Georgia News


State Rundown 3/22: Springtime Tax Debates Blossom Nationwide


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This week in state tax news saw major changes debated in Hawaii and West Virginia and proposed in North Carolina, a harmful flat tax proposal in Georgia, new ideas for ignoring revenue shortfalls in Mississippi and Nebraska, an unexpected corporate tax proposal from the governor of Louisiana, gas tax bills advance in South Carolina and Tennessee, and property tax troubles in Missouri, Nevada, and New Jersey.

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

  • The North Carolina Senate has released its preferred tax plan, a billion dollar so-called “middle-class” tax cut featuring a drop in the state’s personal and corporate income tax rates and other reductions.  An ITEP analysis found the top 20 percent of North Carolinians would receive nearly half of the personal income tax cuts under the proposal despite lawmakers claiming the cuts are targeted to low- and middle-income taxpayers.  The Senate’s proposal would come on top of years of tax cuts in the Tarheel state that have already reduced revenues by more than $2 billion annually.
  • Louisiana's Gov. Bel Edwards is out with a surprising proposal in advance of the state's legislative session--scrap the state's corporate and franchise taxes and adopt instead a Gross Receipts Tax (like in Ohio). This proposal comes from left field, a very different direction from reforms suggested by many groups, including the governor's own Task Force on Structural Changes in Budget & Tax Policy. More details are expected to be released next week.
  • Legislators in West Virginia are taking up an extreme constitutional amendment resolution, Senate Joint Resolution 8, this week that would, among other things, repeal the state's personal property tax, alter the real property tax, apply limitations to the personal income tax, and limit excise, sales and use, and corporate net income taxes. Under the resolution, three-fifths majority vote in each house would be needed to reinstate any repealed tax.
  • Sources in Georgia report that the latest change to a harmful regressive income tax cut bill there creates a larger nonrefundable credit to deliver more help to low- and middle-income residents and those without children who were overlooked in the original bill. But the heart of the bill remains a flat 5.4 percent income tax that slashes taxes on the wealthy while raising them for many lower-income people and reducing revenue for education and other priorities by hundreds of millions.
  • After crossover, Hawaii legislators are still considering over a dozen tax change bills. Proposals include establishing a state earned income tax credit, reinstating high income tax brackets that were repealed in 2015, and changes to low-income credits. Lawmakers are also weighing possible tax increases to fund the state highway system, including a tax based on car value and fuel tax increases.
  • Nebraska lawmakers dead set on massive income tax cuts are trying to get creative to get them passed despite the state's billion-dollar shortfall and general focus on property taxes. The latest idea floated is to repackage an existing property tax credit and then phase in the income tax cuts in future years using an arbitrary "trigger" mechanism.
  • Mississippi's shortfall in its Medicaid budget is still $89 million with just a few months to go in the fiscal year and a key legislative deadline coming up this weekend. Lawmakers are now considering simply not paying health providers for several weeks to push the problem off until next year.
  • Tennessee legislators have reverted back to Gov. Haslam's original regressive tax shift plan, which is now advancing through committees in both houses, after failing to replace it with a raid of the general fund for infrastructure needs.
  • A bill to raise South Carolina's gas taxes and vehicle fees to shore up that state's infrastructure needs is likely to pass the legislature soon, but could be vetoed by Gov. McMaster.
  • New Jersey's property tax cap may be revised this year because it is hamstringing local budgets to such an extent that they cannot qualify for state and federal matching funds for local services like public safety needs.
  • Efforts to reform Nevada's property tax cap that has been undermining local budgets have shifted from various band-aid fixes to a likely study committee to seek solutions over the summer.
  • The Missouri House advanced a bill mentioned in this space last week to eliminate a property tax circuit breaker that helps low-income seniors remain in their homes.
  • Alabama is seeking to modernize its tax structure to include streaming services like Netflix, Hulu, and music services.
  • In an effort to make money managers pay their fair share, Rhode Island legislators have introduced legislation to tax carried interest income the same as earned income.
  • In Texas, a bill to limit the increase of local government budgets has passed the Senate and is expected to receive support of the House. Senate Bill 2 would limit county and local government budget increases to 5 percent annually as a way to limit property tax increases. Any increase above 5 percent would trigger an automatic vote.
  • Seventy percent of New Jerseyans polled were in favor of raising taxes on the state's wealthiest residents to restore pension funds the legislature has failed to make adequate contributions to for years.

What We're Reading...  

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


State Rundown 3/15: Responses to Revenue Shortfalls Vary Widely


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State tax debates have been very active this week. Efforts to eliminate the income tax continue in West Virginia. Policymakers in many states are responding to revenue shortfalls in very different ways: some in Iowa, Mississippi, and Nebraska seek to dig the hole even deeper with tax cuts, while the Missouri House's response has been to slash funding for a property tax program that helps low-income seniors remain in their homes. Other responses include Oregon lawmakers considering sensible reforms to broaden the income tax base and Delaware's governor who wants to engage the public and "reset" the budget and tax conversation altogether. In other news, Florida and Oklahoma legislators are reconsidering tax breaks and credits given out in previous years, and several states continue to look at their gas taxes for transportation funding needs as well as reforming other consumption taxes.

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

Major Tax Overhauls Being Debated

  • In West Virginia new changes to SB 335 will be moving on to the state's full Senate Finance Committee for consideration. The bill would still eliminate the state’s income taxes, but over a longer period. Personal income taxes would be decreased to a flat rate of 2.5 percent before phasing out, inching toward elimination if certain triggers are met, between 2023 and 2032. Post personal income tax elimination, if triggers are met, the corporate net income tax would then phase out, followed by a reduction in severance taxes. The elimination/reduction of these taxes would be replaced by an 8 percent general consumption tax and soda and alcohol tax increases.
  • Meanwhile, the West Virginia House of Delegates is considering a 5.1 percent flat tax rate for the state's personal income tax coupled with a 5.5 percent sales tax rate and base broadening.
  • Georgia lawmakers are considering a slew of tax changes, including a harmful regressive proposal to flatten the state's income tax, though that bill includes positive aspects and could be improved with a simple fix.

Varied Responses to Revenue Shortfalls

  • Some Nebraska legislators continue to seek tax cuts despite a large and growing revenue shortfall and political disagreement over tax and funding priorities.
  • Even after sweeping several special funds into the General Fund, Mississippi lawmakers are still faced with a budget gap, and the state is likely to "collect less revenue than it did the previous year for only the second time in modern history," a largely self-imposed problem due in part to repeated tax cuts. Some are arguing this needs to be the wake-up call to convince the legislature to cancel the harmful tax cuts passed last year that are to be phased in over the next ten years.
  • Soon-to-be Iowa Gov. Kim Reynolds indicated recently that she is on the tax-cut train and plans to cut income taxes under the long-debunked belief that doing so will grow the state's economy. Meanwhile the revenue forecast has been reduced again, growing the state's revenue shortfall by $131 million for the current fiscal year and $191 million for the upcoming budget.
  • Rather than consider revenue solutions to Missouri's fiscal woes, the House has opted to eliminate funding for a property tax circuit breaker program that helps low-income seniors and people with disabilities stay in their homes as their property taxes rise and their incomes remain fixed. A major contributor to the revenue shortfall appears to be unintended consequences of corporate tax measures passed in 2013 and 2015.
  • Facing a $1.6 billion budget deficit, some lawmakers have suggested limiting Oregon's mortgage interest deduction, which currently costs the state $500 million a year and disproportionately benefits taxpayers in the highest income tax bracket. The bill would cap the deduction at $15,000 and eliminate it altogether for homeowners making over $200,000 (MFJ).
  • Delaware Gov. John Carney is holding "budget reset" conversations around the state, asking for input on how to best fill the state's $350 million budget gap and promoting a balanced approach that includes funding cuts for services as well as additional revenues.
  • North Dakota's revenue shortfall grew again as the official forecast was reduced due to a "double whammy" of low oil prices and farm commodity prices.

Reconsidering Tax Breaks

  • The Oklahoma Senate, struggling with the negative effects of recent tax cuts, approved legislation that would repeal the tax cut's trigger and stop the state's top 5 percent income tax rate from dropping to 4.85 percent next year.
  • The Florida House passed a bill last week with a veto-proof 87-28 vote to eliminate Enterprise Florida, an agency used primarily by Gov. Rick Scott to hand out tax subsidies to businesses.

Transportation Funding Needs

  • South Carolina's glaring need for a gas tax update to fund repairs to its ailing roads and bridges has been fairly uncontroversial so far, as one version passed the House last week and a slightly larger version has now advanced from a Senate committee, but Gov. McMaster has thrown a potential wrench in the plan by hinting he may veto the bill. Local jurisdictions that share in those costs will be watching closely, especially considering a proposed fix to the state's underfunded pension system would push costs onto cities, towns, schools, and other local jurisdictions in what one mayor is calling a local "bailout" to cover for state mistakes.
  • In other transportation funding news, West Virginia's Senate Transportation Committee has advanced a bill to increase some fees and taxes, including a 4.5-cent gas tax increase, to fund the state's roadways, and both California and Colorado have introduced bills that would respectively increase the gas and sales taxes in order to fund infrastructure.
  • Lawmakers from Connecticut, Massachusetts, Rhode Island, Vermont, and New Hampshire are all considering proposals to reduce carbon emissions, possibly moving toward a regional initiative.

Consumption Taxes and More

  • Some Connecticut legislators are looking to marijuana as a revenue raiser, using Colorado's experience as a blueprint.
  • The South Dakota Supreme Court has struck down a law requiring online retailers to collect sales taxes, an expected result that puts the question one step closer to being reconsidered in the U.S. Supreme Court.
  • Arizona's Governor Doug Ducey has signaled his support for extending a 0.6 percent sales tax hike that is set to expire in 2021. In FY 2016, the tax brought in $644 million.
  • Struggling to retain qualified teachers, two California senators have introduced a bill that would completely exempt teacher income from the personal income tax.
  • A New Jersey lawmaker has introduced a bill to give a $100 tax credit to people who donate blood at least four times per year.
  • Nevada lawmakers are now debating adding a property tax floor to some types of properties to help make up for the revenue issues their two property tax caps have caused, adding further complexity and highlighting why these arbitrary caps are not considered good policy solutions.
  • The Florida House has advanced a bill to the Senate that would restrict local jurisdictions' ability to set their own tax rates.

 Governors' State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Kasich of Ohio on April 4.

What We're Reading...  

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


State Rundown 3/1: Will Tax Cut Proposals Be "In Like a Lion, Out Like A Lamb"?


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Tax cuts have been proposed in many states already this year, but amid so much uncertainty, it remains to be seen how successful those efforts will be. This week saw one dangerous, largely regressive tax cut proposal move in Georgia, new budget proposals in Louisiana and New Jersey, a new plan to close West Virginia's budget gap, and cities in Alabama and Washington taking more matters into their own hands.

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

Budget Watch

  • New Jersey Gov. Christie presented his final budget to legislators this week. The budget holds funding flat despite growing needs for K-12 schools and higher education, and it makes minor reductions to property tax relief programs despite a record-high average property tax bill in 2016. Christie's proposal also relies on a narrow margin for error due to minimal reserves and assumed savings in public employee healthcare that have not yet been realized. He also suggested devoting state lottery proceeds to fill the pension funding gap.
  • Louisiana Gov. John Bel Edward released his FY17-FY18 executive budget last week. The budget is short $440 million of what is needed to maintain existing year services and requires cuts to safety net hospitals and continued underfunding of the state's higher education tuition program. 
  • North Carolina Gov. Roy Cooper released his first budget (for FY17-19) this week.  While his proposal boosts public investments in education and other critical services, his policymaking was limited by the close to $2 billion in tax cuts enacted since 2013.  As the Director of the NC Budget and Tax Center notes, the spending level as a share of personal income proposed in the second year of his proposal is 17% below the state’s 45 year average.

Governors' State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Scott of Florida on March 7, followed by Gov. Kasich of Ohio on April 4, with Gov. Carney of Delaware and Gov. Cooper of North Carolina's speech dates still to be announced.

What We're Reading...  

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


State Rundown 2/23: Regressive Tax Proposals Multiplying


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This week saw a nearly successful attempt to right the fiscal ship in Kansas; regressive tax proposals introduced in West Virginia, Georgia, and Missouri; ongoing gas tax fights in Indiana, South Carolina, and Tennessee; and further tax and budget wrangling in Illinois, New Mexico, Oklahoma, and beyond.

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

  • Both Chambers of the Kansas legislature approved a tax bill that would repeal the exemption for business pass-through income, restore a third income tax bracket at a higher rate, and remove haircuts to itemized deductions for medical expenses. After the governor's veto of the bill, the House voted to override the veto but the Senate vote to override fell three votes short.
  • Senate Bill 335, proposed last week, would create a general consumption tax in West Virginia (a broader, higher sales tax), eliminate the state’s personal and corporate income taxes and sales and use tax, and reduce the state’s severance tax. The result of such a dramatic shift would result in low- and middle-income West Virginians paying more while wealthy earners benefit. Read more on how this misguided policy would impact West Virginia families.
  • All the while, for the third time this past year, West Virginia braces for another credit downgrade. This week Gov. Jim Justice announced Moody’s decision to downgrade the state’s general obligation debt. The state’s growing structural imbalance between revenue and expenditures was cited as a main concern.
  • A regressive proposal in Georgia would flatten the state's income tax to a single 5.4% rate, eliminate the deduction for state income taxes, and create a small non-refundable Earned Income Tax Credit at 10% of the federal credit.
  • A proposal has been floated in a Missouri Senate committee to amend the state constitution to slowly eliminate the state's income tax, which brings in more than 60 percent of general revenues, and place a cap on state spending.
  • A proposal to eliminate the personal income tax over several decades has died in the Michigan House, which is now fast-tracking alternative legislation to cut the personal income tax rate from 4.25% to 3.9% over four years.
  • Representatives of 16 Nebraska agriculture and education groups joined to push back against attempts by Gov. Ricketts and others to cut income taxes, arguing that property taxes and school funding issues are higher priorities.
  • The Indiana House passed a bill that would raise fuel taxes by 10 cents and increase vehicle registration fees to fund improvement to the state's infrastructure. The bill now moves to the Senate, which may require smaller increases to ensure passage.
  • Proposals to raise Tennessee's gas tax while cutting other taxes, or instead divert sales tax revenue to infrastructure needs, will be on hold for a week after a procedural maneuver.
  • South Carolina business leaders are coming together to advocate for a gas tax increase to improve funding for the state's roads and bridges, warning of job losses if the state doesn't act.
  • Louisiana lawmakers reached a budget agreement for closing the mid-year deficit of $304 million, through a combination of agreed cuts, use of rainy day funds, and shifting around other revenue. The special session ended Wednesday.
  • Delaware's revenue shortfall is now a $350 million gap.
  • Lawmakers in New Mexico are considering a bill that would eliminate exemptions to the gross receipts tax and enact a flat rate for both personal and corporate income taxes. Democratic House members are wary of the inclusion of food and drugs in the proposed base expansions. 
  • Oklahoma Gov. Mary Fallin’s tax plan, which included proposals to expand the state’s sales tax base, eliminate the state sales tax on groceries, eliminate the corporate income tax, and increase cigarette and gas taxes, has been faced with strong opposition. Raising any revenue at all has been described as the last resort for a number of Oklahoma Legislators.
  • The Utah Senate has approved a bill to require more businesses to collect sales taxes for online purchases. In the neighboring chamber, lawmakers have proposed a plan for tax reform without much time for debate or analysis.
  • Following up on a promise from his State of the State address, Alabama's Gov. Bentley has launched a task force to study potentially eliminating the state's sales tax on groceries. He has no plans to replace the revenue.

Budget Watch

  • For his proposed budget to balance, Illinois Gov. Rauner needs $4.6 billion from a "grand bargain" still being worked out in the Senate. But the governor doesn't support major components of the latest iteration of the plan, such as taxing food and drugs at the general sales tax rate. He also is calling for a permanent property tax freeze in exchange for any increase in the income tax rates.  

Governors' State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Scott of Florida on March 7, followed by Gov. Kasich of Ohio on April 4, with Gov. Carney of Delaware and Gov. Cooper of North Carolina's speech dates still to be announced.

What We're Reading...  

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


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.  


State Rundown 3/28: All's Well That Ends Well


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Thanks for reading the State Rundown! Here's a sneak peek: Georgia and Idaho lawmakers say no to income tax cuts. The Vermont House passes a budget and tax package. Maryland's Senate fails to move on manufacturing tax cuts. Nebraska's legislature advances the governor's property tax proposal with amendments.

– Carl Davis, ITEP Research Director

Georgia lawmakers ended their legislative session last week without passing a regressive package of income tax cuts. The Senate had passed two bills that together would have cut the top state income tax rate by more than 10 percent, but the House never took the bills up after Gov. Nathan Deal refused to support them. Deal argued that the cutting the income tax, the state's largest revenue generator, would lead credit agencies to downgrade Georgia's AAA bond rating. An ITEP analysis also revealed (PDF) that over half the cuts would have gone to the top one-fifth of Georgia earners.

Idaho lawmakers rejected a lopsided income tax cut of their own last week. On Friday the state legislature adjourned without passing any reductions to the state's graduated income tax rates. Earlier this year an ITEP analysis of one such proposal revealed that while most Idahoans would have seen their taxes fall by $35 or less under the plan, high-income households would have received a benefit of over $800. Ultimately, the legislature prioritized enhanced funding for education over tax cuts.

The Vermont House passed a package of budget and tax bills for FY 2017 last week, sending the state budget to their colleagues in the Senate for consideration. The $5.77 billion budget includes investments in the state college system, access to child care, and community health services. Lawmakers passed a 3.3 percent provider tax on ambulance agencies to pay for an increase in reimbursement rates for ambulance services under Medicaid. An effort to impose a 92 percent tax on e-cigarettes passed out of committee but died on the floor.

Efforts to create tax incentives for manufacturers in Maryland failed this session despite backing from the governor and senior legislators. SB 181, sponsored by Sen. Roger Manno, and SB 386, championed by Gov. Larry Hogan, would have established Manufacturing Development Zones. Under the bills, new manufacturers who located in the zones would pay no corporate income tax and new employees earning less than $65,000 would pay no personal income tax for a designated period of time. New manufacturers could also apply to counties for a property tax waiver. Hogan's bill would have applied only to poorer jurisdictions, while Manno's measure would have been piloted in seven counties. Both bills failed to move out of the Senate Budget and Taxation Committee after established manufacturers complained the provisions would hurt their business.

Nebraska Gov. Pete Ricketts' plan to cut property taxes got a boost this week when an overhauled version passed the Revenue Committee on a unanimous vote. The proposal would increase property tax credits for farm and ranchland owners by $30 million next fiscal year. The bill has received criticism from both sides. Organizations representing farmers and rural interests said the bill doesn’t go far enough, while Renee Fry of the OpenSky Policy Institute (and ITEP's Board of Directors) warned that it would reduce state revenues and hamper education funding.

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


Cooler Heads Prevail in Georgia as Tax Cuts Fall Flat


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

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

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


Tax Cut Fever in Georgia


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A push to cut taxes for the wealthy that would pinch funding for Georgia schools, roads, and other services may have just become an even more dangerous effort to eliminate Georgia's personal income tax and devastate the state's ability to fund public investments.

Georgia lawmakers, spurred on by the fact that all 236 of them are facing re-election this year, are considering drastic changes to their state's personal income tax. One proposal could entirely repeal the income tax.

One of the bills under consideration (HB 238) contains some positive provisions, such as limiting deductions that are primarily used by high-income households. But the bill would also flatten and reduce the state's income tax to a single rate of 5.4 percent (the top rate is currently 6 percent). Lawmakers are selling this proposal as a tax cut for most Georgia families. But an Institute on Taxation and Economic Policy analysis of the plan reveals that most working families would receive minimal benefit. More than half of the resulting tax cuts would flow to just the top 20 percent (PDF) of Georgia residents, and even then the benefits are weighted most heavily for the very richest. Families earning less than $100,000 would receive an average tax cut of $100 while the top 1 percent of families would get an average cut of $2,850. Meanwhile, the overwhelming majority of Georgia families would lose because the state's ability to fund crucial services would be seriously harmed. Nonetheless, the bill has passed the House and advanced to the Senate Rules Committee and appears to be on a fast track to passage.

Meanwhile, the state Senate has approved a measure (SR 756) that would amend Georgia's constitution to force further income tax cuts when certain 'triggers' are met. The original version of this proposal would have brought the rate down in 0.2 percent increments until it reached 5 percent. But in a hastily conceived attempt to compromise before the state's 'crossover' deadline on Monday, lawmakers changed the bill (PDF) in such a way that, due to its ambiguous wording, could result in the complete elimination of the state's income tax in the long-term. While some observers argue that the bill lacks a minimum, or "floor" tax rate, others say that this is not the case and that rate cuts would stop once the state's tax rate reached 5.8 percent. Even under that generous reading, however, revenues would fall by some $350 million and roughly 70 percent of the benefit would go to the top 20 percent of Georgia households.
 
Georgia’s pending tax cuts are part of a broader, disturbing trend at the state level that seeks to tilt already unfair state tax codes even more heavily in favor of the wealthy. In the case of Georgia, that effort would also come with a large price tag: the tax cut proposals under consideration would result in an annual revenue loss of $281 to $442 million (or nearly $10 billion if LR 756 ultimately eliminates the income tax). A revenue loss of that magnitude would undoubtedly jeopardize the state’s ability to adequately fund public priorities.


2016 State Tax Policy Trends: Addressing Poverty and Inequality Through Tax Breaks for Working Families


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This is the fifth installment of our six-part series on 2016 state tax trends. An overview of the various tax policy trends included in this series is here.   

As we explain in our annual report on low-income tax credits, the strategic use of Earned Income Tax Credits (EITCs), property tax circuit breakers, targeted low-income tax credits and child-related tax credits can have a meaningful impact on addressing poverty, tax fairness and income inequality in the states.  

The use of these tools is so important especially because states have created an uneven playing field for their poorest residents through their existing tax policies. Every state and local tax system requires low- to middle-income families to pay a greater share of their incomes in taxes than the richest taxpayers and, as a result, tax policies in virtually every state make it even more difficult for those families in poverty to make ends meet. Unfortunately, it does not stop there–many recent tax policy proposals include tax increases on the poor under the guise of “tax reform”.   

That reality may seem bleak, but it provides state lawmakers plenty of opportunities to improve their tax codes in order to assist their state’s lowest-income residents. Targeted low-income tax cuts can serve as a vital tool in offsetting upside down tax systems and proposed regressive tax hikes. On top of that, targeted tax breaks and refundable credits do not only benefit a state’s low-income residents–they can also pump money back into the economy, providing both immediate and long-term economic stimulus. With this in mind, a number of lawmakers are heading into the 2016 legislative session with anti-poverty tax reform on the agenda.  

This year we expect states to build on reforms enacted in 2015 with a range of policies to address poverty and income inequality–including, most notably, efforts to enact or improve state EITCs in as many as a dozen states. Unfortunately, lawmakers in a few states are looking to reduce or eliminate their EITCs.  Here’s a look at the opportunities and threats we see for states in 2016:   

Enacting state EITCs:   

Twenty-six states plus the District of Columbia currently have a state EITC, a credit with bipartisan support designed to promote work, bolster earnings, and lift Americans low-wage workers out of poverty. 

In 2016, a number of states are looking to join this group by enacting their own state EITCs. For instance, Mississippi Gov. Phil Bryant recently called for “blue collar tax dividends” to give people back a portion of their hard-earned tax dollars (he has proposed a nonrefundable state EITC). In South Carolina, a refundable EITC is on the table to help offset a largely regressive transportation revenue raising package. And lawmakers in Idaho have proposed the enactment of an EITC at 8 percent of the federal credit (PDF).  Advocates in GeorgiaHawaiiKentuckyMissouri and West Virginia are calling on their state lawmakers to enact state EITCs as a sensible pro-work tool that would boost incomes, improve tax fairness, and help move families out of poverty. 

