Maryland News


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.  


Five States Change their Gas Tax Rates on Friday; Will New Jersey Join Them?


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UPDATE: New Jersey did not increase its gas tax on July 1 because of disagreement over tax cuts that many legislators wanted to tie to the gas tax increase.  Lawmakers continue to search for a solution to the state’s infrastructure funding shortfall.

Independence Day weekend isn’t the only thing arriving this Friday.  Most states will be starting new fiscal years on July 1, and a handful of them will be adjusting their gas tax rates to mark the occasion.  And depending on the actions of New Jersey lawmakers over the coming days, it’s possible that the Garden State could overshadow the rest by implementing the largest gas tax increase in recent memory—and the state’s first in 26 years.

Aside from New Jersey, the rest of the 21 states that have waited a decade or more since last raising their gas tax rates will continue to hobble along as their transportation revenues stagnate.  In total, nineteen states will witness gas tax “anniversaries” on Friday when their gas tax rates will officially become a full year older.  Of that group, Tennessee’s 27 years of inaction leads the pack.  The Volunteer State has been collecting the same 20 cents in tax per gallon of gas since July 1, 1989—a few months prior to the fall of the Berlin Wall.

Gas Tax Increases

For the moment, Washington State has the largest gas tax change scheduled for this Friday.  There, the tax rate on gasoline and diesel fuel will rise by 4.9 cents per gallon, bringing the state’s overall rate to 49.4 cents.  This is the second and final stage of an 11.9 cent increase enacted last year to fund improvements to the state’s transportation network.

Meanwhile, Maryland’s gas tax rate will rise by just under a penny per gallon (0.9 cents).  This represents the final stage of a reform signed by then-Gov. Martin O’Malley in 2013, though the state’s tax rate will continue to vary in the years ahead alongside both inflation and fuel prices.

Given the enormous economic importance of our transportation network, both of these increases are steps forward for these states.  But both would also pale in comparison to the 23 cent increase under consideration in New Jersey.  For years, lawmakers in the Garden State have struggled to fund their state’s infrastructure with a meager 14.5 cent per gallon gas tax, ranked second lowest in the nation behind only Alaska.  Boosting that rate to 37.5 cents per gallon would allow for enormous improvements to the state’s infrastructure while still leaving its rate below that of its two largest neighbors—New York and Pennsylvania.  But the cuts to general fund taxes (including income, sales, and estate taxes) that key lawmakers are insisting must accompany a gas tax hike would result in a major erosion of funding for education, health care, and the state’s notoriously underfunded pension system.

Gas Tax Cuts

Three states will see their transportation funding situations deteriorate later this week when gas tax rate cuts take effect.

In California, the 2.2 cent per gallon cut taking effect on Friday represents the third cut in as many years.  Altogether, this series of reductions has pushed the Golden State’s gas tax rate 11.7 cents lower than where it stood in the summer of 2013.

In Nebraska, the situation is somewhat better as the state’s more modest 1 cent per gallon cut is bookended by an increase that took effect in January and another increase expected to take effect next January.  But even so, the state’s gas tax rate is still lower than it was a decade ago.

And finally, the 1 cent per gallon gas tax cut taking place in North Carolina actually represents a smaller decline than was originally scheduled.  Last year, lawmakers intervened to curb reductions in the gas tax rate triggered by low gas prices.  At the same time, they also implemented a new formula that will allow the state’s tax rate to grow alongside its population starting this January.

Given how gas prices have declined as of late, it is remarkable that more states aren’t cutting gas tax rates on Friday.  Kentucky, Vermont, and Virginia all have gas tax rates linked to fuel prices that often undergo automatic adjustments on July 1, but the tax rates in each of these states have already fallen so low that they’ve reached the minimum, or “floor,” level specified in law.  Similarly, had Georgia not reformed its gas tax last year, it’s possible that a gas tax cut would have taken effect there as well.

Decades of Procrastination

Sometimes, inaction can be just as significant as actual changes in policy.  In total, nineteen states will see gas tax “anniversaries” arrive on Friday.  Unless New Jersey lawmakers act, for example, the state’s 14.5 cent per gallon fuel tax rate will have been frozen in time for exactly 26 years come Friday.  The last time the state’s tax rate on fuel went up was on July 1, 1990 when the four cent Petroleum Products Gross Receipts Tax took effect.

Other states where gas tax rates officially become one year older on Friday include Tennessee (27 years), New Mexico (23 years), Montana (22 years), Arkansas (15 years), Kansas (13 years), North Dakota (11 years), and Ohio (11 years).  At the other end of the spectrum, states such as Idaho and Rhode Island saw their gas tax rates increase exactly one year ago under reforms recently enacted by those states’ lawmakers.

As we explain in a newly updated brief identifying the number of years that have elapsed since each state last raised its gas tax rate:

If the gas tax is going to provide an adequate amount of revenue to fund transportation in the medium- and long-term, the tax rate needs to be periodically adjusted to at least keep pace with the rate of growth in the cost of infrastructure maintenance and construction. State gas tax rates that have gone ten to twenty years, or more, without an increase clearly do not live up to this bare minimum test of sustainability.

Read the brief 


Income Tax Cuts, Including Expanded EITC, Fail to Make it Across Finish Line in Maryland


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Tax cuts in Maryland seemed inevitable at times this year, as lawmakers in the House and Senate seemed to be in agreement on some key issues. Both chambers sought to improve the Earned Income Tax Credit (EITC) for childless low- and middle-income working Marylanders while also cutting tax rates for those higher up the income scale. But lawmakers were unable to agree on whether the bulk of the benefit should be distributed broadly, or whether it should be reserved primarily for the wealthiest Marylanders. In the end, all of the personal income tax changes under consideration were left on the cutting-room floor, though it's worth noting that lawmakers were able to agree on a $37.5 million credit for aerospace company Northrop Grumman.

The central difference between the two tax plans was that the Senate's version was heavily skewed toward the highest-income Marylanders while the House's version was tailored to be more consistent in its impact across different income groups (see Figure 1). The Senate plan (PDF) would have cut the state's top four income tax rates, which affect people with incomes of at least $100,000 or $150,000 depending on filing status, and increased the personal exemption by $200 per person. The House plan (PDF) omitted the personal exemption increase and focused its rate cut on a middle income tax bracket that affects all Marylanders with taxable income of at least $3,000. 

Looking back on the session, Senate President Thomas Miller made the peculiar claim that his chamber's plan "did tax cuts across the board," while the House "wanted simply to help the people on the lower end of the economic spectrum." That difference, said Miller, was the reason that lawmakers failed to reach agreement.

But ITEP's analysis makes clear that of the two, the House's plan was actually closer to being an "across the board" cut. The Senate's plan would have provided roughly $1,700 in tax cuts each year to members of the state's top 1 percent of earners (a group that averages $1.6 million in income). The House's version, by contrast, would have given that group a reduction more in line with what lower- and middle-income households could expect to receive: approximately $140 on average versus about $60 for low-income families and $40 for middle-income families. Overall, the Senate's version gave more than a quarter (27 percent) of the total benefit to the top 1 percent of earners and almost half (48 percent) to the top 20 percent of Marylanders—a far cry from an "across the board" benefit.

While Maryland will be no worse off for its failure to cut income tax rates, these disagreements did have the unfortunate side effect of blocking an expansion to the state's EITC that was widely agreed upon by lawmakers in both the House and Senate. Similar to a recent innovative change in neighboring Washington, D.C., the expansion would have significantly improved the value and reach of the credit for childless adults, a group largely overlooked by the federal EITC on which the Maryland credit is based.

Figure 2 shows how meaningful the expansion would have been for childless adults at different income levels. For example:

  • Currently, a single working Marylander with no children and an income of $11,000 (just below the federal poverty guideline of $11,880) is eligible for a Maryland EITC of only about $77. Increasing Maryland’s EITC from 26 percent of the federal credit to 28 percent (as is already scheduled to occur next year) would only improve this by about $6. But under the expansion proposed in SB 840, that person would have received a total Maryland EITC of $506, which, combined with the federal EITC of $297, would go much further toward lifting this worker out of poverty.
  • A single working Marylander with no children and an income of $5,940 – only half the federal poverty guideline – receives a Maryland EITC of just $127 even when the credit increases to 28 percent of the federal credit as scheduled. But this person’s credit would have been $454 under SB 840, a $327 increase that would be very meaningful for someone in such severe poverty.
  • A single working Marylander with no children and a full-time $9-per-hour job ($18,720 annually) is currently not eligible for any federal or Maryland EITC because the credit is heavily weighted toward working families with children and very-low-income childless adults. But under the expansion proposed in SB 840, such an individual would have received a state credit of $366, enough to pay for a community college class that could improve their job skills.

The debate in Maryland this year exemplifies the difficult political realities associated with crafting tax policies that are geared toward those most in need. With continued work, hopefully the negotiations this year paved the way for some of the EITC improvements in SB 840 to become law in the future.

 


State Rundown 3/28: All's Well That Ends Well


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Thanks for reading the State Rundown! Here's a sneak peek: Georgia and Idaho lawmakers say no to income tax cuts. The Vermont House passes a budget and tax package. Maryland's Senate fails to move on manufacturing tax cuts. Nebraska's legislature advances the governor's property tax proposal with amendments.

– Carl Davis, ITEP Research Director

Georgia lawmakers ended their legislative session last week without passing a regressive package of income tax cuts. The Senate had passed two bills that together would have cut the top state income tax rate by more than 10 percent, but the House never took the bills up after Gov. Nathan Deal refused to support them. Deal argued that the cutting the income tax, the state's largest revenue generator, would lead credit agencies to downgrade Georgia's AAA bond rating. An ITEP analysis also revealed (PDF) that over half the cuts would have gone to the top one-fifth of Georgia earners.

Idaho lawmakers rejected a lopsided income tax cut of their own last week. On Friday the state legislature adjourned without passing any reductions to the state's graduated income tax rates. Earlier this year an ITEP analysis of one such proposal revealed that while most Idahoans would have seen their taxes fall by $35 or less under the plan, high-income households would have received a benefit of over $800. Ultimately, the legislature prioritized enhanced funding for education over tax cuts.

The Vermont House passed a package of budget and tax bills for FY 2017 last week, sending the state budget to their colleagues in the Senate for consideration. The $5.77 billion budget includes investments in the state college system, access to child care, and community health services. Lawmakers passed a 3.3 percent provider tax on ambulance agencies to pay for an increase in reimbursement rates for ambulance services under Medicaid. An effort to impose a 92 percent tax on e-cigarettes passed out of committee but died on the floor.

Efforts to create tax incentives for manufacturers in Maryland failed this session despite backing from the governor and senior legislators. SB 181, sponsored by Sen. Roger Manno, and SB 386, championed by Gov. Larry Hogan, would have established Manufacturing Development Zones. Under the bills, new manufacturers who located in the zones would pay no corporate income tax and new employees earning less than $65,000 would pay no personal income tax for a designated period of time. New manufacturers could also apply to counties for a property tax waiver. Hogan's bill would have applied only to poorer jurisdictions, while Manno's measure would have been piloted in seven counties. Both bills failed to move out of the Senate Budget and Taxation Committee after established manufacturers complained the provisions would hurt their business.

Nebraska Gov. Pete Ricketts' plan to cut property taxes got a boost this week when an overhauled version passed the Revenue Committee on a unanimous vote. The proposal would increase property tax credits for farm and ranchland owners by $30 million next fiscal year. The bill has received criticism from both sides. Organizations representing farmers and rural interests said the bill doesn’t go far enough, while Renee Fry of the OpenSky Policy Institute (and ITEP's Board of Directors) warned that it would reduce state revenues and hamper education funding.

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


2016 State Tax Policy Trends: Addressing Poverty and Inequality Through Tax Breaks for Working Families


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

As we explain in our annual report on low-income tax credits, the strategic use of Earned Income Tax Credits (EITCs), property tax circuit breakers, targeted low-income tax credits and child-related tax credits can have a meaningful impact on addressing poverty, tax fairness and income inequality in the states.  

The use of these tools is so important especially because states have created an uneven playing field for their poorest residents through their existing tax policies. Every state and local tax system requires low- to middle-income families to pay a greater share of their incomes in taxes than the richest taxpayers and, as a result, tax policies in virtually every state make it even more difficult for those families in poverty to make ends meet. Unfortunately, it does not stop there–many recent tax policy proposals include tax increases on the poor under the guise of “tax reform”.   

That reality may seem bleak, but it provides state lawmakers plenty of opportunities to improve their tax codes in order to assist their state’s lowest-income residents. Targeted low-income tax cuts can serve as a vital tool in offsetting upside down tax systems and proposed regressive tax hikes. On top of that, targeted tax breaks and refundable credits do not only benefit a state’s low-income residents–they can also pump money back into the economy, providing both immediate and long-term economic stimulus. With this in mind, a number of lawmakers are heading into the 2016 legislative session with anti-poverty tax reform on the agenda.  

This year we expect states to build on reforms enacted in 2015 with a range of policies to address poverty and income inequality–including, most notably, efforts to enact or improve state EITCs in as many as a dozen states. Unfortunately, lawmakers in a few states are looking to reduce or eliminate their EITCs.  Here’s a look at the opportunities and threats we see for states in 2016:   

Enacting state EITCs:   

Twenty-six states plus the District of Columbia currently have a state EITC, a credit with bipartisan support designed to promote work, bolster earnings, and lift Americans low-wage workers out of poverty. 

In 2016, a number of states are looking to join this group by enacting their own state EITCs. For instance, Mississippi Gov. Phil Bryant recently called for “blue collar tax dividends” to give people back a portion of their hard-earned tax dollars (he has proposed a nonrefundable state EITC). In South Carolina, a refundable EITC is on the table to help offset a largely regressive transportation revenue raising package. And lawmakers in Idaho have proposed the enactment of an EITC at 8 percent of the federal credit (PDF).  Advocates in GeorgiaHawaiiKentuckyMissouri and West Virginia are calling on their state lawmakers to enact state EITCs as a sensible pro-work tool that would boost incomes, improve tax fairness, and help move families out of poverty. 

Even states without an income tax could offer a state EITC and lift up the state’s most vulnerable. Washington State enacted a Working Families Tax Rebate at 10 percent of the federal EITC in 2008, though it still lacks sufficient funding to take effect.  

Enhancing state EITCs:   

While state EITCs are undoubtedly good policy, there is still room for improving existing credits. Three states (Delaware, Ohio and Virginia) have EITCs but only allow them as nonrefundable credits–a limitation which restricts their reach to those state’s lowest-income families and fails to offset the high share of sales and excise taxes they pay. Lawmakers in Delaware seem to have recognized this shortcoming by recently introducing a bill that would make the state’s EITC refundable, but only after reducing the percentage from 20 to 6 percent of the federal credit and then gradually phasing it back up to 15 percent over the course of a decade.  Advocates in Virginia are calling for a strengthening of the state's EITC as an alternative to untargeted tax cuts proposed by Gov. Terry McAuliffe. 

In addition to refundability, many states are discussing an increase in the size of their credit. Governors, in particular, are stepping up to the plate: Rhode Island Gov. Gina Raimondo recently announced her plan to raise the state’s EITC to 15 percent, up from 12.5 percent of the federal credit; Louisiana Gov. John Bel Edwards, meanwhile, has called for doubling the state EITC as part of his commitment to reduce poverty; and Maryland’s governor, Larry Hogan, called to accelerate the state’s planned EITC increase. In California, Gov. Jerry Brown reiterated his support for the state’s new EITC in his 2016-17 budget. In New York, Assembly Speaker Carl Heastie proposed increasing the EITC by 5 percentage points over two years. And Oregon lawmakers are calling to bring the EITC up to 18 percent of the federal credit.   

Another “enhancement” trend that is building momentum is expanding the EITC to workers without children. At the federal level, President Obama proposed just that (PDF) in 2014 and again reiterated his support for such a change in his most recent State of the Union address and budget proposal. Just last year, the District of Columbia expanded its EITC for childless workers to 100 percent of the federal credit, up from 40 percent, and increased income eligibility.   

Protecting state EITCs:  

Rather than focusing on proactive anti-poverty strategies, a handful of states will be spending the better part of 2016 protecting their state EITCs from the chopping block. Tax reform debates in Oklahoma have led to calls that the state’s EITC should be re-examined and possibly eliminated, possibly in combination with the elimination of the state's low-income sales tax relief and child care tax credit.  

For more information on the EITC, read our recently released brief that explains how the EITC works at both the federal and state levels and highlights what state policymakers can do to continue to build upon the effectiveness of this anti-poverty tax credit. 

 


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


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

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

 Part 2: Revenue Surpluses May Prompt Tax Cut Proposals

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

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

Part 3: Revenue Shortfalls Create Opportunities for Meaningful Tax Reform

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

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

Part 4: Tax Shifts in All Shapes and Sizes

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

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

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

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

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

Part 6: Overdue Increases in Transportation Funding

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

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


January 1 Brings Gas Tax Changes: 5 Cuts and 4 Hikes


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Since 2013, eighteen states have enacted laws either increasing or reforming their gas taxes to boost funding for transportation infrastructure.  A snapshot of gas tax rate changes scheduled to occur this upcoming January 1st, however, reveals that five states will actually move in the opposite direction as 2016 gets underway.

Gas tax rates will decline in New York, North Carolina, Pennsylvania, Vermont, and West Virginia—in most cases because of gas tax rate structures that link the rate to the average price of gas (an approach similar to a traditional sales tax applied to an item’s purchase price).  But cutting gas tax rates is problematic because doing so reduces funding for economically vital transportation infrastructure investments.  And with drivers already benefiting from gas prices that have just reached a six-year low, the timing of these rate cuts is difficult to justify.

Given these realities, many states have recently taken steps to limit gas tax volatility by imposing “floors” on the minimum tax rate, limitations on how much the rate can change from one year to the next, and in some cases even moving toward entirely different formulas based on more stable (and arguably more relevant) measures of inflation. 

While five states will be forced to grapple with the consequences of reduced transportation revenue, there are four states where gas tax rates will actually rise on January 1: Florida, Maryland, Nebraska and Utah.  In addition to those increases, Washington State has a gas tax increase scheduled for July 1st and governors in states such as Alabama and Missouri have said they intend to pursue gas tax increases during their upcoming legislative sessions.  With lower gas prices having become the norm for now, lawmakers in those states that have gone years, or even decades, without raising their gas taxes should give real consideration to enacting long-overdue updates to their gas tax rates

The five states that will see their gas tax rates decline on January 1st include:

  • West Virginia (1.4 cent cut), New York (0.8 cent cut), and Vermont (0.27 cent cut) will see their gas tax rates fall because their rates are tied to the price of gas, which has been declining in recent months.
  • North Carolina (1.0 cent cut) was scheduled to see an even larger decline in its gas tax rate due to falling gas prices, but lawmakers intervened in 2015 to limit the size of the cut and its impact on the state’s ability to invest in infrastructure.  Moving forward, North Carolina will also have a somewhat more stable gas tax because of a reform that removed a linkage to gas prices and instead tied the rate to population growth and energy prices more broadly.
  • Pennsylvania (0.2 cent cut) is the only state in this group whose decline is not directly linked to falling gas prices.  A reform approved by lawmakers in 2013 included a modest tax rate cut in 2016, though notably, this cut is bookended by significantly larger increases in 2014, 2015, and 2017.

