Indiana News


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


| | Bookmark and Share

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


| | Bookmark and Share

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.  


States Kick Can Down Crumbling Road on Transportation Funding


| | Bookmark and Share

Three states – Indiana, South Carolina, and West Virginia – started the year on the right foot, looking at serious proposals to raise new revenue for severely underfunded transportation construction and maintenance funds. Sadly, legislators in all three states embraced partial solutions or punted entirely, preferring short-term fixes at the expense of other budget priorities.

South Carolina lawmakers had the chance to pass a significant tax package that would increase revenue for road repairs. In January, the state’s Senate Finance Committee considered a plan that would raise revenue by $694 million annually through a phased-in 12-cent increase in the gas excise tax, along with other transportation-related fee increases. Those increases would then be offset with a combination of $398 million annually in "broad-based" income tax cuts (bracket expansion and rate reductions on the top and bottom brackets), "targeted" income tax cuts (creation of a 3.5 percent refundable EITC and expansions of a few other credits), and some reduction of business property taxes. The offsets were a requirement of Gov. Nikki Haley, who vowed to veto any bill without them. The net effect of this plan would have been somewhat regressive and would have been much worse without the EITC.

However, the unwieldy package that tried to appeal to all legislators was undone by its complexity. For example, the EITC intended to attract progressive lawmakers repelled more conservative lawmakers. After weeks of delay in the Senate and a filibuster, the backers of the more ambitious package caved. Senators instead passed a measure to raid the general fund for more road money, jeopardizing other priorities and failing to solve the state’s structural funding issues. House Speaker Jay Lucas was not pleased. “This plan kicks the can further down the road and into a giant pothole,” he decried. “It's not really a new idea, and it's not a solution.” Gov. Haley has urged House lawmakers to accept the Senate’s $400 million punt, but also acknowledged that the state needs a long-term fix.

The debate in West Virginia followed a similar pattern, but began with more urgency due to the ongoing fiscal challenge there. A global downturn in energy markets has hit West Virginia and many other states reliant on oil and gas revenues hard in the pocketbook. Just last week, revenue forecasts for the state were downgraded by $92 million, adding to the $354 million shortfall that Gov. Earl Ray Tomblin and lawmakers have been grappling with since January.

Gov. Tomblin began the legislative session by calling for new tax increases to close the budget gap, including an increase in the cigarette tax of 45-cents-per-pack, a new tax on e-cigarettes and a 6 percent sales tax on telecommunications. A Senate bill, SB 555, would have increased the gas tax by 3-cents-per-gallon, the sales tax rate by 1 percent and various vehicle fees and taxes to send more money to the State Road Fund. The Senate proposal would have increased revenue by $290 million annually.

State lawmakers have been unable to come to an agreement on how to solve the budget crisis or raise new revenue for roads. After the release of the gloomy revenue numbers, Gov. Tomblin announced that the legislative session would end with no budget at all. Lawmakers are expected to reconvene later this spring.

Indiana lawmakers followed a familiar script this legislative session. There, the most ambitious proposal belonged to state Rep. Ed Soliday. His plan, HB 1001, would have earmarked excess general funds and gasoline excise taxes for transportation infrastructure, allowed counties and municipalities to levy motor vehicle surtax and wheel taxes, and allowed some portion of local income tax revenues to be used for roads/bridges. The bill would have increased revenue by raising the gas tax, special fuel tax, and motor carrier surcharge tax. It also would have increased the cigarette tax to $1.995 per pack to pay for Medicaid (to offset the general fund revenues now earmarked for infrastructure). Soliday’s proposal was later amended by his House colleagues to include expanded tolls and an income tax cut for non-corporate taxpayers.

Unfortunately, HB 1001 was stripped of most of its revenue raising components once it moved to the Senate. The final bill allowed the earmarking of general fund and gasoline excise taxes to transportation and includes the provision allowing local jurisdictions to levy vehicle surtaxes and wheel taxes. But instead of increasing state revenue, the final bill relies on shifts and transfers,  including transferring surplus general revenue funds to the state highway fund, which over the next two years will generate less than $230 million in “new money” for transportation funding at the expense of other critical state investments. Gov. Mike Pence praised the final measure as short-term benefit for the state, but the bill is far less than the $1 billion investment in transportation infrastructure he initially sought. 


Guest Blog: Indiana Income Tax Cuts to Offset Gas and Cigarette Tax Increases? There are Better Ways


| | Bookmark and Share

Ensuring Indiana has funding needed to adequately repair its roads and bridges over the next several years is a top priority among lawmakers this legislative session. Among the proposed infrastructure improvement plans is HB 1001, which would raise the state’s gasoline tax by 4 cents per gallon, the tax on diesel fuel by 7 cents, and the cigarette tax by $1 per pack. The package would increase road funding by an estimated $500 million a year, with the revenue from the cigarette tax increase offsetting general revenue funds that would be newly diverted for transportation.

The House bill also includes a $294 million tax cut via a gradual reduction in the state’s personal income tax rate to 3.06 percent. By also proposing a reduction in the personal income tax, the bill undermines revenue potential for infrastructure improvements, deprives the state of revenue needed for other critical investments, and exacerbates the unfairness of Indiana taxes (Indiana has the tenth most unfair tax system in the country). Hoosiers among the bottom 80 percent of earners already pay a higher share of their income in state and local taxes than those in the top 20 percent. Under HB 1001, the average taxpayer among the bottom 80 percent would see a tax hike while the wealthiest 20 percent would benefit from a tax cut.

HB 1001: Taxing the Bottom and Cutting the Top

Our analysis[i] of HB 1001 illustrates how upper-income taxpayers come out ahead under this proposal. Gas and cigarette increases are regressive—meaning that middle- and low-income families pay a larger share of their incomes than the wealthy. As shown in Table 1, taxpayers making less than $22,000 will see their taxes go up by 0.7 percent of their incomes while taxpayers in the top 5 percent will pay increases less than 0.05 percent under the proposed gas and cigarette changes.

While cutting the personal income tax can offset some of the regressive effects of raising regressive consumption taxes, cutting the income tax rate disproportionately benefits wealthier taxpayers, worsening the tax fairness of the proposal.[i] The combined impact of these regressive tax increases and cut to the income tax rate would result in a tax increase for the average Indiana taxpayer in the bottom 80 percent and an average tax cut for the top 20 percent. For families in the bottom 20 percent, this means an average tax increase of $79 while those in the top 1 percent would see an average tax cut of more than $1,200.

More Equitable Alternatives

If lawmakers are intent on offsetting regressive consumption tax increases with tax cuts, there are more equitable ways to do it. We considered three alternatives, all of which would cost the same amount as the proposed rate cut but better target the cut to households who are already being asked to pay a higher share of their income in Indiana taxes.

The three proposals include raising the personal exemption by $1,530 for all taxpayers, raising the personal exemption by $2,150 for households with income less than $100,000 (or $50,000 if single or married filing separately), and coupling Indiana’s Earned Income Tax Credit (EITC) to the federal EITC and increasing it from 9 percent to over 32 percent. Table 2 shows how each of these alternatives compares to the proposed HB 1001 rate reduction.

Under Option 1, the same number of Hoosiers (90%) would receive an income tax cut as under the proposed rate reduction, but the share of the tax cut going to low- and higher-income households is rebalanced: the top 20 percent of earners receive 29 percent of the cut (instead of 55) and the remaining 80 percent of earners receive 71 percent (instead of 45). 

In Option 2, the tax cut is more narrowly targeted to the bottom 80 percent of earners. While these earners would still be paying a higher net tax under HB 1001 (the average increase in gas and cigarette taxes would be greater than their average income tax cut), this alternative gets closer to holding these taxpayers harmless than HB 1001’s rate cut.

Option 3 is the most targeted of the alternatives presented, targeting the cut to the bottom 60 percent of earners. Coupling Indiana’s EITC with the federal credit and increasing its value from 9 to over 32 percent would fully offset the impact of the proposed tax hikes on the average taxpayer in the bottom 40 percent of earners. It would also help offset the disproportionately high rate of taxes these earners pay in all Indiana state and local taxes.

Closing Thoughts

The gas tax is a critical source of revenue for funding state transportation infrastructure needs. Indiana hasn’t raised its gas taxes in 13 years, making money to pay for these critical investments harder to come by, especially in light of the growing costs of materials and construction. Given this, lawmakers’ efforts to raise the gas tax are applaudable, but pairing an increase for transportation funding with a large tax cut undermines the purpose of the tax increase while shorting the state of revenue needed to fund other critical state investments, including higher education, public health, and safe communities. Indiana would be better off pairing regressive tax increases with targeted tax cuts for working families rather than enacting cuts that tilt the state’s upside down tax system more in favor of the wealthy.

This post was originially published in the Indiana Institute for Working Families blog.


[i] While Indiana has a flat income tax rate, the effect of its income tax is not perfectly “flat” because the state offers some sensible tax breaks (personal exemption, rent deduction, EITC, etc.). Because of these tax breaks, a different portion of households’ income is subject to the flat income tax rate—for example, a personal exemption of $1,000 exempts 20% of income from taxation for a family with $5,000 while this same exemption only exempts 0.002% of income for a household with $50,000. Since a larger portion of middle- and high-income families’ income is subject to the income tax, when there is a reduction in the tax rate, they benefit more from the cut. (Note that while low-income families pay a smaller share of their income in personal income taxes, they still pay the highest share of their income in all state and local taxes combined.)


[i] This analysis was performed using the ITEP Microsimulation Tax Model, which is a tool for estimating the impact of federal, state, and local taxes by income group.  It uses a very large stratified sample of federal tax returns, as well as supplementary data on the non-filing population, to derive estimates that apply to taxpayer populations at the state level. The U.S. Treasury Department, the Congressional Joint Committee on Taxation, the Congressional Budget Office, and several state departments of revenue use similar models.  For a more detailed explanation of the ITEP Tax Model, see http://www.itep.org/about/itep_tax_model_full.php 


2016 State Tax Policy Trends: Shifty Tax Proposals


| | Bookmark and Share

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

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

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

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

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

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

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

Tax Shifts for Transportation a Bridge to Nowhere

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

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

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

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

Up Next

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

 


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


| | Bookmark and Share



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

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

 


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

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

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

 


State of the State Addresses This Week:

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

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

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

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

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

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

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


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

 


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


| | Bookmark and Share

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

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

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

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

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

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

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

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

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

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

Trigger Warning

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

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

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

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

And Speaking of Driving on Flats

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

Up Next

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


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


| | Bookmark and Share

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.


State Rundown 9/16: Let's Make A Deal


| | Bookmark and Share

Click Here to sign up to receive the 
State Rundown in your inbox.

SRLogo.jpg

Leaders in New Hampshire voted on a final budget deal this week after months of wrangling between Gov. Maggie Hassan and legislative leaders. Hassan vetoed a budget passed by the legislature in June, and lawmakers were unable to overcome her veto. The budget dispute centered on business tax cuts pursued by the legislature but opposed by the governor. The final compromise will cut taxes by the same amount as the vetoed budget over the biennium, but the second round of tax cuts will be contingent upon state revenues meeting certain targets. If lawmakers pass the compromise budget, the business profits tax (BPT) rate will decrease from 8.5 to 8.2 percent and the business enterprise tax (BET) rate will be lowered to 0.72 percent in 2016. In 2018, the BPT rate will fall to 7.9 percent and the BET rate will fall to 0.675 percent, provided the revenue trigger is met.