Even states without an income tax could offer a state EITC and lift up the state’s most vulnerable. Washington State enacted a Working Families Tax Rebate at 10 percent of the federal EITC in 2008, though it still lacks sufficient funding to take effect.  

Enhancing state EITCs:   

While state EITCs are undoubtedly good policy, there is still room for improving existing credits. Three states (Delaware, Ohio and Virginia) have EITCs but only allow them as nonrefundable credits–a limitation which restricts their reach to those state’s lowest-income families and fails to offset the high share of sales and excise taxes they pay. Lawmakers in Delaware seem to have recognized this shortcoming by recently introducing a bill that would make the state’s EITC refundable, but only after reducing the percentage from 20 to 6 percent of the federal credit and then gradually phasing it back up to 15 percent over the course of a decade.  Advocates in Virginia are calling for a strengthening of the state's EITC as an alternative to untargeted tax cuts proposed by Gov. Terry McAuliffe. 

In addition to refundability, many states are discussing an increase in the size of their credit. Governors, in particular, are stepping up to the plate: Rhode Island Gov. Gina Raimondo recently announced her plan to raise the state’s EITC to 15 percent, up from 12.5 percent of the federal credit; Louisiana Gov. John Bel Edwards, meanwhile, has called for doubling the state EITC as part of his commitment to reduce poverty; and Maryland’s governor, Larry Hogan, called to accelerate the state’s planned EITC increase. In California, Gov. Jerry Brown reiterated his support for the state’s new EITC in his 2016-17 budget. In New York, Assembly Speaker Carl Heastie proposed increasing the EITC by 5 percentage points over two years. And Oregon lawmakers are calling to bring the EITC up to 18 percent of the federal credit.   

Another “enhancement” trend that is building momentum is expanding the EITC to workers without children. At the federal level, President Obama proposed just that (PDF) in 2014 and again reiterated his support for such a change in his most recent State of the Union address and budget proposal. Just last year, the District of Columbia expanded its EITC for childless workers to 100 percent of the federal credit, up from 40 percent, and increased income eligibility.   

Protecting state EITCs:  

Rather than focusing on proactive anti-poverty strategies, a handful of states will be spending the better part of 2016 protecting their state EITCs from the chopping block. Tax reform debates in Oklahoma have led to calls that the state’s EITC should be re-examined and possibly eliminated, possibly in combination with the elimination of the state's low-income sales tax relief and child care tax credit.  

For more information on the EITC, read our recently released brief that explains how the EITC works at both the federal and state levels and highlights what state policymakers can do to continue to build upon the effectiveness of this anti-poverty tax credit. 

 


2016 State Tax Policy Trends: Shifty Tax Proposals


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This is the fourth installment of our six-part series on 2016 state tax trends. An overview of the various tax policy trends included in this series is here 

Tax shifts lower or eliminate one tax in exchange for increasing a different tax. While tax shifts can come in different forms, recent tax shift proposals have typically called for the reduction or elimination of personal and corporate income taxes and expanded consumption taxes to make up some or all of the lost revenue. Despite the detrimental effect these tax shifts have on working families and state budgets down the road, they’ve been quite popular among states. Unfortunately, this trend continues in 2016, with several states considering tax shift proposals right out of the gate.

This year we are keeping our eye on an emerging sub-trend in tax shifts—leveraging the need for states to make long-overdue improvements to transportation infrastructure in order to get tax cuts that disproportionately benefit the highest-income households. We saw this in Michigan this past November, where lawmakers approved increases to gas taxes and vehicle registration fees but also offset new revenue with future cuts to the state’s top income tax rate. While an increase in transportation funding has been long-overdue in many states, these tax shift proposals have the effect of doing so at the expense of other critical state investments including higher education, public health, and safe communities. 

Here's a list of states we are watching in 2016:

Arizona. Eliminating the income tax and replacing lost revenues with a higher sales tax is still a priority for Gov. Doug Ducey and lawmakers like chairman of the Ways and Means Committee Representative Darin Mitchell. Details are still forthcoming, but the governor has stood by his campaign pledge to drive the income tax rate as close to zero as possible. In Arizona, the bottom 20 percent of taxpayers already pay three times as much in taxes as a share of their income as do the top one percent. Further tax shifts from the income tax to the sales tax would be a disastrous move for tax fairness, increasing taxes on low- and middle-income families while providing substantial tax cuts to those with high-incomes.   

Mississippi. There was no shortage of significant tax proposals last year, including the Senate’s proposal to reduce income tax rates and franchise taxes, the governor’s tax cut for working families, and the House’s proposal to eliminate the income tax. However, the session ended last year without a compromise plan that could garner enough votes to win approval.  Given a new supermajority among republican lawmakers thanks to November elections, the state is almost certain to see some sort of major tax shift this year. 

Mississippi’s transportation infrastructure needs may very well provide the ticket lawmakers need to enact their desired cuts. It’s been 27 years since Mississippi last raised its gas taxes, making proposals to reform fuel taxes this year most welcome and long-overdue. Plans to raise at least $300 million for road and bridge maintenance however, are unlikely to move forward without offsetting tax cuts. Even Governor Bryant is calling for “an equal and sufficient tax reduction” to offset any proposed tax increases.  His preferred plan is a “blue collar” tax cut in the form of a nonrefundable EITC (the same plan he advocated for last year), but he is also amenable to a reduction or elimination of the state’s corporate franchise tax. While a tax cut for working families would be an appropriate and targeted policy to pair with a regressive tax increase, House and Senate lawmakers are likely to propose less targeted and more broad-based tax cuts that could result in tilting the state’s already upside down tax system more in favor of the wealthy.

Tax Shifts for Transportation a Bridge to Nowhere

Indiana. To make it more palatable for lawmakers to fund repairs for roads and bridges, House Republicans slipped a phased-in 5 percent income tax cut into a transportation package that passed the House this past Tuesday. Intending to increase funds available for infrastructure improvements, HB 1001 raises the state’s gasoline excise tax by 4 cents per gallon and the tax on diesel fuel by 7 cents. It also increases the cigarette tax by $1 per pack. The revenue potential of this bill, however, is undermined by the reduction of the personal income tax rate down to 3.06 percent over eight years. The proposal also exacerbates the unfairness of Indiana taxes: an ITEP analysis of the proposal found that the average taxpayer among the bottom 80 percent of earners would see a tax hike while the wealthiest 20 percent would benefit from a tax cut.

Georgia. What we’re seeing in Georgia is an attempt to enact a tax shift over two legislative sessions. Last year, the state enacted significant gas tax reform amongst other measures, raising $1 billion in transportation revenue. Part of the transportation package created a Special Joint Committee on Revenue Structure, which was tasked with identifying tax cuts. Due to a failure of the House to appoint their members, the committee did not convene and no tax reform plan was created. As a result of this inaction and in direct response to the prior year’s tax increase, Senator Judson Hill has introduced his own tax-cutting measures. Senate Bill 280’s primary effect is to flatten Georgia’s personal income tax to a single rate of 5.4 percent. Senate Resolution 756 requires a constitutional amendment that would bring down this rate even further. Both measures would deprive the state of needed revenue and require it to inevitably to make up these losses through more regressive sources. 

New Jersey. Facing a drying up Transportation Trust Fund, lawmakers continue to talk this year about increasing the gas tax. However, Governor Christie has said that he won’t consider raising the gas tax unless lawmakers agree to other tax cuts, specifically raising the exemption level of the estate tax or eliminating the tax altogether. In contrast to the governor’s claim that the estate tax is a burden on the middle class, a new report from the New Jersey Policy Perspectives shows that just four percent of estates are subject to the tax and that cutting the tax could seriously threaten resources needed to fund important building blocks of a strong economy such as higher education, health care, and safe communities.

South Carolina. South Carolina is preparing to debate and vote on a road repair plan in the coming weeks. The proposed law would raise an estimated $700 million each year in new revenue once fully phased in through an increase to the gas tax and other transportation related-fees, but this amount would be offset by $400 million from a combination of income tax and business property tax cuts. While there are some targeted income tax breaks that would benefit working families, including the creation of a 3.5% refundable Earned Income Tax Credit, the overall effect of the plan is somewhat regressive. There may be talk of offsetting the gas tax increase with cuts to the sales tax instead of the income tax, which, all things being equal, would be a preferable shift since it would favor cuts for middle-income earners over the wealthiest. But, most importantly, like in every other state considering this brand of tax shift, increasing one set of fees and taxes to support new funding for transportation while cutting taxes that support public education and health care is not a sensible or sustainable policy idea.

Up Next

Not all tax cuts and shifts are bad policy. Building on the momentum from 2015 reforms, many states are headed into their legislative sessions looking to address poverty and inequality through targeted tax measures. Stay tuned for the next blog post in our series for a more in-depth look at what states are addressing poverty and inequality through enacting or strengthening tax credits for working families.

 


2016 State Tax Policy Trends: Budget Surpluses and Misguided Economics Drive Calls for Tax Cuts


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This is the second installment of our six part series on 2016 state tax trends.  An overview of the various tax policy trends included in this series is here

A number of states are experiencing much-welcome revenue surpluses this year, but some lawmakers in these states seem to have already forgotten the fiscal pain of the Great Recession, during which revenues plummeted and many states cut back investments in their schools, roads, and other vital services. Rather than take this opportunity to recompense for those cuts and/or re-stock their Rainy Day Funds, lawmakers in some states are considering tax cuts that would further erode their revenue streams.

Even states that are not enjoying surpluses and find their economies still struggling or newly sputtering are still hearing calls for tax cuts on high-income residents under the misguided premise that tax cuts at the top trickle down and stimulate economic growth.

Here's a list of states we are watching in 2016:

Florida: In Florida, an expected revenue surplus is bringing tax cut proposals out of the woodwork. Gov. Rick Scott has called for about $1 billion in cuts, mostly through a $770 million tax giveaway that completely eliminates the corporate income tax for manufacturers and retailers. The House has its own $1 billion plan that includes some elements of the governor's plan, such as continuing a sales tax exemption for manufacturers, and adds a number of other components, including a litany of gimmicky (and generally ineffective) sales tax holidays for everything from guns and fishing poles to computers and tablets. Members of the state Senate have called these massive tax cut plans "ridiculous" and "laughable." Meanwhile, the revenue forecast on which these plans are based has been revised downward by $400 million, though even that may not dampen the tax cut fervor in Florida. With the Florida legislature in a short, 60-day session, we should learn more about the Senate's plans soon, and the debates will play out in February and early March.

Idaho: Idaho finished last year with a budget surplus but may not be so lucky this year, as revenue estimators have recently revised their forecast downward. Yet despite this news and the fact that Idaho is already a relatively low-tax state, a tax cutting effort is proceeding in the Legislature. That proposal would reduce personal income tax rates for Idahoans in the top two income brackets, cut the corporate income tax rate, and provide a small increase in the state's grocery tax credit. A recent report using an ITEP analysis shows that these changes would be skewed in favor of the highest-income Idahoans.

Maryland: Maryland faces a budget surplus of $450 million as well as a surplus of tax cut proposals. Gov. Larry Hogan's plan would accelerate a scheduled increase in the state's Earned Income Tax Credit (EITC), a smart policy that delivers assistance to the low-income working families who need it most and are most likely to put the money back into the economy. But Hogan's EITC proposal accounts for just $16 million of his $480 million plan. Much of the rest is either unfocused, like the $100 million tax exemption for elderly Marylanders regardless of their need, or unproductive, like the easily abused 10-year tax hiatus for certain manufacturers. Meanwhile, others in the state have recently called for regressive and costly cuts to the corporate income tax and estate tax.

New York: Tax cut debates are active in New York as well. Gov. Andrew Cuomo has proposed tripling (from 5 percent to 15 percent) a tax exemption on "pass-through" income earned by businesses that pay personal income tax instead of corporate income tax. His plan would also expand eligibility for that exemption to include more businesses and would eventually lower the tax rate paid on that income to 4 percent. Meanwhile local entities, including New York City, feel the state has already gone too far in pushing costs onto the local level, a development that has contributed to high local property taxes. Those local officials are pushing for the state to find ways to increase its investments in local communities and statewide infrastructure. In fact, the mayor of Syracuse is advocating for tax increases on New York's wealthiest residents to fund a better system of aid to local schools.

Virginia: Virginia's Gov. Terry McAuliffe, too, is proposing tax cuts (PDF). His proposed package includes removing businesses with sales between $2.5 million and $25 million from the state's accelerated sales tax; reducing the corporate income tax rate from 6 percent to 5.75 percent; increasing income tax exemptions; increasing existing tax credits for angel investors, research and development, and neighborhood assistance; and creating three new credits. The largest piece of the proposal is the corporate tax cut, a change that will reduce funding available for vital public services, primarily benefit large profitable corporations, and have negligible effects at best on Virginia's economy.

Other states to watch: Minnesota, another state currently enjoying a surplus, may see tax cut efforts but as in New York there will be strong competition from others who feel the state has more pressing needs to address such as broadband access, transportation, and career and technical education. In Ohio, where some major tax cuts enacted in recent years are only now taking effect, some lawmakers may push to reduce taxes even further. Rhode Island is another state where there may be efforts to slash taxes on its wealthiest residents this year, similar to a push that took place last year (PDF).

Trigger Warning

Putting our state tax systems on cruise control might sound like a nice idea, but the reality is very different. Imagine if our cars automatically let a little bit of air out of the tires each time we sped up. Before long, we'd all be driving on flats and would have no way to get back up to speed after a slowdown (not to mention the state our roads would be in!). Yet that's what policymakers in many states are proposing to do to their tax systems by implementing automatic tax cut "triggers" that reduce taxes whenever economic tailwinds give the state a boost. Such trigger proposals hamper states' ability to save for the inevitable rainy day, and leave their budgets even further underwater when that day does come (not to mention the state their roads will be in!).

Georgia: Georgia is the latest state to consider such a trigger-based tax cut. In addition to legislation that would immediately increase personal and dependent exemptions, eliminate many itemized deductions, and convert the state's graduated rate structure to a flat 5.4 percent rate, a proposed constitutional amendment would then lower that to 5 percent when revenues and reserves hit specified targets.

Nebraska: In Nebraska a trigger bill introduced last year remains in committee and could re-emerge. That proposal could take many years to reach full implementation but nonetheless would be dramatically tilted in favor of high-income Nebraskans and put a major hole in the state's budget.

Another state to watch: Indiana: While not a "trigger" proposal, Indiana is an example of a state where some are trying to pass tax cuts now that don't take effect until future years, often a way of scoring immediate political points while pushing the difficult budget-balancing decisions into the future. Under the proposal, the state's income tax rate would drop from 3.23 percent to 3.06 percent, but not until 2025.

And Speaking of Driving on Flats

Another very troubling trend is that many of these proposals are efforts to abandon progressive income taxes -- in which rates go up as income goes up -- in favor of single-rate "flat" income taxes. State and local tax systems already lean more heavily on low-income families than their higher-income neighbors, and moving to flat taxes would only exacerbate this unfairness. The Georgia proposal linked above, as well as a question that may be put to voters in Maine, both aim to flatten their states' income taxes.

Up Next

If you found these tax cut updates deflating, be sure to tune in to the rest of our 2016 Trends series, in which we'll try to pump you back up with some examples of states considering more meaningful and positive tax reforms.


State Rundown 1/28: Taxes Up For Debate


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New Kentucky Gov. Matt Bevin delivered his first State of the Commonwealth address on Tuesday, forgoing tax cuts he promised during the campaign because in his words, the state "can't afford them right now." Instead, he called for deep reductions in state spending that would impair crucial services. Bevin would cut spending by $650 million across the board -- a 4.5 percent reduction for all agencies for the remainder of the fiscal year and a 9 percent reduction over the next biennium. The governor's plan would protect per-pupil K-12 funding, Medicaid, and social workers, and would increase some public safety spending. Bevin would also move $1.1 billion to the state's troubled pension funds for teachers and state employees. However, universities, regulatory agencies, parks, public television, workplace safety, public health, environmental quality and economic development would be affected by the cuts.  


The North Carolina Budget and Tax Center came to the aid of partners in West Virginia this week, pleading with legislators to take proposed tax cuts off the table. Gov. Earl Ray Tomblin's budget proposal would cut the state's severance tax on coal to help prop up the ailing industry, while raising taxes on tobacco products and telecommunications. Ted Boettner of the West Virginia Center on Budget and Policy warned lawmakers that more tax cuts wouldn't help the economy, and could make matters worse, pointing out that recent sales and corporate tax cuts had reduced state revenue that could have prevented the current deficit. Alexandra Sirota of the North Carolina Budget and Tax Center backed him up, noting that tax cuts in her state merely shifted taxes down the income scale and failed to produce new jobs.  


Georgia Senate Finance Chairman Judson Hill proposed two tax-cutting measures last week. The first would institute a flat income tax rate of 5.4 percenteliminate most itemized deductions (though would allow taxpayers to deduct all charitable contributions), and increase the personal and dependent exemptions by $2,000. Hill's second measure would amend the state's constitution to mandate a decrease in the flat rate (assuming the first proposal is enacted) to 5 percent if state revenues and reserves exceed certain levels. The finance chairman's proposals come against the backdrop of Gov. Nathan Deal's call for additional funding to make up for reduced spending in the wake of the Great Recession.  Look for an ITEP analysis of these proposals soon on the Tax Justice Blog.

  

Lawmakers in South Carolina continue to debate how to increase road funding while also cutting taxes in order to satisfy a demand by Gov. Nikki Haley to offset any gas tax increase with income tax cuts. The latest compromise would increase the state's gasoline excise tax by 12 cents per gallon over three years, along with a number of other vehicle related fees and taxes. The increases, expected to increase road funding by $665 million, would be paired with $400 million in  income tax cuts. One point of contention is a desire by some  lawmakers to include a refundable EITC for low-income South Carolinians in the package. The proposed EITC would cost $44 million and benefit 514,000 residents who would face higher costs at the pump. Some influential lawmakers were amenable to idea. Senate President Hugh Leatherman, who supports proposed tax breaks for manufacturers included in the plan, said "When we are giving everybody else something, why wouldn't we look to help them to pay the additional increase in the gas tax?" An ITEP analysis of this proposal will be coming soon to the Tax Justice Blog. 


The debate over the budget deficit in Alaska continues, with lawmakers mulling a gas tax increase and proposals to bring an income tax back to the state. The Senate and House transportation committees considered Gov. Bill Walker's plan to double the state's gasoline excise tax from 8 to 16 cents per gallon. The measure would raise $49 million annually, a far cry from the $4 billion needed to plug the state's budget hole. The governor has also suggested levying a state income tax equal to 6 percent of the federal income tax Alaskans owe, while State Rep. Paul Seaton has put forth a plan asking Alaskans to pay the state 15 percent of what they pay in federal taxes. Walker's income tax plan would raise $200 million, while Seaton's more ambitious plan would raise $655 million and includes a long-term capital gains tax of 10 percent. A recent poll of Alaskans shows that residents favor a mix of cuts and new revenue to address the crisis by almost a 2-1 margin. 


Got a juicy news story or new development in state tax policy that's too good to miss? Send your ideas and any comments to Sebastian at sdpjohnson@itep.org and we'll add it to the next State Rundown!  


What to Watch for in 2016 State Tax Policy: Part 1


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State legislative sessions are about to begin in earnest.We expect tax policies to get major playin statehouses across the nation this year with many states facing revenue surpluses for the first time in years and others having to grapple with closing significant deficits. Regardless, officials should focus on policies that create fairer, more sustainable state tax systems and avoid policies that undermine public investments.

ITEP this year once again will be taking a hard, analytic look at tax policy proposals and legislation in the states. This is the first in a six-part blog series providing analyses on the implications of policy proposals, as well as thoughtful commentary on best policy practices.

 Part 2: Revenue Surpluses May Prompt Tax Cut Proposals

In some states, economies have recovered well since the economic downturn, and lawmakers are considering spending surpluses on tax cuts instead of providing much-needed boosts to public investments that were scaled back during the recession. The economic recovery has been uneven, however, and some states that find their economies still struggling or newly sputtering may consider tax cuts on high-income residents under the misguided premise that tax cuts at the top trickle-down and stimulate economic growth.

One trend we expect to see is tax cuts that take effect in small increments over a very long period based on revenue performance or some other automatic "trigger." The effect of these incremental cuts is to push the brunt of revenue losses into the future. Another trend is to move toward single-rate income taxes, negating the chief advantage of the income tax: its ability to reduce tax unfairness by requiring people with higher incomes to pay higher rates and those with less income to pay lower rates. Keep an eye in 2016 on Georgia where there is a proposal to cut and flatten the income tax and then further reduce it in future years based on automatic triggers.

Part 3: Revenue Shortfalls Create Opportunities for Meaningful Tax Reform

A number of states including Alaska, Connecticut, Delaware, New Mexico, Vermont, West Virginia, and Wyoming are grappling with current and future year revenue shortfalls. Pressed for revenue, we anticipate that some states may turn largely to spending cuts or more regressive and less sustainable tax options (like a small hike in the cigarette tax) to close their budget gaps. The scale of the problem in many of these states could also present a real opportunity for lawmakers to debate and enact reform-minded tax proposals that could raise needed revenue, improve tax fairness, and craft more sustainable state tax systems for the future. 

The most significant revenue downturns and best opportunities for reform are in states dependent on oil and gas tax revenue, most notably Alaska and Louisiana. Alaska Governor Bill Walker unveiled a proposal in December that would among other things bring back a personal income tax. Louisiana's new governor, John Bel Edwards, will call a special session next month to pitch short- and long-term revenue raising ideas, including much-needed reforms to the state's income tax. We are also watching Illinois and Pennsylvania where lawmakers are now more than seven months overdue on putting together a budget for the current fiscal year, largely over disagreements on how to find needed revenue to pay for public investments.

Part 4: Tax Shifts in All Shapes and Sizes

Tax shifts, which reduce or eliminate reliance on one tax and replace it with another source, are one bad policy idea we expect to continue to rear its ugly head. The most common tax shifts in recent years have sought to eliminate personal and corporate income taxes and make up the lost revenue with an expanded sales tax. Such proposals result in a dramatic reduction in taxes for the wealthy while hiking them on low- and middle-income households, increasing the unfairness of state tax systems and exacerbating already growing income inequality.

Lawmakers in Mississippi  and Arizona  have expressed support for lowering and eliminating income taxes. Changing political and revenue pictures in both of these states could lead to lawmakers finally making good on their promises in 2016. Also watch for smaller scale shifts like a plan in New Jersey where lawmakers want to pair a much needed increase in the state’s gas tax with an elimination of the estate tax to “offset” the tax hike.

 Part 5: Addressing Poverty and Inequality Through Tax Breaks for Working Families

In 2016, we expect states to focus on a range of policies to support working families, building off the momentum of their 2015 reforms and national dialogue on poverty and income inequality. In particular, developments to enact or improve state Earned Income Tax Credits (EITCs) are likely in a dozen states across the country. For instance, Louisiana’s new governor John Bel Edwards called for doubling the state EITC as part of his commitment to reduce poverty. Maryland’s governor, Larry Hogan, called to accelerate the planned EITC increase. Delaware lawmakers are looking to take a step forward by making the state’s EITC refundable, but unfortunately are also considering a drop in the percentage of the credit.

Tax breaks for working families may also appear as proposals to provide targeted cuts to offset regressive tax increases in states where lawmakers plan to raise revenue. We suggest also keeping an eye on working family tax break proposals in the following states: California, Georgia, Illinois, Minnesota, Mississippi, Missouri, Oregon, Rhode Island, Utah, Virginia, and West Virginia.