And in the four states where gas tax rates will rise:

  • Florida (0.1 cent increase) is seeing its tax rate rise due to a forward-thinking law, in place for more than two decades, that links the state’s gas tax rate to growth in a broad measure of inflation in the economy (the Consumer Price Index).
  • Maryland (0.5 cent increase) is implementing a rate increase as a result of the U.S. Congress’ failure to pass legislation empowering states to collect the sales taxes owed on purchases made over the Internet.  In 2013, Maryland lawmakers enacted a transportation funding bill that they had hoped would be partially funded by requiring e-retailers to collect sales tax.  Rather than trusting Congress to act, however, state lawmakers also built in a backup funding source: an increase in the state’s gas tax rate from 3 percent to 4 percent of gas prices this January 1st, plus a further increase to 5 percent on July 1 if Congress continues to delay action.
  • Nebraska (0.7 cent increase) and Utah (4.9 cent increase) are seeing their gas tax rates rise because of legislation enacted by each state’s lawmakers in 2015.  The Nebraska law (enacted over the veto of Gov. Pete Ricketts) scheduled 1.5 cent rate increases for each of the next four Januarys, though more than half of this year’s scheduled increase was negated by a separate provision linking the state’s gas tax rate to (currently falling) gas prices.  In Utah, the 4.9 cent increase is the first stage of a new law that could eventually raise the state’s gas tax rate by as much as 15.5 cents, depending on future inflation rates and gas prices.

Earlier this year, lawmakers in states such as Georgia, Kentucky, and North Carolina realized that allowing gas tax rates to fall would harm their ability to invest in their states’ infrastructure.  As a result, each of those states acted to limit scheduled rate cuts and curtail the volatility of their gas tax rates moving forward.  Without question, linking gas tax rates to some measure of growth (be it gas prices, inflation, or fuel-efficiency) is a valuable reform that can improve the long-run sustainability of this important revenue source.  But as the gas tax cuts taking effect next month demonstrate, that linkage should be done in a way that manages potential volatility in the tax rate.

View chart of gas tax changes taking effect January 1, 2016 

 


State Rundown 10/30: Spooky Appointments, Phantom Tax Increases


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New Jersey Gov. Chris Christie, clearly not a regular reader of this blog, nominated Art Laffer acolyte Ford Scudder to be state treasurer. Scudder is chief operating officer of Laffer Associates and an analyst at Laffer Investments. If appointed to the position, Scudder would be responsible for crafting the state budget and overseeing state investments, pensions and benefits, state debts and lottery revenue. Senate President Stephen Sweeney was not impressed by the governor’s move: "The so-called Laffer curve came to embody the trickle-down economic policies that were discredited because they favored the wealthy at the expense of everyone else. New Jersey is not the place to reintroduce the policies that caused so much lasting damage to the economy.” This is not the first time a Laffer associate has served in state government. Donna Arduin, a partner in Laffer’s consulting firm, recently left a high-profile position in Illinois (which remains mired in a budget standoff) and Laffer himself was a prominent architect of Sam Brownback’s failed tax experiment.

Louisiana voters decided on four constitutional amendments with implications for the state’s fiscal health this past weekend. Voters rejected Amendment 1, a proposal to weaken the state’s rainy day fund to benefit transportation projects, and Amendment 3, which would have loosened the rules around which bills could be offered during the fiscal legislative sessions held in odd-numbered years. Voters approved Amendment 2, a proposal that gives the state treasurer the option of investing funds in the state infrastructure bank, by a slim margin. The infrastructure bank allows local governments to borrow money at favorable rates for infrastructure projects. Voters also approved Amendment 4, which allows local governments to collect property taxes on properties owned by state and local governments outside of Louisiana.

A Maryland environmental group is challenging one jurisdiction’s plan to phase out a stormwater fee – also derided as a “rain tax” – without first spelling out an alternative way of paying for required environmental projects. The Chesapeake Bay Foundation argues that Baltimore County, which plans to eliminate the stormwater fee over two years, must first specify how it will pay for state-mandated projects designed to reduce water pollution. In 2012, the state legislature required urban and suburban districts to collect the stormwater fees to reduce runoff; under newly-elected Gov. Larry Hogan, the law was revised to allow jurisdictions to drop the fee if they dedicate another source of money to the required projects.

A bill that will fix an unintended feature of a recently-enacted tax cut passed the Ohio legislature this week and will now go to Gov. Kasich for his signature. In June, lawmakers passed a tax cut that allows business owners to deduct up to 75 percent of their first $250,000 in business income this tax year, and 100 percent of that amount in 2016. Any income in excess of $250,000 would then be subject to a flat tax of 3 percent in both years. However, as the law was originally enacted, the 2015 exemption only covered 75 percent of the first $250,000 and the other 25 percent (as well as any income over $250,000) would have been subject to a 3 percent flat tax.  For some taxpayers, this would have resulted in a tax increase since the state’s current graduated income tax system includes rates as low as 0.528% on low levels of income. Essentially, the tax cut included an accidental tax increase. The recently passed measure fixes the oversight, though it’s worth noting Ohio would have avoided $81 million in revenue losses next fiscal year if no correction was made. 


Gas Tax Changes Take Effect July 1


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On Wednesday July 1, six states will raise their gasoline tax rates.  While some drivers may view this as an unwelcome development during the busy summer travel season, the reality is that most of these “increases” are simply playing catch-up with inflation after years (or even decades) without an update to the gas tax rate.  Moreover, these increases will fund infrastructure improvements that directly benefit drivers and other travelers—an especially important step at a time when Congress’ commitment to adequately funding infrastructure remains highly uncertain.

The largest gas tax increases are taking place in Idaho (7 cents per gallon) and Georgia (6.7 cents for gas and 7.7 cents for diesel).  Each of these increases is occurring due to legislation enacted earlier this year.  Maryland’s increase of 1.8 cents is a result of legislation signed by former governor (and current presidential candidate) Martin O’Malley in 2013.  Rhode Island’s 1 cent increase is the first automatic update for inflation to take place under a law signed by former Gov. Lincoln Chafee in 2014 (Chafee is now a presidential candidate as well).  Finally, Nebraska’s 0.5 cent hike and Vermont’s 0.35 cent increase are automatic changes resulting from these states’ variable-rate gas tax structures.

By contrast, the gasoline tax rate will fall by 6 cents in California and the diesel tax rate will drop by 4.2 cents in Connecticut as a result of laws linking those states’ gas tax rates to gas prices (a unique quirk in California’s law will cause the diesel tax to rise by 2 cents).  These cuts will reduce the level of funding available for transportation at a time when basic infrastructure maintenance is already lagging far behind.  Earlier this year, similar automatic cuts had been scheduled to take place in Kentucky and North Carolina, but lawmakers in both of these states wisely intervened by placing a “floor” on their gas tax rates that minimized the loss of infrastructure revenue. 

View chart of states raising gasoline taxes 

View chart of states raising diesel taxes

 

 

 


Martin O'Malley's Record on Taxes is Progressive


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At a time when many governors stubbornly rejected new revenues despite their states’ weak fiscal positions, former Maryland Gov. Martin O’Malley’s was one of only a few governors who championed tax increases to preserve his state’s public investments even during the Great Recession.

Early in his term, O'Malley made a substantial revenue increase the centerpiece of his economic agenda. The most notable piece of this package was a progressive measure, the "millionaires tax," which temporarily created a slightly higher new tax bracket applicable solely to taxpayers with taxable income in excess of $1 million. This change raised millions in much-needed revenue from the very wealthiest Marylanders—a group that could clearly afford to pay more since, at that time (PDF), the top 1 percent of taxpayers in Maryland paid just 6.2 percent of their income in state and local taxes compared to an effective tax rate of almost 10 percent for the bottom 20 percent of earners.

Unfortunately, the millionaire's tax faced substantial opposition from anti-tax conservatives who claimed that the tax was driving wealthy individuals to leave the state. In reality, these claims turned out to be entirely fallacious and were driven in large part by the Wall Street Journal’s reckless misreading of data.

Additionally, the package contained other regressive revenue raisers, which were more of a mixed bag. For example, O'Malley approved increases to the regressive sales tax and cigarette tax. He also attempted to substantially expand the sale tax base through taxing services, a smart move in terms of policy, but one that turned out to be to politically toxic.

Each of these tax increases disproportionately affected low- and middle-income taxpayers. However, these increases were part of a broadly progressive package and were critical in maintaining public services that benefit all families in the state.

Five years later, O'Malley moved to increase the sustainability and progressivity of the tax code by raising income tax rates and limiting tax exemptions for Marylanders earning more than $100,000. According to an analysis by the Institute on Taxation and Economic Policy (ITEP), these changes only affected 11 percent of Maryland taxpayers and a majority of it was borne by the wealthiest 1 percent of taxpayers in the state.

In terms of enhancing the sustainability of Maryland’s tax system, one of the best moves made by O'Malley was his push to reform Maryland's gasoline tax, which is the state's main funding source for transportation projects. Like most states throughout the country, Maryland had allowed inflation to gradually chip away at the value of the gas tax. If lawmakers failed to act, the tax was on its way to its lowest level (adjusted for inflation) in 91 years. Fortunately, O'Malley was able to usher through a reform that both raised the gas tax rate in the short term, and allows for further adjustments in the future to keep the rate in line with inflation and gas prices.

One of the more noteworthy ways that O'Malley improved his state’s tax system was with expansions of the state's Earned Income Tax Credit (EITC) in both 2007 and 2014. According to an ITEP analysis, the state's expanded EITC made the state's tax system significantly less regressive for low- and middle-income families.

O'Malley has yet to articulate a detailed vision on federal tax policy, but he recently laid out some broader progressive principles. In a recent speech at Harvard, O'Malley lambasted the failure of "supply-side economics" and called for an end to "tax policies that not only underinvest in our nation, but grossly and disproportionately benefit corporations and the ultra-wealthy."

In addition, he has recently argued in favor of raising the capital gains tax rate, which would make the tax system significantly more fair considering that capital gains receive a preferential rate compared to wages and primarily are received by wealthier Americans. This move could potentially position him to the left of Hillary Clinton, who has been mum on raising the capital gains tax rate so far this election and has expressed skepticism of increasing the rate in the past. 


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. 

 

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.

 


Netflix is a Real-Life Frank Underwood When it Comes to Tax Breaks


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Political nerds and TV binge watchers of all stripes will gather around the TV (or laptop) this weekend to watch the much anticipated release of Season 3 of the Netflix original series House of Cards. While the show follows the shadowy manipulations of Frank Underwood, the company and producers behind the show have done some manipulating of their own to get millions in generous tax breaks from the state of Maryland for the production of its third season.

Last year, the producers of House of Cards played hardball with Maryland lawmakers by threatening to “break down our stage, sets and offices and set up in another state" if they did not receive millions more in tax credits. Pairing this stick with a carrot, the House of Cards producers brought in Kevin Spacey to meet with "star-struck" lawmakers and push for the passage of more tax breaks for the TV series.

The trouble for Maryland lawmakers is and continues to be that the film tax credit program lavishing House of Cards with millions in tax breaks provides very little economic benefit to Maryland taxpayers—in fact, the entire program has cost the state $62.5 million since 2012. A recent study by the Maryland Department of Legislative Services found that the film tax credit in Maryland only brings in 10 cents for every dollar that it provides in economic benefits.

Unfortunately, the lawmakers in Maryland are reflective of lawmakers across the nation, who keep falling for the siren call of film producers and ponying up ever larger tax credits to companies in hopes of creating a lasting film industry in their state. Leading the pack, Louisiana spent over $1 billion on its film tax credit program from 2002-2012, yet the state still has very little to show in terms of permanent jobs and economic development benefits from the program.

In spite of all of the evidence against film tax credits, Maryland lawmakers, fearful of "losing" the Netflix series, decided to give in and increased the size of the credits for House of Cards, bringing the total amount of tax breaks that the show has received to a whopping $37.6 million. What makes these tax breaks particularly galling is that Netflix is already exploiting the stock option loophole to such an extent that it paid nothing in federal or state corporate income taxes on its $159 million in profits, even before it received the new cache of tax breaks.

The tax swindle that Netflix is running with the production of House of Cards would be enough to make Frank Underwood proud. 


State Rundown 2/5: State of the States


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

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

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

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

 

Following Up:

  • Maine: As expected, Gov. Paul LePage used his state of the state address to make a case for his tax reform proposal, arguing that the state should adopt a constitution amendment that commits future revenue growth to income tax cuts. LePage appears to be following a broader national strategy for Republican governors to cut income taxes and raise sales and other taxes on a promised “path to prosperity.”  
  • Ohio: Gov. John Kasich’s budget proposal received pushback from school districts concerned that his new funding plan will unfairly redistribute state resources. The governor and his staff claim the plan will send more money to poorer districts, but school officials have criticized the opacity of his funding formula. Look to the Tax Justice Digest next week for full coverage of the plan, including an analysis of who wins and who loses.
  • Texas: Gov. Greg Abbott vowed to veto any budget that does not include tax cuts for businesses, arguing that cutting or eliminating the state’s franchise tax would stimulate job growth.
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    State Rundown 1/29: 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:

     

     


    New Year, New Gas Tax Rates


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    Residents of 10 states will see their gasoline tax rates change on Jan. 1, but the direction of those changes is decidedly mixed.  Five states will raise their gas tax rates when the clock strikes midnight, while the other five will cut theirs, at least for the time being.

    Among the states with gas tax increases are Pennsylvania (9.8 cents), Virginia (5.1 cents), and Maryland (2.9 cents).  Each of these increases is taking place as scheduled under major transportation finance laws enacted last year.

    North Carolina (1 cent) and Florida (0.3 cents) are also seeing smaller gas tax increases as a result of formulas written into their laws that update their tax rates each year alongside inflation or gas prices.

    The states where gas tax rates will fall are Kentucky (4.3 cents), West Virginia (0.9 cents), Vermont (0.83 cents), Nebraska (0.8 cents), and New York (0.6 cents).  Each of these states ties at least part of its gas tax rate to the price of gas, much like a traditional sales tax.  With gas prices having fallen, their gas tax rates are now falling as well.

    While some drivers may be excited by the prospect of a lower gas tax, these cuts will result in less funding for bridge repairs, repaving projects, and other infrastructure enhancements that in many cases are long overdue.  Because of this, Georgia Governor Nathan Deal recently signed an executive order preventing a gas tax cut from taking effect in his state on January 1.  And Kentucky is considering following Maryland and West Virginia’s lead by enacting a law that stabilizes the gas tax during times of dramatic declines in the price of gas.

    But while states such as Kentucky may struggle to fund their transportation networks in the immediate wake of these tax cuts, these types of “variable-rate” gas taxes are still more sustainable than fixed-rate taxes that are guaranteed to become increasingly outdated with every passing year.  To that point, here are the states where gas tax rates will be reaching notable milestones of inaction on Jan. 1:

    • Iowa, Mississippi, and South Carolina will see their gas tax rates turn 26 years old this January.  Each of these states last increased their gas taxes on January 1, 1989.  
    • Louisiana will watch as its gas tax rate hits the quarter-century mark.  Its gas tax was last raised on January 1, 1990.  
    • Colorado’s gas tax rate will “celebrate” its 24th birthday on New Years Day, having last been increased on January 1, 1991.
    • Delaware will become the newest addition to the 20+ year club as it “celebrates” two decades since its last gas tax increase on January 1, 1995.

    Gas tax rates need to go up if our infrastructure is going to be brought into the 21st century Jan. 1 may be a mixed bag in that regard, but it’s increasingly likely that things could change soon as debates over gas tax increases and reforms get under way in states as varied as Georgia, Idaho, Iowa, Michigan, New Jersey, South Dakota, Tennessee, Utah, and Wisconsin.


    The Best and Worst State Tax Policies of 2014


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    2014. It was the best of times; it was the worst of times. Our position didn’t prevail in every state, but the cause of tax justice and fairness for working families made significant gains in a number of places. Below, the best and worst tax policies of the past year:

    The Best

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    Washington, DC takes the number one spot for enacting a progressive tax reform package this past summer. Unlike other jurisdictions that have used the guise of “reform” to cut taxes for the wealthy, the D.C. City Council cut the personal income tax rate for middle-class residents and expanded a number of provisions to assist working families, including the property tax circuit breaker and standard deduction. The council also expanded the city’s EITC for childless workers, one of the most effective strategies for lifting workers out of poverty and a longtime ITEP recommendation. The city partially paid for these reforms by broadening the sales tax base to include more services, limiting personal exemptions for better-off citizens, and making permanent its 8.95 percent income tax bracket on high-income earners.  Many additional changes are tied to revenue triggers, ensuring that the reform measures won’t wreck the city’s finances.

    Washington Gov. Jay Inslee made sustainability and fairness the centerpiece of his 2015 budget proposal, announced this month. The proposal protects education spending and important services through a 7 percent capital gains tax on capital gains earnings above $25,000 per individual and $50,000 per couple. The governor also pledged to fund the state’s working families tax credit (the state’s Earned Income Tax Credit) through his proposed tax on carbon polluters, benefiting 450,000 Washington families. The proposal is the boldest by a Washington governor in some time.

    Lawmakers in Minnesota and Maryland invested in provisions to give working families a lifeline. Minnesota expanded the property tax credit for homeowners and renters and increased the working family credit (the state’s EITC) and the dependent care credit. Maryland legislators expanded the refundable portion of the EITC, from 25 percent to 28 percent.

    Alaska officials saw the light and decided to let their film tax credit expire five years early. The film tax credit has been notoriously ineffective in a number of states.

    Vermont legislators increased homestead property taxes by 4 mills (cents per $100 of assessed value) and non-residential property taxes by 7.5 mills, while leaving rates unchanged for low and moderate-income taxpayers.

     

    The Worst

    Lawmakers in Wisconsin doubled down on their tax-cut fervor, reducing the bottom personal income tax rate from 4.4 percent to 4 percent and enacting another round of state-funded property tax cuts.

    Voters in Tennessee permanently banned the state from enacting a broad-based personal income tax through a ballot measure that amends the state constitution, essentially tying the hands of future lawmakers and ensuring that the state’s tax system will remain among the most regressive in the nation.  Georgia voters approved an amendment to cap the state’s top personal income tax rate where it stands as of Jan. 1, 2015, which could lead to financial problems down the road and will prevent future Georgians from making needed investments.

    Lawmakers in Missouri and Oklahoma enacted personal income tax cuts dependent on the state hitting revenue targets.  Oklahoma’s top personal income tax rate would drop from 5.25 to 4.85 percent while Missouri’s top income tax rate would drop from 6 to 5.5 percent; in Missouri, a new 25 percent exemption on pass-thru business income would be implemented.

    Lawmakers in a number of jurisdictions – Washington, DC, Rhode Island, Maryland, Minnesota, and New York – increased the estate tax threshold, essentially giving the wealthiest residents in those states a huge, unnecessary tax break.

    Florida lawmakers passed a hodgepodge of gimmicky sales tax holidays and exemptions for car seats, cement mixers, helmets, electricity bills, college meal plans and a host of legislator’s pet causes. The legislature also reduced the business franchise tax and cut motor vehicle fees, for a total of $500 million in lost revenue. 


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


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


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


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


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


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


     


    State Rundown 11/14: Here Comes the Judge


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


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


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


     


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


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

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

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

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

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

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

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

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

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

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

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


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


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

    Brown---Hogan.jpgMaryland’s gubernatorial election pits current Lt. Gov. Anthony Brown (D) against former state official and businessman Larry Hogan (R). Current governor (and possible presidential candidate) Martin O’Malley (D) is not on the ballot, but the election is widely seen as a referendum on his stewardship, most notably the tax increases passed during his tenure.