Alabama lawmakers also moved to resolve a longstanding budget impasse as state leaders get closer to an October 1 deadline. There, legislators and the governor disagree over how to make up a projected $200 million budget gap. This week, the legislature passed a cigarette excise tax of 25 cents per pack and approved a permanent shift of some use tax revenue from the Education Trust Fund to the General Fund. Revenue from the use tax, a sales tax on goods purchased outside the state, tends to growth with the economy, while the General Fund revenues have remained flat since 2008. The portion of revenue moved to the general fund is projected to yield $80 million. The cigarette tax increase was opposed by some conservatives, while progressive lawmakers said the transfer of funds out of the Education Trust Fund could hurt public schools. Gov. Robert Bentley is expected to sign both measures.  The state capitol was the site of dueling rallies by progressive groups and Alabama tea partiers over various tax proposals designed to close the budget gap.

West Virginians continue to urge their state legislators to exercise caution on tax reform proposals, despite Art Laffer’s encouragement. Ted Boettner of the West Virginia Center on Budget and Policy noted that “Years of austerity and tax cuts have not boosted the West Virginia’s economy,” and that previous tax cuts have not kept the state from ranking first nationally in unemployment. “Taxes pay for services businesses want and need.” Boettner echoes the advice of Commerce Secretary Keith Burdette, who said legislators should focus on other ways to make West Virginia more competitive, like workforce and infrastructure investments.

Local officials in Indiana are worried that a push from big-box retailers will spell big revenue losses for cities and towns and a higher tax bill for homeowners. The concern arises because some retailers insist that their stores should be assessed as vacant structures for sale instead of based on their value as active stores. Some retailers have successfully appealed their assessments before tax courts, forcing jurisdictions to issue millions in refunds. A legislative fix was approved by the lawmakers in Indianapolis, but the change only limits property value comparisons to vacant structures that have been up for sale for less than a year and used for similar purposes. It is unlikely the law will address the underlying dispute over property valuation, and local officials want stronger language.

State gambling revenue has been flat since the Great Recession, according to the Rockefeller Institute, thanks to a lack of interest in traditional gaming from younger consumers. Polling from the American Gaming Association finds that younger players are more attracted to table games, which bring in less casino revenue, than they are slots, which are the most lucrative form of gaming. Other studies found that younger gamers spent more on food, entertainment and drink than gambling at casinos. The studies highlight the danger of states relying on gambling revenue rather than more traditional sources not subject to industry volatility. 

 


State Rundown 9/24: Tax Cuts, Tax Cuts and More Tax Cuts


| | Bookmark and Share

monopoly.jpgThe Kansas dogpile continues, with the Washington Post editorial board launching the latest broadside against Gov. Sam Brownback’s tax cut fiasco. “Few if any governors, “it writes, “have undertaken such an extreme trial-by-revenue-deprivation in a state so clearly lacking the economic means to withstand it.” The board also notes that both Moody’s and Standard and Poor’s have downgraded the state’s credit rating, since they feel that budget is not “structurally aligned.” That’s fancy credit agency talk for Kansas is broke.

In Ohio, where state officials have apparently never heard of Kansas, enthusiasm for needless tax cuts continues unabated. Incumbent Gov. John Kasich, running for a second term, promises that if reelected he will make further income tax cuts a top priority. To make his case, he employed the canard that high income tax burdens have forced people to leave the state. Kasich has already cut income taxes by 10 percent -- though, the “relief” hasn’t been evenly distributed. An analysis by ITEP and Policy Matters Ohio found that 70 percent of Ohio taxpayers will get an average tax cut of less than $100, while the top 1 percent of earners will pay $8,262 less, on average. Even worse, those making under $19,000 will actually pay more in taxes, after taking into account a sales tax hike meant to offset cuts elsewhere.

The tax debate started by Gov. Mike Pence in Indiana continues, as the governor gears up for the upcoming biennial legislative session. Tax reform is high on his agenda. Pence held a tax conference to bat around ideas to make Indiana’s tax system more competitive in June; some observers were dismayed that Art Laffer and Grover Norquist had speaking slots, while the general public (you know, the people affected by tax changes) were barred from attending. Meanwhile, the state superintendent is asking for more money so she doesn’t have to charge families for school textbooks.

Both candidates for governor in Arkansas are trying to one-up each other with voters by touting their plans for big tax cuts. Republican candidate Asa Hutchinson has pledged to cut the income tax by $100 million in his first year as governor, with the end goal of eliminating the tax entirely. Democratic candidate Mike Ross wants to cut the income tax by $575 million -- but gradually, and only if the state can afford it. According to Ross, Hutchinson’s plan is fiscally irresponsible and would put Arkansas on a glide path to Kansas’ budget woes. Hutchinson claims that Ross is making big promises to voters without being specific. Neither plan would make Arkansas’ tax system less regressive; as it stands, the bottom 20 percent currently pay an effective tax rate nearly twice that of the top 1 percent. For more coverage of the race in Arkansas, check out our recent blog post

If you have a great state news item that we missed here, please send it to sdpjohnson@itep.org so we can spread the word. 


State News Quick Hits: Governors Misguidedly Oppose Progressive Taxes


| | Bookmark and Share

New Jersey Governor Chris Christie signed a FY15 budget on Monday after nixing Democratic bills which would have fully funded the state’s promised pension payments through a new “millionaire’s tax.” The effects of the governor’s decision to forgo making the full payments required under his much-lauded 2011 pension reform law are yet to be seen - Standard & Poor’s has threatened to downgrade the state’s debt again while a judge could still reverse Christie’s decision and require the payments to be made.

Indiana Governor Mike Pence pledged to make tax reform a priority during the next legislative session at a conference last week attended by infamous supply siders Arthur Laffer and Grover Norquist, and former Bush administration economic advisor Glenn Hubbard. Pence claims that the tax code must be simplified in order to create a better environment for economic growth, but Indiana House Minority Leader Scott Pelath argues that the language of “simplification” is really just a ruse to disguise the objective of reducing the progressive personal income tax.

Rhode Island and Indiana saw drops in their corporate tax rates Tuesday, a misguided tactic used by states to promote job creation with little proof of success. Rhode Island will drop its rate from 9 to 7 percent, while Indiana’s rate will gradually be reduced to 4.9 percent (this is on top of a gradual reduction from 8.5 to 6.5 percent enacted a few years ago).  However, at least Rhode Island lawmakers sensibly coupled the corporate rate drop with base broadening policies including mandatory combined reporting  which requires a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report.

Kansas’s June revenue collections came in $28 million under projections, according to officials. The state ends the fiscal year $338 million short of total projected revenue amid concerns that Governor Brownback’s income tax cut package is causing more bleeding than initially anticipated. Concerned that the state may be spiraling into a budget crisis, House Democratic leader Paul Davis has proposed postponing the next phase of the governor’s tax cuts.


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


| | Bookmark and Share

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


Indiana Lawmakers Shower More Breaks on Low-Tax Corporations


| | Bookmark and Share

The state corporate tax study Citizens for Tax Justie and the Institute on Taxation and Economic Policy released today shows that three very profitable Fortune 500 companies headquartered in Indiana paid an effective corporate income tax rate ranging from just 0.4 to 1.5 percent over the last five years.  Eli Lilly, NiSource, and WellPoint earned a total of over $35 billion in profits between 2008 and 2012, but thanks to a variety of tax avoidance techniques none of these companies even came close to paying the statutory 8.5 percent rate that was in effect in Indiana for most of this five-year period.  Despite this fact, Indiana lawmakers inexplicably decided last week to enact yet another corporate income tax rate cut, as well as a property tax break for business equipment.

Less than three years ago, former Governor Mitch Daniels signed into law a bill gradually lowering the state’s corporate tax rate from 8.5 percent to 6.5 percent.  The final stage of that tax cut is still over a year away, and yet Governor Pence says he’s “pleased” with the fact that the current legislature just sent him another corporate tax bill that will eventually lower the rate to 4.9 percent.  The Institute on Taxation and Economic Policy (ITEP), notes: “When some of Indiana’s most successful corporations are paying such a small fraction of their profits in state income taxes to states around the country, it raises serious questions about whether reducing the corporate income tax is a worthwhile priority.”

But this corporate tax rate cut isn’t the only giveaway for big business that Governor Mike Pence will soon be signing into law.  The same legislation containing the corporate tax rate cut also grants localities the option to begin a race-to-the-bottom by eliminating their property taxes on new business equipment.  A report (PDF) from the Indiana Fiscal Policy Institute explains that giving localities this option is unlikely to draw any new businesses into the state, though it may reshuffle existing businesses around within the state’s borders.  And the president of the Institute explains that “I’m a little worried about the nature of allowing local governments to adopt this when some counties depend so much on business personal property tax and some don’t.”

Indiana’s largest and most successful companies already enjoy a shockingly low tax rate, and that rate is about to get a lot lower.  Hopefully next session lawmakers will turn their attention toward initiatives that could actually benefit ordinary Indiana residents—like improving the state’s education system and infrastructure.


State News Quick Hits: Party With Boeing, Targeted Tax Cuts and More


| | Bookmark and Share

It’s an age-old question: How do you thank legislators who give your profitable company an $8.7 billion tax subsidy? Most etiquette experts agree that a handwritten note just won’t do. But a lavish party thrown in your benefactors’ honor — that’s more like it. Recently, Boeing threw a party for Washington state lawmakers to thank them for the record amount of taxpayer money they delivered to the company in a special legislative session late last year. The reception was conveniently held across the street from the Capitol. Thankfully for Boeing, the cost of the party will likely be written off as a business expense on next year’s taxes.

Indiana lawmakers are looking in all the wrong places for a way to boost their state’s economy. The Indiana Senate has passed a bill eliminating the business equipment tax for companies with less than $25,000 worth of equipment, while the House version would give localities the option of eliminating the tax entirely for new machinery. But a new report (PDF) from the Indiana Fiscal Policy Institute explains that localities are in no position to deal with yet another cut in their property tax bases, and that giving localities the option of eliminating this tax is unlikely to draw any new businesses into the state (though it may reshuffle existing businesses around within the state’s borders).

The Arizona Daily Star reports that “a bid to enact a flat income-tax rate in Arizona is dead.” State Representative J.D. Mesnard had hoped to begin flattening one of the state’s only major progressive revenue sources by reducing the number of income tax brackets from five to three, but he appears to have abandoned that effort after failing to gather any support. But income tax cuts are hardly off the agenda. Mesnard still wants to funnel any new sales tax revenue collected from cracking down on online sales tax evasion into income tax cuts that are likely to benefit the rich. Much more reasonable, however, is his proposal to index the state’s tax brackets to inflation—a change that would actually help retain the progressivity of Arizona’s income tax over time.