Part 6: Overdue Increases in Transportation Funding

The recent momentum toward improvements in funding for transportation infrastructure is likely to continue in 2016. Governors in states such as Alabama, California, and Missouri have voiced support for gasoline tax increases, and gas taxes seem to be on the table in Indiana and Louisiana as well. These discussions on a vital source of funding for infrastructure improvements are long-overdue, as many of these states haven’t updated their gas taxes for decades

But not all transportation funding ideas being discussed are worth celebrating. Arkansas Gov. Asa Hutchinson, for example, has proposed that additional infrastructure funding come from diverting significant revenues away from education, health care, and other services. Meanwhile, lawmakers in other states (Mississippi, New Jersey, and South Carolina) would like to leverage a gas tax increase to slash income or estate taxes for high-income households. While these plans would result in more funding for transportation, their overall effect would be to worsen the unfairness and unsustainability of these states' tax codes.


Hope Springs Eternal in Georgia


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

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

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

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


State Rundown 9/9: Spin, Opinions and Tax Cuts


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Louisiana voters will consider ballot initiatives next month regarding road and bridge funding. The first measure would steer tax revenues from oil and gas from the state’s rainy day fund to its transportation fund. If approved, $21 million would shift from the rainy day fund to the state highway system in each of the next five years, with up to $100 million annually shifted to transportation thereafter. The second measure would establish a state transportation infrastructure bank, which would use public funds to offer loans and credit to public and private transportation projects. Of course, Louisiana’s legislators could also address the state’s $12 billion backlog in infrastructure needs by raising the state gas tax, which hasn’t changed in over 25 years or kept pace with inflation.

Kansas Gov. Sam Brownback has changed his spin on the disastrous tax cuts he enacted two years ago, preferring now to focus on employment numbers instead of the promised revenue growth. When asked about his policies by a local reporter, Brownback replied, “The tax cuts were always designed around jobs and economic growth. Wasn’t designed around revenue for the state.” This, of course, is false – in 2012, Brownback and economist Art Laffer claimed tax cuts would increase revenue growth by 5 percent. And despite Brownback’s sunny job growth rhetoric, Kansas still lags the nation in that category. But what use are facts to a good story?

The Illinois budget might be a disaster at the moment, but one company will still get a tax cut. Amazon will receive a corporate tax credit for a new warehouse in Joliet, despite the fact that the corporate recruiting program was put on hold in June during the budget showdown. Economists have consistently questioned whether tax incentives matter to company relocation, and some Illinois legislators called for the decision to be reviewed. The state Department of Commerce and Economic Opportunity says the tax credits were awarded to Amazon to honor a commitment made before the suspension of the corporate recruiting program, though some question that logic. Rep. Jack Franks asked, “"I'm not sure why we would provide tax credits to a company that's already made a decision to come here. If they've already said they're doing this, what benefit is there to the state?"

Tax reform proposals from conservative legislators in Georgia would make life’s necessities more expensive, according to an editorial in The Atlanta Journal-Constitution. Columnist Jay Bookman, citing ITEP data, argues that conservative plans to cut the income tax and replace the lost revenue by increasing sales taxes and applying the sales tax to groceries would result in higher taxes for middle and low-income families and tax breaks for corporations and wealthy individuals. Bookman also notes that the move could have a negative impact on the state’s bond rating if revenues don’t materialize as expected, and that families at the bottom of the income scale have already lost purchasing power.

Another editorial in The Toledo Blade argues that Ohio workers fare worse than others across the country, thanks in part to the misguided policies of current Gov. John Kasich. The column cites ITEP data to show that, under the governor’s new tax plan, the top one percent of Ohio taxpayers will receive an average cut of $17,600 while the bottom 20 percent will pay more. During his tenure Kasich also eliminated the estate tax, which provided revenue for local aid. With less aid from the state, poorer cities have struggled to get by or have been forced to raise local taxes on their already cash-strapped residents. 


Fiscal Year Finish Line Part III: Transportation Funding


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This is the final installment of our three part series on 2015 state tax trends.  The first article focused on tax shifts and tax cuts.  The second article discussed tax credits for working families and revenue raising initiatives.

Thumbnail image for 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). 

Perhaps the most active area of state tax policy this year was the debate over how to fund the nation’s deteriorating infrastructure.  As Congress continues to drag its feet on a solution to our current revenue shortfall, lawmakers in many states took action by enacting gas tax changes that will fund meaningful improvements to their transportation networks. A total of 17 states have enacted gas tax increases since 2013—including 9 this year alone.

Check out the detailed list after the jump to see which states increased their gas tax to support transportation funding.

 

Transportation Funding

Georgia: A 6.7 cent gas tax increase took effect July 1, 2015 as a result of a law signed earlier this year.  That law also positions Georgia for the long-term by allowing future increases to occur alongside growth in inflation and vehicle fuel-efficiency.

Idaho: A 7 cent gas tax increase took effect July 1, 2015—the state’s first gas tax increase in over 19 years.

Iowa: A 10 cent increase finally took effect on March 1, 2015 after years of debate.

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

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

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

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

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

Washington: Gov. Inslee signed a recent compromise package approved by the legislature. Washington State’s gas tax will rise by 11.9 cents in two increments: 7 cents on August 1 and an additional 4.9 cents on July 1, 2016. 

 


Gas Tax Changes Take Effect July 1


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On Wednesday July 1, six states will raise their gasoline tax rates.  While some drivers may view this as an unwelcome development during the busy summer travel season, the reality is that most of these “increases” are simply playing catch-up with inflation after years (or even decades) without an update to the gas tax rate.  Moreover, these increases will fund infrastructure improvements that directly benefit drivers and other travelers—an especially important step at a time when Congress’ commitment to adequately funding infrastructure remains highly uncertain.

The largest gas tax increases are taking place in Idaho (7 cents per gallon) and Georgia (6.7 cents for gas and 7.7 cents for diesel).  Each of these increases is occurring due to legislation enacted earlier this year.  Maryland’s increase of 1.8 cents is a result of legislation signed by former governor (and current presidential candidate) Martin O’Malley in 2013.  Rhode Island’s 1 cent increase is the first automatic update for inflation to take place under a law signed by former Gov. Lincoln Chafee in 2014 (Chafee is now a presidential candidate as well).  Finally, Nebraska’s 0.5 cent hike and Vermont’s 0.35 cent increase are automatic changes resulting from these states’ variable-rate gas tax structures.

By contrast, the gasoline tax rate will fall by 6 cents in California and the diesel tax rate will drop by 4.2 cents in Connecticut as a result of laws linking those states’ gas tax rates to gas prices (a unique quirk in California’s law will cause the diesel tax to rise by 2 cents).  These cuts will reduce the level of funding available for transportation at a time when basic infrastructure maintenance is already lagging far behind.  Earlier this year, similar automatic cuts had been scheduled to take place in Kentucky and North Carolina, but lawmakers in both of these states wisely intervened by placing a “floor” on their gas tax rates that minimized the loss of infrastructure revenue. 

View chart of states raising gasoline taxes 

View chart of states raising diesel taxes

 

 

 


State Rundown 4/7: Bad Ideas Die Hard


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Kansas Gov. Sam Brownback doubled down on defending his disastrous tax cuts, insisting that the state would benefit from a shift away from income taxes to consumption taxes. The governor claimed that such taxes, which fall more heavily on middle and working-class citizens, are more “growth oriented” than the income tax, despite the problems with this claim. Brownback has proposed increases in taxes on cigarette and alcohol consumption this session to make up for freefalling revenues, and has indicated willingness to increase the sales tax. Meanwhile, the deep budget cuts enacted in the wake of Brownback’s tax cuts means Kansas schools will close early this year. 

It seems as if New Jersey Gov. Chris Christie’s lottery privatization plan is a bust. The Associated Press reports that the New Jersey lottery, once among the most profitable in the nation, has failed to meet state revenue targets for the second year in a row. Legislators have already lowered income expectations for the struggling lottery, but Gtech, the private firm in charge of operations is trailing even the revised number by $64 million. Gtech is the same company responsible for the abysmal performance of the Illinois State Lottery after it was privatized in 2011. Former Gov. Pat Quinn fired the firm last summer.

Nevada Gov. Brian Sandoval hit back at critics of his proposed increase in business license fees, singling out a report by the Tax Foundation as irresponsible and “intellectually dishonest.” Sandoval wants to replace Nevada’s flat fee of $200 for a business license with a tiered system that takes into account gross receipts and the type of business. The new fees would range from $400 to $4 million a year and would raise $430 million. The governor would use the new revenue to help increase education funding by nearly $782 million. He has gained the support of business and interfaith groups, as well as the majority of Nevada voters.

 

Following Up:
North Carolina: An editorial in The News and Observer blasted the income tax cut proposal offered by state Senate leaders, noting that “while they’ve been cutting taxes for the wealthy and businesses, which have gotten most of the breaks, they’ve bashed the public schools, cut the university system and put the state in such a tight revenue margin that further tax cuts could be catastrophic.”

Idaho: The state Senate killed the tax plan offered by House leaders that would have removed the sales tax on groceries, increased the gas excise tax and lowered income taxes for the wealthy. ITEP found that the overall impact (PDF) of these changes would be higher taxes for low- and middle-income taxpayers, and dramatically lower taxes for the affluent (the top 1 percent of earners would receive an average benefit of $5,000 per year).  While an alternative plan has yet to be formulated, the Senate appears to be interested in refocusing efforts on the original objective of this legislation: raising money for transportation.

Nebraska: The proposed gas tax increase continued its progress through the state’s unicameral legislature, when senators voted 26-10 to advance the measure. Two more votes are required before the bill reaches Gov. Pete Ricketts, who does not support increasing the gas tax.

 

Things We Missed:
The Georgia legislature approved a sweeping transportation deal last Tuesday that will raise $1 billion for infrastructure maintenance and improvements through a mix of new revenue sources. The final version of House Bill 170 raises the existing state gas tax by 6.7 cents and reforms the tax so that it will grow alongside fuel-efficiency gains and general inflation, rather than being tied to gas prices. The bill also introduced a new $5-per-night hotel and motel tax and a new fee of $50 to $100 on heavy commercial trucks. The measure eliminated tax breaks for commercial airlines and electric cars to raise revenue as well. Gov. Nathan Deal has indicated that he will sign the measure into law.

 

States Ending Session This Week:
Mississippi (Sunday) (note: the end of the session means no new tax cut proposals can be considered in Mississippi this year)



Six States Have Raised or Reformed Their Gas Taxes This Year


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

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

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

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

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

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

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

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


Add Georgia to the List of Tax-Shifting States


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georgiastatehouse.jpgJust last week we wrote about the trend of tax shifts sweeping the nation. Policy makers in Ohio, Maine, Idaho, Michigan, South Carolina, and New Jersey are seriously considering regressive tax proposals that would shift taxes away from higher-income taxpayers who have more ability to pay to those with less. Now we can add Georgia to that notorious list. Earlier this week, lawmakers introduced House Bill 445. The measure would lower the state’s top income tax rate from 6 to 4 percent and raise the sales tax from 4 to 5 percent. An ITEP analysis of this, likely regressive tax shift, will be forthcoming. In the meantime read these thoughtful pieces – here and here (which cite ITEP data) about Georgia’s already inequitable tax system.


State Rundown 1/16: Kumbaya Caucus


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Newly-elected Arkansas Gov. Asa Hutchinson continued a well-established tradition in the Natural State by beginning the legislative session with a proposed tax cut. Hutchinson’s plan would cut personal income tax rates by one percent for those making $21,000 to $75,000 a year, and would cost $137.8 million once fully implemented (according to Hutchinson's office). The governor has yet to outline how he will pay for his tax cut. His plan will offer virtually no relief to the 40 percent of Arkansans who make less than $22,600 and currently pay a percentage of their income in state in local taxes that is twice as high as that paid by the wealthiest Arkansans, according to the most recent edition of ITEP’s Who Pays report. Legislators predicted that the cuts would receive broad bipartisan support.

North Carolina lawmakers began their legislative session yesterday with the usual pledges of bipartisanship meant to muffle the sharpening of knives. The state’s Republican legislature could face a showdown with Gov. Pat McCrory over Medicaid expansion, a policy that the governor now says he is open to considering. At their traditional press conference, the leaders of the House and Senate reiterated their opposition to expanding Medicaid to cover 500,000 additional North Carolinians, but were non-committal on other issues likely to dominate the session – business incentives, teacher pay and local taxes, among others. Senate President Pro Tem Phil Berger defended previously enacted corporate and personal income tax cuts, saying they are contributing to an improving economic environment despite revenue collections falling $190 million below state projections. This is after state projections were already adjusted downward by close to the same amount last year, so the state is actually bringing in $400 million less than originally anticipated.

Georgia Gov. Nathan Deal urged lawmakers to find money to invest in the state’s transportation system, saying $1 billion was needed to simply maintain the current system. While the governor did not specify where the funding should from, he highlighted the inadequacy of the state’s gasoline excise tax, signaling his openness to a tax increase. Georgia’s excise tax has not increased since 1971, while fuel efficiency has almost doubled. The prospect of a transportation plan passing the legislature is dicey; Republicans are likely to oppose increasing taxes or fees, while Democrats could balk at a plan that doesn’t include funding for mass transit. Democrats enjoy leverage on the issue since their votes could be necessary to overcome Republican opposition.

 

Following Up:

Arizona – A judge ordered lawyers for the Legislature, governor and Arizona public schools to enter into settlement talks over a lawsuit brought by the schools against the state. Gov. Ducey previously called for a resolution in his State of the State address.

New Jersey – Gov. Chris Christie’s State of the State address received mixed reviews for being light on details (the governor did not mention his state’s transportation crisis and punted on unfunded pension liabilities) and targeted toward a national audience. Christie did, however offer dissonant platitudes about the need to make investments and also cut taxes. Perhaps next he will boldly declare his intention to rub his tummy and pat his head at the same time.

Nebraska – The Nebraska Cattlemen Association is monitoring the property tax cut proposals emerging in the legislature after Gov. Pete Rickett’s pledge to offer Nebraskans property tax relief in his State of the State address. They have shown particular interest in Sen. Al Davis’ plan to pay for property tax relief through new local income taxes.

Tennessee – As predicted, plenty of legislators hate Gov. Bill Haslam’s plan to expand Medicaid coverage to 200,000 Tennesseans. House Republican leader Gerald McCormick is particularly unenthused, saying he would sponsor the governor’s bill but only because it’s his job (cue heavy sighing and eye-rolling).

 

Things We Missed: 

New Mexico’s Legislative Finance Committee and Gov. Susana Martinez both released their budget proposals this week. State revenues are expected to continue sliding due to falling oil prices, and less generous spending is expected. (Thanks to Ellen Pinnes for the tip!) 


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. 


The Realities of Governing Will Put Candidates' Anti-Tax Rhetoric to the Test


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electionnight.jpgThe outcome of Tuesday’s election surely will shape the direction of state tax policy in 2015 as tax shift proposals appear to be looming in a number of states. In states with budget shortfalls, it may be difficult for elected officials who campaigned on tax-cutting platforms  to balance that rhetoric with the realities and priorities of governing.

As a recent Standard & Poor’s study revealed, worsening income inequality makes it harder for states to pay for needed services (e.g. education, roads and bridges, public safety and public health) over time. Campaigns consist of soaring rhetoric on what candidate will do for the people. Governing puts that rhetoric to the test. State lawmakers, regardless of party affiliation, should focus on reckoning the reality of their constituents’--ordinary working people--daily lives rather than claim the outcome of the Tuesday’s election is license to impart policies that overwhelming benefit corporations and the wealthy at the expense of everyone else.

In coming weeks, ITEP will provide a comprehensive overview of state tax policy trends to anticipate in 2015 as well as a look at other states where tax policy will be a dominant issue.  For now, here’s a glance at some of the most important states to watch where the outcome of Tuesday’s election will surely shape tax policy decisions next year:

Arizona: Former ice cream magnate Doug Ducey cruised to victory over opponent Fred DuVal on a promise to eliminate the personal and corporate income tax. Ducey appeared to back away from his tax pledge in the waning days of the campaign, but it is likely that he will claim a mandate to push an anti-tax agenda, financed with drastic spending cuts. “If anyone needs to cut back,” he declared in his victory speech, “it will be government.” The state’s anemic economy and yawning budget gap could prove an obstacle to his plans.

Arkansas: Former Congressman Asa Hutchinson was elected governor besting former U.S. Rep. Mike Ross. This means that both the Arkansas legislative and executive branches will now be under one-party control. Hutchinson campaigned on a costly plan to cut the personal income tax by lowering tax rates for all but low-income households. News outlets have  quoted him saying that income tax reduction would be his “top and possibly only tax cutting priority.” Given one party control in Arkansas government, legislators will likely feel more inclined to push through tax cuts and potentially pursue more aggressive tax shift legislation (which has been on their agenda for years) that would eliminate income taxes and replace the lost revenue with regressive sales taxes.

Georgia: Gov. Nathan Deal won his campaign for reelection over challenger Jason Carter. Given that Republicans will continue to control both the House and the Senate, top state lawmakers are expected to pursue a tax-cutting agenda that will likely include extreme tax shift proposals.  Late last year, the Georgia Budget and Policy Institute published  a report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated its income tax and replaced the revenue with sales taxes.  Georgia voters also approved the “Income Tax Straightjacket” a ballot initiative that amends the state’s constitution to keep the top income tax rate at 6 percent.

Illinois: Gov. Pat Quinn lost his bid for reelection to businessman Bruce Rauner. Taxes were a big issue in this campaign. Rauner’s position on how to handle the state’s temporary 5 percent income tax rate changed through the campaign. (The state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in January). Initially he proposed allowing the temporary income tax hike to immediately expire, but he changed his position once the reality set in that as governor he would need to fill the $2 billion budget hole created by allowing the tax rate to fall. More recently, Rauner has said that he will allow the temporary tax increase to expire over four years and will keep property taxes at their current level. Rauner would make up $600 million of lost income tax revenue by broadening the sales tax base to include many business services such as advertising, printing and attorney fees. The Illinois House and Senate, which remain under Democratic control, may tackle the temporary income tax rate before Rauner takes office. Regardless, Illionois will be a state to watch in 2015 given the governor’s stand on taxes, divided government and  overwhelming voter approval of a referendum showing support for a millionaire’s tax.

Kansas - Given Kansas’s recent fiscal woes, the race between  Gov. Sam Brownback and House Minority Leader Paul Davis was thought to be a toss-up right until the polls closed. Ultimately, Gov. Brownback prevailed. Gov. Brownback’s record on taxes has made national headlines and the race was largely viewed as a referendum on his controversial tax cuts that benefited wealthy Kansans disproportionately, resulted in a bond rating downgrade, and left the state with a huge budget shortfall. Now that Kansans have re-elected Gov. Brownback,  he’ll be forced to deal with a budget shortfall through rolling back his tax cuts, raising other taxes, or reducing services. All eyes will continue to be on Kansas into 2015.

Maryland: Larry Hogan’s stunning upset over Lt. Gov. Anthony Brown in the gubernatorial race will likely result in gridlock rather than significant changes on tax policy. Hogan used outgoing Gov. Martin O’Malley’s tax increases as an effective cudgel against Brown, hammering away at his support among Democrats. Though Hogan has pledged to repeal as many of O’Malley’s tax policies as possible, he is unlikely to find support for his agenda in the Maryland state legislature, which remains overwhelmingly Democratic. A similar dynamic plagued his former boss, Republican Gov. Bob Erlich (2002-2006), who found himself stymied by a combative General Assembly. The likely result of divided government is gridlock.

Pennsylvania: Tom Wolf unseated Pennsylvania’s incumbent governor, Tom Corbett, in Tuesday’s election.  Corbett’s unpopularity stemmed from a number of his policy choices including cutting more than $1 billion in education spending and allowing a significant budget shortfall to develop in the state.  So, the top job of the newly elected governor will be determining how to close the budget gap (estimated to be between $1.7-$2 billion) while reinvesting state dollars in public education.  Look to Wolf to put forth several revenue raising ideas he first proposed on the campaign trail.  For starters, Wolf promised to enact a 5 percent severance tax on natural gas drilling to help fund education (Corbett opposed such a tax).  Wolf also wants to raise revenue through changes to the personal income tax which will also improve the fairness of the state’s tax system. Pennsylvania has a flat income tax rate of 3.07 percent and the Pennsylvania Supreme Court has ruled that the constitution bars the adoption of a graduated income tax. Wolf’s plan would raise the income tax rate but exempt income below a certain level. Wolf has said he intends  to use the extra revenue generated by his tax reform to increase the level of state aid to public schools and reduce Pennsylvanians’ property taxes.  While Wolf may face opposition to his progressive personal income tax plan, many Republican lawmakers could get on board with the idea of the state taking on a greater share of school funding if it would result in lower property taxes.

Wisconsin: Wisconsin Gov. Scott Walker won reelection by besting Trek Bicycle Executive Mary Burke. Gov. Walker ran on his record of cutting taxes. (During his time in office Governor Walker passed three rounds of property and personal income tax cuts). As a candidate Gov. Walker pledged that property taxes wouldn’t increase through 2018. Even more worrisome, Gov. Walker has said he wants to discuss income tax elimination. While telling voters that he’d like to eliminate their state income tax bills may sound good on the campaign trail, Wisconsinites should know that most taxpayers, especially middle- and low-income households, would likely pay more under his plan. An ITEP analysis found that if all revenue lost from income tax repeal were replaced with sales tax revenue the state’s sales tax rate would have to increase from 5 to 13.5 percent.  ITEP also found that the bottom 80 percent of state taxpayers would likely see a net tax hike if the sales tax were raised to offset the huge revenue loss associated with income tax elimination.


Georgians Set to Vote on Income Tax Straightjacket


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

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

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

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

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

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

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

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

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

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

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


Tax Proposals on the Ballot this Election Season


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Ah, fall. The season marks the countdown to that quintessential American holiday, where childish figures go door-to-door, asking for favors under false pretenses. I am of course talking about election season, which traditionally kicks into high gear in October.

This year, voters in states across the nation will have the opportunity to make their voices heard on a number of ballot initiatives regarding taxes. In some states, ballot initiative supporters are seeking to limit tax policy choices available to lawmakers, while ballot initiatives in other states would raise revenue to boost school funding. We’ve compiled a few of them here, along with links to the best resources, to help voters understand the issues and make their decision this November.

Georgia voters will decide the fate of a constitutional amendment that would prohibit the state from increasing the top marginal income tax rate above the rate in effect on Jan. 1, 2015. While the legislature is now adjourned until 2015, a special session could theoretically be called to lower the top rate (now at 6 percent) before Jan.1. Supporters of the measure argue that its passage would make the state more competitive and reduce uncertainty over fiscal policy for businesses interested in investing in Georgia. Opponents say the uncertainty argument is bogus since the state hasn’t raised the income tax since the 1980s, and that businesses and residents choose where to locate based on a number of factors other than income tax rates. They further note that states that have passed similar measures have faced fiscal challenges down the road; Illinois and California, both of which have restrictive tax amendments in their constitutions, have been hamstrung by budget deficits and an inability to raise revenue during economic downturns.

Massachusetts voters have the option of repealing a 2013 law that ties the gas tax to inflation, allowing for automatic gas tax increases each year. The law also includes a minimum cap on the state gas tax, to prevent gas tax decreases due to deflation. Supporters of repeal argue that the law is a slippery slope that could lead to the linkage of other taxes to inflation, and that it unfairly allows legislators to raise taxes “through the back door” without having to answer to voters. They also argue that the state has a spending problem, not a revenue problem; the last time the state raised the gas tax for road repairs, the money was diverted to other purposes. Opponents of the ballot measure say it would jeopardize transportation projects across the state, threatening the safety of Massachusetts drivers and contributing to the deterioration of many roads and bridges. 53 percent of the state’s bridges are structurally deficient or functionally obsolete, and bad roads cost Massachusetts drivers $2.3 billion a year in car repairs. In the past, ITEP has argued that gas tax indexing is good policy since it maintains a state’s purchasing power and creates a stable funding source – read more in our comprehensive gas tax report.

Tennessee voters could enshrine the state’s current lack of a broad-based personal income tax in the state constitution. A ballot question would permanently ban the legislature from enacting a general income tax on wages and salaries by state or local governments. Supporters argue that the measure would make the state more attractive to businesses by reducing uncertainty and locking in Tennessee’s status as a low-tax state. Opponents argue the measure will make it harder for future Tennesseans to deal with economic downturns and that the state’s political climate makes the imposition of an income tax unlikely in any event. For more on Tennessee, check out this recent blog post.

