Maine News


On Revenues and Referenda: Will Maine Voters Increase Taxes on the Wealthy to Support Public Education?


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Maine voters will decide the fate of Question 2 next week, a ballot measure that increases taxes on the state’s wealthiest households and provides additional revenue for K-12 education.  If approved, a 3 percent tax surcharge would apply to taxable income above $200,000 generating more than $150 million annually for a new dedicated public instruction fund.  An ITEP analysis found that the measure would only impact Maine’s wealthiest 2 percent of households who currently pay an effective state and local tax rate lower than the other 98 percent of Mainers.

Proponents of the measure, led by Stand up for Students Maine, say that school funding has been falling short and years of tax cuts for wealthy Mainers are partially to blame.  Measure 2 would not only bring in additional revenue for K-12 spending, but it would also help to improve tax fairness by requiring the state’s wealthiest households to pay their fair share. 

Opponents argue that the new revenue generated by the measure will not solve public school inequities.  There is also concern that the three percent surcharge would make Maine’s top marginal personal income tax rate the second highest in the country behind California.

Polling results show Question 2 has strong support from potential voters.  If such support pans out at the ballot, Maine will have a more fair and adequate revenue stream for public education.


Surveying State Tax Policy Changes Thus Far in 2016


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With the exception of New Jersey, the dust has now settled on most state legislatures' 2016 tax policy debates.  Many of the conversations that took place in 2016 were quite different than those that occurred over the last few years.  Specifically, the tax cutting craze sparked by the election of many anti-tax lawmakers in November 2010 has subsided somewhat—at least for now.  For every state that enacted a notable tax cut in 2016, there was another that took the opposite path and opted to raise taxes.  And contrary to what you may expect, the distinction between tax-cutting and tax-hiking states did not always break down along traditional partisan lines.

The most significant theme of 2016 was one we've written about before: the plight of energy-dependent states whose budgets have been battered by falling oil and gas prices as well as the growing cost of tax cuts enacted during the "boom" years. In conservative-leaning energy states such as Louisiana, Oklahoma, and West Virginia, lawmakers raised taxes to help deal with these issues in the short-term, but long-term solutions are still needed.

Tax increases elsewhere were enacted to fund health programs (California), raise teacher salaries (South Dakota), and expand tourism subsidies (Oregon).  In Pennsylvania, meanwhile, a significant but flawed tax package was enacted to cope with a large general fund revenue shortfall.

On the tax cutting side, the "tax shift" craze was less pronounced than usual this year. Again, however, New Jersey lawmakers may be the exception as they continue to debate a shift toward gas taxes and away from some combination of income, estate, and sales taxes.  Moreover, some of the tax cuts that were enacted this year may ultimately set the stage for future "tax shifts," as lawmakers in states such as Mississippi and Tennessee search for ways to fund tax cuts whose full cost won't be felt for many years.

Looking ahead, debates over tax increases in Alaska and Illinois are likely to resume once the November elections have passed.  On the other hand, lawmakers in Arkansas, Mississippi, Nebraska, and elsewhere are already positioning themselves for tax cut debates in 2017.  But before that happens, there are also a significant number of revenue raising ballot proposals to be voted on in California, Colorado, Maine, Massachusetts, Missouri, Oklahoma, and Oregon.

Below is our summary of 2016 state tax happenings, as well as a brief look ahead to 2017.

Tax Increases

Louisiana: Tax increases of varied sorts were among the strategies lawmakers employed this year to address billion dollar deficits for FY16 and FY17. The most significant was a one cent increase to the sales tax, a regressive hike that gives the state the highest combined state and local sales tax rate in the country. Given the severity of Louisiana's revenue shortfall, much of the appeal of this approach came from the fact that it could be implemented quickly. But while a higher sales tax will generate hundreds of million of dollars in needed revenue, it is also set to expire in July 2018 and is not a permanent solution to the state's fiscal stress. Over the course of two special sessions, lawmakers also: increased cigarette and alcohol excise taxes; extended, expanded, or reinstated taxes on telecommunications, hotel, and auto rentals; cut vendor discounts; limited deductions and credits that benefit businesses; and increased a tax on the health insurance premiums of managed care organizations. All of these incremental changes buy the state some time in the short-term, but the need for more substantive reform remains.

Oklahoma: To fill the state's $1.3 billion shortfall, Oklahoma lawmakers enacted a number of policy changes that will harm the state's poorest residents and set the state on an unsustainable fiscal path. Oklahoma's 2016-17 budget relied heavily on one-time funds. Lawmakers opted to change the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, meaning that poor families earning too little to owe state income taxes will now be ineligible for the credit. While this will have a noticeable impact on those families' abilities to make ends meet, the $29 million saved as a result of this policy change is a drop in the bucket compared to the $1 billion in revenue lost every year from repeated cuts to the state's income tax. Thankfully, though, cuts to the state’s sales tax relief credit and the child tax credit were prevented, and full elimination of the state EITC was avoided. Lawmakers also capped rebates for the state's "at-risk" oil wells, saving the state over $120 million. On another positive note, Oklahoma lawmakers eliminated a nonsensical law, the state's "double deduction," that allowed Oklahomans to deduct their state income taxes from their state income taxes. 

Pennsylvania: Pennsylvania lawmakers avoided broad-based tax changes, largely relying instead on regressive tax options, dubious revenue raisers, and one-time funds—most of which fall hardest on the average Pennsylvanian—to fill the state’s $1.3 billion revenue shortfall. The state’s revenue package draws primarily from expanded sales and excise taxes. In particular, it includes a $1 per pack cigarette tax increase and a tax on smokeless tobacco, electronic cigarettes, and other vaping devices along with changes to the state's sale of wine and liquor. State lawmakers also opted to include digital downloads in the sales tax base and put an end to the “vendor discount”—an unnecessary sales tax giveaway that allowed retailers to keep a portion of the tax they collected from their customers.

West Virginia: Lawmakers in West Virginia punted, for the most part, on solving their fiscal problems this year. Instead, they addressed the state’s $270 million shortfall with budget cuts, tobacco tax increases, and one-time funds. The state increased cigarette taxes by $0.65 per pack and will tax electronic cigarettes and vaping liquids. Even with this $98 million revenue gain, shortfalls are not last year’s news. Ill-advised tax cuts and low energy prices will again put pressure on the state’s budget in 2017.

South Dakota: South Dakota lawmakers enacted a half-penny sales tax increase, raising the rate from 4 to 4.5 percent. The increase will fund a pay raise for the state's teachers, who are currently the lowest-paid in the nation. Though they rejected a less regressive plan to raise the same amount of funding by raising the sales tax rate a whole cent and introducing an exemption for grocery purchases, progressive revenue options are very limited in states like South Dakota that lack an income tax, and lawmakers can be applauded for listening to public opinion that consistently favors raising revenues to fund needs like education.

California: This past session, California lawmakers were able to drum up the two-thirds majority support needed to extend and expand the state's health tax levy on managed care organizations. The prior tax expired on July 1, 2016 and was deemed too narrow to continue to comply with federal requirements. By extending the tax to all managed care organizations, California lawmakers were able to preserve access to over $1 billion in federal match money used to fund the state's Medicaid program.

Oregon: Lawmakers approved an increase to Oregon's tourist lodging tax from 1 to 1.8 percent in order to generate more revenue for state tourism funds, specifically to subsidize the World Track and Field Championships to be held in the state in 2021.

Vermont: Vermont’s 2016 revenue package included a few tax changes and a number of fee increases. Tax changes included a 3.3 percent tax on ambulance providers and the conversion of the tax on heating oil, kerosene, and propane to an excise tax of 2 cents per gallon of fuel. The move from a price-based tax to one based on consumption was meant to offset the effect of record low fuel prices.

Tax Cuts

Mississippi: Mississippi lawmakers made some of the most irresponsible fiscal policy decisions in the country this year. For one, they opted to plug their growing transportation funding shortfall with borrowed money rather than raising the necessary revenue. And at the same time, despite those funding needs and the fact that tax cuts enacted in recent years caused a revenue shortfall and painful funding cuts this very session, legislators enacted an extremely costly new round of regressive tax cuts and delayed the worst of the impacts for several years. By kicking these two cans down the road at once, lawmakers have avoided difficult decisions while putting future generations of Mississippians and their representatives in a major fiscal bind.

Tennessee: Tennessee legislators, who already oversee one of the most regressive tax structures in the nation, nonetheless opted to slash the state's Hall Tax on investment and interest income. The Hall Tax is one of the few progressive features of its tax system. After much debate over whether to reduce, eliminate, or slowly phase out the tax, an unusual compromise arose that will reduce the rate from 6 to 5 percent next year and repeal the tax entirely by 2022. While the stated "legislative intent" of the bill is to implement the phase-out gradually, no specific schedule has been set, essentially ensuring five more years of similar debates and/or a difficult showdown in 2021.

New York: New York lawmakers approved a personal income tax cut that will cost approximately $4 billion per year. The plan, which is geared toward couples earning between $40,000 and $300,000 a year, will drop tax rates ranging from 6.45 to 6.65 percent down to 5.5 percent. The tax cut will be phased-in between 2018 and 2025. Gov. Andrew Cuomo said that the plan “is not being paid for” since its delayed start date pushes its cost outside of the current budget window.

Florida: The legislative session in the Sunshine State began with two competing $1 billion tax-cut packages and ended with a much more modest result. In the end, the state made permanent a costly-but-sensible sales tax exemption for manufacturing equipment, reduced its sales tax holiday down to three days, and updated its corporate income tax to conform with federal law, along with several other minor changes. Ultimately, the plan is expected to reduce state revenues by about $129 million. The legislature also increased state aid to schools, which is expected to reduce local property taxes and bring the total size of the tax cuts to $550 million if those local reductions are included.

North Carolina:  Billed as a "middle-class" tax cut, North Carolina lawmakers enacted an increase in the state's standard deduction from $15,500 to $17,500 (married couples).  This new cut comes on top of four years of tax changes that are slowly but surely moving the state away from relying on its personal income tax and towards a heavier reliance on consumption taxes. 

Rhode Island: While an increase in the state's Earned Income Tax Credit (EITC) from 12.5 to 15 percent of the federal credit was a bright spot in Rhode Island this year, lawmakers also found less than ideal ways to cut taxes. Specifically, they pared back the corporate minimum tax to $400, down from $450 in 2016 and $500 the year before. The state will also now provide a tax break for pension/annuity income for retirees who have reached their full Social Security age. It exempts the first $15,000 of income for those earning up to $80,000 or $100,000, depending on filing status.

Hawaii: Hawaii legislators made changes to their state's Child and Dependent Care Tax Credit this year, slightly expanding the credit by altering the method for determining the percentage of qualifying child care expenses.

Oregon: Lawmakers increased the state's Earned Income Tax Credit from 8 to 11 percent for families with dependents under 3 years old. Qualifying families will be able to claim this larger credit starting in tax year 2017.

Arizona: There was much talk of tax reform in Arizona this year. Gov. Doug Ducey expressed interest in a tax shift that would phase out the income tax over time and replace it with a regressive hike in the state's sales tax. That plan, thankfully, did not come to fruition this year. Rather, state lawmakers enacted a grab bag of (mostly business) tax cuts, including an expansion of bonus depreciation and sales and use tax exemptions for manufacturing.

Stalled Tax Debates Likely to Resume in 2017

Alaska: Faced with a multi-billion revenue hole, state lawmakers weighed and ultimately punted on a range of revenue raising options—including, most notably, the reinstatement of a personal income tax for the first time in 35 years. Notably, however, Gov. Bill Walker did scale back the state's Permanent Fund dividend payout through the use of his veto pen.                                         

Georgia: Ambitious plans to flatten or even eliminate Georgia's income tax ultimately stalled as advocates showed (PDF) these measures would have amounted to enormous giveaways to the state's wealthiest residents, drained $2 billion in funding for state services over five years, and even threatened the state's AAA bond rating.

Idaho: Lawmakers in the House enthusiastically passed a bill that cut the top two income tax rates and gave the grocery credit a small bump, but the bill stalled in the Senate where lawmakers were more interested in addressing education funding than a tax break for the state's wealthiest residents.

Illinois: After a year of gridlock, Illinois lawmakers passed a stopgap budget. Unfortunately, this "budget" amounts to no more than a spending plan as it is untethered from actual revenue figures or projections. Its main purpose is to delay the work of much needed revenue reform until after the November election.

