more than 1.5% annually, fell short of landing a spot on the Montana ballot. In addition to the limits on tax hikes, the proposal would have ensured that homes can only be reappraised when sold (as opposed to every seven years). Sound familiar? It looks like, at least this year, Montana averted the disastrous path followed by California's Proposition 13.

The Bad News: Other Regressive Tax Proposals ARE on the Ballot in November

Arizona Sales Tax Hike: On June 27, the Digest described the Arizona sales tax initiative which will be on the ballot in November. The proposal would hike the sales tax by one cent. The increased revenues would be directed toward a faltering transportation system. Arizona already has sales taxes bordering on 10% and a nearly flat income tax. As a result, its tax policy is already highly regressive and this initiative would make it more so.

Florida Tax Swap: In November voters will decide on Amendment 5, a 25% property tax cut and a 1 cent sales tax hike. The property tax cut would hit Florida's schools, already in shambles, the hardest. The Amendment would come at a cost of $9 billion in lost revenue and the subsequent sales tax increase would only produce about $4 billion, plunging the Sunshine State even further into debt and shifting the tax burden to lower-income Floridians.

Abolishing Massachusetts' Income Tax: In Massachusetts, voters will have the opportunity to decide on an initiative that would eliminate the state's income tax. Such irresponsible policy would cost the state $12 billion in lost revenue -- a whopping 40% of its budget. The price would be paid with teacher layoffs, school closings, cuts to higher education, worker training programs and health care services, and delays of road and bridge repairs.

Cutting Oregon's Income Tax for the Rich: Oregon voters will have the opportunity to vote on a measure that would drastically cut income taxes for its wealthiest taxpayers. The proposal would create an unlimited deduction on the state income tax form for federal income taxes paid.The state's general fund would lose about $4 billion over four years from the proposal. The general fund is used primarily for education, public safety, the justice system, human services (including health care, care for seniors and child protective services) and state parks. Meanwhile, the average tax cut for the top one percent of Oregon earners would be about $15,000. Those who fall among the middle 20% of earners would receive about $1 on average.


Florida: Tax Swap or Tax Flop?


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Virtually every business group in Florida, with the exception of realtors, has joined tax fairness advocates in opposition to the proposed Amendment 5 on the November ballot. Amendment 5 would eliminate most state property taxes for schools, costing them about $9.5 billion a year, in exchange for a 1 percentage point increase in the state sales tax. The sales tax increase would only bring in $4 billion a year at most, not enough to fill the gap left from the loss of property tax revenue. The amendment does require the state to appropriate another $1.5 billion towards education using other revenue, but educators are rightly suspicious that lawmakers might not live up to this promise. Even if they did, there would still be a gap of a few billion dollars at least.

Most business interests oppose the amendment because they fear the sales tax increase will hurt their profit margins. Realtors clearly believe lower property taxes will raise home sales. The last public policy initiative they backed for this purpose, "portability", a part of Amendment 1 that was approved in January, failed to mitigate the housing crunch.

There are plenty of reasons to oppose the amendment that have nothing to do with profit margins. It is unwise to shift from property taxes to sales taxes in the midst of a recession. Sales tax revenues are strongly linked to economic cycles and they are not a reliable source of income during an economic downturn. Moreover, the sales tax is a regressive way to raise money and will hurt the poor the most at a time when they can least afford it.

Finally, leaving a future source of revenue undefined is an invitation for more deep cuts for public services at a time when states are already facing serious budget shortfalls. The legislature just passed a state budget $6 billion smaller than the year before, followed by an additional 4% across-the-board cut. This leaves vital public services vastly under-funded at a time when they're needed most.

Amendment 5 shifts the state's fiscal burden to lower-income people and also threatens to tear a bigger hole in the system that funds education. It's a step backwards that Floridians should reject.