Nevada voters could implement a new 2 percent margins tax on businesses with over $1,000,000 in revenue to support public schools. Supporters argue that Nevada is 49th in per-pupil spending while also maintaining the lowest state corporate taxes in the nation; since 2009, the state has cut education spending by $700 million. The also maintain that 87 percent of businesses would be unaffected by the measure, and that revenues raised would go solely to education spending. Opponents claim the measure would increase the cost of doing business in the state, would hurt thousands of small businesses, and that the revenue raised would go to county bureaucrats instead of classrooms. The AFL-CIO, which initially supported the measure, now opposes it on the grounds that it could cost some Nevadans their jobs and raise the cost of living if businesses cut costs or pass the tax on to consumers.

Illinois voters will decide whether to support an additional 3 percent surtax on income over $1,000,000 to provide more funding for school districts based on student population. The ballot measure is an advisory question, so it will not be legally binding. Supporters argue that the best-off Illinoisans should do more to support the public schools, which are chronically underfunded. Opponents argue that the measure is an election-year gimmick meant to boost the performance of Democratic candidates rather than a serious proposal. They also argue that the state raised taxes substantially just a few years ago and still cut education funding, and that the tax will lead to tax flight by the wealthy. For the record, tax flight is a myth


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


State News Quick Hits: State Policy Makers Need a Tax History Lesson


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The Cleveland Plain Dealer provided a helpful history lesson in its recent editorial on Governor John Kasich’s State of the State speech. In the speech, Kasich predictably called for yet another round of tax cuts to fix all that ails the state, but as the editorial board smartly points out, “if tax cuts were the key to rebirth, Ohio's troubles should have ended long ago.” The paper goes on to chronicle six substantial state income tax cuts implemented since 1985, none of which generated the economic boom promised by proponents. If state legislators unwisely go along with Kasich’s attempt to repeat history, they shouldn’t expect a different result.

The Idaho Trucking Association has come out in favor of a six-cent increase in the state’s 25-cent gas tax, adding Idaho to a list of states considering long-overdue gas tax hikes this year. If passed, the bill (PDF) would raise the state fuel tax two cents a year for the next three years, and would be the first such increase in 18 years. A gas tax increase is needed to close a $262 million hole in the state’s transportation budget, according to the Governor’s Task Force on Modernizing Transportation Funding. Republican Governor Butch Otter has been a vocal advocate of a gas tax increase, but was rebuked by the legislature on the issue in the past. AAA Idaho has come out against the bill in part because they don’t think it asks enough of the long-haul trucks that produce a disproportionate amount of wear and tear on the state’s roads. We will continue to monitor developments.

The Georgia Senate passed a constitutional amendment last week that would cap the state’s individual income tax rate at the current six percent level. As the Georgia Budget and Policy Institute has previously explained, this is an immensely silly idea, tying the hands of future policymakers by arbitrarily locking in current tax rules. The amendment’s key sponsor has described the effort as a “first step toward moving Georgia away from taxing income.” But personal income taxes are the fairest of the main revenue sources relied on by state governments. Senate Resolution 415 must now win a two-thirds vote in the House and then, if successful, approval by the voters in November.

In the 36 states where Governors are up for election, campaign season is well underway. This is especially true in Wisconsin. Governor Scott Walker isn’t likely to fulfill his 2010 campaign pledge of creating 250,000 jobs, but that isn’t stopping him from making a whole new promise. This time he is pledging that property taxes won’t be increased over his next term. Details about how he will keep property taxes at current levels aren’t available yet, but it’s likely he will recommend some kind of ill-advised property tax cap, as well as an increase in state aid to localities.


Beware of the Tax Shift (Again)


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Note to Readers: This is the second of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on tax shift proposals.

The most radical and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate state income taxes and replace some or all of the lost revenue by expanding or increasing consumption taxes. These “tax swap” proposals appeared to gain momentum in a number of states last year, but ultimately proposals by the governors of Louisiana and Nebraska fell flat in 2013. Despite this, legislators in several states have reiterated their commitment to this flawed idea and may attempt to inflict it on taxpayers in 2014. Here’s a round-up of where we see tax shifts gaining momentum:

Arkansas - The Republican Party in Arkansas is so committed to a tax shift that they have included language in their platform vowing to “[r]eplace the state income tax with a more equitable method of taxation.” While the rules of Arkansas’ legislative process will prevent any movement on a tax shift this year, leading Republican gubernatorial candidate Asa Hutchinson has made income tax elimination a major theme of his campaign.  

Georgia - The threat of a radical tax shift proposal was so great in the Peach State that late last year the Georgia Budget and Policy Institute published this report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated their income tax and replaced the revenue with sales taxes. This report seems to have slowed the momentum for the tax shift, but many lawmakers remain enthusiastic about this idea.

Kansas – In each of the last two years, Governor Sam Brownback has proposed and signed into law tax-cutting legislation designed to put the state on a “glide path” toward income tax elimination.  Whether or not the Governor will be able to continue to steer the state down this path in 2014 may largely depend on the state Supreme Court’s upcoming decision about increasing education funding.

New Mexico - During the 2013 legislative session a tax shift bill was introduced in Santa Fe that would have eliminated the state’s income tax, and reduced the state’s gross receipts tax rate to 2 percent (from 5.125 percent) while broadening the tax base to include salaries and wages. New Mexico Voices for Children released an analysis (PDF) of the legislation (citing ITEP figures on the already-regressive New Mexico tax structure) that rightly concludes, “[o]n the whole, HB-369/SB-368 would be a step in the direction of a more unfair tax system and should not be passed by the Legislature.” We expect the tax shift debate has only just started there.

North Carolina - North Carolina lawmakers spent a good part of their 2013 legislative session debating numerous tax “reform” packages including a tax shift that would have eliminated the state’s personal and corporate income taxes and replaced some of the revenue with a higher sales tax. Ultimately, they enacted a smaller-scale yet still disastrous package which cut taxes for the rich,hiked them for most everyone else, and drained state resources by more than $700 million a year. There is reason to believe that some North Carolina lawmakers will use any surplus revenue this year to push for more income tax cuts.  And, one of the chief architects of the income tax elimination plan from last year has made it known that he would like to use the 2015 session to continue pursuing this goal.

Ohio - Governor John Kasich has made no secret of his desire to eliminate the state’s income tax. When he ran for office in 2010 he promised to “[p]hase out the income tax. It's punishing on individuals. It's punishing on small business. To phase that out, it cannot be done in a day, but it's absolutely essential that we improve the tax environment in this state so that we no longer are an obstacle for people to locate here and that we can create a reason for people to stay here." He hasn't changed his tune: during a recent talk to chamber of commerce groups he urged them “to always be for tax cuts.”  

Wisconsin - Governor Scott Walker says he wants 2014 to be a year of discussion about the pros and cons of eliminating Wisconsin’s most progressive revenue sources—the corporate and personal income taxes. But the discussion is likely to be a short one when the public learns (as an ITEP analysis found) that a 13.5 percent sales tax rate would be necessary for the state to make up for the revenue lost from income tax elimination. 


What to Watch for in 2014 State Tax Policy


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Note to Readers: This is the first of a five-part series on tax policy prospects in the states in 2014.  This post provides an overview of key trends and top states to watch in the coming year.  Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals and take a deeper look at the four key policy trends likely to dominate 2014 legislative sessions and feature prominently on the campaign trail. Part two discusses the trend of tax shift proposals. Part three discusses the trend of tax cut proposals. Part four discusses the trend of gas tax increase proposals. Part five discusses the trend of real tax reform proposals.

2013 was a year like none we have seen before when it comes to the scope and sheer number of tax policy plans proposed and enacted in the states.  And given what we’ve seen so far, 2014 has the potential to be just as busy.

In a number of statehouses across the country last year, lawmakers proposed misguided schemes (often inspired by supply-side ideology) designed to sharply reduce the role of progressive personal and corporate income taxes, and in some cases replace them entirely with higher sales taxes.  There were also a few good faith efforts at addressing long-standing structural flaws in state tax codes through base broadening, providing tax breaks to working families, or increasing taxes paid by the wealthiest households.

The good news is that the most extreme and destructive proposals were halted.  However, several states still enacted costly and regressive tax cuts, and we expect lawmakers in many of those states to continue their quest to eliminate income taxes in the coming years.  

The historic elections of 2012, which left most states under solid one-party control (many of those states with super majorities), are a big reason why so many aggressive tax proposals got off the ground in 2013.  We expect elections to be a driving force shaping tax policy proposals again in 2014 as voters in 36 states will be electing governors this November, and most state lawmakers are up for re-election as well.

We also expect to see a continuation of the four big tax policy trends that dominated 2013:

  • Tax shifts or tax swaps:  These proposals seek to scale back or repeal personal and corporate income taxes, and generally seek to offset some, or all, of the revenue loss with a higher sales tax.

    At the end of last year, Wisconsin Governor Scott Walker made it known that he wants to give serious consideration to eliminating his state’s income tax and to hiking the sales tax to make up the lost revenue.  Even if elimination is out of reach this year, Walker and other Wisconsin lawmakers are still expected to push for income tax cuts.  Look for lawmakers in Georgia and South Carolina to debate similar proposals.  And, count on North Carolina and Ohio lawmakers to attempt to build on tax shift plans partially enacted in 2013.  
  • Tax cuts:  These proposals range from cutting personal income taxes to reducing property taxes to expanding tax breaks for businesses.  Lawmakers in more than a dozen states are considering using the revenue rebounds we’ve seen in the wake of the Great Recession as an excuse to enact permanent tax cuts.  

    Missouri
    lawmakers, for example, wasted no time in filing a new slate of tax-cutting bills at the start of the year with the hope of making good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year.  Despite the recommendations from a Nebraska tax committee to continue studying the state’s tax system for the next year, rather than rushing to enact large scale cuts, several gubernatorial candidates as well as outgoing governor Dave Heineman are still seeking significant income and property tax cuts this session.  And, lawmakers in Michigan are debating various ways of piling new personal income tax cuts on top of the large business tax cuts (PDF) enacted these last few years.  We also expect to see major tax cut initiatives this year in Arizona, Florida, Idaho, Indiana, Iowa, New Jersey, North Dakota, and Oklahoma.

    Conservative lawmakers are not alone in pushing a tax-cutting agenda.  New York Governor Andrew Cuomo and Maryland’s gubernatorial candidates are making tax cuts a part of their campaign strategies.  
  • Real Reform:  Most tax shift and tax cut proposals will be sold under the guise of tax reform, but only those plans that truly address state tax codes’ structural flaws, rather than simply eliminating taxes, truly deserve the banner of “reform”.

    Illinois and Kentucky are the states with the best chances of enacting long-overdue reforms this year.  Voters in Illinois will likely be given the chance to convert their state's flat income tax rate to a more progressive, graduated system.  Kentucky Governor Steve Beshear has renewed his commitment to enacting sweeping tax reform that will address inequities and inadequacies in his state’s tax system while raising additional revenue for education.  Look for lawmakers in the District of Columbia, Hawaii, and Utah to consider enacting or enhancing tax policies that reduce the tax load currently shouldered by low- and middle-income households.
  • Gas Taxes and Transportation Funding:  Roughly half the states have gone a decade or more without raising their gas tax, so there’s little doubt that the lack of growth in state transportation revenues will remain a big issue in the year ahead. While we’re unlikely to see the same level of activity as last year (when half a dozen states, plus the District of Columbia, enacted major changes to their gasoline taxes), there are a number of states where transportation funding issues are being debated. We’ll be keeping close tabs on developments in Iowa, Michigan, Missouri, New Hampshire, Utah, and Washington State, among other places.

Check back over the next month for more detailed posts about these four trends and proposals unfolding in a number of states.  


State News Quick Hits: Return of the "Fair Tax", Business Tax Cuts and More


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Some Indiana legislators aren’t too excited about Governor Mike Pence’s plan to take a major revenue source away from local governments.  Instead of prohibiting localities from taxing businesses’ equipment and machinery, House Speaker Brian Bosma has a more modest plan that would give local governments the option of eliminating those taxes on new investments.  But the Indiana Association of Cities and Towns doesn’t think Bosma’s plan is likely to do much good, explaining that “the more we slice the revenue side the less opportunity we have to create those kind of things which are just as big an economic development tool as reducing taxes.”

After cutting taxes for businesses and wealthy individuals these last couple years, Idaho Governor Butch Otter has changed his tune--at least slightly.  While the Governor wants to continue the state’s tax cutting race to the bottom, he says that boosting funding for education is actually his top priority this year.  Otter’s realization that public services matter to Idaho’s economic success is certainly welcome.  But rather than setting aside $30 million for tax cuts in his current budget, he may want to address the fact that “he’s not proposing any raises for teachers … nor is he proposing funding raises for any of Idaho’s state employees, despite a new state report showing state employee pay has fallen to 19 percent below market rates.”

Jason Bailey, Director of the Kentucky Center for Economic Policy gets it right in this op-ed describing how desperately the state needs tax reform and what the goals of tax reform should be. He notes that first and foremost “tax reform should raise significant new revenue now to begin reinvesting in Kentucky's needs.” He goes on to make the case that the tax reform should also improve the state’s tax structure in terms of fairness. He cites an Institute on Taxation and Economic Policy (ITEP) analysis which found that  currently ”low- and middle-income people pay nine to 11 percent of their incomes in state and local taxes in Kentucky while the highest-earning one percent of people pay only six percent.” Thankfully it looks like Governor Steve Beshear is on board with at least some of the principles outlined in this piece. During last week’s State of the Commonwealth (PDF) address he called for “more resources” to help restore cuts to vital services. The Governor’s own tax reform plan is scheduled to be unveiled later this month.

This piece in the Marietta Daily Journal discusses the radical “fair tax” proposal in Georgia. Some lawmakers are interested in eliminating the state’s income tax and replacing the revenue with a higher sales tax. When the Institute on Taxation and Economic Policy (ITEP) analyzed this proposal we found that this tax shift, despite not raising a dime of new revenue for the state, would actually increase taxes on most families.

Economists agreed last week that Michigan is set to see a nearly $1 billion revenue surplus over the next three years.  But, deciding on what to do with the boost in revenue will not be quite so easy.  There is some agreement amongst lawmakers that at least a portion of the surplus should be spent on tax cuts, some even calling tax cuts “inevitable.” Proposals vary greatly from lowering the state’s flat income tax rate (a permanent change) to handing out one-time rebate checks to taxpayers (recognizing that most of the surplus is one-time money) to restoring cuts to the state’s Earned Income Tax Credit (targeting tax cuts to low- and moderate-income taxpayers).   


State News Quick Hits: Where Is Virginia's Gas Tax Cut? And More


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Colorado Governor John Hickenlooper recently announced his support for converting the state’s flat rate income tax into a more progressive, graduated tax with a top rate of 5.9 percent.  This reform would raise $950 million per year for public schools and would make the state’s regressive tax system (PDF) somewhat less unfair.

Georgia is shaping up to be a major tax policy battleground in 2014, and lawmakers appear to be setting their sights on the personal income tax (as state lawmakers are wont to do).  
According to the Associated Press, officials are considering either cutting the personal income tax, amending the state constitution to ban any increase in the tax, or simply eliminating the tax entirely.  For some context on why these are all bad ideas, see the Institute on Taxation and Economic Policy’s (ITEP) primer on progressive income taxes (PDF).

Martin Sullivan at Tax Analysts asks whether Virginia drivers actually benefited from the gas tax cut that went into effect earlier this month.  On July 1, gasoline taxes fell in Virginia and rose in North Carolina, but gas prices actually increased in both states alongside crude oil prices.   Moreover, while North Carolina saw the larger price increase, the difference between the two states was just 1.8 cents - which raises the question of where the rest of Virginia’s 6.4 cent tax cut ended up going.  Sullivan concludes that “Virginia drivers [have] good reason to question whether gas tax cuts are primarily for their benefit.”

This week, California reported that tax revenues came in $2.1 billion over expectations during Fiscal Year 2013. The additional revenue - largely stemming from unexpectedly high income tax collections - will be directed to schools through the state’s education funding formula. While the extra revenues are a promising change of pace after years of multibillion-dollar deficits, state officials have warned that the surge might not represent a trend.


Good News for America's Infrastructure: Gas Taxes Are Going Up on Monday


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The federal government has gone almost two decades without raising its gas tax, but that doesn’t mean the states have to stand idly by and watch their own transportation revenues dwindle.  On Monday July 1, eight states will increase their gasoline tax rates and another eight will raise their diesel taxes.  According to a comprehensive analysis by the Institute on Taxation and Economic Policy (ITEP), ten states will see either their gasoline or diesel tax rise next week.

These increases are split between states that recently voted for a gas tax hike, and states that reformed their gas taxes years or decades ago so that they gradually rise over time—just as the cost of building and maintaining infrastructure inevitably does.

Of the eight states raising their gasoline tax rates on July 1, Wyoming and Maryland passed legislation this year implementing those increases while Connecticut’s increase is due to legislation passed in 2005California, Kentucky, Georgia (PDF) and North Carolina, by contrast, are seeing their rates rise to keep pace with growth in gas prices—much like a typical sales tax (PDF).  Nebraska is a more unusual case since its tax rate is rising both due to an increase in gas prices and because the rate is automatically adjusted to cover the amount of transportation spending authorized by the legislature.

On the diesel tax front, Wyoming, Maryland, Virginia (PDF) and Vermont passed legislation this year to raise their diesel taxes while Connecticut, Kentucky and North Carolina are seeing their taxes rise to reflect recent diesel price growth.  Nebraska, again, is the unique state in this group.

There are, however, a few states where fuel tax rates will actually fall next week, with Virginia’s (PDF) ill-advised gasoline tax cut being the most notable example. Vermont (PDF) will see its gasoline tax fall by a fraction of a penny on Monday due to a drop in gas prices, though this follows an almost six cent hike that went into effect in May as a result of new legislation. Georgia (PDF) and California will also see their diesel tax rates fall by a penny or less due to a diesel price drop in Georgia and a reduction in the average state and local sales tax rate in California.

With new reforms enacted in Maryland and Virginia this year, there are now 16 states where gas taxes are designed to rise alongside either increases in the price of gas or the general inflation rate (two more than the 14 states ITEP found in 2011).  Depending on what happens during the ongoing gas tax debates in Massachusetts, Pennsylvania, and the District of Columbia, that number could rise as high as 19 in the very near future.

It seems that more states are finally recognizing that stagnant, fixed-rate gas taxes can’t possibly fund our infrastructure in the long-term and should be abandoned in favor of smarter gas taxes that can keep pace with the cost of transportation.

See ITEP’s infographic of July 1st gasoline tax increases.
See ITEP’s infographic of July 1st diesel tax increases.


Louisiana Tax Overhaul Collapse as Bellwether? We Can Only Hope.


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Last week we brought you news that Louisiana Governor Bobby Jindal was abandoning his plan to eliminate the state personal and corporate income taxes and replace the revenue with an expanded sales tax. Instead, the Governor asked the legislature to “Send me a plan to get rid of our state income tax.” But now the legislature is denying the Governor’s request.

House Ways and Means Committee Chair Representative Robideaux has asked his colleagues to “defer” the bills they already had in the works to repeal the state income tax, and he’s said that he won’t allow hearings on any income tax repeal bill, closing the door on any attempt to eliminate the state’s income tax. Robideaux said, “I think it’s probably dead for the session, right now, there’s probably income tax fatigue.”  Importantly, he also asks, “Is there a constituent base out there demanding repeal of the income tax?” The answer is that two thirds of Louisianans actually opposed the Governor’s plan for this tax swap, which happens to be about the same percentage of Louisianans who stand to lose the most if any such tax plan gets implemented.

Jindal’s failure is a victory for tax justice advocates and a may serve as a lesson for lawmakers in other states entertaining similarly radical tax ideas.

The St. Louis Post Dispatch, for instance, editorialized, “Louisiana's lawmakers realize what Missouri's don't: Income tax cuts are suicidal.” Missouri lawmakers are debating their own draconian tax plan that would roll back income taxes. The Post Dispatch continues, “What Louisiana has recognized is that the supposed benefits of cutting state income taxes are vastly overstated. The impact of service cuts is vastly understated. The effect is that rich people and corporations get richer. Everyone else gets poorer.”  

In another state, Georgia, income tax elimination has been debated for years, but this columnist with the Atlanta Journal Constitution is hopeful that the tax justice victory in Louisiana will lead to Georgia lawmakers reconsidering their own proposal, which eliminates the personal and corporate income tax for no good reason.

Tax plans similar to Jindal’s have hit road blocks in Nebraska and Ohio this year. Among the many reasons these plans fail, it seems, is that when people realize that they amount to unwarranted tax cuts for the rich that raise taxes for everyone else and probably bust the budget, too, common sense prevails and these ideas are defeated. 

We know that Louisianans dodged a bullet when the Governor’s plan fell apart.  And while it’s good news that a big reason was widespread concern over its fundamental unfairness, the fact is Bobby Jindal is not the only supply-sider committed to eliminating the income tax. So we savor the victory, yes, but also prepare for the next battle as similar plans are winding their ways through other state capitals.

A story in the Arkansas News show why all citizens should be concerned about the bad design (PDF) of state gasoline taxes. Arkansas’ gas tax hasn’t been raised in over a decade, during which time it has lost about a quarter of its value due to rising construction costs alone. In order to offset those losses, lawmakers are debating a bill that would transfer $2.3 billion away from other areas of the state budget in order to pay for roads and bridges over the next 10 years.  At a rally protesting the idea, Rich Huddleston of Arkansas Advocates for Children and Families ticked off just some of the state services that would have to be cut: “education, higher education, Medicaid and health services for vulnerable populations, services for abused and neglected children, juvenile justice services for kids … public safety and corrections and pre-K and child care for our youngest populations.”

Girl Scouts in Idaho are seeking out a special sales tax loophole for selling their cookies so that they can keep an extra 22 cents on every box sold. There is no tax policy reason to exempt Girl Scout cookies from the sales tax. If enacted, this break would be a true “tax expenditure” -- a state spending program grafted onto the tax code (PDF) in a way that exempts it from the normal processes used to manage state spending year in and year out.

Minnesota Governor Mark Dayton is traveling the state on a “Meetings with Mark” tour to discuss his budget and tax plans with voters. Last week the Governor unveiled a revised tax plan, but minus the sales tax base expansion from his original proposal.  Wayne Cox of Minnesota Citizens for Tax Justice supports the new proposal as it retains two crucial pieces of the original – an income tax hikes for wealthy Minnesotans and a cigarette tax hike. “Gov. Mark Dayton’s new budget is a blueprint for fairer taxes and a brighter future for Minnesota families.  His reforms pave the way for new jobs, healthier lives and a better-educated workforce. Education and health experts around the state have praised Gov. Dayton’s reforms. Future economic growth depends on these changes.”

In response to Ohio Governor John Kasich’s regressive proposal to expand the state sales tax base and lower income taxes, Policy Matters Ohio (using ITEP data) released a paper reminding Ohioans how beneficial an Earned Income Tax Credit (PDF) could be to low-income families hit hardest by an increased sales tax.

Here’s a powerful column from the Atlanta Journal Constitution citing ITEP data. Advocating against a state Senator’s proposal to raise the Georgia sales tax and freeze revenues into the future, Jay Bookman writes: [h]e has proposed two amendments to the state constitution that, if approved by voters, would lead to significantly higher taxes on the vast majority of Georgia households, while sharply reducing taxes on the wealthiest. That ought to be controversial under any circumstances. As it is, lower- and middle-income Georgia households already pay a significantly higher percentage of their income in state and local taxes than do the wealthy. The Shafer amendments would make that disparity considerably worse.”