Michigan Governor Rick Snyder has a better tax-cutting plan than his colleagues in the legislature. Rather than rewarding wealthy taxpayers with a cut in the state’s income tax rate, Snyder wants to provide targeted property tax relief to middle-income families through an expansion of the state’s circuit breaker program. The expansion would help offset a reduction in the circuit breaker passed in 2011 to help pay for a massive business tax cut sought by the Governor. But while Snyder’s plan is an improvement over plans to cut the income tax rate, the Michigan League for Public Policy notes that Snyder’s plan is hardly perfect: “a critical omission [from Snyder’s budget] was the failure to restore cuts in the state’s Earned Income Tax Credit, the best tool for helping families with the lowest wages.” And there are also serious questions about whether Michigan lawmakers should be discussing tax cuts at all—a new poll shows that in terms of their top priorities, voters rank tax cuts a “distant third” behind spending on schools and roads.


A New Wave of Tax Cut Proposals in the States


| | Bookmark and Share

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

Tax cut proposals are by no means a new trend.  But, the sheer scope, scale and variety of tax cutting plans coming out of state houses in recent years and expected in 2014 are unprecedented.  Whether it’s across the board personal income tax rate cuts or carving out new tax breaks for businesses, the vast majority of the dozen plus tax cut proposals under consideration this year would heavily tilt towards profitable corporations and wealthy households with very little or no benefit to low-income working families.  Equally troubling is that most of the proposals would use some or all of their new found revenue surpluses (thanks to a mostly recovering economy) as an excuse to enact permanent tax cuts rather than first undoing the harmful program cuts that were enacted in response to the Great Recession.  Here is a brief overview of some of the tax cut proposals we are following in 2014:

Arizona - Business tax cuts seem likely to be a major focus of Arizona lawmakers this session.  Governor Jan Brewer recently announced that she plans to push for a new tax exemption for energy purchased by manufacturers, and proposals to slash equipment and machinery taxes are getting serious attention as well.  But the proposals aren’t without their opponents.  The Children’s Action Alliance has doubts about whether tax cuts are the most pressing need in Arizona right now, and small business groups are concerned that the cuts will mainly benefit Apple, Intel, and other large companies.

District of Columbia - In addition to considering some real reforms (see article later this week), DC lawmakers are also talking about enacting an expensive property tax cap that will primarily benefit the city’s wealthiest residents.  They’re also looking at creating a poorly designed property tax exemption for senior citizens.  So far, the senior citizen exemption has gained more traction than the property tax cap.

Florida - Governor Rick Scott has made clear that he intends to propose $500 million in tax cuts when his budget is released later this month.  The details of that cut are not yet known, but the slew of tax cuts enacted in recent years have been overwhelmingly directed toward the state’s businesses.  The state legislature’s more recent push to cut automobile registration fees this year, shortly before a statewide election takes place, is the exception.

Idaho - Governor Butch Otter says that his top priority this year is boosting spending on education, but he also wants to enact even more cuts to the business personal property tax (on top of those enacted last year), as well as further reductions in personal and corporate income tax rates (on top of those enacted two years ago). Idaho’s Speaker of the House wants to pay for those cuts by dramatically scaling back the state’s grocery tax credit, but critics note that this would result in middle-income taxpayers having to foot the bill for a tax cut aimed overwhelmingly at the wealthy.

Indiana - Having just slashed taxes for wealthy Hoosiers during last year’s legislative session, Indiana lawmakers are shifting their focus toward big tax breaks for the state’s businesses.  Governor Mike Pence wants to eliminate localities’ ability to tax business equipment and machinery, while the Senate wants to scale back the tax and pair that change with a sizeable reduction in the corporate income tax rate. House leadership, by contrast, has a more modest plan to simply give localities the option of repealing their business equipment taxes.

Iowa - Leaders on both sides of the aisle are reportedly interested in income tax cuts this year. Governor Terry Branstad is taking a more radical approach and is interested in exploring offering an alternative flat income tax option. We’ve written about this complex and costly proposal here.

Maryland - Corporate income tax cuts and estate tax cuts are receiving a significant amount of attention in Maryland—both among current lawmakers and among the candidates to be the state’s next Governor.  Governor Martin O’Malley has doubts about whether either cut could be enacted without harming essential public services, but he has not said that he will necessarily oppose the cuts.  Non-partisan research out of Maryland indicates that a corporate rate cut is unlikely to do any good for the state’s economy, and there’s little reason to think that an estate tax cut would be any different.

Michigan - Michigan lawmakers are debating all kinds of personal income tax cuts now that an election is just a few months away and the state’s revenue picture is slightly better than it has been the last few years.  It’s yet to be seen whether that tax cut will take the form of a blanket reduction in the state’s personal income tax, or whether lawmakers will try to craft a package that includes more targeted enhancements to provisions like the Earned Income Tax Credit (EITC), which they slashed in 2011 to partially fund a large tax cut (PDF) for the state’s businesses. The Michigan League for Public Policy (MLPP) explains why an across-the-board tax cut won’t help the state’s economy.

Missouri - In an attempt to make good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year, House Republicans are committed to passing tax cuts early in the legislative session. Bills are already getting hearings in Jefferson City that would slash both corporate and personal income tax rates, introduce a costly deduction for business income, or both.

Nebraska - Rather than following Nebraska Governor Dave Heineman into a massive, regressive overhaul of the Cornhusker’s state tax code last year, lawmakers instead decided to form a deliberative study committee to examine the state’s tax structure.  In December, rather than offering a set of reform recommendations, the Committee concluded that lawmakers needed more time for the study and did not want to rush into enacting large scale tax cuts.  However, several gubernatorial candidates as well as outgoing governor Heineman are still seeking significant income and property tax cuts this session.

New Jersey - By all accounts, Governor Chris Christie will be proposing some sort of tax cut for the Garden State in his budget plan next month.  In November, a close Christie advisor suggested the governor may return to a failed attempt to enact an across the board 10 percent income tax cut.  In his State of the State address earlier this month, Christie suggested he would be pushing a property tax relief initiative.  

New York - Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Governor Cuomo unveiled a tax cutting plan in his budget address that will cost more than $2 billion a year when fully phased-in. His proposal includes huge tax cuts for the wealthy and Wall Street banks through raising the estate tax exemption and cutting bank and corporate taxes.  Cuomo also wants to cut property taxes, first by freezing those taxes for some owners for the first two years then through an an expanded property tax circuit breaker for homeowners with incomes up to $200,000, and a new tax credit for renters (singles under 65 are not included in the plan) with incomes under $100,000.  

North Dakota - North Dakota legislators have the year off from law-making, but many will be meeting alongside Governor Jack Dalrymple this year to discuss recommendations for property tax reform to introduce in early 2015.  

Oklahoma - Governor Mary Fallin says she’ll pursue a tax-cutting agenda once again in the wake of a state Supreme Court ruling throwing out unpopular tax cuts passed by the legislature last year.  Fallin wants to see the state’s income tax reduced despite Oklahoma’s messy budget situation, while House Speaker T.W. Shannon says that he intends to pursue both income tax cuts and tax cuts for oil and gas companies.

South Carolina - Governor Nikki Haley’s recently released budget includes a proposal to eliminate the state’s 6 percent income tax bracket. Most income tax payers would see a $29 tax cut as a result of her proposal. Some lawmakers are also proposing to go much farther and are proposing a tax shift that would eliminate the state’s income tax altogether.


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


| | Bookmark and Share

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.”


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


| | Bookmark and Share

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

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

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

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

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


Will Indiana Cut Local Revenues Yet Again?


| | Bookmark and Share

Having already cut taxes for the state’s wealthiest residents, Governor Mike Pence and Indiana’s legislative leadership have shifted their focus toward cutting taxes for businesses.  Specifically, they’ve declared eliminating or reducing the business personal property tax to be a top priority for the upcoming legislative session.  The business personal property tax, levied mainly on equipment and machinery, currently raises over $1 billion each year for localities, school districts, and library districts.  State lawmakers would not see their revenues directly affected by repeal of the tax.

Governor Pence says that he wants to take this revenue source away from local governments in a way that would not “unduly harm” them, though he did not specify how he would accomplish this goal, or what an acceptable level of “harm” would be.  While some localities collect just 3 percent of their total property tax revenues from business property, others depend on the tax for as much as 40 percent of their property tax collections.

If the tax is repealed, state aid would be hugely important in avoiding deep cuts in local services, but other states’ track records in providing such aid is less than encouraging.  Lawmakers face a constant temptation to renege on promises they’ve made to localities as they begin to look for ways to pay for their own tax or spending priorities, or when the state budget eventually falls on hard times.

Unsurprisingly, then, the head of the Indiana Association of Cities and Towns says that “every mayor that I have spoken with is deeply concerned about what the elimination of the personal property tax might mean to local government.”  The Associated Press also provides some important context for their concern, noting that “many communities are still struggling with their budgets five years after the enactment of statewide property tax caps.”

If the business personal property tax is repealed and local governments are left to fend for themselves, Dr. Larry DeBoer of Purdue University estimates that other property owners would be asked to make up about half of the lost revenue.  Specifically, he expects that they would see their property taxes raised by a combined total of about $453 million per year.  In part because of the 2008 property tax caps, however, localities would also have to cut their budgets to make up much of the difference.  Unless state lawmakers devise a plan to truly make localities whole (and actually to stick to that plan), Indiana residents could expect their local services to be cut by up to $510 million each year, on top of the cuts that have already gone into effect.


State News Quick Hits: Starving Government With TABOR, and More


| | Bookmark and Share

TABOR stands for Taxpayer Bill of Rights, but it’s really a destructive law that restricts tax and spending growth with the goal of starving government. Colorado has the most restrictive version of this kind of law and serves as a cautionary tale. The Colorado TABOR and its implications are described in a new policy brief from the Institute on Taxation and Economic Policy (ITEP).  In a nutshell, TABOR’s arbitrary limit on the size of government prevents states from meeting their evolving responsibilities as populations change, services become more expensive, and voters demand new public investments.

Texas Governor Rick Perry is headed to Missouri to stump for a regressive income tax cut that some legislators are trying to enact over Governor Nixon’s recent veto.  If Show Me State residents ignore Perry’s advice, who could blame them? The former presidential candidate’s own state’s tax system is one of the least fair in the country.  Only five states require their poorest residents to pay more in taxes than Texas.

Indiana’s property tax caps, which we’ve long criticized, are causing headaches for local lawmakers in Indianapolis who are facing pleas from law enforcement and other agencies for more funds. Coupled with the revenue slump brought on by the recent recession, officials are grappling with three choices: close their current budget gap by raising the city’s income tax; risk the city’s AAA credit rating by tapping its reserves; or enact even deeper cuts in public services on top of those already in effect.

It looks like taxes will be a hot issue in the 2014 Arkansas gubernatorial election.  Arkansas’ leading republican candidate, Asa Hutchinson, recently said he supported phasing out the state’s personal income tax, but offered no specifics for how he would replace the lost revenue.  Mike Ross, the leading Democratic candidate, took Hutchinson to task, reminding Arkansans that tax cuts come with a price: “So when you start talking about cutting taxes, unless you’re talking about shifting the burden to other taxes, you’re talking about laying off teachers, you’re talking about kicking seniors out of the nursing home.... It’s pretty simple math.”