Indiana: An effort to address long-standing needs for infrastructure improvement in Indiana resulted in lawmakers abandoning all proposals to raise new revenue, relying instead on a short-term plan of shifting general revenue to the state highway fund. Over the next two years this change will generate some $230 million in "new money" for transportation projects at the expense of other critical public services.

Maryland: Maryland lawmakers rejected two tax packages that included more bad elements than good. While the plans included an innovative expansion of the state's Earned Income Tax Credit (EITC) for childless low- and middle-income working families, this valuable reform would have been paired with income tax cuts that would have unnecessarily benefitted the very wealthiest.

What Lies Ahead?

Key Tax-Related Measures on the Ballot in November

California: State officials have announced that seventeen (and possibly more) initiatives will appear on California's ballot this November. Among them are several tax initiatives, including extending the current income tax rates on high-income earners, raising the cigarette tax by $2 per pack, and the implementation of state, and potentially local, taxation on the sale of marijuana if legalized.

Colorado: A campaign is underway to gather the signatures required to place a proposal to raise tobacco taxes on the ballot this November. The measure would raise the tax on cigarettes from $0.84 to $2.59 per pack and increase the tax on other tobacco products by 22 percent. If approved, the proposal would raise $315 million each year for disease prevention and treatment and other health initiatives.

Maine: The Stand up for Students campaign is behind a ballot measure in Maine that would enact a 3 percent income tax surcharge on taxable income above $200,000.  If approved, the additional tax would bring in well over $150 million annually to boost support for K-12 classroom instruction.

Missouri: Three tax-related questions will be posed to Missouri voters in November.  Two are competing tobacco tax increase measures of 23 and 60 cents per pack.  The third measure would prevent state lawmakers from reforming their sales tax by expanding its base to include services in addition to currently taxed tangible goods.

Oklahoma: Oklahoma state question 779, to increase Oklahoma's sales tax 1 cent to fund teacher pay increases and other educational expenses, will appear on the state's ballot this November.

Oregon: Voters in Oregon will have the final say on a proposal to increase taxes on corporations this fall. Measure 97 (previously known as IP-28) would increase the state's corporate minimum tax for businesses with annual Oregon sales over $25 million. Under current law, corporations pay the greater of a tax on income (6.6 percent on income up to $1 million and 7.6 percent on income above $1 million) or a minimum tax on sales ($150 to $100,000). Measure 97 would eliminate the $100,000 cap on the sales-based portion of corporate minimum tax and apply a 2.5 percent rate to sales above $25 million.  If passed the measure would generate $3 billion in new revenue earmarked specifically to education, health care, and services for senior citizens.

Laying the Groundwork for Significant Tax Cuts, Tax Shifts, and Tax Reform in 2017:

The saying "after the calm comes the storm" may prove true for state tax policy debates next year.  Lawmakers in more than 20 states have already begun to lay the groundwork for major tax changes in 2017, most with an eye towards cutting personal income taxes and possibly increasing reliance on consumption taxes.  Lawmakers in energy dependent states including Alaska, Louisiana, West Virginia and New Mexico will need to continue to find long-term revenue solutions to their growing revenue problems.  Illinois and Washington lawmakers will also be debating significant revenue raising options.  Governors in Nebraska, Arkansas, Kentucky, Ohio, Arizona and Maryland will take the lead on tax cutting (and possibly income tax elimination) proposals.   Mississippi lawmakers are currently meeting to discuss ways to shift the state's reliance on income taxes towards "user- based" taxes (i.e. regressive consumptions taxes).  And, Kansas lawmakers will likely revisit the disastrous tax changes under Governor Brownback.  


State Rundown 2/26: Tax Changes on the Horizon


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

 – Meg Wiehe, ITEP State Policy Director


 

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

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

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

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

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

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

 


2016 State Tax Policy Trends: States Considering Raising Revenue in Both Big and Small Ways


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

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

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

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

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

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

Alaska

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

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

California

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

Illinois

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

Louisiana

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

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

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

Massachusetts

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

New Mexico

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

New York

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

Oklahoma

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

Oregon

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

Pennsylvania

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

South Dakota

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

Utah

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

West Virginia

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

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

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


State Rundown 1/7: New Year, New Taxes


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The revenue crisis in Louisiana is worse than anticipated, according to Gov.-elect John Bel Edwards. The state is short $750 million this fiscal year, which must be accounted for by the end of June. Next fiscal year, which starts in July, will put the state $1.9 billion further in the hole. Edwards has said he will unveil a “menu of options” to address the shortfall in advance of a special session he plans to call next month.  He will likely ask lawmakers to consider revenue raising measures to help soften the impact of spending cuts in the current year and to boost available revenue for next year’s budget (which will get sorted out in March). 

A tax cut for the middle class took effect on January 1 in Arkansas. Gov. Asa Hutchinson won approval last year of a 1 percent cut in the income tax rate for those making between $21,000 and $75,000, at a cost of $135.7 million over the biennium. Hutchinson sees the cut as the first step toward a broader income tax reduction, but he has no plans to propose new cuts before the 2017 legislative session. But some lawmakers and advocates warn that the income tax cuts will lead to further cuts in state services such as the state’s severely underfunded preschool and child welfare programs. "That's just a huge amount to come out of the budget and we're seeing a lot of current unmet needs in Arkansas," noted Ellie Wheeler of Arkansas Advocates for Children and Families.

Pennsylvania officials still haven’t reached an agreement on their state’s budget (now almost seven months past due), but that hasn’t stopped them from approving the funding of tax breaks for corporations. Gov. Tom Wolf conditionally approved several requests for tax credits from businesses, including breaks for donations to private schools, film tax credits and credits for research and development.  Apparently, this represents a reversal for the governor, who said last Tuesday that emergency funds recently made available for school districts and social services would not be used to fund tax credit programs. The state government approved 3,000 requests for the education tax credit, up from 2,700 last year. Businesses can take a 75 percent credit on their donations (up to $750,000) to organizations that provide scholarships to low-income students to attend private schools.

Utah Gov. Gary Herbert wants his state’s legislature to reconsider its earmarking practices, saying that automatically directing new revenues to specific purposes can reduce flexibility in funding state priorities. Herbert specifically argued that money earmarked for transportation could be better spent on educational priorities. "We're coming to a point where there's a crossroads decision, because if we don't reduce some of the earmarks, we will have a difficult time funding education, particularly higher education,” noted the governor. Some lawmakers have also argued that the automatic earmarking practices prevent the state from regularly reviewing if funds are being spent efficiently.

Snack lovers in Maine will pay a little more at the register this year. Since Jan. 1, a number of products including marshmallow fluff and beef jerky were added to the sales tax base. The sales tax base expansion was one element of the tax reform package passed by the legislature last summer which also included a permanent hike in the sales tax rate, significant changes to the state’s personal income tax, and the introduction of a refundable sales tax credit. 


State Rundown 11/6: Election Day Wrap Up


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Voters went to the polls in a number of state and local elections this week, with lots of implications for tax policy. This rundown covers the burning ballot outcomes and election results that followers of state policy should know about!

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Washington state voters approved Tim Eyeman’s Initiative 1366 with 53 percent of the vote. The measure mandates an automatic decrease in sales tax revenue by $1 billion unless the legislature agrees to refer a ballot measure to voters that would require a supermajority to raise taxes. As we noted in a previous blog post, Initiative 1366 is a disaster for the state. Legal challenges to its legitimacy are sure to follow, but at the moment eyes are on state legislators and what they will do to avoid both the revenue loss and the supermajority requirement.

Voters in Texas approved two proposals that will impact road and school funding. Proposition 1, which increased the property tax homestead exemption from $15,000 to $25,000, will cost schools in the state at least $1.2 billion over the biennium. Homeowners will keep $126 annually, on average. The measure passed with 86 percent of the vote. Proposition 7 diverts up to $2.5 billion a year in sales tax revenue from the general fund to the State Highway Fund beginning in 2018. It passed with 83 percent of the vote.

Ten out of seventeen counties in Utah passed a ballot initiative for transit funding, though the measure went down in defeat in the state’s most populous counties, Salt Lake and Utah. Proposition 1 implements a local sales tax with revenue split between transit providers, cities and counties.

Voters in Kentucky elected Republican Matt Bevin governor in an upset over challenger Jack Conway, the state’s attorney general. Bevin, a businessman often at odds with his own party’s mainstream, has pledged to end Kentucky’s successful healthcare exchange and is opposed to Medicaid expansion. He has also called for corporate and personal income tax cuts and for the repeal of Kentucky’s inheritance tax. Bevin’s election is likely to move Kentucky tax policy in a less fair and unsustainable direction.

Mississippi voters easily reelected Gov. Phil Bryant, who faced token opposition from Robert Gray, a long haul truck driver. Lt. Gov. Tate Reeves and House Speaker Phil Gunn, both also reelected, were responsible for a flurry of tax bills last session that would have lowered income taxes and eliminated the corporate franchise tax. At one point, lawmakers considered eliminating the income tax entirely. These efforts failed because backers could not gain a supermajority vote for their changes; now, Republicans are just one vote away from a supermajority. Expect more of the same during the state’s next legislative session.

In a bright spot, voters in Seattle, WA and Maine approved ballot questions to limit the influence of money in politics and to increase the power of small donors. Maine voters passed by 55 percent a proposal to update their public elections system. Candidates who opt for public funding will now receive additional funds if super PACs spend big for their opponents, and the transparency rules for independent spending have been tightened. The question also requires the legislature to scale back or repeal some business tax breaks in order to fund public financing. Voters in Seattle passed by 60 percent a new concept called “democracy vouchers.” Each citizen will receive four $25 publicly-funded vouchers to pledge to candidates of their choosing. The Seattle initiative also lowered campaign contribution limits, increased ethics enforcement, and banned contributions from lobbyists and city contractors. Hopefully, these measures will make lawmakers more responsive to the public on matters of tax fairness rather than entrenched interests.

 


Tax Ballot Measures Ask Voters to Decide


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The fall harvest season has brought a bumper crop of tax ballot measures in states across the nation(though sadly, no tax-themed seasonal lattes.) We’ve already covered a ballot proposal in Washington, a potential ballot proposal in North Carolina, and a 2016 proposal in Maine – check out the links to get the scoop. Today, we’re looking at measures in Texas and Utah, and providing an update on Washington.

Texas: Texas voters will consider two proposals with significant ramifications for roads and schools. Proposition 1 would increase the homestead exemption for public school property taxes from $15,000 to $25,000. The average savings for Texan households would be about $126, but schools systems across the state would lost $1.2 billion per biennium – money that the state would have to replace from the general fund. A state judge has already ruled that the state’s low level of school funding is unconstitutional, and Proposition 1 will make it harder to even maintain the status quo – all at a time when the needs of Texas’s schoolchildren are growing. Compounding the budgetary pressure is Proposition 7, which would divert sales tax revenue from the general fund to the Texas Department of Transportation for highway maintenance and construction, but would not raise any new revenue. This could have the unintended effect of weakening spending in other important areas that are paid for out of the general fund (including schools), particularly since low oil and gas prices are hurting the state’s bottom line. A better approach would be raising the state’s gasoline tax, which has remained unchanged for 24 years and has failed to keep pace with inflation.

Utah: Utah voters in 17 counties will decide whether or not to raise their sales taxes by 0.25 percentage points in order to fund the Utah Transit Authority. Legislative analysts say the plan will cost affected Utahans $50 a year on average. The legislature voted to allow counties to decide if they wanted to include the measure, Proposition 1, on the ballot and 17 of Utah’s 29 counties followed through. If passed by a county’s residents, the sales tax increase will only apply to that county. If approved, 40 percent of the revenue raised will support the transit authority. Another 40 percent would go to cities for local roads and other transportation projects. The final 20 percent will go regional transportation projects.

Washington: Tim Eyman, the author of Initiative 1366 and previous supermajority requirements, is a lightning rod in Washington state politics. I-1366 would force the legislature to amend the state constitution to require a supermajority vote for tax increases. If legislators refuse to amend the constitution, the ballot initiative would automatically cut the sales tax rate by a penny, leaving the state $8 billion poorer at a time when the Washington Supreme Court says the state is not meeting its constitutional obligation to K-12 students. Already, a mix of uncertainty over funding and questions swirling around Eyeman have caused many supporters of previous anti-tax measures to withhold their support from I-366. The Association of Washington Business and the state’s grocery store association are both keeping out of the debate over the proposal over concerns about how their donations were used in past efforts. If the initiative passes anyway, opponents hope that the courts will eventually rule I-1366 an unconstitutional abrogation of legislative authority. 