Need further proof that the poor are often taxed more heavily than wealthier folks? Take a look at this recent New York Times piece by sociologist Katherine Newman based on her book. She writes that “tax policy is particularly regressive in the South and West, and more progressive in the Northeast and Midwest. When it comes to state and local taxation, we are not one nation under God. In 2008, the difference between a working mother in Mississippi and one in Vermont — each with two dependent children, poverty-level wages and identical spending patterns — was $2,300.” Newman concludes with suggestions for offsetting the regressive impact of state taxes.

The Atlanta Journal Constitution is doing an investigative series on tax breaks and incentives, and here’s their latest article – a look into “the Georgia Agricultural Tax exemption program, [designed] to allow farmers and companies that produce $2,500 in agricultural services or products a year to receive sales tax breaks on equipment and production purchases.” What they found, however, is that construction firms, mineral companies, horse ranches and even dog kennels have applied for the breaks, along with hundreds of out-of-state businesses, with addresses as far afield as Texas and Colorado.” The newspaper found very few requests for this tax break were being rejected, and the governor is imploring businesses to police themselves. The newspaper concludes that it was the absence of clear criteria and lack of resources for screening and evaluating applications that’s resulted in the fiscal and logistical chaos.

Washington State lawmakers are trying to get a better handle on the numerous special tax breaks (PDF) being added to the state’s tax code every year. Under a bill that passed the state senate unanimously, new tax breaks would have to include a statement of purpose against which to judge their subsequent success, and an expiration date that would force lawmakers to vote on them again after a certain number of years.  Both of those reforms (along with others) have been recommended by our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Massachusetts Governor Deval Patrick cited a recent report from ITEP’s “Debunking Laffer” series while testifying in favor of his proposed income tax increase: “Last month, the non-partisan Institute on Taxation and Economic Policy issued a report evaluating the economic growth per capita of several states. The report compared nine states with relatively high income taxes to nine states with low or no income tax. The analysis made clear that the nine states with “higher” income taxes actually saw considerably more economic growth per capita than the nine states with low or no income tax. The states with no income tax have seen a decline in median income.”

The Cleveland Plain Dealer published a new analysis of Ohio Governor Kasich’s “tax swap” plan that “suggests lower and middle income families would not do as well as higher earners under the new system.”  The Plain Dealer notes that its findings bolster a new report by Policy Matters Ohio and our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Online retailer Amazon.com just struck a deal with yet another state to begin collecting sales taxes.  The new agreement with Connecticut will go into effect in November, just in time for the holiday shopping season.  The company also announced that it plans to build an order-fulfillment center in the state – a move which would have clearly established a “physical presence” (PDF) and therefore required the company to begin collecting sales taxes anyway.

The Atlanta Journal-Constitution reports that Georgia may soon join Connecticut on the long list of states that have struck deals with Amazon.  According to the paper, “the world’s largest online retailer has not collected the tax [this year], despite a new state law requiring online retailers to charge it at the start of the year.”  But the Georgia Retail Association expects that Amazon will build a distribution center in the state soon, which would make it impossible for the company to continue ignoring this legal requirement.

Minnesota Governor Mark Dayton reaffirmed his support for progressive, comprehensive and revenue-raising tax reform in his State of the State address last week and mentioned our partner organization, the Institute on Taxation and Economic Policy (ITEP) when referring to the upside down nature of his state’s tax structure:

“Thanks to the excellent work of Minnesota 2020, I recently became aware of a new study, by the Institute on Taxation and Economic Policy, which confirms the Department of Revenue’s analysis. It found that middle-class Minnesotans pay 26 percent more state and local taxes per dollar of income than do the top one percent of our state’s income earners. When people who have the most pay the least, this state and nation are in trouble. When lobbyists protect tax favors for special interests at the cost of everyone else’s best interests, this state and nation are in trouble. My goal is to get us out of trouble.”


Quick Hits in State News: Wisconsin Billionaires Go Tax Free, and More


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Politifact highlights an increasingly common complication for those who sign Grover Norquist’s “no tax” pledge.  On July 31, Georgia voters will decide on a referendum to increase the sales tax to fund transportation, a measure that’s backed by Republican Governor Nathan Deal.  But having signed Norquist’s no-new-taxes pledge, the Governor is struggling to justify supporting a “new tax” that he believes will benefit his state’s economy.

More evidence that Wisconsin’s tax structure is unfair: two of the state’s billionaires paid no state income taxes in 2010.

Here’s a compelling read by former Congressman Berkley Bedell of Iowa, championing the “ability to pay” principle of taxation that he says accounts for the Great Prosperity period in post-war America.

An investigative series in the Toledo Blade reveals the Ohio Finance Agency isn’t properly overseeing the state’s low-income housing tax credit program.  Many of the beneficiaries of the credits are “large corporations such as banks, insurance companies, and tech firms [that] receive tax breaks even as the low-income rental homes for which they received the credits fall apart.”

 


Are States Really "Racing" To Repeal Income Taxes?


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Arthur Laffer recently teamed up with Stephen Moore, his friend on The Wall Street Journal’s editorial board, to pen yet another opinion piece on the benefits of shunning progressive personal income taxes.  Most of the article’s so-called “analysis” is ripped from Laffer reports that we’ve already written about, but there was one new claim that stands out.  According to Laffer and Moore, “Georgia, Kansas, Missouri and Oklahoma are now racing to become America's 10th state without an income tax.”  If this is true, it’s news to us.  So let’s take a look at the most recent reporting on these states’ tax policy debates.

In Georgia, the state’s legislative session ended almost a month ago with the passage of a modest tax package.  Last year, Georgia lawmakers debated levying a flat-rate income tax, but that effort (which should have been easy compared to outright income tax repeal) failed and left lawmakers with little interest in returning to the issue.

The debate over the income tax debate in Kansas isn’t quite done yet, but the most recent news from The Kansas City Star is that “lawmakers say the tax reform package they'll consider next week almost certainly will fall far short of the no-income-tax goal.”

In Missouri, a number of media outlets are reporting that the push to get income tax repeal on the November ballot is all but over because a judge ruled that the ballot initiative summary that proponents of repeal proposed to put before voters was “insufficient and unfair.”

And in Oklahoma, what started as an enthusiastic push for big cuts or even outright repeal of the income tax has since been watered down into something less ambitious.  The most likely outcome is a cut in the top rate of no more than one percent, although lawmakers are still toying with the idea of tacking on a provision would repeal the income tax slowly over time (so the hard decisions about what services to cut won’t have to be made for a number of years).  But in any case, budget realities have left lawmakers in a position where they’re hardly “racing” to scrap this vital revenue source.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0


Clunker of a Tax Package Races Through Georgia Legislature


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GA cap dome.gifA tax bill that flew through the Georgia House and sped through the Senate is now on its way to the Governor's desk for a signature. The package (which took hits from the left and right) is the equivalent of baby steps in terms of the real tax reform the state needs.  Georgia’s tax structure is regressive and outdated and this bill won’t do much to change that;it is a cobbled together set of proposals that includes industry specific tax exemptions, increased tax benefits for married couples and a restructuring of car taxes.

There are, however, two bright spots in the legislation: a tax on retirement income above $65,000 (instead of allowing all retirement income to be excluded from the tax base) and a so-called Amazon law which means that some internet sales transactions will be taxed. The Amazon tax would bring the state about $81 million in revenues over three years.  

Even though the Georgia rep for Grover Norquist’s Americans for Tax Reform called the Internet sales tax “stupid” and the larger package “disappointing,” it still passed the House by 155 to 9 votes, with Republicans boasting that on the whole, it’s a net tax cut.

This is the second year in the row that tax reform was on the table in Georgia. Last year the Special Council on Tax Reform and Fairness for Georgians held extensive hearings and came up with recommendations that proved too far reaching and controversial to be adopted. This year, lawmakers aimed much lower and passed the narrower legislation, partly by rushing it through before anyone could slow it down.

Georgia Budget and Policy Institute published a brief (using ITEP figures) describing the nuances of the legislation and sum it up nicely when they say the work for policymakers on tax reform is anything but over. “To provide Georgians with a modern tax system capable of funding the state’s ever-growing needs, lawmakers must return to the well in coming years and address the issue once again. The work is not done and requires the political will to pass comprehensive reform.”


Quick Hits in State News: Tax Victory in Iowa, and More


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Here’s a huge tax fairness victory in Iowa. The state Senate voted unanimously to increase the Earned Income Tax Credit from 7 to 13 percent of the federal credit to help working families make ends meet.

Matt Gardner, Executive Director of the Institute on Taxation and Economic Policy (ITEP), blogs about lessons for Georgia from a new ITEP report on the economies of states with and without income taxes.  Gardner writes that Georgia lawmakers “wanting to join the non-income tax club are simply idolizing the wrong states.  Most states without income taxes are doing worse than average … and the states with the highest top tax rates are actually outperforming them.”

Also in Georgia, anti-tax guru Grover Norquist is weighing in on collecting taxes on internet sales, warning that it is a violation of his group’s “no new tax” pledge to vote for legislation requiring online retailers to collect sales taxes on purchases.  But the fact is, Georgians who shop online do, by law, have to pay the sales tax on those purchases if the e-retailer does not collect the tax, but the requirement is basically unenforceable.  Collecting taxes legally due is not a tax increase.

Missouri lawmakers are falling all over themselves to come up with revenues without “raising taxes” because the trust fund that pays for veterans’ services in the state is insolvent.  Silly “non tax” ideas being floated by legislators include casino entrance fees and a special lottery, which have already proven to be unsustainable revenue sources for veterans’ and other programs.  Missouri is notorious for its failure to tackle serious tax reform; will a backlog of military veterans in need of care give lawmakers incentive to do the right thing?

Bills in both the Iowa House and Senate are advancing that would finally raise the state’s long stagnant gas tax rate.  ITEP recently found that Iowa hasn’t raised its gas tax rate in 22 years, and that since that time the tax has lost $337 million in yearly value relative to rising transportation construction costs.


Trending in 2012: Destroying the Personal Income Tax


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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 week, we’re taking a closer look at proposals which would lessen a state’s reliance on progressive income taxes, often by shifting to a heavier reliance on regressive sales taxes. 

Georgia – A legislative proposal gaining traction in Atlanta would undercut the state’s reliance on the personal income tax – its only major progressive revenue source.  It would make up those revenues by raising the sales tax – every state’s most regressive source of revenue.  The plan also includes two other components that hit the poorest Georgians the hardest: taxing groceries and adding a dollar to the cigarette tax.  A sensible, comprehensive proposal from the Georgia Budget and Policy Institute is the template lawmakers should be following. It starts with fairness, ends with increased revenues and is all about modernization and reform. 

Kansas – If the expectations about Governor Sam Brownback’s proposed income tax changes are right, Kansas could have a hard time balancing its books. Tonight, the Governor, (who has received technical assistance from supply side guru Arthur Laffer), is expected to propose drastic reductions to state income tax rates.  Details on how the governor plans to make up the lost revenue haven’t been revealed, but his sidekick Laffer was recently quoted as saying, “It’s a revolution in a cornfield. Brownback and his whole group there, it’s an amazing thing they’re doing. Truly revolutionary.”

Kentucky –  Fresh off his reelection to the Governor’s office, Steve Beshear is expected to propose his own tax reform plan, but Representative Bill Farmer, who’s been itching to change Kentucky’s tax code for years, has already pre-filed his own tax overhaul bill, which would slash the state income tax, expand the sales tax base to include more services and lower the sales tax rate.  ITEP conducted an in depth analysis of an earlier Farmer proposal and found that his proposal would cost the state hundreds of millions of dollars and raise taxes on the poorest 20 percent of Kentuckians by an average of $138. We expect that his current proposal won’t do much to fix the state’s regressive tax structure either.

Missouri – Perhaps the most destructive proposal of this type gaining traction is Missouri’s mega-tax proposal, so called because it amounts to a massive consumption tax hike for ordinary Missourians. Proponents of the related ballot initiative that would eliminate the state’s personal income tax and replace that revenue by adding goods and services to the sales tax base are currently collecting signatures in an attempt to place the initiative on the ballot this November. Show-Me-Staters would be unwise to provide their signatures for this kind of campaign, however, because its passage would result in higher overall taxes for working families. Click here to see ITEP testimony on a similar proposal.

Oklahoma – Two seriously bad proposals that would increase the unfairness of Oklahoma’s tax system are currently under consideration. Working with (the aforementioned supply side guru) Arthur Laffer, the free-market Oklahoma Council of Public Affairs is proposing to eliminate the state income tax altogether. An ITEP analysis found that the bottom one-fifth of Oklahoma taxpayers -- those earning less than $16,600 per year -- would be paying on average $250 a year more in taxes, or about 2.5 percent more of their income. Similarly, the Tax Force on Comprehensive Tax Reform (dominated by business interests) suggests lowering the state’s top income tax rate and eliminating a variety of tax credits, many of which are designed to help low and middle income families. David Blatt, director of the non partisan Oklahoma Policy Institute recently said of the proposal, "This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy.”

Photo of Governor Steve Beshear via Gage Skidmore and photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0


Can Georgia's Tax Reformers Overcome Grover Norquist?


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Just weeks after a six-month effort by Georgia lawmakers to enact ambitious tax reform legislation fell apart, Governor Nathan Deal is signaling that lawmakers may be asked to continue their deliberations on this issue when they return for a special legislative session on redistricting this August.


But if Deal's views on the shape of "tax reform" are any indicator, a special session could run into the same difficulties encountered during this year's tumultuous regular legislative session.

The failure of this year's tax reform effort was due to an inexorable rule of tax accounting: when you design a tax plan that is revenue-neutral overall and gives big tax cuts to the wealthiest families, someone else has to pay higher taxes.

But Deal's stated goal of shifting to a "consumption-based approach" to revenue-raising would necessarily reserve the biggest tax cuts for the very best-off Georgians, and the Republican leadership's Grover Norquist-inspired refusal to raise any new revenues through tax reform means inevitably that middle- and low-income families will foot the bill for these high-end tax cuts.

Lawmakers who correctly found this "Robin Hood in reverse" swap unpalatable this spring will presumably feel the same way come August.

The sad part of the story is that this year's tax battles began as an honest discussion of important tax reform principles. When an appointed Georgia tax reform commission issued its recommendations in January, the focus of the plan was on achieving a more sustainable Georgia tax system by eliminating unwarranted tax loopholes — and the original proposal would have done a decent job of achieving this important goal.

But in the hands of Republican leaders in the state legislature, the plan's loophole-closing provisions gradually fell by the wayside under pressure from special interests, which meant that this formerly revenue-neutral plan ended up being a revenue loser that missed important opportunities to modernize the state's tax system.

In their zeal to satisfy Grover Norquist and his no-new-taxes acolytes by removing provisions that would have hiked taxes on anyone at all, legislative leaders lost sight of the broad tax-reform principles that had motivated the reform commission in the first place.

More than anything, this outcome shows the utter incompatibility of the "no new taxes" mantra with the type of sustainable tax reforms that are needed at both the federal and state level. If lawmakers insist that tax reform can't involve tax hikes on anyone, but must include substantial tax cuts for the best-off Americans, sustainable tax reform simply can't happen.


Tax Reform Debate in Georgia So Heated that Tea Partiers and Grover Norquist Can't Agree


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Georgia’s Special Council on Tax Reform recently released recommendations to overhaul Georgia’s tax structure in a way that would improve the state's finances but also shift taxes to Georgians who are less able to pay.

As anticipated, the recommendations were quite sweeping and dealt with every major tax the state levies.  The recommendations included a lot of good base-broadening measures, like repealing the state’s generous pension exclusion, eliminating itemized deductions from the personal income tax, and including more services in the sales tax base. The Council also recommended regressive changes, like replacing the state’s progressive income tax with a flat 4 percent rate, adding groceries back to the sales tax, and increasing the cigarette tax.

The Georgia Budget and Policy Institute (GBPI) offered improvements to the Council’s proposal to prevent tax increases on those who could least afford them.

A House committee came up with their own proposal as a substitute to the Council’s initial recommendations. This new plan includes a 4.5 percent flat income tax rate, no corporate income tax rate changes, and no changes to the cigarette tax. Read GBPI’s complete analysis of this substitute proposal.

The substitute hit a snag too. The Atlanta Journal Constitution reported, “A clunky but effective coalition of Democrats, tea partiers and Baptists forced state Republican lawmakers into a desperate attempt to save their troubled tax reform bill.” The bill even caused infighting between an unlikely cast of characters: Georgia tea partiers and the national leader of the anti-tax movement, Grover Norquist.

Now we are hearing that another set of tweaks to the original recommendations from the Special Council on Tax Reform is in the works and will be unveiled next week. According to the Atlanta Journal Constitution, this latest iteration ensures that more Georgians get a tax cut, but the price tag for such “reform” according to the official fiscal note is $220 million.  This latest and presumably final attempt (because of the legislative calendar constraints) at reform is expensive and makes the state’s tax structure even more unfair for low-income families.

GBPI concludes, “It is better to do nothing this session and come back next year with true tax reform than pass a bill that gives large tax cuts to the wealthiest Georgians and a few favored businesses interests, resulting in further cuts to what is most needed for the broad business sector to prosper—education and basic infrastructure.” Read the full GBPI statement.

There were high hopes that the Council’s efforts would produce tax reform that would improve the state’s already flawed tax structure, but if the legislation that stems from these efforts doesn’t ensure fair and sustainable tax reform, then it’s not worth passing.


The Debate Isn't Over: Georgia Brief on Alternatives to Council's Recommendations


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Debate over the recommendations from Georgia’s Special Council on Tax Reform continues. Should the state flatten its income tax rates? Should the state broaden the income tax base? Folks are likely still making up their minds about how they feel about adding groceries back to the sales tax base, among other possible changes.

Georgians concerned about tax fairness should read the new brief from the Georgia Budget and Policy Institute. It offers several alternatives (using ITEP data) that would tweak the Council’s recommendations and would improve the tax fairness implications of the Council’s initial proposal.

In a recent op-ed in the Atlanta Journal Constitution, Sarah Beth Gehl of the Georgia Budget and Policy Institute makes the case that the Special Council on Tax Reform and Fairness hit a triple when they came out with their policy recommendations for modernizing the state’s tax structure. The Council emphasized sales tax base expansion to include more services and broadening the state’s income tax base. 

Triples are good, but home runs are better and Gehl makes the case that the Council missed out on a homerun because they overlooked a key tax policy principle when devising its recommendations — tax fairness.  Citing ITEP data, she writes, “The best-off 1 percent of Georgians, those making more than $389,000 in 2010, would receive an almost $7,800 average yearly tax decrease. In the case of a Georgian making around $40,000, taxes would rise by about $400 a year.” 

Gehl identifies several sensible alternatives that the legislature could tack onto the Council’s recommendations that would take into account tax fairness, including more generous low-income tax relief and exempting groceries from the sales tax base.

There seems to be a contingent that is steering away from the debate and instead focusing on what Grover Norquist would approve of. In fact, to appease Norquist and his group, Americans for Tax Reform, the Council actually reconvened earlier this week to vote on a resolution which claimed that the intent of the Council’s recommendations was that they were to be “revenue-neutral.” Because, of course, Norquist’s group would never give the thumbs up to a proposal that actually raised revenue to meet the needs of Georgians.

The Special Joint Committee on Georgia Revenue Structure met this week to debate the Council’s recommendations. We’ll be watching their actions closely and it sounds like Grover will be too.


State-Based Coalitions Fight for Budget Fairness


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Faced with huge budget deficits, many state lawmakers are eyeing dangerous short-sighted budget cuts that threaten to gut essential services and state infrastructure.  In response, dedicated advocacy organizations, service providers, religious communities, concerned citizens, and professional associations have formed coalitions in more than 35 states to battle for smart fiscal policies that will protect core services and ensure that states have the resources to meet current and future needs. 

Here’s a brief overview of the newest of these coalitions:

In Georgia, the coalition 2020 Georgia officially launched on January 18th to promote a balanced approach to their budget that adequately addresses the long-term needs of the state instead of pursuing damaging cuts to services that can hurt the state’s economy.  The coalition consists of a wide variety of partners, including AARP, the League of Women Voters of Georgia, and the Georgia Public Health Association.  2020 Georgia hopes to maintain smart investments in education, public safety, health, and the environment.

In Texas, a wide coalition of organizations have created Texas Forward, a group that hopes to spur continued investment in vital public services instead of devastating budget cuts.  Texas Forward believes that smart investment now can prevent future generations from shouldering the burden of the lasting damage caused by disinvesting in services during this time of financial need.  Recently, Texas Forward urged state lawmakers to seek new revenue sources and federal funding to minimize the impact of the projected $24 billion deficit.

In Iowa, the Coalition for a Better Iowa was formed with the express mission “to maintain and strengthen high quality public services and structures that promote thriving communities and prosperity for all Iowans.”  The Coalition for a Better Iowa includes organizations representing children, seniors, human service providers, environmental organizations, and politically engaged citizens.  The coalition is committed to creating a balanced solution to the budget shortfalls while protecting vital services and investing sustainably in the state’s future.

In Montana, a group called the Partnership for Montana’s Future offers an extensive list of revenue-raising mechanisms to solve the state’s budge crisis.  The list has many specific proposals, generally categorized as collecting new revenue through improved tax compliance, closing tax loopholes, targeted tax increases, and other miscellaneous options.  The coalition consists of a wide variety of health, education, environmental, labor, and policy organizations.

In Pennsylvania, Better Choices for Pennsylvania is a coalition of health, education, labor, and religious organizations that recognize that all Pennsylvanians benefit from the services and infrastructure provided by state government.  Like the other coalitions featured, Better Choices for Pennsylvania refutes the proposition that deep tax cuts can solve the state’s budget problems.  Instead, BCP is pushing for closing special tax breaks and loopholes.  The coalition believes that helping working families through hard times will put the state in a better position towards long-term financial stability.

In Michigan, the revenue coalition, A Better Michigan Future recently issued a press release reviewing Governor Snyder’s budget proposal.  The group supports smart revenue-raising tactics like eliminating redundant and wasteful loopholes and modernizing the state sales tax to reflect the changing marketplace.

While not a new coalition, North Carolina’s revenue coalition, Together NC, recently launched a web ad.  The ad is meant to remind North Carolinians about the smart budget choices the state has made in the past that allowed it to prosper and spur citizens to take action to protect their state from falling behind (or, as the ad says, to keep North Carolina from becoming its neighbor to the south).


A Tale of Two Tax Commissions: Georgia vs. Vermont


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In recent weeks, tax commissions in Georgia and Vermont issued reports recommending a major overhaul of their states' tax systems.  The recommendations share many things in common, including sensible proposals to broaden the bases of major taxes and to make the changes revenue-neutral. In fact, when ITEP staff testified before each of these commissions over the last year, our testimony highlighted the importance of base-broadening as a first step towards sustainable tax reform. However, it’s clear that only one commission was concerned about the general welfare of its low-income taxpayers while the other seemed to have little interest in ensuring that a major tax overhaul doesn't disproportionately impact working families.  

Georgia’s Special Council on Tax Reform Releases Recommendations

Earlier this month Georgia’s Special Council on Tax Reform released its recommendations for how Georgia’s tax structure should be changed. CTJ has been following the Council's work closely over the past few months.  

As anticipated, the recommendations are quite sweeping and deal with every major tax the state levies.  Among the recommendations are broadening the income tax base by repealing the state’s generous pension exclusion and broadening the sales tax base by including more services and groceries. The Council also recommends replacing the state’s progressive income tax with a flat 4 percent rate, increasing the corporate income tax rate and increasing the cigarette tax. (Read the Council’s full recommendations.)

Unfortunately, no thought was given to how these sweeping changes impact low and middle-class working families. Broadening tax bases is sound tax policy, but base-broadening must be coupled with targeted measures to ensure that the brunt of this tax modernization isn’t borne by the most vulnerable.

Vermont’s Tax Commission Releases Final Report

On the heels of Georgia, Vermont’s Blue Ribbon Tax Structure Commission released its final report last week after more than a year of review, research, outreach and discussion about the state’s tax system.  The report offers a clear path forward for Vermont to “strengthen its tax system for the 21st century” which means “questioning critically every assumption in the tax system.” 