 


New from ITEP: Indiana Tax Cut Deal Stacked in Favor of the Wealthy


| | Bookmark and Share

When Indiana Governor Mike Pence was campaigning last year, a centerpiece of his campaign was a regressive 10 percent cut in the state’s already low personal income tax rate  It now appears that the Governor has convinced legislative leaders to agree to a tax cut about half that size, though it won’t be fully implemented until the end of his current term as Governor in 2017.

A new analysis from the Institute on Taxation and Economic Policy (ITEP) shows that while this new agreement is more modest than Governor Pence’s original proposal, its impact on the distribution of Indiana taxes is similar. Namely, most of its benefits will flow to the state’s wealthiest households. ITEP analyzed the effect that this agreement would have had on Indiana residents’ tax bills if it were in effect for 2012—the year for which most households just finished filing their tax returns. When this plan takes full effect in 2017, the size of the tax cuts will be slightly larger, but their distribution will be roughly the same. Among other things, ITEP found that for 2012:

- Cutting Indiana’s personal income tax rate to 3.23 percent would reduce the tax bill of the richest 1 percent of Indiana households by an average of $1,181.

- That same cut in the state’s income tax rate would reduce the average tax bill of middle-income households by just $56. 

- Low income households fare worst of all. The recently announced agreement would amount to a tax cut for the poorest 20 percent of Indiana households of just $10 on average in 2012, and roughly one in three members of this group would receive no tax cut at all.

Read the report here.


Indiana Senate's Income Tax Cut Smaller But No Fairer Than Governor's


| | Bookmark and Share

The Indiana Senate recently passed a budget that speeds up the phase-out of the state’s inheritance tax (PDF), cuts taxes for the politically well-connected financial industry, and reduces the state’s flat personal income tax rate from 3.4 to 3.3 percent.  

The income tax cut in the plan, though a scaled-back version of a plan that Governor Pence originally proposed on the campaign trail, is similarly regressive. A new report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), shows that while the Senate income tax cut is significantly smaller than the Governor’s, the two plans are equally lopsided—distributing the lion’s share of the benefits to the state’s most affluent residents.

ITEP finds that over half (55 percent) of the income tax cuts under either plan would go to the best-off 20 percent of Indiana residents. Out of this group, the top 1 percent would fare best of all—receiving an outsized 14 percent share of the benefits.  Their average tax cut would range from $694 under the Senate’s plan to $2,361 per tax filer under the Governor’s preferred approach.

Middle- and lower-income taxpayers would not fare nearly as well. The entire bottom 60 percent of households would be divvying up just 23 percent of the tax cuts enacted under either plan, while the poorest 20 percent of Indiana residents in particular would see a tiny 2 percent share.  Under the Senate plan, this group would see an average tax cut of just $6, while the $20 cut they’d see under the Governor’s proposal is only marginally more generous.

This lopsided tax cut comes on top of a state tax system that is already, according to ITEP’s ranking, the ninth most regressive in the country.

But even putting fairness considerations aside, a recent letter from House Speaker Brian Bosma referenced by ITEP points out that Indiana’s last round of tax cuts wrecked the state’s budget. Even with late news of a boost in revenue projections, Indiana lawmakers would be wise to avoid a repeat of that fiscal history for the sake of tax giveaways that serve no greater economic good.

For more detail, see ITEP’s new report: Indiana Senate’s Income Tax Cut: Just as Lopsided as the Governor’s.


National Anti-Tax Group vs. Indiana


| | Bookmark and Share

The nation is watching Indiana’s tax debate, according to Tim Phillips, national president of the anti-tax group Americans for Prosperity.  But the outcome that Phillips is looking for —a regressive cut in the state’s personal income tax—is facing an uphill battle. The Indiana House, under supermajority Republican control, chose not to include Governor Pence’s proposed tax cut in its budget. Senate leadership has yet to embrace the tax cut either, and the state’s largest newspaper recently editorialized against the plan, explaining: “What holds back faster economic growth now is less about taxes than the lack of a well-educated workforce and higher than average business costs associated with Hoosiers’ poor health.”

But despite all this resistance, Americans for Prosperity is determined to gin up some interest in cutting Indiana’s income tax rate. The Indiana chapter of the group announced that it will spearhead a major TV, radio, online advertising, and door-to-door campaign.  As Phillips explained, “In Washington, it’s gridlock and really that’s not where the action is.” 

There's reason to hope this campaign doesn’t pressure lawmakers into enacting a tax cut against their better judgment, though. In a letter to state GOP officials, House Speaker Brian Bosma recently made a compelling case against the cut and offered a warning about the dire consequences that could arise from following Kansas as it staggers and stumbles down its own tax-cutting path (excerpt below):

“With respect to the Income Tax cut proposal, legislative leaders have expressed caution on this issue for a variety of reasons, which I want you to understand.  First, in 1998, the last time the state had a $2 billion surplus, a series of Income Tax and Property Tax cuts coupled with an unexpected downturn in the economy turned that surplus into a $1.3 billion deficit in a short six year period.  When Republicans regained the majority in 2004, our first order of business was to fill that hole through cuts (and not tax increases), and we did it.  It was painful and difficult, but we knew that the most important job of state government is to be lean, efficient, and most importantly, sustainable in the long run, avoiding wild shifts in one direction or another.  That uncertainty of big shifts leads to uncertainty for business investment and family security.  With pending sequestration, looming federal mandates and an uncertain national economy on the horizon, caution is certainly advisable.

“Finally, the Governor cites the recent experience of Kansas in cutting income taxes last year under the leadership of Governor Sam Brownback.  I would encourage you to get online and see what is going on in Kansas right now, as news reports abound of projected deficits, delays in proposed tax cuts, and lawsuits for underfunding public education.  This is just the type of economic unpredictability and unsustainability that we hope to avoid here in Indiana.”

 


Five States Eyeing Regressive Income Tax Cuts: AR, IN, MT, OK, WI


| | Bookmark and Share

Note to Readers: This is the third of a six part series on tax reform in the states. Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” proposals.  This post focuses on personal income tax cuts under consideration in the states.

While not as dramatic as wholesale repeal of the income tax, five states this year are likely to consider regressive income tax cuts that will compromise their ability to adequately fund public services now and in the future.

In Indiana, Governor Pence campaigned last fall on cutting the state’s already low, flat personal income tax rate from 3.4 to 3.06 percent, and has shoehorned that idea into a budget proposal that also fails to help schools that are “still reeling from the cuts” enacted during the recent recession. The Institute on Taxation and Economic Policy (ITEP) found that Pence’s tax plan would primarily benefit the state’s most affluent residents: 56 percent of the benefits would go to the best-off 20 percent of Indiana residents, while one in three of the state’s poorest residents would see no tax cut at all.  The South Bend Tribune, among others, has urged lawmakers to “pass on this tax cut” because of its high revenue cost and the way in which it would add to the unfairness (PDF) already present in Indiana’s tax code.

In Oklahoma, Governor Fallin has significantly scaled back her tax cut ambitions from last year.  Rather than aiming for a fundamental restructuring of the income tax, the Governor has proposed simply repealing the state’s top personal income tax bracket, thereby cutting the state’s top rate from 5.25 to 5.0 percent.  The Oklahoma Policy Institute explains that this proposal “would take $106 million from Oklahoma schools, public safety, and other core state services without offering any way to pay for it.”  And ITEP’s new Who Pays? report shows that last time Oklahoma cut its top income tax rate, in 2012, the vast majority of the benefits (PDF) went to the highest-income taxpayers in the state.  Meanwhile, State Senator Anderson has once again proposed a dramatic flattening of the income tax that would actually raise taxes on most of the state’s lower- and moderate income residents.

In Montana, two different proposals for cutting personal income tax rates have been floated in recent weeks.  A House proposal to cut the bottom income tax bracket has already been defeated, with Democrats opposing it because of its revenue cost and some Republicans opposing the idea of tax relief for the poor, despite the disproportionate impact (PDF) the state’s tax system currently has on low-income families.  Meanwhile, a Senate bill to repeal the top personal income tax bracket and cut the next tax rate is still alive.  A small portion of the bill would be paid for through scaling back the state’s regressive preference for capital gains income and hiking the state’s corporate income tax rate.  Overall, however, the bill would reduce both the fairness of Montana’s tax system and the revenue it generates.

In Arkansas, the debate over the income tax has yet to heat up, but the House Revenue and Taxation Committee Chairman says he’s “very bullish” about the possibility of enacting a large tax cut, and other Republicans in the legislature are reportedly discussing options for cutting the income tax. 

Finally, in Wisconsin, rumors briefly swirled that there may be a push to eliminate the state’s income tax and replace it with a much larger sales tax, akin to what’s been proposed in Louisiana, Nebraska, and North Carolina.  Governor Walker, however, responded by saying that he will wait and see how those debates play out in other states before deciding whether to advocate for such a change in 2015.  In the meantime, the Governor says he will propose what he claims will be a “middle-class” tax cut of about $340 million.  Assembly Speaker Robin Vos is hoping for a proposal of at least that size.  The Governor’s budget proposal is due out on February 20, and by then we should have a better idea of whether the plan will actually be aimed at middle-income Wisconsinites, as well as its true price tag.

In reference to Indiana Governor Mike Pence’s proposed tax plan, The South Bend Tribune urges lawmakers to “pass on this tax cut” and cites data (PDF) from our partner organization, the Institute on Taxation and Economic Policy (ITEP), to makes its case.  As the Tribune explains, “Needs of poor children, the elderly and mentally ill aren't being met … now is not the time to further stem income tax revenue. Gasoline tax revenue is down. Corporate taxes have been trimmed. The inheritance tax is being phased out. And then there's the Institute on Taxation and Economic Policy's analysis of Pence's across-the-board tax cut plan which concluded it would mostly benefit the wealthiest taxpayers. The poorest Hoosiers, who devote more of their household budgets to state and local taxes than any other income group, would be helped little, if at all.”

New Jersey’s expiring film tax credit is still paying out big bucks for TV shows and movies filmed years ago – even though these credits are billed as incentives. The state Economic Development Authority just handed the makers of Law & Order SVU $10.2 million of New Jersey taxpayers’ dollars for work done on the 2009-10 season of the show.  Hopefully New Jersey’s credit won’t be resurrected after 2015, given that studies have repeatedly shown them to be a poor use of taxpayer dollars.

Kudos to Wisconsin’s Transportation Finance and Policy Commission which will recommend to the legislature that the state increases its gas tax by five cents. This would be the first increase in the state’s gas tax since 2006. In more gas tax news, Washington State Senate Majority Leader Rodney Tom recently said that he would support an increase in the state’s gas tax. For more on the vital role that state gas taxes play in funding transportation needs across the state (and why states should raise theirs) read ITEP’s  Building a Better Gas Tax Report.

And in housekeeping news… We’ve done lots of behinds the scenes work to improve your experience when visiting the Institute on Taxation and Economic Policy (www.itep.org) and Citizens for Tax Justice’s (www.ctj.org) websites. Please take a minute and check out our slightly reorganized (and improved) site!

