Illinois News


State Rundown 2/15: Tax Overhauls Debated Around the Country


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This week we are following a number of significant proposals being debated or introduced including reinstating the income tax in Alaska and eliminating the tax in West Virginia, establishing a regressive tax-cut trigger in Nebraska, restructuring the Illinois sales tax, moving New Mexico to a flat income tax and broader gross receipts tax, and updating gas taxes in Indiana and Tennessee.

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

  • Introduced last week, Alaska HB 115 would reinstate an income tax for the first time since 1980, setting the income tax rate at 15 percent of federal tax liability. It would also draw from the state’s Permanent Fund and change the structure of the yearly dividends provided to Alaskans.
  • West Virginia Gov. Jim Justice echoed the sentiment of the state’s Senate President, who is leading a select committee to examine taxes, to eliminate the state’s personal income tax. The governor said his goal is to “… be the eighth state in the country to have no income tax.” However, given the state has a revenue shortfall, the governor’s budget proposes to use spending cuts and tax increases to close the gap this year, potentially putting the income tax elimination plan on hold for now. Tax increases in his budget proposal include a sales tax increase and base broadening, a gasoline tax increase, and the creation of a commercial activities tax.
  • Nebraska lawmakers sent $137 million in budget cuts to the governor's desk in an effort to help close the state's $900 million budget gap. Also this week, the state's Revenue Committee will hear testimony on a trigger-based tax cut for wealthy Nebraskans that would worsen the budget gap in future years.
  • The latest tax plan out of the Illinois Senate would reduce the general sales tax rate from 6.25 percent to 5.75 percent while taxing food, drugs, and medical supplies at a higher rate and newly taxing services including repair and maintenance, laundry, landscaping, cable, and satellite.
  • Proposals to increase fuel taxes to better fund infrastructure improvement are dead in Idaho but still under consideration in Indiana and Tennessee. In Tennessee, variations on Gov. Haslam's attempt to combine the needed gas tax update with other tax cuts are proliferating, including one that would divert sales tax revenues from their intended purposes rather than update the gas tax, and a more responsible alternative that would update the gas tax and other fees without slashing other taxes.
  • Kansas revenue committees in both chambers are seeing their share of tax reform proposals. A House bill that increases income taxes, eliminates the LLC exemption, and restores itemized deductions for medical expenses advanced by a wide margin today, and could receive a final vote on Thursday. The latest in the Senate—eliminating the exemption for LLC income and restoring pre-Brownback standard and itemized deductions and a third income tax bracket at 6.45 percent--is expected to go to a vote to the full floor tomorrow.
  • A major tax bill has been introduced in the New Mexico House. House Bill 412 would restructure the state's gross receipts tax and proposes a flat personal income tax.
  • Despite higher energy prices, Wyoming’s economy remains flat while job and revenue growth continue to lag.
  • In Oklahoma, the House Appropriations and Budget Committee passed a bill that would increase the tax on a pack of cigarettes by $1.50/pack. The bill now heads to the full House for consideration.
  • Pennsylvania’s state supreme court refused to hear the Philadelphia soda tax appeal, arguing that the pending litigation is stopping the tax from funding programs it was created to fund.
  • An Arkansas bill to collect taxes from online retailers passed the Senate but stalled in House committee. However, Amazon will start collecting and remitting sales taxes in the state this March. A bill to require tax collections for online sales from large retailers is still under consideration in Idaho.
  • Another poll shows Iowa voters support paying more in sales taxes in exchange for investments in the state's water quality and parks system.
  • Efforts to help fill some of the state's $1.8 billion budget deficit with increased revenue contributions from corporations are underway in Oregon.
  • Nevada lawmakers heard a detailed presentation from an economic consultant explaining issues caused by the state's property tax cap that has held property taxes down but undermined funding for schools and other local services.

Budget Watch 

  • Illinois Gov. Bruce Rauner will be delivering his third budget address today. The state has not had a regular budget since FY 2015 due to an ongoing impasse between the governor and a democratic majority legislature.
  • Wisconsin Gov. Scott Walker's budget proposal includes a proposed $600 million in additional tax cuts—including elimination of the state's property tax levy, reducing income tax rates, and restoring the EITC for families with one child. Senate leadership has suggested the more realistic target for tax cuts this session is $100 million.
  • Connecticut Gov. Dannel Malloy’s budget proposal, released last week, includes a mix of budget cuts, new revenue and shifts of state pension obligations onto municipalities. Elimination of the state’s property tax credit and a cut to the state EITC are among the new revenue sources.

Governors' State of the State Addresses 

  • In the past week, Governors Bevin of Kentucky, Sununu of New Hampshire, and Justice of West Virginia delivered their State of the State addresses.
  • There are no states with addresses scheduled through the end of next week.

What We're Reading...

  • A new paper out of the Wharton Business School looks at the relationship between "sin taxes" and consumer behavior, as well as ways to offset the more regressive impacts of these consumption taxes on low-income taxpayers.
  • A study on government pension funds shows combined costs for most jurisdictions appear manageable. Concern is for those outlier states with highest pension burdens—Illinois, New Jersey, Connecticut, Hawaii, Kentucky, Massachusetts, Rhode Island, and Delaware.
  • The West Virginia Center on Budget & Policy issued a brief showing that shifting from income taxes to sales taxes is a poor strategy for growing the state’s economy.

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 7/6: Most Legislative Sessions Come to a Close: Budget Problems Remain


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This week we bring you tax and budget news in Alaska, California, Illinois, New Jersey, North Carolina, and Pennsylvania. Check out the What We’re Reading section below for a good piece on Kevin Durant and the minor role tax rates played in his decision to take his talents to Golden State. Thanks for reading the State Rundown!

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

  • In advance of bringing the Legislature back for yet another special session next week, Alaska Gov. Bill Walker capped the state's Permanent Fund dividend (a flat payment made to all Alaskans) at $1,000 next year, down from the 2015 payout of $2,072, and vetoed $1.29 billion in state spending. The dividend cap and service cuts will hit low-income Alaskans the hardest. However, an income tax, proposed in the governor's New Sustainable Alaska Plan could provide some balance.
  • Lawmakers in Pennsylvania agreed on a $31.5 billion spending plan in advance of the midnight June 30 deadline. SB 1073 increases funding to public schools and funds efforts to combat the state's opioid crisis. However, there is little agreement over how to find the $1 billion plus in new revenue needed to fund it. Gov. Tom Wolf said he will sign the bill "as soon as there is a sustainable revenue package to pay for it...", but lawmakers only have until Monday, July 11 to reach a compromise before the governor must start using his veto pen.
  • On the last day of the 2016 fiscal year, Illinois lawmakers approved stop-gap measures providing long-overdue funding to higher education and human services for FY '16, six months of FY '17 funding for the above mentioned and state agency operations, and a full year of FY '17 funding for K-12 education. While providing some relief for services that have been operating sans funding for the past year, these measures prolong uncertainty and instability by pushing the state's day of revenue reckoning past the November elections.

  • North Carolina lawmakers closed the state's short session on July 1 without giving final approval to a proposal to enshrine a cap on the state's income tax rate in the constitution via voter referendum.  However, the agreed upon budget for the new fiscal year includes a new, small income tax cut by increasing the standard deduction from $15,500 to $17,500 (married couples) continuing the state's march away from reliance on the progressive tax.   
  • In New Jersey, after rejecting a weird plan to pair a needed gas tax increase with a mish-mash of tax cuts that would have primarily benefited wealthy New Jerseyans, and then rejecting an even more destructive plan that would have slashed the state sales tax and blown a hole in the state general fund even bigger than the one they need to fill in the Transportation Trust Fund, lawmakers ultimately chose no plan at all and went on vacation. The state has been forced to declare a state of emergency and shut down most roads maintenance and construction. The bizarre saga will continue when the next scheduled Senate session begins on July 11.

 What We're Reading...

  •  The Washington Post's Wonkblog has a piece explaining that state tax rates were just one very small part of the calculation in Kevin Durant's decision to sign with the Golden State Warriors over the Miami Heat or Oklahoma Thunder.
  • Emmanuel Saez at the Washington Center for Equitable Growth has a new analysis on disproportionate income growth among the top 1 percent and the bottom 99 based on 2015 SOI data. Read the full analysis here.

End of Illinois Legislative Session: Comedy or Tragedy?


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A month ago we wrote about the hope of positive tax reform developments in Illinois in the midst of continuous budgetary chaos. Unfortunately, no such end is in sight.

Here’s an update:

While the campaign to adopt a graduated income tax made significant progress, lawmakers failed to call the bill to amend the constitution before the deadline due to lost support needed to satisfy the three-fifths supermajority requirement. Certainly not aiding the effort was a flawed impact analysis released last-minute by the Illinois Department of Revenue, which failed to account for the positive effect new tax revenues have on public investments. (Read ITEP’s critique of the study.) The earliest Illinois can reconsider this effort is in another two years.

Further, the legislative session just ended May 31st and no appropriations bills were passed, meaning the state is going into its second year without a budget. Any budget agreement that could be reached now has to meet a supermajority hurdle, making passage all the more difficult.

End-of-session reports read like an ancient Greek comedy, complete with ongoing debate among the primary actors, outlandish costuming, and increasingly fantastical plot elements as this unprecedented standoff drags out. The House, Senate, and governor have each presented their own budget proposals, none of which (to date) has received the necessary support from the others. The back and forth among the principal actors is scheduled to continue into June and may not see an end until after the elections in November. It’s difficult to envision a compromise on the horizon amid all the political costuming.

In the meantime, the state continues to face a growing backlog of unpaid bills, needing to rely on emergency procurements to keep basic operations open. Public universities prepare for further budget cuts, human service providers face difficult decisions, and public schools may not open on time or at all this fall. As the Sun-Times Editorial Board writes, absurdity reigns, leading to outcomes that are increasingly damaging to Illinois residents now and for years to come.

Illinois could move past these comedic storylines and tragic outcomes by reaching agreement on revenue solutions. While adopting a graduated personal income tax is a critical piece of real reform, there are many other options lawmakers can consider right now to end the madness and move toward fiscal stability.  


A Positive Headline for Illinois Soon?


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Headlines about the happenings (or non-happenings) at the Illinois Statehouse this past year have been dismal as the state enters the 11th month of the fiscal year without a budget. While the budget stalemate is unlikely to be resolved any time soon, lawmakers are moving forward with important efforts to improve Illinois’ future fiscal health by advancing measures that would reform the state’s personal income tax.

The majority of states and the federal government tax lower levels of income at lower rates and higher levels of income at higher rates, but due to a state constitutional prohibition, Illinois can only apply a single rate to all taxable income. According to ITEP’s tax inequality index, Illinois has the fifth most unfair tax system in the country, requiring more from low- and middle-income taxpayers than from high-income earners. If Illinois were able to adopt a graduated rate structure instead, it would greatly improve tax fairness, as well as improve the ability of its income tax to keep pace with income growth and the rising costs of critical services like education and roads.

Both the House and Senate are expected to take up several bills next week that could change this for Illinois. One set of bills would put the question to voters in November whether the Illinois Constitution should be amended to allow for a graduated income tax. The second set of bills establish what the rate structure would look like should the constitutional measure pass in the fall. The proposed rate structure (see below) would cut the current marginal tax rate of 3.75 percent to 3.5 percent on income below $200,000 for married filing jointly ($100,000 for single) and introduce two new brackets with higher marginal rates on income over $750,000 ($500,000 if single).

An ITEP analysis of the proposal estimates that 99 percent of Illinoisans who file income tax returns would receive a tax cut, with only a small fraction of the state’s top earners paying a higher income tax rate. The result is a more progressive tax—one that requires less from those with less and more from those with more. Additionally, this rate structure is estimated to generate in the ballpark of $2 billion in additional revenue, which the state desperately needs in the short-term to regain its financial footing and in the long-term to keep up with the rising costs of services.

The Illinois House is expected to vote on the bills this coming Tuesday, May 3rd, with the Senate following course on Wednesday, May 4th. While holding one’s breath for a budget deal is not advisable, here’s to hoping we can heave a collective sigh of relief for a fairer and more sustainable income tax when picking up Illinois papers next week.   

 


State Rundown 4/21: Scraping the Bottom of the Revenue Barrel


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Thanks for reading the State Rundown. Here's a sneak peek: Illinois lawmakers push to change state's income tax structure to a graduated one, could ask voters to change state constitution. Kansas lawmakers have had it with Brownback, and refuse to cut services anymore unless tax increases are on the table. Strong majority of Oklahoma voters favor tax increases over further budget cuts to solve revenue crisis. Mississippi lawmakers pile new tax cuts on top of old ones.

-- Carl Davis, ITEP Research Director 

Facing a never-ending revenue crisis, Illinois lawmakers have finally suggested the logical solution of adopting a progressive income tax. House Speaker Mike Madigan and top Democratic representatives have offered a bill, approved by the House Revenue Committee, that would replace the state's current flat income tax with a graduated system. Under the new plan, the income tax rate for married/joint filers with income of $200,000 and lower would fall from the current 3.75 percent rate to 3.5 percent. Joint income between $200,000 and $750,000 would be taxed at 3.75 percent, while an 8.75 percent rate would apply to joint income between $750,000 and $1.5 million. Joint income over $1.5 million would be taxed at 9.75 percent. Proponents of the bill say it would raise $1.9 billion in revenue, which would help significantly with the state's $10 billion in outstanding unpaid bills. Unfortunately, Gov. Bruce Rauner has already rebuffed the measure.

The graduated income tax measure is coupled with a proposed constitutional amendment resolution that would ask voters to decide if the state should move to a graduated income tax (the current flat income tax rate is mandated by the state constitution). Previous legislative efforts to implement a graduated income tax in 2014, or to create a new millionaire's tax, fell short. Voices for Illinois Children has come out strongly in favor of the progressive income tax, saying "This will allow the tools we need to not rely on low- and middle-income families. We truly believe this is one of the best ways to move our state forward."

Kansas officials have lost patience with Gov. Sam Brownback's ruinous tax cuts, and many lawmakers who helped him pass those cuts now refuse to cut spending any further. Tax collections were short of projections in 11 out of 12 months last year, and even conservative lawmakers argue that Brownback should scale back his tax cuts to balance the budget. Following the advice of supply-side Svengali Art Laffer, Brownback promised that economic growth would make up the revenue shortfall caused by his cuts, but the rapid growth never materialized. To make up the deficit this year, the governor has cut higher education by $17 million and shortchanged educators' pensions by $93 million. Additionally, $750 million has been transferred from road projects to other areas of the budget, setting the state up for ballooning maintenance and infrastructure costs down the line. Facing an election year, many lawmakers say they will cut no further and plan to leave Brownback holding the bag.

A new poll of Oklahoma voters shows a large majority favor income tax increases over budget cuts in the face of the state's ongoing revenue crisis. The poll, commissioned by the Oklahoma Policy Institute, found that 56 percent of voters "favor increasing state revenues by raising taxes and reducing tax breaks," while just 15 percent want to cut money for education, health care and public safety. At the same time, 59 percent of voters want to maintain broad-based tax credits for working families, like the state Earned Income Tax Credit and the state Child Tax Credit. Two-thirds of voters would support increasing the top income tax rate on incomes above $150,000 and 62 percent say that the income tax cut that went into effect in January of this year should be delayed.

Mississippi lawmakers passed a $415 million tax cut deal this week despite facing a revenue shortfall caused by previous tax cuts. The package would phase out the corporate franchise tax, which brings in $260 million in revenue each year, and would cut the state's bottom income tax rate from 3 to 0 percent. The income tax cut will cost $145 million annually, and while many lower-income families will not benefit from the cut, upper-income families will receive tax cuts averaging $220 or more per year. Legislators also lowered taxes on income from self-employment by $10.2 million over three years. The cuts will begin phasing-in in 2017 but most of the revenue impact is delayed until later years, not taking full effect until 2028.

At the same time, Mississippi is dealing with a large drop in revenue following tax cuts of roughly $350 million that Gov. Phil Bryant initiated in his first term. Those cuts included $150 million in sales tax rebates to developers of retail centers, another $100 million in limits on the taxing of multi-state corporations, and an additional $100 million in cuts to the business inventory tax. One recent editorial called out legislators who "have chosen to pass legislation pandering to different constituencies while ignoring serious issues like crumbling roads and infrastructure needs."

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: States Considering Raising Revenue in Both Big and Small Ways


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This is the third installment of our six part series on 2016 state tax trends.

Significant revenue shortfalls and the desire to increase funding for public education and other public investments are spurring lawmakers in more than 16 states to consider revenue raising measures both big and small this year.  The need to raise a significant amount of revenue, due either to dips in oil and gas tax revenue or ongoing budget impasses, will provide an opportunity to overhaul upside-down and inadequate tax systems with reform-minded solutions.

A new report from the Rockefeller Institute (PDF) quantified what we all instinctively already know--states with a heavy dependence on revenue from natural resources suffer when oil and gas tax prices tumble.  Revenues dropped by 3.2 percent between September 2014 and 2015 in Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia and Wyoming while the other 42 states experienced a combined growth in revenues of more than 6 percent. So, it should be no surprise that some of the biggest revenue challenges in the country are found in these energy dependent states, many of which shortsightedly reduced or even eliminated reliance on broad-based taxes during their "boom" years.  Of this group, Alaska and Louisiana are of particular interest as both states will explore transformative changes to their tax systems.

More than seven months into the current fiscal year, Illinois and Pennsylvania are still working without budgets, or much needed new revenue, in place. We will be watching both states closely this year for proposals that will finally help to break the stalemates.  And, many other states including Connecticut, and Vermont have lingering revenue problems leftover from the recession that will require lawmakers to take a hard look at their state tax systems to avoid yet more spending cuts. 

On a brighter note, not all of the anticipated revenue raising in the states this year will happen in response to revenue crises.  There are a number of efforts across the country to raise new revenue for much needed investments in public education, health care and transportation.  Voters in California, Maine, and Oregon will be asked to support higher taxes on the wealthy or corporations at the ballot in November and a similar effort could make it onto the ballot in Massachusetts in 2018.  Lawmakers in New York and Utah have filed bills to increase taxes on their states' wealthiest residents to allow for more revenue for public investments.  Even South Dakota is considering raising revenue--lawmakers from both parties want to increase the state's sales tax in order to pay for teacher salary increases (a regressive choice, but one of the few options available in a state that does not have a personal income tax). 

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

Alaska

Alaska sticks out like a sore thumb compared to all of the other states with natural resource dependent economies experiencing revenue shortfalls.  The state has no personal income tax or sales tax to turn to in times of crisis and more than 90 percent of state investments are funded via taxes on the energy sector.  (Alaska is the only state to ever repeal a personal income tax and has been without one for 35 years.)  Thus, there are few options short of drastic measures to plug a growing budget gap of more than $3.5 billion.

Gov. Bill Walker proposed a plan in December that would, among other things, institute an income tax equal to 6 percent of the amount that Alaskans pay in federal income taxes and cut the annual dividend paid out to every Alaska resident.  Other lawmakers have discussed enacting a state sales tax.  No matter the outcome of the debate in the Last Frontier State this year, one things is for certain -- lawmakers in other states that are interested in cutting or eliminating their personal income taxes must now think twice before holding up Alaska as a model for what they would like to achieve.

California

Back in 2012, California voters soundly approved a ballot measure, Proposition 30, that raised more than $6 billion in temporary revenue via a small hike in the sales tax and higher taxes on the state's wealthiest residents.  The revenue raised from the measure helped get the Golden State back on its feet following the Great Recession and has allowed lawmakers to make much needed investments in education and health care.  Now there is an effort afoot to place a new question on the ballot this coming November to extend the income tax changes (higher brackets and rates on upper-income households) through 2030 with the revenue going largely towards expanding and sustaining investments in public education.

Illinois

More than seven months into the fiscal year, Illinois continues to operate without a budget in place because Gov. Bruce Rauner and state lawmakers are still battling over the best way to address the state's massive $6 billion revenue shortfall.  Revenues are short largely due to a 25% income tax cut that took effect the beginning of 2015, leaving the state on even rockier fiscal ground. Democrats have proposed some tax increases, but the governor says he will not consider revenue raising proposals until lawmakers agree to his so-called "pro-business" reforms. 