    Like Brown’s primary challenger Doug Gansler, Hogan has sought to make tax increases a campaign issue. Change Maryland, an organization founded by Hogan in 2011, claims that the O’Malley-Brown administration passed 40 separate tax and fee increases that will cost Marylanders an additional $20 billion by 2018. Hogan further argues that the tax increases have made Maryland’s business climate less competitive, and forced wealthier residents to flee the state. To back up his claims, Hogan cites a recent Gallup poll that that found 47 percent of Marylanders would move to another state if they could, and the loss of 10 out of 13 of the state’s Fortune 500 companies. Hogan has pledged to reverse as many of O’Malley’s tax increases as possible, particularly personal and corporate income taxes, as well as cut more than a billion dollars in wasteful spending.

    Polling suggests Hogan’s anti-tax message has failed to gain traction – Brown leads him 50 percent to 37 percent. Many Marylanders believe the tax increases were necessary to make or maintain investments in transportation, education and other priorities, and they credit O’Malley for his balanced approach of spending cuts and revenue increases during tough economic times.

    Furthermore, many of Hogan’s claims have been called into question. The Maryland Center on Economic Policy asserts that studies showing Maryland losing billions of dollars in income due to out-migration use inflated numbers that don’t account for new income generated by other Maryland residents taking the jobs and businesses left behind. In fact, about 97 percent of households leaving Maryland between 1993 and 2011 were replaced by households moving in from other states. The organization also notes that anti-tax critics attribute out-migration to tax policy, when in reality residents have myriad reasons for moving – and taxes rank far below family, friends and even weather when making moving decisions.

    Hogan’s claim that the state lost 10 out of 13 Fortune 500 companies during O’Malley’s tenure doesn’t hold up to scrutiny. In 2006, the year O’Malley was elected, Maryland had 5 Fortune 500 companies and 12 Fortune 1000 companies – not 13 Fortune 500 companies, as Hogan alleges. A cursory search of Fortune 500 lists between 2006 and 2013 shows that the number of Fortune 500 companies based in Maryland has been remarkably steady, between 4 and 6 each year; results for Fortune 1000 companies are similar, between 11 and 13. The Fortune 500 companies that left the state – Black and Decker, Constellation Energy, and Coventry Health Care – were acquired by other companies (Black and Decker maintains a headquarters in Towson.)

    Brown, for his part, has kept a low profile on tax issues. He has pledged to create a new commission to study comprehensive tax reform within his first 100 days in office, and says he does not foresee the need for any new taxes in the future. His campaign has also pushed back against Hogan’s association with former Governor Bob Ehrlich’s (R) administration, claiming that Ehrlich oversaw one of the largest expansions of government, taxes and fees in state history (Hogan served at Ehrlich’s appointment secretary).

    Both candidates support an exemption for veteran’s pensions from the state personal income tax, with Brown’s endorsement of the proposal coming a day after Hogan’s. Both candidates have been cautious on the recent change to Maryland’s estate tax law, which will raise the estate tax threshold from $1 million to $5.34 million. When asked about the estate earlier this year, Brown demurred, saying that any tax reform should be comprehensive, while Hogan has made no public statement on the bill. 


    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


    Good and Bad Tax Policy in Maryland


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    The estate tax, Earned Income Tax Credit (EITC), and film tax credits were all major topics of debate in Maryland this year.  Now that the state’s legislative session has ended, here’s a quick look at what happened on each of these issues.

    Estate tax:  Despite having the highest concentration of millionaires in the country, Maryland lawmakers say they’re very concerned the estate tax may be driving wealthy residents out of the state.  Because of this, both the House and Senate approved a bill benefiting estates worth more than $1 million.  Assuming the governor signs the bill, which seems likely, Maryland’s estate tax exemption will increase from $1 million to more than $5.3 million by the end of the decade.  This is unfortunate since, as CTJ explained in testimony before both of Maryland’s tax-writing committees, an estate tax cut will reduce the adequacy and fairness of the state’s tax system without producing any economic benefit.

    Earned Income Tax Credit:  In better news, Maryland lawmakers unanimously agreed to expand the state’s EITC.  Maryland currently allows taxpayers to choose between a refundable EITC equal to 25 percent of the federal credit, or a 50 percent nonrefundable EITC.  Legislation approved on Monday will gradually increase the refundable portion of the credit to 28 percent, which means low-income taxpayers who earn too little to owe personal income taxes will receive a somewhat larger refund to help offset the significant amounts (PDF) of sales and property taxes they pay each year.

    Film tax credit:  A couple months ago, the producers of Netflix’s “House of Cards” threatened to leave the state unless lawmakers gave them more taxpayer dollars through the state’s film tax credit program.  Despite trying mightily to comply with their demand, the legislature ultimately failed to reach an agreement on a bill that would have shelled out an extra $3.5 million to the filmmakers.  Less encouraging, however, is that the show could still collect another $15 million in tax credits—on top of the millions it has already received.


    Film Tax Credit Arms Race Continues


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    Tax credits for the film industry are receiving serious attention in at least nine states right now. Alaska’s House Finance Committee cleared a bill this week that would repeal the state’s film tax credit, and Louisiana lawmakers are coming to grips with the significant amount of fraud that’s occurred as a result of their tax credit program. Unfortunately for taxpayers, however, the main trend at the moment is toward expanding film tax credits. North Carolina and Oklahoma are looking at whether to extend their film tax credits, both of which are scheduled to expire this year. And California, Florida, Maryland, Pennsylvania, and Virginia lawmakers are all discussing whether they should increase the number of tax credit dollars being given to filmmakers.

    The best available evidence shows that film tax credits just aren’t producing enough economic benefits to justify their high cost. While some temporary, relatively low-wage jobs may be created as a result of these credits, the more highly compensated (and permanent) positions in the film industry are typically filled by out-of-state residents that work on productions all over the country, and the world. And with film tax credits having proliferated in recent years, lawmakers who want to lure filmmakers to their states with tax credits are having to offer increasingly generous incentives just to keep up.

    Saying “no” to Hollywood can be a difficult thing for states, but here are a few examples of lawmakers and other stakeholders questioning the dubious merits of these credits within the last few weeks:

    North Carolina State Rep. Mike Hager (R): “I think we can do a better job with that money somewhere else. We can do a better job putting in our infrastructure … We can do a better of job of giving it to our teachers or our Highway Patrol.”

    Richmond Times Dispatch editorial board: [The alleged economic benefits of film tax credits] “did not hold up under scrutiny. Subsidy proponents inflated the gains from movie productions – for instance, by assuming every job at a catering company was created by the film, even if the caterer had been in business for years. The money from the subsidies often leaves the state in the pockets of out-of-state actors, crew, and investors. And they often subsidize productions that would have been filmed anyway.”

    Oklahoma State Rep. James Lockhart (D): According to the Associated Press, Lockhart “said lawmakers were being asked to extend the rebate program when the state struggles to provide such basic services as park rangers for state parks.” “How else would you define pork-barrel spending?”

    Alaska State Rep. Bill Stoltze (R): “Some good things have happened from this subsidy but the amount spent to create the ability for someone to be up here isn't justified. And it's a lot of money … Would they be here if the state wasn't propping them up?”

    Sara Okos, Policy Director at the Commonwealth Institute: “How you spend your money reveals what your priorities are. By that measure, Virginia lawmakers would rather help Hollywood movie moguls make a profit than help low-wage working families make ends meet.”

    Maryland Del. Eric G. Luedtke (D): Upon learning that Netflix’s “House of Cards” will cease filming in Maryland if lawmakers do not increase the state’s film tax credit: “This just keeps getting bigger and bigger … And my question is: When does it stop?”

    Picture from Flickr Creative Commons


    State News Quick Hits: Tax Breaks for NASCAR and House of Cards


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    Tax cut one-upmanship continues to be a major theme in the race to be Maryland’s next governor. As of right now, at least two gubernatorial candidates want to completely eliminate the state’s personal income tax–a revenue source that funds about half of the state’s spending on schools, hospitals, and various other services. In terms of how to pay for this massive cut, the best that Harford County Executive David Craig could come up with is a 3 percent across-the-board spending cut (that math seems a little fishy to us), while businessman and candidate Charles Loller seems to have bought into Arthur Laffer’s wild claims that tax cuts pay for themselves. But even if the cost of repeal weren’t an issue, it’s still the case that the personal income tax is an essential element of any fair and sustainable tax system, and should not be on the chopping block in any state.

    Lawmakers in Iowa are poised to give NASCAR a $9 million tax rebate. The bill (PDF), which passed a key Senate subcommittee last week, would extend a five percent rebate for all sales tax collected at Iowa Speedway, a racetrack located about 30 miles outside of Des Moines. The sweetheart deal had originally required that the track be owned at least 25 percent by Iowans, but the Florida-based NASCAR company bought the track last year, prompting legislators to scramble to amend the law. (Racetrack owners are already the beneficiary of a notorious federal tax break, which is part of the group of tax “extenders” currently languishing in Congress.) It is unclear why NASCAR, a profitable company in its own right, needs the handout. It already owns the facility and has plans to host four races there in 2014. Some in the state are hoping that the rebate will be used to upgrade the track so that it can host a lucrative Sprint Cup race, but NASCAR has made no such promise.

    Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have seen a lot of attention directed toward their analysis of an Oklahoma proposal to cut the state’s top income tax rate–including two opinion pieces, a front-page news story, and a paid advertisement (PDF) taken out by the state’s former Governor. While the top rate cut proposed by current Governor Mary Fallin is extremely lopsided (contrast a $29 tax cut for a middle-income family with a $2,000+ tax cut at the top), it appears that the Senate has some interest in improving upon the bill. Rather than simply cutting the top tax rate and slashing public investments, the Senate’s tax-writing committee recently advanced a bill that pairs the cut with a very sensible expansion of the state’s income tax base: eliminating the nonsensical state income tax deduction for state income taxes paid.

    House of Cards–a Netflix show about politicians making bad decisions–is trying to get Maryland’s politicians to make some bad decisions in real life. The Media Rights Capital production company says they’ll shoot the third season of their program elsewhere unless lawmakers direct more taxpayer dollars their way in the form of an expanded film tax credit. Upon learning of the threat, lawmakers on both sides of the aisle had some entirely appropriate reactions: “Is it possible that they would just leave after we gave them $31 million?” “We’re almost being held for ransom.” “When does it stop?”


    A New Wave of Tax Cut Proposals in the States


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    After some high-quality investigative journalism from the Orlando Sentinel last year, prominent state lawmakers in Florida are setting their sights on sunsetting or redesigning a poorly tailored tax break for companies that locate in high-crime areas. The tax provision at issue — the Urban High-Crime Area Job Tax Credit Programallows cities to draw expansive (and unalterable) borders around purported “high crime areas” that are anything but. Companies benefiting from the loophole include Universal Orlando, which has received over $8 million from the program since the provision’s adoption sixteen years ago. Universal is planning to cash in again this year with the opening of its second Harry Potter-themed amusement park (prompting one columnist to ask jokingly if being chased by an imaginary dragon constitutes attempted murder). Dubious corporate subsidies are nothing new in Florida, and the value of this credit is not about to break the bank ($500 to $1,500 per employee and capped statewide at $5 million each year). But by highlighting these abuses, the Sentinel has provided a healthy reminder that even well-meaning corporate tax breaks often create unintended, negative consequences and should be eliminated.

    Despite failing to win over the legislature with his tax swap proposal last year, Nebraska’s Governor Heineman is back to hawking large reductions in the personal income tax. While it’s true that Nebraska is sitting on a budget surplus, the legislature's Tax Modernization Committee held hearings last year and recently recommended only minor changes. Perhaps some middle ground comes in the form of two tax proposals introduced by legislators this month that target relief to low- and middle-income families (imagine that!). Senator Conrad (D-Lincoln) has called for an increase in the state Earned Income Tax Credit (EITC). And Senator Bolz (D-Lincoln) is proposing an increase in the state’s child care tax credit for middle income families. Conrad’s legislation would increase the refundable state EITC from 10% of the federal credit to 13%, which would make a substantial difference in the lives of Nebraska’s working poor. For a family with three children earning the maximum EITC benefit in 2014, such a change would put more than $180 back in their pockets. Bolz’s bill would increase the child care credit for those making more than $29,000 from 25% of the federal credit to 28%. Unlike the federal government, Nebraska already makes its child care tax credit partially refundable (for those making less than $29,000 a year), an admirable feature of the state’s tax code. Bolz’s proposal wouldn’t change the refundability equation and could be better targeted at low-income families, but, like Conrad’s EITC bill, is a step in the right direction.

    The Baltimore Sun has rightly poured cold water on an idea from some Maryland legislators to gut the state’s estate tax. House Speaker Michael Busch and Senate President Mike Miller have proposed increasing the value of an estate that can be passed on tax-free from $1 million to $5.25 million (more information on the mechanics of state estate and inheritance taxes can be found here).  The state comptroller has also signed onto the idea.  But the Sun editorial points out that supporters’ reasoning — that Maryland has become an inhospitable place for rich people to die — is faulty.  According to a recent study, 7.7 percent of Maryland households are millionaires — the highest percentage of any state — and only 2.8 percent of Maryland estates pay any state tax under the current regime.  Maryland policymakers — including Governor O’Malley, who has not yet committed either way hould resist this election-year giveaway to the rich.

    Wisconsin Governor Scott Walker learned last week that the state is expecting a $912 million surplus. The Governor is expected to propose both property and income tax cuts.  But the Wisconsin Budget Project (WBP) rightly cautions that tax cuts aren’t necessarily the best way to spend the surplus.  WBP argues that this revenue “gives lawmakers an excellent opportunity to invest in Wisconsin’s economic future and to put the state on a sounder fiscal footing by filling budget holes.”


    What to Watch for in 2014 State Tax Policy


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

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

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

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

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

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

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

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

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

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

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

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


    Avoiding Tax Cut One-upmanship in Maryland


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    Maryland has made some notable improvements to its tax system these last few years.  In 2012, lawmakers made the state’s regressive tax system (PDF) somewhat less unfair by limiting personal income tax exemptions and raising tax rates on high-income earners.  Then, in 2013, the state increased and overhauled its unsustainable gasoline tax despite the tough politics that accompany any policy that could lead to higher gas prices.

    But with a major state election now less than a year away, the conversation seems to be taking a familiar, and less grown-up, tone.  The Baltimore Sun reports that four of the six candidates for governor have already incorporated “crowd-pleasing” tax cuts into their platforms in an effort to woo voters, and that the speaker of the House and president of the Senate appear interested in following their lead.  Corporate income tax cuts have attracted the most attention so far, and the Sun expects that proponents of a corporate tax cut will get a boost from some business leaders when they unveil their legislative priorities next month.

    Rather than stand idly by and risk the election becoming a contest to see who can promise the longest list of tax cuts, some advocates in the state have already begun to do the hard work that’s needed to explain to lawmakers, candidates, and voters the ways in which taxes benefit the state.  The goal is to make the election year tradition of demonizing taxes a little less politically rewarding.

    One recent example of such work comes from the Maryland Budget and Tax Policy Institute (MBTPI), who spotlights a recent nonpartisan study that found that a corporate income tax cut could actually result in fewer jobs, less disposable income, and/or slower population growth.  More publicity around these kinds of basic facts will be needed if the candidates whose names will appear on Maryland’s (and other states’) ballot next year are going to be convinced that they should drop their familiar refrain about the job-creating power of tax cuts

    .


    EITC Boost Approved by Montgomery County Council


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    During a year in which far too many tax proposals have been focused on cutting taxes for the affluent, and in some cases actually raising them on the poor, Montgomery County Maryland’s decision to expand its Earned Income Tax Credit (EITC) is very welcome news.

    As we noted in August, Montgomery County’s EITC is just one of two local EITCs in the country (the other is in New York City).  The credit is a powerful tool for blunting the regressivity (PDF) of Maryland’s sales and property taxes, and is an effective way to alleviate poverty, encourage work, and improve the long-term prospects of children raised in low-income families.

    Unfortunately, when the Great Recession battered Montgomery County’s revenues, the County Council decided to scale back its EITC in order to help balance its budget.  Rather than matching the state EITC dollar-for-dollar, the credit dropped as low as 68.9% of the state credit in Fiscal Year 2012, and stands (PDF) at 75.5% of the state credit for Fiscal Year 2013.  Under a newly approved measure, however, that dollar-for-dollar match will gradually come back into effect by 2017.

    As Councilman Hans Riemer explained, “Most of the services in the county have been restored from their cuts at the bottom of the recession. Except this one … So we are about back to where we were years ago.”  Montgomery County’s decision to continue its long-running commitment to its poorest residents is one that officials in other states and localities would be wise to emulate.


    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.

     


    Montgomery County Poised to Expand Its Exemplary EITC


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    There is a strong consensus among scholars, think tanks and advocates around the country that there are concrete benefits to providing earned income tax credits (EITCs) – refundable credits (PDF) designed to offset income tax liability for low-income families and individuals. Not only has the EITC been shown to help alleviate poverty, but it has also succeeded in encouraging greater participation in the workforce, improving infant health, and boosting school achievement, among other things.

    While most discussions are about the federal and state EITCs, there are two local EITCs that are often overlooked, including Montgomery County, Maryland’s Working Families Income Supplement (WFIS). Originally introduced in 2000 as a tool to help the county’s poorest residents cope with an extremely high cost of living, the WFIS is one of only two local EITCs in the country (the other is in New York City).

    When originally implemented in 2000, the WFIS was set at 100 percent of the state EITC – that is, if a worker received $600 from the Maryland EITC, he or she would also receive $600 from the county. This supplement provided low-income Montgomery County families with the most generous combined EITC in the country. It also gave these households the ability to pay for basic day-to-day necessities like child care, school books, utility bills, and groceries – and most of all it helped reduce poverty and promote upward mobility. (Other reference materials on the WFIS can be found here.)

    Through the mid-2000s, the number of people living in poverty declined even as unprecedented numbers of people moved into the county. When the Great Recession began to take hold in late 2007, however, these advances were reversed. As jobs were lost and incomes fell, Montgomery County experienced a spike in poverty even as the Washington, DC region as a whole weathered the recession better than most.

    In a case of terrible timing, as county tax revenues began to fall, the Montgomery County Council decided to save a little money by scaling back the WFIS to 72.5 percent of the state EITC in FY 2011, 68.9 percent in FY 2012, and 72.5 percent in FY 2013. This decision only made things worse for low-income families: now, not only were they facing wide-spread layoffs prompted by a weak economy, but they were seeing a significant cut in a critical source of income.

    Now, however, members of the Council have proposed a plan that would restore the 100 percent credit that was in place for nearly a decade.

    Introduced in March and having undergone public hearings in July, Expedited Bill 8-13 (PDF) would gradually return the WFIS to 100 percent of the Maryland credit by Fiscal Year 2016. This expansion is estimated to help over 30,000 low-income households meet their basic day-to-day needs at a cost to the County of $3 million.  (For context, Montgomery County tax revenues are projected to grow by $30 million a year for the foreseeable future – even when factoring in the possible impact of the federal sequester).

    With a committee hearing scheduled for early October, the Council members promoting the bill have just under two months to garner support and move its restoration forward. For over a decade, the Council has demonstrated its dedication to the needs of its low-income residents as it championed one of the most forward-looking income tax credits in the nation.  By restoring the Working Family Income Supplement to 100 percent of the state credit, the Council would be offering critical help to its most vulnerable residents, providing a ladder for upward mobility, and adding a boost to the local economy.