In Maine, Dueling Ballots


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A new proposal from a Maine coalition could set the stage for dueling tax ballot initiatives in Maine. The Stand Up for Students proposal would create a 3 percent surcharge on households with taxable income over $200,000, generating an estimated $110 million in revenue earmarked for costs associated with classroom instruction. According to an ITEP analysis, the tax increase would impact just 2 percent of Maine households, all of them among the top 5 percent of the state’s taxpayers.

Meanwhile, Maine Republicans have proposed a ballot initiative that would replace the graduated income tax structure with a flat income tax rate of 4 percent for all Mainers. As we outlined in a previous blog post, the Republicans’ ballot initiative would cost $550 million in state revenues and give the top one percent of Maine taxpayers an average tax cut of over $21,000. Most middle- and low-income Maine taxpayers would see no benefit given the higher sales and property taxes or drastic budget cuts necessitated by such a plan. For a side-by-side comparison, see the table below.

Voters in the Pine Tree State will face a stark choice if the backers of both ballot measures are successful in getting their preferred policy choice on the ballot. It’s worth pointing out that, in the event that both ballot measures pass, the Republicans’ flat tax initiative would not nullify the Stand Up for Students proposal, as the latter is a surcharge and not a modification to tax rates. 

Side by Side Comparison of Maine’s Dueling Ballots

 

Stand Up for Students Initiative

Maine Republicans’ Citizen Initiative

Revenue

+$110 million in new revenue

-$550 million in lost revenue

Top 1 Percent ($391,000 or more)

Taxes increase by about $15,000

Taxes cut by an average of more than $21,000

Bottom 20 Percent (less than $23,000)

No tax increase

Income taxes cut on average by $14 (but likely swallowed up by sales and property tax increases, and the majority of the state’s poorest residents would see no change in income taxes)

Impact on Services

All new revenue goes to K-12 instruction

Public services will see big cuts or new sales/property taxes to pay for them


Maine Republicans Double Down on Tax Cut Fervor


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lepage-1.jpgThere have been lots of fireworks since the beginning of the year in Maine over tax policy, and they are unlikely to stop anytime soon. This week, the Maine Republican Party announced its intention to seek a ballot measure that would implement a flat 4 percent income tax, replacing the current graduated income tax structure. Their goal is to eventually eliminate the state income tax entirely.

If voters were to approve this ballot measure, the result would be a massive tax cut for the wealthiest Mainers and a steep reduction in the quality of critical public services that would undermine the state’s economy. The Institute on Taxation and Economic Policy (ITEP), estimates that shifting to a 4 percent flat income tax by 2021 would cost $600 million in state revenues – about half of all the state money spent on K-12 education according to the Maine Center of Economic Policy. ITEP also found that half of the tax cut would go to Mainers making more than $175,000 annually, with the top 1 percent of taxpayers receiving an average cut of over $21,000.

Meanwhile, the 20 percent of Maine taxpayers that make do with just an average of $23,000 a year would get a tax cut of only $14 (the vast majority of low-income Mainers would see no cut at all). The ballot measure doesn’t specify which budget cuts or tax increases will happen to make up the lost revenue, but one can be sure that any of the paltry tax cuts given to middle and working-class Maine families will be outweighed by higher sales and property taxes or cuts in public services. ITEP crunched the numbers- if all of the lost revenue was replaced with a higher sales tax, the average taxpayers the in bottom 80 percent would see a significant tax hike while the majority of the state’s wealthy taxpayers would still make out with sizeable tax cuts.

The most egregious part of the Maine Republicans’ push to lower income taxes that benefit the wealthy is that the plan would undo most of the good that came about from tax reform enacted in Maine this year. In a bipartisan compromise, Republican and Democratic legislators rebuked the governor’s initial proposed giveaway to the wealthy and instead cut income tax rates across the board while broadening the tax base. They also implemented or enhanced refundable tax credits for working families, doubled the homestead property tax exemption, cut estate taxes and increased the sales tax. The package had its flaws- mostly in that it is a small tax cut on net and shifted some responsibility for paying for state services away from the personal income tax and onto regressive sales taxes. However, it also made great strides in improving tax fairness and sustainability in the state. Now Republicans want to undo the hard work of the previous legislative session and put Maine on a worse path.

One can confirm that this recent push for a flat income tax is all about politics and not about the welfare of the state by looking at the other proposals included in this ballot initiative, which include draconian reforms to social services meant to punish the low-income residents who rely on them. Undocumented immigrants, felons convicted of drug crimes and the unemployed would be kept from getting any TANF or SNAP benefits, the amount of time citizens could collect benefits would be reduced, and all adult TANF beneficiaries would be subject to drug testing, a policy that has failed in many states. As Jesse Graham of the Maine People’s Alliance laments, Maine Republicans want "tax cuts that primarily benefit the wealthy and new attacks on poor people and immigrants." Apparently what they don’t want is responsible tax policies that would work for everyone, not just the privileged few. 


State Rundown 7/22: The Dog Days of Summer


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

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

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

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

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

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

 

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

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

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

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

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

 

Wins for Working Families

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

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

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

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

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

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

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

 

Significant Revenue Raising:

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

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

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

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

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

 


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.

 


Maine Tax Overhaul is a Boost for Low-Income Working Families


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Earlier this week, Maine lawmakers overrode Gov. Paul LePage’s veto of the state budget for fiscal year 2016, thus enacting a significant tax overhaul lawmakers had agreed to weeks earlier in a bipartisan fashion.  

The final tax reform package improves the state’s tax code and includes several major tax changes: 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.

With the exception of increased sales tax rates and a cut in the estate tax, the overhaul contains provisions that modestly improve the progressivity of Maine’s tax code  (see ITEP’s analysis below).

Coming to an agreement was not an easy feat. Gov. LePage’s initial tax proposal announced in January involved a costly, sweeping tax shift package, which would have resulted in a significant shift away from progressive personal income taxes 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 and would have left the state with $300 million less revenue when fully enacted.

Democratic legislative leaders in Maine responded in April with a plan entitled, “A Better Deal for Maine”, the tax benefits of which would have been targeted to low- and middle-income Mainers rather than the wealthy. Finally, Republican lawmakers released their own proposal in May that would have hiked taxes on the average taxpayer with income below $89,000 while delivering a tax cut to wealthier taxpayers.

After months of debate and competing tax reform and tax cutting proposals,  lawmakers enacted the final package with a great deal of compromise between both parties of the Maine State Legislature.

Major Elements of the Final Tax Package:

  • Restructures the state’s personal income tax brackets and rates: the starting point of the top income threshold increases and the top rate lowers from 7.95% to 7.15%
  •  A significant increase in the standard deduction, which replaces the state’s zero percent bracket; the standard deduction is also phased out for upper-income taxpayers
  • All itemized deductions  are subject to the state’s cap (around $28,000; charitable contributions and medical expenses had previously been exempt from the cap); itemized deductions fully phase out for upper-income taxpayers
  • Introduces a new refundable credit for low- and middle-income Mainers to offset sales tax rate increases
  • Makes Maine’s earned income tax credit refundable at its current level (5 percent of the federal)
  • Doubles the homestead exemption for all Maine resident homeowners;
  • Maintains the current temporary 5.5% sales tax rate and the 8% tax on meals (set to drop to 5% and 7% this month)  while increasing the lodging tax to 9%;
  • Cuts the estate tax by raising exemption level to match federal level
  • Reduces local revenue sharing

While the plan includes some very good income tax base broadening measures–most notably applying all itemized deductions to the state’s cap and fully phasing out itemized deductions for upper-income taxpayers– it is still a subtle tax shift in that most of the personal income tax cuts are paid for with higher sales tax rates. As a result, the state 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 improves the progressivity of the tax code.

This outcome is accomplished in two main ways. First, the plan converts the state’s 5 percent nonrefundable Earned Income Tax Credit (EITC) to a refundable credit. In other words, low-income working families have the ability to receive the entire value of the credits regardless of any personal income tax liabilities, resulting in an increase of after-tax earnings for many working poor families in Maine by about $7 million to $9 million per year.

Second, the plan enacts a new refundable sales tax fairness credit, which will lessen the impact of the included sales tax rate increases on low- and moderate-income Mainers.   The credit has a maximum value of $250 and begins to phase out at $20,000 for single filers and $40,000 for married filers. The refundability of this credit ensures that taxpayers will get the full value of the credit regardless of how much tax they owe.

With the inclusion of the refundable sales tax credit as well as the refundable EITC, Maine’s new budget will direct approximately $40 million more to low- and moderate income families in the state. This is indeed a win for working families; however, threats from Gov. LePage to dismantle the income tax have not waned. In his veto letter LePage proclaimed, “Mainers deserve to have the debate over whether the income tax should be phased out. The future of our state depends on our ability to be competitive with the nation and the word. We must work aggressively each year to cut back the income tax until it's gone.”

The decrease or disappearance of income taxes would undoubtedly result in tax increases and spending cuts elsewhere. Based on LePage’s previous proposals, such changes would adversely affect low and middle-income groups. If the recent bipartisanship displayed among Maine’s legislatures is any indication of future policymaking, they will continue to remain strong in rejecting damaging proposals, while lifting up proposals benefitting Maine families.  


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 5/18: Late-Breaking Developments


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State leaders in North Carolina are crowing about an unexpected budget surplus of $400 million, but the surge in new money will likely be a one-time occurrence. Meanwhile, the state’s corporate income tax rate will continue to fall in accordance with revenue triggers included in the tax cuts passed in 2013. This fiscal year, the corporate rate will drop from 5 to 4 percent, at a cost of about $109 million. As ITEP’s Meg Wiehe noted in a recent editorial, “the truth is that, as a share of income, no matter how you slice the data, the wealthiest households got the biggest tax cut and the vast majority of the net tax cut goes to those families.”

The U.S. Supreme Court ruled Monday that one feature of Maryland’s local income tax law is unconstitutional. The case centered on the state’s collection of a “piggy-back” income tax of up to 3.2 percent on behalf of Maryland counties and Baltimore City in addition to the 5.75 percent personal income tax at the state level. Maryland offers a credit on the state personal income tax for income taxes paid to other states, but the credit does not apply to the piggy-back tax. One Maryland couple sued, saying that applying the piggy-back tax without applying a credit for income taxes paid in other states amounted to double taxation. The US Supreme Court agreed, saying the practice was a violation of the Commerce Clause as it could discourage business across state lines. The ruling will likely cost Maryland counties and localities millions in revenue.

Vermont’s legislative session ended last week with a deal to cover a $113 million shortfall that included $30 million in new revenue. Under the plan, the state sales tax of 6 percent will now apply to soft drinks and the 9 percent meals tax will apply to vending machines. The deal also caps the  most itemized deductions Vermonters can claim against their personal income tax to 2.5 times the standard deduction.

Conservative legislators in Maine shared the details of their tax plan last week. The proposal would cut the top income tax rate from 7.95 to 6.5 percent over two years and would leave the sales tax unchanged. The plan differs greatly from Gov. Paul LePage’s proposal, which would implement much bigger income tax cuts and increase the sales tax. The plan also increases state revenue sharing with localities, rather than eliminating it as the governor’s plan would. Critics of this newest plan, citing ITEP data, note that Mainers who make less than $57,000 would see their taxes increase on average, and that the income tax cuts would overwhelmingly benefit the wealthy and corporations. 

 


State Rundown 5/8: Legislators Make Deficit Sausage


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Conservative leaders in the South Carolina Senate proposed a road funding bill Thursday that reforms the Department of Transportation (DOT), increases the gas tax and reduces income taxes – all measures that Gov. Nikki Haley insisted must be in any funding package she signs. The measure increases the gas tax by 12 cents a gallon over three years, ties the gas tax to inflation and prohibits it from rising higher than gas taxes in Georgia or North Carolina. The bill raises $400 million for roads in the short term and $800 million after five years. The bill also gives the governor near-complete control over the DOT through the power to appoint the Department’s board of directors. Income taxes would be cut across the board by one percent over five years, but would be delayed if economic growth is lower than expected. The plan is in direct contrast to the proposal passed by the Senate Finance Committee last week, which would increase gas taxes and other fees without reforming the DOT or cutting income taxes.

