Kansas News


State Rundown 4/12: Season in Transition as Some States Close, Others Open Tax Debates


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This week in state tax news we see Louisiana's session getting started, budgets passed in New York and West Virginia, Kansas lawmakers taking a rest after defeating a harmful flat tax proposal, and Nebraska legislators preparing for full debate on major tax cuts. Nevada lawmakers may make tax decisions related to tampons, diapers, marijuana, and property before closing their session this week. And gas tax update efforts are gaining steam in Alabama, South Carolina, and Tennessee.

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

What We're Reading...  

  • An op-ed penned by New Jersey Policy Perspective makes a good case for a change of approach to New Jersey's fiscal issues, arguing that "Instead of the annual ritual of scores of groups with important needs fighting for tiny scraps of an ever-shrinking pie of funding, New Jersey needs to take a serious look at making that pie larger." The op-ed offers a few excellent suggestions for how to accomplish this goal.
  • A new report by the Keystone Research Center (KRC) provides estimates of the impact of property tax elimination proposals. The analysis shows that eliminating Pennsylvania's school property taxes would increase taxes on the middle class while hampering the state's ability to adequately fund public schools.
  • The Louisiana Budget Project has just released an analysis of Gov. John Bel Edward's tax plan—a plan that suggests adopting a Commercial Activities Tax and significant changes to the personal and corporate income taxes that would require both legislative and voter approval. If all components of the tax reform package were to be enacted, collectively these reforms would be a move toward a more adequate tax system for the state.
  • The Iowa Fiscal Partnership has released a brief on elements to consider when discussing tax reform and debunking some of the myths currently driving the debate.
  • The Georgia Budget and Policy Institute takes a look back at this year's session, noting the state avoided some harmful regressive tax cuts but also passed a number of smaller changes that add up to a significant reduction in revenue for state services.

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


State Rundown 3/29: More States Looking to Raise or Protect Revenues Amid Fiscal and Federal Uncertainty


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This week we see West Virginia, Georgia, Minnesota, and Nebraska continue to deliberate regressive tax cut proposals, as the District of Columbia considers cancelling tax cut triggers it put in place in prior years, and lawmakers in Hawaii, Washington, Kansas, and Delaware ponder raising revenues to shore up their budgets. Meanwhile, gas tax debates continue in Oklahoma, West Virginia, and South Carolina, among other news.

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

  • It's been another whirlwind week for tax policy in West Virginia. Down to the wire on "crossover" day, the West Virginia Senate voted down the party line to overhaul the state tax system. SB 409 would raise the state sales and use tax to 7 percent (increasing the food tax to 3.5 percent) and step-down the state income tax, phasing it out over time. Ultimately this would shift the state's reliance on the personal income tax to the sales tax, benefiting those most well-off.
  • Georgia lawmakers will end their session Thursday and may pass a major income tax cut then. The plan, which was initially a very regressive flat tax proposal, has morphed into a more fair but also more costly package that eliminates the state deduction for state income taxes, lowers the top personal income tax rate to 5.65 percent, and indexes tax brackets and other provisions for inflation. It is projected to reduce state funding for services by $292 million in 2019, growing to $526 million annually by 2022.
  • Minnesota lawmakers have no shortage of plans for the state's surplus—with House Republicans proposing $1.35 billion in cuts and Senate Republicans aiming for $900 million. Both plans include exempting portions of Social Security income, tax breaks for student debt, and reducing the statewide property tax on business. The Senate plan also includes a provision to cut the lowest marginal tax rate—a policy change that is sold as providing tax relief to low income families but that disproportionately benefits the wealthy while undermining the progressivity of the income tax.
  • The current situation in the District of Columbia highlights two major trends in tax policy this year: tax-cut triggers and federal uncertainty. A trigger has been tripped that will cut DC taxes to the tune of $100 million unless the city council and mayor's office cancel those cuts, and at the same time, the city estimates it will lose at least $100 million under federal budget cuts outlined by President Trump. Such arbitrary automatic cuts undermine states' ability to respond to changing circumstances such as federal policy changes.
  • Nebraska legislators may be inching closer to a destructive tax-cut package that would use triggers like those in DC to ratchet down the state's income tax rates.
  • Advocates for low-income families in Hawaii are hopeful as bills that would boost taxes on the wealthy to pay for tax breaks for low-income people continue to move through the Legislature.
  • The Washington House released a budget that requires $3 billion in new revenues over the next two years from new taxes on capital gains and increases in business taxes. New revenues are necessary for the state to be in compliance with court mandates to adequately fund public education in the state.
  • In other state budget news, the Kansas House budget similarly requires $800 million in new revenues over the next two years in order to remain in the black and Gov. Walker's proposed budget in Wisconsin would increase the state's structural deficit to over $1 billion by 2021. While agitation for tax reform continues in Kansas, there is no similar activity in the Badger state.
  • Delaware Gov. Carney presented his budget-balancing proposal last week after holding "budget reset" listening sessions throughout the state and settling on an approach based on a mix of funding cuts and revenue increases. The tax proposal includes small rate increases of 0.2 to 0.4 percentage points, elimination of itemized deductions, and an increase in the standard deduction, while also raising the cigarette tax and a cap on corporate franchise taxes.
  • Oklahoma's Senate passed a measure that would increase teacher pay through a fuel tax increase (from $0.17 to $0.23 for unleaded gas and $0.14 to $0.21 for diesel). Similarly, West Virginia's Senate approved a gas tax increase of 4.5 cents, coupled with vehicle fees, to fund the state's Road Fund. Both bills now head to their respective Houses for consideration.
  • Chances diminished this week of South Carolina passing a needed gas tax update without tacking on harmful tax cuts that will shift taxes to low-income residents and undermine funding for schools, public safety, and other needs, as advocates for such cuts voted against giving the gas tax update priority status.
  • Idaho lawmakers in both chambers have approved legislation that would eliminate the sales tax on groceries along with a $100 grocery credit. The bill now goes to the governor who is opposed to eliminating the tax on food but who has not said he will veto the bill.
  • The Minnesota Revenue Department released its 2017 Tax Incidence Study, showing that while the overall state and local tax system remains regressive, there was a significant decrease in overall regressivity from 2012 to 2014, thanks in large part to refundable income tax credits and property tax refunds for homeowners and renters.
  • Iowa legislators have settled on $118 million in budget cuts to balance the current year budget.
  • Maryland, Virginia, and the District of Columbia are considering a regional sales tax to improve public transit in the area, an idea that people surveyed in Maryland narrowly support.

Governors' State of the State Addresses

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

What We're Reading...  

  • A new brief from the Corporation for Enterprise Development (CFED) outlines steps legislators can take to make the federal EITC even more successful at reducing poverty and encouraging work.
  • Tulsa World's editorial board asks Oklahomans to "eliminate the false idea that prosperity comes from whittling away at state income tax rates."
  • Ted Boettner, executive director of the West Virginia Center on Budget and Policy explains how the state's tax proposals result in a tax shift from the wealthy to low-income families.
  • A new paper to be published in the N.Y.U. Law Review explores the political popularity and danger of marginal rate cuts at low levels of income and how these policy changes actually disproportionately benefit the wealthy and undermine progressivity while being perniciously sold as "low income tax cuts."

 

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


State Rundown 3/8: Much Ado About Consumption Taxes


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This week brings more news of states considering reforms to their consumption taxes, on everything from gasoline in South Carolina and Tennessee, to marijuana in Pennsylvania, to groceries in Idaho and Utah, and to practically everything in West Virginia. Meanwhile, the fiscal fallout of Kansas's failed ‘tax experiment’ has new consequences as the state’s Supreme Court found the state is unconstitutionally underfunding public schools. Make sure to check out our "What We're Reading" section, which is chock full this week with recent research on Earned Income Tax Credits, state and local responses to budget woes and federal uncertainty, and more.

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

  • Legislative attempts in West Virginia to restructure the state’s tax system, replacing the state’s personal income, corporate income, and sales and use taxes with an 8 percent general consumption tax, are expected to cost at least $610 million a year as currently structured. The state’s fiscal note warns of potential unintended consequences of the tax shift, such as increased taxes on business inputs and consumers evading the higher tax rate on goods and services. That being said, the state is looking for ways to move forward with income tax repeal.
  • Kansas lawmakers return from recess with the added pressure to enact substantive tax reform due to a state Supreme Court ruling that the state is not adequately investing in public education. The state has until June 30 to present a satisfactory plan. As lawmakers continue to work on tax reform, the Senate has clearly indicated that Gov. Brownback's proposals will not be in the mix.
  • Tennessee Gov. Bill Haslam's "IMPROVE Act," which combined a needed gas tax update to generate revenue for roads with an unneeded package of tax cuts, may be falling apart. A subcommittee this week replaced the gas tax component of the bill with a sales tax redirection that essentially raids the state's general fund budget for the money needed for roads, while also cutting taxes that go into the general fund. Gov. Haslam is still pushing to get the gas tax provision of the bill restored. Polls show public opinion on the plan is mixed, though more informed respondents are more supportive.
  • South Carolina is setting a better example for what to do when a gas tax falls far behind the times and is no longer bringing in adequate revenue for the state's infrastructure costs, as the House voted this week to approve raising the rate by 10 cents over five years without tacking on other tax cuts or siphoning off funding from other priorities. The Senate may begin debate on the bill next week, though a filibuster attempt is expected.
  • Pennsylvania's auditor general suggests the state consider regulating and taxing marijuana to close its budget gap. By doing so, the state could bring in $200 million a year.
  • West Virginia's Gov. Jim Justice weighs a state tax on sugary sodas as companies in Pennsylvania (namely, Pepsi) fight against Philadelphia's recent tax increase.
  • Lawmakers in Idaho are hoping to get a hearing on a bill that would eliminate the sales tax on food along with the state's grocery tax credit. Efforts to do the reverse in Utahreinstate the sales tax on food and enact offsetting tax credits for low-income households—will have to wait for another legislative session.
  • It's potentially a big season for sales and excise tax policy in New Mexico. Amazon will start collecting sales taxes in April, the Senate passed a bill that would raise the gas tax for the first time in 20 years, and lawmakers are considering a $1.50 per pack increase on cigarettes to fund education.
  • More than three-fourths of Florida residents polled are against a proposed corporate tax cut, preferring to keep the tax and devote the revenue to education. Of course, that didn't stop Gov. Scott from proposing more tax cuts in his annual address.
  • Despite the state's $1.7 billion projected deficit, democratic lawmakers in Connecticut are lining up in support of a full exemption of social security income. The plan is expected to cost $45 million a year.

 Governors' State of the State Addresses

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

What We're Reading...  

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


Return of the Moderate: A Kansas Force Awakens


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Before the tea party wave of 2010 that brought Gov. Sam Brownback to power and inspired the disappointing “real life experiment” in tax policy, Kansas was primarily governed by a moderate bipartisan coalition. One thing the last few weeks in the Kansas capital has clearly demonstrated is that this coalition is back and they mean business.

Five years after the legislature enacted the largest tax cut in Kansas history that has wreaked havoc on the state’s budget, the legislature voted to rescind many of these same tax policies—including eliminating the exemption for business pass-through income and adding back a third income tax bracket and higher marginal tax rates.

Like a captain committed to a sinking ship, Gov. Brownback vetoed the bill, to which the House promptly responded with an override—carrying one more vote than needed to do so. While the Senate’s override attempt fell three votes short, the session is far from over. A majority of lawmakers in both chambers voted for the initial legislation and then voted to override the veto. Building on this support, new tax bills have been filed in both chambers, including plans that only slightly vary from the bill that was vetoed (HB 2178). (A plan with lackluster support proposed by Gov. Brownback that would raise alcohol and tobacco taxes has also been filed but unlikely to get much traction.)

When lawmakers pick up the work again the week of March 6, expect to see another wave of efforts to eliminate the business pass-through exemption and to find agreeable adjustments to income tax brackets and rates. The resistance is underway. An improved tax policy will hopefully follow.


State Rundown 2/23: Regressive Tax Proposals Multiplying


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

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

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

Budget Watch

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

Governors' State of the State Addresses

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

What We're Reading...  

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


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


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

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

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

Budget Watch 

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

Governors' State of the State Addresses 

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

What We're Reading...

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

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


State Rundown 2/8: Lessons of Kansas Tax-Cut Disaster Taking Hold in Kansas, Still Lost on Some in Other States


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This week we bring news of Kansas lawmakers attempting to fix ill-advised tax cuts that have wreaked havoc on the state's budget and schools, while their counterparts in Nebraska and Idaho debate bills that would create similar problems for their own states, as well as tax cuts in Arkansas that were proven unaffordable within one day of being signed into law. Meanwhile, debates over online sales taxes, Earned Income Tax Credits, and gas tax updates to fund transportation needs continue around the country.

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

  • Kansas lawmakers in both chambers are considering bills this week to roll back Gov. Sam Brownback’s tax cuts primarily via reforming the personal income tax, including repealing the exemption for business pass-through income and raising personal income tax rates in the Senate and a more comprehensive tax reform plan in the House.
  • Nebraska's Revenue Committee will conduct a hearing on Gov. Rickett's proposal to use a trigger mechanism to cut income taxes for the state's wealthiest residents this week. Last week, the committee was presented with two alternatives to slashing taxes on the rich by instead increasing the state's Earned Income Tax Credit.
  • Idaho lawmakers in the House passed bills cutting the corporate and top personal income tax rates and raising the exemption levels for the business personal property tax. The bill faces an uncertain future in the Senate.
  • Alabama lawmakers joined the list of states looking to cut income taxes this year.   
  • Arkansas Gov. Asa Hutchinson signed his $50.5 million tax cut  into law last Wednesday. The following day, the governor told several agencies to prepare contingency plans for budget cuts as the latest revenue reports came in $57 million behind forecast.
  • The Mississippi House has advanced a bill to enforce sales tax collection on online sales and divvy up the revenue with 70 percent going to state roads and other needs, 15 percent to counties, and 15 percent to cities. The need for such a fix is highlighted by the fact that even though Amazon is now collecting sales taxes on its own transactions in the state, many transactions hosted by the site are still not covered. Meanwhile, Tennessee's rule to require such collections has been challenged, adding to the pressure for a new court ruling on the matter.
  • Michigan lawmakers are considering bills to eliminate the sales tax on feminine hygiene products.
  • Wisconsin Gov. Scott Walker has proposed increasing the state's Earned Income Tax Credit for families with one child. Walker decreased the credit six years ago.
  • Wyoming lawmakers are faced with the need to diversify their tax base. Some have already begun considering revenue options: the House recently passed a cigarette tax increase that would increase a pack of cigarettes from $0.60/pack to $0.90/pack.
  • State legislators in both New York and Pennsylvania are pushing back against recent local tax initiatives: the New York City bag tax and the Philadelphia soda tax.
  • A proposal to update the South Carolina gas tax, raising $600 million per year for the state's transportation needs through a 10-cent per gallon increase and other fee changes, has advanced from the House Ways and Means Committee.
  • Tennessee Gov. Haslam's proposal to raise the state's gas tax while slashing other taxes has received criticism lately, as has an alternative plan to divert sales tax revenues away from general fund needs to plug the hole in the transportation fund.
  • Missouri private school advocates are pushing a bill to circumvent the state's prohibition on state money funding religious schools by creating a tax credit for donations to private schools. Read about how these programs are costly and frequently abused in our report here.

Governors’ Budget Watch

  • Faced with an $868 million shortfall, Oklahoma's Gov. Mary Fallin delivered her state of the state address this week. Proposed tax changes include replacing the state corporate income tax with increases in fuel, tobacco, and sales taxes. While details of the sales tax base broadening have not been released, Fallin has called for elimination of the state sales tax on groceries.
  • Pennsylvania Gov. Tom Wolf released his budget proposal this week. As he promised, it was void of any broad-based tax increases. Rather, state spending cuts and a proposal to tax natural-gas drilling are among the ways in which he plans to fill the state's $3 billion shortfall.
  • Today Connecticut Gov. Dannel Malloy is scheduled to unveil his two-year budget proposal. Faced with a $1.7 billion deficit, the plan will likely include a call to eliminate the state's $200 property tax credit and a requirement for cities and towns to pay a third of the annual cost for teacher pensions.
  • Alabama Gov. Bentley proposed studying and ultimately eliminating the state sales tax on groceries, increasing prison construction to deal with overcrowding, and increasing the state's investment in pre-K education in his address this week.

Governors' State of the State Addresses

  • In the past week, Governors Bentley of Alabama, LePage of Maine, Fallin of Oklahoma, and Wolf of Pennsylvania delivered their State of the State addresses.
  • States with addresses scheduled through the end of next week are: Kentucky and West Virginia, both scheduled for today.

What We're Reading...

  • As the Center on Budget and Policy Priorities (CBPP) details in two new reports, state lawmakers are increasingly turning to tax cut phase-ins and triggers as ways to take credit for cutting taxes without having to face the full consequences for years, decades, or in the case of term-limited lawmakers, maybe never.
  • A new report by Ohio Policy Matters uses ITEP research to dig into Gov. John Kasich's tax plan, finding that it would, once again, shift taxes and worsen inequality.
  • Pew Trusts explores the various reasons behind declining state populations in recent years.
  • The Kentucky Center for Economic Policy released a report that provides an overview on how refugees and immigrants are important to the state's economy.
  • The Georgia Budget and Policy Center released two reports showing the importance of immigrants to Georgia's state and local economies and budgets.

 

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.


Kansas State of the State: Worlds Apart


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Back in December, Kansas Gov. Sam Brownback gave an interview with the Wall Street Journal and suggested President-elect Trump should follow his state’s example and cut taxes as well as spending.

The sheer gall of the suggestion belies the fact that Kansas’s tax cuts have resulted in credit downgrades, lack of adequate funding for essential services such as education, and ongoing significant revenue gaps (including a $340 million revenue gap to close this fiscal year and an estimated $1.1 billion gap through the end of fiscal year 2019).

Brownback’s distorted reality was on display again last week in his State of the State Address, in which the fact that Kansas has been struggling with perpetual budget crises for the past four years was remarkably absent.

And based on his budget proposal, it seems achieving a structurally balanced budget is not truly a priority for the governor. Proposed measures to achieve a “balanced budget” include more of the same budget gimmicks and increased reliance on regressive sales taxes Kansans have seen over the past few years: hiking tobacco and alcohol taxes; taking money from the Highway Fund to cover general fund expenses; selling off revenue targeted to fund early developmental programs; and liquidating the state’s investment funds (which are intended to boost the state’s interest earnings, not plug budget holes).

These proposals do not put Kansas on a path toward achieving the stable fiscal footing needed to promote broad prosperity for all Kansans. Rather than raise revenues in a manner that asks more of those who reap more economic benefits, his one-time proposals continue to rely on those with the least and will only make the disparity between the rich and everyone else more vast. And ordinary people will continue to pay in other ways for these poor policy choices that have failed to generate promised results and gutted the state of resources needed to fund services for the disabled, mental health, and education.

Instead of acknowledging these fundamental problems, Brownback has dug his heels in, holding up his small business exemption—whereby more than 330,000 business owners pay no income tax—as a model for the nation.

Brownback in his address to Kansans said the state is “the envy of the world.” While Kansas does have beautiful sunsets, from an economic point of view, the state is failing to adequately invest in its infrastructure and people. A state in which much of the rewards flow to the top is hardly an example for others to follow. Kansas should clean its fiscal house before inviting others to follow its example.

Kansans are increasingly realizing the gap between what is, what is promised, and what might otherwise be and they’re opting for the latter. A growing number of lawmakers are doing the same. Hopefully, lawmakers will reject Brownback’s “everything is fine” vision of the state and steer the state toward meaningful tax reform such as the plan proposed by Rise Up Kansas.


Rise Up Kansas Coalition Calls for Comprehensive Tax Policy Reform


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A statewide coalition is calling for the end of the Brownback tax experiment in Kansas with the release of its 2017 comprehensive plan for tax reform.

 

The “Rise Up Kansas” coalition includes advocacy organizations representing educators, transportation contractors, state employees, early childhood providers, and tax policy experts who want to see an end to the state’s budget crises and tax policies that benefit the few at the expense of critical public investments.

 

The coalition proposes the following: 

 

• End the "March to Zero," stopping the eventual elimination of the individual income tax and preventing future budget crises.

 

• Re-instate the top income bracket of 6.45% for single filers earning $40,000 a year or more ($80,000 for married couples), turning the tax code "right side up" so everyone chips in.

 

• Close the "LLC loophole," cleaning up the tax code and ensuring it's not benefiting a select number of Kansans at the expense of the common good by ending the ability for taxpayers to shield business pass thru income from taxation.

 

• Hold the Kansas Highway Fund harmless for the first time since Gov. Sam Brownback took office by temporarily diverting the 4/10 of a cent sales tax currently dedicated to the State Highway Fund to the State General Fund for a period of three years while also pairing the sweep with an equivalent increase in the state gas tax of $0.11 per gallon.

 

• Reduce the state sales tax on food by 1.5 percent, taking the rate from 6.5 percent to five percent.

 

ITEP analysis shows that the proposal would restore approximately $820 million to the state’s general revenue fund while putting $100 million back into the pockets of Kansas families by reducing taxes on groceries.

 

Gov. Brownback’s recent proposals for addressing the state’s ongoing budget shortfall have included shifting money from the transportation to the general fund, deepening cuts to higher education, K-12 public schools, and community colleges, not making required pension contributions, and selling tobacco settlement dollars.

 

In contrast, the Rise Up Kansas coalition is calling for long-term solutions to the address the state’s long-term fiscal woes, cautioning lawmakers that “[t]he only proposal lawmakers should be willing to accept is one that will restore our state’s financial stability and allow us to once again invest in our future.”


State Rundown 5/26: Bad Ideas, Worse Budgets


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Thanks for reading the State Rundown! Here's a sneak peek: Kansas marks tax cut anniversary with budget cuts. New York governor expected to sign tampon tax repeal. Minnesota legislators pass tax cuts amid chaos. Tennessee repeals its Hall Tax. Massachusetts legislators give initial approval to millionaire tax.

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


 

This week marks the fourth anniversary of Kansas Gov. Sam Brownback's tax cut "experiment," and the governor recently celebrated by signing another austerity budget. Brownback's mid-biennium budget adjustment includes $97 million in cuts for most state agencies. The budget cut by 4 percent all agencies except for public safety and K-12 education, with higher education being hit worst. More than $30 million of the cuts were to the higher education system; the University of Kansas (KU) has already proposed a 4 percent tuition increase for next year. Meanwhile, a recent report found that the state's highest paid public employee – KU basketball coach Bill Self – pays virtually no state income tax thanks to Brownback's derided exemption of business pass-through income. Self receives the bulk of his $2.75 million in annual compensation through a limited liability corporation. Not quite the outcomes Brownback claimed would come from his income tax cuts.

New York Gov. Andrew Cuomo is expected to sign a bill that would eliminate the state's sales tax levy on female hygiene products. Right now, the sales tax adds approximately 88 cents to an $11 pack of 50 tampons. The so-called "tampon tax" has come under fire in some circles for being regressive and an unfair imposition of the sales tax on a product that should be considered a necessity. Others, however, have noted that exempting products from the general sales tax base erodes the base over time, necessitating higher rates on other purchases. They also note that targeted sales tax credits for working families would be a better solution to sales tax regressivity.

Minnesota's legislative session ended in chaos this week, with lawmakers scrambling to pass a series of major deals but falling short. The legislature managed to pass a $260 million package of tax cuts before the Sunday night deadline but fell short on bills for transportation funding and public works. The tax cuts include property tax cuts for farmers and businesses, a new tax credit for Minnesotans with student loan debt, and credits to help Minnesota families with childcare costs. Interestingly enough, lawmakers also passed a $3 million sales tax exemption for the purchase of suites at sports stadiums, but not an exemption for ordinary game tickets. Gov. Mark Dayton has suggested he could call a special session in June to give lawmakers another shot at passing the transportation and public works bills. EDIT: The package of tax cuts also includes a strong expansion of the Working Family Credit, Minnesota’s version of the EITC. Under the changes, the size of the credit would expand for most families and individuals, and the income cutoff for eligibility will be raised for some families and individuals. Moreover, the age requirement for childless workers to qualify for the credit will be lowered from 25 years old to 21 years old. Minnesota is the first state (after Washington, DC) to expand the state EITC to childless workers. About 386,000 Minnesota families and individuals will benefit from the credit expansion, which will reduce taxes by $49 million.

Anti-tax advocates in Tennessee succeeded in their years-long push to eliminate the state's Hall income tax on investment income. Gov. Bill Haslam signed a bill that cuts the tax rate from 6 to 5 percent this year, and that eliminates the tax entirely in 2022. The bill also says that its "intent" is for future legislators to enact additional, gradual rate cuts in the years before full repeal takes effect. The Hall income tax is levied on some dividend and interest income, and was expected to generate $341 million in revenue in FY 2017. ITEP data show that eliminating the tax would give the top 1 percent of Tennessee taxpayers an average $5,000 tax break while doing nothing for the vast majority of Tennesseans. As senior analyst Dylan Grundman notes, “The Hall Tax plays an important role in offsetting the otherwise regressive impact of Tennessee’s tax system. Overall, the state’s tax system captures a greater share of income from low- and middle-income people than from the wealthy but the Hall tax is one of the few taxes that runs counter to that trend.” Municipalities could struggle to make up lost Hall tax revenue, which delivers more than $100 million to the state’s cities and counties each year.