Louisiana

Louisiana faces a current year shortfall of $750 million as well as a $1.9 billion hole next year thanks to anemic oil and gas revenues and the nearsighted tax policies (all cuts and no investments) of former Gov. Bobby Jindal.  Lawmakers will get to work post- Mardi Gras celebrations on a plan to address the state's immediate and long-term revenue problems.

The state's new leader, Gov. Jon Bel Edwards has proposed a number of revenue raising options including much needed reforms to the state's personal and corporate income tax.  But, given that most reform options would take time to implement and that the state has an immediate need for cash to plug the current year gap, he is starting with a call for a one cent increase in the state sales tax (an approach the governor has conceded is less than ideal).  Gov. Edwards'  more long-term solutions to Louisiana's structural budget problems come with a focus on the income tax -- specifically calling for the elimination of the federal income tax deduction as a reform-minded idea that would raise much needed revenue and improve tax fairness. 

Maine voters will likely have the opportunity in November to approve a ballot measure that would raise more than $150 million in dedicated revenue for the state's public schools. Under the initiative, taxpayers with $200,000 or more in income would pay a 3 percent surcharge on income above that amount.  The campaign behind the measure, Stand Up for Students, has collected well above the threshold of needed signatures to qualify for the ballot, but the question along with others must still be certified by the state.

Massachusetts

The Raise Up Massachusetts coalition is behind an effort to create a millionaires tax, dubbed the "fair share amendment", in the Bay State.  Due to the lengthy ballot process involved, the question will not go before voters until 2018, but the campaign is already in high gear. They have collected the needed signatures to move forward and last month the initiative won overwhelming approval from the Legislature's Committee on Revenue.  If approved by voters in 2018, taxpayers with incomes over $1 million would pay an additional 4 percent on that income on top of the state's flat 5.1 percent income tax.

New Mexico

Gov. Susana Martinez continues to stand by her no-new-taxes pledge despite a growing revenue problem in her state, but that has not stopped other lawmakers from filing bills to increase taxes. Proposals have been introduced to delay the implementation of corporate income tax cuts enacted in 2013, raise gas taxes, and increase personal income tax rates.

New York

The New York Assembly unveiled  a proposal to raise taxes on millionaires and cut taxes for working families. Under the proposal, individuals earning between $1 million and $5 million would pay a tax rate of 8.82 percent on that income. Income between $5 million and $10 million would be taxed at 9.32 percent, and income over $10 million would be taxed at 9.82 percent. If enacted, the tax plan would raise $1.7 billion in revenue to increase spending on public education, and infrastructure projects . The plan also includes tax cuts for New Yorkers earning between $40,000 to $150,000 and an increase the state's Earned Income Tax Credit, a tax break targeted to low-income working families.

Oklahoma

Gov. Mary Fallin recently unveiled a revenue raising package relying heavily on regressive cigarette and sales tax increases to plug the state's more than $900 million shortfall.  The governor deserves some kudos for recognizing her state's revenue problem needs a revenue-backed solution.  However, it should be noted that the state has cut the personal income tax by more than $1 billion since 2004, including a more than $140 million cut that went into effect at the start of the year despite the state's revenue woes. Other than a proposal to eliminate a truly nonsensical income tax deduction, her plan mostly ignores income tax options.  Raising significant new revenue from sales and cigarette taxes will continue to shift more of the state's tax reliance onto low- and moderate-income Sooner taxpayers, especially if some lawmakers succeed in their wish to eliminate the state's 5 percent Earned Income Tax Credit.  Without this targeted tax break for low-income working families, the kinds of revenue raisers being discussed would certainly exacerbate tax inequality in the state.   

Oregon

An Oregon ballot initiative, sponsored by Our Oregon, would create an additional minimum tax on corporations with Oregon sales of at least $25 million (a 2.5 percent tax would apply to sales in excess of $25 million). If the initiative wins approval, it would raise close to $3 billion annually in new revenue for public education and senior health care programs. Currently, corporations doing business in Oregon pay the greater of a minimum tax based on relative Oregon sales or a corporate income tax rate of 6.6 percent on income up to $1 million and 7.6 percent on income thereafter.

Pennsylvania

Pennsylvania government continues to operate more than 7 months into this fiscal year without a budget (there is an emergency funding budget in place that is more than $5 billion less than the proposed budget).  Yet, Gov. Tom Wolf is expected to propose a budget for next fiscal year on February 9th.  An ongoing disagreement on revenue raising measures and spending priorities between the governor and House and Senate lawmakers explain the hold up and several compromise budget and tax plans last summer and fall failed to gather enough support to break the impasse.  The situation is reaching crisis stage as the state now faces a $2.6 billion structural revenue gap and cannot continue to operate much longer on emergency funding if there are no longer enough revenues coming in to fund core government services.  Gov. Wolf is likely to try yet again to solve the problem with a balanced revenue proposal including income and sales tax increases and a new severance tax. 

South Dakota

South Dakota lawmakers led by Gov. Dennis Daugaard are proposing a 0.5 cent increase in the state's sales tax that will raise more than $100 million annually.  Most of the revenue will be used to increase teachers' salaries, a long sought after policy goal in a state that ranks 51st in teacher pay.  Democrats are proposing a similar measure, but their plan would first remove food from the state's sales tax base and then raise the rate by a full cent.  While both measures fall more heavily on low-income households, the Democrats' proposal is slightly less unfair (although it raises more revenue) since taxes on food hit low-income households especially hard.  South Dakota is one of nine states without a broad-based personal income tax, so their options for a more progressive tax increase are limited.

Utah

Utah Sen. Jim Dabakis has proposed adding two new brackets with higher rates to his state's flat income tax to raise revenue for public education.  Taxpayers with income greater than $250,000 would pay more under his plan.  Dabakis argues that the state's flat tax is a "disaster" and is largely to blame for the underfunding of K-12 schools.

West Virginia

Just a few short months ago, we were watching West Virginia for a large-scale tax reform package that would have likely reduced reliance on the state's personal income tax.  But now that the state faces a revenue shortfall of more than $350 million this year (and more than $460 million next year), attention has turned to options for filling the gap.  As in Louisiana, past tax cuts are as much to blame for the state's revenue woes as the hit to the state's coal industry.

Gov. Earl Ray Tomblin's budget proposal included higher taxes on tobacco and adding cell phone plans to the state's 6 percent sales tax that together would raise around $140 million when fully implemented.

Other States to Watch: While governors in Vermont and Connecticut have said no to raising taxes to address budget gaps, lawmakers in those states are likely to challenge those sentiments and propose reform-minded tax increases that ask the wealthiest residents in their states to pay more. And Iowa lawmakers are considering a series of bills to increase the state's sales tax to pay for everything from school construction to water quality projects and transportation infrastructure. 


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


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

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

 Part 2: Revenue Surpluses May Prompt Tax Cut Proposals

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

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

Part 3: Revenue Shortfalls Create Opportunities for Meaningful Tax Reform

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

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

Part 4: Tax Shifts in All Shapes and Sizes

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

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

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

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

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

Part 6: Overdue Increases in Transportation Funding

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

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


Illinois Needs Budget, but Leaders Lack Urgency


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Leaders in Illinois, which has not had a budget for six months, have thrown up their hands when it comes to making a deal. Despite the resumption of talks between the governor and legislative leaders, a compromise is nowhere in sight. Since July, the state’s bond rating has been downgraded twice and social service agencies are scrambling to provide crucial services without money. The state’s problems go beyond not having a budget in place – revenues are also short more than $5 billion needed to fund government services.  This is because lawmakers allowed a temporary increase in the state’s personal and corporate income tax rates to rollback on schedule at the beginning of the year, even though the state was not back on solid fiscal ground.

Many lawmakers spent Tuesday’s budget summit patting themselves on the back for being in the same room, but divisions remain. Gov. Bruce Rauner wants the legislature to agree to non-budget issues as a part of any compromise, including legislative term limits, changes in redistricting and weaker collective-bargaining laws. His opponents in the legislature say these measures would harm the middle class. Furthermore, there has been no agreement on raising needed revenue to patch the budget gap.  Meanwhile, the state continues to spend money at a rate that eclipses revenue coming in, adding to the deficit. Leaders did agree to a stopgap measure that would allow lottery winners to be paid and help municipalities shovel snow and operate 911 centers.

Of course, this budget drama could have been avoided. Lawmakers have always had revenue raising options available to them, as this report from Illinois Fiscal Policy outlines.  


State Rundown 9/30: Fall Budget Tumbles


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Michiganders will pay sales and use tax on online purchases for the first time when a new law goes into effect this Thursday. The Main Street Fairness Act, signed by Gov. Rick Snyder in January, requires out-of-state companies with a physical presence in the state, such as a warehouse or distribution center, to collect and remit sales and use taxes on online purchases made by Michigan residents. State analysts estimate that the measure will increase revenue by $60 million annually. The Michigan law is the latest in a series of so-called “Amazon laws,” named after the largest online retailer most likely to be affected by such measures. For more on this story, check out this ITEP blog post.

Conservative lawmakers in Arizona could be gearing up for a push to eliminate the state’s income tax, according to trial balloons in Forbes and by the Arizona Free Enterprise Club (AFEC). The recent advocacy comes from none other than Travis Brown and Stephen Moore, the Scooby Doo villains seemingly behind every terrible state tax plan. In Forbes, Brown uses praise for Gov. Doug Ducey’s education plan as an excuse to argue that Arizona should eliminate its income tax because “now is the time to end the price on work…. There’s no need for such an innovative and financially attractive place as Arizona to slap a growth-discouraging premium on doing business in the state.” Moore argues in a paper on behalf of AFEC that eliminating the income tax would make Arizona more competitive and attract jobs, investments and new residents. Left unmentioned were the disaster in Kansas, where lawmakers took such advice to heart, or the numerous studies showing that businesses and residents don’t follow income tax cuts. 

The budget impasse in Illinois continues with no end in sight. This week, Illinois Sec. of State Jesse White warned that the lights at the state capitol could be cut off if lawmakers can’t reach a deal. Moody’s noted that even reinstating the income tax increase that expired in January, a source of continuing conflict between Gov. Bruce Rauner and the legislature, won’t be enough to close the $5 billion gap. Illinois Comptroller Leslie Munger says the state’s backlog of unpaid bills could hit $8.5 billion by the end of December. Meanwhile, Chicago Mayor Rahm Emmanuel has proposed a city property tax increase of $543 million over the next three years to avoid huge spending cuts.

Deadlock is the name of the game in Pennsylvania, too, where Gov. Tom Wolf and the legislature have yet to agree on a new budget. The governor and key lawmakers met on and off on Monday, which marked 90 days since the start of the fiscal year, but there were no breakthroughs. Gov. Wolf has proposed a tax plan  that would increase education funding and eliminate the budget deficit, while legislators want to privatize state-run wine and liquor stores and reduce pension spending. Wolf says he plans to veto a continuing resolution passed by the legislature since the state has waited too long for a permanent solution. Yields on state bonds have increased as investors see Pennsylvania’s financial situation as increasingly risky


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


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

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

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

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

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


State Rundown 9/3: Back to School, Back to the Drawing Board


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The Texas Supreme Court this heard oral arguments in a school finance case regarding recession-era education budget cuts. In 2011, the Texas Legislature cut K-12 education spending by $5.4 billion and per-pupil spending declined by more than 8 percent. More than 600 school districts sued the state, arguing that the cuts make it impossible to meet minimum education standards and that funding is inadequate and unfairly apportioned. Over the past four years, the state has restored about $5 billion in funding, but District Judge John Dietz still sided with the plaintiffs, declaring that the funding system is unconstitutional. The state then appealed the case. Texas, which has no income tax, relies on local property taxes to fund its public schools. In 1993 the legislature passed the “Robin Hood” plan, which mandated some revenue sharing between wealthy and poor school districts.

The latest group to be fed up with the interminable budget impasse in Illinois is credit rating agency Moody’s, which said that the stalemate is a sign of “weak governance.” Moody’s warned Gov. Bruce Rauner and lawmakers that failure to reach an agreement by late September would turn a projected deficit of $5.14 billion into an actual one. Moody’s suggested that raising the income tax would be the most logical solution, as the state “has the economic capacity to absorb higher income tax rates. It is one of only eight states that levy a flat individual income tax. Among those states, Illinois’ current rate is comparatively low: the average among these states is 4.4%, compared with 3.75% in Illinois.” Increasing the personal income tax by 1 percent and the corporate income tax by 1.5 percentage points would generate approximately $2.4 billion in additional revenue.

Michigan group Citizens for Fair Taxes is fighting for a ballot initiative that would increase the state corporate income tax rate from 6 percent to 11 percent, a change they say would bring in $900 million annually for public roads and reverse the tax shift from businesses to working families begun under Gov. Rick Snyder in 2011. About one-third of Michigan businesses are subject to the corporate income tax. If the group collects 253,000 signatures, the proposal would go before the legislature. If the legislature fails to act or votes down the proposal, it will be put to the voters on the November 2016 ballot.

Connecticut Gov. Dannel Malloy is fighting to keep GE headquarters in the state after the company threatened to move. Some state leaders want to repeal the combined reporting requirement just enacted as part of the tax package supporting the two-year budget in June. Malloy is working with officials to create a sweetheart package of tax incentives to keep GE in the state. The move comes after GE used its political clout to force the legislature into special session this June, after the tax package narrowly won legislative approval despite business objections. Numerous studies have shown that taxes are not the primary driver behind business relocation decisions, but GE and other business still use the threat of relocation to wring concessions out of state and local governments.

Speaking of dubious tax claims, Art Laffer urged West Virginia leaders to slash income taxes to stimulate economic growth, weeks after the state’s commerce secretary said taxes were a non-issue in business relocation decisions. The secretary stated that West Virginia’s uneducated workforce was a larger factor in attracting new companies to the state. Unmoved by facts, Laffer told the West Virginia Chamber of Commerce that lower taxes and a reduced social safety net would result in more growth: “If you tax rich people and give money to poor people, you're going to get lots and lots of poor people and no rich people.” Laffer’s remarks were praised by Senate President Bill Cole, who said, “There's no question in my mind that, by itself, it could be the single biggest and largest economic driver that this state has ever seen. I think he's spot on. I think, virtually, everything he's said has proven itself out in history.” Clearly Sen. Cole has never been to Kansas.

A recent op-ed in The Huntsville Times outlines how Alabama legislators could reform the state’s tax system without constitutional amendments. The four proposals outlined would reform the state’s business privilege tax by reducing rates for small businesses and increasing them on large multinational businesses, require combined reporting on corporate income tax forms, increase the cigarette excise tax, and transfer use tax revenues to the General Fund. Author Carol Gundlach of Arise Citizen’s Policy Project says these reforms would avoid harmful cuts to Medicaid, prisons and mental health being considered by legislators.

 

Do you have a hot state tax tip? Send it to sdpjohnson@itep.org for the next State Rundown!

 


State Rundown 7/22: The Dog Days of Summer


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The Illinois budget saga continues as Gov. Bruce Rauner and Illinois House Speaker Michael Madigan remain at odds. After Rauner vetoed the FY15-17 spending plan passed by the legislature, lawmakers were unable to override it – resulting in a one-month stop-gap state budget passed last week. However, the governor insists that he won’t sign these piecemeal measures, and demands that Madigan embrace his reforms. Any new revenues will have to be passed with a veto-proof majority, as Rauner has pledged not to raise taxes.

Impasse continues in Michigan as well, where the House lacks the votes to pass the roads funding bill that barely passed the Senate. The Senate plan would have increased the gas tax by 15 cents, raised diesel taxes and cut non-transportation areas of the state budget by $700 million. Legislators are wary of enacting gas tax increases after a ballot proposal that would have raised revenue for transportation was defeated by the voters in May. The state legislature will adjourn until mid-August, when new proposals could be offered.

The Maine Republican Party has signed on to help fund and promote Gov. Paul LePage’s plan to put a proposal to phase out and eliminate the state’s income tax before voters. GOP Chairman Rick Bennett said the party would help collect the tens of thousands of signatures required to put the measure on the 2016 ballot. The deadline for gathering signatures is in January.

An Arizona personal income tax credit for contributions to public schools is drawing attention from citizens concerned that it exacerbates inequality. According to The Arizona Republic, a small number of schools in wealthy areas receive most of the donations eligible for the dollar-for-dollar credit – on average nearly $400 per student. One school received almost $900,000 in one year. The average per-pupil expenditure statewide is just $45 in state income tax revenue. The donations were restricted to extracurricular spending, but the legislature approved a change this session that will allow the money to be spent on SAT and AP tests – worsening academic inequality between rich and poor districts. Coupled with proposed K-12 budget cuts at the state level, this income tax credit funnels resources from lower-income to upper-income school districts.

Ohio legislators inadvertently raised taxes on businesses despite attempting to enact deep cuts for them in the recently passed budget. Under the terms of the budget, business income above $250,000 was to be taxed at a reduced rate of 3 percent under the personal income tax. Instead, the legislative language omitted the $250,000 cutoff, saying that all business income would be taxed at a rate of 3 percent. And under Ohio’s graduated income tax structure, most business owners paid a rate lower than 3 percent on their business income. Lawmakers trying to give businesses a break through a flat tax and mistakenly taxing them more is the height of irony. State Senate President Keith Faber says the legislature will fix the error in the fall. For more on how this mishap highlights the need for a graduated income tax, check out this piece from Policy Matters Ohio.

New Jersey officials are considering an increase in the state’s tax on wholesale petroleum (currently at 4 cents a gallon) in the wake of a transit fare hike.  Lawmakers failed to pass an increase in the gasoline tax during the session – at 10.5 cents a gallon, New Jersey’s gas tax is among the lowest in the nation. The wholesale petroleum tax and gasoline excise tax support the state’s transportation fund, which is dangerously close to running out of money.  

 

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.

 


Illinois Lawmakers Need to Take Responsibility for Budget Crisis


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rauner.jpgWhen faced with crisis and a need for new revenue, our 16th president passed the first federal income tax in America’s history. But today, in the Land of Lincoln, Illinois state leaders have taken a drastically different approach. Gov. Bruce 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.

Meanwhile, the Illinois Supreme Court ruled last week that a 2013 pension reform law that reduced cost-of-living increases for retirees and raised the retirement age was unconstitutional. The law would have reduced Illinois’ unfunded pension liability by 20 percent; as things stand now, pension payments account for 25 cents of every dollar in the state budget. Rauner wanted to move current state employees into a plan which provides fewer benefits, adopted in 2010 for new hires, but this proposal is likely unconstitutional as well.

Illinois lawmakers were already grappling with how to solve the budget deficit – a deficit made worse by the expiration of a temporary increase in the state’s flat personal income tax rate from 3.75 percent to 5 percent. Now, they will need to find additional funding for the state’s pension system.  Needless to say, it is time for the governor and state lawmakers to solve this revenue crisis with sensible solutions, not stop-gap measures. And time is running out: May 31st, the scheduled end of the legislative session, is just around the corner.

The fact of the matter is that Illinois does not have a spending problem. It has a revenue problem. Thirteen years ago, ITEP released a report detailing tax reform options for Illinois, observing that “the state’s low reliance on a narrow-based, flat-rate income tax, its generous yet inequitable sales tax exemptions, and its disproportionate reliance on regressive local property taxes all reduce the long-term yield of the tax system—indirectly undermining the state’s ability to provide services to its citizens.”

More than a decade later, the Illinois tax system is still balanced on the backs of the poor. ITEP’s 2015 Who Pays? report ranked Illinois fifth among the nation’s most regressive tax systems. The poorest 20 percent of Illinoisans pay nearly three times more in state and local taxes as a portion of their income than the top one percent.

Friday’s court ruling has proven that lawmakers can no longer rely on gimmicks to delay the inevitable. Nor should they rely on self-defeating budget cuts that will lead Illinois away from the path to prosperity. Instead, the state’s leaders should do what a growing number of observers have urged and implement progressive tax reforms. A new report from the Fiscal Policy Center at Illinois Voices for Children outlined a host of options–from raising the income tax rate to closing corporate loopholes– that would put Illinois on sounder footing. “Governor Rauner and lawmakers have choices,” its authors note. “By selecting from a range of revenue options to close next fiscal year’s over $6 billion budget hole, they can avoid devastating cuts to services for children, families, and communities.” 