A new study from the Urban-Brookings Tax Policy Center blasts another hole in the myth that state tax cuts are a recipe for economic success.  After closely examining a 2008 study that claimed tax cuts could benefit state economies, the authors attempted to replicate the results and found they were “not robust” in more recent years.  Instead, the study concludes that low state income tax rates, or low taxes in general, are unrelated to economic growth across states.

Bad news in the Badger state: new revenue estimates in Wisconsin have confirmed the dismal outlook for the state’s budget, making the adoption of Gov. Scott Walker’s austerity cuts to higher education more likely. Legislators were hoping the new estimates would point to increased tax revenue, but the numbers show that Walker’s tax cuts have evaporated the state’s surplus. The Wisconsin Budget Project has pointed out that legislators have other options, among them accepting federal Medicaid dollars, halting the expansion of ineffective tax cuts, and capping a tax break for manufacturers.

Gov. Paul LePage and Maine lawmakers in favor of eliminating the state’s income tax have shifted tactics away from using negotiations over the budget to push their agenda and toward a constitutional amendment. The proposal currently before legislators would eliminate the state income tax by 2020 and requires a two-thirds majority vote in the House and Senate, as well as ratification by Maine voters. It faces a long road in the legislature. Meanwhile, the Maine Center on Economic Policy argues that eliminating the income tax would be a boon for the wealthy and would fail to promote economic growth.

Alabama legislators moved in the direction of common sense this week. First, lawmakers decided to abandon a proposal to replace the state’s currently regressive income tax structure with an even worse flat tax. At the same time, conservative legislators announced their willingness to increase taxes on cigarettes and large businesses and fees for car titling and renting in order to address a budget deficit. While the proposed fees and taxes are mostly regressive, they are a step toward a better budget. An even bigger step would be if legislators considered the plan put forward by Gov. Robert Bentley, which would increase revenues by a far larger magnitude. 

 


State Rundown 4/23: Tax Cuts in the Face of Budget Disaster


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Alabama senators have proposed a constitutional amendment that would establish a flat personal income tax and lower the corporate tax rate, despite facing a devastating budget shortfall. The proposal would lower the top income tax rate from 5 percent to 2.75 percent and reduce the corporate tax rate from 6.5 to 4.59 percent while eliminating all deductions, exemptions and credits. The bill’s sponsors claim that the measure would make the state more competitive and attract new businesses. Opponents argue that Alabama’s antiquated tax system (unchanged in 82 years) is already a flat tax in practice, since the top tax rate takes effect at $3,000 for single filers. The Montgomery Advertiser notes that “a household of four begins paying state taxes at $12,600 – well below the poverty threshold of $24,250 for that family, meaning the state taxes households operating below the poverty level.”  An ITEP analysis of this plan found that the lowest-income Alabamans would see a tax hike under this change while most other taxpayers would see a small reduction.

A new poll finds that the majority of Oklahoma voters don’t want planned tax cuts to take effect because of the state’s budget deficit. The poll, commissioned by the Oklahoma Policy Institute, found 64 percent of registered voters in Oklahoma opposed moving ahead with a scheduled cut to the top personal income tax rate, while 74 percent of voters felt the state spent too little on education. Legislators in the state have vowed to let the cuts take effect next year despite a $611 million revenue gap.

Colorado Gov. John Hickenlooper wants to implement a plan that in future years would reduce the likelihood that the state would issue taxpayers a refund as mandated under the Taxpayer Bill of Rights (TABOR) amendment to the state’s constitution. Hickenlooper would reduce the share of state revenues subject to the TABOR limit by moving hospital provider fees out of the general fund and into an “enterprise account.” He would also target some TABOR refunds to low-income households via a state Earned Income Tax Credit (EITC). While conservative lawmakers have decried the move, the governor has gained the support of an important hospital lobbying group, which said the plan would "ensure that Colorado has the flexibility to support its top budget priorities, including funding for transportation and K-12 education."

Maine Gov. Paul LePage threw down the gauntlet to state legislators on Tuesday, filing a bill that would eliminate the state’s income tax by 2020 and giving leaders in the House and Senate a short deadline to announce their support. In the past, Gov. LePage has pledged to campaign against those who oppose his plans to get rid of Maine’s income tax and replace it with higher consumption and property taxes. So far, no legislative leaders have announced support for his plan. 


Dueling Tax Reform Proposals Take Shape in Maine


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MaineStateHouse.JPGDespite its setting among rugged coastlines and quaint lighthouses, there will be nothing picturesque about the coming tax battle between Gov. Paul LePage and legislative leaders in Maine. The current debate is the latest in a string of Maine tax reform efforts; in 2013 the “Gang of 11” proposed an ambitious bipartisan plan that was dashed like a fishing boat along a rocky shore, and in 2009 lawmakers passed a tax package that was soundly rejected by voters at the polls.

LePage unveiled his budget proposal back in January, and it included a package of changes that would fundamentally change the way Maine taxes its residents. The governor wants to cut income taxes through across-the-board rate reductions. The threshold for the zero income tax bracket would increase from $5,200 to $9,700. Any income between $9,700 and $50,000 would be taxed at a reduced rate of 5.75 percent, and income between $50,000 and $175,000 would be taxed at 6.5 percent. Income beyond $175,000 would be taxed at just 5.75 percent – an outrageous concession to the already well-off.. His plan also increases the exclusion for pension income from $10,000 to $30,000, introduces a refundable sales tax credit (though the state’s nonrefundable Earned Income Tax Credit is axed under the plan), and boosts the state’s targeted property tax fairness credit.

LePage has gone on record as wanting to eliminate Maine’s income tax – most recently at a Tax Day press conference – calling it “an obsolete form of taxation.” If the state income tax were eliminated, half of Maine’s annual $3 billion in revenue would go with it.

LePage wants other provisions that would inordinately benefit wealthy Mainers as well. His plan would eliminate Maine’s estate tax at a cost of $85 million over four years, and the top corporate income tax rate would fall from 8.93 percent to 6.75 percent.

To pay for his proposed cuts, Gov. LePage wants to increase the sales tax rate to 6.5 percent and expand the sales tax base to include personal and professional services. He makes further changes to the personal income tax as well, including eliminating itemized deductions. He would also end the state’s practice of sharing revenue with municipalities, while allowing cities and towns to implement a new tax on large nonprofit organizations in their jurisdictions. Lawmakers and local officials fear this will upend municipal budgets and force property tax increases at the local level.

The governor’s plan would shift revenues from progressive income taxes to regressive sales and property taxes, and the state will net a revenue loss of $300 million if all changes take effect. The shift would also make state finances more volatile over the long run; as this ITEP brief explains, the income tax displays more robust growth over time than do sales and property taxes.

Last week, legislative leaders in the Maine House and Senate unveiled an alternative to Gov. LePage’s plan entitled “A Better Deal for Maine.” The alternative proposal would also cut income taxes and increase sales taxes, but the benefits would be targeted to middle-income Mainers rather than the wealthy. The average taxpayer with income under $167,000 would get an income tax cut, but the top personal income tax rate would remain untouched and many of the state’s richest residents would see a modest tax increase under the plan. Rather than increasing the 0 percent bracket, the alternative plan boosts the state’s standard deduction and phases out the benefit for upper-income taxpayers. 

The sales tax rate would remain at 5.5 percent, but the base would be expanded to include services, as it would under LePage’s plan. Like the governor’s plan, the alternative introduces a new refundable sales tax credit and increases the property tax fairness credit, but it retains the current pension exclusion amount.

The Better Deal alternative proposed by legislators does not eliminate revenue sharing with municipalities, as the governor would. Under the alternative plan, the Homestead Exemption property tax benefit would be doubled to $20,000 for all homeowners; under the plan proposed by LePage, the homestead exemption was doubled only for homeowners over 65 years of age. Unlike the governor’s plan, the alternative plan is revenue neutral.

An ITEP distributional analysis found that the “Better Deal for Maine” plan would provide bigger tax cuts for more Mainers while protecting investments in critical services like education. Under Gov. LePage’s plan, the average taxpayer in the top 5 percent of Mainers would see significant cuts, while the alternative plan would see taxes increase modestly for most in the same group. Overall, the alternative plan would make Maine’s tax system more fair.

The “Better Deal for Maine” plan has already won an opening salvo, garnering the support of many of the state’s major newspapers. The Bangor Daily News praised the alternative for its focus on reducing property taxes, which fall more heavily on the bottom of the income scale, than income taxes that are felt more heavily at the top. The Morning Sentinel and Kennebec Journal said in a joint editorial that the alternative plan would “boost demand and lead to economic growth” because it targets middle-class consumers rather than wealthy businesses.

 

goldengirls1.jpgWhether you indentified with Dorothy, Blanche, Rose or Sophia, The Golden Girls was a shining moment in television history. The show was groundbreaking in its portrayal of senior citizens as fully complex individuals, and has inspired a devoted following decades after the end of its run.

Life imitates art, and senior citizens are a favorite target of legislator largesse. Almost every state that levies an income tax now allows some form of income tax exemption or credit for citizens over 65 that is unavailable to non-elderly taxpayers. But many states have enacted poorly-targeted, unnecessarily expensive elderly tax breaks that make state tax systems less sustainable and less fair.

Poorly targeted tax breaks for the elderly are a costly commitment for many states—and long-term demographic changes threaten to make these tax breaks unaffordable since older adults are the fastest growing age demographic in the country. Moreover, while poverty has often been associated with advanced age, a 2014 US Census report found that Americans over 65 are less likely to be poor than people in their prime working years, further exacerbating the mismatch between the tax breaks offered and needs within the population.

Despite these concerns, lawmakers in many states have proposed further tax breaks for the elderly (click here to read an ITEP brief on this topic). Here are five states where senior tax proposals are on the table:

Iowa: State Sen. Roby Smith recently filed legislation (SF 277) that would remove pensions, annuities, and retirement income from the personal income tax base. So far, the legislation has 23 cosponsors and a similar bill is being sponsored in the House. Note that Iowa already allows a $6,000 exclusion ($12,000 for married couples) for retirement income.  

Maine: There is a lot of coverage of Gov. Paul LePage’s sweeping tax shift package that would hike sales taxes to help pay for significant personal and corporate income tax cuts and the elimination of the estate tax.  One part of the plan that has received less attention is an increase in the state’s current pension exclusion from $10,000 to $35,000 per each taxpayer over 65.  An ITEP analysis of this increased pension tax break found that more than 60 percent of the benefit would flow to the wealthiest 20 percent of Maine residents.

Maryland: Gov. Larry Hogan would like to eventually exempt all pension income from state income taxes, but due to a tight budget situation he is starting with a more limited proposal targeted toward politically popular beneficiaries: military veterans, police, and firefighters.  It’s important to note that Maryland already has a generous exemption on the books for pensions. Under current Maryland law, the first $29,000 in pension income collected by disabled taxpayers and those over age 65 is exempt from tax, and for military veterans that amount is even higher, at $34,000.  Of course, these breaks come on top of the normal personal exemption ($3,200) and standard deduction ($2,000) that all Marylanders can claim. As a result, Hogan’s plan would mostly benefit taxpayers with above-average pensions (the average military pension is $28,000 according to official statistics) and people with the financial means to retire early.  Fortunately, State Senate President Mike Miller thinks that the plan is unlikely to gain passage.

Minnesota: Lawmakers are debating a variety of bills aimed at eliminating or reducing taxes on Social Security benefits. As this article notes, the cost of cutting the tax on Social Security benefits will grow over time because the number of Social Security beneficiaries is growing.

Rhode Island: Lawmakers want to reduce taxes for Ocean State retirees this session, but the proposals that have emerged from the state’s House chamber and the governor’s office differ greatly in their cost and scope.  A bill introduced in the House would 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, low-income seniors already owe no personal income taxes on those benefits and often have no other retirement income. The House plan could cost more than $60 million if enacted.  Gov. Raimondo’s budget includes a much smaller and more targeted retirement income tax break which would fully exempt taxpayers with incomes less than $60,000 from paying taxes on Social Security.  Not only would her plan cost significantly less (around $4 million), it would ensure that 100 percent of the benefits from the tax break flow to moderate-income older adults who depend primarily on Social Security for their income.

 

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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.

