Hawaii News


EITC Victories Await in Both Hawaii and Montana


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Two states are on the verge of embracing a tried and tested anti-poverty policy, the Earned Income Tax Credit (EITC). In the past two weeks, lawmakers in both Hawaii and Montana passed EITC legislation, which governors in both states are expected to sign.

Once officially enacted, these states will join 26 other states and the District of Columbia in using EITCs to boost low-wage workers earnings and to offset some of the regressive state and local taxes they pay.

While both bills will improve tax fairness, reward work, and help families meet their basic needs, they have notable differences. 

Hawaii’s HB 209 would enact a sizeable EITC equal to 20 percent of the federal credit. But the bill includes three unusual provisions that will limit the credit’s usefulness to low-income families. First, the credit would be nonrefundable, meaning that taxpayers earning too little to owe state income tax will receive no benefit. Second, Hawaii taxpayers could claim the credit only after all of the state’s existing refundable credits have been applied. And third, the credit would expire after tax year 2022. Hawaii lawmakers should consider lifting these restrictions during the next legislative session.

Montana’s HB 391, enacted via a bipartisan effort, includes an EITC equal to 3 percent of the federal credit. Unlike Hawaii’s proposed EITC, this credit would be refundable, meaning that Montanans would receive a refund for the portion of the credit that exceeds their income tax bill. The importance of refundability hinges on the fact that it can be used to offset any state and local taxes paid, rather than only income taxes. This is particularly important given the upside-down nature of state and local tax systems where low- and moderate-income families pay a bigger share of their income in taxes than wealthier taxpayers. While Montana’s EITC would represent a meaningful step toward poverty alleviation, the 3 percent credit would become the lowest in the nation, behind Louisiana’s 3.5 percent credit.


State Rundown 5/3: Lawmakers See Value in State EITCs, Danger in Tax Cut Triggers


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This week, Kansas lawmakers found that they'll have to roll back Gov. Brownback's tax cuts and then some to adequately fund state needs. Nebraska legislators took notice of their southern neighbors' predicament and rejected a major tax cut. Both Hawaii and Montana's legislatures sent new state EITCs to their governors, and West Virginia began an uncertain special session as other tax debates also continued around the country.

-- Meg Wiehe, ITEP Deputy Director, @megwiehe

  • Efforts to slash taxes in Nebraska using a "trigger" mechanism have been defeated for the year after a bill failed to come close to overcoming a filibuster Tuesday. The bill, favored by Gov. Pete Ricketts and Revenue Committee Chair Jim Smith, would have primarily benefited high-income Nebraskans, worsened the state's projected budget shortfall, and could have triggered tax cuts in economic hard times. Lawmakers turn to the budget today.
  • Back from spring recess, Kansas lawmakers are working to find tax reform solutions that raise enough revenue to close budgetary shortfalls and meet constitutional requirements to adequately fund public education, all while receiving the necessary legislative votes to override a gubernatorial veto.
  • Big news out of Hawaii this week: both the Senate and House voted to pass HB 209 yesterday. The bill, which would make permanent the top personal income tax brackets and rates on high-income earners and create a 20 percent nonrefundable Earned Income Tax Credit (EITC), now heads to the governor.
  • Under a bipartisan effort, lawmakers in Montana have also passed a bill creating a state Earned Income Tax Credit (EITC) that would be 3 percent of the federal credit (and refundable). The governor is expected to sign the bill.
  • Tomorrow marks the first day of West Virginia's special session. Yet, uncertainty remains regarding how the divided leadership will come to a budget and tax resolution.
  • Despite a tight budget this year and ever present concerns about property taxes in the state, the Texas House has voted to phase out its franchise tax, which is currently one of three major revenue sources in the state. The approved House bill now makes its way to the Senate, which passed a similar elimination bill earlier this session.
  • In a renewed effort to shore up funds, a hiring freeze on almost all state agencies went into effect this week in Wyoming. Lawmakers’ opposition to tax increases has left them with limited options for dealing with declining oil prices.
  • Florida's legislative session is nearly complete. Most of Gov. Rick Scott's proposed tax cuts have been ignored this year, but the latest package in the House still amounted to nearly $300 million in cuts, and the Senate is expected to approve about $142 million. A bill did pass to send an expansion of the state's homestead exemption to voters in November 2018, which would cut property taxes and would sap an estimated $750 million of funding for local services that rely on property tax revenue and shift taxes onto businesses.
  • A Wisconsin lawmaker is expected to release details soon for a plan that likely proposes to garner more funding for infrastructure investments by raising the gas tax and cutting the income tax through switching to a flat tax structure. Gas tax swaps like this have become increasingly popular, but all suffer from the same problem of boosting infrastructure funding at the expense of core public services like education and public health.
  • In Oklahoma, a bill to raise the state's cigarette and fuel taxes moves forward. If advanced, the bill would increase the cigarette tax rate by $1.50 per pack and the gasoline and diesel fuel by $0.06 per gallon. However, the Senate also passed a bill to reduce road funding in hopes that the fuel tax increase will fill the gap.
  • The Seattle City Council has passed a resolution expressing intent to pursue a local income tax. Under a coalition's proposal, adjusted gross income in excess of $250,000 would be taxed at 1.5 percent. In addition to shoring up the finances of Seattle, the income tax would provide a test legal case for the constitutionality of an income tax in the state of Washington.
  • A proposal to tax sugary drinks in Santa Fe, New Mexico failed at the ballot yesterday.

What We're Reading...  

  • A new report from the California Budget & Policy Center explains the importance of raising awareness of the state's Earned Income Tax Credit (EITC). The credit has been available since 2015.
  • A new working paper from Columbia University law professor David Schizer explores the benefits of taxing both corporations and their shareholders, though in a coordinated fashion.

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 3/22: 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. 


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 2/26: Tax Changes on the Horizon


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Thanks for reading the Rundown! Here's a sneak peek: Alaska legislators consider moving money from their oil tax fund to shore up the budget. Maine lawmakers consider tax changes that would benefit the top 5 percent of earners while Oklahoma lawmakers consider delaying a tax cut that would also primarily benefit the wealthy. Hawaii's legislature will mull a new state Earned Income Tax Credit. And the South Dakota House passes a sales tax increase by a one-vote margin.

 – Meg Wiehe, ITEP State Policy Director


 

Efforts to raise taxes in Alaska to close a yawning budget gap caused by declining oil revenues may be pushed to next session. Legislators are instead considering plans to use the Permanent Fund to plug the state's revenue hole. The Permanent Fund is a constitutionally-mandated sovereign wealth fund, financed with oil tax revenue that pays Alaska residents a dividend each year. Dividends have ranged from $878 to $2,072 per person over the last decade. Under Gov. Bill Walker's plan, that payout would be reduced as the state would transfer $3.3 billion from the Permanent Fund to the state budget each year. Rep. Mike Hawker's plan would go even farther, putting dividends on hold until the state's deficit is eliminated. A large reduction in the dividend is likely to impact lower- and moderate-income families much more heavily than the wealthy, though a progressive income tax (as has also been proposed by the Governor) could help offset some of that regressivity.

Under the cloud of a large budget deficit, the Oklahoma Senate Finance Committee has voted to reverse itself on a previously approved income tax cut. The committee surprised many by voting 10-2 to delay the 0.25 percent reduction in the state's top income tax rate that went into effect January 1. Gov. Mary Fallin and the leaders of the House and Senate all want the income tax cut to remain in effect. The author of the bill to postpone the tax cut, Sen. Mike Mazzei, rallied support to his cause last week, as we covered on The Tax Justice Blog. Expect additional fireworks in this developing story.

A column in the Portland Press Herald makes the case against a bill that would give upper-income Mainers a tax break. The column's author, Bill Creighton, is in the top 5 percent of Maine taxpayers and would see a tax cut if LD 1519 were passed. The proposal would eliminate the cap on itemized deductions adopted last year in a comprehensive tax reform package and would come at a cost to the state of roughly $52 million. ITEP crunched the numbers on behalf of the Maine Center for Economic Policy and found that over half the benefit of eliminating the cap on itemized deductions would go to the top 1 percent of taxpayers. That group would receive an average tax cut of $4,000 per year. No Mainer in the bottom 80 percent of the income distribution (those making less than $93,000) would see any benefit.