State Rundown 2/27: Gas, Sugar and Dodgers


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

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

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

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

 

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

 


State Rundown 2/19: The Budget Balancing Act


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Illinois Gov. Bruce Rauner unveiled his budget on Wednesday to mixed reviews.  The proposal does not include any new revenues despite a $7 billion budget gap, and relies heavily on slashing state spending. Democratic legislators, including powerful House Speaker Michael Madigan, pushed back against the governors’ budget. They argue that his proposed cuts, including $1.5 billion in Medicaid spending reductions and hundreds of millions of dollars cut from social services and transit, would hurt low-income working families the most. Rauner has also proposed $600 million worth of cuts in local government aid (while paradoxically pushing for a freeze in local government property tax rates) and $387 million in higher education cuts. ITEP’s recent Who Pays report found that the bottom 20 percent of Illinois taxpayers pay almost three times more of their income in state taxes than the top 1 percent. The governor’s budget will make an unequal situation worse by slashing programs that many of the less fortunate depend on.

Wisconsin Gov. Scott Walker, who likes to tout his bona fides as a “fiscal conservative,” decided to address his state’s $238 million deficit by not paying its bills. Walker made the decision this week to defer over $100 million in debt payments, opting instead to restructure the debt to the tune of an additional $19 million over the biennium. Many observers have pointed out that Walker’s $2 billion in new tax cuts since taking office – most of which went to the wealthy and corporations – are to blame for the state’s current budget woes. Meanwhile, progressive Wisconsinites slammed Walker for continuing to refuse $345 million in federal dollars to expand Medicaid, arguing that accepting the money could reduce the deficit and help reverse $300 million in higher education cuts proposed by the governor. Walker has also supported cuts to the state park system, science positions in state government, and recycling programs, to the consternation of many.

Connecticut Gov. Dannel Malloy outlined an ambitious budget on Wednesday that combines tax cuts, spending increases and new revenue to address a $1.3 billion deficit. Malloy wants to lower the sales tax from 6.35 to 5.95 percent to support low-income and middle-class families, but also repeal a sales tax exemption on clothing set to take place in July. On the business side, the governor would make a 20 percent surcharge on the corporate profits tax permanent, reduce the size of business tax credits for research and development and capital purchases, and eliminate the $250 business entity tax on small businesses. Altogether, Malloy’s changes to business taxes would increase revenue by $300 million. The rest of the deficit would be made up for with deep cuts elsewhere; Medicaid and mental health services would be especially hard hit, and the budget for state parks would be cut by 25 percent. Malloy affirmed his commitment to avoiding cuts in state aid to municipalities.  He also did not propose using rainy day funds to close the state’s budget gap.

Texas Gov. Greg Abbott, not to be outdone by his lieutenant governor, unveiled a budget proposal with $4.2 billion in tax cuts for businesses and property owners. Half of these cuts would come through a reduction in the state’s business franchise tax – $1 billion more than what the Senate budget proposes – and the other half would come from property tax cuts. Abbott pledged that his budget would make whole any school districts impacted by his property tax cuts. Critics feel that the tax cuts are an irresponsible move, given the state’s worsening economic climate.

State of the State Addresses This Week:
Texas Gov. Greg Abbott (watch here)

Governors’ Budgets Released This Week:
Alaska Gov. Bill Walker (amendments offered)
Connecticut Gov. Dannel Malloy (read here)
Illinois Gov. Bruce Rauner (speech here)
New Hampshire Gov. Maggie Hassan (read here)

 


State Rundown 2/10: Semi-Encouraging News


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Rumors abound in Springfield that a gas tax increase could be in the works. Though Illinois Gov. Bruce Rauner has downplayed reports that he supports such a measure, in his state of the state address last week he said the state needs to “restructure” its motor fuel tax to pay for infrastructure investments. Leaked documents from Rauner’s business allies detail possible fixes, including a 13-cent increase in the gas excise tax and increasing the cost of registering, titling, and driver’s licenses.

Arkansas Gov. Asa Hutchinson signed his proposed middle-class tax cut into law on Friday after the measure passed both chambers of the legislature by wide margins. The bill passed with a proposed capital gains tax measure intact. The exemption for capital gains will fall to 40 percent from 50 percent – less than the 30 percent proposed in the Senate version of the bill, but still a significant improvement in making the state’s tax system fairer. The tax cuts exclude the 40 percent of Arkansans earning less than $21,000 per year. If no additional changes are made, the disparity between the tax rate paid by low-income workers and other Arkansans will worsen; Arkansas ranks 11th in the Who Pays Inequality Index.

Oklahoma lawmakers have turned their sights on a glut of tax credits and incentives that cost the state more than $1 billion annually. Facing a $300 million shortfall, some legislators argue that many of the incentives, though well-intentioned, do not perform well or live up to their promises. Leaders in the House and Senate have proposed a four-year review process for tax credits and incentives. Meanwhile, policymakers have taken the Kansas lesson to heart and pushed proposals to slash the state’s income tax to the backburner.

 

Governor’s Budgets Released This Week:
Kentucky Gov. Steve Beshear (Tuesday)
Texas Gov. Greg Abbott (Wednesday)

 


State Rundown 2/5: State of the States


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Maryland Gov. Larry Hogan fleshed out his plans to cut taxes in his state of the state address this Wednesday, vowing to seek reductions for small businesses, some retirees, motorists and the repeal of the so-called “rain tax,” a contentious stormwater management fee. Faced with a significant budget deficit, Hogan was forced to pursue more piecemeal tax cuts than he suggested during the campaign, though the measures face stiff opposition from the Democratic-controlled legislature. Two of the measures particularly rankle environmentalists; Hogan wants to repeal a law indexing the state’s gas tax to inflation, and his attack on the stormwater fee will shortchange efforts to clean up the Chesapeake Bay. Democrats say the governor’s plans will cost $30 million a year in lost revenue, while the governor’s staff says the cost will be closer to $27 million. Additionally, Hogan proposed legislation to make it easier to open charter schools in Maryland, as well as a tax break for people who donate to private and religious schools. ITEP has argued that such tax breaks, also known as “neovouchers,” unfairly divert public money to private education. New York Gov. Andrew Cuomo recently proposed a similar tax credit in his budget.

North Carolina Gov. Pat McCrory used his state of the state speech to tout his “North Carolina plan,” which would expand Medicaid in North Carolina but seek a waiver for some of the Affordable Care Act’s provisions. The governor made sparing references to taxes in his speech, despite the fact that revenues in the Tarheel state have fallen under projection thanks to tax cuts he signed in 2013. Also left unmentioned was the push by some lawmakers to repeal the state’s capital gains tax, a measure that McCrory has partially supported as a way to lure “innovation-related companies” to the state. Some advocates criticized the governor for failing to push for reenactment of the state’s EITC, which expired in 2013.

Wisconsin Gov. Scott Walker further cemented his conservative-warrior persona in his state of the state speech, slashing higher education budgets by $300 million to help solve a $650 million budget deficit over the biennium (which will inevitably mean higher tuition bills). Walker’s budget also includes a property tax cut of $5 per year for the average taxpayer (according the governors’ office) to the tune of $280 million for the state, to be enacted by sending more state aid to local districts but earmarking that aid for tax cuts. K-12 spending, meanwhile, would remain flat. Walker’s budget has earned the governor steep opposition; faculty and students at the University of Wisconsin decried the governor for proposing the deepest higher education cuts in state history while also giving $220 million in state money to the NBA for a new stadium. Some lawmakers point out that many of the cuts would be unnecessary if Walker and his legislative allies had not squandered last year’s $1 billion surplus on property and income tax cuts. Even some conservative lawmakers are worried that Walker’s cuts to higher education will lead to huge tuition spikes, despite the two-year tuition freeze included in the governor’s budget proposal.

Illinois Gov. Bruce Rauner pushed for a property-tax freeze in his state of the state address, arguing that local governments need to cut expenses and waste or consolidate services in order to make it happen. The governor previously called for expanding the sales tax base to include services in order to bring in more revenue and make the state more competitive. Given that the state faces a projected $11 billion shortfall over the next two years, it has left us head scratching as to why the governor avoided talking directly about how to resolve the state’s revenue crisis.

 

Following Up:

  • Maine: As expected, Gov. Paul LePage used his state of the state address to make a case for his tax reform proposal, arguing that the state should adopt a constitution amendment that commits future revenue growth to income tax cuts. LePage appears to be following a broader national strategy for Republican governors to cut income taxes and raise sales and other taxes on a promised “path to prosperity.”  
  • Ohio: Gov. John Kasich’s budget proposal received pushback from school districts concerned that his new funding plan will unfairly redistribute state resources. The governor and his staff claim the plan will send more money to poorer districts, but school officials have criticized the opacity of his funding formula. Look to the Tax Justice Digest next week for full coverage of the plan, including an analysis of who wins and who loses.
  • Texas: Gov. Greg Abbott vowed to veto any budget that does not include tax cuts for businesses, arguing that cutting or eliminating the state’s franchise tax would stimulate job growth.
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    State Rundown 1/8: All Eyes on the Governors


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    Happy New Year and welcome back to the State Rundown, your statehouse insider and source for all things state tax policy related. We’ll provide a preview of the week’s big debates every Monday afternoon, as well as a follow-up post on Thursday afternoons. Eighteen states began their legislative sessions this week, so let’s hit the ground running!

    California Gov. Jerry Brown was sworn in Monday to a history-making fourth term, delivering his annual State of the State speech at the state Capitol in Sacramento. Brown touted his success in leading California through the Great Recession, turning a severe budget deficit into surplus and presiding over impressive economic growth. However, budget fights over the state’s high speed rail project and temporarily enacted sales and income tax increases, set to expire in 2018, loom this session.

    North Dakota Gov. Jack Dalrymple struck a defiant tone in his State of the State address Tuesday, despite the threat to his spending plans posed by the continuing slide in oil prices. The governor announced plans to increase state support for counties by $1 billion and pledged to make further tax cuts a priority this legislative session. Since 2009, North Dakota has cut taxes by $4.3 billion, and some lawmakers are pushing to eliminate the state income tax. A property tax reform measure has a likelier chance of passage, however.

    Lawmakers in the Rhode Island House of Representatives want to pass a major and costly tax cut for Ocean State retirees. Yesterday, a bill was introduced to exempt all state, local and federal retirement income, including Social Security benefits and military pensions, from the state’s personal income tax. An initial ITEP analysis of the bill found that the lion’s share of the benefits would go to well-off elderly taxpayers.  Since some social security income is already exempted from Rhode Island taxes, fixed-income seniors already owe no personal income taxes on those benefits and often have no other retirement income. 

    The bad economic news keeps coming for Kansas Gov. Sam Brownback. A recent report from the Bureau of Labor and Statistics on employment growth in metropolitan areas shows that the governor’s tax cuts have failed to produce jobs – in fact, Kansas City, Missouri added jobs at four times the rate of Kansas City, Kansas, right across the state line. Back in 2012, Gov. Brownback promised Johnson County business leaders that steep tax cuts would draw economic activity from Missouri. In another setback for the governor (and victory for Kansas schoolchildren), a state judicial panel ruled that Kansas inadequately funds public schools. The ruling could mean that state leaders need to pony up another $548 million in school funding when they already face a $1.1 billion deficit. Of course, these are self-inflicted wounds that could be reversed through a prudent fiscal policy.

    Newly-elected Illinois Gov. Bruce Rauner is on a gloom-and-doom tour, hoping to drive home just how terrible his state’s finances are and prepare voters for the worst. The governor will inherit a budget short by $1.4 billion, and some state agencies are expected to run out of money in a month. The state’s budget deficit is expected to almost double to $12.7 billion. Rauner, who ran on a platform of lower taxes and higher school spending, has his work cut out for him. A temporary income tax increase is slated to expire this month, which will mean $5 billion less in revenue for a state that desperately needs it.

    States Starting Session this Week:
    California
    Connecticut
    Indiana
    Kentucky
    Massachusetts
    Minnesota
    Mississippi
    Missouri
    Montana
    Nebraska
    New Hampshire
    New York
    North Dakota
    Ohio
    Pennsylvania
    Rhode Island
    Vermont
    Wisconsin

    State of the State Addresses this Week:
    California Gov. Jerry Brown (watch here)
    North Dakota Gov. Jack Dalrymple (watch here)
    Maine Gov. Paul LePage (watch here)
    Connecticut Gov. Dannel Malloy (watch here)

    Governor’s Budgets released this Week:
    California Gov. Jerry Brown (Friday)
    Maine Gov. Paul LePage (Friday)


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


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

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

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

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

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

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

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

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

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

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

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


    Tax Proposals on the Ballot this Election Season


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

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

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

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

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

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

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


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


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

    The outcome of the Governor’s race in Illinois will have major  and immediate implications on the state’s ability to provide adequate funding for education, health care, transportation and other important services.  The context for this heated race is especially important. The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. To make matters even worse, the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in January leaving the state with a $2 billion budget gap.

    This year Illinois lawmakers adjourned without making the temporary income tax rate hike permanent.  The legislature also failed to enact legislation that would have allowed Illinois voters to weigh in on a ballot question in November that would amend the state’s constitution to allow a graduated income tax.  Yet, the budget passed assumes the higher 5 percent rate is allowed to continue and leads Illinois down the path of deeper program cuts if lawmakers cannot agree  to increase the rate by the end of the year.  It’s largely agreed that the budget Governor Pat Quinn signed into law was the equivalent of “kicking the can down the road” and that election year politics got in the way, with lawmakers not wanting to cast tough votes in favor of maintaining current tax rates ahead of November.   According to the Fiscal Policy Center at Voices for Illinois Children, the budget was also balanced “by borrowing and by underfunding existing obligations, which will further add to the state’s backlog of unpaid bills.”

    Given this backdrop the choice between Governor Quinn and businessman Bruce Rauner couldn’t be more stark. Quinn has said that he supports making the temporary 5 percent income tax rate hike permanent. In his 2014 budget address he stressed the harm that will come if the income tax rate is allowed to expire and new revenue isn’t raised, “mass teacher layoffs, larger class sizes and higher property taxes.” Quinn has gone beyond saying that the income tax rate should be 5 percent-  he’s also been a long-time supporter of a graduated income tax.

    Rauner initially proposed allowing the temporary income tax hike to immediately expire, but he changed his position once the reality set in that as governor he would need to fill the $2 billion hole created in the budget once the rate hike expired. More recently Rauner has said that he will allow the temporary tax increase to expire over four years and will keep property taxes at their current level. Rauner would make up $600 million of lost income tax revenue by broadening the sales tax base to include many business services like advertising, printing and attorney fees. Sales tax base broadening makes good sense in terms of modernizing a state’s tax structure and making it more sustainable over the long term. But Rauner’s plan is regressive and taxing business to business services is problematic. For more on applying the sales tax to services, read this ITEP brief. Stay tuned. This gubernatorial race is one to watch.


    Keeping Score? Real Tax Reform 0. Tax Cuts 2


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    Illinois lawmakers are putting the state’s bond rating and already shaky fiscal house in further disorder by failing to address the state’s temporary 5 percent tax rate, which is set to fall to 3.75 percent in 2015.

    State lawmakers vigorously debated two tax proposal this legislative session to resolve the issue.The first would have allowed a ballot question in November to amend the state constitution and allow a graduated income tax, and the second would have made the 5 percent income tax rate permanent.  Illinois lawmakers adjourned without going down either path but instead agreed to a fiscal year 2015 budget that is widely viewed as “kicking the can down the road.”

    Voices for Illinois Children analyzed the budget and created an infographic that shows why lawmakers' decision will be detrimental to the state: It ignores that the 5 percent income tax is temporary, relies on borrowing from other funds, and under funds state obligations. Many speculate election year politics got in the way, with lawmakers not wanting to cast tough votes in favor of maintaining current tax rates ahead of November.

    Meanwhile, in Ohio ...

    Lawmakers okayed a $400 million tax cut package that we told you about last week. The package includes accelerating already scheduled income tax rate reductions and increasing an existing tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families. The legislation now goes to Gov. Kasich, who is expected to sign the bill into law. For more on this legislation see Policy Matters Ohio report here.


    State News Quick Hits: How to Tax Twix and Much More


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    The Illinois Fiscal Policy Center just unveiled its new Earned Income Tax Credit (EITC) website called EITC Works! The site allows users to plug in an address and learn the number of households in their House district currently receiving the credit, the number of children who benefit, and the economic benefits of the credit. Policymakers should be especially interested in this new resource because it also shows the impact of doubling the credit to 20 percent of the federal. The site is a great tool for anyone interested in understanding the local impact of this successful anti-poverty policy.

    File this under things that make you go, “hmm.” Did you know that in some states plain Hershey bars are subject to the sales tax, but Twix bars are not because Twix contain flour?  Here’s an interesting read on the intricacies of taxing food, specifically take-and-bake pizzas. The piece affirms the importance of the Streamlined Sales Tax Governing Board and its goal “To assist states as they administer a simpler and more uniform sales and use tax system.”

    Why would voters be inclined to vote for local referenda that raise taxes, but seem less supportive of state or national efforts to raise taxes? Read about the central Louisiana experience that may help answer this question here.

    On the heels of the Missouri state legislature’s override of Governor Jay Nixon’s veto of a costly income tax cut package, a proposal that would increase the state sales tax to fund transportation projects is looking increasingly unlikely. Calling the proposed hike “hypocritical” in the face of the newly passed income tax cuts, which will largely benefit higher-income individuals, House Democrats are beginning to withdraw their support. Read about it here.


    States 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


    Plan to Make Illinois Tax System More Progressive Stalls


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    At a time when many states have toyed with the idea of paring back their progressive income taxes, Illinois policymakers this year showed real interest in a progressive change.

    The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. A proposal (The Fair Tax) would have authorized lawmakers to devise a progressive, graduated income tax structure with higher rates applied to higher income levels. (Note: this Fair Tax proposal is very different from the so-called “fair tax” proposals in other states designed to dismantle state tax systems by eliminating income taxes and replacing their revenue with increased sales taxes.)

    Unfortunately, the Senate adjourned Tuesday without voting on this transformative proposal. Lawmakers had appeared poised to take up legislation that, if passed by a supermajority in both the House and Senate, would have allowed voters to amend the state’s constitution to permit a more progressive tax structure.

    This battle led by Sen. Don Harmon was especially timely because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. In fact, Sen. Harmon went one step beyond just urging lawmakers to cast their vote in favor of a graduated income tax and actually developed his own proposal whereby taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxable income over $180,000 would be taxed at 6.9 percent. 94 percent of Illinoisans would not see their taxes go up under his plan, and no Illinoisan with income under $200,000 would see a tax increase.

    In the wake of this setback, progressive policymakers and advocates are now setting their sights on 2016 as the next opportunity to put the Fair Tax proposal before voters. The campaign for the Fair Tax was spearheaded by a A Better Illinois Coalition . The Coalition released a statement saying that despite their obvious disappointment, “the fight for a Fair Tax – which enjoys the support of 77% of Illinois voters – is far from over.  Our statewide grassroots campaign, including more than 250,000 petition signatures and the support of more than 750 small businesses, faith leaders, labor and education groups, and civic and community organizations from every corner of the state brought us closer to implementing a Fair Tax in Illinois than ever before.”

    Despite this setback there is, in fact, plenty Illinois lawmakers can do right now to raise needed revenues in a fair way. Preserving temporary income tax increases, possibly with low-income offsets, can achieve the same goals as the stalled effort at constitutional reform.

    Tax justice advocates should take these words of Abraham Lincoln to heart: “Always bear in mind that your own resolution to succeed, is more important than any other one thing.” The Illinois tax reform debate is hardly over and this week’s activities should only act to encourage and shore up the resolve of advocates in Illinois and elsewhere.


    State News Quick Hits: Tax Breaks for Expensive Artwork and Apple Inc.


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    Have you recently purchased a multimillion dollar piece of artwork (say, a $142 million Francis Bacon)? If the answer is yes, we have a great tax loophole for you. Rather than immediately bringing the piece of art home with you -- in which case you would be expected to pay use or sales tax on the purchase -- first loan it for a few months to a museum in a state that doesn’t have a use or sales tax. Museums in these states aren’t complaining about this “first use” exemption, which is found in many state tax codes, but taxpayers across the country should be. The buyer of the aforementioned Bacon painting will likely save $11 million in Nevada use tax by loaning it for 15 weeks to a museum in Oregon.