In a bit of good tax policy news, a proposed "millionaire tax" ballot initiative gained initial approval in Massachusetts. Lawmakers  voted 133-57 to advance a 4 percent surtax on income over $1 million. Massachusetts currently has a flat tax rate of 5.1 percent on all income, and the uniform rate is constitutionally mandated. To change this, the millionaire tax ballot initiative must be approved by at least 25 percent of lawmakers in a joint session during two successive legislative sessions. If lawmakers vote again to advance the measure next year then voters will have the chance to weigh in. If enacted, the millionaire tax would generate an additional $1.9 billion in revenue for transportation and education.

 

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


Talk but No Appropriate Action in Kansas


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It could have been different, but it wasn’t different.

Gov. Sam Brownback’s supply-side economics “real live experiment” in Kansas has not lacked critics since the unprecedented tax cuts for the wealthy and elimination of taxes on certain business income went into effect in 2012. However, even in the midst of slashed spending, regressive tax raising to balance budgets, stagnating job growth, and month after month of disappointing revenue reports, “seldom was heard a discouraging word” from those lawmakers who supported the governor’s tax plan.

Until recently. Mounting tension between GOP lawmakers and the administration was first evident in votes this legislative session to override a few of the governor’s vetoes. Subsequently, the Senate president said that lawmakers are “growing weary” and would “prefer to see some real solutions coming from the governor’s office.” And former allies in the Senate introduced a bill to partly roll back the governor’s tax exemption for business pass-through income.

While opposition to Brownback’s approach to the economy is not news, disagreement from these actors is significant as it brought tax reform into the realm of conceivability this legislative session. This proved to be short-lived, however, as lawmakers wrapped up the session with a vote against reforming the business pass-through income exemption and the passage of a budget early Monday that relies on delayed pension payments, raiding the State Highway Fund, and budget cuts to be made by the governor.

Kansas remains among the list of states willing to compromise the current needs of its residents and its future financial well-being simply to avoid raising taxes. It’s possible that the opposition that arose this legislative session is indicative of a tide change among conservative lawmakers that may surge in the coming months or that fed up Kansas voters will demand change this November. In the meantime, not only will Brownback’s policies fail to yield promised economic benefits, they will also continue to erode the foundation of the state’s economic future with further cuts to critical investments in higher education, transportation infrastructure and human services. States that haven't already taken the appropriate course corrections to avoid a similar fate would be wise to do so. 


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


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

-- Carl Davis, ITEP Research Director 

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

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

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

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

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

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

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


State Rundown 2/9: State Coffers Bare


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Today we are taking a look at several states that are dealing with budget shortfalls. Despite shortfalls, governors in Arizona and Kentucky are calling for tax cuts. Newly elected Louisiana Gov. Edwards is taking a different approach and calling a special session next week to talk about tax increases. Meanwhile the sad saga of Kansas continues as lawmakers grapple with revenues that again fell short of monthly projections.
Thanks for reading. 
-- Meg Wiehe, ITEP's State Tax Policy Director

 


 

Years of tax cuts have left Arizona low on cash, despite state officials' protestations to the contrary. While lawmakers point to lingering effects of the Great Recession to explain sluggish revenue collections, economists at Arizona State University blame over 20 years of tax cuts, which have reduced the 2016 general fund by $4 billion. Revenues will continue to decline as corporate tax cuts are phased in through 2019, but no matter -- Gov. Doug Ducey affirmed his commitment to cutting taxes further in his State of the State address (while somehow also promising increases in education spending).

Advocates in Kentucky say years of budget cuts show that the state needs more revenue. Under former Gov. Steve Beshear, the state cut spending by $1.5 billion. Gov. Matt Bevin has proposed $650 million in additional cuts under his latest budget. Recently, a coalition of 20 groups called on lawmakers to consider raising revenue instead of enacting more cuts. Using data from our state partners at the Kentucky Center for Economic Policy (KCEP), the Kentucky Together coalition advocates for eliminating tax breaks for corporations and wealthy property owners as well as broadening the sales tax base to include services. The KCEP report (PDF) cites ITEP data showing that state and local taxes hit middle-income families hardest (10.8 percent of family income) and are relatively light on the top one percent of Kentucky earners (6 percent of family income).

The sad saga of Gov. Sam Brownback continues for Kansas. The governor and his revenue officials continue to make the case that relying heavily on consumption taxes will provide "more stability" for state revenues despite mounting evidence to the contrary. In January, sales tax receipts were $3.9 million under expectations, and since July have come in as much as $10 million under monthly projections. Brownback and lawmakers increased the sales tax rate last June in an effort to pay for the governor's costly income tax cuts. Revenue Secretary Nick Jordan insists that the short-term data are an aberration, and that the sales tax is more reliable than the income tax "over a 5-10 year trend." Conveniently, Jordan won't be around then to see if his prediction was correct. And despite the assertions of Art Laffer and Stephen Moore, the Kansas economy doesn't prove the wisdom of Brownback's "experiment." As Yael Abouhalkah of The Kansas City Star notes, those economists have failed to acknowledge the consumption tax hikes, budget cuts and highway trust fund raids made necessary by the state's recent tax cuts.

At the request of new Gov. John Bel Edwards, Louisiana will hold a special session beginning next Monday to deal with its budget crisis. The session is limited to considering bills that would increase taxes, rollback tax cuts and incentives, or cut spending in an effort to balance the budget. However, it will be up to the legislature to decide if a bill meets the parameters established by the governor. One piece of legislation expected to be considered is a repeal of the SAVE higher education act, a bill passed by Louisiana lawmakers at the behest of former Gov. Bobby Jindal. The convoluted law created a fake tax credit to cover for a tax increase so that Jindal could pretend to keep his no-taxes pledge.

State of the State Addresses This Week:
Louisiana Gov. John Bel Edwards -- Friday, Feb. 12
Pennsylvania Gov. Tom Wolf -- Tuesday, Feb. 9 (watch here)
Wyoming Gov. Matt Mead -- Monday, Feb. 8 (watch 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.orgClick here to sign up to receive the Rundown in via email


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


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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

 


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


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

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

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

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

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


State Rundown 8/20: Summertime Sadness


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Budget gridlock continues in a few states across the country, including North Carolina where lawmakers are dragging through one of the longest sessions in 40 years, and taxpayers have already spent an extra $1 million to keep the legislature in session. House and Senate leaders agreed on a $21.74 billion budget, or roughly the mid-point between the two chambers' spending packages passed earlier this summer.  However, lawmakers now need to agree on how to spend the money.  As a News and Observer editorial notes, such a restrictive level of spending keeps the state's budget "suspended in the recession’s gloomy economic period." A proposed change to local sales tax revenue also caused deadlock. Rural legislators would like to redistribute local sales tax revenue from urban areas and tourist destinations to their jurisdictions, while legislators from those places say the change would require a tax hike on their constituents. Last week legislators passed a stopgap funding measure through Aug. 31.

The Michigan House this week again debated road funding but adjourned Wednesday without a deal, the latest move in a long debate that has already defeated a ballot measure and threatened the state’s EITC. After voters torpedoed a sales tax increase at the polls that would have paid for transportation improvements, both chambers of the legislature passed alternative funding plans. The compromise package called for $600 million in new fuel tax and vehicle registration tax increases as well as a transfer of $600 million in income tax revenue from the general fund. Gov. Rick Snyder and Democratic legislators balked at the general fund transfer, while Republicans in the House were slow to rally around the new taxes. Both houses of the legislature will return after Labor Day.

A controversial education tax credit in Kansas is drawing fire from critics who say it directs public money to religious schools. Created in 2014, the Kansas Low-Income Students Scholarship Program allows non-profit organizations to collect donations from businesses to pay private school tuition for low-income students who attend public schools with low test scores. In return, businesses are allowed a state income tax credit equal to 70 percent of their donation. More than 50 private schools, many of which offer religious education, have signed up for the program. Opponents of the scholarships say the program is unconstitutional, as Article 6 of the State Constitution states “No religious sect or sects shall control any part of the public educational funds.”

New Jersey lawmakers are trading proposals to cut taxes on yacht owners with Gov. Chris Christie. Lawmakers sent a budget to the governor that capped the 7 percent sales tax on yachts at $20,000, a windfall for boats costing more than $286,000. Christie vetoed that measure and responded with a plan that would halve the yacht sales tax from 7 percent to 3.5 percent. Marinas and boat retailers favor the governor’s plan. The vetoed plan would have cost between $3 million and $4 million; estimates on the governor’s alternative are not available but are expected to be higher. Legislators will consider Christie’s proposal when the legislature reconvenes, perhaps as soon as September.

As West Virginia legislators continue to consider changes to the state’s income tax structure to draw more businesses, state Commerce Secretary Keith Burdette questioned whether such an effort was necessary. Burdette pointed out that location was the number one reason that companies chose not to expand in the Mountain State:  “We don’t lose prospects over taxes; I’m not sure we lose them over regulations any more. We lose them over site.” Burdette also pointed out that the state’s lack of an educated workforce hurts business recruitment efforts. “Simply making us the lowest cost state without acknowledging and focusing attention and resources on other factors which make an attractive business climate would be a mistake,” Burdette acknowledged. 


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


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

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

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

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

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

 

Tax Shifts

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

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

Maine (Partially Enacted): Gov. Paul LePage proposed a costly, sweeping tax shift package back in January that would have resulted in a significant shift away from progressive personal income taxes and toward a heavier reliance on regressive sales taxes.  While almost every Mainer would have received a tax cut under this plan, the benefits were heavily tilted in favor of the state’s wealthiest taxpayers. Thankfully, despite its flaws the final tax reform package passed by the legislature over the governor’s veto will actually improve the state’s tax code.  Among the major tax changes it includes are: lower income tax rates, a broader income tax base, new and enhanced refundable tax credits, a doubling of the homestead property tax exemption, an estate tax cut, and permanently higher sales tax rates. Maine will slightly shift its reliance away from its progressive personal income tax onto a narrow and regressive sales tax.  However, this plan is vastly different from other proposed and enacted tax shifts, as it reduces taxes for most low and moderate-income families and somewhat lessens the regressivity of the state’s tax code.

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

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

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

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

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

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

 

Tax Cuts 

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

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

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

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

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

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

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

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

 


And That's a Wrap....the Failed Experiment in Kansas Continues


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The drama that ensued over the last few weeks in Topeka is the stuff of telenovelas. Kansas Gov. Sam Brownback got emotional when urging lawmakers to vote for a sales tax hike, even calling legislators from the hospital where his granddaughter was just born. Staunch anti-tax legislators broke their no new taxes pledge. Lawmakers accused the governor of blackmail, and the legislative session went on for an extra 23 days.

In the end, many Kansans will pay more in taxes due to an increase in sales and cigarette taxes, a freeze in income tax rates and limits for itemized deductions.

But every good soap opera deserves a twist. It’s well known that these tax increases were precipitated by irresponsible, top-heavy tax cuts championed by Gov. Brownback and passed in 2012 and 2013. An ITEP analysis of all Kansas tax changes over the last four years (including this year’s) found that the poorest 20 percent of Kansans, those with an average income of just $13,000, will pay an average of $197 more in taxes in 2015 as a result of the Gov. Brownback tax changes, and, even with the increases Gov. Brownback is expected to sign into law today, the richest 1 percent are still paying about $24,000 less.

Early on in his tax-cutting frenzy, the Governor offered that Kansas was a “real live experiment” for other states in terms of showing the positive impact of supply side economics. Those words have come back to haunt him and other supporters of trickle-down economic theories. If Kansas is an experiment, Friday’s vote makes it clear that the experiment failed.

One of the biggest and most regressive tax cuts included in the Governor’s 2012 tax cuts is its full exemption of non-wage business income. It’s the only state in the nation to fully exempt all pass-through business income. Lawmakers missed a real opportunity to fix this costly loophole.  Instead, they approved a new tax on guaranteed payments to ensure that some tax on small business income is levied, but accountants can easily manipulate the books so their clients don’t pay this new tax.

Most importantly, Kansas’s tax changes, even the provision that allegedly exempts 380,000 low-income people from income taxes, will do nothing to alter the fact that the Sunflower State earlier this year earned a spot on ITEP’s “Terrible Ten” list because it has 9th most regressive tax structure in the country.

The tax bills that barely passed the Senate (and passed the House at 4 am that same morning) included the following:

  • Income Tax Rate Freeze: Income tax rates were scheduled to fall to 2.3 and 3.9 percent, but the budget instead froze the rates at 2.6 and 4.6 percent
  • Itemized Deduction Reform: The bill limits itemized deductions  for mortgage interest and property taxes paid.  This change is expected to generate $97 million in FY2016.
  • Sales Tax Rate Hike: The sales tax rate (including groceries) increases from 6.15 to 6.55 percent. This rate increase is expected to bring in $164 million in FY2016.
  • Cigarette Tax Rate Hike: The cigarette tax increases by $0.50 per pack to $1.29 beginning July 1.  The tax hike is expected to generate $40 million in FY2016 and will almost certainly generate less in years to come.
  • Low Income Exemption: Taxpayers with taxable income less than $5,000 ($12,500 for married couples) are exempt from paying the personal income tax.
  • Guaranteed Payments: These payments, received from some types of pass-through business income, will now be taxed. This change is expected to bring in $23.7 million in FY2016.

The Kansas tax drama is over for the time being, but stay tuned. Chances are this soap opera will continue as lawmakers grapple with the impact of tax hikes in the context of unaffordable tax cuts.


Kansas Considers Tax Hikes on the Poor to Address Budget Mess


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It’s been clear for more than a year that Kansas must make significant policy changes to address its severe budget shortfall. Now, legislative developments are moving quickly as Gov. Sam Brownback and lawmakers try to hammer out a plan to plug the budget gap, but so far proposals on the table would make Kansas’s already regressive tax code even more so.

On Saturday, Gov. Brownback unveiled (a second) tax proposal to fix the state’s fiscal mess, AKA a $400 million shortfall. The governor’s latest plan cuts income tax rates, changes how itemized deductions are taxed, includes a vague low-income exemption and raises both the sales tax and the cigarette tax.

“The latest proposal is asking the Kansas Legislature to repeat 2012 mistakes, proposing dramatic changes to the Kansas tax code without identifying specific statutory changes or data to show the impact those changes will have,” Annie McKay, executive director of the Kansas Center for Economic Growth said in a statement.

By now, it’s no secret that that much of this fiscal mess has its roots in the governor’s own top-heavy, unaffordable tax cuts passed in 2012 and 2013. Perhaps the copious and damaging press over the last several years around the governor’s tax cuts for the wealthy are the impetus behind Brownback’s claim that 388,000 people will not have to pay income taxes under his new plan. While ITEP hasn’t yet evaluated whether this claim is true,  an initial ITEP analysis of Brownback’s plan found that his proposal results in an average net tax hike for Kansans in the bottom 40 percent of the income distribution due in part to higher  sales and other regressive excise taxes.

As our analyses have repeatedly shown, Gov. Brownback’s 2012 and 2013 tax cuts disproportionately benefited the wealthy, collectively cost the state more than $1 billion and actually raised taxes overall on average for the bottom 20 percent of Kansans.

 


State Rundown 6/2: Things Fall Apart


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This week looks like an active one for states that are entering the final stretches of their legislative sessions. Stay tuned to the State Rundown for updates on the tax policy battles happening across the country.

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Bipartisan negotiations in Maine over the scope of proposed comprehensive tax reform failed this weekend after Republican lawmakers in the House and Senate remained deeply divided and a Democratic counterproposal to Gov. Paul LePage’s plan failed to gain traction. State leaders announced that they’ve reached a tentative budget deal that would include no new income tax cuts over the biennium, but as a trade-off would allow a proposed constitutional amendment requiring a two-thirds legislative supermajority to enact new income tax increases to be put before state voters. The plan would also allow the sales tax rate to revert back to 5 percent from a temporary increase to 5.5 percent on schedule (note: this should not be perceived as a tax cut as many commentators have suggested). Republican leaders in the House are vowing to oppose any budget plan that does not include the welfare reform or income tax cuts championed by Gov. LePage in his original proposal. As of now, the compromise budget will fail to be enacted unless is draws enough House Republican support to override Gov. LePage’s certain veto.

Republican leaders in Kansas remain deadlocked over a plan to close the state’s big budget shortfall, despite warnings from government officials that state workers would be furloughed by the end of the week without a deal. Legislators are divided over how to close the projected $406 million gap; some want to roll back Gov. Sam Brownback’s exemption of business pass-through income for business owners and farmers, while others want to rely on increased sales and excise taxes. Meanwhile, Gov. Brownback unveiled a plan on Saturday that would protect his business income exemption but eliminate income taxes for low-income individuals in response to criticisms that his previously enacted tax cuts shift income taxes from employers to their employees. A preliminary ITEP analysis of the governor’s plan found that on average, Kansans in the bottom 40 percent would pay more.

Texas’s legislative session ended on Monday, with lawmakers passing new tax cuts in addition to the tax changes enacted last week. The first change, a $10,000 increase in the homestead exemption for property taxes, has been described as “the least-worst way to under-invest,” as the homestead exemption is spread evenly across taxpayers and the bill will replace local property tax revenue with more state aid to schools. For more on why homestead exemptions can be a good policy option, check out this ITEP brief. The second change, a cut in the business franchise tax rate of 25 percent, will cost the state $2.6 billion in revenue in a way that decidedly favors the wealthy and corporations.

In a welcome development, Nevada Gov. Brian Sandoval gained legislative approval of $1.3 billion in new revenue to fund improvements in public education, despite strong opposition from conservative lawmakers in the Republican-dominated legislature. Sandoval’s tax package, which he is expected to sign this week, will increase the business license fee and the payroll tax, extend some tax measures that were to sunset this year, and implement a new Commerce Tax on gross business revenue that falls more heavily on capital-intensive businesses. Altogether, the measures add up to the biggest one-time tax increase in state history. The new revenue will increase education funding, expand services to the poor, and provide for special education and statewide full-day kindergarten. 

States Ending Legislative Session This Week:
Nevada
Texas
Connecticut
Iowa


State Rundown 5/14: Helping and Hurting Working Families


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California Gov. Jerry Brown included a new state Earned Income Tax Credit (EITC) in his revised budget plan this week, responding to critics who claim he has not done enough to address poverty. Brown’s proposed EITC would provide qualifying working families in California an average credit of $460 a year, with the maximum credit for a family with three or more kids of $2,653. In order to qualify, families must earn a maximum of $13,870, about the average income of California’s bottom fifth of taxpayers but relatively low considering the median household income in California is $60,194. The governor’s proposal is much less generous than two bills under consideration in the legislature. Senate Bill 38 and Assembly Bill 43 propose EITCs with no income cutoff for eligibility. According to an ITEP analysis, SB 38 would provide an average credit of $781 to the bottom fifth of taxpayers, as well as generous credits to middle-class taxpayers. AB 43 would provide an average credit of $602 to the bottom fifth. State EITCs are one of the most successful poverty-fighting tools available to policymakers, and we hope that California adopts an EITC more in line with the legislative proposals on the table.

A Michigan representative wants to replace the state’s flat personal income tax with a progressive structure, arguing that the recent defeat of ballot measure Prop 1 shows Michigan voters reject regressive sales taxes and want the wealthy to pay their fair share. “The middle class is pretty tapped out, and obviously the working poor can't afford to pay more,” Rep. Jim Townsend noted. “And yet we have the people in the top five percent, and specifically the top one percent, who have been doing by all accounts, extremely well.” Changing the state’s income tax structure from a flat rate to a graduated version would require a two-thirds vote of the legislature and approval by a majority of voters. Townsend’s bill is unlikely to pass the current legislature, but the people are already on board; a recent survey of Michigan voters found that 66 percent would vote for a graduated income tax.

A new report finds that voters have not punished lawmakers who support gas tax increases to fund transportation investments. The study by the American Road and Transportation Builders Association says 95 percent of Republican and 88 percent of Democratic legislators who voted to increase state gas taxes in 2013 or 2014 were reelected last cycle. Even legislators who pledged to never raise taxes were unpunished at the polls; of the 191 legislators included in the study that signed the Americans for Tax Reform (ATF) state pledge, 13 percent “ignored the ATR and supported increased revenue for transportation improvements… Only one legislator who defied the ATR and sought re-election was not returned to office.”

 

Following Up:
Nebraska: Lawmakers successfully overrode Gov. Pete Rickett’s veto of a 6 cent increase in the state’s gas tax over four years. The tax increase will raise an additional $25 million annually for the state and $51 million for cities and counties once fully implemented. The revenue is sorely needed, as Nebraska’s gas tax rate, adjusted to inflation, is currently at an all-time low according to ITEP data.

Kansas: Legislators in the House and Senate are gravitating toward plans to increase the sales tax to make up for the budget deficit. The plans would also implement a lower sales tax on food; Kansas is one of a few states where the full sales tax applies to food. Meanwhile, a bill to repeal Gov. Brownback’s income tax exemption for business pass-through income was approved by the House Taxation Committee. 

 


State Rundown 5/11: Deadlock and Infighting


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Kansas lawmakers continue to clash with Gov. Sam Brownback over the efficacy of his tax break on business pass-through income, this time in the House. State Rep. Mark Hutton says the measure was passed to boost the economy, and that the record shows the tax cut hasn’t paid off. His concerns echo those of Senate Pres. Susan Wagle, who pointed out that her constituents are concerned the tax break isn’t fair, since owners of businesses can avoid income taxes while their employees cannot. The Chair of the House Taxation Committee, Rep. Marvin Kleeb, has stated that lawmakers never intended that small business owners would have no income tax liability, and that changes should be considered. Meanwhile, public schools in the state continue to cut programs and shed jobs, and legislators hold out hope the governor will present a coherent strategy for dealing with the budget shortfall.

The budget negotiations in Minnesota continue, though lawmakers have reached the last full week of the regular legislative session. After Gov. Mark Dayton released his budget proposal, Conservative lawmakers in the House passed over $2 billion in unwise tax cuts. Gov. Dayton expressed his willingness to consider the House’s personal income tax exemption and a some additional exemptions for Social Security income, but held firm on his opposition to proposed business tax cuts, calling them a bait-and-switch: “You put out the favorable item, in this case middle-income tax cuts,” Dayton argued, “and then you switch that to eliminating the estate tax on millionaires and billionaires and then permanent business property tax relief that goes on and on after the middle-income tax cut falls away.” The governor, meanwhile, called for permanent investments in education in his budget, including $343 million for universal pre-kindergarten that the House and Senate budget proposals did not include. Some legislators, like Senate Majority Leader Tom Bakk, want to tie agreement on any tax cut proposals to a transportation package that raises new revenue for road construction and maintenance.

 

Following Up:
South Carolina: Political observers in the Palmetto State feel that Gov. Nikki Haley’s hard-line stance on road funding could prove costly. Some legislators have grumbled that the governor’s transportation plan is unrealistic and that she should work with lawmakers instead of demonizing them.

Nebraska: State senators passed a six cent increase in the state’s gasoline tax, which Gov. Pete Ricketts vetoed immediately. The gas tax bill passed just four votes shy of a veto-proof majority, and its sponsors say they are confident they can override the governor’s veto since eight senators didn’t vote at all. Gov. Ricketts wants the legislature to give his newly-appointed roads director time to come up with an alternative.

States Ending Session This Week:
Missouri (Friday)

 


State Rundown 5/4: Road Money and Budget Gaps


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A complex Michigan ballot initiative that would increase various taxes to fund roads, public transit, K-12 education and local governments is a sound idea that, unfortunately, is unpopular among the state’s voters. The measure, Proposal 1, would increase the sales tax from 6 to 7 percent for education, and increase the gas tax and vehicle registration taxes to fund transportation. The measure also includes a provision to improve the EITC. An analysis of the plan estimates it would raise about $1.8 billion annually. The bottom fifth of Michigan taxpayers would receive an average tax cut of $24, while earners in the state’s top bracket would pay an average of $497 to $697 more. Given that Michiganders spend more than $686 a year on vehicle repairs thanks to atrocious roads, the measure is a comparative bargain for most.

The South Carolina Senate Finance Committee passed a road funding bill that would raise $800 million a year by increasing the gas tax and driver’s license and vehicle registration fees. It would also tie the gas tax to inflation and increase the sales tax cap on cars.  Passed earlier, a House plan would raise $400 million by increasing the gas tax and sales tax cap on cars (by smaller amounts than the Senate bill) and introducing a new gas excise tax at the wholesale level. Neither measure includes the immense income tax cuts that Gov. Nikki Haley insisted be included with any bill that raises the state gas tax. For more on the gas tax debate in South Carolina, check out this guest blog post from John Ruoff on the Tax Justice Blog.

Despite the plethora of bad press the state has received for attempting to balance the budget on the backs of low-income people while maintaining ill-advised tax cuts for the wealthy and businesses, Kansas lawmakers continue to propose regressive tax plans to plug the state’s deficit. Sen. Les Donovan, who chairs the Senate Assessment and Taxation Committee, suggested that the committee would consider a measure to increase excise taxes on cigarettes and liquor as well as a bill that would weaken the state’s EITC by reducing the credit and making it non-refundable. The committee will also review a host of small tax exemptions to phase out. Kansas faces an $800 million deficit, $400 million of which must be closed with spending cuts or tax increases.