Hawaii lawmakers will consider creating a state Earned Income Tax Credit (EITC). SB 2299 would implement a state credit equal to 10 percent of the federal EITC—providing an average benefit of approximately $220 per eligible filer. In 2013 over 315,800 Hawaii residents, including 127,200 children (PDF), benefited from the federal version of the EITC. Enacting an EITC could go a long way toward lessening the unfairness of a tax system that ITEP ranks as levying the 2nd highest taxes in the country on low-income taxpayers.

The South Dakota House voted to raise the state sales tax rate by half a point, from 4 to 4.5 percent, in order to fund an increase in pay for teachers. The measure initially failed by one vote, but supporters were able to convince their colleagues to reconsider. The measure will now go to the Senate for consideration. The South Dakota Budget and Policy Institute, citing ITEP data, says the change will raise $107 million but will also make the state's tax structure more regressive. They suggest an alternative plan that would remove food purchases from the sales tax base but raise the rate an entire percentage point on all other goods. This alternative would raise $128 million while actually cutting taxes for the bottom 20 percent of earners.

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

 


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. 

 

This is the second installment of our three part series on 2015 state tax trends.  The first article focused on tax shifts and tax cuts, and the final article will discuss transportation funding initiatives.

finishline.jpgJuly 1 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 1 (Illinois, New Hampshire, North Carolina, and Pennsylvania.  Alabama has until October to reach a budget agreement).  

While every state’s tax system is regressive, some states chipped away at this problem by enacting new tax policies to support working families. Most commonly, states adopted or strengthened their Earned Income Tax Credits (EITCs). But a number of proposals to enact or improve tax credits for working families stalled, including bills in Mississippi, Louisiana and Nebraska. There is still a chance that Illinois could improve its state EITC before the end of its legislative session.

In addition to policies supporting working families, a number of states, facing deep budget deficits, discussed or enacted revenue-raising plans this year. These plans will also help the public by supporting crucial services.

Check out the detailed lists after the jump to see which states created new tax policies to support working families and which states increased taxes to raise needed revenue.

 

Wins for Working Families

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

Hawaii (Still Active): Assuming Gov. David Ige signs a bill approved by the state’s legislature, most low-income families receiving the state’s refundable food tax credit will see their credit grow somewhat starting in 2016.  The credit is designed to offset highly regressive sales taxes on food in a state that ITEP has ranked as having higher taxes on the poor than anywhere except Washington State.

Massachusetts (Enacted): Massachusetts lawmakers included an increase in the state’s refundable EITC from 15 to 23 percent of the federal credit in their final budget agreement.

New Jersey (Enacted): The legislature increased the state EITC to 30 percent of the federal credit after a surprise endorsement from Gov. Chris Christie. As New Jersey Policy Perspective notes, the increase will help more than 500,000 working families and boost the state economy: “It’s been estimated…that the EITC has a multiplier effect of 1.5 to 2 in local economies – in other words, every dollar of tax credit paid ends up generating $1.50 to $2 in local economic activity.”

Rhode Island (Enacted): As part of the budget deal, Rhode Island lawmakers approved an increase in the state’s refundable EITC from 10 to 12.5 percent of the federal credit. 

Maine (Enacted): The final budget package approved by lawmakers converted the state’s nonrefundable 5 percent EITC to a refundable credit and introduced a new refundable sales tax fairness rebate, which will help to offset the impact of higher sales tax rates also included with the budget.

New York (Enacted):  Gov. Andrew Cuomo, the Assembly, and the Senate all proposed separate versions of a refundable property tax credit this session – some more targeted than others.  In the closing days of the session, lawmakers agreed to a compromise credit that is a sliding scale percentage of homeowners’ STAR property tax exemption, with benefits targeted to low- and moderate-income homeowners.  The credit is unavailable to homeowners with income above $275,000, and those residing in New York City or other jurisdictions that do not comply with the state’s property tax cap.  Unfortunately, the final agreement did not include any support for renters.

 

Significant Revenue Raising:

Alabama (Still Active): Lawmakers left their regular legislative session without a budget—or a needed revenue raising plan—in place (their fiscal year starts Oct. 1, so they are working on borrowed time).  Gov. Robert Bentley proposed a $541 million revenue package earlier in the year, including a higher cigarette tax, higher sales taxes on car purchases, and enacting combined reporting under the corporate income tax.  Unable to reach agreement on which taxes to raise and by how much to raise them, lawmakers sent the governor a budget with no new revenues, which he swiftly vetoed.  Lawmakers reconvened briefly on July 13 to receive Gov. Bentley’s latest revenue raising proposal that would raise more than $300 million: eliminating a state deduction for social security payroll taxes (only taken by lawmakers), a 25-cent cigarette tax increase, and a few small business tax changes.  His proclamation also suggested lawmakers could consider a soda tax as an alternative to eliminating the payroll deduction.  Lawmakers are expected to review the revenue changes over the next three weeks and will meet again on August 3 to vote on the proposal.

Connecticut (Partially Enacted): Connecticut lawmakers passed a budget with more than $1 billion in new revenue to plug a budget gap and ensure the state has resources to make needed investments in education, transportation, and health care.  In late June, lawmakers were called back to the capital for a special session after Gov. Dannel Malloy caved to the behest of corporate lobbyists. At issue was an increase in the state’s sales tax on computer and data processing services from 1 to 3 percent, as well as new combined reporting rules for businesses operating in Connecticut. The legislature backed down on those changes after corporations decried the measures and leaned heavily on the governor. The new deal maintains the sales tax rate on computer and data processing and delays the start of combined reporting by one year.  The close to $1 billion revenue package also includes higher personal income taxes for very wealthy households, the elimination of an exemption on clothing under $50, cuts to a property tax credit, and a cap on car taxes paid in some districts.  

Illinois (Still Active): Gov. Bruce Rauner and lawmakers face a reckoning of their own making; the state could be headed toward a shutdown without a resolution. Rauner wants to address the state’s $6.1 billion budget gap with massive spending cuts to healthcare, education and other public services in a budget proposal denounced as “morally reprehensible” by critics in the state. The legislature and the Governor are at a standstill.

Louisiana (Enacted): State leaders grappled with how to close a $1.6 billion budget gap all session long. Eventually, they passed a package of eleven bills that will raise about $660 million in revenue. The package increases the state cigarette tax by 32 cents per pack, scales back business subsidies, and decreases many of the state’s existing tax breaks through a 20 percent across-the-board cut. Most of the new revenue raised by the package of bills will go toward preventing deep cuts to higher education and healthcare programs. To win approval from Gov. Bobby Jindal, lawmakers were forced to adopt a convoluted plan with a fake fee and fake tax credit as a smokescreen for raising revenue so that the governor could keep his promise to Grover Norquist not to raise taxes.

Vermont (Enacted): In order to address a revenue shortfall, Vermont lawmakers enacted a handful of tax increases this year.  Most notably, they broadened the income tax base by capping itemized deductions (mostly used by upper-income taxpayers) at just 2.5 times the value of the state’s standard deduction.  Sensibly, lawmakers also eliminated the ability to deduct Vermont state income tax from, well, Vermont state income tax.  They also expanded the state’s sales tax base to include all purchases of soda beverages.

 


State Rundown 1/27: All Tax Cuts Are Not Created Equal


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Some North Carolina lawmakers may push to eliminate the state’s capital gains tax under the guise of promoting economic growth, according to a recent report by the North Carolina Budget and Tax Center. The tax is levied on income from the sale of stocks, artwork, vacation homes, and other fancy items – so this isn’t a middle class tax cut we’re talking about. ITEP crunched the numbers for the report and found that eliminating taxes on capital gains would reduce state revenue by $520 million, and 60 percent of the benefits would accrue to taxpayers making $1 million or more – just one percent of North Carolina’s taxpayer base. The idea is even more appalling when you consider that all income growth in the state between 2009 and 2012 went to these same earners, according to the Economic Policy Institute.