    The most recent development in the income tax fight in Illinois comes from Chicago Mayor Rahm Emanuel, who ruled out a city income tax last week. Emanuel faces serious pension gaps in his municipal budget, which is why he is pushing for a $250 million increase in property taxes. But some, including Chicago Tribune columnist Eric Zorn and Center for Tax and Budget Accountability Executive Director Ralph Martire, think the mayor’s position is misguided and that a city income tax is worth considering. Regular Quick Hit readers will find Zorn’s and Martire’s arguments familiar: unlike property taxes, income taxes can be easily targeted at those most able to pay. ITEP’s own Matt Gardner was quoted in Zorn’s column, rebuffing arguments on the other side that a city income tax will drive people out of the city and kill jobs.

    Arizona Governor Jan Brewer signed a pair of business tax cuts into law last week. In addition to a sales tax exemption for electricity used by manufacturers, she also signed a $5 million tax break that many expect will only benefit Apple, Inc. Regular readers may recall that Apple currently has billions of dollars stashed in foreign tax havens.

    Oklahoma lawmakers have gone over a quarter century without approving an increase in their state’s gasoline tax, and have instead opted to fund transportation by redirecting money away from other areas of the budget. But that redirection of funds may have gone too far, as the Oklahoma Policy Institute explains that “Oklahoma’s transportation spending has grown considerably at a time when almost every other area of public services has seen cuts or flat funding.” Now lawmakers, at the urging of 25,000 Oklahomans who recently rallied at the state capitol, are considering legislation that would boost funding for schools by scaling back the amount of general fund money being spent on transportation.


    ITEP Predicts Illinois Tax Reform Debate...and Then Puts Crystal Ball Away


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    Earlier this year our partners at the Institute on Taxation and Economic Policy predicted Illinois would be a state “taking on real tax reform.” Policymakers in Illinois are making our crystal ball look very reliable as a bevy of tax reform measures are being seriously discussed. The pressure is on Illinois lawmakers to do something to enhance revenue because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. The following is a roundup of some of the proposals being discussed.

    Last week, Gov. Pat Quinn delivered his budget address. During the speech he discussed “comprehensive tax reform [that] protects children, working families and seniors while preventing radical cuts to critical services.” The governor’s proposal includes making permanent the temporary income tax hike, doubling the state’s small Earned Income Tax Credit (EITC), providing a new $500 refundable tax credit for homeowners, and new tax cuts for businesses.

    The day before Gov. Quinn’s address, Sen. Don Harmon released his own version of tax reform that would increase the progressivity of the state’s income tax by introducing a graduated rate structure. Taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxpayers with taxable income over $180,000 would see that income taxed at 6.9 percent. No Illinoisan with income under $200,000 would see a tax hike under this plan.

    Since the Illinois constitution mandates a single income tax rate, Senator Harmon’s plan would require a 3/5th majority vote in the House and Senate, as well as a vote of the people. Illinois Voices for Children rightly argues that Senator Harmon’s proposal (or one like it) is necessary to create a more equitable tax structure.

    But Harmon and Quinn’s plans are hardly the only ones under discussion. Late last week, House Speaker Michael Madigan put forward his own constitutional amendment that levies a 3 percent surcharge on Illinois millionaires. The proposal was approved by the House Revenue Committee. Speaker Madigan admits his plan wouldn’t solve the state’s budget woes noting that this is especially true if the current income tax rate is allowed to expire, “We’ll still struggle with a budget for the state of Illinois because there will be a great loss of revenue unless we extend the increase in the income tax.” That same House committee voted down a proposal that would eliminate the state’s current flat rate income tax and replace it with graduated rates and brackets. Let’s hope there is more debate on this important issue.

    We aren’t going to press our luck again and dust off our crystal ball to predict what the outcome of this debate will be. But tax justice advocates everywhere should be heartened to hear that real reform is being discussed in a state where there is a desperate need for it. The Illinois tax structure is one of the ten worst in the nation in terms of fairness, and income tax reform could go a long way to improving this grim situation.


    State News Quick Hits: To Cut or Not to Cut?


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    A battle over New York Governor Andrew Cuomo’s proposed property tax cuts is heating up, with protesters pouring into the New York State Capitol in Albany last week, a new TV ad hitting the airwaves, and the introduction of alternative tax cut plans from the Assembly and Senate. The governor’s plan would “freeze” property tax increases over the next two years by giving a refundable tax credit to homeowners for the amount of any increase in taxes over the prior year (and only to those living in jurisdictions complying with a 2 percent property tax cap and showing an effort to consolidate services with neighboring jurisdictions). In the third year, the freeze would be replaced with an expanded homeowner circuit breaker property tax credit and new renter’s tax credit. State legislators and many local leaders have voiced unease with the proposal. The Assembly’s plan would skip the freeze altogether and simply offer the homeowner and renter circuit breaker credits with less restrictions.

    Illinois House Speaker Michael Madigan has called for a state constitutional amendment (PDF) to charge millionaires a tax surcharge and use the resulting $1 billion in revenue to fund public education. The proposal is likely the first of many attempts by both political parties to define the electoral turf prior to the gubernatorial election in November, which the Chicago Tribune has dubbed the “governor's race of a generation.” Current Governor Pat Quinn is running for re-election against Republican Bruce Rauner, who happens to be a multimillionaire. Even if the constitutional amendment doesn’t make it on the ballot (it would first have to be approved by supermajorities in the House and Senate), voters will face a stark choice on taxes: the state’s temporary income tax rate increase is set to decrease in 2015, and the two candidates will likely have different views on how to make up the lost revenue.

    Most Oklahomans don’t want lawmakers to enact the income tax cut approved by the state Senate last month. A new poll reveals that when voters are told about the Institute on Taxation and Economic Policy’s finding that much of the tax cut will flow to the state’s wealthiest residents, 61 percent of voters oppose the plan compared to just 29 percent in support. Even among voters who aren’t told about this lopsided impact, less than half support the rate cut, and fewer people support the cut than did so last year.

    Colorado spends roughly $2 billion per year on special tax breaks and a new law just signed by Governor John Hickenlooper (backed by the Colorado Fiscal Institute, among others) ensures that basic information about those breaks will continue to be made public going forward. Colorado’s Department of Revenue published the state’s first comprehensive tax expenditure report in 2012, and now the department is required to update that information every two years. Our partners at the Institute on Taxation and Economic Policy (ITEP) explain that “a high-quality tax expenditure report is a bare minimum requirement for even beginning to bring tax expenditures on a more even footing with other areas of state budgets.”


    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.


    State News Quick Hits: Transformers and Tax Breaks for the Rich in Disguise


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    Editorial boards at the Milwaukee Journal Sentinel and the Wisconsin State Journal have both (rightly) responded to Governor Walker’s property and income tax cut proposals by encouraging lawmakers to instead curb the state’s growing structural deficit, or put any surplus revenue toward serious problems like poverty reduction and enhancing K-12 education. Perhaps the editorial boards were persuaded by Institute on Taxation and Economic Policy (ITEP) findings that wealthier folks benefit more from the tax cuts than low-and middle-income families. For more on ITEP’s analysis read this Milwaukee Journal Sentinel piece.

    Idaho’s House Speaker has proposed dramatically scaling back the state’s grocery tax credit in exchange for a regressive $70-80 million cut to the individual and corporate income tax rates. But economist Mike Ferguson of the Idaho Center for Fiscal Policy points out that the Speaker’s plan would amount to a giveaway to the rich, while further squeezing the middle class.  An Idahoan making $50,000 per year, for example, could expect to see about $305 tacked on to their state tax bill under this change. Governor Butch Otter has been saying the right things about taking a break from tax cuts (kind of) and instead making education spending a priority this year. But the Governor recently said he was open to the Speaker’s idea, and the Idaho Statesman provided a partial endorsement. Idaho legislators should tread carefully: raising taxes on the middle class to pass another trickle-down tax cut is bad public policy and even worse politics.

    A Wichita Eagle editorial, “Pressure on sales tax”, shares our concerns about one of the major consequences of the tax cuts and “reforms” enacted in Kansas over the past two years.  With the gradual elimination of the state’s personal income tax and pressure on local governments to raise revenue, it is inevitable that the state’s sales tax rate will continue to rise at the detriment of low- and moderate-income working families who are stuck footing the bill. And, in order to have sufficient revenue to fund services over the long-run, Kansas lawmakers will need to make the politically difficult decision to broaden the sales tax base, something they’ve shown little stomach for so far. The editorial states, “as Kansas strains to deal with declining tax collections and reserves according to Brownback’s plan to become a state without an income tax, the sales tax will be one of the only places to go for more revenue.”

    Indiana lawmakers want to get a better handle on whether their tax incentives for economic development are actually doing any good.  Last week, the House unanimously passed legislation that will require every economic development tax break to be reviewed ov

    er the course of the next five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recommends that all states implement these kinds of ongoing evaluations.

    Illinois Governor Pat Quinn is pushing back against a string of bad publicity regarding film tax credits. Quinn says that an entertainment boom is occurring in Illinois in part because of the Illinois Film Services Tax Credit, an uncapped, transferable credit that was extended in 2011. What Governor Quinn fails to mention, however, is how much taxpayers lost in the process. The credit costs roughly $20 million a year, requiring higher taxes or fewer public services than would otherwise be the case. Research from other states indicates that only a small fraction of that amount would be recouped via higher tax receipts. Moreover, film subsidies often waste money on productions that would have located in the state anyway and are unlikely to do much good in the long-term since the industry is so geographically mobile. Indeed, one of the producers of Transformers 3 admitted that he would have filmed in Chicago even without the credit, which cost taxpayers $6 million. Instead, the decision was based on “the skyline, the architecture and the skilled crews here, among other factors.”


    What to Watch for in 2014 State Tax Policy


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

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

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

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

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

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

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

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

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

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

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

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


    State News Quick Hits in Wisconsin, Illinois, Kentucky and Oklahoma


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    The LaCrosse Tribune gets it right in this editorial titled, “Don’t Conduct Tax Talks in Private.” As we told you last week , Wisconsin  Governor Scott Walker asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Unfortunately, the first invitation-only discussion happened behind closed doors. We couldn’t agree more with the Tribune that, “true tax reform deserves feedback and input from all Wisconsin citizens because while we may not all contribute to political candidates or align ourselves with political parties, we all pay taxes.” Now we hear that the Governor is interested in  income tax repeal. Let’s hope this debate doesn’t happen behind closed doors.

     

    Illinois Governor Pat Quinn has come out in favor of reviewing tax breaks given to businesses over the last several years in order to see if they really had a positive impact on the state’s economy.  We’ve been critical of the Governor for offering such tax incentives to specific companies.  Reviewing those giveaways for effectiveness is long overdue.

     

    In more good news for those of us concerned with the “race to the bottom” in which states are doling out massive tax incentives to businesses with little oversight, Archer Daniels Midland is set to announce that they will move their headquarters to Chicago without receiving any state or city incentives in return.


    Kentucky Governor Steve Beshear is (again) committing himself to tax reform. He recently said in 

    an interview, “Tax reform remains a top priority of mine, and I am hopeful that we can address it in some way in the upcoming session.”

    The Oklahoma Supreme Court recently struck down a regressive and unpopular cut to the state’s top income tax rate that Governor Mary Fallin signed into law earlier this year.  According to the court, the bill containing the tax cut violated a provision in the Oklahoma constitution requiring each bill to be focused on a “single subject.”  In addition to cutting the state’s income tax, the bill would have also provided funding to repair the state’s Capitol building. 

    Washington Governor Jay Inslee testified before legislators on the first day of a special session in favor of allowing tax breaks for Boeing that are estimated to cost the state $9 billion. Washington State Budget and Policy Center’s Remy Trupin issued this statement reminding lawmakers “It does not do our state’s economy any good to subsidize Boeing as they ship jobs out of state. We must ensure that significant state investments in Boeing benefit all Washingtonians.” Update: Governor Jay Inslee signed into law  tax breaks for Boeing.
     

    There is a promising movement afoot in Minnesota to better fund the state’s transportation needs. The Minnesota Transportation Alliance, in next year’s legislative session, is going to propose either increasing the gas tax or, better yet, reforming it so that it grows alongside gas prices.
     

    Here’s some temporary good news: The Illinois Senate adjourned without approving the litany of corporate tax breaks we told you about in an earlier post. So for now at least $88 million will stay in the state’s coffers. But the sponsor of the tax break bill, Sen. Thomas Cullerton says he expects to bring up the bill again next month. The Chicago Tribune is reporting, “even though [Cullerton] is positive he has enough votes to send the ... bill to the House, he would like to secure more.”
     

    Amazon.com, the world’s largest online retailer, managed to score a $7 million subsidy from Wisconsin taxpayers in exchange for building a distribution center in their state.  But as our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains, these kinds of tax incentives are a zero-sum game that rarely pay off with any real economic benefits.

     


    More Illinois Companies Trying to Extort Tax Breaks


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    We’ve followed the tactics of corporations in Illinois, from Motorola to CME Group, who again and again ask lawmakers for pricey handouts they claim they need to keep doing business in the state. House Majority Leader Barbara Flynn Currie has called this egregious behavior “blackmail.” She recently said, "[i]t essentially is saying, if you don’t jump to, if you don’t go do this for us we might think about going somewhere else."  

    Now the list of companies asking for handouts is growing, including: Archer Daniels Midland Company, OfficeMax, Zurich North America Insurance, Univar, and High Voltage Software. Giving individual companies special treatment is a violation of the neutrality principle and means that similarly situated companies are treated differently based on who can get the Legislature to bend to their will. Granting these singular incentives creates an environment wherein states end up competing in a “race to the bottom” and, ultimately, ordinary taxpayers pay the price through higher taxes or fewer services.

    Illinois is facing an enormous budget crisis, due in part to the tax breaks for big multistate corporations that lawmakers have enacted over the years. Now is not the time for pandering to corporations at the expense of investing in the state’s future.

     

     


    Illinois Ruling Strengthens Case for a Federal Solution to Online Tax Collection


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    Last week, the Illinois Supreme Court struck down a state law (commonly called the “Amazon law”) that would have helped solve some of the sales tax enforcement problems surrounding online shopping.  As things currently stand in Illinois (and most other states), traditional retailers with stores, warehouses, or actual employees in Illinois are required to collect  state sales taxes from their customers, while online retailers who don’t employ any Illinois residents (or have any other “physical presence”) are given a free pass.  Online shoppers are supposed to pay the sales tax directly to the state when e-retailers fail to collect it, but few shoppers actually do this in practice.

    Illinois, along with nine other states, had tried to strengthen its sales tax enforcement by requiring more online retailers to collect the tax (specifically, those retailers partnering with Illinois-based “affiliates” to market their products).  But this court ruling strikes down Illinois’ law on the grounds that it treats companies partnering with online affiliates differently than companies who advertise in Illinois through traditional media.  According to a majority of the justices, this feature of Illinois’ “Amazon law” violates a federal law enacted in 2000 that bars “discriminatory taxes on electronic commerce.”

    In his dissent, Justice Lloyd Karmeier points out that Illinois’ “Amazon law” didn’t actually impose any new taxes—it simply required a larger number of retailers to be involved in collecting and remitting sales taxes that are already due.  Karmeier went on to say that he would have upheld the law – in much the same way that New York’s highest court did with a similar law in that state earlier this year.

    With Illinois’ and New York’s courts disagreeing on this issue, legal observers seem to think there’s a growing chance that the U.S. Supreme Court will consider the case next year.  But it’s a shame it’s come to this.  The Supreme Court already made clear over two decades ago that Congress has the authority to set up a more rational, nationwide policy for how states can tax purchase made over the Internet.  The U.S. Senate did exactly that this May with a bipartisan vote in favor of the Marketplace Fairness Act, but so far the U.S. House of Representatives has yet to act on it.  We presume it’s the political disagreements among activists and lobby groups that’s prevented the House from acting so far, but it’s increasingly urgent that states finally be allowed to resolve the mess that is tax collection for online shopping.

    Cartoon by Monte Wolverton, available at and courtesy Cagle Cartoons.


    State News Quick Hits: Brownback Under Fire, and More


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    Governor Sam Brownback’s tax policies are being challenged by a state legislator who’s running to unseat him, Paul Davis. "Gov. Brownback's `real live experiment' is not working," Davis said, using Brownback’s own description of the extreme tax changes he signed into law. Davis was referring to rising unemployment rates and a new Kansas Department of Revenue report showing revenues are falling below projections. Kansas lawmakers have slashed taxes over the past two legislative sessions and, despite what supply-siders would have you believe, tax cuts really don’t pay for themselves.

    The Institute for Illinois’s Fiscal Stability at the Civic Federation in Chicago issued a report describing the lack of movement on fiscal issues as a “lost opportunity” for the state (we agree). Laurence Msall, president of the Civic Federation said, “This year was a lost opportunity as legislators failed to prepare for the extreme financial challenges everyone knows are on the immediate horizon. We see some progress this year on the backlog of unpaid bills, but nothing to address the unresolved pension crisis or to plan for the revenue loss coming next year.”  Next year, the state’s income tax rate is scheduled to be reduced and with that even larger shortfalls in the state’s budget are expected.

    Following up a story from last week about Archer Daniels Midland Company (ADM) asking for $20 million in tax breaks from Illinois, Illinois Governor Pat Quinn is now saying that he won’t approve any ADM tax breaks until the state’s pension system has been reformed.

    For evidence of why special “tax incentives” don’t work in boosting state economies, look no further than this Washington Post story on the tax breaks that the District of Columbia tried to give LivingSocial last year.  Shortly after being offered $32.5 million to expand its DC presence, the tech company did exactly the opposite, cutting its DC payroll from nearly 1,000 employees to just over 600.  Today, just 244 DC residents work for the company.  Had LivingSocial seen a rising demand for its product, it would no doubt have expanded its payroll and happily collected a $32.5 windfall courtesy of DC taxpayers. But promises of a special tax break aren’t enough on their own to convince a smart business owner to expand.

     


    State News Quick Hits: Andrew Cuomo Loves Tax Cuts, So Does ADM, and More


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    States are just beginning to come to terms with the impact that the shutdown of the federal government will have on state residents. This informative blog post from the Wisconsin Budget Project tells us what programs folks should and shouldn’t be worried about on the state level and links to several resources from The Center on Law and Social Policy (CLASP) that readers might find helpful.

    Another day...another company asking for enormous state corporate tax breaks. This time Archer Daniels Midland Company (ADM) is asking Illinois lawmakers for $20 million in tax breaks to keep their headquarters in Decatur. During a House Revenue and Finance Committee hearing, Rep. Barbara Flynn Currie characterized testimony of an ADM executive as “essentially blackmailing the state ... saying if you don’t go through this hoop for us, we may think about going somewhere else.”  (H/T POLITICO's Morning Tax.)

    The Tax Foundation and the National Taxpayers Union are urging the U.S. Supreme Court to hear a case that could allow Overstock.com -- and other online vendors like Amazon.com -- to shirk  their responsibility for collecting state and local sales taxes. While a previous Supreme Court precedent bars states from requiring sales tax collection by vendors who have no “physical presence” in the state (a ban which Congress is considering lifting via the Marketplace Fairness Act, which passed the Senate by a rare bipartisan vote in May), some states have chipped away at e-tax-evasion by interpreting “physical presence” more broadly than others. In New York, for example, Overstock.com has agreements with in-state affiliates to pay for customer referrals, thus requiring the company to collect sales taxes from its New York customers under a 2008 state law that has been upheld by the New York Court of Appeals. While a national solution that levels the playing field between all online vendors and the brick-and-mortar stores who have always collected sales tax is preferable, states should be free in the meantime to require sales tax collection from online retailers who have legitimate ties to their local economies. Hopefully the Supreme Court agrees.

    Having already made some backwards moves on the tax policy front, New York Governor Cuomo now appears to be abandoning his commitment to study and improve the state’s tax structure. In December, he announced the New York State Tax Reform and Fairness Commission. The Commission was “charged with addressing long term changes to the state tax system and helping create economic growth.” But instead of going forward with this thorough examination, the Governor has just appointed former Governor George Pataki and Controller Carl McCall to head a task force whose sole objective is to find a way to cut between $2 and $3 billion in taxes next year, in just one year! Maybe the junior Cuomo really does plan on running for President -- of Texas.

     

    The Commonwealth Institute of Virginia explains the folly of cutting state corporate income taxes – a move endorsed by Virginia gubernatorial candidate Ken Cuccinelli, among others. The Institute points out that corporations are already paying a smaller share of state income taxes than in years past, and have left individual taxpayers to pick up the rest of the tab. Moreover, Virginia analysts say (PDF) that about three-quarters of any corporate income tax cut would actually flow outside of Virginia’s borders, since most of the cut would go to large, multi-state corporations.