Over the past decade, West Virginia lawmakers have phased out and eliminated the state’s Business Franchise Tax and reduced the corporate income tax rate from 9 to 6.5 percent. The tax cuts failed to deliver the promised job growth, instead blowing a hole in the state budget; business tax collections next year will be lower than they were in 1990.  Meanwhile, public university students in West Virginia could soon see big tuition increases thanks to shrinking state funding. West Virginia University is considering a 10 percent tuition hike on top of the 29 percent increase over the past five years, while West Virginia State University recently announced a 7 percent hike.

A California Senate committee approved a bill that creates a refundable earned income tax credit (EITC) for low-income and working families. The state EITC would equal 30 percent of the federal EITC for eligible individuals with children.


State Rundown 4/27: Leaders Push Back Against Unwise Tax Cuts


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New Hampshire business leaders, nonprofits and civic organizations have come together to oppose business tax cuts proposed in the legislature, arguing that they would jeopardize needed investments in education, infrastructure and other areas. The inclusion of business leaders in the coalition led by the New Hampshire Fiscal Policy Institute represents a rare but growing alliance between businesses who understand that investments are needed for economic growth and progressive organizations that advocate on behalf of working and middle-class families. The state Senate passed two bills in March that would cut corporate tax rates. One would reduce the business profits tax from 8.7 to 7.9 percent, while the other would reduce the business enterprise tax from 0.75 to 0.675 percent.

Kansas lawmakers want to take another look at Gov. Sam Brownback’s tax exemption on pass-through business income after more than 300,000 Kansans claimed the exemption at a cost of millions in state revenue. Initial estimates suggested that fewer than 200,000 taxpayers would be eligible for the exemption, a key part of the governor’s 2013 tax cuts. Many lawmakers, including members of Brownback’s own party, believe the business pass-through exemption is unfair because it has “created situations where a business owner may not pay tax on income, but an employee making less would.” Other legislators believe the exemption has contributed to structural imbalance in the budget, which currently has a $400 million hole.

Minnesota Gov. Mark Dayton rejected a budget proposal from legislators in the state House, saying the $2 billion tax cut package is a “non-starter” because of its fiscal irresponsibility. The House plan would give many Minnesotans a temporary income tax break, permanently phase out the statewide business property tax and reduce taxes on Social Security benefits. The governor refuses to begin budget negotiations until House leaders come up with a plan that is closer to his own targets. Dayton also asserted that the House plan would cost $4 billion annually once implemented, turning the state’s $1.9 billion surplus into a deficit. Gov. Dayton’s budget plan would use the surplus to shore up investments in education, particularly on a push for universal pre-kindergarten.

Nebraska Gov. Pete Ricketts and state legislators are headed for a showdown over a 6 cent-per-gallon increase in the state’s gasoline excise tax that, if approved, would raise $180 million after four years. The measure has already passed the initial hurdle in the state’s unicameral legislature, but two additional votes are needed before it is sent to the governor’s desk. Ricketts has said he does not support the measure. A recent article in the Omaha World-Herald found that inflation has eroded the buying power of Nebraska’s gasoline excise tax by $1 billion since 1995. ITEP's Carl Davis, who was interviewed for the article, noted that “It’s an inevitable fact that if gas tax rates are not updated from time to time, the tax is not going to keep pace with construction costs.” 

 

Things We Missed:

  • Arizona ended its legislative session on Saturday, April 25th.
  • North Dakota Gov. Jack Dalrymple signed Senate Bill 2349, which cut the state’s corporate income tax rate by 5 percent and the personal income tax rate by 10 percent. This is the ninth straight year that the state’s leaders have cut income taxes. The House also passed a tax cut for oil companies.

States Ending Session This Week:
Montana (Monday)
Indiana (Wednesday)
Florida (Friday)
North Dakota (Friday)

 


State Rundown 4/10: Positive Developments


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Momentum is building in California for the passage of a state Earned Income Tax Credit (EITC) for low-income workers. Two bills, Assembly Bill 43 and Senate Bill 38, would create a new, refundable state EITC. AB43 would provide a state credit equal to 15 percent of the federal credit for working families with children, and 60 percent of the federal credit for workers without children (the federal EITC for childless workers is significantly less generous than the credit for workers with children). AB43 would also provide a more generous EITC for working families with children under age 5, at 35 percent of the federal credit, in order to support children in their early development. SB38 does not include the provision for families with young children, but is more generous to childless workers; under this bill, families with children would receive 30 percent of the federal credit, while childless workers would receive 100 percent of the federal credit. An ITEP analysis finds that both bills would benefit a significant portion of working families and would improve outcomes for childless workers, who receive little support from other public benefit programs.

A bill in Alaska could impose a state income tax for the first time in 35 years. HB 182, sponsored by Rep. Paul Seaton, would introduce a state income tax equal to 15 percent of an individual’s federal income tax and would apply to some capital gains earnings as well. Seasonal workers would not be exempt from the tax, which Seaton projects would bring in $600 million annually. Revenues are an increasing concern in Alaska, which relies heavily on the volatile oil and gas industry to fund government services and has no state-level income, sales or property taxes. While the bill’s reception has been lukewarm, Rep. Seaton argued that the people should have a stake in funding government. He also argued that an income tax would be easier to collect than a sales tax. Another proposal from Rep. Click Bishop would institute an “education tax” of $100 on those making at least $10,000 a year, $200 for those making between $50,000 and $100,000 a year, and $500 for those making $500,000 or more.

 

Following Up:
Kansas: A new poll found that 69 percent of Kansans oppose using funds from the highway trust fund to close the state’s budget gap, and 95 percent said infrastructure investment should be a top priority. Gov. Brownback has proposed directing $2.1 billion from the transportation fund over 10 years to pay for his income tax cuts.

New Jersey: State newspapers have reported that Gov. Chris Christie’s privatization of the New Jersey lottery may have helped supporters of the governor. Gtech, the firm that operates the lottery, hired a law firm and a public relations company headed by men close to Christie to make the privatization deal happen. Gov. Christie privatized the state lottery over the objection of the state legislature and without a public bidding process.

Nevada: Legislators in the state Assembly advanced a plan out of committee that they say is an alternative to Gov. Brian Sandoval’s proposed expansion of the state’s business license fee. The Assembly plan would raise the rate of the Modified Business Tax (MBT) instead, from 1.17 percent to 1.56 percent. Proponents of this plan argue that it would be easier to calculate and a more predictable revenue stream, while opponents note that the MBT only covers 4 percent of state businesses and disproportionately falls on labor intensive companies.

 


Dear Kansas, Punishing the Poor Won't Solve Your Budget Mess


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brownback.jpgKansas’s fiscal woes have become the stuff of legend. Thanks to disastrous income tax cuts championed by Gov. Sam Brownback, the state government repeatedly has been forced to slash spending. The projected revenue shortfall for the fiscal year beginning in July is $600 million.

The budget crisis is so bad that some school districts have been forced to end the school year early. Yet Kansas lawmakers are wasting time tackling trumped-up problems around how poor people use their meager but much-needed cash benefits.

Just last week, the Kansas legislature passed a bill that would limit the daily amount of money TANF recipients can withdraw from an ATM to $25. The bill would also ban recipients from withdrawing benefits at ATMs in movie theaters, casinos, nail salons, and pools. The maximum amount of time Kansas can receive TANF benefits would be reduced from 48 to 36 weeks, a stingy amount of time for families struggling to find employment or gain the skills necessary to be self-sufficient. The measure also bans those who fail a required drug test from ever receiving welfare benefits.

All of this is reasonable only in a world where pernicious stereotypes about poor people are true. The fact is poor communities have few resources. A nail salon may provide the closest ATM. Furthermore, Kansas’s drug testing program has turned up 11 positive results out of 2,783 applicants since it began in 2014, at a cost of $40,000 (similar programs in other states, like Florida and Tennessee, have also been unproductive). Poor people are no more likely than the general population to use illegal drugs, and if the .004 percent rate of positive drug tests in Kansas is any indication, they actually have a lower likelihood than the general population.

The Kansas measure is likely to fail in its stated goals since the legislation will not prevent the behavior lawmakers seek to curtail. It will, however, make it harder for poor people to live their daily lives. One state senator told the Wichita Eagle that some of her constituents rely on TANF benefits to pay rent, and that the $25 ATM limit will make it harder to manage money. The small daily withdrawal limit will increase the amount of ATM fees that TANF beneficiaries must pay, cutting into the purchasing power of their already-meager benefits. But banks will win in the form of more frequent ATM fees.

Policies like the ones in Kansas increase costs and make outcomes worse. Since 2011, TANF enrollment has dropped by half in Kansas, despite the rate of children in poverty increasing in the state during the same period.

The reduced welfare rolls are no accident. Research shows the best way to build communities and strengthen families is through strategies that increase employment and opportunity, but Kansas lawmakers have taken the more expedient, less rational route of making the TANF program so onerous that it’s too difficult to enroll. One supportive opinion writer argues that the law “isn’t designed to hurt the poor, but to make their poverty uncomfortable.” But trying to make poverty more uncomfortable so that people move out poverty is like trying to put out a house fire with kerosene.

This brings us to the ulterior motive shared by state legislators and Gov. Brownback: state coffers are dry thanks to their tax cuts, they have a budget to balance, and Kansans on public assistance make an easy target.

To be fair, Kansas isn’t the only state to use TANF money for other needs. Misery, after all, loves company. But Kansas, thanks to its regressive tax cut “experiment,” is a particularly galling example. Recently, Gov. Brownback doubled down on his support for zeroing out the state’s income tax, claiming a shift to consumption taxes would create more growth. It’s the same old song he sang when he asked for income tax cuts in the first place, and the growth never came. The governor backed up his talk by suggesting regressive cigarette and alcohol tax increases to shore up the budget gap caused by his giveaway to the wealthy and corporations.

So in Kansas, low-income working families get it coming and going. State lawmakers have cut taxes for the well-off and increased taxes that fall more heavily on middle- and low-income Kansans. Meanwhile, they’ve made programs designed to help lift Kansans out of poverty less effective to save money. Taking from those who have the least seems to be of the foundation of Gov. Brownback’s entire economic development strategy.

Time and again, lawmakers enact restrictions on safety net programs that serve no purpose other than distracting voters from real problems that lawmakers don’t want to deal with. But politicians find it politically convenient to blame the poor for wasting tax dollars and making poor decisions. They would be better served by looking in the mirror.


State Rundown 4/7: Bad Ideas Die Hard


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

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

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

 

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

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

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

 

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

 

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



State Rundown 2/27: Gas, Sugar and Dodgers


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

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

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

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

 

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

 

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Shell games have been with us since ancient times, and the tax shift proposals of today indicate that the basic concept has a long shelf life. A “conjurer” who makes fantastic claims that are later found too good to be true? Kansas Gov. Sam Brownback and many other governors fit the bill. A “shill” who enthusiastically vouches for the legitimacy of the game and who stands to make a hidden profit? Any number of supply-siders who claim that tax cuts will promote prosperity or that tax increases will lead to a mass exodus. A “mark” who plays the game in hopes of winning, never realizing that it’s been rigged from the start? Unless you sit in the uppermost tax bracket, the mark is likely you.

Tax shifts lower one tax and increase another in a way that is purportedly revenue neutral. All too often, such proposals reduce taxes for top earners and stick low- and middle-income people with the bill by increasing regressive, consumption taxes. As ITEP’s Who Pays report shows, every state tax system asks more of the poorest residents than they do of the rich. Tax shifts allow elected officials to serve political goals, posing as fiscal stewards acting in the public interest even though their tax policies are detrimental to state budgets and critical programs such as education, infrastructure and public safety.  

There is a right way to do a tax shift. Last year, the District of Columbia broadened its sales tax base to include more services used by businesses and well-off residents. At the same time, it lowered taxes for middle-income earners and strengthened the Earned Income Tax Credit to put more money in the pockets of working people. Unfortunately, states currently considering tax shifts are focused on cutting taxes for the highest-income households.

Below are the top tax shift trends that ITEP is following in legislatures across the country:

1) Hiking Taxes on Low Income Families to Pay for Tax Cuts for Wealthy Families
Ohio: Gov. John Kasich’s budget includes yet another massive tax shift away from well-off taxpayers to the middle-class and working poor. He wants to slash income taxes for the second time since he’s been in office, cutting rates by 23 percent over two years, with an immediate 15 percent cut in 2015. The cuts would cost an estimated $4.6 billion in revenue over the biennium. Kasich also wants to eliminate the income tax for business owners with $2 million or less in annual receipts at a two-year cost of $700 million dollars, and increase the personal exemption allowed for those with $80,000 or less in annual income. He would pay for these massive income tax cuts through regressive tax hikes. The governor wants to increase the sales tax rate from 5.75 to 6.25 percent and broaden the sales tax base to include a number of additional services. He also wants to increase excise taxes on cigarettes and other tobacco products, two measures that hit low-income households the hardest. ITEP ran an analysis of the tax shift plan and found that the top one percent of Ohio taxpayers would receive an average tax break of $12,010, while the bottom 40 percent of taxpayers would actually see their taxes go up by about $50. For more on the ITEP analysis read this report from Policy Matters Ohio.

Maine: Gov. Paul LePage has proposed a sweeping tax shift package that would hike sales taxes to help pay for significant personal and corporate income tax cuts and would also eliminate the estate tax. All together, the governor’s tax changes would cost $260 million when fully phased in. LePage wants to increase the sales tax rate and broaden the tax base to include some services. His plan would also eliminate cost-sharing with local governments, which could force them to hike property taxes. The governor described his plan as a way to move the state from an income-based tax system to a “pay-as-you-go” consumption-based tax system – a dangerous and ill-advised shift in the way Maine funds its crucial public investments.  But, wait; there’s more!  In his State of the State address, LePage announced his intention to fully eliminate Maine’s income tax in three steps (we saw how that worked out for Kansas). Eliminating the state income tax would result in the loss of half of the state’s $3 billion in annual revenue, necessitating deep cuts and major tax shifts to more recessive revenue sources. 

Idaho (updated 4/6/2015): Idaho lawmakers have given serious thought to a number of tax shifting ideas, almost all of which would make the state’s regressive tax system even more unfair.  The House recently decided to move forward with some of these ideas, passing a bill that would have flattened the income tax for many taxpayers, raised the gasoline tax, eliminated the Grocery Credit Refund, and exempted groceries from the sales tax.  ITEP found that the overall impact (PDF) of these changes would be higher taxes for low- and middle-income taxpayers, and dramatically lower taxes for the affluent (the top 1 percent of earners would receive an average benefit of $5,000 per year).  Fortunately, the Senate killed the bill and seems to be interested in refocusing on the original objective that inspired it: raising money for transportation.

Michigan: This May, Michigan voters will be asked to approve a major tax package that would boost funding for transportation and education by some $1.7 billion per year.  The package relies entirely on regressive tax changes to raise revenue, notably through a 1 percent sales tax increase and a gasoline tax restructuring that would raise the tax rate by roughly 12 cents per gallon.  However, the package also includes a valuable progressive offset for low-income families in the form of a significant expansion to the state’s Earned Income Tax Credit (EITC), from 6 to 20 percent of the federal credit.  Unfortunately, lawmakers are now sending signals that if voters approve this package, they may squander some of the revenues on a personal income tax cut that would be no good for the state’s economy and would make the state’s regressive tax system even more unfair.  According to an ITEP analysis provided to the Michigan League for Public Policy, the income tax rate cut under consideration would give low-income taxpayers an average reduction of $12 per year, while handing over $2,600 per year to each of Michigan’s top 1 percent of earners.

2) Using Tax Shifts as Political Cover to Raise Revenue to for Infrastructure
South Carolina: Gov. Nikki Haley has said that she won’t support a gas tax increase without an across the board income tax cut. Raising gas taxes while cutting income tax rates would result in a tax shift from well-off South Carolinians to middle income and working families. Her proposal would phase in income tax rate reductions over 10 years, resulting in a top income tax rate cut from 7 to 5 percent, and increase the gas tax from 16 to 26 cents. This shift away from progressive income taxes coupled with a regressive gas tax hike would be problematic for state coffers over the long term, and low-income folks would undoubtedly feel the brunt of this tax shift.

New Jersey: Lawmakers in New Jersey seem to agree that the state is facing a transportation funding crisis and that an increase in the gas tax is needed.  However, it appears more and more likely that a gas tax increase will not be enacted without a tax cut elsewhere. The taxes lawmakers are considering reducing or even eliminating to get the much needed gas tax boost?  The estate and inheritance taxes, which only impact roughly 4 percent of New Jersey families each year and have zero connection to the need to boost transportation funding in the state.  As our friends at New Jersey Policy Perspectives have argued, the other problem with this proposal is that it does nothing to help low- and moderate- families who will actually be hit hardest by a gas tax increase.  Restoring the state’s Earned Income Tax Credit to 25 percent of the federal (cut to 20 percent in 2010) makes much more sense as the tax cut to propose alongside a gas tax hike, rather than eliminating taxes which benefit only the wealthiest families in the state.

3) Other States to Watch
Arizona: Online shoppers In Arizona (and every other state) often fail to pay sales taxes because e-retailers shirk their tax collection responsibilities.  In 2013 the U.S. Senate passed legislation that would have closed this gap in sales tax enforcement, but the House failed to act on it.  Now, some Arizona lawmakers say that if the federal government ever does act on this important issue that any additional revenue collected through improved enforcement should be immediately sent back out the door in the form of a regressive income tax cut.  Fortunately, legislation aimed at accomplishing this end was recently voted down by a narrow margin in the Arizona House, though the sponsor is still trying to find a way to resurrect the proposal.

Mississippi (updated 4/6/2015): Mississippi lawmakers showed zeal this session for changing the state’s tax code.  Gov. Phil Bryant recommended a nonrefundable Earned Income Tax Credit and Lt. Governor Tate Reeve’s proposal would have cut personal and corporate income tax rates and eliminated the state’s franchise tax.  But, the most extreme plan emerged from the House where members passed a bill that would have phased out the state’s personal income tax over several years with more than two-thirds of the cut flowing to the richest 20 percent of taxpayers in the state at a cost of nearly $2 billion. Thanks in part to ITEP’s number crunching on all of the plans, which advocates in Mississippi shared with the media and lawmakers and put to use in publications, the House and Lt. Governor’s tax cutting proposals failed to muster enough support to move forward this session.

New Mexico: We are closely following a bill in the New Mexico legislature that would eliminate most of the taxes currently levied in the Land of Enchantment and replace the revenues with a 1 percent tax on gross receipts.  Similar tax-shifting legislation was introduced in 2013 and gained little traction.

4) The Cautionary Tale: Kansas
Kansas: The most notorious case of tax shifting continues to unfold in Kansas. In 2012 and 2013 Gov. Brownback pushed through two rounds of very regressive income tax cuts that lowered taxes on wealthy Kansans while hiking taxes on low-income Kansans, and he’s now proposing more regressive tax hikes to help balance the state’s budget. The income tax cuts already passed will cost Kansas $5 billion in lost revenue over the next seven years. Given the state’s budget situation, Brownback has been forced to delay further income tax cuts planned for this year. He also has been forced to raise taxes, though not the ones you would think: his budget proposal would increase the excise tax on cigarettes by nearly 300 percent, from $0.79 to $2.29 per pack, and taxes on liquor would rise from 8 percent to 12 percent. The governor’s regressive tax hikes would fall  on the same Kansans hurt the most by his failed economic stewardship. They also drive home some of the consequences that could arise from other officials’ rosy tax shift plans. Aggressive tax shifts that favor businesses and the wealthy at the expense of low- and middle-income families can result in states having difficulty adequately funding basic public obligations over the short and long-term.

 


Sam Brownback's White Whale


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Little did Kansas voters know that in reelecting Sam Brownback they were actually voting for a vengeful old sea captain obsessed with one issue above all others – eliminating the state’s personal income tax.

How else to explain the governor’s insistence on continuing his ruinous path, despite the dictates of reality and reason? His zeal for cutting the personal income tax will cost Kansas $5 billion in lost revenue over the next seven years. The governor’s recent budget proposes cutting K-12 operational spending by $127.4 million this year alone, to say nothing of the draconian cuts he implemented over his first term. Per-pupil spending in the state is $861 less than it was in 2008, according to a recent study from the Center on Budget and Policy Priorities. The governor has already been forced to reduce spending by  4 percent across the board for state agencies this year (on top of other cuts), and he has raided the highway fund to the tune of $421 million. The reserve fund is almost empty. The state’s credit is in tatters.

Brownback has been forced to delay further income tax cuts planned for this year. He has also been forced to raise taxes, though not the ones you would think: his budget proposal would increase the excise tax on cigarettes by nearly 300 percent, from $0.79 to $2.29 per pack, and taxes on liquor would rise from 8 percent to 12 percent. As former Kansas Gov. Kathleen Sebelius said recently, “I’m not sure there’s enough smokers and drinkers in Kansas to balance these enormous cuts.” Furthermore, the governor’s regressive tax hikes would increase the burden on the same Kansans hurt the most by his economic stewardship.

The governor’s plan has succeeded in uniting state lawmakers in opposition. “These changes to tax policy proposed by Governor Brownback do nothing to address the systematic problem created by his irresponsible tax polices and fiscal mismanagement,” House Minority Leader Tom Borroughs complained. Sen. Laura Kelly groused that “People are being asked to take politically difficult votes on proposals that don’t solve the problem.”

Faced with this reality, Brownback and his first mate, supply-side Svengali and economist-for-hire Art Laffer, have resorted to the time-honored strategy of obfuscation. When a reporter pointed out that the governor’s plan to delay income taxes was a copy of his opponent’s plan from the gubernatorial election – a proposal that Brownback’s campaign derided as “appalling” – Brownback’s revenue secretary testily responded that, while Davis’s plan would have halted tax cuts forever, the governor’s proposal would still allow for tax cuts to go forward if growth in state tax receipts exceeded 103 percent of tax receipts in the previous fiscal year. Since the state is forecasting budget deficits through 2019, this is disingenuous at best.     

The governor’s budget director has tried to claim that the governor has not cut spending at all. “I know many people have different words for efficiencies. I do not believe these to be cuts,” he said, referring to the $1.38 billion in spending reductions in the governor’s proposed budget. Somehow I don’t think the kids in overcrowed classrooms and pensioners uncertain about their retirement plans would agree.

Laffer, in a recent interview, said that while he was not surprised by the state’s yawning deficits, he was at a loss as to why they occurred – this, despite a PhD in economics from Stanford University. He does feel bad, however – not for the Kansans hurt by budget cuts, but for Brownback. “I feel sorry for the governor,” he lamented, “but he did the right thing.”

Brownback, confronted with terrible revenue projections soon after his reelection, denied having any advanced knowledge that things were so bad. “I knew what the public knew,” he claimed, which is quite a troubling admission.

And let’s not forget Orwellian attempts to distort reality with misleading information. For example, the graph below looks great for Kansas job growth, until you look at the y-axis and see the state has added about 60,000 jobs in the last four years, trailing job growth in neighboring Missouri, Iowa, Oklahoma and Colorado. 

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In his state of the state speech, Gov. Brownback vowed to continue the “march toward zero,” referring to his quest to eliminate state income taxes. But maybe the march is toward zero money for crucial state services, zero new jobs created through his austerity economy, and zero prospects for Kansas schoolchildren.

A wise public servant would acknowledge his error and reverse the policies that have led to so much economic harm. But Sam Brownback has become a 19th century salty dog chasing the white whale of eliminating his state’s income tax. No matter that he has lost his leg and thousands of kids have lost their shot at a decent future. He and Art Laffer, say “Damn the torpedoes, full speed ahead.” 


State Rundown 1/8: All Eyes on the Governors


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

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

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

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

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

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

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

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

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


State Rundown 12/10: The Best Laid Plans (and Reports)


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houseofcards.jpgKansas Gov. Sam Brownback bowed to reality yesterday and unveiled his plan to close the state’s self-inflicted budget gap. In true Sam Brownback fashion, his solution is to stiff highway projects and pensioners rather than reverse his disastrous tax cuts. The plan has been criticized by state leaders on both sides, since keeping your state’s roads in poor condition and your senior citizens poor is bad for economic development. Brownback’s proposal also includes smaller, though significant cuts for early childhood education programs, further showing the governor’s willingness to rob Kansas’s future to pay for unnecessary tax cuts today.


A new report commissioned for Wisconsin Gov. Scott Walker by his lieutenant governor claims that the state’s high taxes and complex tax code are a drag on economic growth. While no recommendations are made within it’s pages, the report’s conclusion represents a consensus among state business and political leaders who were included in the meetings. Not surprisingly, this consensus leaves out the thoughts of advocates for public services, educators and other Wisconsinites who must have missed the invitation to the 23 meetings held across the state. Walker seems to be taking a page from Indiana Gov. John Pence’s playbook, after Pence held a tax reform conference this past summer open to Art Laffer and Grover Norquist, but not the public.


Meanwhile, Maryland legislators held a hearing recently to discuss the fate of its tax incentive program for film production, after a damning report showed the program brings in only 10 cents for every dollar spent. The bulk of the $62.5 million in credits went to just two shows, “Veep” and “House of Cards.” The credits first generated controversy early this year, when House of Cards threatened to stop production in the state unless lawmakers put up more money. This crisis was averted after Kevin Spacey agreed to schmooze with lawmakers and pose for photos at an Annapolis wine bar. Frank Underwood would be proud.