Leaders of both parties unveiled tax cut plans last week in Minnesota, but the beneficiaries of these plans would differ greatly. Gov. Mark Dayton wants to introduce a tax credit for child care expenses that would expand an already existing program to cover families making up to $124,000 a year. Under the plan, which would cost $100 million over two years, the maximum credit would be $2,100, and the governor predicts that the typical family would receive a credit of $481. Meanwhile, state Sen. David Senjem has sponsored a bill to phase out Minnesota’s tax on some Social Security benefits over the next decade.   The lion’s share of this tax cut would go to better-off elderly taxpayers, since social security is already fully exempt from Minnesota tax for seniors with income below $25,000 ($32,000 for married couples) and partially exempt for all seniors. His plan would cost $127 million over two years..

Mississippi Gov. Phil Bryant pledged to consider any tax cut proposal that reaches his desk in last week’s state of the state address, saying “In short, put a tax cut on my desk, and I will sign it.” The governor has proposed a nonrefundable earned income tax credit for working families with income limits that match the federal EITC.. The governor claims the credit would give Mississippians a tax break of $100-400 a year, would cost $79 million, and would only be available in years where revenue growth is sufficient and the state’s rainy day fund is full. An ITEP analysis found that the governor’s nonrefundable EITC proposal would give a tax break to only 9 percent of the poorest Mississippians, but a refundable credit would reach 45 percent of low-income people. Not everyone in the state is enthused by the governor’s plan; one legislator called the cuts “political hogwash” and blasted the governor for not investing more in infrastructure. The Sun Herald criticized the governor for unfounded optimism in his speech, writing “At the risk of reveling in the bad, as Bryant put it, we believe no honest State of the State at this point in its history should sugarcoat this state's miserable rankings in the education of its children, the health of its residents and the income level of its work force.”

 

State of the State Addresses This Week:
Hawaii Gov. David Ige (watch here)
Montana Gov. Steve Bullock (Wednesday)
Utah Gov. Gary Herbert (Wednesday)

Governors’ Budgets Released This Week
Arkansas Gov. Asa Hutchinson (Tuesday)
Minnesota Gov. Mark Dayton (Tuesday)
Wisconsin Gov. Scott Walker (Tuesday)
Massachusetts Gov. Charlie Baker (Wednesday)


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: Don't Expect Much from Congress


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Reuters reports that state lawmakers shouldn’t expect Congress to act anytime soon to close the enormous hole in their sales tax bases created by online shopping. Sales tax enforcement on purchases made over the Internet is a messy patchwork right now because states can only require retailers with a store or other “physical presence” within their borders to collect the tax. (Amazon, for example, is only required to collect the tax in 20 states). This uneven treatment of online retailers versus brick-and-mortar stores is nothing new, but the chairman of the House Judiciary Committee insists that more debate is needed before his chamber will act on the bipartisan bill passed by the Senate last spring.

 

Hawaii lawmakers are giving serious consideration to enhancing a number of tax credits for low-income working families, but the state’s worsening revenue outlook is going to make paying for the credits a bit more difficult. Moreover, Honolulu Civil Beat reports that lawmakers are also debating whether to give out more tax credits for things like charter school donations, backup generators, and building renovations. But reducing the very high state and local tax rate being paid by Hawaii’s poor should be a higher priority than these initiatives.

Last year’s trend toward raising state gasoline taxes seems to be continuing this year. In just the last week, the Kentucky House approved a 1.5 cent per gallon increase and the New Hampshire Senate gave preliminary approval to a 4 cent increase. These increases would allow for valuable investments in both states’ infrastructure, and would reduce the likelihood that lawmakers will eventually cut other areas of the budget to fund those investments.

This week the Wisconsin General Assembly approved Governor Scott Walker’s tax cut proposal which includes $404 million in across-the-board property tax cuts and $133 million in income tax cuts that result from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax. The legislation is now sent to Governor Walker’s desk where it is all but guaranteed he will sign the bill into law. For more on the flaws of this bill check out this Wisconsin Budget Project’s blog post.

 

With pothole season well under way, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has been in the news quite a bit recently for its research on the need for more sustainable federal and state gasoline taxes. USA Today ran a story this week featuring quotes from ITEP staff and six different infographics based on ITEP data that explain where state gas taxes are, and aren’t, being raised.  In addition, ITEP’s Carl Davis appeared on both CBNC and NPR’s Marketplace to talk about the gas tax.

The Missouri legislature is poised to offer Kansas a truce in the never-ending battle to shower Kansas City-area companies with tax credits. Both the Missouri Senate and House recently passed similar bills that would ban state tax incentives for companies that agree to move from the Kansas side of the Kansas City border (Wyandotte, Johnson, Douglas, or Miami counties) to the Missouri side (Jackson, Clay, Platte, or Cass counties). It seems Missouri has finally realized that tax breaks used to lure companies across the border — otaling $217 million between both states in recent years by one estimate — don’t actually create new jobs for the region’s residents and would be better spent on much needed public services. The one catch: the Missouri bill would only go into effect if Kansas agrees to a similar ceasefire within the next two years.

Perhaps this is the year that Utah will establish a state Earned Income Tax Credit (EITC). A bill creating the much-heralded working family tax credit was passed out of the House Revenue and Taxation Committee last month. Last year, a similar bill was passed by the full House, but stalled in the Senate. This year’s bill, which is again sponsored by Representative Hutchings, would give over 200,000 low-income Utahns a refundable tax credit worth 5 percent of the federal EITC, or roughly $113 on average. But one change from last year’s bill is that the credit will not go into effect until Utah is allowed to start collecting sales tax from online shoppers — something that won’t happen until Congress passes legislation granting the states that power. Such a bill has already passed the U.S. Senate and is supported by President Obama, but it is still pending in the U.S. House.

While a full solution to the problem of uncollected sales taxes on online shopping will have to come from the federal government, Hawaii’s House of Representatives wants to chip away at the problem by expanding the number of online retailers that have to collect sales tax right now. Under a bill backed by the state Chamber of Commerce, retailers partnering with Hawaii-based companies to solicit sales would have to collect sales taxes on purchases made by their Hawaii customers.  This move to apply the state’s sales tax laws more uniformly to both online retailers and traditional brick-and-mortar stores would be one step toward a more modern sales tax in the Aloha State.


The States Taking on Real Tax Reform in 2014


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Note to Readers: This is the fifth post of a five-part series on tax policy prospects in the states in 2014. Over the course of several weeks, The Institute on Taxation and Economic Policy (ITEP) highlighted tax proposals that were gaining momentum in states across the country. This final post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax policy proposals are not all bad news this year.  There are some promising efforts underway that would fix the structural problems with state tax codes and improve tax fairness for low- and middle-income families. All eyes are on Illinois as lawmakers grapple with how to raise much needed revenue after their temporary income tax hike expires. Many are hoping the timing is now right for a real debate about a graduated income tax. Washington DC’s Tax Revision Commission has proposed a number of sensible reforms. And, lawmakers in Hawaii and Utah are expected to seriously debate ways to improve their states’ tax fairness.

Illinois - Though there has been much legislative activity in Springfield about corporate tax breaks, the arguably more important issue facing lawmakers is the state’s temporary income tax rate increase that is set to decrease in 2015. Given this upcoming rate reduction, lawmakers and the public are weighing in on alternative ways to fund vital services, including the merits of a progressive income tax.

District of Columbia - DC’s Tax Revision Commission set the stage for real tax reform this Spring when it recommended expanding the sales tax base, enhancing the city’s Earned Income Tax Credit (EITC) for childless workers, boosting the personal exemption and standard deduction, reforming the District’s income tax brackets, and phasing-out the value of personal exemptions for high-income taxpayers. The Commission’s proposal is hardly perfect: it includes an expensive giveaway for people with estates worth over $1 million, as well as a slight cut in the city’s top income tax rate (in exchange for making that temporary rate permanent).  But the plan still contains a lot of good ideas worthy of the word “reform.”