    The Washington Post reports on the state of America’s bridges, and provides some consumer-focused context for why raising taxes to fund infrastructure repair is so important.  “In many cases ... a bridge has weakened to the point where it can no longer handle the heavy loads it once did. When lower weight restrictions are imposed, the big trucks that deliver goods of all sorts have to detour, making their routes longer, and that cost generally trickles down to the price consumers pay for almost everything.”

    Illinois lawmakers have been focused on pension reform lately, but this Crain’s Chicago Business piece highlights the need for real tax reform in the state. Notably two aspects of the state’s income tax are flagged for reform (the same ones we’ve been talking about for years) – the state’s exemption for all retirement income and a universal property tax credit that’s not based on need.

    Last week, Arizona Governor Jan Brewer signed into law SB 1179, a bill containing a wide assortment of tax breaks. The bill’s initial goal was to create a small tax break for one specific industry, but it ended up being a vehicle for tax breaks that lawmakers couldn’t pass individually. The final bill provided certain exemptions for an energy drink company, a sales tax break for companies that rent ignition devices to people with DUI convictions, and an extended property tax break for biofuel manufacturers. The Associated Press reports it this way: “As lawmakers rushed to adjournment last week, those with bills that had languished looked for places for them to land. House members with tax breaks in mind found SB1179, adding four amendments in the late-night hours of June 13.”


    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. 

    Here’s a follow up to our previous post describing the effort to get a much needed severance tax increase on the ballot in Arkansas.  The former natural gas executive, Sheffield Nelson, who was behind the effort has said that he won’t have enough signatures to qualify this proposal for the November ballot.

    Last month, a Louisiana Revenue Study Commission began looking into the state’s tax exemptions to see if these government handouts are effective. Now that Governor Bobby Jindal has been passed over as the Republican Vice Presidential nominee, it appears he’s going full speed ahead with revenue neutral tax “reform” efforts.  As part of the efforts to reform the tax structure and examine tax expenditures the Governor, other policymakers and taxpayers should review these new materials from the Louisiana Budget Project.

    This week, Illinois Governor Pat Quinn signed into law legislation that imposes a new tax on strip clubs. Revenue generated from this new tax will fund programs for victims of sexual assault. By choosing to enact an entirely new tax that seems destined to raise little revenue, rather than enacting needed reforms in the taxes the state already levies, Illinois lawmakers have missed a chance to make the tax system fairer. The worthy goal of funding anti-abuse efforts would be better served by eliminating income, sales and corporate tax loopholes.

    Iowa’s gas tax is at an all-time low and shrinking- and transportation infrastructure is suffering because of it.  Earlier in the year, we thought Governor Terry Branstad would champion an increase in the tax to address the state’s transportation funding needs.  Now we have learned the governor will only support a “modest” change in the gas tax if lawmakers first reduce property, personal income and corporate income taxes.  Which begs the question- how will Iowa pay for much needed road and bridge repairs if the state is left with even less revenue than it had before this so-called “reform” plan?

    Photo of Bobby Jindal via Gage Skidmore Creative Commons Attribution License 2.0


    Motorola: Job Creator or Shakedown Artist?


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    Bowing to political pressure and threats that the company would move its operations to another state, Illinois Governor Pat Quinn last year promised Motorola Mobility $100 million over ten years if it agreed to keep 2,500 jobs in the state.  (In case you’re wondering, that’s a taxpayer funded subsidy of $40,000 for each of those 2,500 employees.) Yet, as so often happens when states are in panic mode and governors believe their own rhetoric about how businesses are altruistic “job creators,” Motorola Mobility’s parent company, Google Inc., recently (and quietly) announced they will be cutting more than 700 Illinois jobs anyway.

    Can it be that in the end, taxes aren’t all that important in the decisions a business makes? This news report makes that very point, citing a university economist: not even $100 million could convince the company to keep an extra 244 employees on the payroll and that’s “a good indicator that even big incentives don't dictate how a company behaves.”

    Although Illinois taxpayers have already forked over $18.6 million in tax credits to Motorola, they aren’t obligated to cover the rest of the $100 million handout.  That’s because despite the insanity of offering these tax breaks to begin with, the state did build into the deal that the company had to keep those 2,500 Illinois-based employees in order to qualify for the handout.  That, at least, is something.

    It’s well documented (in this national report and in more and more individual states) that there are no discernable public benefits to giving businesses tax incentives. That is why more states are getting serious about really measuring if these giveaways do anybody (other than politicians and their corporate friends) any good.

    Illinois may be inching towards more tax break transparency but just this year, the legislature also killed a bill that would have created an expert committee to review tax break deals and determine if they’d contribute to the state’s economy.  The sad truth remains, however, that shortly after Motorola’s incentives were awarded last year, Sears, the CME Group and CBOE Holdings (both financial companies) also threatened to relocate and were, like Motorola, rewarded by a jittery legislature with million dollar incentives.  And then Sears turned around and fired 200 people anyway.

    For more on the racket of tax incentives for businesses, check out Good Jobs First and this (PDF) policy brief from the Institute on Taxation and Economic Policy (ITEP).

    Cartoon by Scott Santis, via Chicago Tribune.

    Good news: Wisconsin appears to be  gearing up for serious income tax reform. Bad news: the legislator heading up the effort is a flat tax proponent.

    Illinois Governor Quinn began the legislative session in February proposing a variety of loopholes be closed, but the budget he signed on June 30 didn’t close those loopholes.

    Think state budgets don’t have an impact on what services localities can provide? Read this article about eight South Carolina school districts facing cuts.

    Millionaires don’t flee taxes. With help from ITEP, the millionaire migration myth takes a hit in this Baltimore Sun letter to the editor.

    Illinois’ pension system is in crisis.  This insightful column by the Center for Tax and Budget Accountability’s Ralph Martire argues that the state’s tax policy is at least partially to blame:  “For decades, Illinois’ antiquated, poorly designed tax policy created an ongoing structural deficit.”


    Blow to Low-Income Seniors: Anti-Poverty Tax Credit Eliminated in Illinois


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    grandmas house.jpgAfter 40 years, the most important mechanism for helping low-income Illinois seniors and the disabled pay their property tax bills is no more. As of July 1, the Illinois Property Tax Circuit Breaker  will no longer be offered despite its relatively inexpensive $24 million price tag.  Funding for the credit wasn’t included in the state’s budget.

    Policymakers of all stripes understand the importance of ensuring that fixed-income families should never lose their home because they can’t afford property taxes—and that’s exactly what “circuit breaker” tax credits are designed to do. By refunding property taxes that represent an “excessive” share of family income, the circuit breaker targets relief precisely to those seniors for whom property taxes are least affordable. Property tax circuit breakers are one of four key (PDF) anti-poverty tax policies. Without this important credit, low-income Illinois seniors will face the brunt of regressive property taxes that force low-income families to pay more of a share of their income than better off families.

    The elimination of this vital credit will have a real and lasting impact on low-income seniors and the disabled, especially those who rent. Renters pay property taxes indirectly, since landlords pass on part of their property tax bills to their tenants in the form of higher rents. But the now-repealed circuit breaker was the only mechanism in Illinois’ tax system that recognized this reality.  Beneficiaries of the credit received between $90 and $350 a year, which could mean the difference between foreclosure or eviction and a senior keeping their home.

    At a time when Illinoisans are just beginning to get back on their feet after a brutal recession, eliminating programs designed to keep low-income seniors in their homes is cruel and counterproductive.

    Adding insult to injury, Illinois will, however, persist in offering a far more expensive property tax credit for homeowners (not renters) of all income levels. The five percent credit for property taxes paid is claimed on state income tax forms, and it functions as a refund through which property taxes already paid are rebated to income taxpayers.  This is an inefficient method for offering property tax relief, though, since the credit depends on income tax liability, so it does little to assist low income families who (obviously) have less income tax liability.

    This inefficient credit costs over $500 million a year; $500 million could fund the property tax circuit breaker for the next 20 years.


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


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

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

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

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

     

    • Michigan lawmakers recently slashed income taxes for businesses by about $1.6 billion, and paid for it mostly with income tax hikes on the elderly and poor.  Now lawmakers are debating a gimmicky income tax cut that would take effect about a month before voters head to the polls in November but do little to offset recent tax increases on the state’s working poor.
    • Late last week, the Illinois House voted to raise the state’s cigarette tax. This is big news not only because the tax increase will help to fill a nearly $3 billion budget hole in the state’s Medicaid program, but because anti-tax zealot Grover Norquist was resoundingly defeated despite threats from his Illinois staffers that voting for the cigarette tax could “ruin the GOP brand in the state for a generation.”
    • Question: Could the popularity of the no-new taxes pledge championed by Grover Norquist be waning? Answer: Yes. Read this.
    • To understand how the regressive, multi-billion dollar tax cut bill signed into law last week in Kansas is being received, check out this news round up from the Wichita Eagle.  A lot of people are “horrified.”

    Good News in Illinois: Hidden Business Tax Breaks May Soon See the Light


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    It’s no longer news to most Americans that big, profitable corporations from Apple to General Electric are finding creative ways to zero out their income taxes.  Two widely cited recent reports on federal and state taxes from CTJ and ITEP identified dozens of companies that have achieved this dubious goal.

    But the big news out of Illinois this week is that at least in the Land of Lincoln, lawmakers are taking positive steps towards doing something about rampant corporate tax avoidance. A bill introduced Wednesday by Senate President John Cullerton would require publicly traded companies to make available some basic information about the amount of state income taxes they pay, and specify which tax breaks reduced their taxes. The bill would also require companies to disclose their profits generated in Illinois, making it easy for lawmakers and the public to know whether these companies are really paying tax at the legal rate.

    While the bill was approved by a Senate committee and sent to the Senate floor on Wednesday, its prospects for passage this year remain murky. And identifying the beneficiaries of unwarranted tax breaks is obviously only a first step towards repealing those tax breaks. But this legislation, along with a similar bill championed by the California Tax Reform Association in the Golden State, likely represents the beginning of a shift toward more transparency in corporate taxation—and that can only lead to improvements in the fairness of our overall corporate tax system.

    Right now virtually every state (there are a few signs of hope) fails to disclose even the most basic information about corporate tax breaks. The Center on Budget and Policy Priorities’ Michael Mazerov has the dirt on how your state can move in the right direction, as does the encyclopedic Good Jobs First.

    Photo from Senator Cullerton's legislative website.

    Calling it “a far-out idea that would force Missourians to pay much more for groceries, homes and everything in between, while sparing wealthy citizens the need to pay income taxes,” the Kansas City Star editorial board bids good riddance to an income tax repeal proposal in Missouri.

    Apparently not content with the massive business tax cut enacted last year, Michigan lawmakers are continuing to push to repeal the property tax on business equipment – a vital revenue source for local governments who can expect a net, permanent 19 percent revenue loss.

    Instead of an immediate income tax cut that will cost significant revenue (that the state can’t afford),  Oklahoma lawmakers are contemplating a “trigger” plan tying cuts to year-over-year revenue growth that would eventually eliminate the tax altogether.  The Oklahoma Policy Institute explains that triggers are sold as a “responsible” way to cut taxes, "but it’s the opposite. It’s an attempt to avoid responsibility by putting the tax system on auto-pilot.“

    An important study from the Pew Center on the States showing the lack of accountability in tax giveaways to business keeps getting good press. Here’s a piece from Illinois describing how, despite some very public giveaways to companies like Sears and the CME Group, the state lags in holding companies accountable for the tax breaks they receive.

    This great article explains who actually pays Minnesota taxes. It cites data from Minnesota’s own tax incidence analysis report – a report that only a handful of states have the technology to develop, but is vital to understanding how taxes impact people of different income levels.

     


    Illinois Pension System in Trouble, Lawmakers Must Act


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    This week, Illinois Governor Pat Quinn and Chicago Mayor Rahm Emanuel came together for a Chicago Tribune Forum, one in a series on the region’s future sponsored by the newspaper. Questions from readers and journalists focused on the state’s ailing pension system and other economic matters.

    One thing Mayor Emanuel emphasized is that Chicagoans are paying more than their fair share into the state’s teacher pension funds. This is part of the problem that lawmakers have refused to face head on for years -- balancing the state’s budget while meeting its pension obligations. 

    The Director of the Illinois Retirement System recently revealed that the system could be insolvent by 2029. One reason the system is on shaky ground is that the state doesn’t have the right tools in place to adequately fund its obligations – like a progressive income tax or a broad income tax base.  

    Illinois is unusual in two ways. It has a flat rate income tax so the state’s most affluent pay a relatively low tax rate, and it does not tax retirement income. Both of these are significant revenue sources for any state.  Lawmakers interested in solving the state’s pension problems and budget shortfall would have to start a real conversation about tax reform that includes taking a hard look at taxing retirement benefits, especially for well-off retirees.

    Photo of Rahm Emanuel and Patt Quinn via  Afagen and Center for Neighborhood Technology Creative Commons Attribution License 2.0

     


    Quick Hits in State News: Cold Feet on Gas Tax Hikes, and More.


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    • Rising gas prices are making some politicians in Maryland, Michigan, and Iowa back away from courageous proposals to raise their states’ long stagnant gas tax rates.  Rather than lose momentum, lawmakers can enact legislation now that will implement a gas tax rate increase when prices begin to come down.
    • The Institute on Taxation and Economic Policy (ITEPtestified this week in front of Alaska’s Senate State Affairs Committee Regarding the Alaska Tax Break Transparency Act. The bill would mandate the state develop a tax expenditure report which would detail the tax breaks the state provides, along with the cost of each to taxpayers. Forty-five other states currently produce these reports which can ultimately help the public have a say in government spending.
    • Following up on our earlier post about New Mexico Governor Susana Martinez’s opportunity to sign legislation instituting combined reporting, the Governor vetoed SB9. Supporters of the bill designed it as a first step in reforming the state’s corporate tax laws and leveling the playing field for small, in-state business.
    • An Illinois Senate committee recently approved a new tax on strip clubs to help fund sexual assault prevention programs. This is the same state considering taxing ammunition to pay for medical trauma centers. Illinois has a history of bad budget gimmicks that are largely responsible for its current $9 billion deficit.

    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.


    Good Idea: Chicago Ponders Extending Sales Tax to Some Services (aka The Rahm Tax)


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    On September 26, the Office of the Inspector General for the City of Chicago released its annual budget options report  to guide city officials as they debate how to close the city’s $1.2 billion budget deficit.  The recommendations are extensive (this year’s report is 136 pages long, more than 80 pages longer than last year’s), and contain some suggestions sure to be controversial, including instituting a city income tax and a commuter tax.

    One promising recommendation, that the city broaden its sales tax base, is similar to a plan Mayor Rahm Emanuel proposed earlier this year.  It was quickly dubbed the “Rahm Tax.”  The mayor’s plan would have imposed a sales tax on those services that he deemed “luxury items,” including limo services, tanning parlors and pet grooming.

    The current sales tax base in Illinois is strikingly narrow.  A report released by the Federation of Tax Administrators shows Illinois taxing only seventeen out of 168 possible services; only Oregon, New Hampshire, Alaska, and Colorado tax fewer services. 

    The obvious advantage to multiplying the goods and services subject to tax is that a state (or city) can actually lower its overall sales tax rate and still generate the same amount of revenue.  Those items purchased by all of us, at fairly consistent rates (think school supplies, shampoo, and shoes), are already subject to a sales tax.  Meanwhile, services – from limo rides to gym memberships to interior design – are not.  So while taxpayers might initially balk at the idea of “new taxes,” everyone is better off if the tax burden is more broadly shared

    At 9.75 percent, Chicago’s sales tax rate is one of the highest in the country, so extending it to services is not insignificant. However, the prospect of more equity in the system, coupled with the potential to eventually reduce the overall rate, should actually make this an appealing option for Windy City residents.

    Photo of Rahm Emanuel via Adam Fagen Creative Commons Attribution License 2.0

    Here’s a headline that shouldn’t surprise anyone: “Business groups complain about Illinois taxes.”  That’s the headline that ran in Tuesday’s State Journal-Register after a hearing in Chicago on Illinois corporate income taxes adjourned. Three more hearings on this same issue will be held across the state through the summer. The hearings are a direct result of companies threatening to leave Illinois because of legislation this year that temporarily increased the state’s corporate income tax rate.

    Senate President John Cullerton asked that businesses testify at the hearings. He also said he was hoping, through the hearings, “to take a holistic approach to business taxes as opposed to the continued piecemeal policies that often pit one business against another.” This is a laudable goal, but it doesn’t take a crystal ball to predict that the some in the business community will keep making the same basic demands.

    Some corporations want to reduce the corporate income tax rate, while others say that tax credits or special incentive programs should be expanded. Of course, these are costly propositions that will make it even harder for Illinois to balance its budget.

    We applaud Illinois lawmakers for delving more deeply into corporate tax reform and specifically tax expenditure reform. But it’s important that the committee hear from a range of voices rather than just the same old group saying the same old thing – that their taxes are too high.

    Photos via Jimmy Wayne Creative Commons Attribution License 2.0


    Illinois to Consider Corporate Demands for Lower Tax Rate


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    Lower the tax rate…or else.  Continued threats from Illinois business lobbyists warning that businesses will leave the state have forced the Illinois state legislature to order a joint House-Senate Revenue Committee to review Illinois’s corporate tax structure.  Companies like Caterpillar and the Chicago Mercantile Exchange continue to complain about the corporate tax rate and threaten to skip town and find another state to do business in if the committee doesn’t respond with dramatic rate cuts.

    Illinois Senate President John Cullerton says the committee will not only look at corporate tax rates, but will also consider reducing corporate subsidies and special exemptions to ensure any change in the rate won’t reduce the overall corporate tax revenues.

    Many businesses have come out in support of eliminating loopholes, not surprisingly most of which pay the full statutory corporate tax rate.  David Vite, president of the Illinois Retail Merchants Association, said that “the most important thing is to have a fair structure that makes Illinois efficient and as attractive as it can possibly be so we can get more businesses here to spread the burden of running the government more broadly.”

    A myth that the corporate tax rate is the primary factor in business decision-making just won’t die.  A recent CTJ article showed that business executives consider taxes low on their list of priorities.  The tax rate is just one small factor that businesses take into consideration when deciding what state will give them the best chance to be profitable.  As Doug Whitley, President and CEO of the Illinois Chamber of Commerce said, “robust economic activity also requires sustained and significant investments in transportation infrastructure…educational opportunities that ensure a quality workforce and support retraining when required.”  The fact is, these investments all cost money, and if corporations are going to benefit from them they should contribute to their funding, just as individual Illinois taxpayers do.

    Similarly, when a family is looking for a place to settle down, low taxes are pretty low on their list of priorities.  They want to know about the educational system, the community, and whether or not this is a good place to raise their children. Everything that makes a community  appealing to that family is supported by the tax base.

    You wouldn’t expect a family to uproot itself and move to another state simply because they could save a couple hundred dollars in taxes next year.  Why would a corporation?

    Lost in this tax debate are the vital public services that support the growth of the private sector.  Corporate taxes are simply one cost of doing business.  This is not to mention that all of these complaining companies have failed to mention the extraordinary financial and logistical costs of moving an entire business to another state.

    We can always expect business leaders to call for rate cuts that would fatten their profit margins, but we shouldn’t expect Illinois’ elected officials to believe they’re acting in the public interest.

    Photo via spudart Creative Commons Attribution License 2.0

    How much is enough? On top of the close to $500 million in corporate tax breaks Illinois doles out each year, Governor Pat Quinn now finds himself confronted by a growing crowd of CEO’s demanding even more. In the wake of tax-break lobbying efforts by Motorola, Sears and Caterpillar, the latest corporation seeking preferential tax treatment is CME, owner of the Chicago Mercantile Exchange and the Chicago Board of Trade.  These companies claim that the temporary corporate tax rate hike enacted by Illinois lawmakers earlier this year might force them to pull up stakes and leave if the Governor doesn’t bend the tax code to accommodate their specific industry.  This tactic is widely viewed as an empty threat, but the Governor has said his door is open.

    Matt Gardner, author of Balancing Act: Tax Reform Options for Illinois and Executive Director of the Institute on Taxation and Economic Policy, issued the following statement in response to the controversy:

    "The real problem with the Illinois corporate income tax rules isn’t the rates, it’s the way the state has lavished industry-specific and even company-specific tax breaks and loopholes over the years.