 


State Rundown 2/5: State of the States


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

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

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

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

 

Following Up:

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

     


    State Rundown 2/2: Groundhog Day on Tax Cuts


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    Maine Gov. Paul LePage plans to borrow from the Sam Brownback playbook, announcing his intention to eliminate his state’s income tax in three steps (we saw how that worked out for Kansas) at tomorrow’s state of the state address. The governor’s current budget proposal would reduce the current top income tax rate from 7.95 to 5.75 percent, and would also slash corporate tax rates and eliminate the state’s estate tax altogether. The governor proposes to pay for these tax cuts by broadening the sales tax base and increasing sales tax rates and reducing state aid for municipalities. Eliminating the state income tax would result in the loss of half of the state’s $3 billion in annual revenue, necessitating deep cuts or major tax shifts to more recessive revenue sources. 

    Ohio Gov. John Kasich’s budget proposal would lower income tax rates, eliminate the income tax for about one million business owners and increase the personal exemption allowed for Ohioans making under $80,000 a year. The plan would wipe out income taxes for 98 percent of business owners who report their profits as personal income, as businesses with annual gross receipts of less than $2 million would be eligible. Taken as a whole, the governor’s plan is a revenue loser despite several proposed regressive tax increases. The governor proposes increasing the state sales tax, increasing the state’s cigarette tax, increasing the tax on business activity, broadening the sales tax base and increasing the severance tax. Republicans and Democrats in the legislature are both likely to oppose the governor’s proposal as a tax shift, though for different reasons: Republicans want to reduce overall revenue, while Democrats oppose the governor’s plan on fairness grounds.

    The budget proposed by the Texas Senate includes over $4 billion in tax cuts, with $3 billion going to school property tax relief and the other $1 billion going to tax breaks for businesses via a cut in the franchise tax. Lt. Gov. Dan Patrick, who presides over the Senate and is the rare example of a powerful lieutenant governor, used the Senate’s proposal to make good on his campaign pledges to cut taxes. Opponents of the Senate plan point out that, with oil prices declining, the state’s current surplus should be invested in needed services or saved for rainier days. "Just because this session they have a $7.5 billion cash balance and a projected increase in revenue doesn't mean that two years from now they won't be scraping for money just to keep up the current level of services," argued Dick Lavine of the Center for Public Policy Priorities. State lawmakers have still not fully restored $5.4 billion in education spending cuts enacted in 2011, and more than 600 school districts have sued the state over inadequate funding.

     

    States Starting Session This Week:
    Nevada
    Oklahoma
    Oregon

    State of the State Addresses This Week:
    Oklahoma Gov. Mary Fallin (read here)
    Maine Gov. Paul LePage (Tuesday)
    Wisconsin Gov. Scott Walker (Tuesday)
    Illinois Gov. Bruce Rauner (Wednesday)

    Governor’s Budgets Released This Week:
    Ohio Gov. John Kasich (Monday)
    Oklahoma Gov. Mary Fallin (Monday)

     

     


    State Rundown 1/29: You Put a Tax Cut In, You Take a Tax Cut Out


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    In the latest twist out of Arkansas, a House committee stripped Gov. Asa Hutchinson’s proposed middle-class tax cut of a capital gains tax measure added just last week in the Senate. The governor’s proposal as passed by the Senate would have reduced the exemption on capital gains from the 50 percent exclusion passed in 2013 to the 30 percent exclusion in effect previously. The House bill would restore the 50 percent exclusion for one year, and then allow the exclusion to fall to 40 percent after that. The House version of the governor’s bill will cost $9 million more each year than the Senate bill. The move is likely to further alienate progressive groups in Arkansas, who previously offered tepid support for the governor’s plan while criticizing its omission of the working poor. Progressives were further angered by the governor’s budget proposal, which did not include promised increases in funding for pre-kindergarten. Arkansas Advocates for Children and Families notes that “Even before the 2013 capital gains tax cut, Arkansas already had one of the most generous capital gains structures in the nation.”

    While many politicians and businesspeople decry inverted companies as unpatriotic for avoiding their US tax liability while taking advantage of all our country has to offer, a legislator in Virginia has other ideas. Sen. Ryan McDougle recently introduced a bill that would create a $5 million corporate income tax exemption for companies that have used an inversion to lower their US tax liability. Qualifying companies would need to make a $5 million capital investment in Virginia to open a facility or other business operation, and would be eligible for the exemption each year for five years. It’s just the latest move in the depressing race to the bottom on corporate taxes.

    A Maryland state senator has offered a bill that would repeal a stormwater fee he once supported. Sen. James Brochin wants to get rid of the so-called “rain tax,” a hot issue in the last gubernatorial campaign, because he claims local jurisdictions have applied the fee unevenly and put businesses at a competitive disadvantage (this aspect of the law was a part of the bill at the time the senator voted for it). Brochin also regrets supporting a bill that indexed the state’s gas tax to the Consumer Price Index (CPI), saying, “If you took the CPI idea and you had passed it in 1993, 21 years later the gas tax would be $1.86 [per gallon]." His math is a little fuzzy. Indexing MD’s gas tax to inflation (CPI) since 1993 would mean the base rate would go from 23.5 cents to 38.5 cents.  On top of that, there’s a 5 percent sales tax on gas phasing-in that would add about 12 cents a gallon to the gas tax at today’s prices, for a total gas tax of 50.5 cents, not $1.86.  For the tax rate to hit $1.86, gas prices would have to be $29.50 per gallon – which won’t happen anytime soon.

    Maine Gov. Paul LePage is expected to push his tax cut package in next week’s state of the state address. Under the governor’s proposed budget, individual and corporate income tax rates would be cut, the estate tax would be eliminated, and the sales tax would be broadened and increased. 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. In other words, the state would shift the way it funds public investments from relying on a progressive personal income tax to a broad- based sales tax which falls disproportionately on low- and middle-income families.

    A bill to enact a property tax circuit breaker credit in Nebraska received a hearing in the state legislature today. The proposal, offered by Sen. Kate Bolz, would offer property tax rebates up to $1,200 to couples who make under $116,000 a year or individuals making under $58,000.  It is designed to target relief to residents whose property taxes or rents are high relative to their incomes. ITEP analyzed the bill and found that two-thirds of the benefits of the property tax circuit breaker credit would go to the bottom 40 percent of Nebraskan taxpayers.

    Following Up:

    • North Carolina: NC Policy Watch drew attention to a new Berkeley study that shows the federal capital gains tax cuts under President George W. Bush failed to stimulate the economy. State leaders are pushing to eliminate North Carolina’s capital gains tax to increase investment.
    • Minnesota: A Senate committee voted to consider proposals to phase out the state’s tax on Social Security benefits as part of a larger tax package yesterday. Seniors and the Minnesota AARP voiced support for the measures, while some legislators balked at the price tag.
    • Mississippi: Gov. Phil Bryant’s plan to cut taxes drew more opposition, most recently in a Clarion-Ledger op-ed: “Bryant exuded optimism that the state's economy was in the best financial condition ever. He didn't dare mention that the primary source of income for Mississippians is transfer funds–namely federal funds.”

    Things We Missed:

     

     


    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)


    States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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

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

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

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

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

    Read the full report


    State News Quick Hits: Maine Cracks Down on Tax Havens and More


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    Maine legislators are poised to crack down on corporations that use foreign tax havens to hide income from state tax authorities. The legislation, which has now been passed by both the House and Senate but still faces further votes, requires multinationals doing business in Maine to declare income otherwise attributed to more than thirty countries known to be popular tax havens (like the Cayman Islands and Bermuda, not to mention the Bailiwick of Guernsey, which turns out to be an island off the coast of France). Analysts estimate that such a change would increase state revenue by $10 million over the next two years. And U.S. PIRG, among other public interest organizations, has been beating the drum for this sensible reform, which we discussed in our recent report: 90 Reasons We Need State Corporate Tax Reform. Oregon and Montana already have similar laws on their books.

    Thanks to a refundable tax credit included in New York’s budget this year, theater companies who launch their productions in upstate New York will enjoy having taxpayers foot the bill for 25 percent of the cost of “their so-called tech periods, the weeks long process in which a production gathers the costumes, tests the sets and choreography and establishes the lighting and musical cues.” Despite the credit’s extreme generosity, we’re still not sure it would have been enough to save Spider-Man.

    Tax swap proposals that would trade income rate reductions for sales tax increases have been all the rage in conservative states in recent years. But what if your state doesn’t even have an income tax to begin with? Not wanting to be left out of the tax swap craze, Republican candidate for Texas Comptroller Glenn Hegar has a solution: completely replace property taxes with an increased sales tax. Texas already has a horribly regressive state tax system (PDF), but eliminating the property tax -- which is at least close to proportional in its distribution across income groups -- would only make matters worse. And while it is “easy to hate” the property tax, without it Texas would need to drastically cut services or more than double the sales tax. Such a trade could also mean less autonomy for localities (PDF) and a revamped school financing system.

    Grover Norquist and the Koch brothers’ Americans for Prosperity are continuing to push for eliminating income taxes on investors in Tennessee, and there’s a chance they may succeed.  The state’s tax-writing committees will be voting this week on whether or not to gradually repeal Tennessee’s “Hall Tax” on dividends, interest, and some capital gains.  But repeal would be steeply regressive, as our partners at the Institute on Taxation and Economic Policy (ITEP) showed in a report cited by The Tennessean.  And on top of that, a spokesman for Governor Bill Haslam explains that “we’re in the middle of dealing with difficult budget realities … and this legislation would automatically put the issue above other priorities when revenues come back.”


    State News Quick Hits: Maine's Millionaires Abandon the 47%, and More


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    Colorado’s Child Care Tax Credit would be expanded for low-income families under a bill approved by a special task force of legislators last week.  As the Colorado Center on Law and Policy explains (PDF), some Colorado households are actually too poor to benefit from the federal credit right now because it's only available to families who make enough to have some income tax liability; if you don't pay income taxes, you can't receive any state tax credit.  This bill would fix that problem at the state level by letting families earning under $25,000 claim a credit equal to 25 percent of their child care expenses, regardless of what credit they did (or did not) receive at the federal level.

    Montgomery County, Maryland continues to make progress toward restoring its Earned Income Tax Credit (EITC) to its pre-recession level: 100 percent of the state’s EITC.  The enhancement was approved by a committee on Monday and will now go before the full council.  For more information, see our blog post on the history, and the benefits, of Montgomery County’s EITC.

    Maine Governor Paul LePage is coming under fire for wildly inaccurate comments he made (which were secretly recorded) at a meeting of the Greater Portland chapter of the Informed Women’s Network.  Gaining him national attention, LePage told his audience  that “47 percent of able-bodied people in Maine don’t work,” a claim that is ridiculous.  At the same meeting LePage also said the following to justify his proposals to cut taxes for wealthy Mainers: “25 years ago Maine had about 2,000 millionaires. Maine has 400 now. New Hampshire at the time had about 500, right now they have 4,000. That’s the difference. That’s when you talk about prosperity and you talk about building an economy those are the things that you need to concern yourself with. So, I am looking at taxation as a big issue.”  Like his 47 percent claim, LePage evidently pulled these numbers out of thin air as data from the IRS do not back this statement. In fact, the number of tax returns with more than $1 million of income increased more in Maine (83%) than in New Hampshire (64%) between 1997 and 2011 (the years IRS data are available).

    Some bad ideas just won’t die. Despite being rejected by the Pennsylvania House of Representatives by a vote of 138-59 last month, a proposal to eliminate school property taxes and reduce spending for schools is now being reconsidered by the state’s Senate. The bill, SB 76, replaces the property tax with higher sales and income taxes but then limits how much of the new revenue would flow to schools. The legislature’s own Independent Fiscal Office warned last week that the bill would create a $2.6 billion funding gap within five years. While reducing property taxes, which have been rising in recent years, may make sense (for low-income renters and fixed-income homeowners in particular), it should not be done at the expense of students, nor in the form of across-the-board cuts that also benefit big businesses. The House-passed HB 1189 at least ensured that the lost property tax revenues would be replaced with some other source, but neither bill addresses the longstanding problem of inadequate and unequal school funding in Pennsylvania.

     

    Here’s some happy news: a recent poll finds that just 27 percent of Louisianans support Governor Bobby Jindal’s tax swap, and that’s before the Institute on Taxation and Economic Policy (ITEP) released its latest analysis showing that the poorest 60 percent of taxpayers in Louisiana would see a tax hike as a result of the Governor’s plan.

    A robotics company based in Nevada recently decided to abandon the state’s allegedly “business friendly” environment in favor of Silicon Valley in California, where there are better trained employees and plenty of deep pocketed investors. Nevada does not levy a personal or corporate income tax, but as Romotive founder Keller Rinaudo explains: "It was not a short-term economic decision ... We have to find experienced roboticists, and that really only exists in a few places in the world, and California is one of them."