Late last week, Kentucky’s Blue Ribbon Commission on Tax Reform released their tax reform recommendations. Many of the Commission’s recommendations are bold and forward-looking, like their proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). Not only does the Commission deserve kudos for trying to shore up tax revenues over the long term while keeping an eye on tax fairness, the Commission also clearly understood the need to raise more revenue. As one Herald-Leader columnist said,  “task force members had the courage to recommend a plan that would add $690 million in revenue during the first year.”  But the Commission’s recommendations aren’t without their flaws, such as $100 million in cuts to the corporate income tax. Jason Bailey from the Kentucky Center for Economic Policy reminds us, "Business tax cuts are really a race to the bottom between states.”

Nebraska think tank Open-Sky Policy Institute released, “Feeling the Squeeze- The Negative Effects of Eliminating Nebraska’s Inheritance Tax” detailing the impact of eliminating the state’s inheritance tax. The tax generates about $43 million annually for counties. These revenues are an important part of county budgets, and its counties assist with natural disasters, keeping roads safe and administering elections, among other things. Tax cuts don’t happen in a vacuum and that revenue will need to be made up with new revenue or reductions in services. Open Sky found that if “counties replaced all of the lost inheritance tax revenue with an increase in property taxes, the average overall county tax rate would have to increase by 7 percent.”

The majority of Hoosiers are telling Indiana Governor-elect Mike Pence “not so fast” on his tax cutting plan.  A new poll shows that taxpayers would rather see their tax dollars spent on investment priorities rather than tax cuts. Just 31 percent of those surveyed supported Pence’s proposal of slashing taxes by 10 percent across the board versus 64 percent of voters who would rather see tax revenue spent on education and workforce development.

Read this fantastic op-ed from Remy Trupin, executive director of the Washington State Budget & Policy Center, which makes the case for fundamental tax reform. “Washington needs a revenue mix built for the 21st century. That means eliminating wasteful tax breaks, modernizing our state sales tax to include more consumer services and taxing gains on the sale of stocks, bonds and other high-end financial assets held by the wealthiest two percent of Washingtonians.”


In the Spotlight: Indiana, Wisconsin and Wrongheaded Tax Cuts


| | Bookmark and Share

Recent reports and opinion pieces in two states caution lawmakers about the affordability and fairness implications of excessive tax cuts.

In Indiana the Associated Press is reporting on “apprehension about [Governor Elect] Pence’s call for a 10 percent cut in the personal income tax … among top Republican lawmakers.”  Recent corporate income tax cuts, the elimination of the state inheritance tax, and declining gambling revenues have created a thick “fiscal fog,” as Republican House Speaker Brian Bosma describes it, which keeps him from committing to an income tax cut, at least for now.  To see how Pence’s plan would affect Indiana residents of different means, read the Institute on Taxation and Economic Policy’s report: Most of Indiana Tax Rate Cut Would Flow to Upper-Income Taxpayers (PDF).

Wisconsin Governor Scott Walker is making tax cutting a major priority in 2013. During a major policy speech at the Ronald Reagan Presidential Library he said, “We are working on massive tax reform…. We are going to continue to lower our property taxes.  We are going to put in place an aggressive income tax reduction reform in the state of Wisconsin.” This analysis from the Capital Times reminds us that the Governor really can’t do that much more for small businesses because the tax package he signed into law in his first budget actually eliminated taxes on many businesses altogether. The article also points out that tax cuts cost money -- money the state can ill afford to spend -- and the state’s “economy is sputtering.” If Governor Walker succeeds in making his tax cut proposals a reality, it warns, “something will have to give.”

It’s no secret that Indiana’s gubernatorial race has been a breeding ground for bad tax ideas this year.  So far on the tax front, the race has essentially been an endless barrage of promises regarding which taxes will be cut, and how deeply.

The most recent of these proposals comes from candidate Mike Pence, current U.S. Representative for Indiana’s 6th district.  Pence has proposed cutting the state’s flat income tax rate from 3.4 percent to 3.06 percent to provide an “across the board” tax cut for “every Hoosier.”  A new analysis from CTJ’s partner organization, however, shows that many Hoosier families won’t see any tax cuts at all under Pence’s plan, and that the cuts will hardly be distributed “across the board.”

Using its Microsimulation Tax Model, the Institute on Taxation and Economic Policy (ITEP) found that the largest tax cuts, by far, would be reserved for the state’s wealthiest taxpayers under Pence’s proposal.  While a typical middle-income family could expect their taxes to fall by about $102, the state’s richest one percent would receive a cut averaging $2,264.  Worse still, over half of all the tax cuts would flow to the best-off 20 percent of Indiana residents.

The story is dramatically different for the state’s poorest residents, however.  Looking at the lowest 20 percent of earners, the average tax cut would be just $18 per household, with about one-third of this group receiving no tax cut at all.  Many of these families are too poor to owe state income taxes, but they still pay significant amounts in sales taxes, excise taxes, property taxes, and other state and local taxes and fees.  In November 2009, ITEP found that the poorest 20 percent of Indiana households devote more of their household budgets to paying state and local taxes than any other income group.  Rep. Pence’s plan would do nothing to fix this fundamental inequity.

Of course, the broader issue is whether tax cuts should be a priority at all, given the uncertain budget situation created by recent taxpayer refunds, corporate tax cuts, and the repeal of the state’s inheritance tax.  Moreover, Indiana still has the lingering problem of how to pay for its transportation investments after revenue from leasing its toll roads runs out.  And the state also has yet to put money aside to expand its Medicaid program in order to take advantage of very generous federal matching dollars currently on the table.

Still, given all the talk coming from both sides of the aisle in favor of slashing Indiana taxes and the likelihood more cuts are in the state’s future, ITEP decided to ask a logical question: how difficult would it be to design a tax cut that’s fairer than what Rep. Pence has proposed? The answer?  Not very difficult.

By raising the state’s personal exemption (unchanged since 1963) from $1,000 to $3,400, Indiana lawmakers could provide larger tax cuts to most Indiana residents—relative to Pence’s proposed rate cut—at the same overall cost to the state.  Overall, 55 percent of Indiana residents would see a larger tax cut if lawmakers went with ITEP’s alternative of raising the personal exemption, rather than adopt Rep. Pence’s plan to cut the rate.  Just 33 percent of Indiana residents would be better off under Pence’s plan than under the exemption increase, while the other 12 percent would be unaffected by either proposal. 

The best part? Lower- and middle-income taxpayers would be the largest beneficiaries if lawmakers chose the personal exemption boost over the rate cut. (Not to mention that more cash in the pockets of lower income families provides a reliable economic boost.) If Hoosiers want a real “across the board” cut, it’s not the Pence plan they want, it’s ITEP’s.

For more detail, see ITEP’s new report: Most of Indiana Tax Rate Cut Would Flow to Upper-Income Taxpayers. 

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

Quick Hits in State News: The Avengers Movie Tax Subsidy, and More


| | Bookmark and Share
  • On the controversial film tax credit front, movie goers should be thanking New Mexico taxpayers who gave away $22 million in tax credits to the Avengers movie – which has earned over $1 billion so far. The state doled out a total of $96 million in film tax credits last year.
  • Stop the presses! There is public support for introducing corporate and personal income taxes in South Dakota. Read about it here.
  • The list of tax cuts being promised by Indiana Gubernatorial candidate John Gregg continues to grow.  In addition to his earlier plan ,Gregg now promises to eliminate the corporate income tax for any company headquartered in Indiana, and to offer a variety of new “job-creation” tax credits to certain businesses, and to pay for it by asking online retailers to collect a sales tax from Hoosiers (despite the current governor’s agreement with Amazon.com to postpone such a tax until 2014).
  • Yet another income tax cut proposal has been unveiled in Oklahoma, this time by Senate leadership.  In it, low-income families would fare poorly because it repeals the Earned Income Tax Credit and scales back the grocery sales tax credit.
  • Florida Governor Rick Scott is attending grand openings of 7-Eleven® stores but a columnist at the Orlando Sentinel observes that “if incentives and low corporate tax rates were working, Florida wouldn't rank 43rd in employment.”  It’s a common sense column worth reading.
  • As another massive tax cut for Michigan businesses continues to make its way through the legislature, the Michigan League for Human Services chimes in with a report, blog post, and testimony on why localities can’t afford to foot the bill for state lawmakers’ tax-cutting addiction.
  • Bad tax ideas abound in Indianas gubernatorial race.  Democratic candidate John Gregg wants to blast a $540 million hole in the state sales tax base by exempting gasoline; he claims he can pay for it by cutting unspecified "waste" from the budget. And Gregg’s Republican opponent, Mike Pence, doesn’t seem to have any better ideas.  So far he’s only offered a "vague proposal" to cut state income, corporate, and estate taxes – without a way to pay for those cuts.
  • Kansas lawmakers are feverishly working to meld differing House and Senate tax plans into a single piece of legislation. Governor Sam Brownback has endorsed an initial compromise which includes dropping the top income tax rate and eliminating taxes on business profits. Earlier in the week the Legislative Research Department said the plan would cost $161 million in 2018 and new state estimates say the price tag is more like $700 million in 2018.  Senate leaders have said that they aren’t likely to approve a tax plan that creates a shortfall in the long term. Stay tuned....
  • Finally, a USA Today article should give pause to lawmakers hoping that drilling and fracking for natural gas leads to a budgetary bonanza.  It explains how the volatile price of natural gas is creating headaches in energy-producing states like New Mexico, Oklahoma, and Wyoming where a dollar drop in the commodity’s price means a budget hit of tens of millions.

Quick Hits in State News: Indiana Kills Its Inheritance Tax, and More


| | Bookmark and Share

Indiana’s inheritance tax will soon be no more.  Under a bill signed by Governor Mitch Daniels this week, the state inheritance tax will be gradually eliminated over the next decade.  Of course, this will further benefit the state’s wealthiest taxpayers even as the state’s poorest residents already pay an effective state and local tax rate more than twice that paid by the rich.  

Connecticut lawmakers are seriously considering capping the state’s gasoline tax rate, due to the political pressures created by high gas prices.  A permanent cap, as some lawmakers prefer, would be extremely poor policy because it would flat line the gas tax as a revenue source for years to come.  A temporary cap would be preferable, but the best solution would be one that ITEP recommended for North Carolina last summer: design a cap that limits volatility. This protects consumers from price spikes and stabilizes state budgets without undermining a key source of revenue.

A new ITEP analysis finds that under a South Carolina House Republican plan, poor South Carolinians would see their income tax increase while wealthy taxpayers would pay less. The effect on individual taxpayers in any bracket are not substantial, but the revenue implications for the state are enormous and depend on the working poor to pick up the tab. The Ruoff Group policy shop does a nice job here of explaining why the plan is neither flat nor fair, as its advocates claim.

An outstanding news analysis in the Cincinnati Inquirer describes Ohio Governor John Kasich’s longstanding desire to eliminate the personal income tax altogether, and his current (failing) effort to pay for it with a fracking tax. The story cites a wide range of policy sources, including ITEP’s report debunking the myth that states without income taxes do better, and concludes that low income taxes alone do not make for stronger economies.