    “CME recognizes the inequities created by these corporate tax giveaways, but ironically, the solution put forward by CME and other highly profitable corporations is to create even more holes in the corporate tax code, further shifting the burden of the corporate tax to those companies not blessed with high-paid lobbying teams. For example, over the last three years, CME paid an effective state income tax rate of 7.7 percent, while Deere & Company  has been paying only 2.2 percent, and Wells Fargo a mere 0.7 percent.

    “Capitulating to big businesses’ aggressive lobbying is what got Illinois in this mess in the first place.  The “single sales factor” tax break that lawmakers enacted a decade ago was designed to please manufacturing companies. This single tax break now costs the state close to $100 million a year—and shifts the cost of funding public services away from manufacturers and onto every other Illinois business – with no demonstrable impact on the size of Illinois’ manufacturing sector. Combined with nearly $400 million in other corporate tax giveaways annually, the single sales factor increases the pressure on state lawmakers to hike tax rates in order to preserve a minimal level of growth in the corporate tax.  Repealing the single sales factor is the first thing the governor and legislature can do to make the Illinois corporate tax system more equitable; creating more exceptions for corporations now lining up to renew their expiring deals will create even more instability in the state’s revenues.

    “Taxes are part of the cost of doing business, and corporations get a big bang for those bucks: educated workers, reliable energy sources, roads and tracks that get them to work and their product to market, the list goes on.  If CME and other corporations want a stable, predictable economic environment, they should be asking for fewer loopholes, not more.”


    Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. ITEP’s full body of research is available at www.itepnet.org.


    State Tax Battles with Amazon.com Continue to Make Headlines


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    Sales tax laws would be essentially meaningless if retailers were not required to collect the tax every time a purchase is made.  The opportunities for customers to evade the sales tax (either on accident, or on purpose) would be overwhelming.  Every state with a sales tax knows this — and as a result, the vast majority of retailers are legally required to collect and remit sales taxes.

    Amazon.com and many other online retailers, however, are the major exception to this broad rule.  A 1992 Supreme Court case carved out a special exemption for any “remote sellers” that don’t have a “physical presence” in a state — like a store or warehouse.  The ruling has allowed the Internet to become an open highway for tax evasion. While customers shopping online owe the same sales tax they would if they shopped in a store, very few actually take the time and effort necessary to pay that tax.

    This week, four states (California, Louisiana, Texas, and Vermont) made headlines for their attempts to limit the amount of sales tax evasion occurring through “remote sellers,” while a fifth state (Illinois) will soon have to defend its efforts to do the same in court.  By contrast, South Carolina lawmakers were recently bullied into granting Amazon an exemption from having to collect sales taxes for five years, despite the fact that it will soon have a “physical presence” in the state.

    In Vermont, Governor Shumlin recently signed a so-called “Amazon law” that will eventually require all remote sellers partnered with affiliate companies physically based in the state to collect and remit sales taxes (see this ITEP report for more on “Amazon laws”).  Unfortunately, the bill was written so that it won’t take effect until 15 other states have enacted similar laws. 

    Six states — Arkansas, Connecticut, Illinois, New York, North Carolina, and Rhode Island — have enacted such laws so far, and many more have given the issue serious consideration.  In the meantime, remote sellers like Amazon will be required to notify Vermont residents of the taxes they owe when making a purchase.

    The California Assembly easily passed an Amazon law last week.  That legislation now goes back to the Senate, where a similar bill gained narrow passage last month.  Even if the Senate approves the Assembly’s version of the bill, however, it’s unclear whether Governor Brown will sign the measure.

    Louisiana can now be added to the long list of states giving serious consideration to enacting an Amazon law.  The House Ways and Means Committee unanimously passed such a law in late-May, though opposition by Gov. Jindal makes it unlikely that it will be enacted any time soon.

    In Texas, Gov. Perry recently vetoed a measure that would have required Amazon.com to collect sales taxes in the state, though the legislature may still try to enact the measure by inserting it into a larger bill that Perry is unlikely to veto. 

    Unlike the true “Amazon laws” discussed above, the measure in Texas was designed to prevent Amazon from continuing to skirt its sales tax responsibilities by claiming that its Texas distribution center is actually owned by a subsidiary, and therefore does not amount to a “physical presence.”  The nearby photo is the actual sign in front of the Texas-based distribution center that Amazon claims it does not own.  

    In Illinois, the Performance Marketing Association (PMA) has filed a lawsuit challenging the constitutionality of the state’s Amazon law.  The lawsuit is similar to one being pursued by Amazon against New York State.

    And in South Carolina, Amazon.com has demanded, and received, a five year exemption from having to collect sales taxes on purchases made by South Carolinians, despite the fact that it plans to open a distribution center in the state (and will therefore meet the Supreme Court’s definition of having a “physical presence”). 

    The granting of this exemption represents a stark reversal from just one month ago, when it was soundly defeated 71-47 in the House. 

    Brian Flynn of the South Carolina Alliance for Main Street Fairness accurately summed up the unfortunate reality of this situation when he said that “with this economy, [Amazon was] in a good position to strong-arm legislators.”  Fortunately, the exemption is only supposed to last five years — though judging from Amazon’s past behavior, it’s reasonable to expect that the company will undertake an aggressive campaign to extend that five-year window.

    In just the last few weeks, Arkansas and Illinois joined New York, North Carolina, and Rhode Island in enacting legislation requiring some online retailers, like Amazon.com, to collect sales taxes on purchases made by their state’s residents.  At least a dozen other states are considering enacting similar policies, and the list of states with a serious interest in this issue seems to be growing by the week.  In a new brief, ITEP explains the basics of so-called "Amazon taxes," and discusses the actions that Amazon, Wal-Mart, Home Depot, and other retailers have taken during this new surge of interest in sales tax reform.

    Read the ITEP brief.


    What Next for Illinois?


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    Earlier this year, Illinois took a major step toward balancing its budget for the upcoming fiscal year by increasing its flat-rate income tax from 3 percent to 5 percent. Even at that time, however, lawmakers were under no illusion that this important step had solved the state's fiscal woes.  A new report from the Center for Tax and Budget Accountability provides a sobering view of just how big a budgeting challenge Illinois lawmakers still face.  Among the findings of the CTBA report is that even after the recent tax hike, Governor Pat Quinn's budget proposal for fiscal year 2012 would leave the state with a revenue shortfall of over $1 billion.

    This report was released at CTBA's annual fiscal symposium last week.  The symposium, aptly entitled "$7 Billion in New Revenue: Now What Do We Do?", included illuminating discussions of a number of spending and tax reform strategies that could help the state deal with its remaining short-term budget deficits, while simultaneously strengthening the state's long-term fiscal position.  Keynote speaker and Illinois Senate President John Cullerton reiterated his previous public statement that he viewed the state's costly and regressive income tax exemption for retirement income as a tax break worth examining as part of this process. And a new ITEP report released to coincide with ITEP staff's participation in this symposium, "Should Illinois Tax Retirement Income?", confirms Cullerton's view. The report shows that this one tax break costs Illinois almost $1 billion a year -- roughly the size of the state's remaining fiscal shortfall.

    Illinois lawmakers took an important step earlier this year to pay for needed public services in the short run -- but it's important to recognize that this year's legislative actions to date have done virtually nothing to achieve the structural tax reforms needed to ensure the long-term sustainability of the state's tax system. ITEP's report -- and Senator Cullerton's willingness to identify the costliest income tax break in Illinois as fair game -- clearly identifies one important strategy for achieving these long-term reforms.

    Read the ITEP Report

    Read the CTBA Report


    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.


    To States Trying to Lure Illinois Businesses: It's Not Just the Tax Rates, Stupid


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    We recently brought you news of policymakers in Illinois voting to temporarily increase their corporate and personal income tax rates. The state’s flat rate income tax will increase from 3 to 5 percent until 2015. In 2015 the income tax rate will fall to 3.75 percent, and in 2025 the rate will fall to 3.25 percent. Corporate income taxes were also increased from 4.8 percent to 7 percent until 2015, when the rate will drop to 5.25 percent. In 2025, the corporate income tax rate will fall back to 4.8 percent.
     
    For tax justice advocates and other folks worried about the state’s fiscal solvency (lawmakers passed the tax package in order to help deal with a $15 billion deficit) the tax increase was welcome news. In a bit of a twist, some public officials and lobbying groups from other states seem elated by the legislation too and hope that businesses will leave Illinois for their state.
     
    In fact, Wisconsin Governor Scott Walker issued a statement saying, “Wisconsin is open for business.  In these challenging economic times while Illinois is raising taxes, we are lowering them.  On my first day in office I called a special session of the legislature, not in order to raise taxes, but to open Wisconsin for business.”

    New Jersey Governor Chris Christie’s administration launched a campaign to lure Illinois businesses to the Garden State. An ad recently placed in the (Springfield) State Journal Register reads "Had enough of outrageous tax increases? We're committed to fiscal responsibility and lower taxes." And, according to the St. Louis Post Dispatch, the Missouri Chamber of Commerce and Industry's website says: "(We're) looking at ways to position Missouri to take advantage of our neighboring state's economic misfortune." There is even a movement afoot in Indiana to lower their state corporate income tax to lure Illinois businesses.

    Illinois Governor Quinn’s response to Christie’s campaign was pretty direct. He recently said, “I don’t know why anybody would listen to him [Governor Christie]. New Jersey’s way of balancing the budget is not to pay their pension payment, not to deliver on property tax relief that was promised, to fire teachers, to take an infrastructure project — building a tunnel that had already been started — and end it and have to pay money back to the federal government.”
     
    Despite these efforts to lure Illinois businesses we haven’t seen businesses packing up their computers and moving to other states. The reason is simple: There is much more to business location decisions than a state’s tax rate.

    The overall business climate, education of the work force, quality infrastructure, and a variety of other factors determine a corporation’s location. Let’s not forget that revenue generated from the tax increase won’t just be flushed down the toilet — the money raised will help to fund the social and physical infrastructure that businesses need to thrive, including police, fire protection, and education.

    As Paul O’Neill, former Bush Treasury Secretary and Alcoa executive, put it: “I never made an investment decision based on the tax code...” As the president of the Illinois Chamber of Commerce said, “I do not think there's going to be some immediate exodus to Missouri. Businesses don't operate that way.” States can bicker back and forth about whose state has the best business climate, but focusing only on corporate and personal income tax rates is silly and shortsighted.


    Tax Reform in Illinois


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    Year after year, policy wonks, the media, and folks across the country have watched as Illinois balanced its budget with gimmicks and accounting tricks. This year the state faces a $15 billion budget gap, and policymakers in Springfield finally did the hard work of raising new revenue.

    Wednesday morning, shortly before new legislators were to be sworn in, revenue-raising legislation was approved. The bill temporarily raises the state’s flat rate income tax from 3 to 5 percent until 2015. In 2015 the income tax rate will fall to 3.75 percent, and in 2025 the rate will fall to 3.25 percent. Corporate income taxes were also increased from 4.8 percent to 7 percent until 2015, when the rate will drop to 5.25 percent. In 2025, the corporate income tax rate will fall back to 4.8 percent.

    The bill also included a strict spending cap which will mean that spending can’t increase by more than 2 percent in each of the next four years. As Governor Pat Quinn's budget director noted this week, imposing such a strict cap at a time when the state is struggling to pay overdue bills and unfunded pension obligations will almost certainly mean that state spending on all the core functions of government will not be allowed to grow at all over the next four years, which of course means that in real inflation-adjusted terms, state spending on everything from education to transportation to public safety will likely decline.

    This is especially worrisome in light of a recent Center for Tax and Budget Accountability report noting that the real value of state spending has already fallen over the last fifteen years.

    Illinois lawmakers should be applauded for passing this legislation. But the state is hardly out of the woods: this tax increase is expected to only fill about half of the state’s budget gap, meaning that the remaining budget hole will likely be closed exclusively through spending cuts.

    The good news, as noted in a number of ITEP reports, is that when legislators find the political will to return to tax reform issues, they'll find the state has a wide variety of sensible revenue-raising (or fairness-enhancing) tax reform options at its disposal, including expanding the sales, income and corporate tax bases by eliminating unwarranted loopholes and expanding the state's relatively low Earned Income Tax Credit.


    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.


    Two States Turning Their Back on Federal Stimulus Dollars; Another Stands Ready to Take the Money


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    Wisconsin Governor-elect Scott Walker and Ohio Governor-elect John Kasich want both of their states to stop any work on high speed rail projects that are funded with federal stimulus dollars. Yet, both newly elected governors seem to want the millions of dollars the federal government is offering. (For Ohio that amounts to about $400 million, and Wisconsin was slated to receive $810 million).

    Neither governor wants to put the transportation money into high speed rail programs. Instead they want to use the money to fix roads and bridges. The newly elected Republican governors apparently like federal spending — when it means money they can spend as they please.  

    It turns out that Ohio has already been given federal dollars to help with the transportation issues Kasich mentions. A letter from Transportation Secretary Ray LaHood reminded Kasich that Ohio has already received over $1 billion for road, bridge, and airport projects. As for the rail funding, LaHood clarified that, "none of those funds may be used for anything other than our high-speed rail program."   

    On election night, Walker unveiled his new slogan “Wisconsin is Open for Business.” But shutting down the progress already made to produce a rail line connecting Madison to Milwaukee means that local employees at the company making the trains, Talgo Inc., fear for their jobs and plans to hire a total of 125 employees are on hold. Earlier this week three Wisconsin Congressman introduced a bill that would allow the state to return its federal high-speed rail money and put it toward federal deficit reduction. Of course, Wisconsin's share of the rail dollars is just a drop in the bucket compared to the deficit.

    Not everybody is taking this same approach with the federal gift horse. Illinois officials seem ready to take the money and Talgo’s operations if no one else wants them. Illinois Governor Pat Quinn has said to Talgo that his office “stands ready to do whatever it can to make Illinois your new Midwestern home.”  The Illinois Transportation Secretary has said that if Wisconsin doesn’t want the money for high speed projects they will take it.  Local officials seem equally enthusiastic “Let’s get after it,” said one County Board Chairman. “I’m in line — what do I need to do? I don’t think I can do a back flip, but absolutely that would be fantastic.”


    Gubernatorial Candidates with Progressive Positions on Taxes Who Won


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    On Tuesday, voters in 37 states went to the polls to vote for Governor. The results of nine gubernatorial races provide a small glimmer of hope for sensible, balanced, and progressive approaches to addressing the next round of state budget shortfalls.  Two candidates campaigned on raising taxes, four incumbents were re-elected after implementing new taxes to close previous budget gaps, and three governors-elect won races against opponents who sought to dismantle progressive tax structures.

    As for those governors-elect who have rejected revenue increases, the next four years will be quite a challenge. In Texas, Governor Rick Perry will face a projected two-year $21 billion budget shortfall.  Likewise in Pennsylvania, Governor-elect Tom Corbett is staring at a $5 billion budget deficit next year.  Faced with these problems, this new crop of state executives can take either a dogmatic cuts-only approach or they can opt for a more flexible approach that allows for raising new revenue by closing tax loopholes or implementing other reforms.

    Candidates Who Campaigned on Raising Taxes

    In Minnesota, Mark Dayton ran for governor on a progressive tax platform, calling taxes “the lubricant for the machinery of our democracy." He has proposed increasing taxes on the wealthiest 5 percent of Minnesotans to raise revenue to address the state’s continuing budget woes and to improve tax fairness.  Although the Minnesota gubernatorial race remains undecided and Dayton may face a recount, Dayton’s small lead demonstrates the support he has received for purposing such a beneficial progressive tax plan.

    In Rhode Island, Lincoln Chafee won a three-way race against Republican John Robitaille and Democrat Frank Caprio.  Like Dayton, Chafee championed tax increases aimed at refilling the state’s depleted coffers.  During the campaign Chafee, whose father lost a Rhode Island gubernatorial race 42 years ago after supporting a state income tax, proposed a one percent sales tax on previously exempted items.  Though more likely to adversely affect low-income families than Dayton’s plan, Chafee deserves credit for supporting a moderate tax plan in this cycle of anti-government sentiment.

    Candidates Who Defeated Opponents Targeting Progressive Tax Structures

    Besides Dayton and Chafee, three other winners on Tuesday night defeated opponents who sought to drastically cut taxes and reduce spending and government services.  In California, Jerry Brown defeated Meg Whitman, who supported a regressive tax cut that would only benefit taxpayers who claim capital gains income

    In New York, Andrew Cuomo defeated Carl Paladino, who promised to cut taxes by 10 percent and spending by 20 percent in his first year.  Unfortunately, however, Andrew Cuomo has not fully distanced himself from Paladino’s vilification of taxes.  Instead, Cuomo, along with eleven newly elected Republican Governors, has pledged to freeze taxes, vetoing any hike that comes his way.  This absolutist approach does nothing to alleviate the enormous deficit problems faced by each of these states.

    In Colorado, Democrat John Hickenlooper defeated Republican Dan Maes and Independent Tom Tancredo.  Maes, who lost voter support after the Republican primary, promised to lower income taxes and cut spending.  As Maes’ popularity decreased, Tom Tancredo began to gain steam, eventually garnering around 37% of the vote.  In their final debate Tancredo proposed removal of “any tax rebates or incentives.”  For his own part, Hickenlooper never committed to raising or lowering taxes, but did call for a "voluntary" tax on the oil and gas industry to fund higher education.

    Incumbents Re-elected After Raising Taxes

    The Governors of Maryland, Illinois, Arkansas, and Massachusetts pulled off victories after enacting or supporting new taxes during their previous terms. 

    In Maryland, Martin O’Malley, who defeated former Governor Robert Ehrlich, oversaw tax increases in his first term to fix a $1.7 billion deficit.  O’Malley’s plan relied in part on progressive tax increases, including a temporary increase in the income tax rate paid by millionaires. While Republicans criticized the tax increases, the citizens of Maryland approved enough to re-elect O’Malley with over 55% of the vote.

    In Illinois, Governor Pat Quinn is the likely winner of a tight race against Republican challenger Bill Brady.  Since becoming Governor in the wake of former Governor Blagojevich’s scandal, Pat Quinn has repeatedly proposed to raise income tax rates to fill budget holes.  Quinn would use the revenue raised to fund education.  Meanwhile Brady, Quinn’s opponent, championed tax cuts that included repealing the sales tax on gasoline and eliminating the inheritance tax.

    In Arkansas, Republican Jim Keet was soundly defeated by Governor Mike Beebe in his re-election bid.  During his first term, Beebe implemented a significant hike in tobacco sales taxes, raising the tax on a pack of cigarettes by 56 cents.  The increase was designed to increase revenues by $86 million to fund statewide trauma systems and expanded health care coverage for children.

    In Massachusetts, Deval Patrick was re-elected Governor after signing last year’s budget that included an increase in the sales tax rate. Patrick also showed interest in improving fairness in Massachusetts’ tax code. Bay State voters rewarded Patrick for his tough decisions by handily re-electing him.


    Tax News in Gubernatorial Races Across the Country


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    Many gubernatorial candidates campaign on a platform of tax cuts, and few, outside of Minnesota Gubernatorial Candidate Mark Dayton, promote tax increases.  In such a political climate, perhaps the best that voters can hope for are candidates that promise to maintain progressive tax structures. 

    California

    One such candidate, California gubernatorial candidate Jerry Brown, recently hammered his opponent, Meg Whitman, for supporting a regressive tax cut that would benefit only taxpayers who have capital gains income.

    In 2008, 93% of taxpayers who paid capital gains taxes in California earned over $200,000.  While other gubernatorial candidates fight over who will cut taxes more, it is refreshing to see a candidate like Brown refuse to endanger the state's budget by cutting taxes for the wealthiest.

    Illinois

    Illinois current Governor Pat Quinn is having it out against Republican Bill Brady to see who will move into the Governor's Mansion next year. Brady proposes to eliminate the state's estate tax and the sales tax on gasoline, saying that this will send a message to business that  "Illinois is open again for business and we're here to stay for the long term." Quinn, on the other hand, supports an increase in the state's income tax to help solve the state's enormous fiscal woes.