    For more information on the structure and benefits of Earned Income Tax Credits:

    Rewarding Work Through Earned Income Tax Credits

    Institute on Taxation and Economic Policy, September 2011

    “Low-wage workers often face a dual challenge as they struggle to make ends meet. In many instances, the wages they earn are insufficient to encourage additional hours of work or long-term attachment to the labor force. At the same time, most state and local tax systems impose greater responsibilities on poor families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve meaningful economic security. The Earned Income Tax Credit (EITC) is designed to help low-wage workers meet both those challenges. This policy brief explains how the credit works at the federal level and what policymakers can do to build upon it at the state level.”

    Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School

    Center on Budget and Policy Priorities, April 9, 2013

    “The Earned Income Tax Credit (EITC), which went to 27.5 million low- and moderate-income working families in 2010, provides work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows. In addition, recent ground-breaking research suggests, the EITC’s benefits extend well beyond the limited time during which families typically claim the credit.”

    Ten Years of the EITC Movement: Making Work Pay Then and Now

    Brookings Institution, April 18, 2011

    “The Earned Income Tax Credit (EITC) … has grown to be called the nation’s largest federal anti-poverty program. The EITC has had significantly beneficial effects for its recipients and their communities. These include encouragement of work, reduction of poverty, and boosting of local economic activity.”


    Good News for America's Infrastructure: Gas Taxes Are Going Up on Monday


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    The federal government has gone almost two decades without raising its gas tax, but that doesn’t mean the states have to stand idly by and watch their own transportation revenues dwindle.  On Monday July 1, eight states will increase their gasoline tax rates and another eight will raise their diesel taxes.  According to a comprehensive analysis by the Institute on Taxation and Economic Policy (ITEP), ten states will see either their gasoline or diesel tax rise next week.

    These increases are split between states that recently voted for a gas tax hike, and states that reformed their gas taxes years or decades ago so that they gradually rise over time—just as the cost of building and maintaining infrastructure inevitably does.

    Of the eight states raising their gasoline tax rates on July 1, Wyoming and Maryland passed legislation this year implementing those increases while Connecticut’s increase is due to legislation passed in 2005California, Kentucky, Georgia (PDF) and North Carolina, by contrast, are seeing their rates rise to keep pace with growth in gas prices—much like a typical sales tax (PDF).  Nebraska is a more unusual case since its tax rate is rising both due to an increase in gas prices and because the rate is automatically adjusted to cover the amount of transportation spending authorized by the legislature.

    On the diesel tax front, Wyoming, Maryland, Virginia (PDF) and Vermont passed legislation this year to raise their diesel taxes while Connecticut, Kentucky and North Carolina are seeing their taxes rise to reflect recent diesel price growth.  Nebraska, again, is the unique state in this group.

    There are, however, a few states where fuel tax rates will actually fall next week, with Virginia’s (PDF) ill-advised gasoline tax cut being the most notable example. Vermont (PDF) will see its gasoline tax fall by a fraction of a penny on Monday due to a drop in gas prices, though this follows an almost six cent hike that went into effect in May as a result of new legislation. Georgia (PDF) and California will also see their diesel tax rates fall by a penny or less due to a diesel price drop in Georgia and a reduction in the average state and local sales tax rate in California.

    With new reforms enacted in Maryland and Virginia this year, there are now 16 states where gas taxes are designed to rise alongside either increases in the price of gas or the general inflation rate (two more than the 14 states ITEP found in 2011).  Depending on what happens during the ongoing gas tax debates in Massachusetts, Pennsylvania, and the District of Columbia, that number could rise as high as 19 in the very near future.

    It seems that more states are finally recognizing that stagnant, fixed-rate gas taxes can’t possibly fund our infrastructure in the long-term and should be abandoned in favor of smarter gas taxes that can keep pace with the cost of transportation.

    See ITEP’s infographic of July 1st gasoline tax increases.
    See ITEP’s infographic of July 1st diesel tax increases.


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


    Mid-Session Update on State Gas Tax Debates


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    In a stark departure from the last few years, one of the most debated state tax policy issues in 2013 has been the gasoline tax (PDF).  Until this February, it had been almost three years since any state’s lawmakers approved an increase or reform of their gasoline tax.  That changed when Wyoming Governor Matt Mead signed into law a 10 cent gas tax hike passed by his state’s legislature.  Since then, Virginia has reformed its gas tax to grow over time alongside gas prices, and Maryland has both increased and reformed its gas tax.  By the time states’ 2013 legislative sessions come to a close, the list of states having improved their gas taxes is likely to be even longer.

    Massachusetts appears to be the most likely candidate for gas tax reform.  Both the House and Senate have passed bills immediately raising the state gas tax by 3 cents per gallon, and reforming the tax so that its flat per-gallon amount keeps pace with inflation in the future (see chart here).  In late 2011, the Institute on Taxation and Economic Policy (ITEP) found that Massachusetts is among the states where inflation has been most damaging to the state transportation budget—costing some $451 million in revenue per year relative to where the gas tax stood in 1991 when it was last raised.  Governor Deval Patrick has expressed frustration that legislators passed plans lacking more revenue for education—in sharp contrast to his own plan to increase the income tax—but he has also signaled that there may be room for compromise.

    Vermont lawmakers are also giving very serious consideration to gas tax reform.  At the Governor’s urging, the House passed a bill increasing the portion of Vermont’s gas tax that already grows alongside gas prices.  The bill also reforms the flat-rate portion of Vermont’s gas tax to grow with inflation.  The Senate is now debating the idea, and early reports indicate that the package may be tweaked to rely slightly more on diesel taxes in order to reduce the size of the increase on gasoline.

    Pennsylvania Governor Tom Corbett has also proposed raising and reforming his state’s gasoline tax.  While Pennsylvania’s tax is technically supposed to grow alongside gas prices, an obsolete tax cap limits the rate from rising when gas prices exceed $1.25 per gallon.  Corbett would like to remove that cap in order to improve the sustainability of the state’s revenues, and members of his administration have been traveling the state to explain how doing so would benefit Pennsylvanians.  While the legislature has yet to act on his plan, the fact that it has the backing of the state’s Chamber of Business and Industry is likely to help its chances.

    In New Hampshire, the Governor has said she is open to raising the state gas tax and the House has passed a bill doing exactly that.  But there are indications that lawmakers in the state Senate might continue procrastinating on raising the tax, as the state has done for over two decades.

    Nevada lawmakers are discussing a gas tax increase following the release of a report showing that the state’s outdated transportation system is costing drivers $1,500 per year.  ITEP analyzed a gas tax proposal receiving consideration in the Nevada House and found that even with the increase, the state’s gas tax rate (adjusted for inflation) would still remain low relative to its levels in years past.

    Iowa lawmakers have been debating a gas tax increase for a number of years, and there may be enough support in the legislature to finally see one enacted into law.  The major stumbling block is that Governor Branstad will only agree to raise the gas tax if it’s part of a larger package that cuts revenue overall—particularly revenues from the property tax.  As we’ve explained in the past, such a move would effectively benefit the state’s roads at the expense of its schools.

    Earlier this year, Washington State House lawmakers unveiled a plan raising the state’s gas tax by 10 cents per gallon and increasing vehicle registration fees.  Senate leaders are reportedly less excited about the idea of a gasoline tax hike, though there are indications they would consider such an increase if it were to pass the House.  While talk of a 10 cent increase has since quieted down, there are rumors that a smaller increase could be enacted.

    Unfortunately, some states where the chances of gas tax reform once appeared promising have since begun to move away from the idea.  In Michigan, while the Governor and the state Chamber of Commerce have voiced strong support for generating additional revenue through the gas tax, neither the House nor the Senate appears likely to vote in favor of such a reform this year.  Meanwhile, the chances for a gas tax increase in Minnesota seem to have faded after the Governor came out against an increase and the House subsequently unveiled a tax plan that leaves the gas tax untouched.

    Overall, 2013 has already been a significant year for state gas tax reform.  Both Maryland and Virginia have abandoned their unsustainable flat gas taxes in favor of a better gas tax that grows over time, just like construction costs inevitably will.  Hopefully, within the next few months, more states will have followed their lead.

    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.


    Chart: New Gas Tax Plan in Maryland House of Delegates


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    UPDATE: As of March 29, 2013 this plan has passed both the House and Senate and is expected to be signed into law by the Governor.

    This week, the Maryland House will vote on a plan to raise and reform the state’s gasoline tax. The plan is very similar to one proposed by Governor Martin O’Malley that our partner organization, the Institute on Taxation and Economic Policy (ITEP), analyzed when it was released two weeks ago.

    An updated chart from ITEP shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not raise the gas tax, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years. Only in 1922 and 1923 did Maryland levy a lower gas tax.

    Moreover, the gas tax increase under consideration in the House, like the one proposed by the Governor, is actually very modest. The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 12 cent increase by 2015. That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised. Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the House plan is enacted, the inflation-adjusted rate over the next decade would average just 32.8 cents.


    Chart: Maryland Governor O'Malley's New Gas Tax Plan


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    Maryland Governor Martin O’Malley recently unveiled his plan to raise and reform his state’s gasoline tax.  Local TV stations predictably responded by interviewing drivers unhappy with the high price of gas, while (also predictably) failing to explain that Maryland’s gas taxes are not to blame for those high prices.

    A new chart from our partner organization, the Institute on Taxation and Economic Policy (ITEP) shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not act on the Governor’s recommendation, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years.  Only in 1922 and 1923 did Maryland levy a lower gas tax.

    Moreover, the gas tax increase proposed by the Governor is actually very modest.  The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 9 cent increase by 2014.  That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised.  Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the Governor’s plan is enacted, the inflation-adjusted rate over the next decade would average just 31 cents.


    State News Quick Hits: Myth of the Tax-Fleeing Millionaire, and More


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    In 2011, Michigan lawmakers enacted a huge “tax swap” that cut taxes dramatically for businesses and raised them on individuals – especially lower-income and elderly families. Given that many of these changes went into effect at the beginning of 2012, and that many Michiganders are just now beginning to file their 2012 tax forms, the Associated Press provides a rundown of the ways in which the tax bills of typical Michiganders will look different from previous years. Our partner organization, the Institute on Taxation and Economic Policy (ITEP), estimated (PDF) that changes in the personal income tax would result in tax increases of $100 for a poor family, $300 for a middle income family and $7 from a rich one.

    South Carolina is considering jumping onto a bandwagon heading the wrong way: supplementing the state’s transportation revenues by taking money away from schools and other state services. If enacted, the plan under consideration would raid $80 million from the state’s general fund every year and use it for roads instead. ITEP estimated, however, that South Carolina could raise more than $400 million for transportation every year just by updating its stagnant gasoline and diesel taxes to catch up to over two decades of inflation.

    There’s some good news on the gas tax issue in Iowa. This week, an ad hoc transportation lobby will rally to support the “It’s Time for a Dime” campaign. These builders, farmers and contractors are urging lawmakers to raise the state’s gas tax to pay for needed infrastructure repairs. The Institute on Taxation and Economic Policy’s (ITEP) Building a Better Gas Tax concludes that Iowa hasn’t raised its gas tax in over two decades and has lost 43 percent of its value since the last increase.

    In case you missed it, here’s a great read from the New York Times about how we shouldn’t be so quick to assume that millionaires are ready to pack up their bags and move at the slightest increase in their tax bills. In “The Myth of the Rich Who Flee From Taxes,” the Times cites ITEP’s work on the Maryland millionaire tax: “a study by the Institute on Taxation and Economic Policy, a nonprofit research group in Washington, found that nearly all the decline in millionaires was the result of a drop in incomes largely attributable to the stock market plunge and recession, and not to migration — “down and not out,” as the study put it.”


    Gas Tax Gains Favor in the States


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    Note to Readers: This is the fifth of a six part series on tax reform trends in the states, written by The Institute on Taxation and Economic Policy (ITEP).  Previous posts in this series have provided an overview of current trends and looked in detail at “tax swaps,” personal income tax cuts and progressive tax reforms under consideration in the states.  This post focuses on one of the most debated tax issues of 2013: raising state gasoline taxes to pay for transportation infrastructure improvements.

    States don’t tend to increase their gas tax rates very often, mostly because lawmakers are afraid of being wrongly blamed for high gas prices.  The result of this rampant procrastination is that state gas tax revenues are lagging far behind what’s needed to pay for our transportation infrastructure.  Until last week, the last time a state gas tax increase was signed into law was three and a half years ago—in the summer of 2009—when lawmakers in North Carolina, Oregon, Rhode Island, Vermont, and the District of Columbia all agreed that their gas tax rates needed to go up, albeit modestly in some cases.  (Since then, some state gas taxes have also risen due to provisions automatically tying the tax to gas prices or inflation.)

    But Wyoming was the state that ended the drought when Governor Matt Mead signed into law a 10 cent gas tax increase passed by the state’s legislature.  And Wyoming is not alone.  In total, lawmakers in nine states are seriously considering raising (or have already raised) their gas tax in 2013: Iowa, Maryland, Massachusetts, Michigan, New Hampshire, Pennsylvania, Vermont, Washington, and Wyoming. And until recently, Virginia appeared poised to increase its gas tax, too.In addition to Governor Mead, Republican governors in Pennsylvania and Michigan and Democratic governors in Massachusetts and Vermont have proposed raising their state gas taxes despite the predictable political pushback that such proposals seem to elicit.  The plans under discussion in these four states are especially reform-minded since they would not just raise the gas tax rate today, but also allow it to grow over time as the cost of asphalt, concrete, machinery, and everything else the gas tax pays for grows too.

    In New Hampshire, meanwhile, Governor Hassan has said that the state needs more funding for transportation and is open to the idea of raising the gasoline tax, among other options.  The state House is debating just such a bill right now.  The situation is similar in Maryland where Governor O’Malley, who pushed for a long-overdue gasoline tax increase last year, recently met with legislators to discuss a gas tax increase proposed this year by Senate President Mike Miller.  Washington State Governor Jay Inslee has also not ruled out an increase in the gas tax—an idea backed by the state Senate majority leader and the House Transportation Committee chair.  And in the Hawkeye State, Governor Branstad once described 2013 as “the year” to raise Iowa’s gas tax (which happens to be at an all-time low, adjusted for inflation), although he has since said that he would support doing so only after lawmakers cut the property tax.

    Other states where gas tax increases have gotten a foothold so far this year include Minnesota, Texas, West Virginia, and Wisconsin, though it’s not yet clear how far those states’ debates will progress in 2013.

    Across the country, no state has received more attention this year for its transportation debates than Virginia, where Governor Bob McDonnell kicked off the discussion by actually proposing to repeal the state’s gasoline tax.  But while Governor McDonnell’s idea was certainly attention-grabbing, it also failed to gain traction with most lawmakers, and the Virginia Senate responded by passing a bill actually increasing the state gasoline tax and tying it to inflation.  Since then, the preliminary details of an agreement being negotiated between House and Senate leaders are just now emerging, but early indications are that the legislature will try to cut the gas tax in the short-term, but allow the tax to rise alongside gas prices in the future.  The size of the cut will also depend on whether Congress enacts legislation empowering Virginia to collect the sales taxes owed on online purchases.

    It’s good to see Virginia lawmakers looking toward the long-term with reforms that will allow the gas tax to grow over time.  But asking less of drivers through the gas tax today—when the state is facing such serious congestion problems—is fundamentally bad tax policy.  For more on the merits of the gas tax and the reforms that are needed to improve its fairness and sustainability, see Building a Better Gas Tax from the Institute on Taxation and Economic Policy (ITEP).


    Beltway's New "Lexus Lanes" a Symbol of Broken Tax Policy


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    On Saturday, a stretch of the legendary I-495 Beltway encircling Washington, DC will grow from eight lanes to twelve.  But this modest expansion of the region’s famously inadequate transportation network isn’t designed to benefit everyone.  With so many federal and state lawmakers terrified to raise taxes for the public good, the Beltway’s new “express lanes” will be paid for in a different way—specifically, by the wealthier drivers who can afford to buy their way out of the congested lanes (Kia Lanes, perhaps?), and into these heavily tolled, so-called Lexus Lanes.

    AAA Mid-Atlantic initially opposed the new Lexus Lanes, since by definition they only work when the rest of the transportation system is failing.  But an “acceptance of reality … about the sad state of transportation funding” led AAA to eventually change its mind and embrace the lanes on the grounds that they’re better than nothing.

    Sad indeed.  The Institute on Taxation and Economic Policy (ITEP) has shown that much of our nation’s transportation funding woes can be traced back to the short-sighted design of federal and state gas taxes, and that there are straightforward ways to fix these glaringly broken taxes.  But raising and reforming the gas tax can be politically difficult, and thus here we are, with Band-Aid fixes like Lexus Lanes instead.


    Evidence Continues to Mount: State Taxes Don't Cause Rich to Flee


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    There’s been a lot of good research these past few years debunking claims that state taxes – particularly income taxes on the rich – send wealthy taxpayers fleeing from “unfriendly” states.  CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP), took a lead role in disproving those claims in Maryland (PDF), New York, and Oregon (PDF), for example. CTJ has also been covering the controversy in several states and in the media.

    Some particularly thorough research on this topic has come out of New Jersey, where researchers at Princeton and Stanford Universities were granted access to actual tax return data, which is not available to the public, in order to investigate the issue in more detail. The resulting paper (PDF) found a “negligible” impact of higher taxes on the migration patterns of the wealthy.

    And now, for the further benefit of lawmakers seeking to become better informed about tax policy, those same Princeton and Stanford researchers were recently granted access to similar confidential taxpayer data in California. Unsurprisingly, the findings of their newest paper (PDF) were similar to those out of New Jersey: “the highest-income Californians were less likely to leave the state after the [2005] millionaire tax was passed… [and] the 1996 tax cuts on high incomes … had no consistent effect on migration.”

    That’s right.  California millionaires actually became less interested in leaving the state after the tax rate on incomes over $1 million rose by one percentage point starting in 2005.

    Another important finding: migration is only a very small piece of what determines the size of a state’s millionaire population.  “At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population,” they explain.  The other 98.8 percent is due to yearly fluctuations in rich taxpayers’ income that moves them above or below the $1 million mark.  

    This finding (which is not entirely new) defeats the very logic that anti-tax activists use to argue their “millionaire migration” case. Here’s more from the researchers:

    “Most people who earn $1 million or more are having an unusually good year. Income for these individuals was notably lower in years past, and will decline in future years as well. A representative “millionaire” will only have a handful of years in the $1 million + tax bracket. The somewhat temporary nature of very-high earnings is one reason why the tax changes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income.”

    But for every new piece of serious research on this issue, there are just as many bogus studies purporting to show the opposite.  Of particular note is a September “study” from the Manhattan Institute, recently torn apart by Sacramento Bee columnist Dan Walters.

    Somewhat surprisingly for a right-wing organization’s study of this topic, the Manhattan Institute report actually concedes that other variables, things like population density, economic cycles, housing prices and even inadequate government spending on transportation, can motivate people to leave one state for another.  But while the Institute doesn’t claim that every ex-Californian left because of taxes, regulations, and unions, it does, predictably, assign these factors an outsized role. But their “analysis” of the impact of taxes spans just six paragraphs and is, in essence, nothing more than an evidence-free assertion that low taxes are the reason some former Californians favor states like Texas, Nevada, Arizona – even, oddly, Oregon, where income tax rates are similar to California’s.

    Obviously, the guys looking at the actual tax returns have a better idea of what’s actually going on, and state lawmakers need to listen.