A new report from the North Carolina legislature’s top economist reveals that state revenues are $190 million short of what was previously projected (this is on top of a previous downgrade in revenue availability for the year by $200 million). Fiscal experts in the state say the gap was caused by weak individual income tax collections and falling paycheck withholdings in the wake of last year’s tax overhaul. ITEP and our allies at the North Carolina Justice Center have been sounding the alarm for months over the huge tax cuts passed for the wealthy, arguing that their cost was wildly underestimated. Let’s hope state lawmakers don’t make up for missing revenue by cutting crucial services and making things worse.


A report commissioned by a pro-business group claims that “tax reform” would boost business in Iowa. The state tax code, according to its authors, is too cumbersome and complex, leaving investors too confused to set up shop in the state. The Chamber Alliance, which commissioned the report, will lobby the state to simplify (read: fewer brackets) and reduce (lower rates) corporate and personal income taxes. Apparently the $4.4 billion in property tax cuts and $90 million in annual income tax relief passed by state legislators last year hasn’t been enough to make the state competitive.


 


State Rundown 11/14: Here Comes the Judge


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USSupremeCourtWestFacade.JPGNew data out of Kansas shows local property tax rates falling after an infusion of state cash for struggling school districts. After the Kansas Supreme Court ruled that cuts in state aid to schools created “unconstitutional, wealth-based disparities” between districts, $134 million in funding was restored, with the greatest relief going to those districts most in need. The case, Gannon v. State, began with a lawsuit brought by a coalition of Kansas school boards. A portion of the lawsuit, concerning general aid to schools, is still pending.


The United States Supreme Court heard arguments today in a case that could have ramifications for states’ ability to tax income earned outside their borders. The case, Comptroller of the Treasury of Maryland v. Brian Wynne, will determine if state residents are entitled to tax credits on certain income earned outside the state. Right now, Maryland taxpayers can deduct taxes paid in other states from their Maryland state income tax, but the rule doesn’t apply to portion of state income tax collected on behalf of counties. The Maryland Court of Appeals ruled that this is unconstitutional under the Commerce Clause because it discriminates against interstate commerce.


A coalition of school districts, parents and civil rights advocates sued top officials in Pennsylvania this week, alleging that state funding for K-12 education underfunds public schools and denies students in poor districts equal educational opportunities. They want the state’s Commonwealth Court to strike down the funding formula as unconstitutional and require a more equitable replacement. According to the plaintiffs, some districts are underfunded by as much as $4,000 per student and the disparities in per-pupil spending between low-income and high-income districts is almost $20,000. In 2011, state officials reduced state education funding by $860 million, leaving districts to rely on inequitable property tax revenues to close the gap.


 


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


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

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

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

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

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

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

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

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

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

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

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


State Rundown 10/30: Ballot Measures and Bad Policy


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IMG_012214capitol_br59.J_7_1_AQ2T51MO_L72370298.JPGNPR has the latest on Kansas Gov. Sam Brownback’s implosion, noting that since his tax cuts were enacted neighboring states have seen more robust job growth, and that revenue shortfalls have been double what state officials originally projected. Politico’s Morning Tax reports that, because the state must balance its budget each year, legislators have been forced to raid highway and reserve funds, as well as close the only school in the town of Marquette. Art Laffer, architect of the Brownback cuts and supply-side partisan, told NPR that it would be nonsense to expect people to quickly adjust to Kansas’ new tax codes, and that it could take a decade to see the promised results -- so great news for Kansas schoolchildren! His take is a departure from state revenue secretary Nick Jordan, who predicted two years ago that the state would see noticeable growth in three years. Maybe 2015 will be the charm?

Speaking of disastrous tax cuts, Chris Fitzsimon of North Carolina Policy Watch wrote an op/ed in The Courier Tribune on the insanity that is North Carolina fiscal policy. He assails lawmakers for their 2013 tax breaks for corporations and the wealthy, noting, “Just three months into the new fiscal year, North Carolina has a revenue shortfall of just over $60 million and it may balloon to ten times that much before next June.” Quoting ITEP data, Fitzsimon warns that “the cost of the Robin Hood in reverse tax cut could reach $1.1 billion this year.” The cuts, initially projected to cost $513 million this year, will actually cost $704 million -- a difference of $191 million, more than enough to pay for the $109 million in education funding that the legislature cut this summer. Meanwhile, the richest 1 percent of North Carolinians received, on average, a $10,000 tax break. I guess we found out where the money for teacher’s raises went.

Zach Schiller of Policy Matters Ohio has an op/ed in The Cleveland Plain Dealer opposing Gov. John Kasich’s proposed elimination of the state income tax. His case is convincing (and not just because it features ITEP data): over the past decade, Ohio has cut its income tax rates by almost 30 percent, just to see job losses of 2 percent while national employment increased by 4 percent. Moreover, shifting the tax burden from income to sales would give the wealthiest Ohioans tens of thousands of dollars in tax cuts while increasing taxes for the bottom fifth. Schiller gets it: “Proponents of income-tax repeal need to explain: Why should we add to growing income inequality and further slant the state and local tax system against low- and middle-income Ohioans so that the affluent can pay less?”

A new poll shows that the number of Massachusetts voters who support ballot Question 1 -- a repeal of a law indexing the gas tax to inflation -- is rising. A month ago, support for repeal stood at 36 percent, while 50 percent said they would vote no on Question 1. Today, support of and opposition to the ballot measure are equal, at 42 percent. Opponents of Question 1 argue that letting the value of gas tax revenue to erode over decades, as has been the case in numerous states, leads to higher costs in the long run since necessary maintenance is deferred. They also argue that taxes set as a rate already increase with inflation, so the approach outlined in the law is not a novel one. Supporters of Question believe that taxes should not increase without legislators publicly voting to do so.


State Rundown 10/10: Lottery Bust, Music Credits on the Table


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iStock_000019480533XSmall.jpgIn a development sure to shock you, the Oklahoma State Lottery has not fixed Oklahoma’s education funding woes (in other news, water is wet). The Oklahoma Policy Institute reports that the combination of the economic downturn and ill-advised tax cuts has reduced education funding by more dollars than the lottery, created in 2003, has raised. For example, last year the lottery brought in $70.1 million, while the Legislature passed an income tax cut projected to cost $237 million. The kicker is that the bottom 60 percent of Oklahoma families will get just 9 percent of the benefits from this tax cut, while lotteries have a notoriously regressive impact.

For the fourth time in six months, tax collections in Kansas fell way short of revenue projections -- $21 million short, according to state officials. The shortfall would have been twice as large if not for a big increase in corporate income tax receipts, as individual income tax receipts were $42.4 million less than estimated. The report is a blow for Gov. Sam Brownback’s administration after July and August revenue met official estimates, suggesting that the worst was over. The Topeka Capital-Journal reports that “the state could burn more rapidly through cash reserves and force the 2015 Legislature to take a scythe to the budget in January.”  The governor said his tax cuts were “like going through surgery. It takes a while to heal and get growing afterwards." It looks like the patient is back on life support.

A music industry lobbying group is pushing the New York state legislature to pass a tax incentives bill similar to the state’s film credits program, according to The New York Times. If the group, New York Is Music, gets its way, $60 million in tax breaks will be available to studios, record companies and other firms involved in creating music. Businesses would be entitled to a 20 percent credit on expenses related to music production. Supporters claim that high rents in New York City and the attraction of incentives in other states mean the measure is vital to the health of New York’s music industry. The truth, however, is that incentives merely subsidize already-planned economic activity rather than promoting new business, and that they rarely pay for themselves. For more, check out this ITEP report on state tax incentives.

California Democrats hope to use the upcoming 2016 election to advocate for the extension of sales and income tax increases, according to The Sacramento Bee. Proposition 30, which increased the sales and income tax for the state’s highest earners, was passed in 2012 as a temporary measure. Supporters of extending the tax increases, including state superintendent Tom Torlakson and the California Federation of Teachers, argue the revenue will be critical to maintaining investments in education and the social safety net. Critics argue that lawmakers would be acting in bad faith if they sought to extend Proposition 30, which was sold as a temporary measure, and that the measure has hurt the state’s business climate. Gov. Jerry Brown, who supported Proposition 30 when it was introduced, has not taken a position on its extension. 

Got a great state tax story you want to share? Send it to Sebastian at sdpjohnson@itep.org for the next Rundown! 


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


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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 Rundown 9/17: Virginia Gas Tax, Tesla's Sweetheart Deal


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TESLA1.jpgVirginia’s gasoline tax will increase by 45 percent on January 1, 2015 if Congress fails to pass a law (the Marketplace Fairness Act) granting states the power to collect sales tax on online purchases. The increase, passed by lawmakers as part of a 2013 transportation spending plan, will cost motorists about 5 more cents per gallon. Rep. Bob Goodlatte, a Virginia congressman and Chairman of the House Judiciary Committee, is responsible for holding up the internet sales tax legislation, allegedly due to the deep pockets of his tech company supporters. Goodlatte’s opponents have accused the congressman of backing the interests of his donors over those of his constituents.

The New York Times reports that Kansas Gov. Sam Brownback (R) faces a revolt from his base over the deep and painful tax cuts he pushed for two years ago. The article quotes staunch conservative voter Konrad Hastings: “[Brownback] is leading Kansas down. We’re going to be bankrupt in two or three years if we keep going his way.” The state’s projected budget shortfalls are in the hundreds of millions of dollars annually, and over 100 Republican state officials have endorsed Gov. Brownback’s challenger, Paul Davis (D).


Using ITEP data, financial services website Wallet Hub released its ranking of the most and least fair state tax systems of 2014. To rank the states, Wallet Hub conducted a national survey, which found that both liberals and conservatives believe a progressive tax system is most fair. Then they compared this against ITEP’s finding that the average local and state tax burden is hugely regressive. Washington took the prize as the least fair state using Wallet Hub’s methodology, while Texas and Florida had the dubious distinction of being states where the top 1 percent are most undertaxed while the bottom 20 percent are most overtaxed. Congrats, I guess?


Nevada has agreed to a $1.25 billion economic incentives package for Tesla Motors, which plans to build a high-tech battery factory outside Reno. The figure is more than double the $500 million Tesla CEO Elon Musk was asking for, and amounts to almost $200,000 per anticipated job created. The deal contains “clawbacks,” clauses that allow states to demand repayment of giveaways if the promised investment is not forthcoming, but experience shows that these clauses are rarely invoked. California Gov. Jerry Brown, who fought for the factory but resisted ponying up millions in incentives, noted that the deal would be good for his state anyway since Tesla Motors is still headquartered in Palo Alto.


 


State Rundown, 9/5: Gun Holiday in Mississippi, Shortfall in Wisconsin, and a Showdown in Washington


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Elmer-fudd-pictures.jpgAdd Mississippi to the list of states adopting shortsighted and impractical sales tax holidays. This week marks the state’s first tax-free weekend for sportsmen, also touted as the “Second Amendment Sales Tax Holiday.” Individual sales of ammunition, firearms, archery equipment and rifle scopes, among other hunting gear, will be exempt from the state sales tax, presumably to help working hunters afford basic necessities. In what is surely no coincidence, Mississippi’s tax-free weekend is the same week as that of neighboring state Louisiana. The two states have long used fiscal policy to compete for jobs and economic development.

In an unsurprising development, Wisconsin’s state tax collections fell short of projections by $281 million last year after Gov. Scott Walker and the state legislature enacted irresponsible tax cuts. Walker and Republican legislators enacted a $320 million tax cut in July 2013, another $100 million property tax reduction last October, and yet another $500 million tax cut in March of this year. Also unsurprising is that the majority of the tax cuts went to the state’s wealthiest residents. According to Wisconsin Budget Project, Wisconsin workers making $14,000 or less got an average tax cut of $48, while those making above $1.1 million got an average tax cut of $2,518. 

In Kansas, another state run into the ground with ruinous tax cuts, Democrats and Republicans are fighting over the definition of what a tax increase is. Republicans claim that gubernatorial candidate Paul Davis (D) wants to raise taxes on low-income families because Davis has proposed freezing income tax rates at current levels to increase school funding, rather than letting the rates fall lower under a plan pushed by Gov. Sam Brownback. The accusation by Republicans is bold, particularly since Brownback actually raised taxes on low-income families when he raised the state sales tax rate, cut the standard deduction, and eliminated several low-income credits (the sales tax rebate was reinstated as non-refundable credit in 2013).

Washington state’s Supreme Court heard arguments from lawyers representing the state’s legislature this week in the ongoing saga over the McCleary school funding case. In 2012, the court ruled in McCleary v. State of Washington that state lawmakers are violating the constitutional rights of schoolchildren by failing to provide them a basic education, as required by the state constitution. The court called for the hearing this past April after legislators failed to craft a funding plan by the end of the legislative session. If the court finds the legislature in contempt, lawmakers could face fines, defunding of non-educational programs, or even the sale of state property. According to ITEP’s Who Pays report, Washington has the most regressive tax structure in the nation, and the need for education funding is severe.


Hey Missouri, You're the Show Me State, But Don't Follow Kansas's Lead


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You’d have to be living under a rock at this point (or mysteriously uninterested in tax policy - but then why would you be reading this) to not know about the fiscal crisis in Kansas. This recent USA Today article (which quotes smart folks at Missouri Budget Project and the Kansas Center for Economic Growth) does a really splendid job of relaying the absolute latest happenings in Missouri and Kansas (sneak peek - Missouri may be a little better off because their tax cuts are dependent on revenue growth, and Kansas has just gotten a fiscal vote of no confidence from another bond rating agency).

Here’s the drama in a nutshell: Governor Sam Brownback declared that his 2012 plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive years of income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state's poorest residents), assuring the public these cuts would pay for themselves. (ITEP has done a ton of work analyzing the various tax cut proposals; peruse them here, here, and here.) Yet, Kansas ended this fiscal year $338 million short of total projected revenue, forcing the state to drain reserve funds to pay the bills.

The news continues to be grim.  And now, the inability of Brownback and the legislature to make these tax cuts add up has created a new problem: bond rating agencies think Kansas’ poor recent fiscal management makes the state less credit-worthy. Standard and Poor’s downgraded the state’s credit rating this week, meaning that every time the state chooses to borrow money to fund long-term capital investments such as roads and bridges, it will cost the state more to do so.

So, perhaps not surprisingly, Governor Brownback is in a close fight for reelection and even a number of notable fellow Republicans aren’t supporting him. Kansas seems to be sputtering and on a downward spiral, but in a move that leaves many tax analysts scratching our heads it appears that Missouri wants a little of what Kansas is laying down.  

In fact, lawmakers in Jefferson City enacted mammoth income tax cuts this spring that overwhelmingly benefit high-income taxpayers. The income tax cuts that were contentiously passed this year included a drop in the top income tax rate and a new deduction for business income. ITEP found that under this legislation the poorest 20 percent of Missourians will see a tax cut averaging just $6, while the top one percent of families will enjoy an average tax cut of $7,792 once the cuts are fully phased in.

This story isn’t going away anytime soon and it’s good to see journalists like those from respected newspapers covering this story in such depth.


State News Quick Hits: Kansas Budget Woes, Absurd Ohio Tax Cuts


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In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, "It's like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low-income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap - a proposal that Christie already has vetoed several times but is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax. But, Gov. Brewer has made it clear she does not support such extreme ideas. From the Arizona Daily Star: “I think that you need a balance,” she said in an interview with Capitol Media Services. Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”

 


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


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

This Kansas gubernatorial election is shaping up to be a referendum on Governor Sam Brownback’s tax cuts and supply-side economics generally. Governor Brownback’s record on taxes has made national headlines. Two years ago, Brownback declared that his plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state's poorest residents), assuring the public these cuts would pay for themselves. Yet, the state ended this fiscal year $338 million short of total projected revenue amid concerns that Brownback’s income tax cut package is causing more bleeding than initially anticipated.

House Minority Leader Paul Davis is the Democrat who will most likely be challenging Brownback in November (the primary is in early August). Davis recently unveiled an economic plan which includes postponing the last round of Governor Brownback’s income tax cuts thus keeping income tax rates at their January 1, 2015 levels (though Davis has stopped short of calling to undo all of the Brownback tax cuts). He is also proposing a bipartisan tax commission to study “accountability measures within the tax code and targeted incentives for job growth” and “proposals aimed at reversing the $400 million property tax increase that has occurred during the Brownback administration.”

Perhaps no gubernatorial election this year will be as intensely focused on taxes as the contest in Kansas. Stay tuned. 


State News Quick Hits: Governors Misguidedly Oppose Progressive Taxes


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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.


Kansas: Repercussions of a Failing Experiment


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Two years ago, Kansas Gov. Sam Brownback declared that his plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state's poorest residents), assuring the public these cuts would pay for themselves.

But the Governor’s experiment now appears to be in meltdown mode: revenues for the last two months have come in way under projections and may leave the state short of the cash needed to pay its bills.

And, while the governor takes credit for cutting taxes at the state level, taxpayers in cities and rural areas are finding themselves paying more in local taxes. The Wichita Eagle cautions that municipalities aren’t even close to being out of the woods yet: “[t]he picture for cities, as well as counties and school districts, could darken over the next year if the state’s revenues don’t better align with projections.”

This tax shift isn’t just happening in Kansas cities. Rural areas are feeling the pinch in terms of increased property taxes. A professor from Wichita State University opined about dramatic property tax increases across the state and concludes “Brownback’s tax experiment is driving these shifts.

Need further evidence of the state’s meltdown mode? Read this superbly titled New York Times piece, “Yes, if You Cut Taxes, You Get Less Tax Revenue, Kansas Tax Cut Leaves Brownback With Less Money.”

 


State News Quick Hits: Regressive Tax Cuts Taking Toll on State Budgets


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In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, "It's like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap - a proposal which Christie has vetoed several times in the past but which is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax.  But, Gov. Brewer has made it clear she does not support such extreme ideas.  From the Arizona Daily Star:  “I think that you need a balance,” she said in an interview with Capitol Media Services.  Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”


State News Quick Hits: Red Ink Mounting in Tax Cutting States


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News we cannot make up from our friends at the NC Budget and Tax Center: The North Carolina Senate wants to take a sacred public trust, the education of our children, and subject it to the whims of a voluntary funding system. After frittering away precious resources for schools by giving millionaires – among the only people who have prospered much in recent years – an income tax cut they didn’t need, the Senate now wants North Carolinians to voluntarily give back part or all of their income tax refunds so teachers can get a pay raise. A better, saner solution would be for the Senate to acknowledge reality: the tax plan that it and the House passed last year and the governor signed into law is failing the people of North Carolina – and their kids. Read more about this ridiculous plan here.

Kansas lawmakers should be prepared to see lots of red ink within the next year. Former state budget director Duane Goossen has said the state simply won’t have enough money to pay its bills. One reason Kansas is going down this path is because the state no longer taxes pass-through business income, and the price tag of the deduction is largely unknown.  Perhaps this is the evidence Kansans need to prove that Governor Brownback’s experiment has failed.

Tax Fairness advocates take heart! Kudos to Missouri Gov. Jay Nixon for coming out against a sales tax hike for transportation. The governor said, “The burden of this ... sales tax increase would fall disproportionately on Missouri's working families and seniors.” The need for increased transportation funding is real, but it makes little sense to hike the sales tax almost immediately after cutting income taxes.

Perhaps South Carolina Governor Nikki Haley hasn’t closely watched the income tax elimination debate that has sputtered to a halt in other states. If she were paying attention she would see that each of these proposals has gone  nowhere, yet she is proposing that very same thing in the Palmetto State.


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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

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

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

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

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

Read the full report


States' Failed Tax Policies Have Some Governors Throwing Red Herrings


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Two years ago as part of the fiscal cliff deal, members of Congress sensibly allowed a subset of the Bush tax cuts for the wealthy to expire, including an increase in taxes on capital gains. Many wealthy investors, who have the benefit of tax advisors, chose to sell stocks in 2012 rather than wait for potentially higher federal income tax rates in 2013. The result was a boost in federal and state income tax collections in fiscal year 2013.

To be clear, the fiscal cliff deal’s anticipated tax hikes on the investor class didn’t increase the amount of revenue from capital gains income—it just shifted that income from fiscal year 2014 to fiscal year 2013. This meant that state lawmakers needed to plan for an extra shot of revenue in 2013, and an equivalent amount of missing revenue in 2014.

Most states planned accordingly. In states such as California, this basic budgeting matter hardly caused a ripple: the Golden State experienced a surge in personal income tax revenues in April 2013 and a large decline this year.  But, they saw the decline coming and when the dust cleared, the state actually brought in more money from personal income taxes than expected in April.

A handful of other states, however, didn’t plan as well and are attempting to blame their failed tax policies on the fiscal cliff deal. Kansas is a prime example.

Two years ago, Kansas Gov. Sam Brownback declared that his plan to repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two successive tax cuts that disproportionately benefited the richest Kansans, assuring the public these cuts would pay for themselves. Now he is facing a barrage of criticism over growing evidence that state tax revenues are declining in the wake of these cuts.

The pressure seems to be getting to the Brownback administration: earlier this month, Brownback’s revenue secretary, faced with a 45 percent decline in April tax revenues relative to the same month in 2013, called the month’s revenue slide “an undeniable result of President Obama’s failed economic policies.”

Kansas experienced the same revenue bubble in 2013, and the same trough in 2014, as did California and many other states. The state Department of Revenue’s April 2014 tax report notes that April 2013 revenues “increased dramatically from the previous year, about 53 percent,” due to accelerated capital gains encouraged by the fiscal cliff deal. In that context, the reported 45 percent decline in April 2014 is not only predictable, it sounds like a pretty good deal.

So why is Gov. Brownback’s administration citing this income-tax timing shift as evidence that President Obama’s policies have caused “lower income tax collections and a depressed business environment?” And why are governors in New Jersey and North Carolina making similar claims? In both Kansas and the Tarheel State, the governor is under pressure to defend the affordability of recently enacted income tax cuts.

Pinning the blame for revenue shortfalls on the fiscal cliff deal deflects scrutiny from state tax cuts costing more than advertised. In New Jersey, as the Tax Foundation has noted, Gov. Christie has been accused of using wildly optimistic revenue forecasts as part of his 2013 reelection campaign, and now he has some explaining to do about why his projections were so wrong. Once again, the Obama Administration serves as a convenient scapegoat for poor fiscal management decisions by state leaders.

But the news is not all bad out of Kansas: in a rhetorical flourish that would make North Korea envious, just one month before the Kansas Department of Revenue blamed President Obama for April’s decline in tax revenues, they explained a March increase in tax revenues as evidence that “ [w]e’re seeing the Kansas economic engine running.”

Kansas is, by all accounts, in a real fiscal jam. The ballooning cost of Brownback’s tax cuts and a recent state Supreme Court mandate that Kansas spend additional money on schools has made the task of a balanced budget very difficult for state lawmakers. But if Kansas lawmakers are in a fiscal hole, they need look no further than the state capitol to determine who is wielding a shovel.


What's the Matter with Kansas (and Missouri, and ...)


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An anti-tax, Republican super majority in the Missouri Legislature claimed victory yesterday in a year-long battle with Gov. Jay Nixon over taxes by voting to override Nixon’s veto of a $620 million income tax cut. This comes one year after Gov. Nixon’s veto was enough to stop a similar measure from becoming law.

The new law, Senate Bill 509, will gradually drop the top income tax rate from 6 to 5.5 percent and create a new tax break for “pass through” business income. Besides blowing a hole in the state’s budget, the tax cut will also make Missouri’s already-unfair tax system even worse: a Missouri Budget Project report, using data from our partners at the Institute on Taxation and Economic Policy (ITEP), found that the poorest 20 percent of Missourians will see a tax cut averaging just $6, while the top one percent of families will enjoy an average tax cut of $7,792.

Throughout this bruising battle, Missouri lawmakers made it clear that similar income tax cuts enacted by neighboring Kansas in 2012 and 2013 were a motivating factor in dropping Missouri’s tax rates. Clearly these lawmakers did not read news stories last week when Moody’s lowered Kansas’s bond rating due, in part, to the fiscal crunch created by that state’s income tax cuts.

But it shouldn’t take a bond downgrade to convince lawmakers that unfunded tax cuts can have a devastating effect on a state’s economy. What has just happened in Missouri and recently in Kansas is a symptom of a larger problem. Anti-tax proponents across the country are pushing a message that taxes are inherently bad without regard to what less revenue does to basic public services, from infrastructure to education. This fallacious messaging has allowed a number of states in the last few years to push through tax cuts that disproportionately benefit the wealthy.

For many states, it’s too soon to tell the long-term impact. But it is likely that other states could experience the same negative consequences as Kansas, including cuts in public services and downgraded bond ratings. Just last week, North Carolina lawmakers (who enacted a massive tax cut package last year) got word that revenues are coming in more than $445 million below projection in the current fiscal year and are likely to be down next year as well thanks in large part to under valuing the impact of their regressive tax cuts. 

Fortunately, Missouri tax cuts won’t begin to phase in until 2017, and even then are contingent on future economic growth. But in the long run, Governor Nixon’s bleak assessment of the bill’s impact—that it’s an “unfair, unaffordable and dangerous scheme that would defund our schools, weaken our economy, and destabilize the strong foundation of fiscal discipline that we’ve worked so long and hard to build” may prove prophetic.  

Results from Governor Brownback’s “real live experiment” (the passage of two rounds of extreme tax cuts under the guise of stimulating the economy) are trickling in and they aren’t good.  The Kansas City Star is reporting that the state’s “plummeting revenues” and increased need are some of the reasons why the state’s bond rating is now down from the firm’s second highest rating of Aa1 to Aa2.