Hawaii - Hawaii levies the fourth highest state and local taxes on the poor in the entire country, but some lawmakers would like to change that.  Proposals to enact an Earned Income Tax Credit (EITC) managed to pass both chambers of the legislature last year before eventually being abandoned, and lawmakers gave serious consideration to other low-income tax credit changes as well.  The Hawaii Appleseed Center’s recent report (PDF) on enhancing low-income tax credits, and options to pay for those enhancements, provides a wealth of information for the many lawmakers and advocates who intend to pick up where they left off last year.

Utah - Last year’s effort to improve Utah’s regressive tax system (PDF) by enacting an Earned Income Tax Credit (EITC) ultimately fell short, though a bill that would have created such a credit did make it out of the state’s House of Representatives.  That push will be resumed this year.


A Reminder About Film Tax Credits: All that Glitters is not Gold


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Remember the 2011 Hollywood blockbuster The Descendants, starring George Clooney? Odds are yes, as it was nominated for 5 Academy Awards. Perhaps less memorable were the ending credits and the special thank you to the Hawaii Film Office who administers the state’s film tax credit – which the movie cashed in on.

Why did a movie whose plot depended on an on-location shoot need to be offered a tax incentive to film on-location? The answer is beyond us, but Hawaii Governor Abercrombie seems to think it was necessary as he just signed into law an extension to the credit this week.

Hawaii is not alone in buying into the false promises of film tax credits. In 2011, 37 states had some version of the credit. Advocates claim these credits promote economic growth and attract jobs to the state. However, a growing body of non-partisan research shows just how misleading these claims really are.

Take research done on the fiscal implications such tax credits have on state budgets, for example: 

  • A report issued by the Louisiana Legislative Auditor showed that in 2010, almost $200 million in film tax breaks were awarded, but they only generated $27 million in new tax revenue. According a report (PDF) done by the Louisiana Budget Project, this net cost to the state of $170 million came as the state’s investment in education, health care, infrastructure, and many other public services faced significant cuts.

  • The Massachusetts Department of Revenue – in its annual Film Industry Tax Incentives Reportfound that its film tax credit cost the state $200 million between 2006 and 2011, forcing spending cuts in other public services.

  • In 2011, the North Carolina Legislative Services Office found (PDF) that while the state awarded over $30 million in film tax credits, the credits only generated an estimated $9 million in new economic activity (and even less in new revenue for the state).

  • The current debate over the incentive in Pennsylvania inspired a couple of economists to pen an op-ed in which they cite the state’s own research: “Put another way, the tax credit sells our tax dollars to the film industry for 14 cents each.”

  • A more comprehensive study done by the Center on Budget and Policy Priorities (CBPP) examined the fiscal implications of state film tax credits around the country. This study found that for every dollar of tax credits examined, somewhere between $0.07 and $0.28 cents in new revenue was generated; meaning that states were forced to cut services or raise taxes elsewhere to make up for this loss.

Not only do film tax credits cost states more money than they generate, but they also fail to bring stable, long-term jobs to the state.

The Tax Foundation highlights two reasons for this. First, they note that most of the jobs are temporary, “the kinds of jobs that end when shooting wraps and the production company leaves.” This finding is echoed on the ground in Massachusetts, as a report (PDF) issued by their Department of Revenue shows that many jobs created by the state’s film tax credit are “artificial constructs,” with “most employees working from a few days to at most a few months.”

Second, a large portion of the permanent jobs in film and TV are highly-specialized and typically filled by non-residents (often from already-established production centers such as Los Angeles, New York, or Vancouver). In Massachusetts, for example, nearly 70 percent of the film production spending generated by film tax credits has gone to employees and businesses that reside outside of the state. Therefore, while film subsidies might provide the illusion of job-creation, they are actually subsidizing jobs not only located outside the state, but in some cases – outside the country.

While a few states have started to catch on and eliminate or pare back their credits in recent years (most recently Connecticut), others (including Maryland, Nevada, Pennsylvania, and Ohio) have decided to double down. This begs the question: if film tax credits cost the state more than they bring in and fail to attract real jobs, why are lawmakers so determined to expand them?

Perhaps they’re too star struck to see the facts. Or maybe they, too, want a shout out in a credit reel.


Earned Income Tax Credits in the States: Recent Developments, Good and Bad


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Note to Readers: This is the last in a six part series on tax reform in the states. Over the past several weeks CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) has highlighted tax reform proposals and looked at the policy trends that are gaining momentum in states across the country.

Lawmakers in at least six states have proposed effectively cutting taxes for moderate- and low-income working families through expanding, restoring or enacting new state Earned Income Tax Credits (EITC) (PDF). Unfortunately, state EITCs are also under attack in a handful of states where lawmakers are looking to reduce their benefit or even eliminate the credit altogether.

The federal EITC is widely recognized by experts and lawmakers across the political spectrum as an effective anti-poverty strategy. It was introduced in 1975 to provide targeted tax reductions to low-income workers and supplement low wages. Twenty-four states plus the District of Columbia provide EITCs modeled on the federal credit. At the state level, EITCs play an important role in offsetting the regressive effects of state and local tax systems.

Positive Developments

  • Last week, the Iowa Senate Ways and Means Committee approved legislation to increase the state’s EITC from 7 to 20 percent. Committee Chairman Joe Bolkcom said, “This bill is what tax relief looks like. The tax relief is going to people who pay more than their fair share.”

  • The Honolulu Star-Advertiser recently reported on the push to create an EITC and a poverty tax credit (PDF) in Hawaii. The story cites data from ITEP showing that Hawaii has the fourth highest taxes on the poor in the country and describes the work being done in support of low-income tax relief by the Hawaii Appleseed Center.  The poverty tax credit would help end Hawaii’s distinction as one of just 15 states that taxes its working poor deeper into poverty through the income tax.

  • In Michigan, lawmakers are looking to reverse a recent 70 percent cut in the state’s EITC.  That change raised taxes on some 800,000 low-income families in order to pay for a package of business tax cuts.  Lawmakers have introduced legislation to restore the EITC to its previous value of 20 percent of the federal credit, and advocates are supporting the idea through the “Save Michigan’s Earned Income Tax Credit” campaign

  • Pushing back against New Jersey Governor Christie’s reduction of the EITC from 25 to 20 percent, last month the Senate Budget and Appropriations Committee approved a bill to restore the credit to 25 percent. Senator Shirley Turner, the bill’s sponsor, said there was no reason to delay its passage as some have suggested because low-income New Jersey families need the credit now.  "People would put this money into their pockets immediately. I think they would be able to buy food, clothing and pay their rent and their utility bills. Those are the things people are struggling to do."

  • Oregon’s EITC is set to expire at the end of this year, but Governor Kitzhaber views it as a way to help “working families keep more of what they earn and move up the income ladder” so his budget extends and increases the EITC by $22 million. Chuck Sheketoff with the Oregon Center for Public Policy argues in this op-ed, “[t]he Oregon Earned Income Tax credit is a small investment that can make a large difference in the lives of working families. These families have earned the credit through work. Lawmakers should renew and strengthen the credit now, not later.”

  • In Utah, a legislator sponsored a bill to introduce a five percent EITC in the state. The bipartisan legislation is unlikely to pass because of funding concerns, but the fact that the EITC is on the radar there is a good development. Rep. Eric Hutchings said that offering a refundable credit to working families “sends the message that if you work and are trying to climb out of that hole, we will drop a ladder in."

Negative Developments

  • Last week, North Carolina Governor McCrory signed legislation that reduces the state’s EITC to 4.5 percent. The future looks grim for even this scaled down credit, though, since it is allowed to sunset after 2013 and it’s unlikely the credit will be reintroduced. It’s worth noting that the state just reduced taxes on the wealthiest .2 percent of North Carolinians by eliminating the state’s estate tax, at a cost of more than $60 million a year. Additionally, by cutting the EITC the legislature recently increased taxes on low-income working families, saving a mere $11 million in revenues.