FY 2009 State Budget Carnage: Florida


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The situation in Florida is worst of all. Governor Crist recently signed into law a $66 billion budget which slashed spending across the board, leaving Florida's public education, justice and health care systems in peril. As a recession, coupled with inflation, hits Floridians particularly hard, it is becoming clear that a sales tax on its own cannot possibly come close to adequately funding necessary programs. The cuts to public education amount to a reduction in spending of $130 per child at a time when Florida has the worst drop-out rate in the country. Tuition at community colleges and universities will rise by 6%. These institutions, forced to cut spending, are struggling to attract, recruit and retain valuable faculty members. Payments to hospitals serving the poor will be eliminated. It's predicted that cuts to nursing homes will lead to massive layoffs and shut-downs. Homes for the developmentally disabled will be forced to limit services. The justice system must cope with huge job cuts, with the burden being borne primarily by case-specific divisions such as sex crimes and drug arrests. Increased fees and wait times for justice services will disproportionately affect the poor as well as indigents, battered women and rape victims.

Governor Crist believes that strangling services for the most vulnerable in his state will "maintain the gains that Florida has achieved over the past several years." Would the worst drop-out rate in the nation fall under "gains"? How about the fact that Florida is the only state that does not waive court fees for indigents? Is an exodus of university professors a "gain"? Meanwhile, funds are allocated toward tourism marketing and promotion and economic-development incentives for new industry and film production. Florida can barely afford to educate its children but is more than willing to promote its image for tourists (despite the nationwide recession) and bring in big-time movie productions (which provide only temporary employment and economic benefits).

David Denslow, head of the University of Florida's Bureau of Economic and Demographic Research contends that reducing a state's budget actually amplifies and spreads the effects of a recession. Clearly the preservation of tax breaks for the wealthy and the second most regressive tax system in the nation are also in no way stimulating the economy. Florida's lack of an income tax has actually worsened its situation under the current economic conditions. Rhode Island and New Jersey lawmakers, beaming with pride over their recent "tax-free" budget agreements, should take careful notice of Florida's crisis and avoid making the same "gains."


Florida: Good Thing We Don't Have to Do This Again for Twenty Years


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Seven tax-related ballot proposals ranging in quality from "highly regressive and irresponsible" to "completely inconsequential" are now set to be on the November ballot in Florida. Proposed by a "reform" commission that meets only once every two decades, the small scale of most of the proposals is surprising. Preferential property tax treatment for marinas, farm land and housing livestock, as well as for owners who improve their property with windstorm protection or renewable energy products, are among the proposals for which Florida voters have apparently had to wait twenty years.

But there is one very serious change to the state tax structure that has left progressives wishing the Commission would have stuck to making only minor changes. Well aware of the existing $3.4 billion budget shortfall facing Florida, the Commission has nonetheless proposed that school property taxes be abolished at an annual cost of $9 billion. In order to meet the requirement established by the Commission that school funding not decline as a result of this change, it was recommended that the legislature raise the sales tax rate by one percent, eliminate numerous sales tax exemptions (on both goods and services), and cut spending. In addition to these ideas, the Commission helpfully suggested that the legislature might try to find "other revenues".

A 1% sales tax hike is expected to raise less than half of the revenue needed to replace school property taxes, so expansions of the sales tax base appear imminent if the proposal gains approval in November. Expanding the sales tax base is good policy, assuming that it is done carefully, but doing so would ideally be coupled with much better targeted tax cuts. An across-the-board property tax reduction of the kind proposed here will provide huge benefits to those wealthier individuals with the most valuable homes.

And as if all of this wasn't bad enough, the Commission has also proposed tightening the caps on increases in a home's assessed value (criticized in the Digest just a few weeks ago) for homes not occupied by the owner.


Taxation's Own Digital Divide


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Earlier this month, Apple announced that it had surpassed Wal-Mart as the largest music retailer in the United States, citing data from market research firm NPD for the first two months of 2008. The announcement will hopefully help to draw more attention to a long-standing shortcoming in some states' tax systems -- namely, their inability to tax electronic commerce properly. Simply put, the form a transaction takes should not affect the amount of tax it might incur. Someone who downloads the latest Mariah Carey album from iTunes should pay the same state sales tax as someone who purchases the CD at his or her local record store, and a hotel reservation made through Orbitz should result in the same amount of revenue to the state as one made over the phone or in person.