 


Trending in 2012: Estate and Inheritance Tax Rollbacks


| | Bookmark and Share

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would reduce or eliminate state inheritance and estate taxes.  If you haven’t already, be sure to read our inaugural article in the series on proposals in some states to roll back or eliminate income taxes, which are the uniquely progressive feature of our tax system.

Whether state or federal, inheritance and estate taxes play an important role in limiting concentrated wealth in America. Warren Buffett views the estate tax as key to preserving our meritocracy, and the great Justice Louis Brandeis famously warned that we could have concentrated wealth or we could have democracy, but not both.  While the federal estate tax is often the source of passionate debate, these taxes are particularly important at the state level because they help offset some of the stark regressivity built into most state tax systems.  Unfortunately, lawmakers in some states have bought into the bogus claims of the American Family Business Institute (a.k.a. nodeathtax.org), Arthur Laffer, and others in the anti-tax, anti-government movement that repealing estate and inheritance taxes will usher in an economic boom.

Nebraska – Governor Dave Heineman has proposed repealing Nebraska’s inheritance tax entirely, determined, it seems, to pile on to the tax cuts already enacted earlier in his term.  (Inheritance taxes are very similar to estate taxes, except that inheritance taxes are technically paid by the heir to the estate, rather than by the estate itself.)  Unfortunately, in addition to worsening the unfairness of the state’s tax system, the Governor’s proposal would also kick struggling localities while they’re down, since revenue from Nebraska’s inheritance tax flows to county governments.

Indiana – Senate Appropriations Chairman Luke Kenley recently made the same proposal as Nebraska’s governor: outright repeal of the inheritance tax.  Kenley has floated the idea of using sales taxes on online shopping to pay for the repeal, but while Internet sales taxes are good policy on their own, this change would amount to an extremely regressive tax swap overall.  Indiana’s inheritance tax is already limited, however, and exempts spouses of the deceased entirely, as well as the first $100,000 given to each child, stepchild, grandchild, parent, or grandparent.

Tennessee – Governor Bill Haslam’s inheritance tax proposal may be less radical than those receiving attention in Nebraska and Indiana, but not by much.  Rather than repealing the tax entirely, Haslam would like to increase the state’s already generous $1 million exemption to a whopping $5 million.  It’s surprising, to say the least, that one of Haslam’s top tax policy priorities should be slashing taxes for lucky heirs inheriting over $1 million.

North Carolina – Efforts to gut the estate tax in North Carolina haven’t gained backers as visible as those in Nebraska, Indiana, and Tennessee.  But there are rumblings that repeal could be on the agenda of some legislators, as evidenced by the vehemently anti-estate tax testimony that a joint House-Senate committee heard from the American Family Business Institute this month.


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


| | Bookmark and Share

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

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

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

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

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

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

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

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

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

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


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


| | Bookmark and Share

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.

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

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

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

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

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

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


State Transparency Report Card and Other Resources Released


| | Bookmark and Share

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.


Results of Tax-Related Ballot Initiatives


| | Bookmark and Share

Earlier this week, voters in states across the nation voted overwhelmingly against implementing major changes to their states’ tax codes. Voters in Massachusetts defeated an effort to slash the state’s sales tax, preserving much-needed revenue to fund education, public safety and other vital services. In Colorado, three anti-tax measures that would have wreaked havoc on the state’s budget were also soundly defeated. Washington State voters rejected a plan that would have created an income tax while rolling back other taxes.

In other states, big business successfully used its money to influence the outcomes of ballot measures on tax issues. Voters in Missouri and Montana passed initiatives designed to ensure that neither state could implement a tax on the transfer of real estate. Neither state currently has a real estate transfer tax, yet the real estate lobby spent millions trying to pass the initiatives. In Washington and Massachusetts, the beverage and alcohol industries poured millions of dollars into campaigns to see that sales taxes levied on their products were rolled back.

And in California, corporations spent millions to defeat a ballot measure that would have repealed several poorly-thought out corporate tax breaks. As the New York Times noted earlier this week, Fox News aired a critical piece on the ballot measure as part of their "War on Business" series, as parent company News Corporation gave $1.3 million to defeat the measure. Fox executives said they "didn't know" the parent company had made these contributions.

Unfortunately, voters in a number of states also ratified measures that will make it harder to raise revenues going forward. California and Washington each face tighter supermajority constraints on revenue-raising, Indiana voters enshrined property tax caps in their constitution, and voters in Massachusetts and Washington retroactively rejected small tax increases enacted by state legislatures in the past year.

Here are the results of initiatives we’ve been following.

Personal Income Tax

Washington: Initiative 1098 - FAILED
Initiative 1098 would have introduced a limited personal income tax applicable only to the richest Washingtonians, reduced the state property tax and eliminated the Business and Occupation tax for many businesses.

Colorado: Proposition 101 - FAILED
Proposition 101 would have reduced Colorado’s income tax rate and eliminated various fees resulting in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Business Tax Breaks

California: Proposition 24 - FAILED
Proposition 24 would have eliminated several business tax breaks enacted in 2008 and 2009 and would have increased state revenues by more than $1.3 billion.

Super Majority Voting Requirements

California: Proposition 25 - PASSED
California: Proposition 26 - PASSED

The passage of California’s Proposition 25 removes the current two thirds super majority requirement needed to pass the state budget (replacing it with a simple majority vote). However, Proposition 26 institutes a new super majority requirement for raising certain fees (classifying them as taxes, which still require a two thirds vote).

Washington: Initiative 1053 - PASSED
Initiative 1053 will ensure that all tax increases (no matter their size) be approved either by a two thirds majority in the legislature or a public vote of the people.

Earnings Tax

Missouri: Proposition A - PASSED
Proposition A requires voters to decide whether two local earnings taxes levied in St. Louis and Kansas City should exist and also prohibits other localities from levying a local income tax.

Sales Taxes

Massachusetts: Question 1PASSED
Massachusetts: Question 3 - FAILED

Question 3 would have cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 removes the sales tax on alcohol, which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 - PASSED
Initiative 1107 repeals a recently enacted sales tax increase on a variety of goods including soda, bottled water, and candy.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 - PASSED
This constitutional amendment fully exempts disabled prisoners of war (POWs) from paying property taxes.

Virginia: Question 2 - PASSED
Question 2 changes Virginia’s constitution to exempt disabled veterans and their surviving spouses from paying property taxes.

Property Tax Caps

Indiana: Public Question #1 - PASSED
The amendment to Indiana’s state constitution permanently limits property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. These limits already existed in statute. This ballot measure simply makes them more difficult to repeal.

Colorado: Amendment 60FAILED
Amendment 60 would have taken away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes and require school districts to cut property tax rates in half over the next ten years, replacing the lost revenue for K-12 schools with state funding.

Real Estate Transfer Fees

Montana: Constitutional Initiative 105 - PASSED
Initiative 105 prohibits the state from enacting any type of real estate transfer tax.  

Missouri: Constitutional Amendment 3 - PASSED
Amendment 3 prohibits the state from enacting any type of real estate transfer tax.

Government Borrowing

Colorado: Amendment 61FAILED
Amendment 61 would have prohibited or restricted all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.

California: Proposition 22PASSED
Proposition 22 amends California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.


State Tax Issues on the Ballot on Election Day


| | Bookmark and Share

The stakes will be high for state tax policy on Election Day, with tax-related issues on the ballot in several states. With a couple of notable exceptions (a new income tax in Washington and rollback of corporate tax breaks in California), these ballot initiatives would make state taxes less fair or less adequate (or both).

Personal Income Tax

Colorado: Proposition 101 would reduce or eliminate various fees and immediately reduce the state’s income tax rate from 4.63 to 4.5 percent and eventually to 3.5 percent).  If passed, Proposition 101 will result in an estimated loss of $2.9 billion in state and local revenue once fully implemented.

Washington: Initiative 1098 would introduce a personal income tax, reduce the state property tax and eliminate the Business and Occupation tax for small businesses. If passed, this legislation would improve tax fairness in the state with the most regressive tax structure in the country.  For more read CTJ's Digest articles about this initiative.

Business Tax Breaks

California: Proposition 24 would eliminate several business tax breaks enacted in 2008 and 2009 and increase state revenues by more than $1.3 billion.  For more details on these tax breaks, read the California Budget Project's Budget Brief on the initiative.

Super-Majority Voting Requirements

California: Proposition 25 would remove the current two-thirds super-majority requirement needed to pass the state budget (replacing it with a simple majority vote), while Proposition 26 would institute a new super-majority requirement for raising certain fees (classifying them as taxes).  For more details on these initiatives, read the California Budget Project’s initiative summaries.

Washington: Initiative 1053 would, if approved, ensure that no tax increases (no matter their size) become law without either approval by a two-thirds majority in the legislature or a public vote of the people. The Washington Budget and Policy Center gives a helpful summary of the initiative and its potential impact.   

Earnings Taxes

Missouri: Proposition A, if approved, would require that voters be asked every five years to decide whether or not local earnings taxes levied in St. Louis and Kansas City should exist. (If voters then decide to not allow them, they will be phased out over a ten-year period). The Proposition would also exclude any other local government from levying its own earnings taxes. For more on Proposition A, read Missouri Budget Project’s fact sheet.

Sales Taxes

Massachusetts: Question 1 and Question 3
A diverse coalition of businesses, advocacy organizations, citizens groups and political leaders have joined together to defeat Question 3, an initiative that would cut the state’s sales tax rate from 6.25 to 3 percent, resulting in an annual revenue loss of $2.5 billion.  Question 1 would remove the sales tax on alcohol which was just added last year in order to raise $80 million for substance abuse programs.

Washington: Initiative 1107 would repeal the new sales taxes on a variety of goods including soda, bottled water, and candy. For more information, read CTJ's Digest article on the issue and the Washington Budget and Policy Center’s summary.

Despite the regressive nature of the sales tax, it's an important revenue source. Slashing it in either Washington or Massachusetts without replacing the lost revenue with another source would cripple the ability of those states to provide core services such as education and public safety to their residents.

Property Tax Exemptions

Missouri: Constitutional Amendment 2 would exempt fully disabled prisoners of war (POWs) from paying property taxes. Read Missourians for Tax Justice’s take on this issue.

Virginia: Question 2 would change Virginia’s constitution to exempt veterans and their surviving spouse from paying property taxes if the veteran is 100 percent disabled.

Property Tax Caps

Colorado: Amendment 60 would take away the ability of voters to opt out of Colorado’s TABOR limitations as they relate to property taxes.  Currently, voters can approve an increase in property tax rates above the constitutional limit which caps increases at the rate of inflation plus a small measure of local growth.  The amendment would also require school districts to cut property tax rates in half over the next ten years and replace the lost revenue for K-12 schools with state funding (an estimated $1.5 billion will be required from the state, meaning reductions will have to made to other services to support an increase in K-12 spending).

Indiana: Public Question #1 will ask Indianans to decide if their state's constitution should be permanently altered to limit property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. Voters may find it helpful to read this brief from the Indiana Institute for Working Families.