    Maryland’s gas tax will be increased and reformed starting July 1 under a bill just sent to Governor Martin O’Malley by the state’s legislature.  This year’s increase will be something less than 4 cents per gallon, but the tax will now rise each year alongside inflation and gas prices, as recommended by ITEP. ITEP showed that even with the increase, Maryland’s gas tax rate will still remain below its historical average and be less than the state probably needs.

    Here’s an interesting story in the Minnesota Star Tribune about how Governor Dayton’s tax plan would impact the wealthiest Minnesotans. While opponents resort to the usual tax-hikes-kill-jobs refrain, Wayne Cox of Minnesotans for Tax Justice notes, “Economists believe keeping teachers and firefighters on the payroll is at least three times more helpful to the economy than keeping income tax rates at the top the same.”

    Tax cuts for opposite ends of the income spectrum are getting opposite treatment in Maine and Arkansas. This week, Maine lawmakers rejected a bill that would cut taxes on capital gains (which heavily benefits wealthy taxpayers) and approved an increase in the state’s Earned Income Tax Credit (EITC) (PDF), which amounts to a tax cut to low- and moderate-income families. But last week in Arkansas, a House panel approved a cut in taxes on capital gains while passing up an opportunity to enact a state EITC.

    A Missouri child advocacy group is planning on lobbying for an extension of the “Children in Crisis” tax credit during the upcoming legislative session.  But Missouri doesn’t need more tax breaks, even if they are designed with noble causes in mind. Instead, lawmakers should be looking at ways to sustainably raise enough revenue to adequately support children’s programs so they don’t have to resort to special tax breaks.

    Some Wisconsin lawmakers continue to insist that Wisconsin’s progressive income taxes are too complex and unfair and that the best remedy is a flatter tax structure with a single rate. But this post from the Wisconsin Budget Project reminds us that moving to a flatter income tax structure “would benefit the biggest earners and could raise taxes for people in the working class.”  Flatter does not mean fairer.


    In their brief arguing for increasing the state’s earned income tax credit, the Louisiana Budget Project (LBP) cites Institute on Taxation and Economic Policy (ITEP) data showing how the state’s tax structure asks low income families to pay more taxes as a share of their income than wealthier Louisianans. LBP advocates doubling the state’s current 3.5 percent tax credit saying, “the benefits for Louisiana families and children are proven.”

    We’ve made the case for why tax breaks for big oil and gas companies should be repealed at the federal level, and now the Oklahoma Policy Institute has weighed in with their take on why state tax breaks for oil and gas should be jettisoned as well. According to the Institute, “Oklahoma’s oil and gas companies have ranked tax incentives as the least important factor affecting drilling decisions,” and offering these breaks is therefore unnecessarily “squeezing out resources for schools, roads, public safety, and other keys to long-term economic growth.”


    Maine Governor Proposes Regressive Tax Break for Seniors


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    Hot off of signing an expensive and unfair $400 million tax cut for Mainers in June, Maine Governor Paul LePage is now promoting a new regressive tax break targeted to older adults. 

    He would like for state lawmakers to fully exempt all pension income from the state income tax, a move he thinks will help fixed-income older adults and bring wealthy retirees to the state. While most states with broad-based personal income taxes, including Maine, allow some sort of pension income exclusion, only Illinois, Mississippi and Pennsylvania fully exempt it from taxation. 

    Maine currently allows retirees to deduct a maximum of $6,000 per spouse of their pension income less Social Security benefits received.  In other words, older Mainers with annual Social Security income over $6,000 ($12,000 if married) do not currently benefit from the pension deduction.

    LePage’s proposal is a poorly-targeted and unnecessarily expensive tax break that will make Maine’s tax system less sustainable and less fair.

    As a newly released ITEP brief points out, state income tax breaks for older adults, especially those that exempt all pension income, typically reserve the lion’s share of their benefits for better-off elderly taxpayers. Such poorly targeted tax breaks shift the cost of funding public services towards non-elderly taxpayers, many of whom are less well-off than the seniors benefiting from the tax breaks.

    Also, long-term demographic changes threaten to make such a pension income tax break unaffordable in the long run. Older adults are the fastest growing age demographic in the country.  According to the US Census, between 2000 and 2010, the US population of adults 55 and older grew by more than 30 percent while the population of those under 55 grew only by 4 percent.  This change was even starker in Maine where the 55 and older population grew by 32 percent while the population under 55 actually shrank by 4.5 percent.  Over time, this demographic shift will mean that a shrinking pool of workers will be forced to fund tax breaks for an expanding pool of retirees — heightening the need to target these tax breaks appropriately in order to minimize their cost. 

    Maine Revenue Services has estimated that this special tax break for older adults would cost the state $93 million.  Given that Maine is still climbing out of a budget hole ripped by the ongoing recession, services would have to be cut or other taxes would have to be increased to pay for LePage’s proposal.

    Maine lawmakers would be wise to reject LePage’s proposal and should either stick to their current pension income deduction or consider a break which is better targeted to the state’s neediest older adults.

    Photos via Maine Public Broadcasting Creative Commons Attribution License 2.0


    Maine's New Budget Gives to the Rich and Takes from the Poor, Literally


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    Maine Governor Paul LePage signed a $6.1 billion two-year budget into law this week. The budget includes reductions to the state’s personal income and estate taxes in addition to other tax changes that will cost the state $153 million in FY12-13 and $400 million in FY14-15. 

    The new tax changes are both expensive (and force spending cuts elsewhere) and incredibly unfair. A reduction in the top income tax rate and increase in the state estate tax exemption primarily benefit the state’s wealthiest residents.  According to an Institute on Taxation and Economic Policy analysis conducted for the Maine Center for Economic Policy (MECEP), more than half of the benefits of the new personal income tax reductions will go to the wealthiest 20 percent of Maine taxpayers. 

    Not only do the richest Mainers benefit most from this budget, 75,000 low, moderate and middle income families are likely see their taxes increase by as much as $400 annually because of cuts to the state’s property tax circuit breaker program that protects homeowners from paying too large a portion of their family income in local property taxes. (See our fact sheet on circuit breakers.) Whatever modest tax reductions these moderate and low income filers get from the new personal income tax cuts will be offset by the increase they’ll face in property taxes.

    The major tax changes enacted in Maine this session are:

    • A reduction of the top marginal personal income tax rate from 8.5 to 7.95 percent;
    • A restructuring of the personal income tax rates, collapsing from four to three brackets replacing current rates with  0, 6.5, and 7.95 percent;
    • Increasing the standard deduction and personal exemption to the federal amounts;
    • Eliminating the state’s alternative minimum tax, which is designed to ensure that upper-income taxpayers pay at least some income tax;
    • Raising the estate tax exemption threshold from $1 million to $2 million;
    • Limiting the value of the property tax circuit breaker to 80 percent of the total benefit;
    • Eliminating the annual indexing of the state’s motor fuels tax to inflation, a move that would make the gas tax less sustainable over time.

    Photo via Jimmy Wayne Creative Commons Attribution License 2.0


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


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

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

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

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

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

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

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

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


    Flood of Bad Tax Ideas Coming from the States


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    Ill-conceived tax ideas are coming out of statehouses and governors’ mansions at a faster rate than we’ve seen in quite a while.  Here’s a quick summary on recent proposals receiving serious consideration in Arizona, Florida, Idaho, Maine, Michigan, Minnesota, New Jersey, Ohio, and Wisconsin.

    Arizona: Business tax breaks and property tax breaks are being pushed by the Arizona Chamber of Commerce, and legislative leaders are taking them seriously.  The specifics have yet to be worked out, but expect at a minimum to see tax subsidies ostensibly aimed at boosting business hiring and investment.  As the Center on Budget and Policy Priorities (CBPP) has explained, however, states cannot stimulate their economies by cutting taxes.

    Florida: Newly elected Governor Rick Scott continues to insist that “the way to get the state back to work is to cut property taxes and phase-out the corporate income tax, and we’re going to get that done.”  The state’s enormous budget gap has caused Senate President Mike Haridopolos to approach the issue more cautiously, though he still claims that “if we see some opportunities for tax relief that we feel absolutely confident will create more jobs and actually grow the economy, we’re open to them.”  Haridopolos is also pushing a “Taxpayer Bill of Rights” (TABOR) proposal similar to the one that decimated Colorado’s education funding stream.

    Idaho: Legislators in Idaho — including the House majority leader — are preparing to revive an idea they first proposed toward the end of last year’s session: slashing the state’s corporate income tax rate from 7.6 percent to 4.9 percent.  Idaho legislators are also discussing cutting the state’s top personal income tax rate from 7.8 percent to 4.9 percent.  Each of these changes would drastically reduce the amount of revenue available to pay for vital state services, though by proposing that these changes be phased-in gradually over the course of the next decade, legislators are hoping to avoid having to spend too much time thinking about what state services will eventually have to be cut.

    Maine: State Tax Notes (subscription required) reports that the chairman of Maine’s Senate tax committee plans to make cutting the state’s personal income tax rate his top priority.  Unlike the tax reform package that Maine voters recently rejected, this cut would be paid for not by broadening the state’s tax base, but by cutting spending and hoping for strong revenue growth.  Maine’s legislators are also apparently contemplating a constitutional amendment that would require supermajority support in the legislature in order to raise taxes.  A supermajority requirement of this type would result not only in lower state services, but also in more tax loopholes.  This is because such a requirement would prevent a simple majority of legislators from eliminating a tax loophole unless they also enlarged another loophole or lowered tax rates in a way that resulted in no net revenue gain.

    Michigan: House and Senate leadership on both sides of the aisle in Michigan have inexplicably come to an agreement that the state’s EITC should be cut.  It’s unclear why tax increases on low-income families have suddenly become so popular in Michigan.  If Governor Rick Snyder gets his way, some of the revenue generated by taxing low-income families will likely to be used to pay for his proposed $1.5 billion cut in state business taxes.

    Minnesota: The Republican leaders of Minnesota’s state legislature made clear this week that business tax cuts will be one of their top priorities.  One Senate leader has proposed cutting the state’s corporate income tax rate in half by 2017 and freezing statewide taxes on business property.  Fortunately, Minnesota Governor Mark Dayton is likely to vigorously oppose these cuts.

    New Jersey: Democratic legislators are seriously considering a move to single sales factor apportionment for their corporate income tax.  The bill has already cleared the relevant committee, and will move to the full Senate soon.  See ITEP’s policy brief criticizing the single sales factor for state corporate income taxes.

    Ohio: Ohio’s House and Governor have declared repealing the state's estate tax to be a top priority.  Local governments receive a majority of the revenue generated by Ohio’s estate tax, and therefore oppose its repeal.  Ohio’s House leaders would also like to create a business tax credit for hiring new employees.

    Wisconsin: Governor Scott Walker has proposed a variety of business tax breaks and, as in Maine, the creation of a supermajority requirement to raise taxes.  More bad ideas are almost certain to come from Wisconsin in the weeks ahead, as Governor Walker made clear during last year’s campaign that he supports the outright repeal of Wisconsin’s corporate income tax.

    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.


    State Tax Code Spending Under Fire


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

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

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

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

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

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

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


    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.


    Bad Tax Ideas from Five Gubernatorial Races


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    In an attempt to win votes, lots of gubernatorial candidates have been promising lots of tax cuts — despite the fact that many of their states face very bleak budgetary outlooks.  Here are examples from five states:

    Rhode Island — John Robitaille won the Republican nomination for governor this past Tuesday on a platform that includes amending the state constitution to cap property tax increases at 2.5 percent per year.  Massachusetts's experience with a similar cap indicates that this proposal could have a very negative impact on local government services.

    Wisconsin — Scott Walker was the winner of Wisconsin's Republican primary on Tuesday.  Walker is also running on an anti-tax platform, including a property tax "freeze" that would only allow revenue growth to the extent that new construction occurs.  Democrat Tom Barrett is also running on a campaign that heavily emphasizes cutting government spending, and enacting so-called "targeted" business tax cuts to create jobs.

    Michigan — Republican gubernatorial candidate Rick Snyder's proposal to cut taxes on Michigan corporations by $1.5 billion received some attention in the media this week.  Specifically, Snyder would repeal the Michigan Business Tax and replace it with a much smaller corporate tax.  Recent polling indicates that Snyder holds a substantial lead over Democrat Virg Bernero.