Yet, flaws in state tax laws mean that purchases of intangible goods -- like a downloaded version of E=MC2 -- are often not subject to the same sales taxes levied on purchases of tangible goods. For example, California loses an estimated $500 million in sales tax revenue each year because it makes such a distinction between tangible and intangible goods. A proposal to move towards ending that distinction was defeated in the Assembly's Revenue and Taxation Committee this past week, the victim of lobbying by the American Electronics Association, Yahoo, Microsoft, and others.

Similarly, states and localities continue to lose vital tax dollars due to hotel reservations made via the Internet. That is, online travel companies like Hotels.com frequently avoid paying the correct amount of taxes by maintaining that they only owe tax based on the wholesale price they paid to the hotels for the room reservations they offer, rather than the retail price they charge their customers. Different jurisdictions have taken different approaches to this problem. A number of cities have brought lawsuits against hotel resellers, while the state of South Carolina recently served one such company with a bill for $6.3 million in unpaid sales taxes. On the other hand, Florida, predictably, has the worst idea. A bill before one House committee -- and backed by Expedia -- would let online travel companies keep this tax break, at a cost of $22 million in forgone revenue.


And Some People Still Think This Is a Good Idea?


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Not all property tax cuts are created equal. Though the intent is to shield homeowners from property tax hikes in times of strong growth in housing prices, it is the unintended consequences of caps on increases in a home's taxable value that have gained these measures attention in recent months.

By effectively limiting the amount by which one's tax bill can increase, these provisions primarily benefit those long-term residents whose taxable home values have been suppressed for the most years. Since this creates huge inequities in tax bills between neighbors who have lived in their homes for different amounts of time, Florida voters in January passed a "portability" measure that allows long-time homeowners to take their tax savings with them to a new home upon changing residences. This obviously does nothing to assist first-time homebuyers, or correct a host of other potential problems that states with such limits have been experiencing.

In Michigan, where housing prices have actually been on the decline, homeowners are continuing to see increases in their property taxes as previously suppressed "taxable values" are using the housing slump to catch up with actual "market values". This development, in addition to baffling and infuriating homeowners, provides an excellent illustration of exactly how convoluted these tax limits make the property tax system. In their poorly conceived attempt to keep property tax bills from getting "out of control", state legislators have created a system where the property tax barely resembles a tax on the actual value of property at all. Only under one of these ridiculous assessment-capped regimes could decreases in a home's market value lead to increases in a home's taxable value.


Florida Tax Commission Charges Ahead With Unfair and Fiscally Irresponsible Plan


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In last week's Tax Justice Digest, we warned that May 8 could be a dark day for Florida taxpayers if the Commission charged with proposing tax-related constitutional amendments did not abruptly change direction. Well, that dark day may have already come, now that the Commission has tentatively approved a massive property tax cut, coupled with regressive sales tax increases to partially offset the revenue lost by that hike.

On the heels of fairly substantial property tax reforms approved by voters just this January, this proposal, which many are already considering a sure-bet to reach the November ballot, would eliminate most school property taxes in the state, with a cost to government of $9.6 billion. $3.3 billion of that would be offset with a one cent sales tax hike. The remaining $6.3 billion addition to Florida's existing $3 billion budget shortfall would be offset by removing numerous sales tax exemptions, taxing services, reducing spending, and in the meantime, hoping for strong economic growth. One member of the commission summed up the plan fairly well, stating "a sales tax is a regressive tax; we're not doing anything here except changing who pays the bill".

Unfortunately for Florida's children, (who just recently had $500 million cut from their schools' budgets) though much of the responsibility for funding education will simply be shifted to lower-income Floridians, significant cuts in education spending will also almost certainly occur. If the measure gains the approval of the voters, the legislature will be responsible for determining the methods for dealing with the loss of revenue. The opposition to removing sales tax exemptions and taxing services runs so strong in the legislature that these regressive tax increases will likely not be carried nearly far enough to offset revenue losses, should the plan pass. Cuts in spending should therefore be expected to be quite deep.

Simply put, the commission's plan is a failure by any number of measures. It makes Florida's tax system even less fair, leaves inadequate funding for even the most vital public services, and, as one member of the Chamber of Commerce stated, "nothing in this proposal will fix the brokenness" of Florida's property tax, which levies vastly different taxes even on neighbors with very similar homes. Hopefully by proposing a plan so extreme that it has spurred opposition from groups as varied as the Florida Chamber of Commerce, teachers' organizations, and advocates for the poor, the Commission has made it likely that Florida voters will vote down the plan in November.