Real Estate Transfer Fees

Missouri: Constitutional Amendment 3 would prohibit the state from enacting any type of real estate transfer tax. Missouri currently doesn’t levy any such tax.  Placing the question before voters is seen as a preemptive move by the Missouri Association of Realtors to ensure that the state can’t create a transfer tax.

Montana: Constitutional Initiative 105 would, if approved, prohibit the state from enacting any type of real estate transfer tax.  The state currently doesn’t levy such a tax. The Billings Gazette has weighed in on this Initiative.

Government Borrowing

California: Proposition 22 would amend California’s Constitution to take away the state’s ability to borrow or shift revenues that fund transportation programs.  For more information, read the California Budget Project’s brief on the initiative.

Colorado: Amendment 61 would prohibit or restrict all levels and divisions of government from financing public infrastructure projects (such as building or repairing roads and schools) through borrowing.


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


| | Bookmark and Share

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.


Ballot Round Up


| | Bookmark and Share

Now that the primary election dust has settled and signature gathering deadlines have come and gone, we have a clear picture of the good and bad tax initiatives voters in a number of states will have an opportunity to support or oppose.  Over the coming month, the Tax Justice Digest will provide updates on tax-related ballot campaigns including links to the best resources to help voters understand what to expect when they hit the polls in November.

Indiana voters will soon decide if their state's constitution should be permanently altered to limit property taxes to 1 percent of assessed value for owner occupied residences, 2 percent for rental and farm property and 3 percent for business property. The state legislature has already approved this short-sighted measure twice.

Voters would find it helpful to read this brief from the Indiana Community Action Association which dispels false claims about the benefits of these property tax caps, including claims that all homeowners are likely to benefit, that having these caps in the constitution will prevent taxes generally from being raised, and that the caps are well-designed in the first place.

Missouri voters will be asked to decide on Proposition A and the fate of the city earnings taxes levied in Kansas City and St. Louis. If Proposition A is approved, voters will be asked every five years to decide whether or not these earnings taxes should exist. (If voters then decide to not allow them, they will be phased out over a ten year period). The revenue generated from these earning taxes represents about 30 percent of the cities' general fund budgets.

A key supporter (and bankroller) of the initiative, Rex Sinquefield, has said that the money "has to be replaced" if the earnings taxes are eliminated, but he doesn't actually say how that money will get replaced. "That was the reason that we proposed a 10-year phase-out," he says, "so you have a lot of time to figure this out."

If passed, the initiative would exclude any other local government from levying their own earnings taxes, further limiting the ability of local governments to raise funds in a progressive way. Missouri voters would be wise to take a step back and heed this warning from the St. Louis Post Dispatch editorial board: "The loss of (earnings tax) revenue would reverberate beyond the residents of St. Louis and Kansas City. Voters throughout both metropolitan regions would face increased uncertainty as their core cities struggled to find replacement revenue. As go the metro areas, so goes Missouri."

For more on the harmful ramifications of Proposition A, read this fact sheet from the Missouri Budget Project.

Washington State voters will soon have the rare opportunity to improve their state's tax and budget structure in a dramatic way. If Initiative 1098 passes, the state's property tax will be cut by 20 percent, the state's unique Business and Occupation tax will be eliminated for small businesses and a new income tax on the wealthiest of Washingtonians will become the law of the land. The Seattle Post-Intelligencer has endorsed I-1098 "as a big step toward tax fairness and reform, as well as a way of putting teachers into classrooms and poor families onto the state's Basic Health Plan. " ITEP's report Who Pays found that Washington has the most regressive tax structure in the nation and badly needs a tax reform of this sort.

Californians will have the opportunity to repeal three costly business tax breaks by voting to support Proposition 24, “The Tax Fairness Act”.  Enacted in 2008 and 2009, the three business tax cuts — elective single sales factor, tax credit sharing, and net operating loss carrybacks — are scheduled to go into effect in 2011 at an estimated cost of $1.3 billion.  As a new Budget Brief from the California Budget Project explains, these tax breaks benefit relatively few corporations and come at a time when the state can ill afford such a significant loss of revenue.  

In Colorado, most Democratic and Republican lawmakers are united in their opposition to three anti-tax initiatives on the state’s ballot which would drastically reduce state and local revenue and hinder the state’s ability to pay for education, health care, public safety, and other core services. 

Amendment 60 would require school districts to cut property taxes and replace the lost revenue. Proposition 101 would slash the state’s income tax and cut other fees. Amendment 61 would limit or disallow government borrowing.  A Colorado Legislative Staff analysis of the combined impact of the three measures found that the state would lose about $2.1 billion in revenue, while taking on $1.6 billion in K-12 education funding to make up for the local property tax cuts.  As a result, education spending would constitute nearly 99% of the state’s general fund budget.

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

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

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

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

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

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

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

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

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

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

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

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


Indiana: Costly and Poorly-Targeted Property Tax Caps will be on the Ballot this November


| | Bookmark and Share

The Indiana legislature gave final approval this week to a measure asking Indiana voters whether the property tax caps enacted less than two years ago should be enshrined in the state’s constitution.  Embedding these caps in the constitution is a radical step. They were only fully phased-in less than a month ago, so the full effect of these provisions has yet to be seen.  Moreover, despite the large amount of uncertainty surrounding the caps, available evidence already suggests that less well-off renters will be among those most hurt by the caps, while homeowners with highly-valued homes will receive enormous benefits.

The property tax cap amendment (which is already permanent law, regardless of whether voters decide to amend the state’s constitution) works by limiting property taxes to 1%, 2%, or 3% of assessed value, depending on the type of property in question.  Homeowners receive the benefit of the generous 1% cap, while rental units and farms will benefit from the less helpful 2% cap.  Other properties’ tax bills (e.g. businesses) will be capped at 3%.

A number of aspects of Indiana’s new tax cap regime are troublesome from a tax fairness perspective.  Since renters are generally less well-off than their home-owning neighbors, their higher cap is reason for concern. The 1% cap for homeowners is not helpful to owners of less expensive homes since they already benefit from a pair of large homestead deductions offered by the state. Instead, only those Hoosiers with very expensive homes (who may in fact be paying more than 1% of their property’s value in tax), are expected to benefit most from the caps

Finally, since some of the cost of these recent changes to the property tax was offset by a regressive sales tax increase, renters and lower-income homeowners can expect to pay more in taxes overall.

Inserting this problematic policy into the state’s constitution will only compound its shortcomings.  Specifically, as the head of the Indiana Association of Cities and Towns (IACT) put it: “This action will forever tie the hands of future General Assemblies to react to any unforeseen economic reality and put a level of specificity into our Constitution that is completely unprecedented.”

Nonetheless, politics made passage of the caps by the legislature almost inevitable.  As one Republican mayor in the state explained, "It's the same old political trick bag. It's typical that the 150 [state] legislators sit there and put a cap on property taxes and get to sit there and look good, when we're the ones taking all the heat, having to cut services."

At present, available polling indicates that the caps are popular among Indiana voters.  November is a long way away, however, leaving plenty of time for Indiana voters to become informed about the shortcomings of these caps.


New Jersey Finally Joins Majority of States Producing Tax Expenditure Reports


| | Bookmark and Share

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

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

The report must, among other things:

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

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

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


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


| | Bookmark and Share

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.


The Exaggerated Promise of Legalized Gambling


| | Bookmark and Share

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.


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


| | Bookmark and Share

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

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

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

For state lawmakers facing a balanced-budget requirement, the problem of revenue volatility can be a serious one. Since one of the more important goals states pursue is to provide a consistent level of services each year, it only makes sense that a correspondingly consistent level of revenue be available. In California, the Governor, together with state legislators, has appointed a commission specifically tasked with providing recommendations on how to reduce volatility. Minnesota recently formed one such commission as well, which actually released its findings just this week. Some of the commission's findings include (as summarized by the Minnesota Budget Project):

- "Shifting to more stable revenue sources would lead to a more regressive system with slower growth rates. Instead of attempting to rebalance the tax system, they recommend establishing a much larger budget reserve ($2.1 billion for now) to help carry the state through economic downturns."
- "Using one-time surpluses strictly for one-time purposes (like rebuilding the reserves)"
- "Avoiding permanent tax cuts or spending increases unless reserves are filled and shifts have been bought back."
- Ensuring "that policymakers and the public have access to more information to improve the decision-making process. That includes releasing a demographic forecast every biennium and adding inflation back to the expenditure side of the state's budget forecasts."

As these recommendations should make clear, revenue volatility is only a problem if it is not planned for in the budget. Restructuring an entire tax system just to smooth out revenue collections is an extreme example of trying to 'throw the baby out with the bath water'. In fact, as we've pointed out in our policy brief on progressive income taxation, restructuring a tax system with this aim in mind is likely to create even more revenue problems in the long-run.

But while there's much to be excited about in the wisdom behind the Minnesota Commission's recommendations, those ideas have yet to take root everywhere. In Indiana, for example, just this week the Governor called for automatically refunding any tax collections above some pre-determined level, during good economic times. Such a change would directly restrict the flexibility policymakers need to plan for rough budgetary times when things are going well.


Minnesota Governor Misses the Memo on Property Tax Fairness


| | Bookmark and Share

Over the past few months, there's been a movement in Missouri to expand the circuit breaker program that benefits low-income property taxpayers. In addition, Indiana Governor Mitch Daniels recently signed legislation increasing his state's renter deduction. Clearly Minnesota Governor Tim Pawlenty didn't get the memo about the trend to help ease property tax burdens in targeted ways. Instead, Governor Pawlenty is proposing to reduce his state's renters' credit by 21 percent. The Minnesota Budget Project rightly points out that approving the Governor's proposal "would not only have a significant impact on ... low-income households, but also increase the regressivity of the property tax." As ITEP notes in its policy brief describing circuit breaker credits, whether such credits are designed to aid renters as well as homeowners is a critical consideration, since it's widely understood that some portion of the rent people pay consists of property taxes.

To read more about benefits of the Minnesota renters' credit, check out the Minnesota Budget Project's report here.


Indiana Governor Signs His Property Tax "Reforms"


| | Bookmark and Share

Governor Mitch Daniels of Indiana finally got the property tax reforms he wanted. The central components of the plan, signed by the Governor on Wednesday, cap property taxes at 1% of the value of a home, 2% of the value of rental property, and 3% of the value of business property.

The revenue loss to government will in large part be offset by a variety of tax increases, meaning the plan is actually more of a tax "swap" than a tax "cut". The sales tax is raised from 6% to 7% by the bill, and most localities can be expected to raise their flat-rate income taxes to help compensate for the property tax reductions.

Reducing one tax (the property tax) and replacing the revenue with a more regressive tax (an increased sales tax) can often mean that low-income people really face a tax hike rather than a cut. Or, if the tax increases are not enough to replace the lost revenue, this tax "reform" could result in a loss of funding for state and local public services. "Swapping" lower property taxes for higher sales taxes is not a fair deal for working families.

As discussed in a previous Digest, earlier versions of the bill contained modest protections for low-income taxpayers, including an expansion of the earned income tax credit (EITC) and some relief for renters. The final version of the bill did expand and make permanent the EITC, as planned, though the relief to renters was scaled back to a meager 20% of the original proposal.