    Florida — Some of the most absurd tax proposals we've seen in a gubernatorial race this year have come from Florida Republican Rick Scott.  In his very first year in office, Scott wants to slash both school property taxes and the corporate income tax — to the tune of $2.1 billion total in tax cuts.  Unspecified cuts in government spending would then be made to keep Florida's budget in balance.  After this, Scott claims he would focus his energy on eliminating Florida's corporate income tax entirely. Thankfully, Democrat Alex Sink is opposed to cutting the corporate income tax, though she has jumped on the job-creation tax credit bandwagon.

    Maine — Both Democrat Libby Mitchell and Republican Paul LePage are running on anti-tax platforms in Maine.  Neither is open to the idea of using tax increases to balance the state's budget.  Mitchell claims that "Maine's income tax is too high and I will continue the effort to lower it."  LePage has stated that "Reducing the overall tax burden for all Maine citizens and small businesses is my vision for tax reform."


    New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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

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

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

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

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

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

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

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

    Read the full report.


    Maine Voters Say: Please Hike My Taxes!


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    Earlier this week, Maine voters approved a ballot measure that repeals an ambitious tax reform enacted in 2009 by the state legislature. The legislature’s plan would have reduced the state’s reliance on income taxes and increased its reliance on sales taxes in a way that was carefully calibrated to leave total tax collections unchanged (while cutting taxes on Maine residents and hiking taxes on tourists).

    This tax reform plan had been placed on hold after a signature gathering campaign gave voters the opportunity to ratify or reject the legislature’s actions. Voters this week rejected the plan by a 61-39 margin—but don’t seem to have been aware that they were essentially voting to hike their own taxes by more than $50 million a year.

    If it seems odd that Maine lawmakers would pass a revenue-neutral tax reform at a time of such budgetary turmoil, this is because the legislation’s sponsors had longer-term reform goals in mind. As in many other states, both the sales tax and income tax were riddled with loopholes that forced tax rates higher than they would otherwise need to be.  

    The legislature’s reforms would have broadened the income tax base by repealing all itemized deductions, and broadened the sales tax base by eliminating exemptions for services from car repairs to laundromats to movie tickets. The tax increases from these base expansions were to be offset by reductions in the top income tax rate from 8.5 to 6.85 percent and the creation of a new refundable “household credit” designed to ensure that most Mainers would see net income tax cuts under the plan; state revenue officials estimated that 95 percent of Maine residents would have seen income tax cuts under this plan, and that 87 percent of residents would have seen net tax cuts even after the sales tax increases.

    The plan was also motivated by a perception that tourists and part-year residents weren’t paying their fair share of the cost of funding public services. The plan would have increased the sales tax rate on certain items consumed primarily by non-residents, such as lodging and rental cars. This is the main reason why this revenue-neutral plan would have cut taxes on Maine residents by $50 million while increasing taxes on non-residents by a similar amount.

    The good news for lawmakers is that because the plan was designed to be revenue-neutral, its rejection by voters won’t affect the state’s budget in the short run. But it’s likely that this failure will make budgeting more difficult for policymakers in the long run. Broadening tax bases by eliminating tax breaks makes a state’s revenue stream less volatile over time: a shortfall in consumer spending in one area can be offset by continued growth in another, and the result is a smoother, more predictable revenue stream.

    From that perspective, this bill was a recipe for a more sustainable tax system. Unfortunately, many Mainers simply thought this was a referendum on whether the sales tax should apply to their movie tickets.


    Voting on the "Maine Miracle" Tax Reform


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    On June 8th, residents of Maine are set to vote on whether or not to repeal the state’s first major tax reform in 40 years.
        
    The referendum appears as Question 1 on the June 8th primary ballot. Voters will be asked, “Do you want to reject the new law that lowers Maine’s income tax and replaces that revenue by making changes to the sales tax?”
        
    The bulk of the reform, passed by legislators last summer, involves broadening the sales tax base, while proportionally cutting income taxes to make the measure revenue neutral. In addition, the reform legislation includes several new tax credits and improves on current credits.
        
    The reform will replace the current marginal income tax rates (2%, 4.5%, 7%, and 8.5%) with a flat tax rate of 6.5% of Maine taxable income. In addition, a .35% income tax surcharge will be applied to Maine taxable income in excess of $250,000.
        
    To supplement an estimated $107 million in income tax cuts, the reform includes an expansion of the sales tax base to include more services, better reflecting the modern economy.  The broad categories that will be added to the base include: entertainment and recreation; installation, repair and maintenance; personal property services; transportation and courier services. The complete list of services is provided by the Maine Revenue Services.

    It also includes a targeted increase in the sales tax rate on things such as lodging (except campgrounds) and prepared food from 7% to 8.5%.
        
    The aim of the specific sales tax increases and base broadening is to shift some tax costs on to out-of-state tourists and visitors. The Maine Revenue Service estimates that about $25 million of the $53 million raised by the new sales taxes will be paid by visitors to the state.

    The tax reform legislation also replaces standard and itemized deductions with a new refundable household credit. The household credit has a base amount of $700 for single taxpayers, $1,050 for heads of household taxpayers, $1,200 for married taxpayers filing jointly, and $600 for married taxpayers filing separately. The legislation also makes the current earned income tax credit refundable

    Tax credits are distinct from deductions in that they reduce a person’s total tax liability rather than simply reducing their taxable income. What is meant by refundable tax credits is that the taxpayer will actually receive money back from the government if the credit exceeds their total income tax liability.

    Maine’s shift toward refundable tax credits shows a significant advance in efforts to combat poverty and improve the state's tax system for low income individuals.  Moreover, the legislation improves access to the state’s circuit breaker program for low-income homeowners and renters
        
    Other smaller income tax credits are a 5% charitable contributions credit in excess of $250,000 and a $60 credit for taxpayers aged 65 years or older.

    Taken together, the new tax rates and credits will result in lower income taxes for some 95.6% of Maine residents and a refund for some 263,000 Maine households that are too poor to owe income taxes.

    Looking forward, one further improvement on the tax reform legislation would be to restore the indexed income tax rates. Although the legislation includes broad tax cuts and smart refundable credits, more than 37% of the overall reduction in taxes benefits only the top 10% of income earners. If the income tax rate included some level of progressive indexing, the disproportionate tax cuts going to top earners could be spread more evenly to lower income earners.
        
    In a time when political polarization is the norm, the tax reform legislation in Maine is exceptional in that it embodies the consensus from a wide variety of ideological groups, from the progressive Maine Center for Economic Policy to the conservative Maine State Chamber of Commerce.
        
    If voters on Tuesday choose to keep the tax reform, it will be an important step forward for creating a better tax system for Maine.

     


    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.


    "TABOR" Update: Restrictions on Revenue-Raising on November Ballots


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    Next month, voters in two states will go to the ballot to decide whether to cap the growth in public budgets according to a formula based on the annual rate of population growth plus inflation. In Washington, the ballot initiative brought forward by anti-taxer Tim Eyman is called I-1033. Researchers at the Washington State Budget and Policy Center and the Colorado Fiscal Policy Institute refer to it as the "toxic twin" of Colorado's Taxpayer Bill of Rights (TABOR).  In Maine, the initiative, dubbed TABOR II, is more akin to an annoying younger brother (well, if that brother had the ability to wreak complete havoc with sound fiscal policy).  You can tell him to go away -- as Maine voters did in rejecting an earlier version of the initiative in 2006 -- but he unfortunately keeps coming back.
     
    Colorado's experience makes it clear that arbitrary funding formulas are an ineffective way to run government, leading to devastating impacts on vital public services. In fact, Colorado voters chose to suspend TABOR in 2005, due to the effects it was having on education, transportation, and human services. 

    The limits that I-1033 in Washington and TABOR II in Maine would impose are especially dangerous in light of the current recession.  Under these initiatives, funding caps would be the lesser of the previous year's cap or the previous year's actual funding levels.  As a result, during economic downturns, when revenues are especially low, the cap is permanently “ratcheted” down to lower levels.

    As to the consequences that these initiatives would have if enacted, Washington State  Senator Rodney Tom was recently quoted in the New York Times as saying, "If I-1033 passes, I think we just all go home and bury our heads in the sand." 

    As discouraging as that image may be, there are reasons to be hopeful.  The Maine Chamber of Commerce, which had initially backed TABOR II earlier this year (despite opposing its predecessor in 2006), recently withdrew its support, a clear sign that the measure goes too far even for business leaders.

    For more on the impact of I-1033, see the Washington Budget and Policy Center's report “I-1033 Undermines Public Priorities.”   For more on Maine’s TABOR II, check out these resources from the Maine Center for Economic Policy or read the Center on Budget and Policy Priorities recent analysis.

    Two states, Washington and Maine, will consider ballot proposals this fall that are similar in concept to the disastrous "Taxpayer Bill of Rights," or TABOR, that Colorado enacted in 1992 to limit tax increases and cap spending by the state government.

    This week, Washington State officials released their estimate of the fiscal impact from Initiative 1033, which will be on the November ballot. The Washington State Budget and Policy Center says I-1033 "would impose strict spending limits on state and local governments resulting in sharp reductions in public investments in education, community devel­opment, health care, and economic security. By restricting resources, I-1033 would dramatically weaken the state’s ability to fund important public priorities and would dimin­ish the quality of life for all Washingtonians."

    The state's Office of Financial Management agrees and says, "The initiative reduces state general fund revenues that support education; social, health and environmental services; and general government activities by an estimated $5.9 billion by 2015." (This doesn't include the estimated loss of nearly $700 million for counties and $2.1 billion for cities by 2015 that would result if I-1033 is approved.) Voters in Washington would be wise get all the facts before voting in favor of this heavy-handed and unnecessary proposal.

    A similarly draconian initiative will be put before the voters in Maine this fall.  Last week, Secretary of State Matt Dunlap approved the so-called TABOR II for inclusion on the November ballot.  The initiative largely reprises an earlier effort – rejected by voters in 2006 – to impose severe limits on state spending and taxes, limits that could become more constraining with each successive economic downturn.   A new and excellent report from the Maine Center for Economic Policy reviews the dangers of the current initiative and concludes that what was bad in 2006 has only gotten worse with time.  Legislators and other public leaders agree.

    To learn about how you can help stop TABOR II in Maine, visit Maine Can Do Better.

     


    Thought You'd Heard the Last of TABOR? Think Again


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    The poorly named Tax Payer Bill of Rights (TABOR) is a cap on allowable spending enacted in Colorado in 1992. Since then, it has become clear that the measure demolished the state's ability to fund higher education, infrastructure and health care. Despite voters approving a ballot measure to suspend Colorado's TABOR for five years, the concept of a spending limit is still rearing its ugly head in both Maine and Missouri.

    In Maine, the Heritage Policy Center has a revised TABOR proposal (a previous proposal was defeated by a vote of the people two years ago), which promises to combat the state's "overspending" problem while making it quite difficult for taxes to be raised. This November, Mainers will be asked to vote once again on the TABOR. Read the Maine Center for Economic Policy's report about the many serious problems with this proposal.

    Meanwhile, a proposal to cap spending is making its way through the Missouri House of Representatives, which will serve as another test for the pro-TABOR forces. Read the Missouri Budget Project's warning about TABOR's impact on the state.


    Gas Tax Increases: An Increasingly Popular Idea


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    At the state level, the usual response to recommendations that taxes be increased to preserve vital state services has generally been: "Now is not the time". The most notable exception to this trend so far has been with the cigarette tax, as we've explained before. Increasingly, however, policymakers appear to be coming around to the idea of boosting gas tax rates in order to raise the revenue needed to maintain our nation's infrastructure. Given that most state gas taxes haven't been increased for quite a few years, and that during that time inflation has significantly eroded the value of most gas tax rates, our only response can be, "It's about time."

    In Maryland, for example, the Senate President recently expressed an interest in raising the gas tax, urging that "there's got to be an increase in the transportation trust fund somewhere, and there's got to be a way we can find people with the political will to make it happen". Numerous governors have echoed this call as of late, most recently in Massachusetts, and Idaho.

    In Idaho, especially, the Governor was able to hit the nail on the head with his observation that, "[we last raised] the fuel tax... 13 years ago. And now here we are trying to accomplish 2009 goals with 1996 dollars. Everyone in this room or listening to me throughout Idaho today -- everyone who has a household budget or runs a business -- knows that just doesn't work".