  • Just two years after signing legislation introducing an EITC, Connecticut Governor Dannel Malloy is recommending it be temporarily reduced “from the current 30 percent of the federal EITC to 25 percent next year, 27.5 percent the year after that, and then restoring it to 30 percent in 2015.” In an op-ed published in the Hartford Courant, Jim Horan with the Connecticut Association for Human Services asks, “But do we really want to raise taxes on hard-working parents earning only $18,000 a year?”

  • Last week in the Kansas Senate, a bill (PDF) was introduced to cut the state’s EITC from 17 to 9 percent of its federal counterpart. This would be on top of the radical changes signed into law last year by Governor Sam Brownback which eliminated two credits targeted to low-income families including the Food Sales Tax Rebate.

  • Vermont Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs, a move described as taking from the poor to give to the poor. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute cites ITEP Who Pays data to make the case for maintaining the EITC.  Calling the Governor’s idea a “nonstarter,” House and Senate legislators are exploring their own ideas for funding mechanisms to pay for the EITC at its current level.

Tax Reform in Paradise: Ideas to Help Hawaii's Poor


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Not only does Hawaii have the highest cost of living in the country, it also has some of the highest overall taxes on the poor. A new report from the Hawaii Appleseed Center, however, explains how to change the tax code to take some pressure off the state’s low-income families. Using data from the Institute on Taxation and Economic Policy (ITEP), the report proposes a new poverty tax credit that would eliminate state income taxes for any Hawaii family below the poverty line.  This change would end the state’s embarrassing distinction as one of just 15 states that actually taxes its poor deeper into poverty through the state income tax.

Rather than simply enacting the poverty credit in isolation, the report also recommends pairing it with a refundable Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC.  Together, these two reforms would both incentivize work and chip away at the regressivity of a state tax system that requires its poorest residents to pay more of their household budgets in taxes than any other group (PDF).  As the Appleseed report shows, these two credits would boost the after-tax income of Hawaii’s poorest families by 1.4 percent, while costing the state $47 million in foregone revenue.

Like many states, Hawaii has more than a few tax breaks on the books that are expensive and unjustified, and the Appleseed experts offer up five of them as suggestions for how the state could replace that foregone revenue (and then some) without compromising vital state services:

1- Repeal the state’s sharply regressive tax break (PDF) for capital gains income.

2- Phase-out the benefits of lower tax brackets for high-income taxpayers.

3- Pare back the state’s enormous tax breaks for wealthy retirees (PDF).

4- Eliminate the state’s nonsensical deduction for state income taxes paid.

5- Enact an “Amazon law” to require more online retailers to collect and remit the sales taxes currently due (PDF) on purchases made by Hawaii residents.

Taken together, the reforms in the Appleseed report could greatly reduce the unfairness built in to Hawaii’s tax code, and put it on a more sustainable footing for generating sufficient revenues in the years ahead.


Quick Hits in State News: The Perils of Tax Credits, Breaks and Incentives


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A Los Angeles Times report out of Hawaii illustrates why all tax breaks need to be subjected to more scrutiny.  The state’s well-intentioned and wildly popular tax “incentive” for solar energy has gotten more than a little out of control, skyrocketing in cost from $34.7 million in 2010 to $173.8 million in revenues this year, and even jeopardizing the reliability of the state’s power grid. Tax authorities have responded by slicing the credit in half for now.  Had Hawaii implemented some of the tax break accountability reforms we’ve recommended before, (first among them establishing measurable outcomes!), they could have prevented some of this chaos.

South Dakota Governor Dennis Daugaard is encouraging Congress to take action on a national Amazon tax policy because he worries about the impact that exempting online sales from his state’s tax base has on tax fairness and revenues. In the wake of a record settling Cyber Monday he points out that the “gift-buying binge also likely broke another record: most purchases made in South Dakota without paying sales tax.” For more on taxing Internet sales see this Institute on Taxation and Economic Policy (ITEP) brief (PDF).

The Illinois Senate deserves kudos for passing legislation that would require publicly traded corporations to disclose their Illinois income tax bill.  Currently about two-thirds of the companies doing business in Illinois aren’t paying state income taxes. If the bill passes the House and is signed into law by Governor Quinn, important, never-before-known information will be available about corporate taxpayers.  House Majority Leader Barbara Flynn Currie said, "Public policymakers can't make good public policy if they don't know what's going on. We don't know whether those 66 percent of corporations that pay no income tax in fact don't have any profits."

In case you missed it -- Good Jobs First and the Iowa Policy Project recently collaborated to release this must read report, Selling Snake Oil to the States, which debunks the tax and regulatory recommendations made by the American Legislative Exchange Council (ALEC) for building economic growth in the states. Here’s a sneak peak of the study’s findings: “the states ALEC rates best turn out to have actually done the worst.”

Michigan House members will likely approve a proposal in the next week to repeal the tax businesses pay on industrial and commercial personal property (equipment, furniture and other items used for business purposes). Idaho lawmakers are considering a similar proposal.  An editorial in the Battle Creek (MI) Enquirer, however, urges lawmakers to put the plan on hold until there is a “better understanding of the impact on local units of government, along with a plan to mitigate that impact.”  Indeed, the overwhelming majority of revenue generated by this tax helps to fund  local governments, and it would be difficult for localities to absorb a cut that severe. 


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


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Naughty

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

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

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

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

Nice

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

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

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

A Little Bit Naughty and Nice

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

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

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


Mercatus Center Misses the Mark with "Simple" Tax Index


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The Mercatus Center, a think tank run by “America’s Hottest Economist,” has attempted to quantify the level of “freedom” enjoyed within each state.  If this sounds impossible, that’s because it is.  A quick look at the “taxes” component of each state’s “freedom score” should make this very clear.

According to the Center, freedom requires that “individuals should be allowed to dispose of their lives, liberties, and properties as they see fit, as long as they do not infringe on the rights of others.”  This, according to the study, requires “a deep distrust of taxation.”

In order to measure the impact of taxes on freedom, the Center does what it correctly describes as a “simple” calculation: it tallies up the size of all tax revenues (with a few exceptions) as a share of the state’s economy.  Basically, more tax revenue means less freedom under the authors’ assumptions — and taxes account for about 10 percent of each state’s overall “freedom score.”  But as everybody outside the Mercatus Center knows, taxes are never this simple.

For starters, states routinely use their tax codes to encourage (and discourage) a huge range of decisions that affect our day-to-day lives.  Most states, for example, offer strings-attached tax incentives designed to spur specific companies into building factories within their borders.  Under the Mercatus Center’s assumptions, a state that uses its tax code to subsidize private sector construction will actually score better on the “freedom” index than an otherwise identical state, simply because the subsidy cuts into its revenue collections.  In reality, however, a state without the subsidy offers a freer and more level playing field with “unhampered markets,” as the authors put it.

Of course, factory construction isn’t the only area where the government tries to manipulate behavior with special breaks.  States offer special tax breaks for everything from competing in a livestock show to purchasing binoculars — each of which the Mercatus Center’s calculations would classify as “freedom enhancing.”

Taxes can also affect freedom in unintentional ways.  For example, a handful of states have placed caps on the rate at which a homeowner’s property tax bill can grow each year.  These tax caps result in huge tax cuts for many homeowners, especially those that have lived in their homes for many years.  Obviously, under the Mercatus Center’s assumptions, these caps are big freedom enhancers.  In reality, however, the opposite is true.

An article in the March 2011 edition of the National Tax Journal showed what anecdotes from homeowners have always suggested: these caps result in a “lock-in effect” where residents are either unable or unwilling to leave their homes, out of fear of losing the tax savings they’ve accumulated over many years.  “Locking” residents into their homes with convoluted property tax breaks is hardly the definition of a free society.  But don’t count on the Mercatus Center’s “freedom index” being able to capture these types of nuanced, but vitally important implications of state tax policies.

Finally, it’s worth noting that the Mercatus index also falls short in its failure to examine who pays taxes.   This is most obvious in the 48th and 49th place fiscal policy rankings received by Hawaii and Alaska, respectively. 