Special Florida Tax Commission Seriously Considering Some Awful Reforms


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A Florida commission appointed primarily to examine the state's tax system has so far been a significant disappointment. Lying dormant for decades before assembling like cicadas every 20 years, the commission is empowered to propose changes to Florida law and to place constitutional amendments directly on the ballot. The commission is supposed to be an independent body removed from politics, but that's not obvious given the inequitable and unsustainable proposals that it's spending most of its time on.

Despite Florida's well-documented budget shortfalls, and the increasingly desperate attempts to fill them (see here, here, here, and here), many members of the commission remain committed to poorly targeted property tax cuts that will cripple state finances and will benefit the wealthy far more than those truly needing relief. The most recent bit of property tax "reform" proposed within the commission is a "super exemption" of 25% of a home's value from taxation. This would be available for all homes valued at over $50,000, and would be provided to homeowners regardless of their ability to pay their tax bills. The proposal would also extend more generous property tax cuts to businesses. It would also allow homeowners who benefit more from the existing (and convoluted) property tax relief system to retain those benefits rather than switching to the "super exemption".

As a small gesture to those concerned with the massive hit the state budget would take as a result of this change, the sales tax would be raised temporarily (for three years) to offset a portion of the cut. No solution for the inevitable revenue shortfalls beyond the first three years has been proposed.

The commission has until May 8 to make its final proposals. If the terms of the debate going on within the commission do not change by that time, May 8 could be a very troubling day for those concerned with tax justice and the adequate funding of state and local programs.


Poorly Reasoned and Poorly Targeted Property Tax Reductions are Gaining Steam


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This week in the Georgia House, lawmakers voted overwhelmingly (166-5) to approve property tax cuts, including the elimination of the state's car tax, that will cost the state more than $750 million when fully phased in. Republican Speaker Pro Tem Mark Burkhalter doesn't seem concerned with offsetting the lost revenue. Responding to concerns about the plan's price tag, he says, "It's very simple. You cut taxes, the economy grows. The economy grows, Georgians prosper. The best way to stem off any recession is to cut taxes. Not to clam up, go home and wait for the storm to pass." We've learned on the federal level that tax cuts simply don't pay for themselves, but clearly legislators in Georgia want to try their own experiment with this flawed (and dangerous) economic myth. The House-passed bill contains another misguided property tax change... a 2% cap on annual increases in a home's value for tax purposes (the cap would be 3% for businesses).

The Georgia Budget and Policy Institute issued a report adding up the costs of the state House's handiwork related to taxes this year and found that the tax bills passed this session would cost as much as $113 million in FY 2009, $473 million in FY 2010, and $798 million in FY 2011.

Coincidentally, the Oklahoma Senate passed a proposed constitutional amendment last week also dealing with caps on increases in a home's taxable value. In this case, the cap would be decreased from 5% to 3% (the 5% cap would remain intact for businesses). Assessment value caps of this sort have recently received much attention in Florida. The unfair way in which these caps provide the greatest relief to long-time residents (creating vastly different property tax bills between neighbors with similar houses) recently drove Florida residents to amend their constitution to patch over the problem in a very imperfect way.

Rounding out the recent trend in debating poorly reasoned property tax cuts is Arizona, where the House narrowly approved a measure to permanently repeal a portion of the property tax that is currently suspended. Allowing the tax to take effect again would raise about $250 million annually for the state, significantly reducing the projected $1.2 billion revenue shortfall for the current fiscal year. If the plan passes, cuts in public services could be the result.


Hopes Drowning in Florida...You Get the Government You Pay For


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The Florida Taxation and Budget Reform Commission meets only every twenty years and is supposed to be free of political pressures. Florida has the country's second most regressive tax structure, mainly because it has no state income tax. The state is facing a multi-billion dollar fiscal shortfall according to this Center on Budget and Policy Priorities paper.