If enacted as a comprehensive package, which Commission members have requested lawmakers to consider, the recommendations would indeed make the state’s tax system more sustainable, adequate, and fair over the long run. 

The Public Assets Institute issued a statement on the report, saying it “was badly needed and long overdue…a  good first step in strengthening our revenue system so it can support the essential public services that all Vermonters deserve.”

The recommended income tax changes include basing Vermont’s taxes on federal adjusted gross income (AGI) and eliminating itemized and standard deductions.

The personal exemption would be replaced with a $350 non-refundable per-filer credit, plus an additional $150 for each spouse or dependent, which is capped at $800 and only available to taxpayers with AGI below $125,000.

The revenue gained from broadening the income tax base would be used to lower income tax rates.

The Commission recommended expanding the sales tax to most consumer-purchased services in order to bring their sales tax in line with current consumer patterns which favor services rather than goods.  They also suggested that all consumer-based sales tax exemptions should be eliminated with the exception of food and prescription drugs.  The revenue gained from broadening the sales tax base would be used to lower the sales tax rate from 6 percent to 4.5 percent.

Additionally, the Commission wants more scrutiny of the state’s tax expenditures and called for the state to develop the capacity to conduct tax incidence studies to better inform policymakers on tax policy changes.

One criticism of the Commission is that their recommendations were revenue-neutral, meaning the changes would not increase or decrease current state revenues.  Given that Vermont must fill a $150 million budget gap next fiscal year, some advocates and lawmakers have suggested that the plan should raise some new revenue, at least temporarily, to fill the gap. 

The good news, however, is that if taken as a comprehensive package, the recommended changes would maintain the state’s reliance on a progressive income tax and would use revenue gained from broadening the sales tax base to lower the sales tax rate rather than moving to a greater reliance on consumption-based taxes.

Commission members asked state leaders to give serious consideration to their findings and recommendations. There is a good chance their request will be answered, because Vermont policymakers are making tax reform a priority during this legislative session.

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.


Georgia Tax Exemptions Under the Microscope


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This week the Georgia Budget and Policy Institute (GBPI) released a new issue brief detailing the impact of taxing groceries. In it, they recommend that “all exemptions, credits, and deductions should be examined and weighed against each other and against the principles of tax reform.” 

Loophole-closing reform is a vital step toward a more sustainable sales tax, to be sure. But there are many other exemptions in Georgia’s tax code that should be studied closely and potentially eliminated before Georgians pay sales taxes on food. For example, Georgia offers one of the nation’s most generous exemptions for retirement income, and the state also offers an unusual and regressive tax deduction for state income taxes paid.

The debate over exemptions is heating up because the Special Council on Tax Reform and Fairness for Georgians will make their tax reform recommendations soon, and the media is reporting that one potential “reform” would be to add food back to the sales tax base. Let’s hope their recommendations take aim at other exemptions that wouldn’t so dramatically raise taxes on low-and middle-income families.


State Tax Code Spending Under Fire


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For years, both state and federal lawmakers have opted to forgo the hassles of the appropriations process in favor of enacting tax breaks — or “tax expenditures” — aimed at exactly the same goals.  The result has been a steady rise in tax code spending, and a corresponding decline in transparency and fiscal responsibility.  Recent developments in Missouri, Georgia, New Mexico, and Maine, however, indicate that at least some lawmakers are interested in getting a grip on this type of out-of-control spending.

In Missouri, the Tax Credit Review Commission, created by Governor Jay Nixon in July, finally issued its recommendations this week.  In addition to recommending the elimination of 28 tax credits and the reform of 30 more, the Commission also took the commendable step of proposing some broader reforms to the way Missouri lawmakers deal with tax credits.  Most notably, the Commission suggested sunsetting every state tax credit in order to force their review, and even proposed a schedule for sunsetting them in waves two, four, and six years from now.  This proposal closely resembles a reform enacted by Oregon in 2009.

In addition to sunsets, the Missouri Commission also proposed capping tax credits in order to reverse the explosion in tax credit spending the state has experienced in recent years.  In support of this proposal, the Commission notes that “as State revenues have declined and spending for other programs has been reduced, spending on the State’s tax credit programs has continued to grow.”  Finally, the Commission also recommends eliminating and/or reducing the ability of businesses to carry-back their tax credits to prior years’ tax bills, and enacting additional “clawback” provisions to ensure that companies only benefit from tax credits if they consistently meet all of the eligibility requirements.

The Georgia Council on Tax Reform and Fairness seems to be contemplating a similar path.  While the group’s report won’t be out until early January, the chairman has suggested sunsetting most tax exemptions on a five year schedule.  Hopefully, the final report from the Council will include this recommendation and enhance it further by bringing all tax expenditures — not just tax exemptions — within its scope.  The Council would also be wise to offer some specific ideas for ensuring that the debate over expiring tax provisions is sufficiently rigorous (like by implementing a complementary tax expenditure review system).

In Maine, a working group comprising various state agency heads recently came out with recommendations that are quite similar to those being considered in Missouri and Georgia.  While not advocating the use of sunset provisions, the group has suggested the creation of a review system similar to the one that exists in Washington State.  Multiple lawmakers have voiced support for the idea, though Maine’s recent switch from all-Democratic to all-Republican control could complicate things.

Finally, in New Mexico, the drive to review state tax code spending is coming not from a commission or working group, but from lawmakers themselves.  Back in 2007, New Mexico lawmakers passed a bill enacting a tax expenditure reporting requirement, only to be thwarted by Gov. Richardson’s veto.  As a result, New Mexico is one of just seven states without a legal requirement that tax expenditure reports be released on a regular schedule.  Now, the Albuquerque Journal reports that some lawmakers — including the Governor-elect — are pushing for enhanced disclosure and review of the state’s film tax credit, among other tax expenditures.

Hopefully, the difficult budgetary situations confronting each of these states will spur lawmakers to do what’s long overdue: finally get a grip on out-of-control tax code spending.


Georgia Gubernatorial Candidates Dueling (Bad) Tax Cut Proposals


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Georgia’s gubernatorial candidates are touting competing tax plans which they claim will stimulate the state's economy and help businesses create and maintain jobs.  Neither plan is likely to do that, but both would deprive the state of revenue that is sorely needed to address the state’s short- and long-term budget shortfalls.

Democrat Offers Capital Gains Tax Break

Roy Barnes, the Democratic candidate, recently released his "Jobs Plan" to "revive Georgia’s economy."  The main element of his plan to "stimulate business growth and reduce the burdens on Georgians" is a proposal to exempt capital gains income from taxation for two years for investors who reinvest their gains in Georgia-based companies.  Barnes believes his plan will increase investments, incentivize companies to rehire, and lead to new job creation.  He has also suggested that the plan will more than pay for itself.

Capital gains tax breaks are costly, inequitable, and ineffective and thus there are a lot of problems with Barnes' plan and his assertions that it will stimulate Georgia’s economy.    

First, Georgia simply cannot afford to lose revenue when facing a projected budget shortfall of close to $2 billion next year.  State officials estimate that taxes on capital gains income under the current laws will raise an estimated $433 million next fiscal year.

ITEP State Tax Policy Director Meg Wiehe was quoted in an Atlanta Journal Constitution story on Barnes’ plan, saying, "The idea of losing any sort of revenue source seems pretty nonsensical to me when we know the things that revenue pays for — like education, teachers’ jobs and public safety — are really important for stimulating the economy." 

Second, and not surprisingly, the benefits of Barnes’ proposed capital gains break will go almost exclusively to the state’s wealthiest residents, not to the low-income households who are struggling the most to make ends meet. 

Furthermore, the idea that reducing taxes on capital gains will lead to a more robust economy is not supported by the evidence.  An array of experts agree there is little connection between lower capital gains taxes and higher economic growth, in either the short-run or the long-run.  A 2002 Congressional Budget Office (CBO) study concluded that capital gains tax breaks "would provide little fiscal stimulus" in the short-run, since most of the benefits of such cuts would accrue to high-income households, households that are more likely to save than spend, when the very aim of such short-term stimulus is to boost consumption. As for the long-term economic effects, there is no correlation between investment and economic growth and the marginal tax rate on capital gains income.

The tide has actually been turning against this type of tax break.  In just the past year, Rhode Island eliminated their preferential rates for capital gains income. And, of the eight states that currently offer some sort of significant capital gains tax break, two of them — Vermont and Wisconsin — have both recently acted to reduce their exclusions for capital gains income.  It seems like Barnes has missed the boat entirely with his proposal.

Republican Offers Corporate Tax Break

Nathan Deal, the Republican candidate, is promoting his "Real Prosperity Plan" as the best means to maintain and grow jobs in Georgia.  The core component of the plan is a cut in the corporate income tax rate from 6 percent to 4 percent. Deal thinks such a cut will make Georgia more competitive with its neighbors and help the state attract potential new businesses that will bring new jobs with them.  As critics have pointed out, most local businesses will not even benefit from Deal’s plan because they are structured as S-corporations or limited liability companies and are not subject to the corporate income tax.   

The corporate income tax is one of the fairest taxes a state can levy.  Just as working families and individuals benefit from the services that state and local governments provide, so too do corporations. At a time when Georgia is facing yet another significant budget shortfall, losing revenue from a progressive tax such as the corporate income tax is a bad prescription for fixing the state’s ailing economy, especially when the evidence suggests cutting the corporate income tax will not have the positive impact on the economy that Deal claims to seek.

A recent report  from the Center on Budget and Policy Priorities offers an excellent explanation for why proposals to cut corporate income taxes offer "false hope" and are "unlikely to have a positive impact on a state's rate of economic growth or the pace at which it generates private-sector jobs."  CBPP notes that "cutting corporate tax rates may be politically appealing, but neither logic nor evidence suggests that doing so will stimulate significant economic growth. The fact that no state has enacted such cuts in the past two or three years suggests that many policymakers already doubt the proponents’ claims."

On a side note, Deal is also an avid supporter of the so-called Fair Tax, another indicator that he is no friend of sensible tax policy.


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.

Convening a Georgia tax reform commission in the summer of 2010 is a bit like tightening environmental regulations after an oil spill — a fine idea, but one that would have been more helpful earlier in the game. Only months ago, the state legislature enacted a costly new income tax giveaway for the best-off seniors and paid for it, in part, by gutting the only refundable credit available to low-income Georgians. This week, the "Special Council on Tax Reform and Fairness for Georgians," which is charged with revamping the state's tax code, convened and heard testimony from ITEP staff and others. 

ITEP's testimony describes the long-term structural challenges facing Georgia's main revenue sources, and surveys the most creative (and most dangerous) responses to these structural threats. By focusing on options that have been implemented or seriously discussed in other states, the testimony provides a very practical working guide for moving Georgia's tax system into the 21st century.
 
ITEP's testimony focuses on four major categories of state taxes levied in Georgia: sales taxes, corporate income taxes, personal income taxes, and gas taxes. It identifies workable reforms (and unworkable red herrings) of which Council members should be aware as they formulate their recommendations. In each case, the testimony spotlights efforts to raise needed revenues and eliminate tax inequities by broadening the tax base to eliminate loopholes for various special interests.
 
On the income tax front, ITEP's testimony focused on the surprising, but laudable growth in the number of states that have pared back excessive tax breaks for capital gains, itemized deductions, and retirement income in recent years. In discussing the sales tax, ITEP noted that while relatively few states have succeeded in meaningfully expanding the sales tax base to include more services in recent years, a growing number are considering sensible plans to do so in 2010. The testimony also took note of the growing use of so-called "Amazon taxes" designed to ensure that e-commerce sales should be at least partially taxable.
 
The testimony also noted the folly of "racing to the bottom" to provide industry-specific or even company-specific tax breaks for businesses as a relocation incentive, and discussed how Georgia could enhance its long-inadequate transportation revenue streams by bolstering its gas tax. Numerous states have recently increased their gas taxes, and many more have seriously discussed gas tax increases or gas tax restructuring aimed at improving revenue sustainability.
 
More so than is usually the case with tax reform commissions, the Special Council's recommendations could carry some weight when the legislature convenes next year, not only because its high-powered roster includes Governor Sonny Perdue but also because its recommendations are required to be introduced, "without significant changes," for a vote in the legislature next year. Hopefully, the growing number of sensible base-broadening measures enacted by other states will provide the Council with a template for reform.


New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.

A new report by the Georgia Budget and Policy Institute (GBPI), Advancing Georgia's 1930s Tax System to the Modern Day, puts forth recommendations for tax reform that will help the state raise enough money to meet its growing needs, bring the revenue system in line with the 21st century economy, and improve fairness if adopted.

The report was delivered to the 11 members of the 2010 Special Council on Tax Reform and Fairness for Georgians who met for a second time this week.  The Council is charged with providing recommendations to the state legislature in January 2011 when the General Assembly meets to amend the fiscal year 2011 budget and create the FY 2012 budget.  The GBPI provides the Tax Council with a set of reform recommendations including:

- Lowering the state sales tax rate and simultaneously broadening the tax base to mirror 21st century spending habits.
- Modernizing income tax brackets, rates, and standard deductions to better reflect current income levels.
- Creating an earned income tax credit (EITC) to offset the highly regressive sales taxes for the state's lowest earners.
- Scaling down tax preferences, both for individuals and corporations, to avoid shifting taxes onto fewer individuals and businesses as they do now.
- Closing corporate loopholes and updating the corporate net worth tax to prevent profitable corporations from avoiding paying their fair share.
- Updating cigarette and motor fuel excise tax rates.

Using data from the Institute on Taxation and Economic Policy's Microsimulation Tax Model, the report provides beginning revenue estimates and distributions among income groups to demonstrate how recommended combined tax reforms would improve fairness while also enhancing adequacy. An overview of similar actions taken by other states, as well as potential federal tax changes, are also included in the report.
 
As the Tax Council members embark on numerous “fact-finding” sessions across the state later this month, they should start by giving the GBPI report a serious look.


Sales Tax Holidays: Good for Little More than a Laugh


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We’re in the heart of sales tax holiday season now.  Despite cooler heads prevailing in DC and Georgia, where sales tax holidays have been scrapped due to gloomy budget projections, Massachusetts and North Carolina have recently decided to move ahead with their holidays, and Illinois has decided to join the party for the first time.

By now, you may be familiar with all the reasons why sales tax holidays are a bad idea (read this ITEP policy brief if you’re not).  Aside from those groups with a vested interest in the holidays (e.g. retailers looking for free advertising, politicians looking to build their anti-tax credentials, and confused parents thinking these things actually save them money), just about everyone seems to agree that sales tax holidays are a worthless political gimmick.  Stateline pointed out last week that analysts as varied as those at Citizens for Tax Justice and the Tax Foundation have come to an agreement on this point.

But as long as sales tax holidays remain popular enough to remain impervious to most state budget crises, we might as well take a moment to marvel at some of their more glaring absurdities.  For example, this year, Massachusetts’ sales tax holiday will apply to alcohol.  College students in the state clearly have quite an effective lobbying presence in Boston.  Interestingly, neither tobacco nor meals will be included in the holiday.

In Illinois, which doesn’t have any experience with sales tax holidays, one columnist speculates that his wife isn’t alone in erroneously believing that the back-to-school holiday applies only to children’s clothes.  Indeed, adult clothes are included as well; as are aprons and athletic supporters.  Work gloves, however, will still be subject to tax.  You’d think that the Illinois Department of Revenue already has enough on its plate without having to worry about such minutia.

Finally, in South Carolina, it looks like the state’s Tax Realignment Commission is going to recommend quite a few changes to the state’s tax holidays.  For starters, the state’s bizarre post-Thanksgiving tax holiday on guns has to go, according to the Commission.  And changes could be in store for the August holiday as well.  The State reports that if the Commission gets its way, “this could be the last year to get your wedding gown, baby clothes, pocketbooks and adult diapers at a discount on back-to-school tax-free weekend.”  Interestingly, the South Carolina representative who first introduced the sales tax holiday idea actually agrees, claiming that he wanted only the holiday to apply to stereotypical “back to school” purchases – that is, things other than wedding gowns and adult diapers.

 


Georgia Begins Tax Reform Discussions


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Georgia is the latest state to formally join the tax reform debate with the creation of the Special Council on Tax Reform and Fairness.  The 11-member Council, which met for the first time this week, has been charged with conducting  a comprehensive study of the current state and local tax system and must offer a set of final recommendations for modernizing the system to state lawmakers by January for an up or down vote.

The goals of the Council are still a bit vague, but by all accounts it is certain the members will pay special attention to closing loopholes, expanding sales taxes to services, restoring the sales tax on groceries, and lowering personal and corporate income taxes.  The Council’s Chairman, A.D. Frazier, announced this week that the members plan to seek input from constituents and stakeholders through a series of statewide meetings and will accept comments via the Council’s website.

Georgia’s House Speaker, David Ralston, who is not on the Council, asked members this week to create a tax system that is “more stable, more fair, more flat, and more job-friendly.”  

The Council should be concerned with increasing stability, fairness, and jobs, but flattening the tax system, particularly the personal income tax, has nothing to do with those goals.   ITEP’s 2009 report, Who Pays?, found that the poorest Georgia families pay an average of 11.4 percent of their income in Georgia taxes, twice as high as the 5.7 percent of income that the very best-off 1 percent of Georgians must pay.  While this upside-down pattern is common in state tax systems, Georgia is somewhat more unfair than the typical state due to its relatively flat income tax structure and reliance on the sales tax. And, as ITEP has already noted, legislation enacted this year would only make this worse.

The Georgia Budget and Policy Institute (GBPI) and ITEP will be monitoring the Council meetings throughout the summer and fall.  When asked about the direction the Council should follow, GBPI’s Deputy Director Sarah Beth Gehl, said she hopes “the council members will consider the tax system from all perspectives, including how it affects low- and moderate-income Georgians and its effect on funding for essential services.  This shouldn't be an exercise in who can protect their special-interest tax break or carve out a new one."


It's Nearly that Time of the Year... Sales Tax Holidays in the News


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Back-to-school time is just around the corner and with that comes the annual debate about sales tax holidays. States offering sales tax holidays typically won't collect sales tax for a specific number of days on items considered to be back-to-school items like school supplies, clothes, or even shoes. Of course, sales tax holidays do nothing to offset the regressivity of the sales tax the rest of the year, they are an administrative headache, costly for state governments, and very low-income people usually don't have the flexibility to shift their spending to take advantage of the holiday.

Despite recent headlines like "Illinois: Our very own Greece?" Governor Quinn signed legislation that allows the state to offer its first ever sales tax holiday for a ten day period in early August. The holiday is projected to cost the state between $20 and $67 million, which the state could certainly use right about now. It's hard to understand how offering this sales tax holiday is good fiscal policy.

In brighter news, Georgia is not having a sales tax-free holiday weekend this year. In a state facing its own budget crunch, the Speaker of the House said earlier this year, "What I hear Georgians say is they’d rather have their classroom teachers in the classroom teaching than have that sales [tax] holiday." This move is likely to save the state about $12 million.


Georgia Governor Slashes Low-Income Credit -- But Vetoes Capital Gains Break for Wealthy Investors


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Among the dozens of bills and a $17.9 billion budget signed into law by Georgia Governor Perdue on Tuesday is a law eliminating low-income tax credits for hundreds of thousands of individuals in Georgia — cutting the size of the credit overall by about two-thirds. The legislation signed by Gov. Perdue did not, however, include the 50 percent reduction in the tax on long-term capital gains that was passed by the state’s legislature for the second year in a row.

Specifically, Governor Perdue approved the legislature’s decision to eliminate the “refundability” of the state’s low-income tax credit.  As a result, those low-income Georgians hit hard by sales, excise, and property taxes will no longer be able to receive refunds through the income tax system to offset these burdens.  

Overall, this change amounts to a $20 million tax increase on those in Georgia who are suffering most, and least able to pay during the current recession.  A recent ITEP analysis of this change to the low-income credit shows that 61 percent of the tax hike will fall on the poorest 20 percent of Georgia individuals and families—a group with incomes averaging $9,700 a year—and that virtually all of the tax hike will be paid by the poorest 40 percent of Georgians.

Refundable Credits Still OK for Corporations, but Not Families


While the refundability of Georgia’s low-income tax credit has been eliminated, this same feature of many of Georgia’s corporate tax credits will remain intact. As a report by the Georgia Budget and Policy Institute (GBPI) points out, the refundable portion of corporate tax credits provided by the state are actually similar in cost to the recently repealed refundable portion of the low-income credit.  It’s more than a little surprising, to say the least, that Georgia’s lawmakers believe low-income individuals to be less worthy of tax breaks than corporations.

Governor Vetoes Capital Gains Cut

Fortunately for Georgia residents, Governor Perdue vetoed for the second time an effort by Republican legislative leaders to cut capital gains taxes by an estimated $340 million.  According to an ITEP analysis, 77 percent of the tax reductions resulting from this change would have gone to the richest 1 percent of taxpayers in the state, while the 80 percent of taxpayers earning less than $76,000 per year would have received just 1 percent of the overall capital gains tax break.

Proponents of the capital gains tax break touted the effort as a sort of economic and jobs stimulus legislation, despite the consensus that exists among a wide array of economists that capital gains tax cuts are among the least effective stimulus efforts and have no connection to long-term growth.

As ITEP’s recent report “Who Pays?” points out, the poorest fifth of families in Georgia already pay nearly twice as much in taxes as a percentage of their income as the top 1 percent of Georgians. The legislature’s clear desire to shower the wealthy in additional tax breaks while forcing low-income Georgians to pick up the tab would only make this stark regressivity even worse.

Instead of continuing down this road, Georgia lawmakers could make their budget fairer and more sustainable by passing reforms like repealing the deduction for state income taxes along with a whole variety of reforms.

In an Atlanta Journal-Constitution op-ed, Kathy Floyd of AARP Georgia sums up our feelings about the budget this year by saying, frankly, “Georgia deserved better.”

 

 

And then there were seven.  With the enactment of a tax expenditure reporting requirement in Georgia late last week, only seven states in the entire country continue to refuse to publish a tax expenditure report — i.e. a report identifying the plethora of special breaks buried within these states’ tax codes.  For the record, the states that are continuing to drag their feet are: Alabama, Alaska, Indiana, Nevada, New Mexico, South Dakota, and Wyoming

But while the passage of this common sense reform in Georgia is truly exciting news, the version of the legislation that Governor Perdue ultimately signed was watered down significantly from the more robust requirement that had passed the Senate.  This chain of events mirrors recent developments in Virginia, where legislation that would have greatly enhanced that state’s existing tax expenditure report met a similar fate. 

In more encouraging news, however, legislation related to the disclosure of additional tax expenditure information in Massachusetts and Oklahoma seems to have a real chance of passage this year.

In Georgia, the major news is the Governor’s signing of SB 206 last Thursday.  While this would be great news in any state, it’s especially welcome in Georgia, where terrible tax policy has so far been the norm this year. 

SB 206 requires that the Governor’s budget include a tax expenditure report covering all taxes collected by the state’s Department of Revenue.  The report will include cost estimates for the previous, current, and future fiscal years, as well as information on where to find the tax expenditures in the state’s statutes, and the dates that each provision was enacted and implemented. 

Needless to say, this addition to the state’s budget document will greatly enhance lawmakers’ ability to make informed decisions about Georgia’s tax code. 

But as great as SB 206 is, the version that originally passed the Senate was even better.  Under that legislation, analyses of the purpose, effectiveness, distribution, and administrative issues surrounding each tax expenditure would have been required as well.  These requirements (which are, coincidentally, quite similar to those included in New Jersey’s recently enacted but poorly implemented legislation) would have bolstered the value of the report even further.

In Virginia, the story is fairly similar.  While Virginia does technically have a tax expenditure report, it focuses on only a small number of sales tax expenditures and leaves the vast majority of the state’s tax code completely unexamined.  Fortunately, the non-profit Commonwealth Institute has produced a report providing revenue estimates for many tax expenditures available in the state, but it’s long past time for the state to begin conducting such analyses itself.  HB355 — as originally introduced by Delegate David Englin — would have created an outstanding tax expenditure report that revealed not only each tax expenditure’s size, but also its effectiveness and distributional consequences. 