    Quick Hits in State News: Wynonna Judd's Tax Break, Undocumented Workers' Taxes


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    The Iowa Policy Project’s Research Director Peter Fisher is quoted in a Des Moines Register piece where he recommends that Iowa increase it Earned Income Tax Credit (EITC) as one way to help low- and middle-income children. ITEP has long championed EITCs as a vital anti-poverty tax policy.  

    With Halloween just around the corner, Renee Fry of Nebraska’s Open Sky Policy Institute shares the scary news that Nebraska ranks 27th among states for its regressive tax structure. Taxes are expected to be a contentious issue this year and “fiscal guru” Fry says the state’s “tax system is taking its toll in how much Nebraskans invest in schools, roads and communities. Outdated tax codes also complicate state leaders’ ability to plan strategically.”

    Here’s a familiar problem, this time from Tennessee.  Big property tax breaks for farmers are reducing local tax bases by up to 20 percent. Worse, a state report says that the break is “being used by some people who clearly aren't farmers.”  Among the so-called “farmers” benefiting from this giveaway are some of the state’s wealthiest residents, like country music stars Billy Ray Cyrus and Wynonna Judd, as well as the founder of Autozone.

    With a Maryland version of the DREAM Act on the November ballot, columnist Dan Rodricks at the Baltimore Sun wants readers to be aware of  the taxes that are often paid by undocumented workers, including state income taxes, federal income taxes, Social Security taxes, sales taxes, and fees.


    New From ITEP: Maryland Tax Bill Would Improve Tax Fairness and Revenue


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    May 16, 2 PM UPDATE: The House has passed SB1302 and it now heads to Gov. O’Malley’s desk, where he is expected to sign it.

    Maryland lawmakers are on the verge of bucking a national trend.  While most of the biggest state tax debates in 2012 have focused on proposals that would cut taxes and tilt state tax systems even more heavily in favor of the wealthy, Maryland appears poised to do exactly the opposite.  On Tuesday, the state Senate voted to raise tax rates and limit tax exemptions for single Marylanders earning over $100,000 and for married couples earning over $150,000 per year.  The House is expected to follow suit by passing the same bill (SB1302) as early as Wednesday.

    If enacted into law, these changes will allow the state to avoid a variety of cuts to vital public services, as detailed by the Maryland Budget and Tax Policy Institute.  But in addition to improving the adequacy of Maryland’s tax system, a new analysis from our sister-organization, the Institute on Taxation and Economic Policy (ITEP), shows that the income tax changes contained in SB1302 would also lessen the unfairness of a regressive tax system that allows Maryland’s wealthiest residents to pay less of their income in tax than any other group.  Among ITEP’s findings:

    • Because the income tax changes are limited to taxpayers earning over $100,000 or $150,000 per year, only 11 percent of Maryland taxpayers would face an income tax increase in 2012 as a result of SB1302.  (It’s worth noting, however, that increases in tobacco taxes, fees, and other provisions would affect additional taxpayers—though these increases make up just 3 percent of the bill’s total revenue.)
    • 54 percent of the income tax revenue raised by SB1302 would come from the wealthiest 1 percent of state taxpayers—a group with an average income of nearly $1.6 million per year.  87 percent of the revenue would come from the top 5 percent of taxpayers.
    • The changes in families’ income tax bills—even at the top of the income distribution—would be very modest.  After considering the "federal offset" effect, the tax increase faced by the top 1 percent of taxpayers would equal just 0.16 percent of their total household income, and taxpayers outside of the top 1 percent would face an even smaller increase.  Given the small size of these tax changes, Maryland’s tax system would undoubtedly remain regressive overall.
    • The progressive nature of SB1302 means that it’s well suited to take advantage of the “federal offset” effect mentioned above, whereby wealthier taxpayers write-off their state tax payments and receive a federal tax cut in return.  17 percent of the revenue raised by SB1032—or $28 million in tax year 2012—would come not from Marylanders, but from the federal government in the form of new federal tax cuts for Maryland taxpayers.

    See ITEP’s full analysis here.

    • Michigan Governor Rick Snyder is voicing support for federal legislation that would allow states to collect sales taxes owed on purchases made over the Internet, but he has little interest in pursuing a state-level law that would allow Michigan to begin chipping away at the problem.
    • The Gazette has an article about the failure of Maryland legislators to raise the gas tax during their recently concluded regular session.  It cites research from the Institute on Taxation and Economic Policy (ITEP) showing that the state’s gas tax rate would need to rise by 15.8 cents just to offset the last two decades of construction cost inflation.  In the article, Governor O’Malley explains the obvious: high gas prices caused lawmakers to delay this overdue reform, again.
    • Legislators in New Hampshire were well on the way to eliminating a tax on internet access, until a flap between the House and Senate over other provisions in the legislation derailed it. Still, leadership in both chambers remain committed to eliminating the tax that appears on consumers’ broadband and wireless bills.  But the New Hampshire Fiscal Policy Institute (NHFPI) warns against eliminating the tax in a recent report which explains that $12 million in annual revenues are a stake, and that better, more targeted options for reducing taxes on New Hampshire families are available.
    • This week, New Hampshire gubernatorial candidate Bill Kennedy came out with his own proposal to reduce property and businesses taxes and make up for the loss of those revenues by introducing a personal income tax in the state, which is one of nine states that doesn’t levy one. At the same time, the Granite State’s Senate is about to take up a radical and constraining proposal to amend their constitution to make sure no personal income tax can ever be levied. Stay tuned.

     

    Maryland Governor Martin O’Malley announced that he will call a special legislative session to start next week.  Lawmakers are widely expected to pass a progressive income tax package in order to avoid massive “doomsday” budget cuts.

    Tennessee’s inheritance tax will be eliminated beginning in 2016.  Legislators recently sent Governor Haslam a bill repealing the tax, seduced by bogus claims about the economic benefits of repeal.  Lawmakers also passed two other notable tax cuts: one repealing the gift tax (which The Commercial Appeal says will benefit Gov. Haslam himself, along with other wealthy taxpayers), and another cutting the state sales tax on groceries by a quarter of a percent.

    The gubernatorial race in Washington State is heating up and costly tax expenditures are getting long overdue attention from the candidates. But as this piece in the Seattle Times highlights, eliminating spending programs embedded in the tax code is easier said than done.  Read CTJ’s advice for how to do it here.

    Finally, check out this timely column describing why Minnesota Governor Mark Dayton should veto a bill passed by the legislature under the guise of job creation. (Hint - it’s really a massive tax cut for business.)


    Stadium Subsidies: Playing Games With Taxpayer Dollars


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    The history of states subsidizing professional sports stadiums with taxpayer dollars is long and, increasingly, controversial. Maryland provided nearly one hundred percent of the financing for the Orioles’ and Ravens’ shiny new facilities in the 1990s. In 2006, the District of Columbia subsidized the Washington Nationals’ new stadium at a cost to taxpayers of about $700 million.  And even though most stadiums are, in the long run, economic washes at best, losers at worst, there are still politicians willing to throw money at them.

    Minnesota legislators, for example, are currently grappling with how to fund a new stadium for the Vikings in response to threats that the franchise may leave the state.  But before the legislature gives away nearly a billion dollars, State Senator John Marty raises some excellent points about the math, and morals, behind the proposed taxpayer subsidies for the stadium:

    “The legislation would provide public money in an amount equivalent to a $77.30 per ticket subsidy for each of the 65,000 seats at every Vikings home game. That's $77 in taxpayer funds for each ticket, at every game, including preseason ones, for the next 30 years.… Public funds can create construction jobs, but those projects should serve a public purpose, constructing public facilities, not subsidizing private business investors. The need to employ construction workers is not an excuse to subsidize wealthy business owners, especially when there is such great need for public infrastructure work.” 

    In  Louisiana, the House of Representatives has gone ahead and approved a ten-year, $36 million tax subsidy  to keep the state’s NBA team, the Hornets, in New Orleans until 2024. Some are asking if the state can really afford it given a $211 million budget gap.  Representative Sam Jones noted that while the state has cut health and education spending, it still found a way to come up with millions of dollars to help out the ”wealthiest man in the state.” That would be Tom Benson, owner of not only the Hornets but the legendary New Orleans Saints football team, whose net worth is $1.1 billion dollars.

    In California, however, a different scenario is unfolding. Sacramento Mayor Kevin Johnson just abandoned negotiations with owners of the city’s NBA team, the Kings.  The Kings organization was unwilling to put up any collateral, share any pre-development costs, or commit to a more than a 15 year contract; this would have left the city shouldering all the costs – and all the risks – for developing the $391 million downtown facility.  Mayor Johnson said he’d offered everything he could to the team and it still wasn’t enough, so he pulled the plug. 

    Given the high cost and low return (including in terms of jobs) that sports facilities generate, more leaders should follow Minnesota’s Marty and Sacramento’s Johnson and stand up for the taxpayers who pay their salaries.

    (Thanks to Field of Schemes and Good Jobs First for keeping tabs on these subsidies!)

     

     

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

    We’ve written a lot about plans to eliminate Missouri’s income tax and boost the sales tax instead, spearheaded by anti-tax mastermind Rex Sinquefield.  He had hoped to put this radical plan before voters this November but the initiative’s advocates aren’t sure they can use the signatures they’ve gathered because of legal challenges.  The awful policy implications of the Sinquefield plan aside, this article explains how the ballot initiative process in Missouri has gone kablooey in recent years.   The 22 versions of the anti-income-tax initiative filed with the Secretary of State is in some ways an indictment of Missouri’s elected officials who have repeatedly refused to participate in serious tax reform debates.

    With tax day just around the corner, Wisconsin Budget Project reminds us that working Wisconsinites who qualify for the Earned Income Tax Credit will actually see fewer benefits this year thanks to draconian cuts in the credit passed in the 2011-13 budget.

    Maryland’s Senate President says that lawmakers “have an agreement” on a package of progressive personal income tax increases, but that they simply ran out of time to pass that package before last night’s midnight deadline.  Gov. O’Malley is expected to call a special session so that the increases can be enacted, but he has not done so yet.

    Here’s a great read from The American Prospect that talks about the need to reform regressive state and local tax structures, citing ITEP research.


    Transportation Funding Debacles Around the Country


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    Our nation’s gas tax policy is horribly designed, and the consequences have never been more obvious at either the federal or state levels.  Construction costs are growing while the gas tax is flat-lining, and the resulting tension has made even routine transportation funding debates too much for our elected officials to handle.  Just last week, President Obama signed into law the ninth temporary, stop-gap extension of our nation’s transportation policy since 2009, and numerous states are similarly opting to kick the proverbial can down the crumbling road.

    Much of our collective transportation headache arises from our “fixed-rate” gas taxes that just don’t hold up in the face of rising construction costs.  The federal gas tax hasn’t been raised in over 18 years, and most states have gone a decade or more without raising their tax.  There’s no doubt that we’re long-overdue for a gas tax increase, but political concerns have kept that option largely off the table.  In addition to the embarrassing federal Band-Aid fix just signed into law by the President, here’s what we’re seeing in the states:

    The Michigan Senate has voted to permanently take millions in sales tax revenue away from health care, public safety, and other services in order to complete basic road repairs.  But as the Michigan League for Human Services explains, the state would be much better off modernizing its stagnant gas tax.

    Both the Oklahoma House and Senate have voted to raid the general fund as a result of lagging gas tax revenues.  These proposals are very similar to the one under consideration in Michigan, and when fully phased-in they would divert $115 million away from education and other services in order to improve some of the state’s wildly deficient bridges.

    Luckily, Virginia lawmakers didn’t agree to Governor McDonnell’s proposal to raid the general fund in a manner similar to what’s being considered in Michigan and Oklahoma.  But they also failed to enact a much smarter proposal passed by the Senate that would have indexed the state’s gas tax to inflation.  It looks like rampant traffic congestion will remain the norm in Virginia for the foreseeable future.

    Iowa and Maryland appear likely to follow Virginia’s lead and do nothing substantial on transportation finance this year.  Iowa House Speaker Kraig Paulsen says that after much talk, a gas tax increase is not happening.  And while Maryland Governor Martin O’Malley is trying hard to end almost two decades of gas tax procrastination in the Old Line State, it doesn’t look like the odds are on his side.

    Connecticut lawmakers aren’t just continuing the status quo, they’re actually making it worse.  Connecticut is among the minority of states where the gas tax actually tends to grow over time, since it’s linked to gas prices.  But the Governor recently signed a hard “cap” on the gas tax that prevents it from rising whenever wholesale prices exceed $3.00 per gallon.  Lawmakers in North Carolina briefly considered a similar cap last year, but as the Institute on Taxation and Economic Policy (ITEP) explains, blunt caps are very bad policy and there are much better options available.

    For more on adequate and sustainable gas tax policy, read ITEP’s recent report, Building a Better Gas Tax.

    Photo of Governor Martin O'Malley and Sunoco Gas Station via  Third Way and MV Jantzen Creative Commons Attribution License 2.0

     

    Whatever comes of rumors that Governor Haley might face tax fraud charges, a modified income tax cut has passed out of South Carolina’s House Ways and Means Committee. Perhpas due to ITEP’s analysis, which found that the poorest South Carolinians would see their taxes increased under the legislation, it was modified to at least spare the poorest South Carolinians from new taxes.

    Check out yesterday’s post from the Wisconsin Budget Project showing that diminishing revenues are a "purple problem" because taxes keep getting cut no matter who's in power.

    The personal income tax has been under threat of repeal for most of this year in Oklahoma, but the Oklahoman reported yesterday that the Chair of the House Taxation and Revenue Committee says it’s unlikely full repeal will come to fruition.  A cut in the top tax rate, however, still appears likely so they’re still buying the economic snake oil.

    Here is a commonsense editorial from the Kansas City Star advocating for the taxing internet purchases and the streamlined sales tax agreement.  

    This week, Progressive Maryland came out with their compromise plan designed to bridge the gap between the personal income tax increases passed by the state House and Senate.  The plan was analyzed with the help of the Institute on Taxation and Economic Policy (ITEP), and would raise needed revenues while actually reducing the unfairness of the state’s regressive tax system.

     


    Quick Hits in the State News: Taxes Don't Scare Millionaires, and More


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    A new report from the Political Economy Research Institute at UMass Amherst examines the research on potential responses to states raising taxes on wealthy households.  They conclude that while it can lead to tax planning changes among the more affluent, a permanent reasonable tax increase will improve a state’s revenue picture and, contrary to conventional wisdom, will not cause wealthy residents to flee to lower tax states.

    Legislation pending in Maryland would require the state to evaluate whether its tax credits are achieving the goals for which they were enacted.  The vast majority of states still have no system in place for determining the costs and benefits of tax credits.  As in Oregon, the legislation would use sunset provisions (or expiration dates) to force lawmakers to review the evaluations before allocating more funds.  The Institute on Taxation and Economic Policy (ITEP) has a policy brief on accountability in tax credits and testified in support of a similar bill in Rhode Island last year.

    The grassroots group Alabama Arise is getting positive news coverage for a rally they organized in Montgomery last week calling on lawmakers to exempt groceries from the sales tax and replace the revenue by eliminating a tax break that primarily benefits the wealthiest Alabamians.

    In response to Ohio Governor John Kasich’s proposal to cut income taxes (paid for by increased taxes on gas mining) Policy Matters Ohio released a brief showing that Ohioans in the top one percent would get an annual tax cut of about $2,300 while middle income Ohioans ($32,000 to $49,000) would only get about $42.  Meantime, the powerful House Finance Chairman, Rep. Ron Amstutz, is postponing action on the Governor’s proposal, saying, “the more the members of our caucus have learned about this particular proposal, the more concerned I’ve become that there are key questions that cannot be sufficiently answered and resolved within the available legislative time frame.”


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


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

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

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

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


    Quick Hits in State News: ITEP Testifies in Maryland, and More


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    The Institute on Taxation and Economic Policy (ITEP) testified this week in favor of a bill that would reinstate Maryland’s recently expired “millionaires’ tax.”  As ITEP explains in its testimony, the millionaires’ tax would make the state’s regressive tax system slightly less unfair.  And despite predictable claims from the anti-tax crowd, there’s no reason to think that the tax would harm the state’s economy.

    Confirming our fears, it looks like Idaho lawmakers’ plan to cut taxes for the wealthiest and businesses in Idaho is moving forward. Legislation to reduce the top income tax rate passed out of the House Revenue and Taxation Committee.  In more bad Idaho news, it will not be joining the ranks of states with an Amazon tax this year as the bill failed to gain enough support.

    It’s only March, yet Sales Tax Holiday season is already rearing its head. Alabama Governor Robert Bentley supports a “storm gear” holiday in advance of tornado season.  Lawmakers in Georgia are combining a sales tax holiday (bad idea) with a proposal to require online retailers to start collecting sales taxes from Peach State e-shoppers (good idea) in an effort “to kill any talk that a tax increase is afoot.”  And, Florida House members have already approved another year of a back to school tax holiday planned for August. 

    ITEP’s Who Pays study was cited in an Associated Press article about heroic efforts to start taxing capital gains and other reforms in Washington State.  Because Washington has no personal or corporate income tax, and instead relies heavily on sales taxes, it has the most regressive tax system in the country.  At a press conference this week in support of the capital gains tax, Rep. Laurie Jinkins said, “Our fundamental problem in this state, in terms of revenue long term, has to do with fairness, adequacy of resources and stability of the resources that we bring into this state.”


    Trending in 2012: Admitting Taxes Are Too Low


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    Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would increase state revenues to pay for important public investments. 

    Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

    California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

    Maryland Governor Martin O’Malley included several revenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim - a recommendation ITEP made last year.

    O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

    Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

    Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

    North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

    Massachusetts Governor Deval Patrick is promoting some revenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

    Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s$88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

    Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0


    Maryland's Governor O'Malley is Right: Digital Downloads Don't Need a Special Tax Break


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    Governor Martin O’Malley’s budget has been circulating for a few days, and it seems people are just now turning their attention to one of its smaller tax changes, that is, the Governor’s proposal to end the tax exemption for digital downloads of things like software, songs and magazines.

    Maryland’s House Minority Leader had some predictably harsh words for O’Malley after learning of the proposal, but it’s hard to argue that the state should be taxing books and CD’s bought from Maryland retailers, while not taxing digital versions of the exact same products purchased over the Internet.  Viewed in that light, it’s more than a little confusing why the House Minority Leader apparently views this proposal as some kind of revenue grab.  If it’s reasonable for Maryland’s sales tax to apply to all the books, CD’s and other similar products purchased within the state’s borders, the governor’s proposal is also reasonable.  The fact is, this change would simply update the state’s sales tax code to take account of the changing ways in which Marylanders are doing their shopping.

    Just as taxing services and online sales is the right response to a changing consumer marketplace, so is a tax on digital downloads.

    Photo of of Governor Martin O'Malley via Chesapeake Bay Program Creative Commons Attribution License 2.0


    Maryland Commission Omits Indispensible Piece of Gas Tax Reform: Credits for Low Income Families


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    On Tuesday, the Blue Ribbon Commission on Maryland Transportation Funding voted to recommend a set of tax and fee increases that would boost funding for the state’s roads and transit systems by some $870 million annually.  The largest component of those reforms is a long-overdue increase and restructuring of the state’s gas tax, which has been unchanged for nearly two decades and lagging behind the cost of everything else the tax pays for. These recommendations should have a major impact on the transportation funding debate expected when the legislature convenes in January.

    The proposed 15 cent increase in the state’s gasoline tax, phased-in over a three year period, is smart because Maryland’s fixed-rate gas tax (23.5 cents per gallon) hasn’t been raised since 1992, and this change would return the tax roughly to its previous buying-power (that is, adjusted to consider the rising cost of road construction).