Regrettably, Florida lawmakers just approved those “super-sized” sales sales tax holidays we told you about a few weeks ago. Read why sales tax holidays are a bad deal for both consumers and the Sunshine State in the Institute on Taxation and Economic Policy’s (ITEP) policy brief.

We offer our congratulations to former President George H.W. Bush on being awarded the Profile in Courage Award for raising taxes in 1990 despite his “Read my lips: no new taxes” pledge.  John Sununu, the President’s chief of staff, said, “George Bush did the right thing for the country, and it’s nice to see people are beginning to appreciate it.”

Calls for the Texas legislature to remedy a state tax law that has allowed commercial properties to be assessed at an (often large) discount are still being heard, loud and clear. An opinion piece in the Dallas News calls the lower property tax bills that many businesses have been receiving “unfair,” and cites examples of some of the state’s largest commercial buildings being assessed at a 35-40% discount.

 


Kansas Lawmakers Compliance With Supreme Court Decision Proves Difficult


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Kansas lawmakers just passed legislation to comply with the recent state Supreme Court ruling mandating increased K-12 funding to poor school districts, but it didn’t come easy.

The Kansas City Star notes that “[l]awmakers discussed taking the money out of the state’s reserve fund, but those dollars are needed just to keep the lights on in state government. They talked about taking from some educational funds to give to others. They considered shaking out pockets looking for spare change. At one point, senators were reduced to eying the $2 million in the problem gambling fund.”

These difficult choices are a direct result of the last two years of radical tax cuts. Governor Sam Brownback’s supply-side promises notwithstanding, his regressive income tax cuts show no sign of paying for themselves anytime soon, which means lawmakers must look under cushions to meet their court-mandated funding obligations.

The current budget is balanced precariously. As the Kansas City Star reminds us, “Right now, the budget is balanced only by dipping into reserve funds. If current revenue and spending trends continue, it will go underwater in 2016. After that, a state that is shortchanging its universities and disabled citizens will have to start cutting more deeply; forecasters estimate $962 million in cuts by the 2019 fiscal year. Kansas already is raiding its highway fund to pay for transportation of school students and even a chunk of the debt service for the recently completed statehouse reconstruction. Part of the teachers’ pension funds are coming from gambling revenues, in apparent violation of state statute.”

Having found $129 million in new money for poor school districts, the legislature clearly felt the need to dispel any illusion on the part of voters that they actually value public schools, and added legislative measures to undermine them. Kansas is now the latest state to enact “neo-vouchers,” corporate tax credits for companies making contributions to private schools. As we’ve explained in the past, this back-door approach to school vouchers erodes corporate tax revenues, takes money away from already-strapped public schools, and limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. In other words, having grudgingly given new revenue to public schools with one hand, they now will be taking it away with the other.


Kansas Supreme Court Case Shows Public Services Suffer When Tax Breaks for Wealthy Take Priority


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Far too often, lawmakers use tax cuts to score political points and throw around phrases such as “more effective government” to gloss over the lasting, negative effects of starving public investments.

In the case of Kansas, public schools are paying the price. The state Supreme Court ruled last Friday that the state Legislature hasn’t allocated enough money to poorer school districts but must do so by July 1. Although the Court didn’t designate a specific dollar amount, state Department of Education officials have estimated that complying with the Court ruling will cost at least $129 million.

Unfortunately, state political leaders have already signaled their intention to skirt the Court’s decision. Quoted in the New York Times, state Rep. Kasha Kelly, the Republican chair of the House Education Committee, said the legislative branch has the “power of the purse.” And Gov. Sam Brownback lauded the Court for not declaring a dollar amount, stating that equity is more about equality of opportunity rather than dollars spent.

Such rhetoric has no basis in reality. Indeed, state lawmakers have a responsibility to be stewards in the public interest. This means deciding how to raise revenue as well as spend revenue. Too often, lawmakers interested in backing the narrow interests of an elite few discuss taxes in a vacuum as though they are unrelated to how states fund critical priorities. This makes it easier to push through tax cuts under the guise of stimulating the economy without talking at the same time about long-term implications of less revenue for basic public services—or, in the case of Kansas, equitable funding for public schools.

Gov. Brownback has led the way in a recent wave of governors advocating for large tax cuts for the affluent under the misguided premise that tax cuts pay for themselves.

In Kansas, recent state budget cuts have meant increased classroom sizes and fewer resources for extra-curricular activities, not to mention cuts in other public services.  State funding per student has dropped since the economic recession from $4,400 five years ago to a reported $3,838 today. Kansas lawmakers initially claimed they had to cut funding for K-12 education due to the lingering effects of the recession. But even as state revenue rebounded, legislative leaders astonishingly moved to cut income taxes rather than restore funding for public education and other services.  In fact, the Legislature enacted two rounds of major tax cuts that disproportionately benefit the wealthiest Kansans. The first round, in 2012, dropped the top tax rate from 6.45 to 4.9 percent and exempted all “pass-through” business income from the personal income tax.

The next round, enacted in 2013, doubled down by dropping the top tax rate even further, to 3.9 percent, and setting the income tax on track for complete elimination if, as Gov. Brownback has said, the state meets revenue targets. The long-term fiscal impact of these tax cuts in Kansas will be a whopping $1.1 billion.

If, as Gov. Brownback says, he is for equality of opportunity, he should concede that overcrowded classrooms and reduced services are not the way to achieve this. Lawmakers would be wise to consider rolling back some of Gov. Brownback’s tax cuts by not allowing the top income tax rate to fall further and by eliminating the costly deduction for pass through business income.


State News Quick Hits: EITC Awareness, Grover Norquist's New Target and More


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Community organizations, state tax departments, and editorial pages across the country celebrated National EITC Awareness Day last Friday. Roughly 80% of those eligible for the federal Earned Income Tax Credit take advantage of it each year, a higher participation rate than most other social programs. But keeping this figure high -- and ensuring that busy, working people are also aware of state and local EITCs they may qualify for -- requires continued vigilance. One way to boost participation, and to save beneficiaries from wasting their refund on paid tax preparers, is by joining the volunteer income tax assistance (VITA) program. We also need anti-poverty advocates on the front lines fighting plans in some states to eliminate or weaken their state EITC, as North Carolina did last year.

Like many Americans, Grover Norquist is apparently sick of Congressional gridlock (despite having played no small part in causing it through his inflexible no-new-taxes pledge).  But rather than sit around while federal tax reform continues to stall, Grover has turned his sights toward Tennessee.  Grover wants to see Tennessee repeal one of the few bright spots of its staggeringly regressive tax system (PDF): its “Hall Tax” on investment income.  The Massachusetts native and current DC resident is signaling his intention to push lawmakers to repeal the tax, according to The Tennessean.

With an election just a few months away, Florida Governor Rick Scott has made clear that he wants tax cuts, yet again, to be a top priority in the Sunshine State.  His newest list of ideas includes cutting motor vehicle taxes, cutting sales taxes on commercial rent, cutting business taxes, and cutting business filing fees.  He’d also like to give shoppers a couple of sales tax holidays — a perennial favorite among politicians that like their tax cuts to be as high-profile as possible.

Check out the Kansas Center for Economic Growth’s new blog! Their latest post makes the salient point that two rounds of radical income tax cuts “have failed to create prosperity and are leaving low- and middle- income Kansas families struggling to make ends meet.”


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


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

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

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

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

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

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


Beware of the Tax Shift (Again)


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

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

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

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

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

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

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

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

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


Will Basic Constitutional Rights Be the Next Casualty of Kansas' Supply-Side Experiment?


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Almost every American would agree that education is a fundamental right. Any serious commitment to the notion of “equal opportunity” means ensuring that kids have an opportunity for a quality education—and that this opportunity should be as available to the very poor as it always has been to the very rich. As it happens, every state’s constitution includes a provision guaranteeing a basic education to its residents. But as an excellent op-ed in today’s New York Times notes, if some Kansas policymakers have their way, that state’s constitutional guarantees may be the latest victim of Governor Sam Brownback’s income tax cuts.

It’s worth reviewing how Kansas lawmakers found themselves talking about jettisoning fundamental constitutional rights. In 2012, Governor Brownback pushed through huge tax cuts for the affluent based, in part, on the argument that these tax cuts would be largely self-financing. (Brownback was apparently influenced heavily by the half-baked supply-side claims of Arthur Laffer that cutting income taxes will automatically spur economic growth.) Rather than requiring harmful cuts in state and local public investments, Brownback argued, his tax cuts would be “a shot of adrenaline into the heart of the Kansas economy,” generating new economic activity that would actually boost tax collections.  But as the Center on Budget and Policy Priorities notes, it hasn’t worked out that way. State lawmakers were forced to enact substantial spending cuts across the board, and per-pupil funding plummeted from nearly $4,500 less than a decade ago to $3,838 last year. After a group of Kansas parents brought suit against the state, a lower state court ruled (PDF) that these cuts were an unconstitutional violation of the state’s basic education guarantees—and prescribed a remedy that returns per-pupil funding to the levels achieved in the last decade.

In response to the court’s finding (which is now being reviewed by the state Supreme Court), policymakers in the Brownback administration have argued that the court’s mandate for more school spending prevents them from adjusting spending levels to reflect economic downturns. As the state’s solicitor general argued last year, “The Legislature has to deal with the real world…the constitution shouldn't be a suicide pact." But this argument is ludicrous: as the court sensibly pointed out in its ruling, state lawmakers gutted education spending at the same time that they were pushing through huge tax cuts, making it “completely illogical” to argue that the unconstitutional education cuts are anything other than “self-inflicted.” Notwithstanding this, some policymakers have called for amending the state constitution to modify or even eliminate the guarantee of a basic education in response to this ruling. In other words, when the state constitution conflicts with supply-side tax cuts, it must be the constitution’s fault.  

The good news is that most other states have, so far, resisted the siren call of Laffer’s calls for huge income tax cuts. But in Kansas, some policymakers are so enamored with the Brownback tax cuts that they appear to be willing to write off their most basic constitutional guarantees. 

Governor Scott Walker says that one of his goals is to lower taxes for all Wisconsinites. He’s asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Regrettably, transparency clearly isn’t another one of the Governor’s goals as the first roundtable discussion was closed to the public (and press) and only business leaders were invited.

In “race to the bottom” news, Missouri lawmakers approved a 23-year, $1.7 billion package of tax cuts for Boeing in an attempt to lure the manufacturer to the state. Missouri is one of twelve states vying for the opportunity to make the new 777X passenger jets. As we have explained, Missouri seems eager to repeat the mistakes of of Washington State, which recently provided Boeing with the largest state tax cut in history, at $8.7 billion.

It turns out that Kansas’ recent tax cuts aren’t just 
bad policy.  They’re also unpopular.  The income tax cuts, sales tax hikes, education cuts, and social service cuts that resulted from Governor Brownback’s tax plan are all opposed by a majority of Kansans, according to polling highlighted in The Wichita Eagle.

Due to the extensive changes to North Carolina’s personal income tax starting in 2014, the state’s Department of Revenue has 
asked all employers to distribute new state income tax withholding forms to their employees.  The need for a new form has unfortunately led to a lot of confusion and some really inaccurate press coverage on the regressive and costly tax “reform” package enacted this year.  Some articles mistakenly reported that everyone will get an income tax cut (and thus a little more money in their paychecks next year), but we know this is not the case.  The loss of the state’s Earned Income Tax Credit, personal exemptions (despite a higher standard deduction), and numerous other deductions and credits will negatively impact many working North Carolina families and seniors living on fixed incomes.  And, these stories all failed to point out that while income taxes may be going down for some, sales tax on items including movie tickets, service contracts and electricity will be going up in 2014.


State News Quick Hits: Amazon's Esoteric Tax Dodge, and More


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Iowa Senator Jack Hatch is one of three Democratic candidates running to unseat Governor Terry Branstad. If elected, the Senator intends to pursue a package of tax changes that would cost the state $415 million in Fiscal Year 2015 and $300 million in the following years. Most components of his plan are quite progressive: eliminating the flawed deduction for federal income taxes paid and asking the wealthiest Iowans to pay more overall.  But we wonder if permanently reducing tax revenues is the best approach when (for example) food insecurity in the state is rising.

Interested in how college textbooks are taxed in your state? Check out this New York Times piece which also explains why Amazon is telling its customers not to carry the textbooks they “rent” from Amazon across state lines. It’s one of the many convoluted steps the company takes in efforts to dodge its sales tax collection responsibilities.

The Kansas City Star explains in an editorial why the gas tax is a better tool for funding infrastructure than the sales tax.  As the Star notes, relying on a general sales tax to pay for roads “is a big leap away from the “user pays” world in which motorists help finance road repair and construction … [and] many drivers from outside the state who use the state’s roads would pay little if anything in sales taxes to maintain them.”  Our partner organization, the Institute on Taxation and Economic Policy (ITEP) makes a similar point in its 50-state report on the gas tax.

Nebraska’s Tax Modernization Committee, which we have been following, has moved on from taking public comment and is now back to deliberating potential changes to the Cornhusker state’s tax system.  At the suggestion of the Committee’s Chairman, members are focusing first on how they would pay for any proposed tax cuts – which could include fully exempting social security from the personal income tax and providing state aid to help reduce property taxes. While tapping into the state’s Rainy Day Fund and reserves is one option under consideration, many lawmakers wisely cautioned against using one-time money to pay for permanent tax changes. We are also happy to see that some Committee members are making tax fairness an important part of the debate. To this point, State Senator Jeremy Nordquist said, “There's a number of options for us to address the regressivity of our state and local tax system, and that's certainly what my goal will be."

 

 

 

 


Kansas: Dispatches from a Failing Experiment


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At the behest of Kansas Governor Sam Brownback, the state legislature has enacted two rounds of major tax cuts that disproportionately benefit the wealthiest Kansans. After signing into law the first set of tax cuts, Governor Brownback called the radical bill “a real live experiment.” He was quite proud of the legislation, saying that it wouldn’t affect the state’s ability to provide quality education and meet the needs of its poorest residents because the tax cut would eventually pay for itself by generating increased economic growth. The Governor said, “I want to ride the income tax rates on down, keep this glide path going to zero that we’re on, to get to a pro-growth position.”  But any good experiment calls for constant monitoring and so far, the Governor’s experiment is failing.

For starters, there is evidence that local governments are feeling enormous pressure to make up for reductions in state support by increasing their property tax rates. Hannes Zacharias, Johnson County’s Manager said, “Indeed, we are at the end of the food chain, and we’re the ones who have to clean up the mess.”  And as the Associated Press reports: “the county has lost state revenue for jobs such as inspecting sewer septic tanks for new residents in rural areas. In addition, furloughs in district court operations caused by limited state funds mean defendants must stay in county jails longer while awaiting trial, a cost picked up by local governments.”

And what of the Governor’s promise to continue to provide quality education?  It turns out that this is another instance where the state’s supply-side experiment has apparently been less than successful.  The Lawrence Journal-World reports that because of cuts in state classroom spending, school finance as a percentage of Kansas personal income will next year hit its lowest level in history. And soon the Kansas Supreme Court will be taking up this very issue. The Topeka Capital-Journal writes that the lawsuit before the Kansas Supreme Court could actually “end Brownback’s tax legacy.”  If the Court rules that more state money needs to be spent on public education, the legislature will likely need to raise hundreds of millions of dollars in new taxes.

The Governor’s office claims that state general fund monies to schools have increased since he took office, but this is apparently because the administration is now including contributions made to teacher retirement funds in its math. Teacher retirement funding dollars have never been used to calculate overall classroom spending in the past.

So far, the Governor’s experimental policies are actually not that popular with Kansans. But in some circles, the clamor for tax cuts persists.  Infamous billionaire anti-taxer Rex Sinquefield, for example, is urging Missouri lawmakers to follow Kansas’ lead.  He writes (with no evidence) of the Kansas experience: “Lower income tax rates have in fact stimulated the economy by reducing the price both of work and conducting business in the state, not to mention that lower rates have predictably proven effective when it comes to luring out-of-state businesses to Kansas’ friendlier business environment.”

Thankfully, the Kansas City Star took the time to refute Mr. Sinquefield’s wild claims: “What we do know is corporations have moved from Missouri to Johnson County and vice versa because of generous tax incentives that have nothing to do with Brownback’s income tax cuts. One year later, what we also know is from July through September, revenue to the state coffers has declined by $135 million, or a 9 percent drop from last year. The Legislature’s research staff projects that there will be a net reduction this fiscal year of a half billion dollars and a billion dollars by 2018.”


Quick Hits in State News: Tricks, Treats and Taxes!


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Happy Halloween to our readers!

 

Kansas Governor Sam Brownback’s bloodcurdling vision for his state is on display in a new article in Governing magazine, which poses the question “Can Tough Love Help Reduce Poverty?” As the article notes, Brownback has demanded that poverty-stricken Kansans get off welfare and get a job, despite the dearth of quality employment opportunities in the state. What makes this fanciful approach to poverty-alleviation even more revolting is that Brownback’s own policies don’t support the working poor. For example, he has proposed to eliminate the state’s Earned Income Tax Credit -- which, as the name implies, only goes to those with wages earned through work during the year. While that proposal was rejected by the legislature, the tax cut bills he ultimately signed in 2012 and 2013 were wildly unfair, raising taxes on low-income families in order to give tax breaks to the wealthy.
 

The frighteningly incoherent world of online shopping sales taxes is undergoing yet another change this week.  We recently wrote about how a court ruling in Illinois limits the state’s ability to enforce its sales tax laws. In other states, though, things are moving in exactly the opposite direction.  The world’s largest online retailer--Amazon.com--will begin collecting sales taxes in Massachusetts and Wisconsin this Friday under agreements reached with those two states.
 

Advocates of "pay-per-mile" taxes are continuing to tell hair-raising stories about how the gas tax is doomed by the growing popularity of hybrids and alternative fuel vehicles--most recently in the Los Angeles Times.  But while fuel-efficiency gains may spell trouble in the long-term, the Institute on Taxation and Economic Policy (ITEP) recently explained that the root cause of our current transportation funding nightmare is much more straightforward.  78 percent of the gas tax shortfall we see today is simply a result of Congress’ failure to plan for inflation.
 

ITEP got a shout-out in a recent New York Times editorial urging voters to reject New York Governor Andrew Cuomo’s shortsighted plan to increase the number of casinos in the state. As the editorial points out, ITEP has shown that higher state revenues from casino gambling are fleeting, often vanishing like a ghost to neighboring states and leaving in-staters, particularly those afflicted with gambling addictions, holding the bag.


 


State News Quick Hits: Brownback Under Fire, and More


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

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

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

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

 


Watching a Train Wreck in Kansas


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During the 2013 legislative session, our state policy team has been observing the tenor of the Kansas tax cut debate with some concern. Too many media accounts have focused primarily on the sales tax and whether the temporary hike to 6.3 percent would be extended. (Ultimately the legislature decided to increase the sales tax rate to 6.15 percent.)

But attention is beginning to turn, albeit too late, to some incredibly important provisions of the legislation that was just signed into law by Governor Brownback. As highlighted in this Kansas City Star editorial and this Associated Press analysis, the tax debate was about a lot more than the sales tax.

The Kansas City Star explains the consequences in a sobering editorial: “The two-year spending plan, which Gov. Sam Brownback is expected to approve, places income tax cuts ahead of schools, universities and public safety. Giving tax breaks to wealthy Kansans matters more to state leaders than investing in the state and its citizens.”

The Associated Press reports: “Important but relatively little-noticed provisions in the tax plan approved by Kansas legislators this year embody conservative Republicans' vision for long-term constraints on government spending.” Indeed, the bill that passed the legislature includes arbitrary spending controls and could mandate the eventual repeal of the state’s personal income tax.

Of course all of this is what ITEP argued in a paper (one of many) last April: “Lawmakers and the public should be aware of the devastating impact either the House or the Senate bill would have, regardless of the compromise reached about the current sales tax rate, on the state’s ability to balance its budget and on tax fairness.”

For some combination of political and ideological reasons, lawmakers in Kansas, for two years running, have been falling all over themselves to pass tax cuts of disastrous proportions, despite red flags from experts, editorial boards and their colleagues in other states.  When good policy is not even on the priority list, it seems no amount of evidence can stop elected officials from pursuing their short-term political agendas.


Brownback's Kansas is Taking Tax Cuts to Extremes


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During the tax cut debate last year in Kansas, Governor Sam Brownback characterized his own radical tax cuts as a “real live experiment.” Now, following the actions of the legislature this past weekend, the experiment continues.

To fully understand the scope of the tax cuts that passed in a recent Sunday morning session, it’s necessary to review what was signed into law
last year: Income tax rates were reduced (the top rate dropping from 6.45 to 4.9 percent and the bottom rate dropping from 3.5 to 3.0 percent). Kansas became the only state in the nation that levies an income tax to exempt all “pass-through” business income from the personal income tax base. A variety of targeted tax credits, including the Food Sales Tax Rebate, Child and Dependent Care Credit, and the Homestead Property Tax Refund for renters, were eliminated and the standard deduction for head of household filers and married couples was increased to $9000. The Institute on Taxation and Economic Policy (ITEP) estimated that the cost of the tax cuts would be $760 million.

Kansans hadn’t even had a chance to file income tax returns reflecting this slew of new provisions before Governor Brownback was
advocating for yet another round of tax cuts. After several weeks of pretty cantankerous negotiations it became clear that the Kansas “experiment” would now have even higher stakes. As this ITEP analysis shows, it didn’t matter whether the House or the Senate plan was adopted because both of them pave the way for complete elimination of the state’s personal income tax.

Two groups that usually find themselves on opposite sides of tax debates, the Tax Foundation and the Center on Budget and Policy Priorities,
agreed that the Kansas experiment part deux was “the worst in the nation.” But the Sunflower State’s elected leaders aren’t letting facts and policy experts get in their way.

Instead, Governor Brownback is expected to sign the new legislation that further reduces income tax rates (to 2.3 and 3.9 percent), reduces the standard deduction, increases the sales tax (from 5.7 to 6.15 percent), disallows 50 percent of all itemized deductions (except for charitable donations, which will be fully deductible) and allows for the potential elimination of the income tax entirely if revenues targets are reached. ITEP found that the bill would cost $186 million, raise taxes on the poorest 20 percent of Kansans but give every other income group a tax cut. The impact of these last two rounds of tax cuts in Kansas will be a whopping $1.1 billion, according to ITEP’s estimates (to be published soon).

Tax cuts don’t actually pay for themselves, and Kansans will likely face some serious fallout from their failed experiment. Lawmakers are on a path to complete elimination of the most progressive major revenue source the state levies (the income tax) and this will force the state to depend on regressive sales and property taxes to make ends meet. Phase one of this experiment made it a fiscal cautionary tale for
other states, and its political leaders are making their state’s tax structure even more regressive.


State News Quick Hits: Why a Revenue Uptick is Not a Surplus, and More


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Colorado lawmakers recently decided to enact a pair of poverty-fighting tax policies: an Earned Income Tax Credit (EITC) and a Child Tax Credit (CTC). Both had been on the state’s books at some point but had either been eliminated or were often unavailable. The EITC, equal to 10 percent of the federal credit, will become a permanent feature of Colorado’s tax code once state revenue growth improves – likely not until 2016. Similarly, the CTC will not take effect until the federal government enacts legislation empowering Colorado to collect the sales taxes due on online shopping.

Kansas legislative leadership and Governor Brownback are in the midst of secret meetings to discuss how the House and Senate will reconcile their varying tax plans. The largest sticking point is whether or not to allow a temporary increase in the state’s sales tax rate to expire. But the larger issue, that is getting less attention, is that (as ITEP’s recent analysis points out) both the House and Senate plans could eventually phase out the state’s income tax altogether.

The Rockefeller Institute is warning (PDF) states and the federal government not to get too excited about the recent “surge” in income tax revenues. Rather than indicating an economic recovery, the surge is likely a result of investors realizing their capital gains a few months earlier than usual in order to avoid the higher federal tax rates that went into effect on January 1st. As the Institute points out: “over the longer term, this could be bad news — it could mean that accelerated money received now, used to pay current bills, will not be there to pay for services in the future.”

California is one state enjoying a sizeable revenue surplus this year. The state’s Legislative Analyst’s Office understands that a good portion of the bump is thanks to rich Californians cashing in on capital gains in 2012 to avoid higher federal tax rates in 2013. Yet as budget season kicks off, lawmakers are sure to be at odds over exactly what to do with the more than $4 billion in unanticipated revenues they will have to either spend or save.  

Here’s an excellent editorial from the Wisconsin State Journal urging Governor Scott Walker and the legislature to be wise about a projected uptick in revenues and invest any “surplus” in public schools, which have endured cuts in recent years. “Our editorial board is less convinced a showy income tax cut makes sense. Up is certainly better than down when it comes to revenue predictions. But some caution is required.” It seems that the Governor may not heed this caution, however, as he appears poised to propose an expansion of his current income tax cut proposal.


Missouri's Kansas-Envy is Self-Destructive


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The Missouri House and Senate have each passed their own versions of a “race to the bottom” tax plan in a misguided effort to keep up with neighboring Kansas, where a radical tax plan that is eviscerating the state’s budget might actually be followed up by another round of tax cuts (currently being debated by the legislature).

Both the Missouri Senate and House plans would reduce income tax rates, introduce a 50 percent exclusion for “pass-through” business income, reduce corporate income tax rates, and increase the sales tax. The Senate plan is summed up in this St. Louis Post-Dispatch editorial, Missouri Senate Declares Class War Against Citizens.