    Maryland

    While fiscal prudence may call for hard decisions, campaigning calls for easy sound bites.  Former Governor and current Republican candidate for Maryland Governor Robert Ehrlich wants to repeal Governor O’Malley’s 2007 sales tax increase.  Ehrlich’s proposal would cost the state treasury over $600 million. While Ehrlich himself raised taxes during his tenure, the former Governor is trying to re-brand himself as the anti-tax candidate

    Like Ehrlich, current Governor O’Malley is also seeking to distance himself from his past constructive and successful tax policies.  However, O’Malley refuses to rule out future tax increases, signaling that he has not forgotten how he expanded health coverage and increased education funding these last four years.

    Michigan

    The “Michigan Business Tax” has fallen out of grace with Michigan’s gubernatorial candidates.  Both Democrat Virg Bernero and Republican Rick Snyder favor eliminating the business tax and replacing it with some other revenue source. Synder’s plan would partially offset the revenue loss from the business tax cuts by instituting a flat 6% corporate income tax.  Still, Synder recognized the plan would remove $1.5 billion from the state’s coffers. 

    Bernero’s plan does little more to make up for the lost revenue.  His proposal includes collecting taxes on internet sales, although he refuses to commit to any gas or service tax increase. Instead, Bernero also seeks to cut state programs and lower costs.  While it is disappointing to see both candidates propose tax and funding cuts, Bernero has pledged to support state funding for anti-poverty and unemployment programs.

    Pennsylvania

    Despite massive state budget shortfalls in Pennsylvania, both gubernatorial candidates, Republican Tom Corbett and Democrat Dan Onorato pledged, abstractly, not to raise taxes. Neither candidate seems to be sticking to such a pledge. Onorato was gutsy enough to suggest imposing a new tax on shale severance.  Onorato’s proposed tax would allow the state to remain competitive with neighboring states.  Onorato’s Republican counterpart, Tom Corbett, has maintained that he will not raise taxes, but he is reportedly open to increasing payroll taxes. So apparently, Corbett’s pledge only applies to big business.

    South Carolina

    South Carolina voters are guaranteed to see a new Governor in Columbia that is going to slash budgets instead of raising revenue. Both the major candidates, Democrat Vincent Sheheen and Republican Nikki Haley, are saying that they won't raise taxes despite the fact that the budget is in disarray (falling to mid-1990's levels) and the federal government can't be relied on for more stimulus money to help prop the state up. Sheheen has said, "We can't keep funding everything at the levels of two or three years ago. We can't keep funding everything, period."

    Perhaps it comes as no surprise, but Haley does have some pet projects she'd like to see improved despite claiming that South Carolina must live within its means. She says, "When your revenues are down, the last thing you cut is your advertising, so we need to make sure the Commerce Department is strong. We need to strengthen our technical colleges." No matter who wins this election, it's going to be difficult to improve technical colleges and the Commerce Department when money is so tight and lawmakers aren't leaving many options.

    Tennessee

    Tennessee politicians realize the state has serious budget shortfalls.  Unfortunately, the only question facing Tennessee voters this November will be how much to cut state programs and who to reward with tax cuts.

    Last week, the current Democratic Governor Phil Bredesen announced plans to cut next year’s state budget by up to $160 million.  Democratic gubernatorial candidate Mike McWherter lauded the plan, while Republican gubernatorial candidate Bill Haslam criticized the cuts for not being large enough

    However, the candidates do have differing ideas about creating jobs through tax cuts.  McWherter proposed a $50 million state tax break for small businesses that would reward qualifying companies for creating the next 20,000 jobs.  In contrast, Haslam proposed creating regional economic development centers.  McWherter’s plan is based on a similar program in Illinois, which Democratic Governor Pat Quinn instituted and Republican gubernatorial candidate Bill Brady would like to expand.


    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.


    What You Should Know Candidates are Saying About Taxes


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    Candidates across the country are gearing up for the November elections. Over the coming months we'll highlight just some of the candidates running in local, state, and national races with an eye toward evaluating their positions in terms of tax fairness.

    Current Iowa Governor Chet Culver - Iowa's film tax credit program has been costly and controversial. This week current Governor Chet Culver came out against keeping the program. He said in a recent news conference, "We’re not going to be taken for suckers. People, unfortunately, exploited that program.”

    Current Illinois Governor Pat Quinn - During the Democratic primary we wrote about Governor Quinn's proposal to raise income taxes in a progressive way. Now Candidate Quinn is proposing that, in combination with an income tax hike, he would urge local school districts to reduce regressive property taxes. He recently said, "If you get additional new money from Springfield, from the state government, then I think part of the bargain has to be that the local school districts at least roll back a portion of their property taxes. It's a fair bargain."

    Current Massachusetts Governor Deval Patrick - Massachusetts voters will be asked to decide Question 3, which would slash the state sales tax from 6.25 to 3 percent. Despite the regressive nature of the sales tax, taking a hammer to this revenue stream would have a disastrous impact on the state budget. Current Governor and gubernatorial candidate Deval Patrick has come out against Question 3, saying that if the sales tax is reduced it would be "a calamity."

    X South Carolina gubernatorial candidate Nikki Haley - South Carolina collected $147 million in corporate income tax revenue in the last fiscal year. Nikki Haley has said that she would eliminate the tax altogether in hopes of attracting more businesses. She said at a recent fundraiser, "If we become a no-corporate-income-tax state, we will become a magnet for companies." Instead of proposing to throw out an entire revenue source, she should take a minute to read ITEP's latest policy brief on economic development.

    X Vermont gubernatorial candidate Brian Dubie - Candidate Dubie is campaigning on a promise to cut $240 million in income and property taxes paid by Vermonters. Specifically, he would drastically reduce personal income tax rates, cut corporate income tax rates, and support a property tax cap.  But when he was asked how the tax cuts would be paid for in terms of fewer services, Dubie couldn't offer any details.


    Sales Tax Holidays: Good for Little More than a Laugh


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

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

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

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

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

     


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


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

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

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


    How to Fix State Budgets and Help the Economy


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

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

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

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

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


    Need for Tax Increase Becomes Increasingly Obvious in Illinois


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    Illinois Governor Pat Quinn reminded Illinoisans this week of the need for a tax increase by previewing a drastically reduced spending plan that would cut deeply into education, public safety, and human services while still failing to fill the state’s budget gap.  On Wednesday, Governor Quinn made clear that he plans to again push for a state income tax increase, though he has promised to make some refinements to the version he advocated last year.

    During the FY10 budget debates last year, the Governor attempted to secure support for a progressive tax hike that would raise the state’s flat income tax rate while also increasing the personal exemption.  This plan represented a fair and practical solution, given the state’s constitutional restrictions on levying a graduated rate income tax.  While the Senate did pass a bill that both raised the state’s income tax and expanded the sales tax base, the push for tax reform died in the Illinois House where lawmakers insisted on using spending cuts and borrowing to ease the state’s budget shortfall.

    But the lack of sustainable tax increases last year has only made Illinois’ current budget situation that much worse.  Illinois now has what is perhaps the worst fiscal situation of any state in the entire country.  As Ralph Martire of the Center for Tax and Budget Accountability put it earlier this week, "Any elected official or candidate who says you can solve this without a tax increase is either incredibly math-impaired or intentionally deceiving voters."

    Given the dire situation of the Illinois budget, even the Civic Federation, a traditionally anti-tax, business-oriented group, has recently come to acknowledge the absolute necessity of raising the state’s individual and corporate income taxes.  While the group still considers such increases “distasteful,” it has finally realized, as have many Illinoisans, that the spending cuts alone cannot fix the state’s problems.

    For more on tax reform in Illinois, be sure to read this recent ITEP report examining both short- and long-term strategies for improving the Illinois tax system.


    The Way Forward in Illinois


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    Last week saw the conclusion to a bruising Democratic primary in the campaign for Illinois Governor. Both Democratic candidates, incumbent Governor Pat Quinn and Comptroller Dan Hynes, had plans for shoring up the state's long- and short-term fiscal crisis. Governor Quinn put forward a plan to raise the existing income tax rate of 3 percent to 4.5 percent and to increase the value of personal and dependent exemptions from $2,000 to $6,000. His plan would generate roughly $3 billion per year. Comptroller Hynes proposed a rate structure that would leave the present 3 percent rate in place for all taxpayers with incomes below $200,000 but that would impose rates ranging from 3.5 percent to 7.5 percent on incomes above that amount, with the highest rate applying solely to income in excess of $1 million.

    A recent report from ITEP describes both candidates' income tax reform proposals and argues that a combination of the two plans would be ideal. Governor Quinn narrowly beat Hynes in the primary and, assuming he wins the election, there is real hope that fundamental tax reform in Illinois is not just possible, but likely.

    Quinn and Hynes are not alone in their commitment to progressive tax policy. A bipartisan task force on Illinois property taxes recently recommended several policy options that could be combined with proposals that Quinn supports. The task force's recent report suggests rebalancing the state's revenue sources, consolidating government services and functions, and enhancing the circuit breaker program.


    Growing Momentum for Income Tax Reform Among Gubernatorial Candidates


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    Michigan gubernatorial candidate State Representative Alma Wheeler Smith is calling for the restructuring of the state's tax structure. Michigan is one of a handful of states with a flat income tax, and its fiscal woes are infamous. Rep. Smith feels that now is the time for a complete restructuring of the state's tax system, including making Michigan's income tax graduated and lowering the state's sales tax rate while extending the sales tax base to include more services.

    Representative Smith isn't the only person running for Governor who is turning to income tax reform in these difficult times. Both Democratic gubernatorial candidates in Illinois have also called for significant changes to the Illinois tax structure, including reforming their state's flat rate income tax. For more on Illinois Governor Pat Quinn and Comptroller Dan Hynes' tax reform plans, see ITEP's report. Progressive income taxes are an important tool for states struggling in this current economic downturn. Read more about the benefits in ITEP's Policy Brief on progressive income taxes.


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



    The “Terrible Ten” Most Regressive Tax Systems

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

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

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

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

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

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

    Implications for State Budget Battles in 2010

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


    Illinois: Governor and Comptroller Each Have It Partially Right on the Income Tax


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    Can’t we all just get along? 

    Proponents of progressive taxation in Illinois might be wondering just that after listening to the main candidates for the Democratic nomination for Governor – incumbent Governor Pat Quinn and Comptroller Dan Hynes – criticize each other’s income tax plans over the past two months. 

    As ITEP explains in its most recent report, both plans are progressive, as they would both require more affluent Illinoisans to contribute larger shares of their incomes to maintaining public services than individuals and families struggling to make ends meet. 

    Sure, of the two plans, the one offered by Comptroller Hynes may be fairer, but it may also be less well-suited to meeting Illinois’ current and future revenue needs than the plan put forward by Governor Quinn in March.  The Hynes plan's only change to the income tax would be the creation of a graduated rate structure that would impose higher tax rates on upper-income taxpayers, an approach to taxation that is currently barred by the Illinois Constitution. 

    Getting the Hynes plan off the drawing board and into the tax code could thus take several years, even though there is a clear need for additional revenue now. (The state's budget deficit for the upcoming fiscal year is projected to be $12 billion.)  What’s more, while the Comptroller asserts that his income tax plan would generate as much as $5.5 billion, ITEP estimates that it would yield only about $2.2 billion if in effect in 2011. 

    Consequently, as ITEP suggests in its report, what is needed is an approach that combines the principal elements of both plans – the immediacy of the Quinn plan coupled with the fundamental reform embodied in the Hynes plan. 

    If Illinois were to enact this spring an increase in its single income tax rate to 4.5 percent and to triple its personal and dependent exemptions – as Governor Quinn proposed earlier this year – it could generate roughly $1 billion for FY10.

    Those changes could then serve as a bridge to a graduated rate structure, a bridge that could be removed once that new structure is in place.  As the ITEP report points out, adopting a graduated rate structure ranging from 3 to 7.5 percent, while leaving in place the higher personal exemptions recommended by the Governor, could ultimately generate in excess of $4 billion annually, while reducing taxes for nearly three out of every five Illinois taxpayers. 

    Though it seems like most legislative sessions just ended after laborious budget battles, many lawmakers are looking to the future and one word is coming to mind -- grim. In many states, revenue isn't keeping up with projections. As a result, this week alone, lawmakers in Illinois, Mississippi, and Washington State have said revenue-raisers must be on the table.

    Spending cuts have their consequences and there is only so much cutting that is possible or reasonable. A recent Peoria Journal Star editorial calls on lawmakers to respond to a report from the Commission on Government Forecasting and Accountability. The report discusses various revenue-raisers, including a sales tax base expansion. The Journal Star says, "This structural deficit is not going away by itself. To declare discussion about alternative revenue options DOA would just be foolish."

    Meanwhile, lawmakers in Mississippi are likely to review lists of fee increases put together by state agencies to show how some revenue could be increased. 

    In Washington, Governor Chris Gregoire earlier this week said that she would consider tax increases, saying that Washingtonians may have had their fill of cuts, "At some point, the people, I assume, don't want us to take any more spending cuts. I mean, I'm already hearing about, 'Why did you cut education?' Well, there weren't any options. We're without options.''


    The Exaggerated Promise of Legalized Gambling


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    There’s a lot that can go wrong when a state turns to legalized gambling as a source of revenue.  This is a fact that Kentucky, Pennsylvania, and others should keep in mind during their continuing efforts to push for expanded gambling as a solution to their budget woes

    For starters, a poor economy, opposition by local residents, legal challenges, and a number of other factors can delay the opening of newly legal gambling establishments.  And without functioning gambling venues, there’s no money for the state.  Recent stories out of Maryland and Pennsylvania demonstrate the very real nature of this threat.  Additionally, recent polling done in Illinois suggests that opposition to gambling at the local level – fueled in part, no doubt, by the Not-In-My-Back-Yard (NIMBY) syndrome – could cause similar delays there.  And legal challenges in Ohio indicate that the Buckeye state could be in for delays in gambling implementation as well.

    But even after a state manages to get its gambling operations up and running, the revenue stream produced by gambling may not be as lucrative as advertised.  A recent New York Times story details the degree to which gambling revenues (from casinos, racetracks, lotteries, etc) are disappointing states this year.  The most obvious culprit in this case is the slumping economy, though some experts believe that increasing competition for gamblers both between states, and within states – known as “market saturation” – may be at least partially to blame.  Worries about market saturation have been on full display in Ohio, where racetrack owners are on edge about the effect that casino legalization (to be voted on by Ohioans this November) could have in cutting into their profits.

    In other cases, it may simply be the case that gambling just isn’t as popular as first expected.  The perceived need among many states to legalize slot machine gambling as a means of drawing gamblers back to struggling racetracks is evidence of this problem.  Unfortunately, the failure of this method in Indiana has drawn into question the wisdom of this revenue-raising strategy as well.

    Other methods, such as loosening the restrictions on betting limits or alcohol sales (which were originally imposed to secure support for gambling from reluctant lawmakers) are being tried as well.

    Ultimately, the fact is that gambling is far from a fiscal panacea for the states, and given the tendency for implementation delays, is exceedingly unlikely to result in much revenue to fix the current round of state budget shortfalls.  Take a look at this ITEP policy brief for more on the gambling issue.


    Income Tax Debate Heats Up in Illinois


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    In his bid to be reelected Governor of Illinois, the incumbent Pat Quinn will face a primary challenge from Dan Hynes, the Illinois Comptroller. The two both see a need to move the state's tax system in a more progressive direction, but apparently disagree on how to get there.

    Earlier this year, Governor Quinn championed an income tax increase plan which would have raised the state’s constitutionally mandated flat rate from 3 to 4.5 percent, while also increasing the state’s personal exemption from $2,000 to $6,000. Governor Quinn deserves credit for having the courage to talk about raising taxes in a progressive way, given the state’s recent reliance on one-time spending and severe budget cuts. The Governor was obviously aware that, because of constitutional restrictions, he didn't have the option of introducing a graduated income tax (which would have to be approved by the legislature and a vote of the people) and have it become law in time to help solve the state's nearly $12 billion budget shortfall.

    Comptroller Hynes unveiled his extensive budget and tax plan on Wednesday citing support for instituting a graduated income tax on Illinoisans with incomes over $200,000. The Hynes plan also calls for various belt-tightening strategies, higher cigarette taxes, closing coporate loopholes, and some sales tax base broadening to include luxury services. It’s undoubtedly good news that the major candidates running for Governor both see the need for progressive income tax reform. 

    But points of contention remain. Hynes is denying Quinn’s claim that "In 2004, [Hynes] opposed a graduated income tax. Maybe he's flipped and he's flopped over to our side.''  Hynes is countering that Quinn’s income tax proposal is a “regressive ... 50 percent tax hike on all Illinois families,” a claim that doesn’t hold up to analysis. Let’s hope that the candidates don’t continue to beat up on each other so much that the victim in the debate becomes income tax reform.


    Illinois Budget Debate Resolved... For Now


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    After much debate, Illinois Governor Pat Quinn signed a budget last week. Despite Governor Quinn initially advocating for an income tax increase to help balance the state's $11.6 billion shortfall, the budget that passed didn't include a tax hike and instead relied heavily on borrowing, delaying payment to vendors and spending cuts. The Senate voted 45-10 for the key funding piece of the budget, while the House supported it 90-22. Despite this disappointing news, Senate President John Cullerton has said that his "primary purpose" starting next year is an overhaul of the state's tax structure. Here's hoping Senator Cullerton gets some inspiration from ITEP's recent report: Ready, Set, Reform: How the Income Tax Can Help Make the Illinois Tax System Fairer and More Sustainable.


    Bad News for Tax Reform in Illinois


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    Tax reform hopes in Illinois were crushed (at least temporarily) on Sunday when the state House of Representatives rejected Governor Pat Quinn's proposal to increase the state income tax from 3 to 4.5 percent and the corporate tax from 4.8 to 5 percent in order to avoid a $7 billion budget cut. The 42-74 vote came a day after Senate Democrats led passage of a measure that would raise personal income taxes, boost the income tax from 3 to 5 percent and impose $1 billion in sales tax for the first time on many services. The House opted not to vote on the measure passed by the Senate.

    Facing a midnight deadline, Illinois lawmakers instead passed a makeshift spending plan that provides for only 50 percent of the funding for state agencies laid out in Quinn's original budget and is not expected to last much more than 6 months. On Wednesday, State Senate President John Cullerton used a parliamentary maneuver to block the budget and hold it in the Senate. The action was considered mostly symbolic since Governor Quinn claims he won't sign the budget anyway because it does not solve the deficit problem.

    Governor Quinn has stated before that he believes "in the tax based on the ability to pay: the income tax." Last month ITEP published its own report, agreeing with the governor's call for an income tax increase and recommending other reforms to help raise revenue and even out one of the most unfair tax systems in the nation.

    Illinois lawmakers can continue this dance for only so much longer, since the budget currently in effect expires on June 30 and the state faces a deficit of $11.6 billion. Tax reform in Illinois is long overdue, but it remains to be seen whether or not lawmakers are serious about balancing the budget in time to avoid what one called an "apocalyptic series of funding cuts."


    ITEP Weighs In: Illinois Tax Reform Debate


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    After years of relying on gimmicks and borrowing schemes to balance the state budget, Illinois elected officials are now signaling that they're prepared to think constructively and wisely about how to fill the state's $11.6 billion shortfall. Governor Pat Quinn, Cook County Assessor Jim Houlihan, and Senator James Meeks have each proposed tax reforms built around an increase in the state's personal income tax -- and have also proposed providing targeted income tax reductions for middle-income families.

    Now ITEP has released its own tax reform proposal. In a new report, ITEP shows that an income tax rate increase, in combination with targeted tax credits, could raise $3.6 billion in new state revenues while actually cutting the overall taxes paid by the poorest sixty percent of Illinoisans.

    There's good reason for this emphasis on income tax reform. The Illinois income tax is undeniably one of the lowest income taxes in the nation. Its 3 percent flat tax rate is the lowest top income tax rate in the U.S. And of the 41 states that levied broad-based income taxes in 2006 (the most current year for which data are available), only four states' income tax collections were lower, as a share of personal income, than Illinois.

    For too long Illinois has chosen to balance its budget on the backs of low and middle income taxpayers. Progressive revenue-raising options (like those discussed in the ITEP report) that alter the income tax are key if Illinois lawmakers want to solve the state's budget crisis.