    The proposal is something legislators and their constituents should get behind because poor road conditions and traffic congestion are estimated to cost the average Maryland driver over $2,200 in vehicle repair, gasoline, and safety costs each year.  The gas tax increase, however, should only cost the average driver about $77 per year according to a forthcoming Institute on Taxation and Economic Policy (ITEP) analysis.

    But while the 15-cent increase is vitally important to Maryland’s roads and transit systems today, this change will only be a Band-Aid fix if legislators fail to combine it with another one of the Commission’s recommendations: allowing the rate to rise alongside the rising cost of construction.  Florida already links (or “indexes”) its gas tax rate to the general inflation rate, and thirteen other states allow their gas taxes to grow alongside gas price growth.  Just a few months ago, a commission in Pennsylvania proposed a similar measure that would allow their tax rate to grow over time with the price of fuel, and an influential Republican legislator there declared just last week that he would introduce legislation containing that reform.

    These gas tax reforms are desperately needed because Maryland’s transportation system, like nearly every other state’s, is vastly underfunded, and for many daily commuters, time can be even more important than money.  Baltimore was ranked as having the 6th worst traffic congestion in the nation, and the DC area as having the absolute worst.  Recognizing that these shortcomings have real costs in terms of lost productivity, both the Maryland Chamber of Commerce and the Greater Baltimore Committee have come out recently in support of the gas tax increase.  And Maryland Governor Martin O’Malley also appears likely to support the increase.

    Enthusiasm for the gas tax increase, however,  is only justified if it includes provisions to protect the lower income Marylanders who are likelier to feel its effects. However overdue this tax may be, it remains, like many of the fee increases being proposed, a regressive change – meaning it will disproportionately impact low-income families relative to their incomes.  Seven states currently offer low-income tax credits designed to offset the effect of these sorts of “regressive” consumption taxes, and most states (including Maryland) offer similar credits that accomplish broadly the same goal. 

    If Maryland’s gas tax update is paired with offsetting relief provided via low-income tax credits, it’s a winning proposal with widespread benefits that deserves support.

    Photo of Maryland Road Construction via Bank Bryan Creative Commons Attribution License 2.0


    WSJ Accidentally Admits that 'Millionaires Go Missing' Because of Economy, Not Taxes


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    Millionaires Go MissingWe couldn’t help but laugh when we saw the title of last week’s Wall Street Journal editorial.  For those of you that have followed the “millionaire migration” debate, it should be a very familiar one.

    First, a little background: Over the last couple years, the Wall Street Journal has run three editorials claiming that state income tax hikes in Maryland and Oregon were major factors in the shrinking of those states’ millionaire populations.  According to the Journal, while the recession did reduce the number of rich folks in those states, the tax hikes enacted by the “redistributionists” and “class warriors” (to use their words) just had to have something to do with it as well.  No self-respecting rich person would sit around and pay more in taxes when they could quit their job, pull their kids out of school, and move to a state with lower taxes on the rich – like South Dakota.

    Our sister organization, ITEP, went to great lengths to point out the problems with the Journal’s migration theory, responding to those editorials in three separate reports, one letter to the editor, and a Huffington Post piece.  All of those publications analyzed official state data and reached the same conclusion: there’s no evidence to suggest that the shrinking of Maryland and Oregon’s millionaire populations was anything other than a predictable result of the recent recession.

    That’s what makes last week’s Journal editorial so amusing.  It’s been a little over two years since the Journal first popularized the Maryland millionaire migration myth with a 2009 piece titled “Millionaires Go Missing.”  Apparently, members of the Journal’s editorial board have short memories, because they’ve recycled that same title, but used it to argue the opposite point (and the one ITEP insisted was the case all along): new federal tax data shows that the recession caused a huge decline in the number of millionaires all across the country.  “Told you so” just doesn’t seem sufficient.

    Looking back, it’s really unfortunate how much influence the Journal’s made-up story about “Maryland’s fleeced taxpayers fighting back” (as the sub-title of their 2009 article read) actually had.  It resulted in countless misinformed debates about a “millionaire migration” phenomenon that never even existed, and played no small role in the eventual defeat of efforts to extend a very good tax policy in Maryland.

    But even against that backdrop, perhaps we should all feel just a bit relieved right now.  At least the Journal opted not to use the new federal data to concoct a fiction about wealthy Americans migrating to low-tax Mexico.  Well, at least not yet.


    The Millionaire Migration Myth: Don't Fall for This Anti-Tax Scare Tactic


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    State lawmakers across the country have heard again and again that wealthy taxpayers will pull up stakes and move in response to just about any progressive state tax increase. This couldn't be further from the truth.

    Read the full ITEP article in the Huffington Post


    New ITEP Report: Five Reasons to Reinstate Maryland's "Millionaires' Tax"


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    Yesterday the Maryland House Ways & Means Committee held a hearing on a bill that would reinstate and make permanent the state’s recently expired 6.25% tax bracket on taxable incomes over $1 million.  In advance of that hearing, ITEP released a new report offering five arguments in support of the millionaires’ tax.

    Read the Report


    Authors of New York Study Claiming Millionaires Fleeing Reach New Low and Just Make Up Numbers


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    In the past year, we've documented ad nauseum the lengths that anti-tax advocates will go to in order to convince lawmakers that the so-called "millionaire's tax" is prompting wealthy taxpayers to move to other states. In Maryland, New Jersey and Oregon, these groups have selectively presented data in order to "show" that resident millionaires are packing up their Lear Jets and moving to Florida. And in each case, we've shown that when the data are presented honestly and fully, there's simply no evidence that millionaires are voting with their feet.

    But the latest such effort, by the Partnership for New York City, breaks new ground by simply making data up. For example, the report says that "Since the imposition of New York's surcharge in 2009, there has been a 9.4 percent decrease in the state's taxpayers who earn $1 million or more, decreasing from 381,786 in 2007 to 345,892 in 2009." Take a minute and read that quote again. What the Partnership is implying is that millionaires had the magical ability to see into the future and start moving out of New York in 2007 and 2008 as a result of a tax increase that hadn’t even happened yet.

    Next, it’s worth taking a closer look at that 381,786 figure, the supposed amount of millionaires in New York in 2007. Interestingly enough there is state-by-state data available from the IRS which shows that there were actually only 375,265 returns with federal adjusted gross income over $200,000 in 2007. Of course, not all 375,265 returns were all millionaires. So the 381,786 figure sited by the Partnership is troubling to say the least.

    What is even more troubling is that there isn’t actual data available (from New York or the federal government) for 2009 showing the number of tax returns by income group. Which leaves us with a very troubling question — where does the Partnerships earlier figure of 345,892 millionaires in 2009 actually come from?

    The answer: they're using a forecast of the number of households in each state with wealth, not income, of $1 million or more. See the data. Released last September by a marketing firm, these estimates tell us a few interesting things. One is that between 2007 and 2009, the nation as a whole lost 13.9 percent of its net-worth "millionaires" between 2007 and 2009, which makes the 9.4 percent loss for New York seem not that impressive. Another is that 43 of the 50 states lost proportionally more of their net-worth "millionaires" over this period than did New York. So, leaving aside the minor detail that income taxes are based on income rather than wealth, which makes these marketing data utterly irrelevant to the point the Partnership is trying to make, any objective look at this data would suggest that New York is doing better than most other states.

    For more on the many flaws of the Partnership’s paper, read this brief from the Fiscal Policy Institute. Suffice to say, the theory that New York millionaires are moving because of a targeted tax increase is based on deeply flawed (and perhaps even made up) data.


    More on the Journal's Bogus Oregon Migration Story


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    Two weeks ago, while most people were headed home for the holidays, the Wall Street Journal put out an extremely misleading and factually inaccurate editorial suggesting that up to 10,000 wealthy Oregonians fled the state because of a recent tax increase.  Both ITEP and the Oregon Center for Public Policy (OCPP) quickly responded with information refuting this claim.

    The Journal’s claim hinges on the fact that 10,000 fewer Oregonians were affected by a tax increase on incomes over $250,000 than the state’s Legislative Revenue Office (LRO) originally expected.  Armed with just this single piece of information, the Journal enthusiastically jumped to the conclusion than 10,000 wealthy Oregonians must have moved to states like Texas, which lack an income tax.  But as ITEP points out in its report, Oregon’s shortage of high-income filers was accompanied by an even larger surplus of filers lower down the income distribution.  This strongly suggests that wealthy Oregonians simply earned less income (due to the recession) than the LRO expected.  And indeed, the LRO made this point explicitly when it released the data that eventually sparked the Journal’s editorial.

    The analyses produced by ITEP and the OCPP were subsequently picked up by The Providence Journal, The New Republic, the Center for Budget and Policy Priorities (CBPP), and numerous other outlets.

    But the Wall Street Journal has continued to stick to its baseless narrative, publishing two letters to the editor echoing its claim about the damage done by Oregon’s tax increase.

    If past experience is any guide, talk of tax-induced migration from Oregon isn’t likely to fade any time soon.  As ITEP reminds readers in its report, this most recent editorial very closely resembles a pair of editorials the Journal released in 2009 and 2010 claiming that Maryland’s millionaires had fled the state because of a similar tax increase.  Just as with this editorial, the Maryland editorials were both misleading and factually inaccurate, though they were still very influential in the debate over taxing high-income earners in Maryland and other states.  The steady stream of misinformation from the Journal isn’t likely to subside any time soon.


    Wall Street Journal Wrong Again on State Migration


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    The Wall Street Journal recently published an editorial suggesting that a state income tax increase caused up to 10,000 wealthy taxpayers to flee the state of Oregon.  A new report from ITEP, however, explains why this assertion is totally unsupported by data from the Oregon Legislative Revenue Office (LRO).

    Specifically, the Journal claims that because 10,000 fewer taxpayers were affected by a recent state income tax increase than the LRO originally anticipated, it must be the case that most of those 10,000 taxpayers packed their bags and moved to Texas.  But as ITEP's report explains, the decline wasn't due to migration; instead, Oregonians simply earned less than the LRO thought they would (because of the recession), and as a result fewer taxpayers were affected by the new tax rates on income over $250,000 (or $125,000 for single filers).

    ITEP also criticizes the Journal for continuing to spread the myth that "one-third" of Maryland's millionaires "vanished from the tax rolls after rates went up" on millionaires in 2008.  ITEP has noted the fallacy of this claim on two separate occassions, and even the Journal itself has conceded as much in the past (see page 2 of ITEP's report).

    Read the Report

    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.


    Maryland Business Tax Reform Commission Says Tax Avoidance Creates Economic Growth


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    On Tuesday, the Maryland Business Tax Reform Commission chose not to recommend one of the most sensible — and most needed — corporate income tax reforms available to state policymakers, "recommend[ing] to the General Assembly that combined reporting not be implemented in 2011.” The commission failed to understand (or chose to ignore) the benefits of requiring "combined reporting" of corporate income by corporations with income from different states. This method of taxation greatly reduces the opportunities for multistate companies to shift profits from the state where they are generated to states with lower corporate income taxes or none at all.

    The actions of the Commission, which has been meeting for over a year with a mandate to make recommendations to the state legislature on a wide variety of business tax issues, still leave the door open for lawmakers to pursue combined reporting in 2011. And lawmakers should seriously consider it, in the wake of news last week that the state's budget deficit for the next fiscal year is $1.6 billion.

    From a tax avoidance perspective, Maryland's lack of combined reporting is the equivalent of a farmer leaving the barn door wide open. As ITEP's policy brief on this topic notes, in the absence of combined reporting, multi-state companies can easily shift their income on paper from one state to another to avoid paying income tax, creating "nowhere income" that isn't taxed by any state.
     
    In a hearing last week, ITEP and other organizations testified on the need for combined reporting, both as a means of achieving a level playing field between big multi-state companies and their mom-and-pop competitors, and as a desperately needed revenue-raiser. And as a Tuesday editorial in the Baltimore Sun eloquently argues, the "level playing field" argument alone should be a compelling reason to enact this needed reform.

    Hopefully, Maryland lawmakers will show clearer thinking on this topic than has the Commission when they convene next spring.


    Gubernatorial Candidates with Progressive Positions on Taxes Who Won


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

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

    Candidates Who Campaigned on Raising Taxes

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

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

    Candidates Who Defeated Opponents Targeting Progressive Tax Structures

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

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

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

    Incumbents Re-elected After Raising Taxes

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

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

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

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

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

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

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

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

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

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

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

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

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


    Tax News in Gubernatorial Races Across the Country


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

    California

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

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

    Illinois

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

    Maryland

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

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

    Michigan

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

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

    Pennsylvania

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

    South Carolina

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

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

    Tennessee

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

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

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


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


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

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

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

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

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

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

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


    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.


    Yoga Lobby Tries to Block Tax Fairness Initiative


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    ITEP, CTJ, and dozens if not hundreds of other organizations have argued for years that a well-designed sales tax should apply to nearly all retail sales, including both goods and services. We have shifted over the years from an economy in which most people sell goods to an economy in which most people sell services. Taxing only the sale of goods is an antiquated and inadequate approach for any state or local government to take.

    So why don't all states with sales taxes expand them to apply to services? The answer has nothing to do with what's good policy and has everything to do with politics. Pretty much every business that provides a service can conjure up some argument as to why this particular service is vital to the health and happiness of the state's residents, and from there will argue that a tax (no matter how minimal) will destroy their ability to provide this service.

    The most recent example comes from Washington, DC. The DC yoga lobby flexed their political muscle yesterday, urging yoga consumers (apparently known as yogis) across the District of Columbia to oppose expanding the District’s sales tax base to include yoga services and gym memberships.  The “DC Yogis Against the Yoga Tax” — which appears to be a coalition of yoga studios, teachers, and consumers — argues in their boilerplate letter to the Council that “most yogis and gym members are middle income-ers who've simply made it a priority to invest in their health and well-being.  The DC Council should reward their behavior, and encourage more people to take responsibility similarly for their own well-being.” 

    Their plea then subtly attempts to downplay the revenue that could be gained by a tax on yoga, implying that such a tax would encourage people to abandon yoga, and therefore result in losses in productivity, self-reliance, and basic human functioning — all of which would adversely impact DC’s coffers.

    If you live in the District of Columbia, we suggest that you write to your council member to tell them you support this tax proposal, which is essentially just an attempt to expand the base of the sales tax.

    For more information, the DC Fair Budget coalition has additional details on the proposed sales tax base expansion, as well as on fiscal 2011 revenue options more broadly.  Also see the DC Fiscal Policy Institute’s take on sales tax base expansion, and on the recent outcry from the yoga community.

    DC's yoga lobby is not unique. Maryland’s recent attempt to tax a handful of services met similar obstacles.  After proposing a list of perfectly sensible expansions of the sales tax base, industry lobbyists skillfully removed their clients from the list, one-by-one, until only the computer services industry remained (and of course, in time, the computer services industry was eventually able to avoid taxation as well). 

    During all of this, the circling of the Annapolis capital building by lawn care trucks provided one of the most memorable and oft-cited examples of the influence that special-interests can have in a tax policy debate. 

    For more on the importance of taxing services, be sure to read this recent op-ed by Sharon Parks of the Michigan League for Human Services.  In it she explains the history and merits of taxing services in Michigan, and advocates strongly for the proposal put forth by Michigan Governor Jennifer Granholm to expand the state’s sales tax base to include a host of new services, and to return some of the revenue gained to Michiganders via a 0.5 percentage point decrease in the sales tax rate.


    States Seek to Increase Sales Tax Revenue Without Changing their Tax Rates


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    Across the nation, state lawmakers wary of further increasing their general sales tax rates are looking (sensibly) for ways of broadening the tax base in order to maximize their "bang for the buck" from the existing tax rates. As a recent New York Times survey documents, half a dozen states are thinking seriously about expanding their sales tax to include previously untaxed services, from haircuts to hot-air-balloon rides.

    From a policy perspective, this approach is a slam dunk: a good first principle for sales tax design is that your sales tax liability should depend only on how much you spend — not on what you buy. However, proposals to tax services in Maryland and Michigan have recently run aground because of politics, not policy.

    But there is a much more straightforward (and more politically viable) sales tax base broadening strategy that virtually every state can tap right now. Interestingly, even the Wall Street Journal found it difficult to argue against a growing effort by states to enforce collection of their "use tax" (a companion to the sales tax that is designed to apply to goods and services purchased in other states).

    From a policy perspective, this is every bit as sensible as taxing services: if you buy a book, the sales tax should be the same whether you buy it in a store or on-line. But the politics are substantially more promising in this case: among the parties most aggrieved by the use tax loophole are small, "bricks and mortar" businesses that collect sales taxes on all their purchases and face a clear tax-based disadvantage compared to Amazon.com and other Internet-based retailers.

    In the wake of recently passed legislation in Colorado designed to encourage more taxpayers to pay the use tax on their own, more states will likely seek to replicate Colorado's approach.

     

     


    The Wall Street Journal and the Maryland Millionaire Migration Myth


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    The following letter to the editor of the Wall Street Journal points out that their widely-cited op-ed on the Maryland "millionaires' tax" is both misleading and factually inaccurate.  The letter makes clear that the Journal's general interpretation of the Maryland "millionaires' tax" -- which it first began touting nearly one year ago -- is grossly distorted. Perhaps as a result, the letter went unpublished.

    Your March 12 editorial, “Maryland’s Mobile Millionaires,” (Review & Outlook, March 12) states that “one-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008.” But this is simply wrong. The most recent data from the Maryland Comptroller’s office show that just 6.8% of Maryland’s 2007 millionaires have yet to file their 2008 returns, far below the 12.5% your “one-in-eight” figure implies. And as the Comptroller’s Office has reminded anyone who will listen, there are two reasons to be skeptical that even this 6.8% figure can be attributed to the state’s “millionaires’ tax.”

    First, Marylanders—like all Americans—were quite mobile before the millionaire’s tax was introduced. In the seven years before the enactment of the tax hike in question, an average of 5.6 percent of Maryland’s millionaire filing population moved out from one year to the next—not that different from the 6.8 percent we’re seeing in 2008 so far. Moreover, there are quite sensible reasons why upper-income taxpayers would be late filing their 2008 taxes. As Maryland Comptroller Peter Franchot noted in a May 2009 letter, “It is possible that, with the economic turmoil experienced in the last half of 2008, the tax situations of many wealthy individuals are more complicated than usual, and a higher proportion will therefore use the filing extension than is typical.”  In other words, it’s far too soon to call these numbers final. It’s a shame that the Journal’s editorial board has jumped the gun on this once again.

    Carl Davis

    Institute on Taxation and Economic Policy


    Maryland's Ongoing Millionaire Migration Myth


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    Despite a lack of data to support their claims, some lawmakers and business groups continue to insist that extending Maryland’s 0.75 percentage point income tax rate hike on incomes over $1 million has caused an exodus of millionaires from the state.  To help clear things up, this week ITEP released a two-page brief explaining why evidence surrounding a similar policy in New Jersey does not provide support for this claim (despite many assertions to the contrary), and testified before the Maryland Senate Budget and Tax Committee on the merits of extending the “millionaires’ tax.”

    In 2004, New Jersey implemented a 2.5 percentage point increase in the top tax rate on incomes over $500,000, frequently called the “half millionaires’ tax.”  Opponents of the Maryland “millionaires’ tax” have recently begun to portray the New Jersey experience as a horribly failed experiment in order to discredit any attempts at extending Maryland’s version of the tax.