The poorest 20 percent of Missourians, those earning $18,000 a year or less, will pay $63 a year more in taxes. Those earning between $18,000 and $33,000 a year will pay $129 more. The middle quintile — those earning between $33,000 and $53,000 a year — will pay $150 a year more. The fourth quintile ($53,000 to $85,000 a year) will pay $149 a year more. That’s a grand total of 80 percent of Missourians who will pay more and get less: crummier schools, higher college tuitions (because state aid will continue to fall) and less access to worse state services. The poor are used to this. It remains to be seen whether the middle class will put up with it.”


Despite the fact that similarly reckless tax proposals in other states have failed (Louisiana and Nebraska) or been scaled back (Ohio), it seems the proposals are moving forward in Missouri, thanks in large part to Americans for Prosperity. This national group uses state chapters to throw money at anti-tax, anti-government agendas its corporate funders like, and it has launched a “Bold Ideas Tour” to travel Missouri advocating for deep tax cuts as the state’s legislature approaches its closing date of May 17.

Governor Jay Nixon has vowed he will veto a tax cut bill of this magnitude, rightly saying, "Making a veteran with aches and pains pay more for an aspirin so that an S Corporation can get a tax cut does not reflect our values or our priorities. I have long opposed schemes like this one that would shift costs onto families because they reflect the wrong priorities and do not work.”

The Governor’s position is supported by multiple experts, including the Institute on Taxation and Economic Policy (ITEP), and it looks like Missouri could be a state where good information comes between the national anti-tax movement and their legislative agenda.


State News Quick Hits: Kansas Named Worst in the Nation for Taxes, and More


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This week Missouri is offering a sales tax holiday on energy efficient appliances. Not only are these holidays costly for state budgets, they are poorly targeted. That is, it’s generally wealthier folks who have the cash flow flexibility to time their purchases to take advantage of these holidays, when it’s poorer residents who feel the brunt of sales taxes in the first place. To learn more about why these holidays aren’t worth celebrating, check out The Institute on Taxation and Economic Policy’s (ITEP) policy brief here (PDF).

Here’s a great investigative piece from the Columbus Post Dispatch about the nearly $8 billion in tax code entitlements (aka tax expenditures) Ohio currently offers. The state needs to closely study these tax expenditures and determine if they are actually producing the economic benefits promised. Before debating extreme income tax rate reductions, Ohio lawmakers should also take a look at this ITEP primer on what a thoughtful, productive discussion of state tax expenditures looks like.

In this Kansas City Star article, ITEP’s Executive Director, Matt Gardner, talks about the fate of many radical tax plans this year in the states. “The speed with which these plans have fallen apart is as remarkable a trend as the speed with which they emerged,” he says. Kansas and its budget crisis have become a cautionary tale for other states considering tax cuts, but even the latest plans passed by the Kansas House and Senate are radical and could eventually lead to the complete elimination of the personal income tax.

Criticism of the tax cuts enacted in Kansas last year continues to mount.  We already wrote about Indiana House Speaker Brian Bosma’s caution that his state might become another Kansas, but now a number of media outlets have picked up on the fact that both the Center on Budget and Policy Priorities and the Tax Foundation called that Kansas tax cuts the “worst” (ouch!) state tax changes enacted in 2012.

Watch out, North Carolinians! It appears that Americans for Prosperity (AFP) is coming to town to the tune of $500,000 to pay for town hall meetings, “grassroots” advocacy and advertising all to support the dismantling of the state’s tax structure. Let’s hope the facts can defeat AFP’s cash.


Two Bills, One Outcome: Kansas Kills Its Income Tax


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Earlier this year, Kansas Governor Sam Brownback proposed another round of personal income tax cuts (on top of those he signed into law last year that are creating a massive hole in the state’s budget). Read ITEP’s analysis of that proposal here.  Now the Kansas House and Senate have each responded with their own tax cut plans, and are expected to reconcile their differences soon.

To date, much attention has been given to the major difference between the House and Senate plans — the Senate bill includes permanently preserving a temporary sales tax rate hike while the House plan would allow the hike to expire. What the two plans have in common, however, is what should be of paramount concern to all Kansans because both plans eventually lead to the elimination of the state’s personal income tax – which would grow the hole in the state’s coffers by another $2.2 billion.  

Policymakers have not proposed a way to pay for this tax cut. Instead they are making an explicit assumption that income tax repeal will at least partially “pay for itself.” Kansas’ balanced-budget requirement means that the state will be forced to offset at least some portion of the revenue loss from income tax repeal, and it’s a sure bet that further increases in the state sales tax will be the primary remaining revenue-raising mechanism lawmakers would look to.

ITEP’s latest analysis runs some scenarios that show the impact on Kansas taxpayers of using a sales tax increase to replace various percentages of the revenue currently raised through the personal income tax.  For example, if 50 percent of the revenues were made up with sales tax hikes, the poorest 40 percent of Kansans would see a net tax increase from this change and the state sales tax rate would have to be raised from 6.3 to 9.11 percent, pushing the statewide average state/local rate up to 10.86 percent.

Read ITEP’s full report here.

Kansas is one of several states contemplating a “tax swap” of some sort, but no state can meet its fiscal needs fairly and sustainably without an income tax -- especially in the absence of extraordinary natural resources (like Alaska’s oil), for example, or out-of-state consumer dollars to tax (like Nevada’s tourism).


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


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

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

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

Positive Developments

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

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

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

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

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

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

Negative Developments

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

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

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

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

National Anti-Tax Group vs. Indiana


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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.”

 


Missouri Gaining on Kansas in Race to the Backwards Tax Plan


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The Missouri Senate preliminarily approved legislation that would slash the state’s revenues because it is stacked with tax cuts. Though a preliminary legislative step, it’s worth noting that if the law does get implemented, restoring the lost revenues would be nearly impossible given Missouri’s constitutional amendment restricting tax increases. The bill, originating in the state Senate, cuts the top personal income tax rate, reduces corporate income taxes, offers a tax deduction for pass-through business income and increases the personal exemption. The only tax increase is in the sales tax, which is any state’s most regressive revenue source.  

This package is billed as Missouri’s answer to the radical tax package passed last year by Kansas Governor Brownback. Its sponsor explained, “I’m trying to stop the bleeding. I’m trying to stop the businesses from fleeing into Kansas,” and then invokes the kind of magical thinking that almost always results in a deficit. According to the Associated Press, State Senator Kraus predicted his plan would “create an economic engine in our state” that would generate enough new tax revenues to make up for the losses.”

But the revenue losses -- which are certain -- are not justified. A report from the Missouri Budget Project, Racing to the Bottom: Senate Gives Initial Approval to Extreme Tax Cut Bill Which Would Devastate Missouri Services, Infrastructure, and the State’s Economy, using Institute on Taxation and Economic Policy (ITEP) data helps show that the biggest beneficiaries of this tax package are the wealthiest 1 percent who have an average income of over $1 million, and who will see an average tax cut of $8,253 if the legislation becomes law. Middle income families would generally break even, but lower income Missourians would experience a tax increase.  

The Missouri Budget Project points out the obvious: “To truly compete with Kansas and other states, Missouri must invest in its quality of life and what families and businesses need to thrive: strong schools to educate our children and provide a skilled workforce, quality transportation to get to school and work and bring companies’ products to market, and safe, stable communities.”


State Tax Proposals Worthy of the Word "Reform"


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Note to Readers: This is the fourth 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” and personal income tax cut proposals.  This post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax reform proposals are not all bad news this year.  There are some good faith efforts underway that would fix the structural problems with state tax codes, rather than simply dismantling or eliminating entire revenue sources and calling it “reform.”  Proposals in Minnesota, Kentucky, Utah, and Massachusetts would improve the fairness, adequacy and sustainability of those states’ tax systems through various combinations of base broadening, tax breaks for low- and moderate-income families, and increases in the share of taxes paid by wealthy households. Other states to watch include Nevada, California, New York and Hawaii, though the specific proposals that will be considered in these states have yet to be fully fleshed out.

Minnesota Governor Mark Dayton recognizes that his state’s tax structure is in need of an overhaul and is looking at long-term solutions that will set the state’s revenues on a sustainable path now and in the future.  As he sees it, the current system is fraught with problems. It does not reflect the modern economy in many ways. It has shifted the responsibility for funding government to those with the least ability to pay. It is out of balance due to its heavy reliance on property taxes.  And, it is riddled with expensive and ineffective tax breaks that make the state’s revenues less sustainable.  Out of all the high-profile state tax reform plans unveiled this year, Governor Dayton has put forth the best example of a comprehensive and progressive tax reform proposal.  It will make Minnesota’s tax code more fair, adequate, and sustainable.  The Governor’s plan includes: broadening the sales tax base to services and using some of the additional revenue to lower the state’s sales tax rate; reducing property taxes; adding a new personal income tax bracket for the state’s wealthiest taxpayers; and closing corporate tax loopholes.  The plan also raises more than $1 billion a year to boost investments in public education and restore structural balance to the state’s budget.

Kentucky Governor Steve Beshear signaled his support for overhauling the Bluegrass State’s tax code in his State of the State address in early February and indicated he would be looking to the recommendations from his appointed Blue Ribbon Tax Commission as a starting point for a proposal.  With a few exceptions, the Commission’s recommendations (released in December) were courageous and forward-looking, including a proposal to expand the sales tax base to services (PDF) while simultaneously adopting an Earned Income Tax Credit (EITC) (PDF) to offset the impact on low-income working families.  The recommendations also included broadening the personal income tax base by limiting itemized deductions for wealthy households, lowering the very large exclusion for pension income (and phasing it out for high wealth retirees), and lowering personal income tax rates.  Like the Minnesota plan, if taken as a whole, the Kentucky Tax Commission’s recommendations would shore up state revenues over the long term and more immediately raise revenue for current needs.

Utah lawmakers are looking at a proposal to raise the sales tax rate applied to groceries and couple that change with two new refundable credits to offset the impact on low- and moderate-income families: a food credit (PDF) and a state EITC (PDF).  While less comprehensive than the proposals under consideration in Minnesota and Kentucky, an ITEP analysis found that the Utah plan would reduce the regressivity of Utah’s tax code (PDF).  In other words, low-income working families would ultimately pay less of their income in taxes while upper-income families would pay slightly more.  Simply exempting food from state sales taxes (or taxing it at a lower rate) is a poorly targeted and costly policy that narrows the tax base and extends the break to wealthier taxpayers who don’t need it. Therefore, refundable credits of the kind Utah is considering are a smart, less costly alternative that can be designed to reduce taxes for specific groups of taxpayers in need of relief.

Massachusetts Governor Deval Patrick’s FY14 budget included a tax package that will boost revenues now and in the future and make slight improvements to the fairness of the state’s tax system. While many governors this year are looking to replace progressive income taxes with regressive sales taxes, Governor Patrick wants the Bay State to do the reverse and rely more on the personal income tax and less on the sales tax.  His plan would raise the state’s flat personal income tax rate from 5.25 to 6.25 percent, double the personal exemption, and eliminate more than 40 personal income tax breaks that tend to benefit the wealthiest families.  The sales tax rate would drop from 6.25 to 4.5 percent and computer software, soda, and candy would be newly subject to the tax.  He also recommends a $1 increase to the cigarette tax. Governor Patrick’s plan would raise close to $2 billion when fully phased in. The Campaign for Our Communities coalition praised the proposal, saying that it “creates growth and opportunity through long-term investments in education, transportation and innovation funded by making our tax system simpler and fairer.”

 

 


A Second Year of Tax Increases for Poorest Kansans


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Last month, Kansas Governor Sam Brownback proposed, for the second straight year, major tax changes during his State of the State speech. These new changes include lowering the state’s two tax bracket rates to 1.9 and 3.5 percent, eliminating itemized deductions for mortgage interest and property taxes paid, and raising the sales tax. The Institute on Taxation and Economic Policy (ITEP) analyzed the impact of the Governor’s proposal on Kansans and found that his plan is quite costly and raises taxes on the poorest Kansans. Read the full analysis here.

The ITEP analysis found that if fully implemented in 2012, Brownback’s latest proposal would have reduced state revenues by close to $340 million and the poorest 20 percent of Kansas taxpayers would pay 0.2 percent more of their income in taxes each year, or an average increase of $22. However, upper-income families would reap the greatest benefit from his plan, with the richest one percent, those with an average income of over a million dollars, saving an average of $6,528 a year, which is about 0.6 percent of their income. Taxpayers in the middle income groups would see a more modest tax cut, up to $200 on average, amounting to roughly 0.3 percent of their income. When combined with the cuts from last year, wealthy Kansans benefit overwhelmingly – to the tune of an average tax cut of nearly $28,000. And the only group who’d pay higher taxes are the lowest earners.

In his Kansas City Star op-ed, ITEP’s director notes that the first rule of tax reform ought to be to first do no harm, but it seems pretty clear Governor Brownback’s plan would harm low-income Kansans. At the same time, it’s a second round of cuts for Kansans who don’t need them, and when the state can’t afford them.


Anti-Tax Credo Keeps Texas Kids In Underfunded Schools


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Earlier this week, a district court in Texas ruled for a second time that the state’s system of paying for schools is unconstitutional, both because it fails to provide enough revenue to deliver an adequate education for Texas children and because it creates huge inequities in the quality of education enjoyed by richer versus poorer districts. The lawsuit prompting this decision was brought by hundreds of school districts in the wake of a 2011 decision by the state legislature to dramatically cut state aid to local schools. The state of Texas is expected to appeal, in which case it goes to the Texas Supreme Court.

As the Texas Center for Public Policy Priorities (CPPP) notes (PDF), the 2011 spending cuts came after a misguided decision by the 2006 legislature to replace local property tax revenue with revenues from cigarette taxes (of all things) and a new, untested approach to taxing business income. CPPP finds that the tax hikes in that 2006 “tax swap” have paid for only about a third of the lost property tax revenue, leaving a gaping $10 billion hole in the state’s 2011 budget. This probably also helps account for what the 600 school districts in the lawsuit say is a $43,000 gap between rich and poor classrooms, too.

The choice to pay for the growing cost of education using a flat-lining tax such as the cigarette tax (whose returns are famously diminishing, PDF) reflects the limited options available in a state that refuses to levy a tax on personal income.

Texas is one of only a handful of states with no income tax, and its current Governor has made a big show of his intention to keep it that way. At a time when a number of states’ elected officials are expressing a desire to restructure their tax systems to more closely resemble the Texas tax system (usually by simply repealing their personal income tax), this week’s court decision is a harsh reminder that the short term politics of tax cuts has long term consequences for citizens. Texas, for example, has abysmal numbers on education and its poverty rate continues to rise.

So when someone like Kansas Governor Sam Brownback crows “Look out Texas. Here comes Kansas!” it might be he didn’t read the brochure before planning this particular trip. It’s not the first time he – like other political leaders – has talked up the Texas tax structure.  But given the Lone Star State’s track record, and the budget havoc tax cuts are causing in Kansas, all lawmakers should think twice before embarking on the no-income-tax path.

Photo courtesy Texas Tribune.


Quick Hits in State News: Wisconsin's Income Gap, the Brownbacks' Values Gap


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Kansas First Lady Mary Brownback has been appointed an unofficial advisor to a task force addressing childhood poverty in the state. The Hays Daily News predicts that this could lead to some uncomfortable conversations between Governor Sam Brownback and his wife, especially regarding the tax package he recently signed into law that raised taxes on low-income families. The editors suggest, “[m]aybe the first lady can ask why the governor and state legislature agreed to an unprecedented reduction in income tax rates while at the same time eliminating various tax credits, such as the food sales tax rebate and breaks for child care and renters.”

Monday was the biggest day ever for online shopping. “Cyber Monday” shoppers spent 30 percent more this year than last. The Illinois Retail Merchants Association and other brick-and-mortar business groups used Monday’s online shopping surge to remind shoppers and policymakers alike that sales taxes should be collected on Internet purchases just as on items purchased in traditional stores: “The tax is supposed to be paid. If someone orders something from an online retailer or a catalog retailer that doesn’t collect the tax, the customer owes the money to the state.”

It appears that the gap between Wisconsin’s rich and poor continues to widen. The bottom two fifths of the state’s residents actually saw their incomes decline while the top fifth – and especially the top one percent – saw theirs climb over the last 25 years. One solution to this problem, identified by the Center on Wisconsin Strategy and the Wisconsin Budget Project, is to reform the state’s regressive tax structure because currently, “state and local taxes in Wisconsin increase income inequality rather than reduce it.”

A recent policy brief from the Washington State Budget and Policy Center identifies eight strategies to rebuilding the state’s economy. One of the goals identified is implementing a “Productive, Equitable Revenue System” through modernizing the tax structure and making it more fair. Washington has the most regressive state tax structure in the country; low income people pay far more of their income in taxes compared to wealthy Washingtonians. If state policymakers want to rebuild their economy, improving their tax structure is a good place to start.


Quick Hits in State News: Tricks, Treats and Taxes!


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Happy Halloween to our readers!

In honor of the spookiest of all holidays, we want to start by sharing this recent Wall Street Journal piece called Meet One of the Super-PAC Men which profiles Missouri’s Rex Sinquefield, the masked financier behind of one of the scariest state tax policy proposals around -- eliminating Missouri’s income tax and replacing it with increased sales tax revenues.

Word is that fracking taxes, income tax cuts, bank “tax reform” and possibly privatizing the Ohio Turnpike could all be priorities for Ohio’s ghoulishly anti-tax governor, John Kasich. Given the Governor’s track record of supporting tax cuts above all else, we are more than a little afraid about what is to come in the Buckeye State.

Kansas Governor Sam Brownback recently proposed a “property tax transparency” plan which will prevent automatic property tax increases when property values rise. But this proposal leaves local governments who depend on the property tax at the mercy of a zombie math formula. Brownback’s plan should spook all the citizens who depend on local government services.

This one will send a shudder up the spines of supply-siders who want to cut taxes on businesses and the wealthy under the guise of economic development.  The Wisconsin Budget Project is reporting on a national poll which found that a “majority of small-business owners believe that raising taxes on the top 2% of taxpayers is the right thing to do.” On this issue, anyway, it looks as though the good goblins are giving Grover a run for his money!

 


Governor Brownback Considers Sales Tax as Band-Aid for Broken Budget


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When Kansas Governor Sam Brownback signed into law a $4.5 billion (over six years) tax cut package ealier this year, he told Kansans, “I think we are going to be in good shape.” He promised tens of thousands of new jobs and insisted “[w]e will meet the needs of our schools ... Our roads will be built.”  But after claiming as recently as July that the state was in “an excellent fiscal position,” the Governor is conceding that even across-the-board spending cuts may not be enough to make up for the massive revenue losses (projected to be $2.5 billion over six years) from these tax cuts – that will go disproportionately to the state’s most affluent.  

The Governor received national praise from conservative quarters for the tax package he signed into law in May. The plan included income tax rate reductions, elimination of several low-income credits, completely eliminating taxes on some business income, and was supposed to put the state “on a road to faster growth.” But the reality is that tax cuts cost money and Governor Brownback is now indicating he is open to a sales tax hike to pay for them.

The current 6.3 percent sales tax (a temporary revenue fix from 2010) is scheduled to drop back to 5.7 percent in July.  The Governor’s own original tax package, proposed in January, would have permanently held that sales tax rate steady, and thus cost much less than the tax legislation he eventually signed.  His plan was also seriously flawed: the bottom 80 percent of Kansas taxpayers would have seen a tax hike under the Governor’s plan because it reduced reliance on the state’s income tax in exchange for a higher sales tax. But once again, Governor Brownback finds himself relying on a higher sales tax (even though he ran against it in his 2010 campaign) because of income tax cuts that gut his state’s budget.  He rationalizes the need for a sales tax increase by saying, “There's going to be a two-year dip. That's the nature of these, when you cut taxes. If you cut them right, you get growth on the other side, but there's a dip first."

Unlike a progressive income tax, sales taxes (PDF) require low and middle income taxpayers to pay more of their income in taxes than wealthier taxpayers. This way of handling what Brownback euphemistically calls a “dip” that results from radical tax cuts actually falls hardest on the Kansas families who can least afford it.


Quick Hits in State News: Tax Breaks Spell Trouble Everywhere


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The difficulty of enacting real tax reform is on display in Louisiana, where a commission studying the state’s tax breaks just heard from some of the industries and interests seeking to protect their special breaks and loopholes.  For example, a retail group claimed that a sales tax exemption for international tourists doesn’t actually cost the state because it raises $1.80 in revenue for every $1.00 foregone. In the end, though, it did cost the state $1.1 million in sales taxes last year.

Transportation officials in Kansas and Tennessee are in an increasingly common situation: looking for new revenues as their states’ gas taxes dwindle because of rising construction costs and improving vehicle fuel-efficiency.  Officials in both states seem to recognize that a gas tax hike is needed, but in Tennessee at least, the state’s anti-tax governor has reportedly ruled that out.

In November, voters in Kansas will be asked to decide whether their state constitution should be changed to lower taxes on boats and other watercraft. Changing a state’s constitution to reward boat purchases? Seriously? The experts who wrote the ITEP Guide warn that “tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources or, worse, to schemes whose sole aim is to exploit such preferential tax treatment.”  Let’s hope Kansas voters don’t start down this slippery slope.

The Savannah Morning News editorial board is urging the state legislature to fix a tax break in the Georgia Tourism Development Act which was intended to encourage development but “apparently is indecipherable” and can’t be implemented. The bureaucratic quagmire the legislation created highlights one of many problems with trying to micromanage economic development through the tax code.


Quick Hits in State News: Brownback Spins a Story, and More


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Looks like the “spin room” in Topeka has been busy lately. Read how Kansas Governor Brownback and his staff “fashion[ed] a new budget narrative” in reaction to criticism over massive budget cuts he signed (PDF) earlier this year and possible further reductions. Insisting that revenue lost to his pet tax cuts (which take effect next year) won’t be responsible for budget shortfalls, the governor is saying that somehow the European debt crisis and other things beyond the state’s control are forcing spending cuts.

It’s been a while since we’ve heard much about “marriage penalties” imposed by state tax structures (a so-called marriage penalty is imposed when single filers pay more tax as married couples than if they filed as two single filers). But the issue is rearing its head in Wisconsin and this thoughtful blog post from the Wisconsin Budget Projects helps to put the concept in context.

In order to debunk the absurdity of Mitt Romney’s 47 percent claim, an opinion piece in the Las Vegas Sun reminds Nevadans -- by pointing to research from the Institute on Taxation and Economic Policy -- that low income people are paying more than their fair overall share because of state and local taxes.

Here the Charlotte Observer editorial board decries both gubernatorial candidates’ calls for politically popular rate reductions and their failure to commit to genuine, comprehensive reform for North Carolina. “Today’s tax code is riddled with exemptions, loopholes and preferential treatment that sap the state of needed revenue... [and] it’s time for tax code reform to take a prominent place on the agenda of the state’s chief executive. The public – the voting public – should insist on it.”


Governor Brownback Goes on PR Offensive For His Tax Cuts


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In a recent Wichita Eagle op-ed the Kansas Governor defended his harsh, regressive, and costly tax bill saying “our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy.” He is proud that he signed the largest tax cut in state history and claims that the state will still be able to provide for its neediest residents and provide “high-quality” education despite the fact that the tax bill he signed will take more than $760 million a year from state coffers.

The Governor’s op-ed may have been written in response to the heat he’s been getting since calling the bill “a real live experiment.” The conservative group Traditional Republicans for Commonsense writes (PDF) that the “’experiment’ will bankrupt our state and create a $2.7 billion deficit within five years.” In this op-ed, Bernie Koch from the Kansas Economic Progress Council writes that the legislation could actually discourage new businesses from locating to the state because the bill was so hastily written its implications for business are unclear.  He further notes that the bond credit rating organization Moody’s recently predicted “[n]o improvement in economic growth as a result of the tax cuts” in Kansas.

Brownback’s next public relations effort is a forum he’s hosting at a community college in Overland Park. He’s invited the self-proclaimed father of supply side economics and - his own tax policy advisor - Arthur Laffer, to join him, which is further evidence the governor is making no apologies about signing a law that many of his constituents deem irresponsible, at best.


Quick hits in State News: Arthur Laffer Under Scrutiny, and More


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To celebrate the five year anniversary of the first “Rich States, Poor States,” an Arthur Laffer/ALEC publication that ranks states based on how closely their tax and budget policies adhere to conservative economic principles, the Iowa Policy Project put it to the retrospect test and found it lacking.  They write, “The ALEC Outlook Ranking fails to predict economic performance. In fact, the less a state followed ALEC’s prescriptions, the better it did in terms of job growth, and the better it did on change in poverty rate and median income.”

New York just decided to throw even more taxpayer money at filmmakers, despite ample evidence that these giveaways don’t do much for long-term job growth or economic performance.

This Topeka Capital-Journal letter-to-the-editor from a registered Republican laments that the tax plan signed into law by Governor Brownback “will increase Kansas income tax on the poor and reduce taxes predominately for the wealthy.”

On Tuesday, Tennessee Governor Bill Haslam told the House Judiciary Committee that states need to be able to collect sales taxes on internet purchases. He said plainly, “This discussion isn’t about raising taxes or adding new taxes.” Instead it’s about “collecting taxes already owed.” We couldn’t agree more.