Hawaii’s sales and excise tax revenues are very robust, in large part because of the huge quantities of hotel rooms, car rentals, tours, and souvenirs that are sold to out-of-state tourists.  Similarly, a significant amount of Alaska’s tax revenue (even excluding severance taxes, which the study omits) comes from multinational oil companies. 

In each of these states, many tax dollars flow into state coffers from outside the state — and while every one of those dollars sinks the state lower in the Mercatus “freedom index,” it has little if any impact on the freedom of anybody living within those states’ borders.  For this reason alone, readers should hesitate before taking the authors’ advice that “individuals can use the data to plan a move or retirement.”

At the end of the day, how taxes are collected is equally if not more important than how much taxes are collected.  Economists recognized this a long time ago when they discovered the tax policy principle of “neutrality,”  which basically means that tax systems should interfere with our decisions as little as possible.  A tax system that doesn’t generate much revenue can still reduce our freedom in important ways if it’s applied in a narrow and discriminatory fashion.  Anybody interested in enhancing freedom through tax reform should be focused on the plethora of special breaks contained in state systems — not the overall revenue yield of those systems.


Hawaii Passes Budget Limiting Upside-Down Tax Giveaways


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Last week the Hawaii legislature sent Governor Neil Abercrombie a package of tax changes designed to help close the state’s yawning budget gap.  Among its most notable components are the partial repeal of the state’s nonsensical deduction for state income taxes paid, and a new limitation on itemized deductions taken by wealthy taxpayers.  Both of these changes will help mitigate the upside-down, regressive nature of Hawaii’s itemized deductions — a move that ITEP has urged many states to consider.

If Governor Abercrombie signs the legislature’s tax package into law — as he is expected to do — Hawaii will become the first state in the nation to place a cap on the overall size of itemized deductions. 

Married taxpayers earning over $200,000 per year will be prevented from sheltering more than $50,000 of their income from tax via itemized deductions, while single taxpayers earning over $100,000 will be limited to a $25,000 deduction. 

ITEP recommended a similar option in its August 2010 “Writing Off Tax Giveaways” report, and the Hawaii legislature actually passed a cap of this type last year that was eventually vetoed by then-Governor Linda Lingle.

If this bill becomes law, itemizers will still be able to take a deduction much larger than the $2,000 per-spouse “standard deduction” enjoyed by many Hawaii residents.  Nonetheless, the cap will go a long way toward reducing tax regressivity while also raising much-needed revenue for the state.

Hawaii’s legislature chose to collect additional revenue from itemized deduction reform by partially repealing the deduction for state income taxes paid.  Hawaii residents earning over $200,000 per year (or $100,000 in the case of a single filer) will be unable to take this deduction, while taxpayers earning under that amount will continue to benefit. 

Allowing taxpayers to deduct their state taxes on their state tax forms is a bizarre policy with no real rationale.  Instead, it exists only because Hawaii has “coupled” its itemized deduction laws too closely to federal rules, where the state tax deduction is used as a form of revenue-sharing. 

Gov. Neil Abercrombie rightly called the state tax deduction an “absurdity” in his State of the State address.  The vast majority of states have already abandoned the state income tax deduction — most recently in New Mexico and Rhode Island, both of which repealed the deduction in 2010.

In addition to these progressive reforms, the legislature’s plan also raises significant revenue by temporarily suspending various sales tax exemptions for business activities, and by delaying a scheduled increase in the state’s standard deduction and personal exemption.  Rental car taxes, vehicle registration fees, and the vehicle weight tax are also slated to rise under the legislature’s plan.

Perhaps the most disappointing part of the final package is that it does not include the Governor’s proposal to eliminate the pension exemption for middle- and high-income retirees.  This already costly tax break is almost certain to grow rapidly in size as Hawaii’s population advances in age.  Moreover, this break creates inequities between Hawaii residents with different forms of income, offering nothing to low-income, elderly residents that must continue to work in order to make ends meet.

But while the legislature deserves some criticism for failing to rein-in costly retiree tax breaks, it also deserves much praise for including revenues as part of its budget solution, and in particular for using itemized deduction reform as tool for enhancing the fairness and adequacy of Hawaii’s tax system.


Are Amazon.com's Sales Tax Avoidance Days Coming to an End?


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Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.


Debates Heating Up Over Broadening the Income Tax Base to Include Retirement Income


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We've written before that state governments provide a wide array of tax breaks for their elderly residents. Almost every state levying an income tax now allows some form of exemption or credit for its over-65 citizens that is unavailable to non-elderly taxpayers. But many states have enacted poorly-targeted, unnecessarily expensive elderly tax breaks that make state tax systems less sustainable and less fair. These breaks are being reconsidered in Illinois, Michigan, and Hawaii.

One of the most egregious examples of the special treatment retirees receive is the Illinois income tax exemption for all retirement income. But this exemption is getting more and more attention. Senate President John Cullerton recently said, “It would just be a matter of fairness” to tax this income.

The Chicago Tribune joins us in applauding Cullerton for raising this issue. “Illinois needs a talk about revising tax policies and rethinking exemptions," the Tribune editorializes. "Not to grab more from taxpayers, but to broaden the tax base as a matter of fairness. Why should the working family making $50,000 a year pay a tax that the retiree getting $100,000 a year avoids? Credit Cullerton for thinking creatively — and out loud. ”

Eliminating senior tax preferences is also receiving attention in Michigan, where Governor Rick Snyder has proposed scrapping the state’s generous exemptions for pensions, annuities, and various other types of retirement income.  Unfortunately, Snyder has paired this change with an elimination of the state’s EITC — a proposal that has contributed greatly to the overall regressivity of Snyder’s personal income tax changes.  Retaining the EITC and means-testing Michigan’s pension breaks, rather than eliminating them entirely, could greatly reduce the regressivity of Snyder’s plan. 
 
Finally, in Hawaii, a proposal to tax pensions earned by taxpayers with incomes over $100,000 (or $200,000 for married filers) recently passed the House.  Unlike in Michigan, this plan both includes protections for low-income retirees, and uses the revenue it would generate in order to close the state’s budget gap.


Glimmers of Hope on Taxes in the States


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It seems that each week brings another round of regressive tax proposals from the states, but there are a few bright spots. As previously reported, the governors in Connecticut, Hawaii and Minnesota have been strong proponents for taking a balanced approach to their state’s budget gaps and have unabashedly supported raising revenue in mostly reform-minded and progressive ways.  More details emerged this week on the Connecticut and Minnesota governors’ revenue-raising proposals.   Also, Illinois Governor Pat Quinn, who recently backed a successful initiative to increase the state’s flat personal income tax rate, started sending positive messages this week about the need to make his state’s tax system fairer.

On Wednesday, Connecticut Governor Dan Malloy released his plan to deal a budget gap exceeding $3 billion. As promised, his plan would not to rely solely on spending cuts to close the gap. He offered a $1.5 billion package of new revenues including reforms to the personal income tax, sales tax, business taxes, and estate tax.
  
Under his plan, the state’s personal income tax would expand from 3 to 8 brackets, the top marginal rate would increase from 6.5 to 6.7 percent, and the bottom marginal rate of 3 percent would phase out for high-income earners.  The plan also eliminates an existing property tax credit which is most beneficial to middle-income families. 

Perhaps most significantly, Governor Malloy would buck a recent trend by adding a refundable state Earned Income Tax Credit (EITC) set at 30 percent of the federal program.  If enacted, Connecticut would become the 26th state to have an EITC.
 
Governor Malloy also proposed expanding the sales tax base by taxing several services, including pet grooming, boat repairs and hair cuts, eliminating the exemption on clothing under $50, and imposing an additional 3 percent sales tax on “luxury items.  The state sales tax rate would increase from 6 to 6.25 percent. 

Governor Malloy also supports positive changes to business taxation including adopting what is known as the "throwback rule," which mandates that sales into other states or to the federal government that are not taxable will be “thrown back” into the state of origin for tax purposes.  His plan would improve the estate tax by lowering the taxable estate threshold from $3.5 million to $2 million.