    In response, ITEP's brief looks specifically at two academic studies that have recently been touted as evidence against the New Jersey policy. One study was published by Boston College, the other by Princeton University.  The Boston College (BC) study, in particular, has recently become a favorite among opponents of Maryland’s “millionaires’ tax.”  But while the BC study does show that $70 billion in wealth left the state over the 2004 to 2008 period, it makes absolutely no attempt to focus its analysis on that small subset of New Jerseyans actually affected by the “half millionaires’ tax,” and does not mention taxes even once as a potential contributing factor.

    The Princeton study, in contrast, actually does attempt to evaluate the “half-millionaires’ tax,” and finds that its effect in driving people from the state was “small.”  It goes on to conclude that “if the New Jersey experience is any guide, Maryland’s ‘millionaires’ tax’ is likely to generate substantial revenues and very little out-migration.”  Oddly, these straightforward findings never seem to find their way into the talking points used by the anti-taxers.  Simply put, opponents of the “millionaires’ tax,” unhappy with the results of the Princeton study, have turned toward the infinitely less relevant BC study to create the appearance that the facts are on their side.

    ITEP also relayed the facts behind the “millionaires’ tax” to the Maryland Senate Budget and Tax Committee in testimony it gave this past Tuesday.  In addition to refuting claims that the “millionaires’ tax” has resulted in an exodus among the rich, the testimony also explains how the “millionaires’ tax” reduces the unfairness inherent in Maryland’s tax system, and how the tax results in a sizeable federal tax cut for millionaires, as they are able to write-off the tax increase as a federal itemized deduction.

    Read ITEP’s Brief on the New Jersey Migration Studies’ Relevance (or Lack Thereof) to Maryland.

    Read ITEP’s Testimony on Extending the Maryland “Millionaires’ Tax”.


    Truth and Nonsense about Progressive Solutions to State Budget Crises


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    As the current economic storm continues to batter state budgets, policymakers in numerous states are continuing to talk of raising taxes to help mitigate cuts in state services.  In Maryland, lawmakers are debating an extension of the state’s temporary “millionaires’ tax,” while a new policy brief out of Georgia proposes to eliminate an unwise (and rare) deduction currently only offered in just seven other states — Arizona, Hawaii, Louisiana, Oklahoma, New Mexico, Rhode Island, and Vermont.

    Maryland's legislature is currently considering whether to extend a temporary "millionaires’ tax" enacted as part of a major 2007 tax reform effort. ITEP staff testified Thursday at a hearing of the state House Ways and Means Committee. ITEP's testimony highlighted several important details, such as the fact that the millionaires’ tax modestly reduces the overall unfairness of Maryland's tax system. With the tax in place, low-income families still pay more of their income in Maryland taxes than millionaires must pay — and if the tax is repealed, this inequity will become even worse.

    The testimony also explains why claims by anti-taxers that millionaires have fled the state in response to the millionaires’ tax are unfounded. As ITEP's analyses have shown, the primary cause of the decline in the number of Maryland millionaires in the past year is that they stopped being millionaires due to the recession.  The claim that the decline in the number of millionaires is due to the high income tax would be news to lawmakers in Utah (the only other state in which there is publicly available data on the change in the number of millionaires between 2007 and 2008). In the same year that Maryland lost 30 percent of their millionaires, Utah lost 60 percent of theirs. And while Maryland hiked their income tax on wealthy taxpayers the previous year, Utah cut theirs.

    In Georgia, some attention is beginning to be paid to a progressive idea passed by the New Mexico legislature just last week.  On Thursday, the Georgia Budget and Policy Institute (GBPI) released a brief explaining why the state’s deduction for state income taxes paid — which costs the state $450 million each year — should be eliminated to help fill the state’s budget gap.  The vast majority of states already disallow this deduction (which originates from federal tax rules) in order to avoid the bizarre, circular situation in which one’s state tax payment can be used to reduce their state taxes.  

    Finally, a new report from the Center on Budget and Policy Priorities (CBPP) helps put these developments in Maryland and Georgia into perspective.  The report notes that states have increased taxes by a combined $32 billion during the current recession.  In total, thirty three states have raised taxes to help fill their budget gaps, with twenty two of those having enacted “significant” tax increases, meaning increases that total more than 1 percent of their total revenues.  The report’s appendices provide an excellent summary of the multitude of state tax changes that have been enacted during these difficult budgetary times.


    MARYLAND: A Pair of Progressive Possibilities


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    Like their counterparts in most states, legislators in Maryland are expected to face some pretty rough sledding as they attempt to craft a balanced budget for the coming fiscal year.  As a result of the ongoing national recession, revenues have remained well below prior projections and the state now faces a budget shortfall of roughly $2 billion in FY 2011 alone.  Fortunately, as Neil Bergsman of the Maryland Budget and Tax Policy Institute pointed out this past week, legislators who recognize that revenue increases are an important part of a balanced approach to addressing budget deficits have multiple options available to them.  

    Two of the most progressive of those options are the preservation of Maryland’s so-called “millionaires’ tax” and the implementation of combined reporting.  As ITEP explains in its latest report, to compensate for the loss of revenue arising from the repeal of a tax on computer services, Maryland enacted a temporary change in its income tax in 2008. That change, the so-called “millionaires’ tax,” created a new top income tax bracket with a rate of 6.25 percent applicable solely to taxable income over $1 million.  As ITEP observes, the change is slated to expire at the end of 2010, but preserving it would generate close to $100 million in annual revenue, while affecting fewer than 5,000 Marylanders each year.

    Adopting combined reporting – as Texas, West Virginia, New York, Michigan, Massachusetts, and Wisconsin have all done within the last five years – would have a similarly salutary effect on Maryland’s long-term fiscal outlook. 

    As this issue brief from ITEP argues, combined reporting represents the most comprehensive option available to states seeking to halt the erosion of their corporate tax bases and to curtail corporate tax avoidance. 

    Indeed, a 2009 study by Maryland’s Office of the Comptroller suggested that the implementation of combined reporting in Maryland could yield as much as $100 million per year in additional revenue, simply by preventing large corporations from using legal and accounting maneuvers to shift income out of state.

    Of note, according to the Maryland Gazette, Delegate Roger Manno has already introduced legislation that pairs these two options to help improve pension funding in the state.


    Out of Control Tax Credits Demonstrate Need for Greater Oversight


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    Recent developments in Oregon and Massachusetts demonstrate how relying too heavily on tax breaks to accomplish policy goals can quickly cause things to get out of hand.  Policymakers in Maryland should heed these warnings when considering the Governor’s recent proposal to create new tax incentives for businesses, despite the state’s dire budgetary outlook.

    In Oregon, the controversy involves the state’s Business Energy Tax Credit (BETC, or “Betsy”).  The BETC program is purportedly designed to encourage the growth of “green” energy companies in Oregon.  Under pressure from the Governor’s office, the Oregon Department of Energy is reported to have deliberately (and drastically) low-balled the cost-estimate attached to the BETC program.  This lower cost estimate allowed the program to be enacted with much less scrutiny than would otherwise have been the case.  Of course, if the program had instead been operated as a traditional spending program, its overall size would have been limited to whatever dollar amount the legislature decided it deserved during the appropriations process.

    The Oregon credit has also taken heat in recent weeks for its lack of accountability – specifically, by providing benefits to businesses that have done little or anything to create jobs or improve the environment.  And moreover, because of the “transferability” of these credits, the program has also resulted in huge windfall benefits to businesses, including Walmart, that have made absolutely no attempt to promote the credit’s environmental goals.

    In order to quell the outrange expressed by Oregonians at this blatant misuse of state resources, the Governor has since proposed, among other things, to cap the overall size of the BETC program and force the government to prioritize potential projects in order to bring the cost of the program beneath that cap.  It remains to be seen whether the Governor’s recommendations will be enough to salvage this so far disastrous program.

    While Oregon’s recent experience with BETC provides anecdotal evidence of the danger of relying upon the tax code as a tool of economic development, evidence from Massachusetts provides an even more comprehensive picture of this problem.  The Massachusetts Budget and Policy Center’s (MBPC) recent analysis of economic development tax incentives shows that while traditional government “spending” has been forced downward by the economic recession, spending on business tax incentives has continued to rise sharply.  The 2.8% drop in FY10 appropriations, for example, contrasts sharply with a 4.2% increase in FY10 economic development tax breaks.  MBPC explains the cause of this asymmetry as follows:

    “Tax expenditures are in many ways similar to direct appropriations. Both seek to achieve certain policy goals through the use of the state’s economic resources, and both have an effect on the state’s bottom line. A primary difference is that budget appropriations must be reauthorized by the Legislature each year, while tax expenditures remain in effect without the Legislature having to take action.  The effectiveness of these tax expenditures is rarely examined in any detail and very little data is available to analyze.”

    In order to correct this bias in favor of special tax breaks, the MBPC proposes six reforms designed to shine a brighter light on these programs.  The first such reform, “provide information on the purpose and effectiveness of each tax expenditures,” mirrors a proposal made by CTJ just last month.

    On the heels of this disappointing news from Oregon and Massachusetts comes a proposal from Maryland Governor Martin O’Malley to provide businesses with a $3,000 tax credit for each employee they hire.  While the Governor has thankfully proposed to cap the overall credit at $20 million, one can’t help but wonder whether another economic development tax break is really the best use of the state’s very scarce resources.


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


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

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

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

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

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

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

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


    State Revenue Matters In the News


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    With legislative sessions starting in just a few months, advocates and the press are weighing in on the options available to cash-strapped states. Kentucky lawmakers are urged to find a real solution to the state's fiscal woes. Idaho's Governor is suddenly open to delaying an improvement in an important tax justice tool. Maryland advocates urge a balanced approach to this year's budget, Arizona researchers offer insight into the cost of previous tax cuts, and Ohio lawmakers rethink their own previously enacted tax cuts.

    Kentucky

    Late last week, Kentucky's Lexington-Herald Leader published an editorial urging lawmakers to reform that state's tax code, saying "Our representatives and senators turned to a 'smoke and mirrors' approach to budgeting because they simply lacked the backbone to do the right thing: Pass the kind of real tax reform that could provide state government with a stable, sustainable revenue base." They fear that during this session lawmakers will continue to cut important programs instead of fixing the state's revenue stream. The paper warns the lawmakers appear to be on track to continue "robbing Peter to pay Paul...Only this time, Peter is a schoolchild."

    Idaho

    Tax fairness advocates in Idaho may be facing a similar uphill battle. Governor Butch Otter, once a strong proponent of the state's grocery tax credit (which helps to offset the state's sales tax on food), has now left the door open for delaying an increase in the credit amount in order to save the state $15.5 million. Of course, now is precisely the wrong time to delay such an important credit specifically targeted to help offset the state's regressive sales tax on food. While it's important to keep all options on the table, during this time of fiscal upheaval delaying the increase in this credit is an option that should be quickly dismissed.

    Maryland

    Recently the Maryland Budget and Tax Policy Institute released a paper urging lawmakers to approach the state's budget woes in a balanced way. The report makes a strong case against a cuts-only budget. "An all-cuts budget solution would sacrifice too many of the things that make Maryland such a great state." The report goes on to offer a list of concrete revenue-raising options available to lawmakers interested in preserving the state's education, health, and transportation programs.

    Arizona

    Arizona's budget woes are dire. A new report from the Arizona Children's Action Alliance describes the state's budget crater, which is projected to be $1.5 billion for FY10 and $2.5 billion in FY11. The report is useful for any Arizona advocate interested in understanding the impact that previous rounds of tax cuts have had on the resources available to fund public services. It explains "why any [budget] package that results in further net loss to the state general fund endangers the common benefits that Arizona counts on." The report goes on to offer ten reasons why the state should freeze and reverse the harmful tax cuts from recent years.

    Ohio

    Last week, the Ohio House of Representatives voted to suspend the state's scheduled income tax rate reductions for two years to help plug a budget hole. Governor Ted Strickland congratulated members of the House, saying they "acted quickly, courageously and responsibly to protect Ohio schools from devastating cuts while reducing their own pay in solidarity with struggling Ohio families and businesses." Now the legislation moves to the state's Republican controlled Senate. Let's hope lawmakers there follow in the House's footsteps and put the needs of Ohio first.


    Maryland: Combined Reporting Would Have Saved State as Much as $170 Million in 2006


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    Anyone who has ever wondered about the extent of corporate tax avoidance in Maryland need wonder no longer: a new analysis from the state’s Bureau of Revenue Estimates (BRE) suggests that it is quite substantial.  The analysis, mandated by law two years ago, answers some very important questions: if Maryland had used combined reporting as part of its corporate income tax in 2006, how much more revenue would the state have collected and how would it have affected the taxes paid by certain businesses and industries? 

    Combined reporting, as this ITEP issue brief explains, is the single most effective means of curbing corporate tax avoidance available to state policymakers. Given the degree of corporate tax avoidance at the state level, its adoption should, overall, be expected to generate significant amounts of additional tax revenue. This is true even if some corporations, due to varying levels of profitability among their subsidiaries, end up paying less in taxes.

    Not surprisingly, that is what the BRE’s analysis finds.  Had combined reporting been part of Maryland’s tax code in 2006, the state, on net, would have collected as much as $170 million in additional revenue, an amount equivalent to nearly 20 percent of total corporate income tax collections that year. 

    What’s more, as a related analysis from the Maryland Budget and Tax Policy Institute (MBTPI) points out, it is typically larger businesses that would pay additional taxes under combined reporting.  The data released by the BRE indicate that as much as 70 percent of corporations with incomes over $25 million would have owed higher taxes in 2006 had combined reporting been in effect.

    To be sure, the BRE’s analysis goes to great lengths to emphasize that, given current economic conditions and other factors, Maryland would not immediately realize $170 million in new revenue if the Assembly and the Governor were to enact combined reporting legislation tomorrow or next week – and you can be certain that opponents of combined reporting will strive to make the same point. 

    Still, as the MBTPI argues, there’s no time like the present for action.  Combined reporting is not some new or risky gambit. The majority of states that have corporate income taxes now use it. (Some have used combined reporting for over sixty years.) Nor will waiting longer to adopt it help address Maryland’s long-term fiscal problems.  Fortunately, it appears that some Maryland legislators, such as Senator Paul Pinsky, may be ready to take up the issue once the Assembly reconvenes next year.


    The Exaggerated Promise of Legalized Gambling


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

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

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

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

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

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


    New CBPP Report Informs Sales Tax on Services Debate


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    For several decades, the American economy has shifted from producing consumer goods to providing services. As a result, states that tax the purchase of goods but not the purchase of services will increasingly find themselves unable to raise the revenue needed to support public services.

    The Center on Budget and Policy Priorities released a report this week that explains why states should expand their sales tax bases to include services. The report offers various reasons why taxing services is a good policy prescription including: increased short- and long-term revenues, the potential for less volatility in the sales tax, and the potential for more administrative compliance.

    A helpful discussion of the pros and cons of taxing business-to-business services is also included. Advocates interested in knowing how much revenue could potentially be raised from expanding the sales tax base to include services will also find the state-by-state estimates included in the paper very informative.

    The Maryland Business Tax Reform Commission met last Thursday specifically to discuss trends in business taxation across the country. During the meeting ITEP offered testimony regarding the wide variety of options policymakers have when seeking to reform their business taxes.

    For example, in the past several years, a handful of states, including Ohio and Texas, have completely changed how they tax businesses operating within their boundaries. Other states like California have modified their basic apportionment formulas, while still more continue to offer a variety of tax credits and inducements with the aim of luring or retaining employers.

    ITEP's remarks specifically focused on one particular trend: the move to require combined reporting of a corporate group's nation-wide income to state tax authorities. Under combined reporting, a multi-state corporation calculates its income for tax purposes by adding together the income of all its subsidiaries -- without regard to their location -- into one total. That total is then apportioned to the state using the combined apportionment factors of the entities that comprise the corporation.

    Without this reform, corporations can use various accounting tricks and sham transactions (which exist only on paper) to shift profits into a state that has no corporate income tax. Simply put, combined reporting represents the most comprehensive option available to states seeking to halt the erosion of their corporate tax bases and to curtail corporate tax avoidance.

    Since 2004, seven states have adopted combined reporting. In fact, a majority of the states that levy a corporate income tax of some kind now use this approach to determining the tax liabilities of multi-state businesses. Read ITEP's testimony here on the importance of combined reporting and the gains experienced by states that have enacted the measure.


    Maryland: Millionaires on the Move?


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    Earlier this month, Maryland Comptroller of the Treasury Peter Franchot submitted a letter to Governor Martin O'Malley and the state's legislative leadership that, among other things, maintained that the number of millionaires filing tax returns in the state had dropped significantly. News outlets, such as the Washington Examiner, subsequently seized on his assertion, arguing that tax changes enacted over the past two years were driving the affluent out of the Free State. As this latest release from ITEP demonstrates, Maryland's millionaires may be moving, but their likely destination is a lower income group. Preliminary data from the Maryland Comptroller's Office suggest that the number of returns falling in the ranges of income below a million dollars have grown at above average rates in the past year. This, in turn, may indicate that the wealthy haven't left; rather, They've just been left with less money due to the economic downturn. Nevertheless, as ITEP's release points out, using preliminary data at this point in the tax collection process to draw conclusions about tax policy changes is a fool's errand. In 2007, preliminary returns for filers with taxable incomes over $1 million comprised less than one-third of the total returns the state ultimately received from taxpayers in that income group.


    Tax Amnesty: States' Lack of Self-Control Diminishes Tax Fairness


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    Despite their obvious unfairness, tax amnesties are a tool frequently used by states during tough budgetary times. By waiving late fees and sometimes reducing the interest rate charged on overdue taxes, state policymakers can provide their state with a quick band-aid fix without having to make the much harder choice of raising taxes or cutting valued services. But penalizing similar taxpayers at different rates dependent only upon whether they decide to pay up during an amnesty period is plainly unfair. The problems associated with amnesties become even worse, however, as soon as a state establishes a habit of repeatedly offering amnesties during tough economic times.

    With the possibility of another amnesty always on the horizon, delinquent taxpayers will think twice before settling their debts with the state during normal times, and at normal penalty rates. Creating multiple sets of penalties (one for normal times, and one, lower penalty when budgets shortfalls are projected) therefore reduces fairness by penalizing similar taxpayers differently based only on the timing of their payment, and can also reduce the effectiveness of enforcement efforts and the tax system broadly. These effects can continue long after the most recent amnesty period ends. (Note that this is very similar to the argument against allowing corporations to "repatriate" their profits to the U.S. at a lower rate, a proposal which was recently rejected at the federal level).

    Despite the obvious problems, Maryland and New Mexico are both considering legislation to once again provide temporary tax amnesty programs some time in the coming months. New Mexico last provided an amnesty less than a decade ago, while Maryland's last amnesty came in 2001. After that 2001 amnesty, the Maryland comptroller's office noted that "repeated use of amnesties is likely to create cynicism among law-abiding taxpayers, and lessen the need for voluntary compliance with state tax laws, which is vital for our system of taxation". Should another amnesty be offered less than a decade after the 2001 amnesty, growth in taxpayer cynicism seems unavoidable, especially in light of the fact that a similar program offered in 1987 in the state was billed as a "once-in-a-lifetime" opportunity for delinquent payers.

    Without a doubt, the momentum in favor of such programs is strong. Alabama is already in the mist of an amnesty period (the state last offered an amnesty in 1984). Massachusetts is currently in the process of deciding upon a date for its amnesty program (Massachusetts last provided amnesty in 2003). Connecticut's program is already slated to take effect on May 1st (Connecticut's last amnesty took place in 2002). And Oklahoma just recently closed its most recent amnesty period, just seven years after its 2002 amnesty.