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

Months after cutting the state income tax for wealthy taxpayers, Idaho’s budget situation isn’t looking good.  The Associated Press reports that “earlier this year it looked like the state had sufficient revenue to provide a $36 million tax cut, as well as give state employees a 2 percent raise” but that surplus has already evaporated. In fact, there was never real consensus about the state’s revenue projections in the first place.

Kansas Governor Sam Brownback admits his radical tax cut package is a “real live experiment.”

The South Carolina House approved a measure to keep the state running if it doesn’t have a budget by July 1 when the new fiscal year begins.  The Senate and House are currently bickering over how to implement a (regressive) tax cut for so-called "small" business owners.

It’s back! New Jersey Assembly Democrats are once again planning to introduce a millionaire’s tax into the budget debate.  Proponents of the tax on the wealthiest New Jerseyans want to use the $800 million in revenue it would raise to boost funding to the state’s current property tax credit program for low and middle-income homeowners and renters.  Governor Chris Christie has already vetoed a millionaire’s tax twice. 

The clever folks at Together NC, a coalition of more than 120 organizations in North Carolina, held a Backwards Budget 5K race this week to “to shine a spotlight on the legislature’s backwards approach to the state budget.” 

California Governor Jerry Brown’s revenue raising initiative (which temporarily raises income taxes on the state’s wealthiest residents and increases the sales tax ¼ cent) has officially qualified for the state’s November ballot. Two additional tax measures will join Brown’s plan on the ballot: a rival income tax measure pushed by a billionaire lawyer to fund education and early childhood programs; and an initiative to increase business income tax revenues by implementing a mandatory single-sales factor (PDF backgrounder) formula.

The Pittsburgh Post-Gazette editorializes in favor of capping Pennsylvania’s “vendor discount,” a program (PDF) that allows retailers to legally pocket a portion of the sales taxes they collect in order to offset the costs associated with collecting the tax.  The Gazette explains that a handful of big companies are taking in over $1 million per year thanks to this “antiquated” giveaway.  Computerized bookkeeping takes the effort out of tax collecting and a cap would only impact the national chain stores who disproportionately benefit from the program.

  • The Institute on Taxation and Economic Policy talks back to the Wall Street Journal about its failure to cover the consequences of the new Kansas tax bill for the state’s working poor.
  • North Dakota Tax Commissioner Cory Fong comes out against a radical ballot initiative that would do away with the state’s property tax. The Commissioner writes that Measure 2 is risky, and will be destabilizing for North Dakotans. The vote is on June 12.
  • Louisiana’s legislature appears to be nearing adjournment now that the House approved a nearly $26 billion budget for the next fiscal year. The budget, now sitting on Governor Jindahl’s desk, includes $270 million in “one-time money” scavenged from various programs to balance the budget.
  • Read this op-ed in the Chicago Sun-Times from the CEO of the National Retail Federation calling for fairly taxing Internet sales and pointing out that “modern software, allowing sales taxes to be calculated as quickly and easily as shipping costs, renders” any remaining objections a so-called Amazon Tax obsolete.
  • When the richest woman in Wisconsin (and the governor’s biggest donor) pays no income tax to the state in 2010, it gets people asking about loopholes in the tax code.
  • We aren’t the only think tank taking issue with the Kansas tax bill recently signed into law.  The fiscally conservative Tax Foundation recently issued a report which says that provisions in the bill to exempt “pass through” business income are “problematic” and an invitation to tax avoidance.  
  • With summer road tripping underway, it’s bad news for Iowans that the state’s Department of Transportation appears to be more than $200 million short. Governor Branstad was right to say the state gas tax should be increased next year (as should almost every state’s).

Photo of Governor Christie via Bob Jagendorf Creative Commons Attribution License 2.0


Kansas Joins Uniquely Regressive Bad Tax Policy Club


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Last week Kansas Governor Sam Brownback signed into law Senate Substitute for House Bill 2117, a tax bill that dramatically changes the Kansas income tax structure and makes Kansas a real outlier when it comes to tax fairness. ITEP released a report which finds that the legislation includes a broad tax cut that will cost the state over $760 million a year, and yet will actually increase taxes on some low- and middle-income families – while the wealthiest Kansans will see their taxes reduced by $21,000 on average.

As a result of this legislation, Kansas is now a member of a uniquely regressive tax policy club; it joins Mississippi and Alabama in taxing food, but not offering any targeted tax relief for the poorest families who have to spend a larger portion of their budgets on groceries.  Until last week’s bill signing, Kansas offered a Food Sales Tax Rebate (FSTR) that targeted tax relief to Kansans over 55 and those with children and an income less than $35,400. Families with income of less than $17,700 could claim a flat $91 per family member to offset the sales tax they paid on food.

Even after cutting income tax rates and increasing the standard deduction, a family of four with $17,000 of income will still lose $294 because of the elimination of the food sales tax credit.

For more on the new law and to learn more about the various tax plans that were debated in Kansas this legislative session, check out ITEP’s Kansas Tax Policy Hub.

(Photo courtesy Wikipedia)

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

Governor Brownback Signs Backwards Tax Bill Into Kansas Law


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Today, Governor Sam Brownback signed into law a radical tax bill that is projected to cost more than $2 billion over the next five years.  It also means the poorest 20 percent of Kansas taxpayers will pay 1.3 percent more of their income in taxes each year, or an average increase of $148, while the wealthiest one percent of Kansans will see their state income taxes drop by about $21,087 on average.  (See ITEP’s analysis of the Senate plan here for more figures.)

In terms of fairness, the legislation is tragic. Kansas is one of a few states that taxes food, but the Food Sales Tax Rebate (FSTR) has, until now, given targeted relief to taxpayers that are hit hardest by this regressive tax. By eliminating the FSTR, this new law makes it that much harder for low-income people to make ends meet.

The legislation also exempts from taxation all business income that companies “pass through” to owners  – something that no other state that taxes business income does. It’s likely that tax avoidance will increase as a result of companies reorganizing their corporate structure to take advantage of this loophole, which was, of course, billed as a tax cut for small businesses. If lawmakers wanted to offer assistance to small business owners, there are more targeted ways to do just that, through credits or limiting exemptions.

Other provisions of the bill include reducing tax rates down to 3.0 and 4.9 percent; increasing the standard deduction for head of household filers and married couples; and eliminating the Homestead Property Tax Refund for renters.

Proponents of the bill and Governor Brownback himself have said that the tax cuts will pay for themselves because of increased economic activity, but these supply side arguments are groundless.  As the Wichita Eagle opines, this “extreme makeover” of the state’s tax system is a “huge gamble,” and the odds are against Kansas recovering any time soon.

Photo of Governor Sam Brownback via King Content Creative Commons Attribution License 2.0

 

 


Quick Hits in State News: Sports & Shopping Boondoggles, and More


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  • The Minnesota Vikings will get their new stadium and taxpayers are on the losing team.  In more sports news, the New Orleans Hornets can thank the Louisiana legislature, who recently voted to give the team a tax break that amounts to $37 million over the next ten years. But the Milwaukee Bucks might not be as lucky.  
  • Kansas House Speaker Mike O’Neal said  that once the Governor signs the tax bill sitting on his desk, "Everybody's just going to be amazed, and your constituents will be very proud of you."  But in fact it’s more bad news for Kansans.
  • Here’s a great opinion piece from the Canton (Ohio) City Council President showing the impact that state budget cuts have had on his community. Budget cuts don’t happen in a vacuum.
  • It’s that time again. Louisiana’s hurricane preparedness sales tax holiday is a boondoggle (as is Virginia’s); they are the definition of “poorly targeted” and do little for consumers and local business.

Photo of Vikings Stadium via AFA Gen Creative Commons Attribution License 2.0

  • 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.
  • Kansas Governor Brownback’s insistence on steep tax cuts has met more resistance.  A group called Traditional Republicans for Common Sense has come out against  even a watered down version of Brownback’s vision in the legislature. One of the group’s members (a former chair of the state’s GOP) said, “Now is not the time for more government intervention. Topeka needs to stay out of the way and make sure proven economic development tools – like good schools and safe roads – remain strong so that the private sector can thrive.” 
  • Stateline writes about the problems with “the spending that isn’t counted” – meaning special breaks that lawmakers have buried in state tax codes.  The article highlights efforts in Oregon and Vermont to develop more rational budget processes where tax breaks can’t simply fly under the radar year after year.  CTJ’s recommendations for reform are in this report.
  • In this thoughtful column, South Carolina Senator Phil Leventis writes, "I have been guided by the principle that government should invest in meeting the needs and aspirations of its citizens. This principle has been undermined by an ideology claiming that government is the cause of our problems and, accordingly, must be starved.” He praises tax study commissions and says being “business friendly” cannot be the only measure of state policy.
  • An op-ed from the Pennsylvania Budget and Policy Center (PBPC) calls on lawmakers to address the issue of rampant corporate tax avoidance, and to do so responsibly. It raises concerns that legislation currently under consideration to close corporate loopholes could be a “cure worse than the disease.”  The legislation takes some good steps but is paired with business tax cuts that could cost as much as $1 billion over the next several years.  PBPC argues for a stronger and more effective approach to making corporations pay their fair share such as combined reporting, which makes it harder for companies to move profits around among subsidiaries in different states.
  • Just four days after Amazon agreed to begin collecting sales taxes in Nevada in 2014, the company announced a similar agreement with Texas that will take effect much sooner – on July 1st.  As The Wall Street Journal reports, “With the deal, the Seattle-based company is on track to collect sales taxes in 12 states, which make up about 40% of the U.S. population, by 2016.”

Picture from Flickr Creative Commons.


Are States Really "Racing" To Repeal Income Taxes?


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

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

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

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

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

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

  • The Maryland Budget and Tax Policy Institute just unveiled a “Doomsday Clock” on their website.  The countdown shows how many days are left until massive budget cuts take effect on July 1.  The Institute explains that these cuts can be avoided if Governor O’Malley calls a special session and lawmakers pass the progressive income tax package agreed to in conference committee.
  • Former Mississippi Governor Haley Barbour continues to lobby for taxing internet sales even after leaving the Governor’s mansion. In fact, in his farewell address to Mississippians the Governor said, “It is time for the federal government to allow Mississippi and every other state to choose to enforce our laws and to collect these taxes. They are owed us today, and there is no longer any public policy reason to keep us from collecting. Indeed, good public policy says it is past time that our brick-and-mortar merchants on Main Street and in our shopping centers get a level playing field with Amazon and the Internet. That they get fair treatment for paying our taxes.”
  • Thanks to an obscure tax loophole which offers Iowans the ability to write off all of their federal income taxes paid, Governor Terry Branstad had a 2011 tax bill of just $52. One state senator is pondering whether or not the state needs a “Branstad rule” to ensure that upper income Iowans pay more in state taxes. The Governor’s lack of a tax bill illustrates just how preposterous the loophole is – and why there are only six states that allow it.
  • Now that the rush to make sure our taxes are filed on time is over, here’s a downright beautiful essay from a priest in Kansas reminding us the good that comes from all the frenzy.
  • Here’s a thoughtful editorial from the St. Cloud Times describing Minnesota’s need to fund important transportation projects. Lawmakers there are looking into toll roads because the political will to raise gas taxes doesn’t exist – yet the editors rightly conclude, “It’s not that we oppose building this bridge or expanding roads. It’s just that the fairest revenue stream to do so is the gas tax. Legislators just need the courage to adjust it as needed.” To see how Minnesota’s gas tax has effectively shrunk over time, check out this chart from the Institute on Taxation and Economic Policy (ITEP).

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

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

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

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

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


New Analysis: Kansas House & Senate Follow Governor Brownback Down Dangerous Road on Taxes


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Kansas Governor Sam Brownback laid down a legislative marker at the beginning of year, promising to cut and eventually eliminate the state’s personal income tax. Since then, state lawmakers have debated a number of approaches to changing the state’s tax laws that have been, to varying degrees, in line with the Governor’s own deeply flawed plan. The House and Senate each recently passed their own tax plans, and a conference committee began meeting this week in effort to reconcile them into legislation the Governor would sign. 

The Institute on Taxation and Economic Policy (ITEP) has analyzed both plans and finds that both would give gradually larger tax cuts, as a percentage of income, to Kansans higher up the income ladder while actually raising taxes on filers further down.

Each also creates a massive gap in the state’s revenues. The full analysis is here.


Quick Hits in State News: Nevada Governor Earns Grover's Ire, and More


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Nevada Governor Brian Sandoval campaigned on a promise of no-new-taxes but is breaking that promise (for a second time!) with his plan to balance the Silver State budget.  In an effort to avoid deep cuts in education, Sandoval is once again supporting an extension of temporary sales, payroll, and car taxes originally enacted in 2009.  Grover Norquist calls Sandoval the poster boy for why candidates can’t just promise no-new-taxes, they have to sign his pledge; in fact, Sandoval is a good example of why they shouldn’t.

We’ve already written that Arthur Laffer’s claims about economic growth and income tax repeal are fundamentally flawed and that in fact “high rate” income tax states are outperforming no-tax states. Now, three respected Oklahoma economists have come out in agreement, and are offering their own critique of Laffer’s findings. This is great news given that Laffer’s work has been so central to lawmakers’ efforts to eliminate the state income tax – the most progressive feature of any state’s tax system.

This week the Maryland Senate voted to raise personal income taxes in order to offset the anticipated "doomsday cuts" in public services that would otherwise have to occur.  An analysis from the Institute on Taxation and Economic Policy (ITEP) showed that the bill would be generally progressive.  And in yet another bit of good news, a late amendment to the bill would enhance its progressivity even more, as Marylanders earning more than a half-a-million dollars will no longer be able to take advantage of the state’s lower marginal rate brackets.

The Wichita Eagle editorial board is watching the Kansas House and Senate take up tax reform, and they are worried. While they’re glad some lawmakers are dubious about “the suspect advice of Reagan economist Arthur Laffer,” the governor’s advisor, they don’t like a House plan that “makes permanent the punishing budget cuts of the past few years to education, social services and other programs.” They opine that “tax reform needs to make fiscal sense and broadly benefit Kansans,” and conclude that with the various and competing proposals right now, it’s anybody’s guess if that will be the outcome.

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

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

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

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

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

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

Here we go again: another governor who thinks it’s okay to cut taxes for the rich and raise them on everyone else.  Kansas Governor Sam Brownback last week unveiled his long anticipated tax plan. Sweeping changes to reduce the state’s reliance on a progressive, personal income tax are at the core of the proposal, but the question of whose taxes will be cut is dogging the governor.  His plan, already dubbed “Robin Hood in reverse,” may cut income tax rates across the board, but because it also eliminates a variety of income tax deductions and credits, and permanently raises the sales tax, in the end, it’s actually a tax hike on the majority of Kansans – especially the poorest.

Here is how that works. For most middle- and low-income Kansans, the tax break from the income tax rate cuts would be completely offset by the loss of income tax credits and itemized deductions, as well as a higher sales tax rate. A new analysis from the Institute on Taxation and Economic Policy (ITEP) found that the bottom 80 percent of the state’s income distribution would collectively see a tax hike under the Brownback plan, while the best off 20 percent of Kansans would see substantial tax cuts.

In fact, ITEP found that under Governor Brownback’s proposal, the poorest 20 percent of Kansas taxpayers would pay 2.2 percent more of their income in taxes each year, or an average increase of $242.  Upper-income families, by contrast, reap the greatest benefit with the richest one percent of Kansans, those with an average income of over a million dollars, saving an average of $16,933 a year. Read ITEP’s two-page analysis here.

Photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0


Trending in 2012: Destroying the Personal Income Tax


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Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country. This week, we’re taking a closer look at proposals which would lessen a state’s reliance on progressive income taxes, often by shifting to a heavier reliance on regressive sales taxes. 

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

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

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

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

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

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


Kansas Governor Brownback Shutting Out the Public on Tax Debate


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Reforming a state’s tax structure and the planning, meetings, and discussions that go into such a monumental and consequential project shouldn’t happen behind closed doors.  After all, taxes are fundamental to government and its activities and they impact everyone.

But apparently Kansas Governor Sam Brownback’s administration sees it differently.

The media has been reporting that the Governor will come out with a new tax reform proposal before the end of the year. We know that he’s enlisted the help of mega-supply sider Arthur Laffer to assist him and that Laffer is getting paid about $75,000. But that’s where the information stops. We can assume a task force or committee of some type is meeting, but that’s really all anyone knows.

The Lawrence Journal-World recently sent an email to the Brownback administration to attempt to gain “access or copies of minutes, agendas and policy papers of the task force.” But the governor’s people are throwing up bureaucratic excuses and indicated they might need seven weeks to comply. At which point the task force might be disbanded and Governor Brownback’s plan already complete.

Governor Brownback, his administration and his task force group should abandon this secrecy strategy.  The Wichita Eagle points out that given the political climate in Kansas, transparency is of paramount concern: “With the 2010 election having left the Legislature rich with conservatives ready to implement Brownback’s sweeping agenda without much second-guessing, transparency and scrutiny are needed now.”

State Senate President Steve Morris, R-Hugoton, agrees. “Right now,” he said, “there are a lot of ideas being floated around, but what they all seem to be missing is citizen input.”

You know what they say about sunlight – it’s time for Governor Brownback to let it shine on this important policy-making process.

Photo of Art Laffer via Republican Conference and photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0


Raising A Red Flag: Governor Brownback's Tax Plans Are Bad for Kansas


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This week Kansas Revenue Secretary, Nick Jordan, said that by the end of the year Governor Sam Brownback will have recommendations for how to reform the state’s tax structure. He said, “We're looking at tax policy in a very comprehensive way. We're not just focusing on business or individual incomes, I don't know that we are targeting numbers. We're targeting what is the best economic growth policy for the state." This statement, combined with other media reports that the governor is working with supply side guru, Arthur Laffer, and that the governor seeks to reduce and eventually eliminate income tax rates, should cause grave concern for Kansas taxpayers.

In anticipation of the governor’s tax proposals, the Institute on Taxation and Economic Policy (ITEP) recently issued a memo to media outlets in Kansas. ITEP’s analysis shows the impact of repealing the Kansas income tax and replacing part or all of the revenue with increased sales taxes.  For example, if every dime of an income tax repeal were ultimately paid for by increases in state sales taxes, the poorest 80 percent of Kansans would, as a group, see a tax hike overall and require a statewide average sales tax rate of a whopping13.5 percent.

Governor Brownback recently told the Kansas Chamber of Commerce that in terms of low taxes and regulation, “We’ve got to look more like Texas and a lot less like California.”

But Kansas shouldn’t want to look more like Texas! The Texas tax structure doesn’t have an income tax, making it the fifth most regressive in the country and chronically unable to fund public investments. Texas ranks 45th in SAT Scores and 50th in terms of the percent of the population with a high school diploma. Texas has the highest percentage of uninsured citizens, and the second highest percentage of the population experiencing food insecurity in the nation.

We will keep an eye on the governor’s plans for Kansas, but if he’s looking for a state on which to model his tax reforms, he should take a look at Connecticut.

Photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0


Kansas & Missouri: Front Line States in Battle over Tax Fairness


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Anti-tax lawmakers and activists in Kansas and Missouri continue to promote ideas to repeal their state income taxes and replace some of the revenue with a huge consumption tax. As ITEP’s Meg Wiehe explained in a recent Kansas City Star article, “A lot of education needs to happen around this issue. If you move to a consumption-based tax, the vast majority of taxpayers would likely pay more in taxes than they are under the income tax, except for the wealthiest.”

ITEP’s written testimony on one such proposal in Missouri  explains that only the richest 5 percent of Missourians would see a tax cut if the state’s personal income tax was replaced with a broad based sales tax, leaving the other 95 percent to pay higher taxes.

The corporate-controlled, anti-government American Legislative Exchange Council (ALEC) says approvingly that “Kansas and Missouri are at the top of the list” of states considering such proposals. To ALEC, ITEP’s estimates aren’t devastating at all. They recently claimed that “the downside of the tax swap appears to be minimal, if not non-existent.”

As a recent Kansas City Star editorial, warns, “The blessing of the council, known as ALEC, raises a red flag.”

In Kansas, Governor Sam Brownback has long been a proponent of eliminating, or at the very least, drastically reducing the state’s income tax. The Governor’s budget director anticipates that his budget for the new fiscal year will show “some significant (income tax) cuts”.

Missouri lawmakers have tried for the past couple of years to pass legislation that would eliminate the income tax entirely, but the legislation has not successfully passed both houses of the legislature.

Since cooler heads prevailed in the legislature, mega-rich troublemaker Rex Sinquefield has filed 11 ballot initiatives with the Secretary of State’s office that all do basically the same thing — eliminate state income taxes and replace the revenue with a broader sales tax. 

It’s expected that Sinquefield will eventually fund signature-collection for one of these ballot questions. If enough signatures are gathered, Missouri voters would likely be asked to decide about this radical shift in November 2012.

The proposals in Kansas and Missouri threaten those states’ ability to provide core and critical services because they would result in permanently lower revenue, while also tilting each state’s tax system even more heavily in favor of the well-off.

Photos via KDOTHQ Creative Commons Attribution License 2.0


Regressive Taxes Find a Friend in Kansas Governor Brownback


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Kansas Governor Sam Brownback’s budget chief, Steve Anderson, has announced that a new tax study committee will be formed to recommend ways to reduce or even eliminate the state’s income tax, according to an article in the Wichita Eagle. 

Legislation to phase out individual income taxes and lower corporate tax rates died in the legislature this past session, but evidently the Brownback administration isn’t giving up on its regressive agenda. State representative Jim Ward was being generous when he called this proposal “shameful.”

The graduated income tax is Kansas’s only major progressive tax levied; reducing or eliminating the income tax would ensure that regressive property and sales tax rates would have be raised, or services would have to be cut.  If the Brownback administration gets its way, the state’s most vulnerable will suffer the most. Ironically, Brownback came out against an effort to reduce the sales tax just this last November, citing the budget deficit and insisting the state couldn’t afford it.

In a recent speech to a local Republican club, budget chief Anderson fell just short of admitting that corporate leaders are writing the administration’s economic plan.  He told his audience the story of a CEO friend who threatened the state of Oklahoma that he would move his company to Texas because it has no income taxes. Anderson said it “drove home to me how important it is to get [income tax] down to that point that you’re at the lowest rate you can be, hopefully zero.”

States too often fall for, and suffer the consequences of, a race to the bottom with other states over taxes.  Corporations regularly lead states down this path, and unfortunately, the leadership in Kansas is apparently all too willing to follow their corporate pals.

Representative Ward is right to point out that numerous studies have shown taxes are just one of many factors -- alongside education and other government services -- that corporations consider when making their relocation decisions.  A tax code that adequately funds the communications, transportation, power and public safety that support the state’s economy is good for Kansas – both its businesses and its residents.

Photo via KDOTHQ Creative Commons Attribution License 2.0


Tax Cuts Do Not Equal Tax Reform


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Republican Governor Sam Brownback and many conservative Republicans in Kansas are attempting to use the term "tax reform" to describe their efforts to reduce the equity and sustainability of Kansas’s tax system.  

Brownback has begun studying tax proposals with the ultimate goal of putting out a plan for a large tax overhaul. Brownback has stated that the goal of "reform" should be reducing income taxes.

This would mean cutting the only progressive tax in Kansas, which would further exacerbate Kansas’s already regressive tax system.

Brownback’s emphasis on income tax reductions comes after the Kansas State House of Representatives passed legislation which would have gradually repealed the state's personal income tax and cut the corporate income tax in half. That effort stalled in the Kansas Senate, as even Republican lawmakers balked at its $739.4 million price tag over the next 2 years, before the reductions would even be fully in effect.

As has been widely noted, Kansas Republicans are divided on whether to take such a regressive and revenue-hemorrhaging approach. Republican State Senator Pete Brungardt, for instance, argued that the income tax is not the problem at all and that the state should consider reforming its sales tax.

Instead of focusing singularly on the income tax as Brownback desires, the Kansas Economic Progress Council argues that lawmakers should carefully evaluate the entire system of state and local business taxes with a special emphasis on the sales tax, which is frequently ignored in such discussions.


Kansas: Budget Battle Highlights Divisions Within Republican Party


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Late last week, the Kansas Legislature adjourned a dramatic session that ended at 3 a.m. Friday morning, when a controversial budget that slashed spending for schools, social services, and the arts was finally approved. In total, 2,000 state positions were eliminated. And the cuts could have been even worse.

Early in the session, conservative groups like Americans for Prosperity Kansas urged the legislature to repeal last year’s temporary sales tax increase, which raised the state sales tax from 5.3 to 6.3 percent. Thankfully this extreme policy didn’t receive the votes necessary to pass out of the House. In fact, repealing the sales tax hike was dismissed by moderate Republicans and even Republican Governor Sam Brownback.

Shortly after he was elected Governor, he understood that the state’s dire fiscal situation meant that the temporary sales tax hike would need to stay. When asked whether the sales tax increase should be repealed he said, “We're short of resources for the state, and I don't think it's something that we should be doing at this time. Our fiscal situation is not stable.”

One key sticking point for the Senate and House during the budget negotiations was whether or not the state should beef up its cash reserves. Conservatives in the House wanted to put money aside for a rainy day while the Republican-controlled Senate wanted to use that reserve money to curb some of the dramatic spending cuts.