Minnesota Governor Mark Dayton ran on a pro-tax platform, promising to increase taxes on his state’s wealthiest households in order to stave off massive spending reductions.  Governor Dayton released a plan this week to raise $4.1 billion in new revenues over the next two years to help solve a $6.2 billion budget shortfall.   Sticking to his campaign pledge, the majority of the new revenue would be raised from the wealthiest 5 percent of taxpayers in the state. The plan would add a new top income tax bracket, charge a 3 percent surtax on filers with taxable income above $500,000, and add a new statewide property tax on homes valued at more than $1 million.

The Minnesota Budget Project had the following to say about Governor Dayton’s proposal: “The Governor’s tax proposal seeks to add balance to the state’s tax system. Over time, the state has cut progressive taxes (like the income tax) during good times and increased regressive taxes (like property taxes) during the bad times. These policy changes, combined with economic trends, have led to a tax system that has shifted more of the responsibility for funding state and local services on to low- and moderate-income Minnesotans. People at the highest income levels pay a smaller share of their income in state and local taxes (8.9 percent) than the average for all Minnesotans (11.2 percent).”

Illinois lawmakers should be applauded for temporarily raising the state’s flat income tax rate from 3 to 5 percent in January to help fill a $15 billion budget gap. However, they missed an opportunity to fix the state’s broken, outdated, and unfair tax system rather than just raise rates.  But the opportunity may still be available.  This week, Governor Pat Quinn asked state lawmakers to consider modernizing the tax system and making it fairer.  He did not offer specific suggestions on how to achieve this goal, but explained that Illinois’ tax system is regressive, requiring more from its poorest residents than from the rich. 

In response to his call for reform, some Democratic lawmakers offered a few suggestions, including moving the state to a graduated income tax, expanding the sales tax base to include services, and relying less on property taxes to pay for schools.


Super Bowl Ad about Taxes from Corporate Astroturf Group


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The last place you would ever expect a discussion of tax policy is in the sea of Super Bowl commercials about beer, cars, and Doritos, yet the organization Americans Against Food Taxes spent over $3 million to change that last Sunday.

The ad, called “Give Me a Break”, features a nice woman shopping in a grocery store,  explaining how she does not want the government interfering with her personal life by attempting to place taxes on soda, juice, or even flavored water. The goal of the ad is to portray objections to soda taxes as if they are grounded in the concerns of ordinary Americans.

But Americans Against Food Taxes is anything but a grassroots organization. Its funding comes from a coalition of corporate interests including Coca-Cola, McDonalds and the U.S. Chamber of Commerce.

It is easy to understand why these groups are concerned about soda taxes, which were once considered a way to help pay for health care reform. The entire purpose of these taxes is to discourage the consumption of their products. As the Center on Budget and Policy Priorities explains in making the case for a soda tax, such a tax could be used to dramatically reduce obesity and health care costs and produce better health outcomes across the nation. Adding to this, the revenue raised could be dedicated to funding health care programs, which could further improve the general welfare.

These taxes may spread, at least at the state level.  In its analysis of the ad, Politifact verifies the ad’s claim that politicians are planning to impose additional taxes on soda and other groceries, writing that “legislators have introduced bills to impose or raise the tax on sodas and/or snack foods in Arizona, Connecticut, Hawaii, Mississippi, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont and West Virginia.”

It's true that taxes on food generally are regressive, and taxes on sugary drinks are no exception according to a recent study. It's a bad idea to rely on this sort of tax purely to raise revenue, but if the goal of the tax is to change behavior for health reasons, then such a tax might be a reasonable tool for social policy. We have often said the same about cigarette taxes, which are a bad way to raise revenue but a reasonable way to discourage an unhealthy behavior.

With so many states considering soda taxes and the corporate interests revving up their own campaign, the “Give Me a Break” ad may just be the opening shot in the big food tax battles to come.


Bright Spots for Tax Policy from States with Good Ideas


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Governors are in the midst of crafting their budget proposals for next year, and many state leaders continue to grapple with historic budget shortfalls due to lagging revenue recovery and a high demand for public services.  In 2009 and 2010, most states balanced their budgets with a mix of temporary and permanent tax increases, significant federal assistance, and spending cuts.  This year, state revenues continue to lag, many of the temporary tax increases are set to expire, and federal stimulus assistance will dry up, yet the need for quality education, safe communities, affordable health care, public transit and well-maintained roads has not diminished.

As the Tax Justice Digest has previously noted, so far this year we have seen mostly a slew of bad proposals from state leaders. Many states are offering tax breaks to corporations and wealthy households and refusing to consider new taxes, while choosing to cut state spending to historically low and damaging levels. A few governors, however, have recently bucked the cuts-only trend and have made it clear that taxes must be a part of the solution.
 
In Connecticut, newly elected Governor Dannel Malloy plans to address the state’s $3.7 billion budget shortfall with an almost equal share of spending cuts ($2 billion) and tax increases ($1.7 billion).   While the details of his tax plan will not be unveiled until February, he is likely to support eliminating a majority of the state’s sales tax exemptions as one part of his revenue raising plan.

Hawaii’s new governor, Neil Abercrombie, has also embraced the need to raise new revenues as part of a budget-fixing compromise.  Governor Abercrombie proposed raising $279 million, including taxes on soda, alcohol, and time-shares. Most significantly, Abercrombie would tax pension income (which is generally exempt from taxation currently) for taxpayers with incomes over $50,000, raising around $114 million a year.  He also supports eliminating the state deduction for state taxes, a smart reform measure that would raise $70 million a year.  

North Carolina lawmakers addressed their budget crisis in the previous two years in part with $1.3 billion in temporary taxes which are set to expire this year.  For months, Governor Bev Perdue opposed extending the taxes for another year despite a shortfall of nearly $4 billion.  She recently changed her tune, and is now considering including an extension of these temporary tax increases (a 1 cent sales tax increase and income tax surcharge on high-income households and corporations) in her budget proposal in order to stave off massive cuts to K-12 education.


Lawmakers in Four States Want to Make Tax Reform Even More Difficult


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Republican lawmakers in four states — Wisconsin, Maine, New York, and Hawaii — are seeking to amend their state constitutions to require a two-thirds supermajority vote in each legislative chamber in order to raise taxes.  Each of these proposals would reduce the ability of these states to provide an adequate level of public services, and would make it significantly more difficult to enact real tax reform that wipes out wasteful tax deductions, exemptions, and credits.

These supermajority requirements would mean that even if state lawmakers representing 65 percent of a state's residents in both chambers, and the governor, all support a revenue increase, it still would not become law.

Besides being blatantly anti-democratic, the supermajority requirement to raise taxes would be particularly damaging during difficult economic times.  State revenues inevitably decline when the economy weakens, and dealing effectively with the resulting revenue shortfall requires a balanced approach relying on both higher taxes and cuts in state services.  A supermajority requirement would make striking this balance far more difficult.

Less obvious is the impact that supermajority requirements have on states’ abilities to reform their tax systems.  As CTJ has explained in the past, state supermajority requirements are one of the most important factors in biasing lawmakers toward pursuing their favorite policy goals via the tax code.  Supermajority requirements make it impossible for a simple majority of legislators to close a tax loophole unless they enlarge another loophole or lower tax rates in order to offset the resulting revenue gain. 

State lawmakers are well aware of the bias that already exists in favor of continuing tax breaks, and have begun crafting their favorite initiatives (e.g. energy subsidies, job-creation incentives, etc.) in the form of tax breaks in order to take advantage of this fact.  The result is the overly complicated, inefficient, and pork-laden tax codes you see in almost every state today.

Maine and Wisconsin are the only two states in the country that flipped from entirely Democratic control to entirely Republican control in last November’s election.  It’s no coincidence that these are also the two states most seriously considering a supermajority requirement.  In both cases, it took almost no time at all for Republicans to realize that a constitutional amendment of this type could allow them to continue implementing their anti-tax agendas long after they’ve been voted out of office.

In New York, a supermajority amendment has already passed the state Senate (along with an extremely ill-advised cap on state spending), though it’s likely to be greeted much less enthusiastically in the Democrat-led Assembly.  The proposal would also have to pass in the next legislature (which convenes two years from now), and be approved by voters before it would become a part of the state’s constitution.