Unfortunately, the legislation was greatly watered down before arriving on the Governor’s desk.  While the legislation, which the Governor signed last month, will provide some additional information on corporate tax expenditures in the state, it lacks any requirement to disclose the names of companies receiving tax benefits, the number of jobs created as a result of the benefits, and other relevant performance information.  The details of HB355 can be found using the search bar on the Virginia General Assembly’s website.

The Massachusetts legislature, by contrast, recently passed legislation disclosing the names of corporate tax credit recipients.  While these names are already disclosed for many tax credits offered in the state, the Department of Revenue has resisted making such information public for those credits under its jurisdiction. 

While most business groups have predictably resisted the measure, the Medical Device Industry Council has basically shrugged its shoulders and admitted that it probably makes sense to disclose this information.  Unfortunately, a Senate provision that would have required the reporting of information regarding the jobs created by these credits was dropped before the legislation passed.

Finally, in Oklahoma, the House recently passed a measure requiring the identities of tax credit recipients to be posted on an existing website designed to disclose state spending information.  If ultimately enacted, the information will be made available in a useful, searchable format beginning in 2011.

Sonny Perdue is enjoying his last year as the Governor of Georgia and all signs indicate that he's going out with a bang that, depending on how he uses his veto pen, could have enormous implications for Georgia's tax system and revenue stream for years to come. The Governor has already signed legislation that removes retirement income from the income tax base and repeals the state portion of the property tax. Tax and budget fairness advocates are watching to see what action he'll take on a capital gains tax cut and a proposal that would eliminate the refundable portion of a low-income tax credit.

Last week, Governor Perdue made good on a campaign promise to entirely remove retirement income from the tax base for seniors. Georgia seniors already enjoy some of the highest exemptions in the country on retirement income. Fully exempting this income, especially as the boomer population ages, means that the cost of this legislation will only grow in the future.

But even if one can (for some reason) ignore the fiscal implications, the fairness implications are eye-popping. Under this legislation, income seniors receive from work would continue to be taxed the same as before. If you're a senior who can't afford to retire, you still get taxed on most of your income (seniors would still get the existing $4,000 exemption on earnings). But if you can afford to retire, your income is not taxed. The most basic principle of tax fairness — that taxes should be based on ability to pay — seems to have disappeared in Georgia.

The Governor also signed a law that completely eliminates the state portion of property taxes. The Georgia Budget and Policy Institute estimates that this cut alone will cost the state $63 million in 2013, with the cost increasing each year.

Once again, the idea that taxes should be based on ability to pay would justify very different measures. For example, if policymakers are truly concerned about the impact that property taxes are having on the state's most vulnerable residents, they should just institute a property tax circuit breaker, rather than eliminating the tax altogether.

Governor Perdue may not be done yet. Two new bills currently sitting on the Governor's desk would be even more regressive.

The first one is HB 1023, the so-called JOBS Act, which would allow individuals to exclude 50 percent of their capital gains from their income when the state's rainy day fund reaches $1 billion. An ITEP analysis found that "low- and middle-income families would see virtually no benefit from the new exclusion for capital gains." In fact, those Georgians who would benefit from this tax change are overwhelmingly in the top five percent of the income distribution.

Second, the Governor will decide whether to remove the refundable portion of the state's Low Income Tax Credit (LITC). Currently, the credit is available to Georgians with incomes less than $20,000, and if the filer's tax credit is larger then their tax bill, then they get a small refund of between $5 and $26 dollars (or more, depending on family size).

As Laura Lester from the Atlanta Community Food Bank wrote in the Atlanta Journal Constitution, "While eliminating the refundable portion of the LITC may appear to be a simple line-item adjustment, the result will increase the tax burden on those who struggle most in the current economy. This will have consequences well beyond the budget. The current recession has reduced work hours and wages for hundreds of thousands of Georgians, and the LITC helps to ease this hardship and stabilize incomes."

Slashing a tax credit for low-income families while offering enormous tax cuts for the wealthy investor class seems like a strategy to confirm the most cartoonish stereotype of right-wing lawmakers that can be imagined. Let's hope this is not the legacy Governor Perdue prefers to leave for his state.


Bad Tax Reform Ideas? Georgia's Got 'Em


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Will Georgia earn the dubious reputation of passing the most misguided state tax changes of 2010? With the state's legislative session coming to a close, Peach State lawmakers are building an impressive body of work. After sending the governor bills that will cut the capital gains tax by 50 percent and exempt all retirement income for better-off seniors, the legislature this week is moving to take away the state's sole refundable low-income credit and authorize a statewide sales tax increase.

As a new ITEP report shows, the net impact of these changes would be to make the state's already-unfair tax system dramatically more unfair. The ITEP report shows that the current tax system actually redistributes income away from low-income families into the pockets of the best-off taxpayers — and that the proposed changes would make this inequity even worse.     

This week the Oklahoma Policy Institute released a report urging, among other things, that one of the state’s more ridiculous tax breaks be eliminated — specifically, the state income tax deduction for state income taxes.  This deduction was created not as a result of careful consideration and debate among Oklahoma policymakers, but rather as an accidental side-effect of the state’s “coupling” to federal income tax rules.  And as the New Mexico Legislative Finance Committee politely points out, while the deduction may make some sense at the federal level, the rationale for providing it at the state level is “less clear.”

Citing figures provided by ITEP, the Oklahoma Policy Institute notes that only one out of four Oklahomans would be affected by eliminating this deduction, and roughly 58% of the overall tax hike would be borne by those richest 5% of Oklahomans.  This is a predictable result of the deduction only being available to itemizers.  In total, the state could collect an additional $118 million in revenue each year by eliminating the deduction — revenue that could go a long way toward preserving important public services.

State income tax deductions for state income taxes have been receiving a growing amount of attention.  Last year, Vermont limited its deduction to a maximum of $5,000, while just last week New Mexico Governor Bill Richardson signed a budget eliminating his state’s deduction entirely.  The Georgia Budget and Policy Institute (GBPI) also highlighted the benefits of eliminating this deduction in a policy brief released just a few weeks ago.

In total, seven states currently offer this deduction: Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont.  Eliminating the deduction in each of these states is long overdue.


Georgia Lawmakers Propose Cut in the Low Income Credit


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Georgia's Republican leaders, facing a deficit pinch, want to save $20 million a year by eliminating the refundability on the Low Income Credit offered on the state's income tax forms. (This is an alternative to a state EITC, and gives a per-person credit up to $26 for each low-income Georgia family member.)

ITEP estimates that making the credit nonrefundable would take away about three-quarters of the value of this credit, and that most of the tax hike would fall on the poorest 20 percent of Georgians.

As it happens, Georgia's current tax system offers an important reminder of why refundability is such an important feature in low-income tax credits. The poorest 20 percent of Georgians pay an average of 11.7 percent of their income in Georgia state and local taxes — and taxes other than the income tax represent 11.2 percent. (The personal income tax on this group averages 0.5 percent of their income.) This means that lawmakers seeking to make the state's tax system somewhat less regressive can only do so through tax credits that can be applied against not only the income tax, but against sales and excise taxes as well.

A new report from the Georgia Budget and Policy Institute (GBPI) points out that many of the recipients of the refundable Low Income Credit are seniors, and suggests that if lawmakers are intent on balancing the state's budget on the backs of seniors, a more sensible approach would be to reduce the state's very generous retirement income exclusion, which allows seniors at all income levels to enjoy $35,000 (per spouse) of retirement income tax-free. Reducing this cap from $35,000 to $32,000 would raise just as much money as the Low Income Credit proposal, without affecting a single fixed-income senior.

The report also makes some interesting points about refundable tax credits. For example, the state also offers refundable tax credits to corporations, and these cost the state about as much as the refundable credits for low-income families. As the report explains, "This raises the question of why refundable credits are appropriate for Georgia's corporate community but not residents with the lowest incomes."


Truth and Nonsense about Progressive Solutions to State Budget Crises


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As the current economic storm continues to batter state budgets, policymakers in numerous states are continuing to talk of raising taxes to help mitigate cuts in state services.  In Maryland, lawmakers are debating an extension of the state’s temporary “millionaires’ tax,” while a new policy brief out of Georgia proposes to eliminate an unwise (and rare) deduction currently only offered in just seven other states — Arizona, Hawaii, Louisiana, Oklahoma, New Mexico, Rhode Island, and Vermont.

Maryland's legislature is currently considering whether to extend a temporary "millionaires’ tax" enacted as part of a major 2007 tax reform effort. ITEP staff testified Thursday at a hearing of the state House Ways and Means Committee. ITEP's testimony highlighted several important details, such as the fact that the millionaires’ tax modestly reduces the overall unfairness of Maryland's tax system. With the tax in place, low-income families still pay more of their income in Maryland taxes than millionaires must pay — and if the tax is repealed, this inequity will become even worse.

The testimony also explains why claims by anti-taxers that millionaires have fled the state in response to the millionaires’ tax are unfounded. As ITEP's analyses have shown, the primary cause of the decline in the number of Maryland millionaires in the past year is that they stopped being millionaires due to the recession.  The claim that the decline in the number of millionaires is due to the high income tax would be news to lawmakers in Utah (the only other state in which there is publicly available data on the change in the number of millionaires between 2007 and 2008). In the same year that Maryland lost 30 percent of their millionaires, Utah lost 60 percent of theirs. And while Maryland hiked their income tax on wealthy taxpayers the previous year, Utah cut theirs.

In Georgia, some attention is beginning to be paid to a progressive idea passed by the New Mexico legislature just last week.  On Thursday, the Georgia Budget and Policy Institute (GBPI) released a brief explaining why the state’s deduction for state income taxes paid — which costs the state $450 million each year — should be eliminated to help fill the state’s budget gap.  The vast majority of states already disallow this deduction (which originates from federal tax rules) in order to avoid the bizarre, circular situation in which one’s state tax payment can be used to reduce their state taxes.  

Finally, a new report from the Center on Budget and Policy Priorities (CBPP) helps put these developments in Maryland and Georgia into perspective.  The report notes that states have increased taxes by a combined $32 billion during the current recession.  In total, thirty three states have raised taxes to help fill their budget gaps, with twenty two of those having enacted “significant” tax increases, meaning increases that total more than 1 percent of their total revenues.  The report’s appendices provide an excellent summary of the multitude of state tax changes that have been enacted during these difficult budgetary times.


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.”


State Budget Deficits Drive Greater Interest in Examining Tax Breaks


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State budget woes appear to be spurring an increasing amount of interest in re-examining state tax breaks.  The Governors of both Michigan and Idaho have taken steps to ramp up the scrutiny directed at their state’s tax breaks, while a new report out of Oklahoma and an editorial highlighting legislation in Georgia this week have urged similar actions.

In Michigan, the Detroit Free Press urged the adoption of Governor Granholm’s proposal to thoroughly analyze the merits of every tax break, and to saddle most breaks with sunset provisions that would force lawmakers to either debate and renew these breaks, or to let them expire.  This proposal would help to remedy the lack of scrutiny given to tax breaks because of their exclusion from the appropriations process.  Notably, the proposal’s use of sunsets as a mechanism for forcing review seems to resemble a law enacted in Oregon just last year.

In Georgia, the need for additional scrutiny of tax breaks is even more desperate.  Because the state lacks a tax expenditure report, Georgia lawmakers are not even aware of the full range and cost of special breaks that their tax system provides.  SB 206, which was endorsed by a Macon Telegraph editorial this week, would remedy this problem by finally requiring the creation of such a report.  The editorial rightly points out that the bill could be strengthened by requiring an analysis of each tax break’s effectiveness, but at this point, even simply producing a list of tax breaks and their costs would be a major step forward.  The Georgia Budget and Policy Institute has been pushing for the creation of such a report for many years.

Idaho governor Butch Otter has also shown some tentative interest in figuring out whether his state’s tax breaks are worth their cost.  While Governor Otter continues to hold out hope that the state’s revenues will rebound soon, he also recently directed the state’s Tax Commission to study sales tax exemptions in the event that closing some of those exemptions becomes necessary to fill the state’s budget gap next year.  If done carefully, the studies produced by the Tax Commission could provide a wealth of information on breaks that have so far received a relatively small amount of scrutiny.
    
The Oklahoma Policy Institute has also added to the progress being made on this issue with a new report outlining what should be done to scrutinize tax breaks in a systematic fashion.  Their report, titled “Let There Be Light: Making Oklahoma’s Tax Expenditures More Transparent and Accountable,” provides twelve specific recommendations for realizing this vision.  Among those recommendations are: improving the state’s existing tax expenditure report, sunsetting all tax incentives, requiring the extension of a sunsetting incentive to undergo a “performance review,” and developing a unified economic development budget.


New Jersey Finally Joins Majority of States Producing Tax Expenditure Reports


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Until this week, New Jersey was one of just nine states refusing to publish a tax expenditure report – i.e. a listing and measurement of the special tax breaks offered in the state.  Such reports greatly enhance the transparency of state budgets by allowing policymakers and the public to see how the tax system is being used to accomplish various policy objectives. 

Now, with Governor Jon Corzine’s signing of A. 2139 this past Tuesday, New Jersey will finally begin to make use of this extremely valuable tool.  Beginning with Governor-elect Chris Christie’s FY2011 budget, to be released in March, the New Jersey Governor’s budget proposal now must include a tax expenditure report.  The report must be updated each year, and is required to include quite a few very useful pieces of information.

The report must, among other things:

(1) List each state tax expenditure and its objective;
(2) Estimate the revenue lost as a result of the expenditure (for the previous, current, and upcoming fiscal years);
(3) Analyze the groups of persons, corporations, and other entities benefiting from the expenditure;
(4) Evaluate the effect of the expenditure on tax fairness;
(5) Discuss the associated administrative costs;
(6) Determine whether each tax expenditure has been effective in achieving its purpose.

The last criterion listed above is of particular importance.  Evaluations of tax expenditure effectiveness are extremely valuable since these programs so often escape scrutiny in the ordinary budgeting and policy processes.  Such evaluation can be quite daunting, however, and the Governor’s upcoming tax expenditure report should be carefully scrutinized in order to ensure that these evaluations are sufficiently rigorous.  One example of the types of criteria that could be used in a rigorous tax expenditure evaluation can be found in the study mandated by the “tax extenders” package that recently passed the U.S. House of Representatives.  For more on the importance of tax expenditure evaluations, and the components of a useful evaluation, see CTJ’s November 2009 report, Judging Tax Expenditures.

Ultimately, New Jersey’s addition to the list of states releasing tax expenditure reports means that only eight states now fail to produce such a report.  Those states are: Alabama, Alaska, Georgia, Indiana, Nevada, New Mexico, South Dakota, and Wyoming.  Each of these states should follow New Jersey’s lead.


VERMONT & GEORGIA: This Time, Use a Wooden Stake


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If nothing else, 2009 certainly saw its share of movies featuring the undead – New Moon, Zombieland, and Daywalkers all spring to mind.  Now, that trend seems to be infecting state legislative debates, as tax policies or tax policy proposals thought to be dead seem to be springing back to life to terrorize unsuspecting citizenries.  

In Georgia last May, Governor Sonny Perdue rightly vetoed a measure that would have cut in half the taxes businesses and individuals pay on long-term capital gains, costing the state as much as $400 million per year, largely to the benefit of the most affluent of Georgians.  This past week, though, Lieutenant Governor Casey Cagle announced his intention to resurrect the measure in an attempt to spur economic growth.  

The undead are also threatening Vermont.  As part of its FY 2010 budget agreement, the Vermont Legislature enacted a variety of tax changes, including a reduction in the state’s capital gains exclusion from 40 percent of such income to an exclusion capped at $5,000.  While the Legislature was forced to enact such changes over the veto of Governor Jim Douglas, it’s worth noting that, as recently as 2008, the Governor had backed repealing the deduction outright and using the influx of revenue to reduce marginal tax rates, which the legislature did, to some degree, via the FY10 budget agreement.  Yet, in his State of the State address earlier this month, Governor Douglas proposed restoring that 40 percent exclusion to life.

Given the nation’s economic woes, it’s only natural for elected officials to seek ways to boost employment and to foster economic development.  Still, capital gains tax cuts are not the elixir of life for state economies.  As ITEP observed in its examination of state capital gains preferences last year, “extensive economic research demonstrates that there is little connection between lower taxes on capital gains and higher levels of economic growth, in either the short-run or the long-run.”

For more on tax and budget debates in Georgia and Vermont, visit the Georgia Budget and Policy Institute and the Public Assets Institute.


Our Prediction: Property Taxes Will be Debated (Again!) in Georgia


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Our crystal ball tells us that Georgia legislators will spend a lot of time in the new year debating property taxes. The Atlanta Journal Constitution has responsibly studied this issue with several in-depth articles that dig through property tax data and look to nationally respected experts for their opinions.

This week, Senate Majority Leader Chip Rogers recently revealed portions of the reform package that is expected from the Senate committee he chairs. The proposed reforms include: overhauling the appeals process and prohibiting county assessors from setting a property's value higher than the sales price. The latter proposal would likely deal a tremendous financial hit to local governments, given the housing downturn.

In slightly brighter news, there doesn't seem to be much political will to actually eliminate the property tax altogether despite proposals put forward in recent years by prominent politicians, including former Speaker of the House Glenn Richardson. Stay tuned...


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.

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.


Gubernatorial Hopefuls Talk about Income Tax Elimination Rather Than Real Solutions


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When someone demands that Congress abolish the federal income tax, we typically consider that a fairly extreme position. But then again, we don't run in the same circles as Georgia gubernatorial candidate John Oxendine, who feels that his peers in the anti-tax community are too wishy-washy if they don't also call for a repeal of state income taxes. 

He recently said, "I think it's very hypocritical for state officials to be running around bad mouthing the federal government for having an income tax when the state of Georgia does the same [thing]. As governor, I want to get rid of the state income tax." Oxendine thinks that states like Georgia must lead the way and eliminate their state income taxes.

In Georgia, inadequate tax revenue is a threat to justice -- quite literally, in the sense that the state is not able to carry out the basic administration of justice through its court system. As the Wall Street Journal reports, "the wheels of justice in Georgia are grinding more slowly each day" because "Cuts in spending for the state court system have led to fewer court dates available for hearings and trials, creating a growing backlog of cases."

Now, just three months into the state's fiscal year, already under-funded state agencies are being asked to cut another 5 percent from their 2010 budget. Now is likely not the time to eliminate the state's largest source of revenue.

Former Ohio Congressman John Kasich is running for Ohio Governor and is also promising to repeal the state's income tax. However, the severity of Ohio's budget situation has apparently provoked some caution. The Columbus Dispatch recently reported "Kasich also said that the state's dire budget situation would make it difficult to begin phasing out the state income tax in his first term." He apparently assumes that the state's current budget crisis is the last the state will ever face, freeing it to abolish a major source of revenue in the future.

Of course, abolishing a state's income tax is a terrible idea even in times of surplus because income taxes are fairer than any other type of revenue source. A recent ITEP report makes this point in analyzing a recent proposal in Missouri to eliminate corporate and individual income taxes and replace the revenue with an enormously expanded sales tax. The Missouri proposal (which was not enacted) would have effectively slashed state taxes for wealthy residents while sending the bill to working families who spend most of their income purchasing necessities.  


Experts Say States' Economies Will Suffer If Budgets Are Balanced Solely by Cuts in Spending


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States policymakers across the country are looking to the future and anticipating another year of tough budget decisions about whether to cut services or increase taxes. Two recent pieces from research groups in Georgia and North Carolina make excellent points about the importance of considering tax increases and their impact on economic development.
 
Last week, the Macon Telegraph published an editorial by Alan Essig, Executive Director of the Georgia Budget and Policy Institute. Essig notes that there "is more to economic development policy than having the lowest tax rate. Economic development depends on, at the least, adequate public structures; without them, it is difficult to recruit and grow businesses in Georgia, no matter how low taxes are." Racing to the bottom in terms of tax rates is hardly the best economic development decision a state can make.
 
North Carolina legislators did take a balanced approach to filling their state's budget shortfall by passing both tax increases and budget cuts. Yet, this hasn't stopped anti-taxers from crying "job killing taxes." The North Carolina Budget and Policy Center recently released a report debunking the myth that state tax increases cause job losses. Read the Center's report, Wishful Thinking: Claims That State Tax Increases Cause Job Loss are Unfounded.

 


Regressive Tax Cut Vetoed in Georgia


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Governor Concedes Supply-Side Tax Cuts Are Not Workable, But Still Insists He Likes Them

Georgia's Governor Sonny Perdue ended a month of speculation this week when he decided to veto a capital gains tax cut -- but seemed to equivocate on the outrageous claim that capital gains tax cuts can actually result in increased revenue.

As reported here, the Georgia legislature in early April passed a budget for fiscal year 2010 that included a major tax cut for the wealthy (an exclusion for long-term capital gains income). The proposal was roundly criticized by opinion leaders in the state, including the Atlanta Journal Constitution and the Macon Telegraph, because the vast majority of the benefits would go to the richest state residents and because of its potential revenue impact during a state budget crisis.

Uncertainty surrounded the outcome because it was unclear what Governor Perdue, a proponent of "supply-side" tax cuts, would decide. Supply-side economics is a school of thought associated with conservative politicians (but not many mainstream economists) that tax cuts for investment or for those who invest can yield huge increases in economic growth. Most incredibly of all, this resulting economic growth is often argued to result in so much new tax revenue that the tax cut can be cost-free or can even lead to increased revenues. Proponents of this idea believe that cuts in the capital gains tax are especially likely to lead to increased revenues.

On Monday, the Governor issued a veto statement saying that, "While some argue these tax reductions will ultimately generate more revenue, the constitutional restraint of a balanced budget prevents policymakers the luxury of time to allow that growth to overcome the short-term loss of revenue." In other words, the Governor seemed to imply that cutting taxes on capital gains income could actually result in increased revenue, but the increased revenue simply would not come soon enough to meet the requirement that the state budget be balanced each year. To make clear that he was not opposed to such tax cuts in principle he added, "Should the General Assembly choose to enact a budget next session that incorporates the estimated revenue reductions caused by large tax cuts, I would entertain such cuts at that time."

The Governor should be thanked for vetoing a regressive and irresponsible tax cut in the middle of a budget crisis, but he should be called to task for entertaining the absurd idea that tax cuts (of any sort) can actually lead to increased revenues.

Middle-income Georgians are still waiting for their Governor to decide whether to increase their property taxes and use the revenue to slash capital gains taxes for the rich. Legislation making both of these changes (HB 481 and HB 261) continues to sit on Governor Sonny Perdue's's desk even as it's roundly criticized by opinion leaders, including the Atlanta Journal Constitution and the Macon Telegraph.

The editorial boards of both papers cite ITEP's recent report on the legislation. The analysis describes the impact across income groups of eliminating a property tax relief program in combination with cutting taxes on capital gains income. The Atlanta Journal Constitution points out, "So who will see a boon from a capital gains tax break? A very wealthy few. People in the top 10 percent of the income spectrum own about 70 percent of taxable stocks. In its analysis of the capital gains tax break, the Washington-based Institute on Taxation and Economic Policy concluded that 77 percent of the tax cut would go to the very richest 1 percent of Georgians."

Sadly, bad news for the Georgia economy may be what it takes to convince the Governor that tax cuts for the rich, even if they are partially offset by tax increases on somebody else, are simply unaffordable. As Charles Richardson at the Macon Telegraph writes, "There is more bad news on the economic front. On May 7, the governor should get the revenue report for April. It is not expected to be good. March's numbers were down 14 percent. However, that dark cloud may hold a silver lining. The dismal income report may spur Gov. Perdue to veto HB 481 and HB 261. That would be fiscally prudent, and move the state closer to fiscal responsibility and away from ideological, get-out-the-vote rhetoric that is leading us to disaster."