Now would be the perfect time for the Commission to come forward and offer creative revenue-raising ideas. Yet, as a Palm Beach Post editorial rightly states, the Commission "is wasting its opportunity to update the state's outmoded tax structure." Even a proposal that would broaden the state's sales tax base and close loopholes appears to have been rejected. Many businesses cling to their unjustified exemptions from the sales tax. As the Palm Beach Post explains, "The argument that customers of lawyers, accountants and architects will go to Georgia to avoid a 6 percent tax has achieved almost magical reverence in Tallahassee." Broadening the sales tax base would go along way toward modernizing the state's tax structure and filling the state's budget hole. The inability to think outside of the politically popular box continues to plague Floridians.

Commission members and other policymakers would do well to read the Florida Center for Fiscal and Economic Policy's brief describing how the quality of life in Florida compares to that of other states. For example, Florida has the 2nd highest percentage of uninsured children in the country and is 50th in per capita funding for higher education. Florida is the perfect example of residents getting the government they pay for.


Florida Voters Approve Property Tax Cut


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Lost in the excitement over the presidential primary, Florida residents on Tuesday also voted to approve a property tax cut that will unfortunately do nothing to eliminate the increasing unfairness in the state tax system.

Florida already has property tax "caps" which create strange inequities between long-time homeowners and more recent homeowners or new residents. The measure approved on Tuesday includes more tax cuts almost exclusively for Florida homeowners, while renters and businesses should expect to see little change -- aside from future budgetary crunches, since this tax cut is unfunded.

One of the largest components of the cut doubles the amount of a home's value that homeowners can exempt from taxation. Another is a new option for homeowners to continue to enjoy accumulated property tax savings upon changing residences. This measure neglects newcomers to the state while carefully guarding the property tax advantages enjoyed by long-time residents. In fact, it appears so discriminatory and inequitable that lawsuits have already surfaced challenging its constitutionality.


Florida: Confused Yet?


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Florida's property tax reform debate may finally be nearing an end - and, then again, it may not. During a special session in June, the Legislature put a plan on the January 2008 ballot to allow homeowners to choose between their existing "Save Our Homes" property tax assessment caps and a so-called "super-exemption" of up to $195,000. That plan was then removed from the ballot by a Leon County court in September because it would have been too difficult for voters to understand. Then, last Monday, the last possible day to do so, the Legislature approved an alternative plan to increase the existing homestead exemption and to permit current residents to take their "Save Our Homes" assessment caps with them when they move, thus putting property tax reform back on the ballot. Yet, as the Miami Herald points out, the state's Taxation and Budget Reform Commission, which itself has the power to put matters before the voters, could come up with another approach for the voters to consider next November. What's more, creating "portability" for "Save Our Homes" may well violate the U.S Constitution, as an analysis by Walter Hellerstein and others found back in February.

Given the particulars of the Legislature's latest plan, a different approach would certainly be warranted. As the St. Petersburg Times observes, the Legislature's latest plan "... takes what's wrong with the current property tax system and amplifies it. The unfair advantage long-time homeowners have over more recent home buyers would be extended. The shifting of the tax burden from homesteaded property to non-homesteaded property would be exacerbated. And the cost for making matters worse would be indefensible."

The Miami Herald offers its compiled coverage on the whole sorry saga here.


Florida Court Throws Out Deceptive Ballot Language on Tax Measure


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On Monday, a Florida court derailed (for the moment) a legislative effort to put an expensive local property tax cut on a special January 2008 ballot. The property tax proposal, which was referred to the ballot by the state legislature earlier this year, would create an optional "super-exemption" of as much as $195,000 of a home's value from the property tax. But the proposal would also gradually phase out an existing tax break, the so-called "Save Our Homes" cap, that restricts the annual growth of a home's assessed value to 3 percent. The court argued that the wording of the ballot measure was misleading, partly because the language says that "everyone" will get a bigger exemption (which isn't true because the plan is optional), and says that the proposal would "preserve" and "revise" the existing Save Our Homes tax cap (when a less Orwellian wording would be "phase out").