    In this environment, it is extremely important for state policymakers to not only oppose more amnesties, but also to convincingly state that another amnesty will not be offered any time in the near future. For states looking to responsibly close their tax gaps, stepping-up enforcement spending is often a route that can produce sizeable returns, and is undoubtedly much more fair than trying to get something for nothing by arbitrarily waiving penalties in an effort to boost voluntary "compliance". For more specific alternatives to the tax amnesty approach, take a look at these recent enforcement recommendations from Oregon's Department of Revenue.


    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.


    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.


    Ballot Update 2008: Maryland Slots Not a Fix for State's Budget Problems


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    Maryland is one of more than twenty states struggling with mid-year budget shortfalls as a result of a weak economy and the corresponding slump in tax collections. While this fact wasn't the original impetus for this November's ballot proposal to introduce 15,000 slot machines into the state, it has swayed some observers into supporting the measure, despite the fact that it would be years before the first slot machine lever is ever pulled.

    As in Missouri, the backers of the proposal have tried to dress up slots in Maryland by linking the new revenue to education. But since no requirement exists that total education funding actually increase, there is no barrier to using revenues from the machines to simply replace revenue currently coming out of the general revenue fund. This hasn't deterred many supporters, though, as the increasingly dire situation of the Maryland budget has boosted the appeal of gaining additional government revenue (no matter how far off in the future) without raising taxes.

    But taxes, particularly the income tax, have some notable advantages over gambling revenues as a means of paying for government. Though supporters of the measure have dismissed the idea of raising taxes during these tough economic times, they fail to acknowledge that gambling revenues are disproportionately collected from those less well-off individuals most harmed by the weak economy. Taxes also do not create the inevitable social ills that accompany gambling, which can end up draining a significant portion of the revenues expected from introducing slots.

    Two other problems also plague the specific proposal facing Maryland. First, some question has been raised as to the accuracy of the revenue figures provided by Legislative Analysts in the state. Those estimates are unavoidably sensitive to economic conditions at the time of the introduction of slots, and to the gambling policies of other states.

    Second, as Jeff Hooke of the Maryland Tax Education Foundation has pointed out, the proposal offers an unwarranted sweetheart deal to the horse raising industry, in the form of government subsidized winnings, or "purses". About $100 million of the government's portion of slot machine revenues will be dedicated to boosting racing purses. Hooke argues that this will do nothing to help Maryland's racing industry, and the majority of the money will go to out-of-state horse owners. Though this subsidy to racing purses has been reduced substantially from what was originally proposed, it is still an irresponsible use of slot machine revenues.


    Cigarette Taxes: Another State Seeking the Path of Least Resistance


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

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

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

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

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

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


    Arkansas to Consider Cigarette Tax Hike in 2009


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    Arkansas legislators have put off until next year a proposed 50 cent hike in the cigarette tax from 59 cents per pack to $1.09 per pack. The increase is expected to generate about $71.1 million in state tax revenues. This money would be used to fund a badly-needed state trauma system to respond to emergencies in which victims must be sent quickly to nearby specialists. Arkansas is one of the only states lacking such a vital infrastructure. The trauma system is estimated to cost $25 million a year and the extra revenue would be used to fund community health centers and charitable clinics serving the poor.

    Arkansas currently ranks in the middle of its neighboring states in terms of its cigarette tax. If the tax is raised, Arkansas will have the second highest tax in its region, behind only Texas' $1.41 per pack tax. The situation in Maryland last year almost exactly parallels the one that Arkansas is facing this year. When Maryland's cigarette tax was $1.00 per pack, the tax ranked exactly in the middle of those of neighboring states. After the tax doubled to $2.00 per pack, it became the most expensive among Maryland's neighbors.

    So what does all this mean? In a recent Wall Street Journal editorial, Maryland's cigarette tax hike was slammed as a failure because, the author speculated, it did not deter smoking and the state lost sales to nearby Virginia, where a carton is almost $15 cheaper. And as usual, the WSJ misleads its readers with anti-tax rhetoric, implying that higher tax rates decrease tax revenues. But if Arkansas lawmakers take a closer look at the numbers cited in the Wall Street Journal piece, the outlook for their proposed increase appears feasible, at least in the short term.

    The editorial states that Maryland's cigarette sales fell 25% after a 100% tax increase. But what is craftily omitted is that this does not mean that tax revenues will fall. In fact, quite the opposite should happen. The tax increase is large enough to offset the fall in sales so much that the state should actually gain 50% more in cigarette tax revenue thanks to the hike. And just as Marylanders descended upon their neighbors to take advantage of cheaper cigarettes, it is highly likely that Arkansans will do the same. But the purpose of the Arkansas tax is to generate at least $25 million each year to fund an essential trauma system, not to deter smoking. Indeed the tax may help to curb the habit, especially among youths but even if smokers in Arkansas leave the state to shop for smokes in Missouri or Mississippi, where the taxes are the lowest in the US, sales within the state are still likely generate a sizeable and sufficient amount of tax revenue because the increase in the tax is so high.

    So what is the drawback to this plan? The percentage of smokers in the US, along with the number of cigarettes sold, declines steadily each year. While Arkansas and Maryland risk losing business to neighbors, they also risk losing a sizeable amount of business to quitters and the declining number of new smokers, regardless of the size of their cigarette taxes. This means that an essential program that requires yearly funding cannot be viably sustained by a tax on a product for which demand is shrinking. The policy may be a responsible budgetary decision in the short term, when money is tight and the tax is likely to generate a sufficient amount of revenue. But as time goes on and smoking becomes increasingly unpopular (regardless of price), Arkansas will have to find another way to fund its trauma system.


    Another Example of the Power of Service Sector Lobbyists


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    Maryland Governor Martin O'Malley signed a temporary income tax increase on millionaires this week to make up a portion of the revenue lost by the repeal of a recently passed 6 percent sales tax on computer services that had not yet taken effect. Originally intended to be part of a service tax increase on about six different services, the computer services tax ended up being singled out after its lobbying presence was demonstrated to be much weaker than that of the other services legislators were thinking about taxing. That quickly changed as the sector set up a formidable lobbying presence in only a matter of months.

    Though the tax on millionaires is a more progressive option than the computer services tax, this story ultimately has to worry those who appreciate the merits of expanding the sales tax to include services. What lessons can be learned from this failed attempt to carry out a much needed expansion of Maryland's sales tax base?

    The failure of this service tax may have been a result of its narrow scope. By going after only one type of service, rather than trying to comprehensively expand the base as Hawaii, New Mexico, and South Dakota have done, Maryland set its sights too low. The debate was focused on an issue much less important than the broader issue of taxing the state's enormous and growing service sector. The position of tax fairness advocates was weakened as a result of this narrowing of the debate. By focusing on only one type of service, advocates of the tax were also left vulnerable to criticisms that they were unfairly singling out certain businesses to pay more. And even if Maryland had succeeded in expanding the sales tax base to include computer services, it would ultimately be only a small step towards the bigger goal of modernizing the sales tax base.

    Fortunately for Marylanders, though, the progressive income tax change the legislature enacted was much better than most alternatives. But it certainly would have been nice to get the ball rolling on service taxation in Maryland.


    New York and Maryland Consider Taxes on Wealthiest Residents


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    New York is no different than most states in at least one respect - it too must confront a major budget deficit, estimated at $4.7 billion for the fiscal year starting April 1. It may, however, follow a much more responsible path than Georgia and other states attempting to cut taxes in the midst of dire financial straits. The state Assembly has approved a plan that would levy a temporary income tax surcharge on people with incomes over $1 million and that would yield roughly $1.5 billion per year. The plan is opposed by the Senate, but new Governor David Paterson has yet to rule it out.

    Maryland faces a situation similar to New York and is also considering an increase in personal income taxes for some of its wealthiest residents. But rather than devote that additional revenue to current appropriations, lawmakers want to use it to repeal a change in tax policy that isn't scheduled to take effect until this summer. Recent tax projections in the Free State are now $333 million lower than previously expected and, just this past week, the Maryland House adopted a FY 2009 budget that reduces spending $250 million below Governor Martin O'Malley's initial request.

    Yet, one topic that continues to dominate conversations in Annapolis is the extension of the state's sales tax to computer services. Enacted as part of a larger tax package during last fall's special session, the tax change isn't slated to take effect until July 1, but is the target of a major lobbying campaign by the computer industry. The Governor recently threw his weight behind a Senate plan to repeal the computer tax and replace the lost revenue with an increase in the personal income tax: specifically, the creation of two new tax brackets with rates of 6.0 percent and 6.5 percent for taxable income above $750,000 and $1 million respectively. Such a move would improve the progressivity of Maryland's tax system, but could be a step back for sustainability. Maryland - like most states - needs to expand its sales tax base to include more services or be left with a tax system that is poorly matched to today's economy.


    MD Assembly's Tax Plan: More Revenue, Less Fairness


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    Read ITEP press release.

    Victory for Tax Adequacy, Missed Opportunities on Tax Equity and Essential Reforms

    The tax plan approved by the Maryland General Assembly on Monday will help provide the revenue necessary to fund vital public services in Maryland, but, according to the latest analysis from the Institute on Taxation and Economic Policy (ITEP), working families will bear the brunt of the tax changes contained in the plan. All told, taxes for the poorest Marylanders will rise, on average, by more than 0.7 percent of their incomes under the Assembly's plan, while taxes for the wealthiest one percent of Marylanders will climb by just over 0.5 percent of their incomes.


    Senate Plan Falls Hardest on Low-Income Marylanders


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    Read the ITEP press release.

    Governor's Plan Much More Fair than Bill Backed by Key Senate Committee

    A new analysis of the tax legislation approved by the Senate Budget and Taxation Committee on Tuesday shows that the Senate's tax changes would impose the largest tax hikes, as a share of income, on low- and middle-income Marylanders. The analysis also shows that the Senate plan's regressive impact is in sharp contrast to the plan proposed by Governor Martin O'Malley late last month, which would make Maryland's tax system less unfair overall.


    Tax Reform Debate Underway in Maryland


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    The Maryland General Assembly last week began a special session to consider Governor Martin O'Malley's $1.7 billion deficit reduction package, holding hearings on each of the key elements in the package. ITEP staff testified on a number of the tax policy changes the Governor has recommended, including a more progressive personal income tax rate structure, an expansion of the sales tax base and an increase in the sales tax rate, and efforts to close corporate tax loopholes through the adoption of combined reporting. The Center on Budget and Policy Priorities has also released several helpful reports on the Governor's tax proposals, detailing ways to generate additional tax revenue in Maryland and to protect low-income taxpayers from regressive tax increases. Progressive Maryland and the Alliance for Tax Fairness will hold a statewide Town Hall Meeting on Tuesday, November 6 in Annapolis to give concerned citizens an opportunity to express their support for a more equitable tax system. As the Washington Post opines, the fate of Governor O'Malley's proposal is uncertain, but the need for action - and for important reforms like a more progressive income tax and a more robust corporate income tax - are clear.


    Tax Reform Agenda In Maryland - ITEP Testimony


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    Tax Reform Agenda In Maryland - ITEP Testimony on:

    Closing Corporate Loopholes with Combined Reporting - October 31, 2007

    Making the Personal Income Tax More Progressive - November 1, 2007

    Expanding the Sales Tax - November 1, 2007


    More Details Emerge on Maryland Governor's Tax Plan


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    Maryland Governor Martin O'Malley continues to release details of his ambitious revenue-raising plan, which would use income tax, sales tax, cigarette tax and gambling revenues to close a $1.7 billion structural budget deficit. The latest wrinkle: a progressive low-income sales tax credit, which would offset a small part of the O'Malley plan's sales tax increase by giving each household earning less than $30,000 a $50 tax credit.

    But the most controversial part of the O'Malley package -- allowing slot machines at Maryland race tracks -- ran into a major road bump this week, as Maryland Senate Republicans signaled that they would not support slots as part of a tax package. Since slots would ultimately account for close to a third of the revenues from O'Malley's proposal, this casts doubt on whether O'Malley's planned special legislative session for tax reform will take place this fall. The Baltimore Sun thinks that's a good thing. The Washington Post's Steven Pearlstein has a level-headed critique of the governor's plan here.

    Earlier this week, Maryland Governor Martin O'Malley released the broad details of a tax reform plan designed to close the state's $1.7 billion structural deficit. The plan would make the state's nearly-flat income tax more progressive, cutting income taxes for low- and middle-income families and creating two new upper-income tax brackets for those with taxable incomes over $150,000, and would reduce the rate of a statewide property tax. The net impact of the income tax hike (somewhere north of $150 million a year) would be dwarfed, however, by the impact of a regressive sales tax hike that would increase the rate and broaden the base ($730 million), a $1-a-pack cigarette tax hike, and the introduction of legalized gaming at Maryland racetracks ($500 million), each of which would arguably make the plan both less sustainable and less fair. The plan would also increase corporate income tax collections, although the way in which this would be done is not yet entirely clear.

    So who will win and who will lose from the governor's plan? The governor himself is only conceding that "if you make more than $700,000 a year, you smoke, you go to the tanning salon every day, you have a gym membership, and you're a renter, you'll probably pay more." Of course, people earning a whole lot less than $700,000 are going to be picking up much more of the tab than O'Malley's description lets on. But that may be the unavoidable price of closing the state's yawning fiscal gap.


    Fallout Continues from Minnesota Bridge Collapse


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    Fight Over Federal Gas Tax Brewing

    According to the U.S. Department of Transportation, an eighth of bridges in America are "structurally deficient" which is the same designation that had been given to the Minnesota bridge over the Mississippi that collapsed on August 1. This designation does not necessarily mean that a bridge is unsafe, but the Department has stated that $65 billion could be spent immediately in cost-effective ways to address these deficiencies.

    So it might seem reasonable that one effect of the August 1 tragedy would be to wake the nation up to pressing infrastructure needs. And in fact, Rep. James Oberstar (D-MN), chairman of the House Transportation and Infrastructure Committee, has introduced a bill to temporarily raise the federal gas tax by five cents to fund bridge repairs.

    But anti-tax advocates are having none of it. A coalition of 56 right-wing organizations has sent a letter to the President and Congress opposing the proposed gas tax increase. It's not clear which side will win this argument. There is some support on the Republican side of the aisle for raising revenue to address the issue. Rep. Don Young (R-AK), the former chair of Oberstar's committee, caused a stir when he said that hundreds of bridges are "potential death traps," which would justify a tax increase to fund repairs.

    Food Fights in State Legislatures?

    Meanwhile, the situation on the state level doesn't look any less cantankerous. Minnesota Governor Tim Pawlenty and legislative leaders have not yet agreed on the parameters of a special session that weeks earlier seemed the likely result of the horrific tragedy. Recently Governor Pawlenty said on a local radio program "I'm not going to call a special session if there's going to be a food fight. Not everybody's on the same page." But if he fears a food fight, he's strangely ready to throw the first pie. The Governor said he may add property tax relief to the session's agenda, which would be oddly placed in a session that is supposed to address the bridge collapse. The session isn't likely to start until after Labor Day.

    Other states are also taking transportation funding more seriously. Maryland Governor Martin O'Malley is expected to call for a gas tax increase that would adjust automatically for increases in the cost of construction. A thoughtful Baltimore Sun article describes the crisis that is created when gas taxes are low, but infrastructure costs are rising. There's no such thing as a free lunch, and certainly no such thing as a free bridge.


    Tax Reform? No. Save an Antiquated Pastime that Can't Support Itself? Yes.


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    In many ways, Maryland's current debate over legalized gambling is depressingly familiar. Faced with a loophole-ridden and unfair tax system that cries out for progressive reform, some elected officials want to introduce thousands of slot machines as a politically palatable revenue-raising alternative. But Maryland offers an interesting, if bizarre, twist. Governor Martin O'Malley's administration is arguing that slot machines would make an excellent economic development tool for propping up the state's ailing horse-racing industry.

    About the best one can say about the idea of providing tax subsidies for such a small and distinctly 19th-century industry is that it's less expensive than the more conventional smokestack-chasing other states continue to engage in. But Maryland isn't the first state that's had this idea -- and neighboring Delaware's experience has not exactly yielded dividends for that state's racing industry. And as an excellent Washington Post editorial explains, the environmental and economic policy goals the administration allegedly seeks to achieve with slots are a red herring.

    The author of the O'Malley administration report that makes the economic development-based pitch for slots, Thomas Perez, claims that the introduction of slots in neighboring states has "revitalized the previously moribund horse racing industries in those states." Perez describes his report as "a fact finding tour of racetracks in Delaware, West Virginia and Pennsylvania." Perez's research techniques included counting the number of Maryland license plates in a West Virginia parking lot -- but his time might have been better spent just asking West Virginia's Racing Commission chairman, who sees "no correlation... inverse, in fact" between their 1994 introduction of slots at racetracks and the current health of that state's racing industry.


    Some Maryland Lawmakers Hope to Address Deficit with Progressive Tax Reform


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    With a budget deficit of roughly $1.5 billion looming, the time has come for comprehensive reforms to Maryland's tax system. As the Maryland Budget and Tax Policy Institute explains, the alternative - trying to slash state spending by that amount - would be disastrous, "[impacting] in some negative way almost every family in Maryland."

    Fortunately, it appears that policymakers in Maryland are now beginning to consider meaningful tax reforms, such as enacting combined reporting to combat corporate tax avoidance or expanding the state's personal income tax brackets and raising income tax rates for wealthier individuals and families. While these changes would generate much needed revenue and enable the state to continue to provide vital public services, they could also make Maryland's tax system much more equitable. As the Washington Post points out, Maryland's personal income tax brackets are among "the flattest in the nation", meaning that working-class families pay much the same rate as the ultra-rich. Other options for closing the budget gap, such as an increase in the sales tax, are available but as a recent op-ed in the Baltimore Sun notes, that approach would put a "disproportionate burden on the backs of those least able to pay."


    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.


    States Growing Tired of Large National Businesses Avoiding State Taxes


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    As expected, Massachusetts Governor Deval Patrick this week joined the ranks of chief executives calling for the use of combined reporting of state corporate income taxes to combat tax avoidance by large and profitable companies. Like the Governors of New York, Pennsylvania, and Iowa, Governor Patrick, in his FY2008 budget plan, recommended adopting this approach to corporate taxation, which would require corporations operating in multiple states to report all of their income... including that attributable to subsidiaries. This would negate any tax benefit derived from accounting schemes designed to shift profits out-of-state. A fact sheet from the Massachusetts Budget and Policy Center explains how combined reporting works and why it's needed in the Bay State. While Martin O'Malley has not yet added his name to this growing gubernatorial roster, Maryland legislators this week considered a bill to institute combined reporting in their state. ITEP Executive Director Matt Gardner was among those who testified on the measure.


    ITEP Speaks Out On Sales Tax Holidays


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    Sales tax holidays are growing in popularity this year with four more states, Alabama, Maryland, Tennessee and Virginia, joining nine others and the District of Columbia in waiving sales and use taxes for a limited time during July and August. To see a list of participating states and tax holiday dates, click here.

    As ITEP staff told USA Today earlier this week, "This tax break makes sense for lawmakers because it's cheap and avoids real reform." State legislatures claim that tax holidays alleviate the tax burden on working families and jump-start local retail businesses. In reality, however, sales tax holidays are a political gimmick that probably helps consumers less than proponents claim.

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

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