Under this bill, the state now assumes responsibility for funding a variety of programs previously handled by local governments. Even combining this with the prospect of local income tax increases, however, some local governments are already preparing for budget shortfalls.

A better policy would provide tax relief in a more targeted way (i.e. based on one's income) and would be much less costly. The legislature did pass a constitutional amendment that would move in this direction, but under the state's ratification rules this measure must be approved again by the next legislature before it's put to the voters. But even this plan, while it has the right idea, has some flaws that are outlined in an earlier Digest article.


Indiana Property Tax Reform Is Coming, But In What Form?


| | Bookmark and Share

Committees in both houses of the Indiana legislature this week proposed major changes to the property tax reform legislation first reported in the Digest in early February. A Senate Committee left untouched the heart of the bill, which would pay for across-the-board property tax cuts with a sales tax rate increase, but made several serious changes at the margin that strip even the modest gains in tax fairness for low and middle income residents that the original bill had offered. Most importantly, the proposed increases in the state's EITC and renter deduction were pared back, eliminating the only two clearly progressive components of the entire proposal.

In contrast to the Senate plan, a new proposal passed by the House Ways and Means Committee departs fundamentally from the Governor's original plan. The plan endorsed by the House Committee limits homeowner property tax bills to a maximum of 1% of a household's income. Though income-based "circuit-breakers" such as this one are by far the most effective method for ensuring that nobody's property tax bill rises beyond their ability-to-pay it, the version endorsed in this instance has an unknown (but likely large) cost, and unlike every other circuit-breaker credit in existence, would be available even to the wealthiest homeowners. The best circuit-breakers exempt very low income individuals from property taxes entirely, and then limit everybody else's property taxes based on a graduated rate system that may range anywhere from 1% to 9% of income.

Given the constant concerns voiced by Indiana residents since at least July regarding their inability to afford their property tax bills, it is astounding that it took this long for a proposal that directly measures ability-to-pay in calculating property taxes to be given any notable attention. Though in this case the plan is unrealistic and unlikely to pass, adopting an income-based circuit-breaker is especially important in Indiana since its tax system would be made much less fair by the proposed sales tax hike.


Tax Proposals in Indiana Would Do a Lot of Harm and Some Good


| | Bookmark and Share

Yet another bill attempting to swap a property tax reduction for a sales tax increase is working its way through a state legislature, this time in Indiana. Low-income Hoosiers can expect to lose out not only because of the regressive sales tax hike (from 6% to 7%). They will also find the distribution of $700 million in property tax credits completely divorced from need-based considerations. Further, the expansion of property tax caps (deceptively labeled "circuit breakers") will inevitably create inequities akin to those running rampant in Florida. The bill also caps the taxes that can be levied by Indiana localities in a manner that does not adequately take account of the rising cost of providing public services.

In an effort to offset the myriad regressive implications of the bill, the Indiana legislature also expanded the Earned Income Tax Credit (EITC) and provided some income tax relief to renters. But these comparatively minor steps will not be enough to offset the harm done to low-income Hoosiers. A recent report released by the Indiana Association for Community Economic Development includes a number of recommendations for reforming Indiana's tax system, most of which are not addressed by the current bill.


If It Sounds Too Good...


| | Bookmark and Share

This week, taxpayers in Indiana will read promising headlines like, "Daniels announces property-tax plan" and assume that their angst about the property tax will disappear. But one doesn't have to read very far to know that Governor Daniels' proposal is an empty promise for low-and middle-income taxpayers. He is proposing $1 billion in property tax relief by 2009, but the relief comes at a steep price in the form of raising the state sales tax by 1 percent and capping homeowner property taxes at 1 percent of assessed value. Property tax caps are a long proven foe for taxpayers with less ability to pay. For more on property tax caps check out ITEP's policy brief.


Challenges of Change... You Got That Right


| | Bookmark and Share

As we've told you in past Digests, some Indiana taxpayers are threatening a revolt over property taxes. Rather than considering constructive reforms to the property tax, some anti-tax zealots are using the current situation as a reason to call for its outright elimination. Last week members of the Commission on State Tax and Financing Policy heard about the impact that property tax repeal would have on the state. The Legislative Services Agency (LSA) rightly titled their presentation "Challenges of Change."

The LSA estimates that in order to replace the $6.1 billion Indiana property taxes currently bring in, lawmakers would have to either increase the state income tax rate from 3.4 to 9 percent, or hike the sales tax rate from 6 percent to a whopping 13.2 percent. The LSA's presentation shows that repealing all Indiana property taxes would be prohibitively expensive. While Indianans' angst over their rising property tax bills is understandable--property taxes are regressive, and are often not based on a homeowner's ability to pay them-- enacting targeted property tax reforms such as a low-income "circuit breaker" credit would allow local governments to retain this important revenue source, and would make Indiana property taxes less unfair without requiring a double-digit sales tax to pay for it.


How Not to Deal with the Property Tax Issue


| | Bookmark and Share

Property tax reform continues to make headlines in several states. Some Indiana property taxpayers are revolting against what they perceive to be an unfair system. Recently more than 3,000 Hoosiers signed post cards addressed to their state policymakers urging them to fix the state's property tax mess permanently. In fact, a legislative commission began hearings last month and Governor Mitch Daniels' appointed blue ribbon commission started work this week. The problems are that taxes are not based on a homeowner's ability to pay and that assessments are executed poorly.

One thought-provoking solution described in the Indianapolis Star is to closely study the property in the state that is not being taxed. Indiana, like most states, exempts nonprofit organizations and religious institutions from paying the property tax. In Marion County alone millions of property tax dollars could be collected if religious institutions paid property taxes. Estimates show there is $2.7 billion in property that goes untaxed in Marion County. Should churches and nonprofit organizations pay property taxes? It's probably the case that no politician in Indiana would seriously propose to tax churches, but the fact that some are contemplating such a move could startle legislators enough to enact real reform.

Are Rebates the Answer?

Indianans will receive locally-funded property tax rebates this winter, but those rebates aren't being greeted with much enthusiasm. Many question the motives of the legislators who approved these rebates. The Post-Tribune writes that instead of offering credits that would be applied to a homeowner's property tax bill directly, "The General Assembly instead decided property owners should receive checks in the mail, so they can see what their elected officials did for them this year."

This week Montana homeowners can begin to apply for a $400 state-funded property tax rebate. The rebates were a highly contested issue in the legislative session as Republicans pushed for permanent property tax cuts instead of the one-time rebates supported by Governor Brian Schweitzer. The Montana rebates shed light on a problematic aspect of property tax rebates and circuit breakers. Because states don't often know how much property tax a homeowner paid, it becomes the homeowner's responsibility to know about and apply for the credit.

Itemized Deductions on State Tax Are No Better

Another misconceived approach to property tax reform is the itemized exemption for property taxes, which is allowed for most states' income taxes. One problem with this is that in the low- and middle-income families hit hardest by property taxes typically don't itemize. Also, income tax deductions are an "upside-down" tax break, since deductions are worth more to the wealthy taxpayers who typically pay higher income tax rates. If property taxes are problematic for some families, offering a deduction that is largest for the wealthiest and not available at all to many middle-income families is certainly not the solution.

In the current skirmish between Missouri and Kansas discussed above, some Missouri legislators have asked why people should be granted such an itemized deduction for property taxes paid in another state (which certainly angers those who pay Missouri income taxes because they work in Missouri, even though they live in and pay property taxes in Kansas). But the better question is why should Missouri allow an itemized deduction for property even if its located in Missouri. The deduction probably does little to help those who could actually use some help.


Tax Trouble in Indiana


| | Bookmark and Share

Emotions were running high this week in Indiana during the state legislature's public property tax hearing. Hundreds of people showed up to protest in what some say is the beginning of a tax revolt. Protestors were angry over what they see as the unacceptable rise in property tax bills this year. Many speakers called the current property tax system "broken" and advocated drastic cutbacks in school spending, or even a complete repeal of the property tax system. Just this week, Governor Mitch Daniels ordered that property tax levies in four counties remain at their 2006 levels until reassessments are conducted and the list of counties where reassessments will be ordered is expected to grow. Governor Daniels has hinted at a calling a special session to deal primarily with property taxes. Expect this raging debate to continue.


Indiana Governor Can't Suspend Gas Tax?


| | Bookmark and Share

In earlier Digests we've told you about how policymakers across the country have been dealing with increasing gas prices. Indiana Governor Mitch Daniels (R) been asked recently to suspend the state's sales tax on the sale of gasoline. The Governor declined to do so, saying "...although I can appreciate the short-term popularity that would go with it, I don't think it is a responsible step when you consider all the factors." Now it looks like the Governor may be relieved of the burden of making any choice at all. The state's Attorney General ruled late last week that the Governor doesn't have authority under a specific statute to suspend the gas tax. However, the ruling hasn't ended the controversy as the Speaker of House is urging that the gas tax be suspended anyway.


Property Tax Gimmick Prevails During Last Hours of Indiana's Legislative Session


| | Bookmark and Share

During the final hours of Indiana's Legislative Session lawmakers attempted to provide some property tax relief, but missed out on an opportunity to truly reform the state's property tax. Legislators voted to temporarily send property tax rebate checks to homeowners (after they already paid their property tax) worth $300 million to help offset increasing property taxes. Republicans are calling the legislation a political trick and in the end taxpayers are the real losers because inherent issues with Indiana's property tax are allowed to continue. For more, check out the Talking Taxes blog. Legislators also voted to allow counties to increase local income taxes in an attempt to allow locals to diversify their own revenue sources.

Smokers are also impacted by this last minute lawmaking and will soon pay 44 cents more for a pack of cigarettes. The new revenues generated are going to be used for health care programs and are expected to lower the number of Hoosiers who smoke. Of course, the increase is quite controversial given the ongoing need to fund health care and the fact that cigarette tax revenue declines overtime. For more on cigarette taxes read ITEP's Policy Brief on the topic.


Should Driving Cost Less or More?


| | Bookmark and Share

Several states are grappling with how and whether gasoline should be taxed. In Indiana, House Democrats campaigned on a proposal to eliminate the state's sales tax on gasoline entirely, but this plan was cast aside because it was entirely too expensive to carry out. Instead, the House has passed a rather complicated bill this week that would remove the sales tax from gasoline only when the price rose to $2.25 a gallon or higher. This bill, which is certainly not efficiently targeted to those who might need help the most, is expected to cost the state $45 million a year and perhaps more in later years.

Some environmentalists argue that the total cost of fuel consumption needs to be increased, not lessened, by government policy. But even states that attempt to move in that direction are not necessarily going about it in a rational or efficient manner. Oregon is in the midst of a pilot mileage tax program where cars are equipped with mileage readers and a tax is calculated based on miles driven. Governor Tim Pawlenty in Minnesota has included money to study a similar initiative in his budget. This proposal creates privacy concerns and does not seem particularly helpful from an environmental perspective. It would treat both gas-guzzling SUVs and fuel-efficient hybrids the same, so long as they drove the same number of miles.


Short Term Gain, Long Term Pain


| | Bookmark and Share

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.

Sign Up for Email Digest

CTJ Social Media


ITEP Social Media


Categories