    Making Way for Progress in Illinois


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    With the drama of newly impeached Governor Rod Blagojevich a distant memory, it's fine time that Illinois lawmakers got down to the people's business and worked to solve the state's startling $11.5 billion shortfall. According to the Chicago Tribune, if you converted the shortfall into $100 bills and stacked them it would make a tower 9 miles high and weigh 126 tons. The state of Illinois was surviving on borrowed money long before the current fiscal crisis rocked the Land of Lincoln. Part of the blame falls squarely on the shoulders of Governor Rod Blagojevich who infamously took a no new taxes pledge, saying, "We're not going to raise taxes on people." But then oddly, Governor Blagojevich turned around and proposed a gross receipts tax which would ultimately be paid by... people. When his proposal was defeated, he sat back and let the state go deeper and deeper into debt.

    On Wednesday, Governor Pat Quinn worked to close the door on the Blagojevich era by proposing his own sweeping fix to the state's budget. Along with over $1 billion in cuts, he also proposes to increase the state's income tax rate from 3 to 4.5 percent and triple the personal exemption from $2,000 to $6,000. These are not easy times for governors of any state, but Governor Quinn's position is certainly unenviable considering the situation he is inheriting. The debate over how to solve Illinois' budget problems is far from over, but Governor Quinn's proposal is a welcome shift from the close-your-eyes-and-duck approach of his predecessor.


    Opening for Progressive Tax Options in New York and Illinois


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    The New York Times reported earlier this week that the Empire State may use tax increases on the very wealthiest residents to help close a budget gap of roughly $15 billion. This is common sense, particularly since, as the Times notes, "Over the last 30 years, the trend has been to pare back income tax rates on the rich, federally and in the state. Since the mid-1970s, the state has cut its top tax rate from 15.375 percent to 6.85 percent." For more on New York's fiscal condition and ways to improve it, see this presentation by the Fiscal Policy Institute.

    Progressive tax reform may also be on the horizon for Illinois. Much hope accompanies newly elected Illinois Senate President John Cullerton. Cullerton replaces retiring Senate President Emil Jones who often stood with Governor Rod Blagojevich against constructive tax changes to solve Illinois' budget woes. Senator Cullerton recently hinted that needed tax hikes may be in the state's future, alluding to the fact that all options to solve the state's infamous budget shortfall are on the table.

    In a speech to the Senate Cullerton said, "In recent years, we have seen all the gimmicks and listened to all the quick-fix promises. But, we know they won't solve our problems. Instead we need a cooperative partnership -- and that requires sacrifice." Let's hope Cullerton can work to solve the state's budget with progressive solutions like increasing reliance on income taxes and lowering the state's dependence on property taxes instead of the litany of solutions floated in recent years (like increased borrowing and dependence on gambling) to solve the state's fiscal woes.


    With Blagojevich's Downfall, Will Tax and Budget Issues Be Resolved More Effectively in Illinois?


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    Rod Blagojevich, the Illinois governor who for years watched his states' finances spiral out of control because he refused to raise income or sales taxes, was arrested by FBI agents this week and is being charged with fraud and soliciting bribes.

    Blagojevich opposed various measures that would have helped the state pay for public services, but he supported a regressive and complicated tax (a gross receipts tax) that would have effects similar to that of a sales tax.

    Resignation, impeachment, conviction (maybe even two out of three) are all possible outcomes for the chief executive with the lexicon of a longshoreman.

    Obviously, Illinois public policy is in enormous flux now, too. On one hand, Lt. Gov. Pat Quinn does not appear to be a big fan of sound tax policy. He championed a measure that would have allowed taxpayers to use the ballot to block local tax changes. (To assess the idea of deciding tax issues through direct democracy, one only needs to look at California's budget crisis.) On the other hand, legislative leaders like Speaker of the House Mike Madigan have left the door open to using the income tax to address the state's budget deficit.

    To stay abreast of all the latest budget developments in Illinois, visit the Center for Tax and Budget Accountability's website.

    As the vast majority of state governments stare down budget shortfalls, new ideas about how to responsibly and fairly fill those gaps should receive an enthusiastic welcome. A new report from Good Jobs First, entitled Skimming the Sales Tax, does exactly that by revealing that states are currently giving away over $1 billion through "vendor discounts" or "dealer collection allowances" that reduce sales taxes.

    Vendor discounts allow retailers to legally keep a portion of the sales tax revenue they collect as compensation for the costs involved in collecting and remitting the tax. Twenty six states currently provide retailers with such compensation, amounting to a total of over $1 billion in annual revenue losses for those states.

    The policy prescription in many states is fairly clear. While there may be room for debate over whether any compensation is warranted, what is not in question is that there should be a sensible limit on the maximum amount that any one business can receive via this practice. As author Philip Mattera points out, "the main expenses that retailers incur with regard to sales taxes, especially software programs to track them, are fixed costs that do not rise in tandem with growth in receipts."

    Those states without such a limitation in many cases forfeit quite substantial amounts of revenue through vendor discounts. Illinois, for example, loses over $126 million annually due to the practice. Texas, Pennsylvania, and Colorado each lose in the neighborhood of $70 - $90 million per year. Thirteen of the twenty six states offering vendor discounts do not cap the amount any individual retailer can claim. In addition, five states that do impose limits on maximum compensation have set those limits at seemingly excessive levels, ranging from $10,000 to $240,000 per retailer.

    For state-by-state details on existing vendor compensation practices, as well as other ways in which retailers are being subsidized through the sales tax, see the report here.


    Students Boycott School to Highlight Flawed System


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    Chicago public school students boycotted classes this week. Illinois State Senator James Meeks organized a student boycott of public schools during the first week of classes to draw attention to the state's school funding crisis. The boycott began on Tuesday and was expected to go all week, but ended Wednesday when Sen. Meeks announced that Governor Blagojevich agreed to meet with him to discuss possible solutions. The Governor refused to meet with Senator Meeks if the boycott was in effect. Hundreds of students were said to have participated and organizers coordinated teach-ins for students in lobbies of area companies like Boeing and the Chicago Mercantile Exchange.

    The state's current method of funding schools is based largely on property taxes and results in drastic and inequitable differences in per pupil spending across the state. This example cited by the Chicago Tribune shows the inherent inequity. New Trier Township spent nearly $17,000 per student in 2005-06 and Sunset Ridge spent about $16,000, while Chicago Public Schools spent an estimated $10,400 per student. For several years, Senator Meeks, Illinois Voices for Children, the Center on Tax and Budget Accountability, and ITEP have advocated reform of Illinois' tax structure in favor of less reliance on regressive property taxes and increased reliance on income taxes as a way to correct the flaws of the current school funding structure. Let's hope that this protest encourages the Governor to see beyond his "no new taxes" pledge and reform a terribly broken system.


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


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

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

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

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


    Note to Illinois: Direct Democracy Does Not Produce Good Fiscal Policy


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    In Illinois, Lt. Gov Pat Quinn and Cook County Commissioner Forrest Claypool are leading the charge to allow taxpayers to use the ballot to block local tax changes. Currently voters in the state don't have the power to decide tax questions through the ballot. But in response to the Cook County sales tax's recent increase to 10.25 percent, some now want the state assembly to give voters the power to stop tax increases by local governments.

    To decide whether or not this is a good idea, one need only look around at the states that are already deciding tax issues via the ballot. One can look to Maine, where business interests are spending large amounts of money to convince voters to choose cheap beer over health care. Or look to Massachusetts, where some well-funded individuals have managed to secure a ballot question that would abolish the state's income tax, the source of 40 percent of the state's budget, without any provision to replace the money. Or look to the train wreck that started it all, California's Proposition 13, the infamous ballot referendum approved by the state's voters 30 years ago. One of the changes it made requires that the legislature approve any income tax increase by a two-thirds majority. Another provision limited property taxes to one percent of property's assessed value and limited increases in assessments to 2 percent each year. California's schools went from the best in the nation to among the worst as a result.

    Why does direct democracy produce unfair tax policy? The answer is obvious. Every single state has people who are elected and paid to make policy decisions. It's their job. They are supposed to study up on issues, talk to the people who care about the issues, and make a an educated decision. Most of us don't have the time to put that kind of work into learning about public policy and formulating positions. That's why we pay our lawmakers to do it. If they do a good job we reelect them, if they do a terrible job we throw them out. Ballot referenda allow lawmakers to escape this responsibility by placing issues before the voters, who have not thought through certain intricate questions (like whether or not eliminating a state's income tax will make it impossible to pay for schools, health care and road repair).

    As budget watchers have noted, the Illinois state government would probably not receive any awards for excellent fiscal policy these days. They will only make matters worse if they saddle the local governments with what is possibly the worst conceivable process for determining fiscal policy.


    Progressive Tax Reform Gains Ground in Alabama and Illinois


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    Ideas are being floated in Alabama and Illinois to address the regressive nature or their tax structures. Proponents of a revenue-neutral plan that has gained some attention in Alabama claim that it would cut taxes or keep them at their current level for 80% of taxpayers, while increasing taxes on only the wealthiest 20% of payers. Since the Alabama tax system is incredibly regressive, this would be a very welcome change.

    Under the proposed plan, the income tax would be made more progressive by increasing personal exemptions and standard deductions, at a cost of about $250 million per year. Additionally, the regressivity of the Alabama sales tax would be reduced by exempting groceries. The grocery exemption would bring Alabama closer in line with the overwhelming majority of states, as Alabama is one of only two states that makes no effort to mitigate the regressive effects of the grocery tax. The $550 million price tag attached to these tax cuts would be paid for by eliminating Alabama's regressive tax deduction for federal income taxes paid. Only two other states allow for a full deduction of federal income taxes paid. Eliminating this deduction would increase taxes the most for those wealthiest Alabamians who have the highest federal income tax liabilities.

    The reforms proposed in Illinois, and just recently approved by a Senate committee, would result in a net tax increase of about $3.8 billion to be used to fund education, early childhood programs, pensions, health care, and construction projects. Given that Illinois is projected to have budget deficits this year and for years to come, progressive tax increases seem like a very good idea. To ensure tax fairness, revenues would be raised by the most progressive tax available - the income tax. The personal income tax rate would increase from 3% to 5%, and the corporate income tax rate would rise from 4.8% to 8%. Offsetting much of this tax increase would be property tax cuts (a minimum of 20% of the school portion of property tax bills) and income tax credits for low-income families.

    Unfortunately, the governors in each of these states are opposed to the plans (primarily to the tax increases for wealthier taxpayers). This means that if tax reform is to occur in 2008, it could be much less progressive than what has been proposed thus far. It's certainly refreshing, however, to see state lawmakers discussing these kinds of relatively major tax overhauls with fairness considerations obviously on the top of their agendas.


    Illinois and Pennsylvania Governors Advance Proposals to 'Stimulate' Economy


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    The governors of Illinois and Pennsylvania are each seeking to follow the feds' lead and stimulate their economy with tax breaks. Governor Rendell's plan in Pennsylvania is to rebate up to $400 to low-income families with children, with the precise amount of the rebate being determined by the number of parents, number of children, and income earned in the family. In Illinois, Governor Blagojevich's plan is similar to Rendell's proposal in that it is only available to families with dependent children, though it differs in that its income eligibility thresholds are much higher: single-parent families earning up to $75,000, and two-parent families earning $150,000 will be eligible for the full $300 per child credit. Blagojevich's plan could be made more effective and less expensive by lowering the income limits to make these credits available primarily to the low and middle income families who would be most likely to immediately spend tax rebates on everyday needs.

    Fortunately, both of these stimulus proposals are refundable, meaning that families receive the money regardless of how much, if any, state income tax they paid. This is an extremely important component of any fair credit or rebate since even though those in the greatest need often pay no income taxes because of their low incomes, they do pay huge portions of their incomes in regressive sales and property taxes.

    One additional flaw with each plan is that low-income individuals without children will see no benefit. In terms of both stimulating the economy and assisting those in need, both of these plans could be improved by extending the rebates/credits in some form to individuals without children. This could be done very easily in Illinois by lowering the income eligibility criteria and using the resulting savings to assist low-income, childless individuals.


    Unfortunate Sweepstakes


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    In Kansas, several school districts are fighting to lure casinos into their boundaries. As the Kansas City Kansan notes, "Each of the five casino proposals on the table would bring different levels of funding to each of the local school districts." These local school districts are lobbying hard for casinos that would add to their their district's property tax base. Millions of dollars in new tax revenue -- as well as millions of dollars in social costs -- could result for the school district "lucky" enough to be the recipient of a new casino.

    Meanwhile, Illinois lawmakers continue to grapple with funding education, construction, and Chicago area public transportation. Some are predicting a financial "doomsday" next year for the state if new revenues aren't created in a hurry. House Speaker Michael Madigan has come out in favor of a plan to increase state gambling to forestall the doomsday. His plan "would put a casino in Chicago, auction off two other licenses, expand existing riverboats and put thousands of slot machines and video poker at horse tracks." Illinois House members are expected back in Springfield on Monday to consider increased gambling.

    Policymakers in both Kansas and Illinois have the opportunity to meet the needs of their residents through progressive and stable means, like income tax reforms. Unfortunately, gambling revenue is not stable over the long term and is certainly a regressive revenue source. Residents in both states lose when gambling proposals like these are on the table.


    Ongoing Budget Problems in Illinois


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    Faced with a looming budget hole, Illinois lawmakers shied away from addressing tax reform this year -- and elected officials in the state's biggest local government, Chicago's Cook County, now find themselves asking the hard questions state lawmakers avoided. A recent report from the Center on Tax and Budget Accountability shows that the county's current budget hole, estimated at $288 million, reflects a "structural deficit" -- that is, a recurring imbalance between the services a government provides and the revenues it uses to fund those services -- that will grow to over $800 million a year by 2012. The CTBA report explains that the county's heavy reliance on slow-growth property taxes and a narrow local sales tax base make the tax system incapable of keeping pace with the cost of funding important services. County lawmakers have proposed an increase in the county's already-high sales tax rate (without expanding the sales tax base to include currently-untaxed services), which would reduce the deficit but wouldn't directly address the sustainability concerns raised by the CTBA report.

    Meanwhile, state and county lawmakers are engaged in a tug of war over whether to extend the county's soon-to-expire temporary caps on the growth of residential property taxes. The Chicago Tribune explains succinctly why such caps are bad policy.


    Illinoink?


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    After weeks of angst, political bickering, and general upheaval, Illinois Governor Rod Blagojevich recently signed a budget bill for Fiscal Year 2008. Controversy had not died by the time of the signing, and the Governor line-item vetoed nearly $500 million in so-called "pork" projects. But the Center on Tax and Budget Accountability examined the projects in question and found the state's budget was not really laden with pork. Its report concluded that "it does not appear necessary to change the state's name to 'Illinoink'."


    Human Needs Services Endangered by Budget Standoff


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    Little progress has been made in the Illinois budget standoff. In fact, Governor Rod Blagojevich pleaded with state employees to continue working even though the state's one-month temporary budget extension ended on July 31. State Comptroller Dan Hynes says that the state must have some sort of budget by August 8 - when the state is scheduled to make school aid payments. In the meantime, legislative leaders have rejected the Governor's proposal for another one-month budget extension. Powerful House Speaker Michael Madigan has said, "I think we're close." Looking through our crystal ball we predict that Illinoisans can expect a modest budget that does little to improve education, expand health care coverage, or improve the state's tax structure.


    Turmoil in the Land of Lincoln


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    Lawmakers in Springfield are setting records that they certainly can't be proud of. The Chicago Tribune reports that Wednesday marked the 55th day the state has gone without a budget ("a modern day record"). The government is operating under a temporary one-month budget for July, but a long-term budget is fiscally and politically necessary. There was great hope at the beginning of the 2007 legislative session that this would be the year the state's school funding problems were solved, but now there's little hope that more than a business-as-usual budget will be eventually agreed to.

    Senate Democrats are promoting a 75 cent cigarette tax hike. Illinoisans are interested in a fully funded pension system, health care reform, and fixing the state's school funding situation, but a cigarette tax hike would hand the bill to those least able to pay. Apparently, powerful Senate President Emil Jones has again come out in favor of an income tax increase for school funding, but according to this article the legislature may continue to put off this progressive solution.


    Better Ideas for Illinois Tax Reform


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    Many observers thought this could be the year for progressive tax reform in Illinois. But in the wake of a disappointing regular legislative session that was dominated by one poorly-thought-out idea (Governor Rod Blagojevich's proposal for a "gross receipts tax"), lawmakers are back in Springfield for a special "overtime session." A new report from Voices for Illinois Children reminds lawmakers that reforming the state's low,flat-rate income tax could make the Illinois tax system both fairer and more sustainable. To read the Voices report, click here.


    Grossly Overrated


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    Gross Receipts Tax Is Not a Cure-All for the States

    Over the past few years, both Texas and Ohio have enacted major changes to their tax systems, choosing to replace existing business taxes with taxes based on companies' total receipts. This takes the form of a "margins" tax in Texas and the "commercial activity" tax in Ohio. Two other states, Illinois and Michigan, are also now considering whether to follow suit by implementing taxes based, at least in part, on gross receipts.

    IL Gov Won't Raise Taxes on People, Just Taxes That Are Passed onto People

    Despite Illinois Governor Rod Blagojevich coming before the Illinois House in a rare all-day hearing to promote his plan for implementing a gross receipts tax (GRT) his proposal was unanimously defeated by the Illinois House in a 107-0 vote. The Governor's proposal barely passed the Senate Executive Committee. Analyses by the Center on Budget and Policy Priorities and the Institute on Taxation and Economic Policy suggest that gross receipts taxes are generally passed on by businesses to consumers. The Governor, however, said in his address to the House, "I will not raise taxes on people. I won't do it today. I won't do it tomorrow. I won't do it next week, next month, next year." Ironically, the Governor also said that he would oppose any income or sales tax hike because "It's regressive, and people already are paying to much" but many experts think that the GRT is regressive and hits low- and middle-income people hardest.

    Eliminating Revenue Source + No Plan to Replace Revenue = Government Shutdown

    Since voting last year to repeal the state's Single Business Tax (SBT), which is set to expire on December 31, Michigan lawmakers have been in almost continuous debate regarding ways to replace this vital revenue source. Fearing a government shutdown, the Michigan House and Senate have passed very different tax proposals. The Senate-approved plan would not completely replace the revenue lost from the SBT, while the Governor-supported House plan will raise the same amount of revenue as the current SBT, but would allow for large tax credits for Michigan-based businesses. The House and Senate proposals both have a business income tax component, but the Senate plan relies more heavily on a gross receipts tax element. In the coming weeks, compromise is needed before Governor Granholm has the opportunity to sign this important yet contentious legislation.

    Ignore Those Lobbyists Boring Holes into the Gross Receipts Tax

    Part of the allure of gross receipts taxes - to hear proponents like Governor Blagojevich tell it, anyway - is that they don't have many of the same loopholes as corporate income taxes and will expand the base of economic activity and economic actors subject to taxation. The reality may prove quite different, however. Gross receipts type taxes have scarcely settled onto the pages of law books in Texas and Ohio, yet businesses in both states have already begun clamoring for - and will soon start receiving - concessions and special treatment. In Texas, the House of Representatives last week approved a bill that would double the exemption for small businesses under the margins tax, would lower the taxes paid by multistate financial services companies under the tax, and would attempt to prevent Sprint Nextel from passing the tax along to its customers.

    In Ohio, a provision of the commercial activities tax designed to raise tax rates automatically - should the total amount of revenue generated by the tax begin to fall - will soon be eliminated, thus leaving the state without an important stopgap. These changes may not have a deleterious impact on the fiscal situation in either Texas or Ohio. The changes being debated in Texas would be offset by other revenue measures, for instance. Still, they should give policymakers in Michigan and Illinois pause. What they enact now may ultimately look quite different from what they envision.


    Short Term Gain, Long Term Pain


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    At first glance, it looks like the holy grail of state governance: a way to raise more revenue without raising taxes.The idea of selling off or leasing state assets, such as the state lottery, is now under discussion in Illinois, Indiana, Minnesota, New Jersey, and Texas. It is easy to see the idea's appeal: Texas Governor Perry predicts that the sale of his state's lottery would generate at least $15 billion, for example, while Indiana Governor Daniels expects that state's lottery to carry a price tag of over $1 billion, all without a single tax increase. However, there is a catch. While the boost to revenue is substantial, it is a one-time gain, and it comes at the cost of the yearly revenue contributions these assets would provide far into the future. While the seemingly painless financial gain offered by this privatization schemes is tempting, in the long run these sales would only diminish state coffers.

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