    In response to this problem, Idaho Governor "Butch" Otter has recommended bumping the gas tax upward by 2 cents in each of the next 5 years. Addressing the root of the problem even more directly, Wisconsin Governor Jim Doyle has proposed indexing the gas tax rate to inflation -- a practice that had existed in Wisconsin up until 2006. Maine and Florida continue to index their gas tax rates today, with very favorable results in terms of providing each state with a somewhat more adequate and sustainable source of transportation revenue.

    Importantly, the federal gas tax is not indexed to inflation, meaning that the Federal Highway Trust Fund is suffering from many of the same problems we see plaguing the states mentioned above. The federal gas tax has not been increased in over 15 years. President Obama's new Energy Secretary, Steven Chu, has previously gone on the record as supporting raising the gasoline tax. The views of Transportation Secretary Ray LaHood are not yet clear. What is clear, however, is that something will have to be done at the federal, as well as the state level, if gas tax revenues are to be restored to their previous purchasing power.

    Of course, the gas tax is not perfect. Aside from the long-term issues arising out of improved fuel efficiency (which we need to begin planning for now), the regressivity of the tax is very worrisome, especially in these difficult times. Fortunately, low-income gas tax credits, as we've advocated on multiple occasions, are very capable of remedying this shortcoming.


    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.


    Numerous Other States Decide on Tax/Revenue Proposals


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    Arizona voters wisely rejected Proposition 105, a proposal that would have placed a nearly insurmountable obstacle in the way of Arizona residents seeking to raise their own taxes through the referendum process.

    Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.

    Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it's certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.

    Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.

    Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.

    Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.

    Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.


    Battles Already Beginning for 2009 and 2010 Ballot Proposals


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    It's never too early to begin preparing for future ballot battles, particularly when they are likely to dramatically affect states' abilities to fund public services that residents depend on. Here are three states that might see major ballot battles in 2009 and 2010.

    Maine: TABOR Question Appears Likely in 2009

    It looks like Maine voters may face a bruising battle over state spending limits in 2009. The "Maine Leads" consulting firm claims to have gathered enough signatures to place a "Taxpayer Bill of Rights" (TABOR) spending cap on the 2009 ballot.

    Supporters of this initiative have apparently learned very little from the lessons of two other states making headlines in recent weeks.

    Colorado voters gave TABOR a chance, but because of the excessive restrictions it placed on their government's ability to provide valued services, a major, permanent scaling back of the requirement is being voted on this November.

    Similarly, though California lacks a TABOR spending cap, the state has plenty of experience with supermajority requirements in its legislature (which TABOR would impose on any tax increase). After the recent budget debacle in California, serious talk has recently surfaced of ending their 2/3 requirement for the approval of state budgets (as explained below). Maine would be wise not to follow down California's obviously failed path.

    Fortunately, a strong opposition to the TABOR campaign can be expected. The Maine Center for Economic Policy is very familiar with the issue, having already worked on the front lines of a similar battle when TABOR was on the ballot in 2006. At that time, they authored a report worth revisiting, aptly titled: "TABOR: Not Right for Colorado, Not Right for Maine.

    Utah: A Return to a More Progressive Income Tax in 2010?

    The Utah Rings True Coalition is beginning the process of getting a graduated rate income tax onto the 2010 ballot. The current, 5% flat rate income tax that took effect this year is defended by numerous lawmakers in the state, despite the huge breaks such a system offers to wealthy taxpayers. The group will have over a year to gather the 92,000 signatures needed.

    Utah Voices for Children has authored a variety of important policy briefs on the flaws of the flat-rate system. You can find them here.

    California: Recent Budget Gridlock Renews Calls to End 2/3 Requirement for Budgets in 2010

    With the recent gridlock surrounding the state budget still fresh in everyone's minds, multiple legislative leaders have voiced an interest in placing on the 2010 ballot a proposal to end supermajority requirements for passing state budgets. Referring to the recent delays the supermajority requirement created in enacting their 2009 budget, Senate leader Darrell Steinberg said "We can't keep doing this. This is ridiculous. It's unproductive."

    And support for ending the supermajority requirement isn't coming only from the majority party. Republican state Senator Tom McClintock has said that "The two-thirds vote for the budget has not contained spending, and it blurs accountability! If anything, in past years, it has prompted additional spending as votes for the budget are cobbled together."


    Maine Voters Must Decide Whether to Veto Health Care Funds


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    This week the so-called "Fed Up with Taxes" campaign successfully gathered enough signatures to place an initiative on the ballot in Maine this fall. What important question are the voters being asked to decide? Whether they want cheap beer or healthcare.

    The initiative will allow voters to decide whether to scrap the recent sales tax hike on beverages. The increase would have amounted to a $4 per gallon tax on syrup used to make soda in restaurants, a 42 cents per gallon tax on bottled soft drinks and a doubling of the tax on beer and wine to 54 cents per gallon for beer and 65 cents per gallon for wine. The drive to obtain signatures for the petition was led by a number of groups, who, according to Gordon Smith of the Main Medical Association, had an "unlimited bank account." Among those funding the petition drive were the beer and wine industry, beverage and soft drink associations, Coca-Cola, Maine's two largest chambers of commerce, the Maine Restaurant Association, the Maine Innkeepers Association, the Maine Tourism Association, and the Maine Merchants Association.

    The tax raise came in response to the fiscal struggles of Maine's state-funded health care program, DirigoChoice. Members of the Maine Medical Association along with Democratic Majority leaders Sen. Libby Mitchell (D-Vassalboro) and and Rep. Hanna Pingree (D-North Haven) are leading the fight to preserve the tax, calling it a "corporate veto" of funding for an absolutely necessary but fiscally strangled program. Lawmakers say DirigoChoice will have to be funded in some way, regardless of whether the initiative is passed by voters. This means higher taxes elsewhere. If the tax is repealed by voters in November, 18,000 Mainers will be left without health care coverage and 40,000 additional individuals will see their health care costs rise. So Maine voters must decide whether to reject a "corporate veto" of an essential tax or face rising taxes elsewhere and seriously jeopardize the innovative state healthcare program and its beneficiaries.

    A new report from the Maine Center for Economic Policy makes the case for preserving these new tax revenues -- and explains the merits of Maine's DirigoChoice program.


    Maine Seeks to Help Residents Lacking Health Insurance... Kind of


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    State legislators in Maine last week missed a great opportunity to expand health care coverage to a significant number of residents. The state's health insurance program was originally created in 2003 with the mission of providing insurance to 135,000 uninsured persons by 2009. Currently, just 15,000 people are covered by the program. The reason for this huge disparity is primarily an unwillingness on the part of legislators to raise taxes to pay for it. In describing this year's legislative session, one representative stated that avoiding tax increases was one of the "overarching goals that we began the budget deliberations under."

    Rather than seizing upon the fast-approaching 2009 target they set for themselves, legislators working under the "overarching goal" chose to expand coverage to only 4,000 of the additional 120,000 people they had originally planned to cover by next year. Instead of addressing the problem head-on with needed tax increases, Maine legislators sidestepped the issue by only enacting relatively minor excise tax increases on alcohol and soda.

    This proposal is totally inadequate and will disproportionately affect those lower-income Mainers who are most likely to have trouble affording health care coverage in the first place. In addition to having all the regressive traits of the sales tax, excise taxes possess an additional degree of regressivity in their per-unit rather than percentage basis. That is, rather than being levied at a fixed percentage of a product's price (5-7% for general sales taxes in most states), excise taxes are levied at a fixed amount on a specific type of good, regardless of that good's price. The Maine excise tax collected per gallon of wine, for example, is the same 65 cents whether that wine costs $6 or $600 per bottle. The obvious result is that low-income people who purchase less expensive brands will usually face a higher effective tax rate than their wealthier neighbors.

    Admittedly, Maine has taken more initiative to provide health care than most states. This does not change the fact, however, that thousands remain uninsured and many would quickly enroll in the state-subsidized program if funding was to be provided in amounts sufficient to meaningfully raise existing enrollment caps. Next time health care is debated in the Maine legislature, policymakers would do well to make assisting the uninsured, rather than steadfastly avoiding tax increases, the "overarching goal" of their work.


    A Delicate Balancing Act: Sales Tax Base Expansion


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    There are several proposals in states across the country that would expand state sales tax bases to include services. These efforts aim to improve both states' financial stability and the fairness of their tax codes. It's probably not fair, for example, that in some states people who do their own laundry pay sales taxes when they buy a washer or dryer but people who have their clothes laundered by someone else pay no sales taxes at all.

    One component of an overall tax proposal in Maine would expand the sales tax base to include a variety of personal and real property services. In Maryland, a state house committee on Wednesday debated House Bill 448, which would expand the sales tax base to include luxury services like interior decorating and other personal services. In Michigan, Governor Jennifer Granholm has also proposed a measure to expand the sales tax base. The political ramifications of taking on previously untaxed businesses may make some policymakers wary. Nonetheless, as states shift from manufacturing economies to service economies, it's essential that tax structures change too. For more on expanding the tax tax base, check out ITEP's policy brief.


    Can the Tax Code Keep Educated Residents from Leaving the State?


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    This November Maine voters will have the opportunity (unless the Legislature acts first) to vote on a proposal that would provide tax cuts to assist college graduates as they pay back their student loans. If the initiative is approved, college students in Maine who stay and work in the state after graduation may claim a tax credit of about $2,100. Advocates of the proposal say that offering the tax credit will make education more affordable for students and also "raise the wage and skill levels of Maine's workforce." However, some important questions remain regarding how much the tax credits will cost, where the money to pay for the credits would come from, and whether or not offering a tax credit will really ensure that students stay in Maine.

    In Iowa a similar proposal is focused on keeping college graduates in the state and slowing the state's "brain drain." The proposal allows businesses who repay new employees' student loan debt (up to $25,000) to receive tax credits of up to $7,500. In order to qualify for the credit, employers have to pay a minimum salary of $25,000 and start repaying the employee's loan within six months. The Des Moines Register's editorial board sharply critiques this proposal and raises good points about whether or not providing tax credits to businesses really is the best strategy for ensuring that college graduates stay or move into the state. Instead, the Register rightly suggests, "To reduce student loan debt, public money would be better used to hold down tuition costs at state universities, so students don't graduate with huge debt in the first place."


    Property Taxes... the Good, the Bad, and the Ironic


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    A recent court ruling in the state of Washington has given policymakers there an opportunity to revisit a property tax cap that has imposed considerable strains on schools and other local services. A new report from the Washington State Budget and Policy Center examines some of the flaws in the state's current property tax system and explores some of the options that other states use "like a property tax circuit breaker" to improve the fairness of that particular tax.

    Florida and Maine are weighing changes to their property taxes as well... changes that would make their tax systems less fair. Last week, the Republican leadership of the Florida House of Representatives proposed abolishing the statewide property tax for Florida residents, limiting local property taxes, and raising the state sales tax rate 2.5 percentage points to 8.5 percent. These changes would not only exacerbate the inequity of Florida's tax system, but would also take a $5.8 billion bite out of state and local revenues, since the higher sales tax rate would only make up a little more than half of the revenue lost due to property tax cuts. "Reckless" and "irresponsible" are among some of the nicer things that the St. Petersburg Times has to say about the proposal.

    Ironically, Maine's Governor, John Baldacci, in his FY 2008-2009 budget, advocated the same sort of limits on property tax assessments for year-round residents that have contributed to Florida's fiscal problems. This ITEP Policy Brief details the shortcomings of these kinds of assessment caps.

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

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

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

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

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

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

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

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

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


    Business Turning Against TABOR


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    Kiplinger reports that business are expected "to mount pitched battles to defeat" TABOR-esque spending tax cap initiatives in Maine, Michigan, Montana, Nebraska, Nevada, and Oregon. In fact, there's a concerted effort forming in Oklahoma that is actually being lead by business groups. The Chairman of Tulsa's Chamber of Commerce was even quoted as saying that TABOR would be a "train wreck" for Oklahoma.


    TABOR in the States: Successes and Failures


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    Advocates of Colorado-style "TABOR" tax and spending limits are seeing mixed success in efforts to get TABOR limits on the November ballot.

    Maine voters will have their say on a TABOR proposal that the Portland Press Herald sees as "the wrong approach."

    But a restrictive Ohio proposal will likely be pulled from the November ballot. Meanwhile, a terrific Denver Post editorial argues that their TABOR law still hurts the state's economy-- even after being pared back by voters last fall.

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