Georgia: Piling on the Pain


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A new report from the Georgia Budget and Policy Institute highlights the shocking decision on the part of Georgia legislators to actually cut taxes in the face of an immense budget deficit. According to the report's analysis of official state fiscal notes, if the Governor signs all tax bills passed by the legislature, state revenues will fall by $116 million in fiscal 2010, and by over $1.2 billion in fiscal 2012.

The bill with the biggest cost includes a pricey and regressive exclusion for 50% of all long-term capital gains income, analyzed by ITEP earlier this month. In addition, a $1,800 tax credit for home buyers, as well as a dozen other tax cuts would dig the state deeper into debt if approved by the Governor.


CBPP Report on Tax Expenditure Reporting Encourages Smarter Thinking About Special Tax Breaks


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The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report. For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers. Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions. Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions. Shockingly, the CBPP found that nine states publish no tax expenditure report at all. Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue. All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.

Last Friday, the Georgia General Assembly passed a budget for fiscal year 2010 that includes a major tax cut for the wealthy (an exclusion for long-term capital gains income) and a substantial tax increase for the middle-class (eliminating a state-funded property tax relief program). A new report from ITEP concludes that if this proposal was fully implemented in 2008, the poorest 95 percent of Georgia taxpayers would pay, on average, higher state taxes than they do now.

The proposed capital gains tax break would allow investors to exclude 50 percent of their long term capital gains income from the state income tax when fully implemented in 2012. If the capital gains tax cut had been fully implemented in tax year 2008, Georgia residents would have seen a total tax cut of about $340 million, and the very richest 1 percent would receive an incredible 77 percent of that. (For more on flaws of capital gains tax breaks at the state level, see ITEP's report A Capital Idea.)

The property tax increase used to offset the costs would eliminate the Homeowner Tax Relief Grant (HTRG). Through the grant, the state of Georgia currently pays most property taxes on the first $8,000 of a Georgia homestead's assessed value. Since Georgia homes are assessed for tax purposes at 40 percent of their market value, this is equivalent to exempting $20,000 of a home's market value from property taxes.

While there are certainly flaws with any homestead exemption, there are plenty of alternatives for making property tax relief fairer. For example, a property tax circuit breaker can ensure that, for homeowners and renters earning below certain income levels, property taxes do not exceed a certain share of a family's income. (For more on the benefits of property tax circuit breakers, see ITEP's policy brief.)

The repeal of the Homeowner Tax Relief Grant should, in theory, have given lawmakers an important opportunity to rethink its approach to property tax relief. But the budget plan squanders most of the tax savings from HTRG repeal on a poorly-conceived long-term capital gains tax cut for a small number of the wealthiest Georgians. Governor Sonny Perdue should know that approving these changes would amount to a blatant shifting of state taxes from the rich to the middle-class.


Sneaky and Unethical Travel Sites...


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This week Columbus, Georgia won an important victory against Expedia.com (an online travel service) in Columbus Superior Court.

First some background: Expedia can keep their prices so low because they negotiate with local hotels to pay discounted/wholesale rates for the rooms, and then they charge customers for the actual cost of the room. The tax charged by Expedia and paid by customers is on the room's actual cost. Here's the kicker: Expedia pockets the difference in tax between the wholesale cost and the room's actual cost.

This obviously leaves localities that levy lodging taxes like Columbus, Atlanta, and San Antonio out in the cold because they aren't collecting needed revenue on the actual cost of hotel stay, but the wholesaler's price. Not to mention the ethical implications of telling customers you are collecting a tax, but then pocketing a portion of it to line company's pockets. Expedia isn't the only travel site spending time in court. A lawsuit before the Georgia Supreme Court targets Orbitz, Travelocity, and fourteen other online travel sites.


Georgia Group Promotes Sensible Options for Budget Troubles


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This week the Georgia Budget and Policy Institute (GBPI) issued a report, Deficit Reduction Step Two: Bringing Other Voices Into the Planning Process which calls for a special legislative session to deal with a projected $1.6 billion deficit, and details a sensible approach for addressing the state's budget situation.

According to the GBPI report, "The state has suspended or eliminated the hiring of new and replacement positions, all out-of-state and non-essential travel, all purchases of motor vehicles, and the purchase of supplies, materials, equipment, and printing." But cutting government services isn't the only option available to cure the state's budget woes. Policymakers should hold a special session to consider the revenue-raising options that this report discusses, like a temporary income tax increase, eliminating special tax breaks, increasing the cigarette tax and reinstating the estate tax.


Some States Need Special Sessions to Address Fiscal Problems


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With summer in full swing and state fiscal years largely underway, most state legislators probably think that they're done with the heavy lifting, at least policy-wise, for the year. Yet, due to the poor condition of the nation's economy, tax revenue in a number of states is falling well short of expectations, reopening budget gaps that policymakers thought they had closed. For instance, the Georgia Budget and Policy Institute this week issued a report that estimates that the deficit for the current fiscal year (FY09) could reach as much as $2 billion, due to weak sales and personal income tax collections. The report calls for legislators to return in September to address the shortfall. As the Atlanta Journal Constitution reports, Senate Appropriations Chairman Jack Hill has already indicated that a variety of options for resolving any potential deficit will be considered, including undoing recent tax cuts.

In New York, where the fiscal year begins in April, the problem may be more prospective than retrospective, but that didn't stop Governor David Paterson from calling this week for a special legislative session to address the Empire State's burgeoning budget deficit. According to the latest analysis from the state's budget office, the expected budget gap for FY 2010 has risen from $5 billion to $6.4 billion in the span of three months, with a three-year deficit now exceeding $26 billion. With his request for legislative action, particularly with the entire Legislature up for election this November, the Governor would appear to be a paragon of fiscal responsibility, except that he is simultaneously demanding a property tax cap that would make matters worse. For more on alternatives to the Governor's property tax plan and on the state's fiscal condition generally, visit the Fiscal Policy Institute's web site.


Sales Tax Holidays: Free Swirlies for Everyone


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As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.


Attack of the 50 Foot Tax Breaks


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Conservative commentators frequently depict Hollywood as ridden with leftists, but the reality is that, when it comes to tax policy, the movie industry is no different from any other. Take recent legislative activity in Michigan and Georgia, for example. Michigan Governor Jennifer Granholm is on the verge of signing a bill that would, among other things, provide a refundable tax credit equal to 42 percent... 42 percent!... of a film production's costs. The Georgia Senate has adopted a measure - also expected to be signed into law - that will more than double that state's current film production credit.

Yet, as an important new report from the Massachusetts Department of Revenue (DoR) documents, states may receive precious little in return for these enormous investments. According to the report, Massachusetts will lose upwards of $140 million between 2006 and 2008 due to its film tax credit, but may receive only about $20 million in new revenue from the economic activity associated with the credit. What's more, as the report notes, "any estimate of the net economic and tax revenue impact of tax incentives needs to take into account the reduction in state government spending" associated with such credits. In such tight budgetary times, that "reduction in government spending" is sure to occur if policymakers keep trying to lure the latest blockbuster to their state.


Georgia Legislature: Tax Cutting Frenzy Part II


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We told you last week the Georgia House was all in a flutter over property tax cuts including caps and repeal of the state's car tax. With only a handful of working days left on the legislative calendar, Senate Republican leaders this week pushed through a tax cut package of their own which includes a 10 percent cut in income tax rates over five years. Estimates are that eventually the state would lose more than $1.2 billion a year. Despite mountains of evidence that tax cuts don't pay for themselves or stimulate the economy (one need only look at the fiscal situation on the federal level to understand this) Senators are billing the income tax changes as a "stimulus plan." The Georgia Budget and Policy Center has a new analysis showing the damaging impact this cut would have on the state.


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.


Victory in Georgia: The So-Called GREAT Plan Is Defeated


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Georgia taxpayers dodged a substantial bullet this week. We've been following for months now Georgia's GREAT Plan and its various modifications. Originally the "Georgia Repeal of Every Ad Valorem Tax" would have repealed virtually all Georgia property taxes and replaced the lost revenues by expanding the state's sales tax base. The tax fairness and budget implications of such a regressive and costly plan did not sit well with many observers and lawmakers.

The bill's main proponent, House Speaker Glenn Richardson, eventually gave up the fight for the original bill. The bill then morphed into a cluster of property tax proposals including the freezing of assessed property values and capping local property tax revenues. (For more on the specific provisions take a look at the Georgia Budget and Policy Institute's fact sheet here). Recently, GBPI's Director Alan Essig had an editorial in the Atlanta Journal Constitution titled, "Have Responsible, Not Reckless, Tax Reform."

It seems that more than a few lawmakers agreed with Essig.In a victory for tax justice advocates, the newer version of the GREAT Plan was defeated in the Georgia House this week by a vote of 110 to 62, ten votes short of the 120 needed to pass.


Plea for Reasoned Reform in Georgia


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For many tax justice advocates, Georgia has been a state to watch. House Speaker Glenn Richardson's "Georgia Repeal of Every Ad Valorem Tax" (GREAT) Plan, which would have repealed the state's property tax and replace the lost revenues by expanding the state's sales tax base, appeared to be doomed to fail this legislative session. The Plan faced numerous political road blocks and would have caused an $8.6 billion budget hole for the state according to Georgia State University's Fiscal Research Center. Yet there were many remaining questions regarding how much political capital the Speaker was willing to invest to make his plan a reality. Seeing the writing on the wall, the Speaker is now moving full speed ahead with a Plan-B.

His new proposal would eliminate just the state portion of the property tax in favor of an expanded sales tax base. The legislation also includes a troubling property assessment cap. (Residential assessed values will only be allowed to increase by 2 percent annually.)

A new report from the Georgia Budget and Policy Institute (GBPI) explains the problems with the legislation, which would create a budget shortfall of $827 million and increase the regressivity of the state's tax structure. In an Atlanta Journal-Constitution op-ed, GBPI executive director Alan Essig writes, "Low- to middle-income Georgians already pay a higher percentage of their income in state and local taxes. Swapping property taxes for more sales taxes will only make it worse." He goes on to plead for a reasoned approach to property tax reform while simultaneously making the case for investment in public services. "The speaker's proposals won't keep Georgia moving forward. In fact, his risky ideas for reform would set the state back for generations. What we need is a reasoned plan for reform that adds up and provides adequate revenue while putting in place a fair tax system for all Georgians." We couldn't agree more.


States React to Economic Turmoil


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Many states are in a fiscal crunch and the number of states facing budget shortfalls may be growing. This week the Center on Budget and Policy Priorities released a state fiscal update saying that, "At least twenty-five states, including several of the nation's largest, face budget shortfalls in fiscal year 2009." A sluggish economy, bursting housing bubble, and the decline of tax revenues have all had a significant impact on states and their ability to keep budgets balanced.

It's not always clear that states can act as effectively as the federal government to kick start a sluggish economy, but that doesn't stop them from trying. For any legislation to be effective as a stimulus to counteract a recession, it must be "temporary, timely and targeted," as argued by the Center on Budget and Policy Priorities. Some of the stimulus initiatives being proposed on the state level meet these goals better than others. Tax cuts that are not temporary can do more harm to states in the long-run, and provisions that will not have any benefit until after a recession has passed are useless as a stimulus. Most importantly, those tax cuts not targeted towards low- and middle-income people are not likely to result in new spending that immediately spurs the economy, but will go largely towards savings, which takes much longer to have a positive effect.

Stimulus Plans in the States: Connecticut, Iowa, Georgia, and Ohio

In Connecticut, Governor Jodi Rell has asked legislators to reconsider their economic stimulus proposals, arguing that there is no money available to pay for tax cuts. Senate Democrats there proposed increasing the state's property tax credit by $250 and House Republicans proposed offering tax credits to offset medical and energy costs. It's certainly not obvious that an increased property tax credit is well-targeted, since property-owners tend to have higher incomes than everyone else. Depending on how it's implemented, it may not be timely either.

Policymakers in Georgia have proposed legislation to expand the state's personal exemptions temporarily. The legislation is targeted to the degree that it benefits middle-income people, but it doesn't reach those too poor to pay state income taxes. It's also flawed because it's not entirely timely. A lot of people won't benefit until next year.

Some Iowa lawmakers have adopted a completely different approach to providing economic stimulus by proposing a five-year property tax break for Iowans who improve their homes. According to one state senator, the tax break "really rewards all homeowners that have pursued the American dream of owning their own home." But a five-year tax break does not qualify as temporary, at least for the purpose of responding to a recession. It's also hard to believe that it would be targeted to those who need help and will spend the extra money right away, and it's not clear that any home improvements that result will happen quickly enough to qualify this as timely. Another idea being tossed around is a proposal that would expand the state's sales tax holiday to include all items subject to the sales tax. ITEP has long argued that sales tax holidays are not good policy. In this context it's worth noting that they are usually not targeted well at all, since the benefits go to everyone who shops during the sales tax holiday and because people who need help the most are less capable of shifting the timing of their consumption to take advantage of it.

Ohio Governor Ted Strickland isn't proposing increased tax credits. Instead, his plan includes borrowing $1.7 billion in an attempt to stimulate the state's economy and create 80,000 jobs. If approved by voters, more money would be available for transportation, renewable energy technologies, and local infrastructure projects. Borrowing to fund important investments makes sense in some contexts, but as a stimulus it's unclear whether these investments will give a timely boost to the economy to counteract a recession that is occurring now.


State of the States Roundup


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Georgia

Georgia Governor Sonny Purdue is singing the same old tired song in this year's State of the State address. In this year's rendition he proposed eliminating the state portion of property taxes levied and removing the tax on retirement and investment income for seniors. Georgia already has a large exemption for retirement income on the books and the state portion of property taxes levied is so small that Georgians would likely see an average tax cut of $30. On a positive note, the Governor didn't endorse House Speaker Richardson's plan to eliminate the portion of property taxes levied to fund schools -- a step in a dangerous direction that Richardson says will eventually lead to the elimination of all property taxes.


Proposal to Abolish Property Taxes Scaled Back in Georgia


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In Georgia, the radical plan to abolish property taxes and hike sales taxes, proposed earlier this fall by House Speaker Glenn Richardson, is shrinking by the day. Last week, Richardson pared back his proposal so that instead of repealing all property taxes, the plan would "only" repeal all homeowner property taxes for schools (plus the annual "car tax" Georgians pay on their motor vehicles), and would pay for the change by taxing personal services.

The plan still raises worrisome questions, however. Georgia already allows large state-funded (and local-option) homestead exemptions and other tax breaks for fixed-income families. If further residential property tax relief is necessary, a state-funded "circuit breaker" tax credit would be a better-targeted (and less expensive) option than outright repeal of all homeowner school property taxes. (Circuit breakers are provisions that prevent property taxes from exceeding a certain percentage of a family's income.) And expanding the sales tax base to include services, while a shot in the arm for a sustainable sales tax, would make Georgia taxes even more regressive unless accompanied by low-income tax breaks of some kind. As the Georgia Budget and Policy Institute has pointed out, a state Earned Income Tax Credit could be an important part of this mix.


Plan to Abolish Georgia's Property Taxes Faces New Roadblock


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Georgia House Speaker Glenn Richardson's plan to repeal all Georgia property taxes and make up the lost revenue by expanding the state and local sales tax base ran into a roadblock last week. Two new reports from Georgia State University's Fiscal Research Center (FRC) show that repealing property taxes would dig an annual $8.6 billion budget hole for the state -- and that under any reasonable scenario for expanding the sales tax base, a property-for-sales tax swap would fall at least $2 billion short of filling that hole. Since Richardson has described his plan as "revenue neutral" without actually providing detailed revenue estimates, the new reports cast doubt on whether this tax swap can be accomplished.

As the FRC report's detailed revenue estimates make clear, the only way such a plan could even approach revenue neutrality would be to tax items that (to put it mildly) wouldn't find much support among the public or tax analysts, including purchases by the federal, state and local government ($2.2 billion), health care ($600 million), and rent ($405 million).

Richardson helpfully suggested this week that the authors of the reports "should sharpen their pencils," but didn't offer more substantive criticism of the FRC analysis.

Even worse for advocates of this tax swap, the latest data show that Georgia sales tax collections in September were down 10% from last September's collections, which is not a good sign for those who want to use sales taxes to pay for property tax repeal.


Georgia's GREAT Plan is Anything But...


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Georgia Speaker of the House Glenn Richardson's Georgia Repeal of Every Ad Valorem Tax (GREAT) Plan would eliminate the state's property tax and replace the lost revenues by expanding the state's sales tax base. The plan is receiving lots of attention that Rep. Richardson probably doesn't like. For starters, media around the state are asking hard questions including this one from the Athens-Banner Herald, "How long is he willing to hold on to an idea that is already all but doomed to fail?" According to the Atlanta Journal Constitution Governor Sonny Perdue also has doubts about the GREAT Plan becoming law.

The Speaker has been traveling around the state discussing his plan and advocates for tax fairness and adequacy aren't letting his tour go unanswered. The Georgia Budget and Policy Institute along with AARP Georgia, the Georgia Association of Educators, The Georgia Municipal Association, the Georgia School Boards Association, and the Georgia Coalition United for a Responsible Budget are also touring the state and visiting nine cities to educate the public about the state's tax and budget situation.


Singing the Same Old Tune... and He's Still Tone Deaf


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It seems that every time the waves splash against Georgia's shores another Georgia policymaker is singing the praises of eliminating one tax or another. This time Georgia House Speaker Glenn Richardson says that eliminating property taxes will be his main legislative priority for the 2008 session. He would replace the lost revenue by broadening the sales tax base to include groceries and services. He'd also implement a rebate for taxpayers with incomes less than $40,000. Georgia's tax structure is regressive and taxes some families living in poverty. Speaker Richardson's proposal will likely do nothing to improve those basic facts. Let's hope before the legislative session begins he changes his tune.


Georgia Budget and Policy Institute: HB 195: Senior Citizen Income Tax Cut


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Georgia Budget and Policy Institute Report

The report analyzes the legislative proposal to eliminate taxes wealthy seniors pay on retirement income, based solely on age. Since Georgia already exempts that vast majority of retirement income from taxes, this bill would help only 10 percent of seniors while doing nothing for other low-income Georgians.


Multi-State Focus: Senior Tax Cuts


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Legislators in Missouri, Kansas, and Georgia are debating reducing taxes on seniors in their state. Lawmakers in Missouri and Kansas introduced legislation that would eliminate income taxes on Social Security benefits. On the surface, eliminating taxes on Social Security sounds like a wonderful idea. However, only a handful of states levy a tax on Social Security benefits and the Social Security Administration estimates that nationally about a third of current beneficiaries pay federal taxes on their benefits. Those who stand to gain the most from these proposals are better off seniors.

An ITEP analysis of the Missouri bill found that 72 percent of Missourians would receive no benefit from the proposal. Also, the bill carries a price tag of $100 million and the cost is likely to increase as Missourians age. For more on the Missouri proposal read the testimony presented by ITEP staff to the Missouri House of Representatives' Tax Reform Committee.

The Peach State already exempts Social Security benefits from their income tax and offers generous retirement income exclusions (totaling $35,000 of retirement income in 2009). But recently Governor Purdue introduced legislation that would completely eliminate tax on retirement income for Georgians 65 and over. Instead of turning to these poorly targeted tax cuts, legislators would do better to provide tax relief to those state residents with the least ability to pay - regardless of age considerations.

While the Democratic takeover of the House of Representatives (and apparently also the Senate) on Tuesday has has given new hope to advocates of progressive tax policies at the federal level, the results of ballot initiatives across the country indicate that state tax policy is also headed in a progressive direction.

In the three states where they were on the ballot, voters rejected TABOR proposals, which involve artificial tax and spending caps that would cut services drastically over several years. Washington State defeated repeal of its estate tax. Several states also rejected initiatives to increase school funding which, while based on the best intentions, were not responsible fiscal policy. Two of four ballot proposals to hike cigarette taxes were approved and the night also brought a mixed bag of results for property tax caps.

Taxpayer Bill of Rights (TABOR):
Maine - Question 1 - FAILED
Nebraska - Initiative 423 - FAILED
Oregon - Measure 48 - FAILED
Voters in three states soundly rejected tax- and spending-cap proposals modeled after Colorado's so-called "Taxpayers Bill of Rights" (TABOR). Apparently people in these three states had too many concerns over the damage caused by TABOR in Colorado. Property Tax

Caps:
Arizona - Proposition 101 - PASSED - tightening existing caps on growth in local property tax levies.
Georgia - Referendum D - PASSED - exempting seniors at all income levels from the statewide property tax (a small part of overall Georgia property taxes. (The Georgia Budget and Policy Institute evaluates this idea here.)
South Carolina - Amendment Question 4 - PASSED - capping growth of properties' assessed value for tax purposes. The State newspaper explains why the cap would be counterproductive.
South Dakota - Amendment D - FAILED - capping the allowable growth in taxable value for homes, taking a page from California's Proposition 13 playbook. (The Aberdeen American News explains why this is bad policy here - and asks tough questions about whether lawmakers have shirked their duties by shunting this complicated decision off to voters.)
Tennessee - Amendment 2 - PASSED - allowing (but not requiring) local governments to enact senior-citizens property tax freezes.
Arizona's property tax limit will restrict property tax growth for all taxpayers in a given district. South Dakota's proposal was fortunately defeated. It would have offered help only to families whose property is rapidly becoming more valuable, and those families are rarely the neediest. Georgia's is not targeted at those who need help but would give tax cuts to seniors at all income levels. The Tennesse initiative, which passed, is a reasonable tool for localities to use, at their option, to target help towards those seniors who need it.

Cigarette Tax Increase:
Arizona - Proposition 203 - PASSED - increase in cigarette tax from $1.18 to $1.98 to fund early education and childrens' health screenings.
California - Proposition 86 - FAILED - increasing the cigarette tax by $2.60 a pack to pay for health care (from $.87 to $3.47)
Missouri - Amendment 3 - FAILED - increasing cigarette tax from 17 cents to 97 cents
South Dakota - Initiated Measure 2 - PASSED - increasing cigarette tax from 53 cents to $1.53. While many progressive activists and organizations support raising cigarette taxes to fund worthy services and projects, the cigarette tax is essentially regressive and is an unreliable revenue source since it is shrinking.

State Estate Tax Repeal:
Washington - Initiative 920 - FAILED
Complementing the heated debate over the federal estate tax has been this lesser noticed debate over Washington Stats's own estate tax which funds smaller classroom size, assistance for low-income students and other education purposes. Washingtonians decided it was a tax worth keeping.

Revenue for Education:
Alabama - Amendment 2 - PASSED - requiring that every school district in the state provide at least 10 mills of property tax for local schools.
California - Proposition 88 - FAILED - would impose a regressive "parcel tax" of $50 on each parcel of property in the state to help fund education
Idaho - Proposition 1 - FAILED - requiring the legislature to spend an additional $220 million a year on education - and requiring the legislature to come up with an (unidentified) revenue stream to pay for it.
Michigan - Proposal 5 - FAILED - mandating annual increases in state education spending, tied to inflation - but without specifying a funding source. The Michigan League for Human Services explains why this is a bad idea.
Voters made wise choices on education spending. The initiative in California would have raised revenue in a regressive way, while the initiatives in Idaho and Michigan sought to increase education spending without providing any revenue source. Alabama's Amendment 2 takes an approach that is both responsible and progressive.

Income Taxes:
Oregon - Measure 41 - FAILED - creating an alternative method of calculating state income taxes. Measure 41 was an ill-conceived proposal to allow wealthier Oregonians the option of claiming the same personal exemptions allowed under federal tax rules and would have bypassed a majority of Oregon seniors and would offer little to most low-income Oregonians of all ages.

Other Ballot Measures:
California - Proposition 87 - FAILED - would impose a tax on oil production and use all the revenue to reduce the state's reliance on fossil fuels and encourage the use of renewable energy
California - Proposition 89 - FAILED - using a corporate income tax hike to provide public funding for elections
South Dakota - Initiated Measure 7 - FAILED - repealing the state's video lottery - proceeds of which are used to cut local property taxes
South Dakota - Initiated Measure 8 - FAILED - repealing 4 percent tax on cell phone users.

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