Of the four states where supermajority amendments are being debated, Hawaii’s is by far the least likely to gain traction.  The Hawaii House’s 8 Republican legislators (out of a 51 person chamber) have floated the idea and encouraged the majority Democrats to fold it into their platform.  In a great example of Aloha Spirit, the Republicans have even been nice enough to insist that “Our caucus isn’t saying we need the credit.  What we’re saying is, we need the result.”  Hopefully, Hawaii Democrats — like the lawmakers in the other three states considering these amendments — will politely brush this proposal aside.


ITEP Releases New Report on Capital Gains Tax Breaks in the States


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Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

 

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.


Hawaii Gubernatorial Candidates Agree On Most Fiscal Issues, Except Some of the Most Important


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Former US Representative Neil Abercrombie and Lt. Gov Duke Aiona are both running to be Hawaii’s next governor. Abercrombie recently said, “Government can and should work to spark the private economy, particularly during tough economic times. This has always been the case.” Aiona disagrees and says, “Government does not create jobs. We're not job creators," he said. "It's the private sector, as we know, that creates jobs. It's the small businesses that create jobs.”

Despite these seemingly different takes on the role of government, both candidates have committed to keeping spending at existing levels, not increasing the state sales tax and continuing to allow hotel room tax revenue to stay with the counties. 

Yet, all is not as amicable as it appears in the land of Aloha. Aiona has said that he would support reductions in both corporate and individual income taxes, if offsetting revenue were available, but it's hard to imagine where that revenue would come from without harming low- or middle-income families. So ultimately, there actually is a pretty clear choice between these two candidates on tax and revenue issues.

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

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


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.

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.


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.


State Income Taxes: The Jet Set Stays Put?


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In the wake of the worst fiscal crisis in decades, several states -- most notably, New York and Hawaii -- have recently adopted income tax increases targeted at upper-income individuals and families. As the Center on Budget and Policy Priorities has documented, they may well be joined by several other states in the coming months as more lawmakers realize that this is the most responsible way to address budget shortfalls.

Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota. Yet, as ITEP observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (New York, New Jersey, and Connecticut) saw an upturn in the number of affluent taxpayers over the ten year period from 1997 to 2006. Guess it's hard to find the equivalent of Per Se or Le Bernardin in Sioux Falls!


Progressive Income Tax Hikes Meet Reckless Opposition from Two Governors


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In unusually difficult times like these, one of the most responsible decisions a policymaker can make is to keep all revenue options on the table. Unfortunately for residents of Minnesota and Hawaii, their governors have approached the current crisis with exactly the opposite mentality. Governor Tim Pawlenty of Minnesota and Governor Linda Lingle of Hawaii have clung to the "no new taxes" mantra in recent months, despite the passage of responsible revenue-raising packages by the legislature of each state. Prominent in each of those packages were progressive income tax hikes.

In Hawaii, despite the Governor's veto, as well as her repeated assertions that any tax increase would be economically damaging for the state, the legislature managed to pass the revenue package over the Governor's stubborn opposition. The bill raises income taxes on single Hawaii residents earning over $150,000 per year, and married couples earning over $300,000.

Minnesota thus far has not been so lucky. Less than a week ago, Governor Pawlenty vetoed a tax package (based on the House and Senate bills we described last week) containing progressive income tax increases. So far that veto has held up, as proponents of the bill appear to be just a few votes shy of an override. Deeper cuts in public services or increased borrowing (the preferred solution of the Governor) may be turned to next in order to win wider support for the package.


Hawaii and Vermont: Two Peas in the Progressive Tax Pod?


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It's probably not often that they are mentioned in the same breath, but both Hawaii and Vermont took steps this week towards using progressive tax increases to help close anticipated budget gaps. In the Aloha State, the Legislature approved a measure that, among other changes, would raise income tax rates for married couples with incomes over $300,000 (and for single people with incomes above $150,000). Governor Linda Lingle has already threatened a veto, but the Legislature may have the votes needed for an override.

The road ahead is a little less certain in the Green Mountain State. The House earlier this month passed legislation to raise additional revenue and the Senate is on the verge of doing so, but substantial differences will have to be resolved before any bill reaches the Governor's desk. The centerpiece of the House's approach is a temporary income tax surcharge that would last three years and that would raise rates by one-tenth of a percentage point for lower-income Vermonters and by one-half a percentage point for upper-income residents. Conversely, the Senate seeks to reduce income tax rates and to generate revenue for the state budget by boosting alcohol and tobacco taxes.

Hawaii and Vermont do share at least one thing in common -- a major flaw in their tax codes in the form of preferences for capital gains income. To date, Hawaii legislators have chosen to leave this flaw in place. Vermont's Senators would pare it back, but use the revenue resulting from such an improvement to reduce income tax rates, particularly for upper income taxpayers. Yet, as recent columns in the Honolulu Star Bulletin and Burlington Free Press observe, both states could improve tax fairness and their fiscal outlooks by repealing those preferences and devoting the funds directly towards deficit reduction rather than further tax cuts. For more on state tax preferences for capital gains income, see this report from ITEP.

As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

Read the report.


Tax Breaks for Tax Avoiders


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Anyone compiling a list of similarities between Hawai'i and the Cayman islands can now add "aspiring tax haven" to "sparkling beaches" and "mild climate." Late last month, Hawai'i Governor Linda Lingle signed into law a measure that will cap the premiums tax paid by so-called captive insurance companies in the hope of luring more of those companies to the Aloha State. (A captive insurance company is a subsidiary of a larger company that insures that larger company's property or employee benefits.)

Using tax policy to try to influence business location decisions is questionable enough on its own, but it's especially troubling in this case, since captive insurers can enable major corporations to avoid millions of dollars in federal taxes annually.

As reported earlier this year, Wells Fargo, by establishing a captive insurer in Vermont, will receive "tax breaks totaling at least hundreds of millions of dollars over the next 30 to 40 years"; ADM, Heinz, Alcoa, and Sun Microsystems may already be following suit. So, policymakers in Hawai'i may think that they're bringing more jobs to their shores, but what they're really doing is using scarce tax dollars to make federal taxes scarcer still.


Limited Progress for One of the Most Unfair State Tax Codes


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The Hawaii Legislature, in accordance with that state's Constitution, recently approved a measure to provide temporary but targeted tax rebates. The rebates are expected to range in value from $160 for married couples with adjusted gross incomes of less than $5,000 to $90 for couples with incomes between $50,000 and $60,000; couples with incomes above that range will not be eligible for the credit, while individuals would receive smaller rebates over the same income range.

The rebates are prompted by a constitutional requirement that tax refunds be distributed whenever the state's general fund experiences a budget surplus of 5 percent or more of state revenue in two consecutive years. The wisdom of reducing taxes, even temporarily, in response to such relatively small surpluses is certainly questionable, but the need to improve the fairness of Hawaii's tax system is not. According to the Center on Budget and Policy Priorities, a family of four earning just enough to reach the federal poverty level paid $546 in Hawaiian income taxes in 2006, the second highest amount in the country. Consequently, offering targeted tax rebates - rather than flat amounts as had been past practice - is a welcome change, but is ultimately insufficient. As the Honolulu Star Bulletin observed, a better approach would be to institute a state Earned Income Tax Credit (EITC) as numerous other states have done.


EITC Expansion: A Good Idea in Every State


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In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits ... or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.


Hawaii: Falling Short on Low-Income Tax Reform


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After abandoning earlier efforts to pass targeted income tax cuts for working families, Hawaii policymakers are poised to enact tax measures that largely benefit wealthy taxpayers. For more on how this plan would affect Hawaii's income tax threshold-- and more on the distribution of tax cuts under the new plan, click here. The Honolulu Star-Bulletin tells it like it is here.

Thank you for visiting Tax Justice Blog. CTJ and ITEP staff will soon retire this domain. But ITEP staff are still blogging! You can find the same level of insight and analysis and select Tax Justice Blog archives at our new blog, http://www.justtaxesblog.org/

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