If the wording is confusing, it's certainly not because the legislature didn't have enough space to explain itself properly (the 255-word ballot description can be found here), but more likely because lawmakers wanted to perpetuate the "free lunch" worldview that has characterized the state's fiscal policy over the past decade. But the court's decision does reflect the harsh reality that the ballot is simply the wrong place, in general, to make fiscal policy decisions. The combination of political pressures and the complexity of tax language makes it very unlikely that voters will ever be given a full and accurate description of the proposals they're being asked to evaluate.

Opponents of the January property tax vote may have won the battle, but the war continues. State lawmakers are now debating whether to appeal the court decision or to take time in a scheduled special legislative session next week to fix the wording of the ballot proposal in a way that would keep it on the January ballot. But as one editorial board notes, a better solution would be to put this complicated decision back in the hands of officials who have both the time and expertise to design property tax reform properly.


Florida Property Tax Proposal Comes Under Fire


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Last month, Florida lawmakers passed a two-part property tax reform plan, including an immediate cut in local property taxes as well as a January 2008 referendum in which Florida voters will be asked to pass judgment on a new, optional homestead exemption that homeowners could choose in place of an existing cap on home value growth. In response to this legislation, Mayor Eric Hersh of the City of Weston filed suit last week challenging the constitutionality of the property tax legislation, calling it "misleading to the public" and "not in the best interest of all Floridians." Hersh contends that the recently implemented law ordering localities to roll back tax collection this year violates a constitutional amendment granting local government the authority to collect property taxes up to 10 mills.

He is also critical of the proposed amendment referendum, claiming it misinforms voters that all Florida homestead property owners would get a $50,000 exemption (those who choose to retain their Save Our Homes exemptions will not). He further argues that it should not even be on the special ballot in January 2008, but requires a general election vote in November. Hersh's criticism demonstrates the difficulty and foolhardiness of trying to legislate tax policy through the ballot box.


Florida Special Session on Property Tax Cuts Makes Progress... Of Sorts


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Some are calling it the biggest tax reduction in Florida history, but it might better be described as the most confusing. After almost a year of documenting the flaws of Florida's "Save our Homes" property tax break for homeowners (which include its complexity and unfairness), the state legislature this week ratified a plan that will provide a replacement homeowner tax break known as the "super exemption." This new exemption will shelter up to 75% of the first $200,000 of a home's value (and up to $195,000 of value for wealthier homeowners) from property taxes. The catch: homeowners who decide they prefer the old Save Our Homes break can keep it. But they'd better think carefully: if a homeowner decides to claim the new homestead exemption, they can never again file under the old system.

Because Florida's property tax breaks are enshrined in the state constitution, this proposal must go before Florida voters; a January 2008 vote is set.


Tax Holiday for Hurricane Help?


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June brings the start of a new hurricane season, and this year some Gulf states are turning to a new tool to try to help residents cope: the tax code. This week is host to Florida's third annual sales tax holiday on hurricane preparedness supplies. Louisiana offered a temporary sales tax holiday in the aftermath of Hurricane Katrina last year, and now some lawmakers are pushing to make it an annual event. However, it is not known how much, if any, benefit shoppers receive from such sales tax holidays. Why would a store offer a 10% discount when shoppers are coming in to avoid paying the four percent state sales tax? Given the serious nature of hurricanes, the burden of proof is on lawmakers to show that this holiday will do what they say it will. People in the Gulf states deserve more than a three-day gimmick.


Two Very Different Approaches to Property Tax Reductions: Florida vs. Minnesota


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The prospects for passage of new property tax reduction legislation are looking dim in Florida, as the House and Senate must now reach a compromise between two competing measures. The House version compensates for the revenue lost from lower property taxes by raising the sales tax by as much as 2.5 cents. This tax swap idea is proving quite controversial, due to the regressive nature of the sales tax. Senate Republican leader Daniel Webster lead the charge against the House proposal, saying: "The sales tax is a regressive tax. And the more you raise it, the more regressive it becomes. The poor are going to get poorer, and the rich are going to get richer." The Senate proposal features a smaller property tax reduction, with no tax increase to offset the revenue loss.