The $14 billion budget cuts overall spending between 5 and 6 percent. But the cutting spree isn’t enough for some conservatives, who say that the budget as passed isn’t one that the state can afford. Conservative Representative John Rubin said, “I'm a fiscal conservative. I encourage our governor to liberally use his line-item veto.”


Do Twitter and Red Lobster Need Local Tax Breaks?


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

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

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

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

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

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

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

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


Tax Cutting Mania: Iowa and Kansas


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The Iowa Fiscal Partnership has issued a policy brief about the destructive tax cuts that are being proposed in the state legislature. The cuts being debated carry a hefty price tag, $1.6 billion, most of which is from a proposal to cut income tax rates by 20 percent across the board.

As we’ve previously noted, these income tax cuts are very regressive. ITEP found that the wealthiest 1 percent of Iowans would receive an average of $6,822, while those in the bottom quintile would enjoy a break of just $18 on average.

According to IFP, the revenue picture in Iowa is improving and the budget can be balanced without drastic cuts to spending and without raising taxes. But it’s mind boggling that legislators would want to cut taxes as they're just barely crawling out of a fiscal crisis.

Charles Bruner, Executive Director of the Child and Family Policy Center, recently said, "Nobody is saying we're flush with revenues, but the picture has improved and we can get through without major cuts. But that assumes we don't dig a bigger hole with unnecessary and unwise cuts in revenues." For more on the tax cut proposals and why they are shortsighted, read IFP’s report.

In more disturbing tax cut news, the Kansas House has passed legislation that would link the state’s personal and corporate income tax rates to changes in revenue. If revenues increase, the rates for the state’s two major progressive taxes will decrease. Eventually the income tax could even be phased out altogether. 

Supporters of the legislation say that this proposal will increase the likelihood that businesses will locate in the state. But a more thoughtful critique was offered by two state Representatives in explaining their vote against the proposal. "When it (the income tax) is gone, our three-legged stool is cut to two — and the worst two we can choose. [The] sales tax is a regressive tax that impacts low-wage earners most.” The legislation now goes to the state Senate.


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


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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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


State Transparency Report Card and Other Resources Released


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

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

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

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

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

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


Tax Overhaul on the Horizon in Kansas


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Last week’s elections saw Republicans in Kansas take control of the state legislature with a 92-33 majority in the House and a 31-9 majority in the Senate. This newfound power has allowed Governor-elect Sam Brownback to speculate about revising the state's tax structure.  One of the items on his agenda will be reviewing a one percent sales tax rate increase passed earlier this year.  Brownback, while criticizing the tax hike, has not explicitly proposed repealing it.  Instead, Brownback has said he wants to evaluate and modify the current levels of income, property, and sales taxes.  Specifically, Brownback said he wanted to lower the state's individual income tax, a tax he sees as hindering growth.

If Brownback wants to keep taxes low and balance the state budget, he would be wise to listen to the proposals coming out of the Kansas Advisory Council on Intergovernmental Relations (KACIR).  KACIR’s recommendation included a three-year moratorium on creating new sales tax exemptions and an examination of the effects of current sales tax exemptions. The report also suggests a three-year moratorium and examination of property tax exemptions. If enacted, these proposals would go a long way toward both modernizing the state's tax structure and making it more stable. 

These proposals should not sound new to returning Kansas legislators.  Secretary of Revenue Joan Wagnon has been advocating these proposals since the legislature began debating the sales tax last year.  Hopefully Brownback’s new administration will be open to reconsidering these sound proposals.


Voters Embrace Higher Taxes at the Local Level


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Last week, the Associated Press took a close look at how local-level tax increases have fared on the ballot leading up to this week’s election.  Out of the 39 states surveyed by the AP, 22 of them held local primary elections or special elections where tax measures were voted on in 2010, and a whopping 19 of those states saw their residents approve more than half of all proposed local tax increases.

Some of the more interesting results highlighted by the AP include the approval of 83% of local tax increases in Louisiana, 72% in Ohio, and 66% in ArizonaKansas, Nebraska, and Washington also approved particularly high percentages of local tax increases.

It’s important to note that the AP study was conducted before this week’s election, and therefore doesn’t tell us how local measures fared on November 2.  Moreover, as the AP points out in their review, there is no single source for information on the results of local ballot measures, and even most states fail to publicize local results in a centralized location. 

Unless and until a study of this week’s local measures is completed, we’ll be left to wonder whether trends from earlier this year have continued to hold.  If they have, there could very well be many more stories of local ballot successes like this one in Colorado.


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


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

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

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

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

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

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

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


New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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

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

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

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

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

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

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

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

Read the full report.

Following Governor Mark Parkinson’s lead, the Kansas legislature voted Tuesday to increase the state’s sales tax rate from 5.3% to 6.3%.  Beginning in July of 2013, the increase will be scaled back to 5.7%.  While this outcome is a disappointment relative to the sales tax base broadening discussed prior to the start of the session, the legislature should be applauded for including two progressive offsets aimed at mitigating the impact of the sales tax hike on the state’s most vulnerable families.

Over the Fiscal Year 2011-2015 period, the legislature’s plan returns about 5% of the revenue gained from the sales tax hike to the state’s lower-income families via a modest expansion of the state’s food sales tax rebate program and an increase in the state’s Earned Income Tax Credit (EITC) from 17% to 18% of the federal credit. 

Unfortunately, while the increases in the sales tax rate and sales tax rebate are permanent, the EITC expansion will lapse in December of 2012.  Given that low-income Kansans pay a larger percentage of their income in tax than anyone else in the state, lawmakers should consider making the EITC expansion permanent when the time comes to revisit this issue.

At least two points bear mentioning in reference to Kansas’ approach to its budget deficit.  First, while the state should be applauded for taking a balanced approach that relies on both revenue increases and spending cuts, the state could have filled its budget gap by enhancing the progressivity of its income tax, which would have fewer consequences for low- and middle-income families.  States without income taxes can be at least partially forgiven for relying on regressive taxes to raise revenue quickly during a recession, but Kansas already has an income tax in place and should have used this tool more directly to raise revenue in an equitable manner.

Second, if Kansas lawmakers were (unwisely) committed to avoiding an income tax increase, revenue could have been generated from the sales tax more efficiently by eliminating unwise exemptions, rather than raising the rate.  A recent survey by the Federation of Tax Administrators focusing on 168 potentially taxable services found that less than half of these services are taxed within Kansas’ borders.  Lawmakers should have taken the advice of the state’s Secretary of Revenue, as well as some of their own colleagues, and reformed the sales tax base, rather than simply raising the rate of a very imperfect tax.


State Tax Cuts Are Not Stimulus


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

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

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

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

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

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

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

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


Budget Band-Aids: Kansas and Washington


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On Monday, Kansas Governor Mark Parkinson gave his State of the State speech, which included a proposal to temporarily increase the state sales tax by 1 percent to help fill a nearly $400 million budget shortfall. Governor Parkinson said, "I can't find $400 million that we can responsibly cut. If you can find responsible cuts, I'm open to looking at them. Let me repeat, as a person who is fiscally responsible, a person that has cut more money out of the Kansan budget than any Kansan in history, there isn't $400 million that we can responsibly cut."

Of course, lawmakers shouldn't forget the very good ideas floated by Secretary of Revenue Joan Wagnon. She has suggested a three-year moratorium on creating new sales tax exemptions and an examination of the effects of current sales tax exemptions. If enacted, her proposals would go a long way to both modernizing the state's tax structure and making it more stable. 

In Washington State there are fewer buttons to press when it comes to revenue raisers (because the state lacks a broad-based income tax), but one option that is available to lawmakers is to increase and modernize the state's sales tax.

This week the Washington Budget and Policy Center released a report on this very topic. It includes a proposal to temporarily increase the sales tax rate, enlarge the base to include consumer services, and include candy, gum, and bakery products in the sales tax base.

Governor Christine Gregoire's budget proposals are frankly disappointing compared to the proposal put forward by the Budget and Policy Center. The Governor's proposal includes offering tax incentives to businesses, closing tax loopholes, service cuts and using federal dollars to help balance the state's budget.


Kansas and Minnesota Discuss Cleaning Up their Sales Tax Bases


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It’s a problem that’s common across many states. Too many exceptions are carved into state sales taxes, which consequently apply to far too narrow a range of purchases.  In large part, this is the predictable result of lawmakers’ desire to enact policies that allow them to claim they’ve cut taxes, while also being able to redirect resources toward their favorite activities or groups.

In Kansas, Secretary of Revenue Joan Wagnon has been leading the charge in encouraging more systematic thinking about the multitude of exemptions from the state’s sales tax.  Specifically, Wagnon has suggested a three-year moratorium on creating new sales tax exemptions, and an examination of the effects of current sales tax exemptions.  The idea has received notable support.  State Rep. Jim Ward, for example, has concurred with the proposal to more closely scrutinize these programs: "Without some criteria to balance the public good, it is very difficult [to ensure tax exemptions are warranted], and we haven't done a great job of it.”  One way to inject such criteria into the policy process in Kansas, and other states, would be to enact a “performance review” system of the type proposed in a recent CTJ report.

Sales tax exemptions can also come about as a result of historical accident.  Minnesota, like most states, exempts a huge number of personal services from taxation, largely because the state’s sales tax was created before the economy shifted to its current, more service-oriented nature.  Fortunately, recent press coverage from Minnesota shows a lot of interest among lawmakers, including gubernatorial candidates, in correcting this flaw in the state’s tax code.  For more on the folly of exempting services from the sales tax base, be sure to read this ITEP Policy Brief.


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


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

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

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

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

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

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

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


Kansas Revenue Official: Tax Cuts Reduce Revenue


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Kansas Secretary of Revenue Joan Wagnon gave a keynote speech last week at Wichita State University where she said that her staff calculated that without the tax cuts and exemptions passed by the legislature since 1995, Kansas would have $1 billion more in revenue this year. And that, interestingly is the amount of the state's expected shortfall for fiscal year 2010. Wagnon went on to say, "It's hard to get that lesson across that you can't keep doing tax cuts and waiting for it to produce more revenue, because at this point, it's producing less revenue."

Wagnon hopes that this staggering figure will be at the forefront of legislators' minds as they are approached to pass various tax exemptions this coming session. Her office has prepared a 21 question piece designed to help legislators evaluate exemptions. State officials across the country could learn from Wagnon when she says, "It just seems so obvious to me that in a time of crisis, you don't give away your revenues."

It's one thing for the federal government to allow a one-time amnesty for Americans who've hid their income from the IRS in offshore accounts. (See related story.) The "stick" is effective (prison) and the "carrot" is not overly generous (since these Americans will pay taxes, interest, and penalties).

But lately several states are providing their own tax amnesties that are very different and very misguided. According to a recent article in State Tax Notes (subscription required), the thirteen state tax amnesties already conducted or promised this year ties the 2002 record for most amnesties offered in one year.  Assuming that DC Mayor Adrian Fenty signs the budget (which contains a tax amnesty) that was recently passed by the DC Council, that record will be broken.  Pennsylvania and Michigan, however, still have a chance to avoid adding to the list of states enacting these short-sighted measures. Amnesties have been proposed within each state's legislature.

As we've argued before, allowing delinquent taxpayers to pay the taxes they owe with little or no penalty is unfair to those diligent taxpayers who paid their taxes on time.

This unfairness is compounded greatly if the interest owed on the late tax bill is reduced, or even waived entirely, as was done this year in Delaware.  Waiving the interest owed on late tax bills essentially means that delinquent taxpayers are granted an interest-free loan by the state, for no reason other than the fact that the state is now desperately in need of money. Had all taxpayers been aware of the possibility of this interest-free loan, the rate of noncompliance would undoubtedly have skyrocketed. 

Repeatedly offering amnesties, as is increasingly becoming the norm, harms the ability of states to enforce their tax laws.  With record numbers of tax amnesties having been offered in the last seven years, delinquent taxpayers can usually assume that they'll be offered an easy way out eventually -- if only they're patient enough.  As one revenue official from Kansas recently put it, "if you have amnesties too often, you're literally training taxpayers not to pay."


Estate Tax Proposal Would Partially Extend One of Bush's Tax Cuts for the Wealthy


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On January 9th, Congressman Earl Pomeroy (D-ND) introduced a bill (H.R. 436) to retain the estate tax with a per-spouse exemption of $3.5 million, essentially freezing in place the estate tax rules in effect this year. The Obama campaign has favored a similar approach to dealing with the estate tax.

Under the first tax cut enacted by President Bush in 2001, the estate tax is being phased out gradually. Under current law, if a wealthy person dies in 2009, the first $3.5 million of their estate is not subject to the tax. That exemption was scheduled to increase gradually under the 2001 law, until 2010 when the estate tax is scheduled to disappear completely. Like almost all of the Bush tax cuts, these rules expire at the end of 2010, meaning that the estate tax will return in 2011 and the pre-Bush rules will apply (including a $1 million per-spouse exemption). Congressman Pomeroy's bill would therefore prevent the estate tax from disappearing in 2010, but would constitute a significant tax cut for millionaires in years after that.

In December, Citizens for Tax Justice issued a report using the latest estate tax data from the IRS showing why the Obama/Pomeroy approach would be a huge and unnecessary tax cut for extremely wealthy families. The report found that only 0.7 percent of deaths that occurred in the United States in 2006 resulted in estate tax liability. The per-spouse exemption that year was only $2 million, which means that the estate tax will affect even fewer families with the $3.5 million per-spouse exemption in place.

Rep. Pomeroy's bill would also repeal new "carryover basis" rules scheduled to be effective next year. Under current law, when you inherit property from an estate, the "basis" of that asset for income tax purposes is stepped up to its fair market value (FMV) on the date of death. When the estate tax is fully repealed in 2010, the stepped-up basis rules are also scheduled to be repealed. The new general rule will be that the basis of the property will carry over from the decedent. (An exception to this rule allows $1.3 million of property to be stepped up to FMV, and an additional $3 million is stepped up if the property is left to a surviving spouse.) H.R. 436 would repeal the new rules prior to their effective date.

It's true that the new carryover basis rules scheduled to come into effect in 2010 under current law are difficult for taxpayers and administrators. How can we figure out what Aunt Sarah paid for her G.E. stock that she's had for at least 30 years when we don't even know when she bought it (or if she received it as a gift or inheritance)? And what if she's been reinvesting dividends all these years (which increase the basis)? A similar rule was enacted by the Tax Reform Act of 1976, but was repealed before its effective date in 1980 because of the outcry from taxpayers and practitioners about the impossibility of complying with the statute.

The phase-out of the federal estate tax also continues to hurt state treasuries. Most states base their state inheritance tax on the federal system and many have lost significant revenues because of the federal changes, including the loss of the credit for state estate taxes. In his budget proposal last week, Gov. Baldacci of Maine included changes to Maine law that would impose a Maine estate tax computed under the pre-2001 federal and state rules. Gov. Sibelius of Kansas has proposed delaying the state's scheduled elimination of estate taxes.

Repeating the familiar mantra that "now is not the time for tax increases", far too many state policymakers have completely dismissed the idea of raising additional revenue to fill their looming budget shortfalls. Other lawmakers, however, have at least left some modest revenue raising ideas on the table. In this piece, we highlight just a few of the ways to boost revenues that have sprung up in states such as Kansas, Oregon, and Massachusetts.

Kansas should be in a somewhat better position than many states, at least politically, when it comes to raising additional revenue. Before Kansas' budget fell into such disarray, legislators passed a variety of unwise business tax cuts that have yet to be completely phased in. Now, with the economy having made a turn for the worst, vulnerable Kansas families are in need of state assistance to weather the storm. At least one Kansas lawmaker has pointed to freezing the phase-in of these business tax cuts as one possibility for protecting state revenues and the families that rely on them. Other states in the process of phasing-in tax breaks may want to re-think their priorities before allowing the phase-in to occur.

Oregon's governor has taken things a step further by proposing three concrete, though not terribly progressive or innovative, ways to boost revenue during these desperate times. First, the Governor would like to raise the state's cigarette tax, a move that many other states have also identified as one of the most politically palatable options available (e.g. Arkansas, Florida, Georgia, Kentucky, Mississippi, South Carolina, Utah, and Virginia). We've written about the connection between the cigarette tax and budget shortfalls before here.

Second, the Governor is seeking some very minor increases in the gas tax, vehicle registration fees, and title fees in order to pay for transportation. Though the two cent gas tax increase he's pondering (and some hikes in various vehicle fees) won't fix Oregon's transportation woes, such a move is certainly preferable to pretending there isn't a need for additional revenue.

Finally, the Governor recommends increasing the state's corporate minimum tax. As was pointed out in the Governor's release, Oregon's corporate minimum tax has not been raised since 1929. As a result, the minimum tax has ceased to be an effective protection against companies who seek to manipulate the tax code to escape taxation. But while the Governor's increase in the minimum tax would generate approximately $40 million per year, this would ultimately be only a very minor step toward a better system of corporate taxation. Fortunately, the Oregon Center for Public Policy has played a leading role in advocating much more meaningful tax solutions in the state, especially in their recent report titled," Rolling Up Our Sleeves: Building an Oregon that Works for Working Families".

And lastly, a valuable reminder regarding the potential revenue to be had from taxing internet sales surfaced in Massachusetts this week, where the Governor proposed (and significant legislative support has formed around) an idea to tax companies that have agreed to participate in the streamlined sales tax initiative. Since participation is currently voluntary, such a move is estimated to produce only $15 million per year for the state -- not a huge sum, but it certainly doesn't hurt. Should a comprehensive internet sales tax plan be passed by the federal government, however, the state could enjoy as much as $545 million in additional annual revenue. Continuing the forward momentum of the streamlined sales tax initiative could ultimately prove quite valuable in enhancing the sustainability of state revenue systems


Cigarette Taxes: Another State Seeking the Path of Least Resistance


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Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans. This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.

The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority. But it's the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.

Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system. South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.

In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time. South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.

Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas. This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.

With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown. A recent study by Howard Chernick entitled "Cigarette Tax Rates and Revenue" found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%. Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling. The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).


Transportation Funding Ideas Abound, But What Role Should the Gas Tax Play?


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As was discussed in last week's Digest, adequate transportation funding has been hard to come by for many states as a result of stagnant gas tax revenues and rising transportation infrastructure costs. This past week, a couple of interesting developments in the transportation finance debate arose out of this nationwide problem.

The first of those developments was a summit held with the cooperation of the National Governor's Association and the U.S. Department of Transportation. Though no formal recommendations were made, among the more intriguing revenue-raising ideas to come out of that meeting were an expansion of tolling on new and existing roads, implementing congestion pricing during high-traffic times, and creating a tax on the number of "vehicle miles" one travels. Each of these provisions would be regressive, requiring low- and middle-income people to pay more of their incomes than their wealthier counterparts, but this could be offset with increases in the overall progressivity of state and federal tax systems. What makes each of these options most appealing is that they can serve two purposes simultaneously -- providing needed funding for roads while at the same time reducing traffic congestion by placing a "price" on driving.

Slightly less encouraging was the insistence by U.S. Transportation Secretary Mary Peters that the gas tax is essentially outdated and broken and should not be increased to keep up with inflation-driven increases in transportation costs. Peters' criticism was that as people consume less fuel by either driving less, switching to mass transit, or purchasing more fuel-efficient vehicles, the gas tax will become increasingly unsustainable. But with states facing immediate transportation shortfalls that need to be addressed in a matter of weeks and months, not years, such a firm opposition to a gas tax increase seems unwarranted.

The transportation funding debate in many states has recently turned to a competition between increasing the gas tax and increasing the sales tax. The gas tax, like Peters' other ideas, asks the most of those people who drive the most, and potentially has some effect on decreasing traffic congestion by adding to the price of driving. If the gas tax is indexed to inflation, as it is to some extent in Florida and Maine, it can also be a sustainable funding source. The sales tax, on the other hand, is just as regressive as the gas tax but isn't at all based on one's driving habits -- it therefore also has no role in reducing congestion. It would seem that until her more long-term goals could be enacted, Peters' should be a staunch supporter of the gas tax as the next best solution.

By contrast, the other big transportation development of the week was a report released by the Kansas Department of Transportation that recommended "protecting [gas tax] revenues from inflation" by continuously adjusting the tax rate. That report also recommended adding additional tolling as a method for addressing the state's transportation woes. But with Kansas facing an immediate transportation funding shortfall estimated at $30 billion over the next 2 decades, an easily implemented solution like a gas tax hike seems like an absolute necessity to any transportation funding package. Other states that lack the luxury of time would do well to listen to the recommendations out of Kansas and consider adjusting their gas tax rates so that the widening gap between revenues and costs may begin to be bridged.


Unfortunate Sweepstakes


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

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

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


Border Conflict


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The Monty Python character expressed something that all politicians aspire to when he said, "To boost the British economy I'd tax all foreigners living abroad." Every elected official would prefer that any taxes be paid by someone who can't vote them out of office. It's not any different in Missouri, which recently triggered a war of words with its neighbor, Kansas.

Kansas Governor Kathleen Sebelius is becoming irritated about a seemingly arcane provision in a recent tax bill signed by Missouri Governor Matt Blunt. The provision does what all states would love to do: It raises taxes on people who work in the state but live and vote somewhere else. And for the Kansas residents who work in Kansas City, Missouri, that means their taxes have been raised by people unaccountable to them.

Earlier this year, Governor Blunt signed into law H.B. 444, an ill-advised bill that created a tax break for better off seniors who receive Social Security benefits. Included in this legislation is a provision ensuring that anyone who works in Missouri, but lives out of state will no longer be allowed to write off their out-of-state property taxes if they itemize on their Missouri income tax forms. This means that many workers who live outside of Missouri will pay higher Missouri income taxes. This is a good thing for Missouri, which is struggling to provide adequate health care and education.

But if you're a policymaker in neighboring Kansas you'd quickly understand that workers who live in Kansas will actually pay less Kansas income tax because they can claim credits for taxes paid to other states. Governor Sebelius asked Governor Blunt to repeal this provision, which she says amounts to a tax increase on nonresidents.

Seeing that shots were being fired at him from the other side of the border, Governor Blunt relented partially and said that he'll support the provision's repeal in the 2008 legislative session. But it's really not clear that the Missouri legislature would relent at all. "What obligation do we have to Kansas people? Why would we want to give them a break on Missouri taxes?" one Missouri legislator said publicly. Kansas Rep. Kenny Wilk, chairman of the House Taxation Committee, is vowing to retaliate unless Missouri acts soon. He said, "Missouri just needs to decide whether they want to do this the hard way or the easy way. We will respond to make sure we recoup all "and plus a bit more... of what we're losing."


How Not to Deal with the Property Tax Issue


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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.


Do Retirees Living in Mansions Need Tax Breaks?


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In Kansas two state senators are championing a new amendment to the state constitution that would freeze the assessed value of a home upon the homeowner's sixty-fifth birthday. The intent behind the proposal is a popular one: to help fixed-income seniors struggling with their property tax payments. However, the bill is poorly-targeted. It would help all seniors, including the wealthiest, and not just those struggling to pay their bills. Critics of the measure are starting to line up. Notably, AARP came out against the bill, saying, "It's not that we aren't concerned about older Kansans and their ability to pay property taxes, we just believe property tax relief should be more targeted". Some have suggested that the measure should be tied to the value of the home, so that, for example, only houses valued at less than $200,000 would have their assessed value frozen. Such a move would make the amendment much less expensive to the state, while still helping elderly homeowners.

However, an even better solution would be to expand the current Kansas property tax "circuit breaker" to include people of all ages. A circuit breaker kicks in when property taxes exceed a given percentage of the taxpayer's income, providing targeted relief only to those who need it. Circuit breakers are a cost-efficient way to provide targeted relief to those who need it most. For more information check out the latest report from the Center on Budget and Policies which takes a hard look at circuit breaker programs across the country.


Multi-State Focus: Senior Tax Cuts


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

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

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


Who Benefits from Tax Breaks for Business?


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Advocates of tax breaks for business typically argue that such tax breaks will benefit workers as companies are more able to expand and invest. The latest study to call this into question comes from the University of Kentucky, which finds that tax breaks don't create as many jobs as previously hoped. The report concludes, "Based on our evidence showing that training incentives are positively related to economic activity in an area, and given that relatively little is spent on this program, the Legislature may want to consider increasing the amount spent on training incentives" rather than more tax breaks.

It's also doubtful that tax breaks are very important to the success of businesses themselves. Despite the fact that Kansas business owners named excessive taxation as their biggest concern for the fourth year in a row, nearly half of the businesses surveyed by the Kansas Chamber of Commerce weren't even aware that the Legislature had enacted a six-year, $632 million business tax cut last year. The bill eliminated the state's property tax on new capital investment in business equipment and machinery and went into effect last July. It's difficult to believe that tax breaks could be vital to economic expansion if they're not even noticed by the corporations that benefit most from them.


Gas Tax "Buffer Zone" in Kansas?


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The Kansas legislature's Joint Tax Committee is considering a proposal to create a series of gas tax "buffer zones" around the state's perimeter. Of the four states that share a border with Kansas, only Nebraska currently has a lower gas tax, allegedly prompting some motorists to cross state lines to fill up. The proposed buffer zones would allow any gas station in a "border town" to lower their gas tax to within one cent of that of the neighboring state. These areas are being promoted as a way to capture gas tax revenue that is currently lost to cross-border trade. However, it is likely that these zones will not eliminate the border problem, but instead simply move the lower gas border further inside Kansas. If these buffer zones become reality, instead of crossing the border to get cheaper gas, Kansans will be able to simply drive into a border town.

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