One idea not under consideration in Florida is paying for a cut in property taxes by increasing income taxes. Just such a measure is being discussed in the Minnesota House. A few weeks ago, both the House and Senate passed legislation creating a fourth income tax bracket, although the rate differed slightly between the two bills. Now a new House proposal would pay for a property tax reduction and expanded tax credits for homeowners and renters with a 9.0 percent income tax rate for single taxpayers with incomes in excess of $250,000 or married couples with incomes above $400,000. This property-tax-for-income-tax swap would create a more progressive state tax system. By contrast, Florida lawmakers continue to refuse to debate instituting a state income tax, depriving themselves of a powerful tool for creating a more just and equitable tax structure.


Property Taxes... the Good, the Bad, and the Ironic


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A recent court ruling in the state of Washington has given policymakers there an opportunity to revisit a property tax cap that has imposed considerable strains on schools and other local services. A new report from the Washington State Budget and Policy Center examines some of the flaws in the state's current property tax system and explores some of the options that other states use "like a property tax circuit breaker" to improve the fairness of that particular tax.

Florida and Maine are weighing changes to their property taxes as well... changes that would make their tax systems less fair. Last week, the Republican leadership of the Florida House of Representatives proposed abolishing the statewide property tax for Florida residents, limiting local property taxes, and raising the state sales tax rate 2.5 percentage points to 8.5 percent. These changes would not only exacerbate the inequity of Florida's tax system, but would also take a $5.8 billion bite out of state and local revenues, since the higher sales tax rate would only make up a little more than half of the revenue lost due to property tax cuts. "Reckless" and "irresponsible" are among some of the nicer things that the St. Petersburg Times has to say about the proposal.

Ironically, Maine's Governor, John Baldacci, in his FY 2008-2009 budget, advocated the same sort of limits on property tax assessments for year-round residents that have contributed to Florida's fiscal problems. This ITEP Policy Brief details the shortcomings of these kinds of assessment caps.


A Bad Idea in New Mexico is a Bad Idea in South Dakota


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This November, South Dakotans will vote on the latest too-good-to-be-true policy solution... Amendment D, a constitutional amendment that would change how property is assessed for tax purposes. In most states a property's taxable value depends on what its really worth. Amendment D would confuse matters by creating two different property tax systems. Property that is sold would be assessed based on its value at the time of the sale. Property that does not change hands would be assessed by rolling back its value to 2003 levels and then increasing growth by an arbitrary 3% or the rate of inflation.

The ideas driving Amendment D are nothing new. In fact, almost identical laws have passed in New Mexico, Florida and California. These laws created a situation where one home located next to an identical home could be assessed at twice the value of the adjacent home, merely because it was sold more recently. As this excellent letter to the editor points out, South Dakota currently has several measures in place to support homeowners when property taxes are due. An expansion of the current homestead credit or a property tax circuit breaker would help those most in need of assistance.


Property Tax Assessment: Eye in the Sky or Head in the Sand?


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The all-important first step towards an equitable property tax is figuring out how much each home and business is actually worth. To do this perfectly, a tax assessor would need to visually inspect the inside and outside of every home... which, of course, no one actually does. But as a recent New York Times article notes, governments from Philadelphia to Florida are now relying on computerized aerial images (taken from a small plane) to detect changes in the outside appearance of homes and businesses. A Philadelphia tax administrator notes that the computerized system, which costs the city about $100,000 a year, "probably paid for itself within about two weeks." Assessment by low-flying planes may seem intrusive, but at the end of the day this is how the property tax is supposed to work. This approach is in stark contrast to the head-in-the-sand approach to property tax administration proposed by Alabama Democratic gubernatorial candidate Lucy Baxley, who has proposed ending the annual reassessment of Alabama homes.


Tax and Budget Reform in the States


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In South Dakota, property tax reform became a hot topic this week when schools brought a suit against the state over education funding. In New Hampshire, where the role of property taxes has been debated for a while now, the State Supreme Court is hearing a case to determine and define the cost of adequate education. The districts bringing the suit argue that statewide property tax is geared to give wealthy towns a break compared to poor towns.

Meanwhile, another state looks to passively let its problem slide by. In response to an executive order by Florida Governor Jeb Bush, a 15-member panel will study property tax reform. Some speculate that the panel was formed for purely political reasons and that during an election year a study of this magnitude means that legislators can put off making politically difficult decisions.

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