Montana News


Investors and Corporations Would Profit from a Federal Private School Voucher Tax Credit


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A new report by the Institute on Taxation and Economic Policy (ITEP) and AASA, the School Superintendents Association, details how tax subsidies that funnel money toward private schools are being used as profitable tax shelters by high-income taxpayers. By exploiting interactions between federal and state tax law, high-income taxpayers in nine states are currently able to turn a profit when making so-called “donations” to private school voucher organizations. The report also explains how legislation pending in Congress called the Educational Opportunities Act (EOA) would expand these profitable tax shelters to investors and corporations nationwide.

The core feature of these tax shelters are credits that offer supersized incentives to donate to organizations that distribute private school vouchers. When taxpayers donate to most charities, such as food pantries or veterans’ groups, they typically receive a charitable tax deduction that somewhat reduces the out-of-pocket cost of their donation. Private school proponents have decided that their cause is worthy of a far more generous subsidy, however, and have successfully pushed for the enactment of state tax credits that wipe out up to 100 percent of the cost of donating to private school voucher organizations. When these lucrative state tax credits are combined with federal charitable tax deductions (and sometimes state deductions as well), some high-income taxpayers are finding that the tax cuts they receive are larger than their actual donations (see Figure 1). Tax accountants and private schools have seized on this tax shelter and turned it into a marketing opportunity, advising potential donors that: “You can make money by donating!”

As things stand today, this tax loophole is only available to taxpayers in nine of the seventeen states with private school voucher tax credits. But the Educational Opportunities Act (EOA) introduced by Sen. Marco Rubio (FL) and Rep. Todd Rokita (IN) would open up entirely new profit-making schemes to investors and corporations nationwide.

The EOA would offer a 100 percent tax credit of up to $4,500 for individuals or $100,000 for corporations donating to fund private school vouchers. Under this system, investors choosing to donate stock (or other property) rather than cash to voucher organizations would find that doing so would be more lucrative than if they had simply sold the stock and kept the money for themselves. This is because rather than receiving (taxable) capital gains income from a buyer of the stock, the investor would be paid in (tax-free) federal tax credits.

Another potential tax shelter would be limited to those taxpayers living in states offering their own voucher tax credits. While the EOA prohibits claiming a federal tax deduction and federal tax credit on the same donation, it is silent as to whether taxpayers can claim a state tax credit and federal tax credit on a single donation. If this occurred, taxpayers would enjoy a guaranteed profit every year they donate to private schools when they stacked 100 percent federal credits on top of state credits valued at 50 to 100 percent of the amount donated.

Wealth managers and tax accountants would be foolish not to advise their clients to take advantage of these handouts. Even families with no particular attachment to private schools would find it to be in their own financial best interest to begin donating to those schools. The result could be an explosion in funding for private schools at the expense of the public coffers and everything they fund—including public education.

Read the report: Public Loss, Private Gain: How Voucher Tax Shelters Undermine Public Education


EITC Victories Await in Both Hawaii and Montana


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Two states are on the verge of embracing a tried and tested anti-poverty policy, the Earned Income Tax Credit (EITC). In the past two weeks, lawmakers in both Hawaii and Montana passed EITC legislation, which governors in both states are expected to sign.

Once officially enacted, these states will join 26 other states and the District of Columbia in using EITCs to boost low-wage workers earnings and to offset some of the regressive state and local taxes they pay.

While both bills will improve tax fairness, reward work, and help families meet their basic needs, they have notable differences. 

Hawaii’s HB 209 would enact a sizeable EITC equal to 20 percent of the federal credit. But the bill includes three unusual provisions that will limit the credit’s usefulness to low-income families. First, the credit would be nonrefundable, meaning that taxpayers earning too little to owe state income tax will receive no benefit. Second, Hawaii taxpayers could claim the credit only after all of the state’s existing refundable credits have been applied. And third, the credit would expire after tax year 2022. Hawaii lawmakers should consider lifting these restrictions during the next legislative session.

Montana’s HB 391, enacted via a bipartisan effort, includes an EITC equal to 3 percent of the federal credit. Unlike Hawaii’s proposed EITC, this credit would be refundable, meaning that Montanans would receive a refund for the portion of the credit that exceeds their income tax bill. The importance of refundability hinges on the fact that it can be used to offset any state and local taxes paid, rather than only income taxes. This is particularly important given the upside-down nature of state and local tax systems where low- and moderate-income families pay a bigger share of their income in taxes than wealthier taxpayers. While Montana’s EITC would represent a meaningful step toward poverty alleviation, the 3 percent credit would become the lowest in the nation, behind Louisiana’s 3.5 percent credit.


State Rundown 5/3: Lawmakers See Value in State EITCs, Danger in Tax Cut Triggers


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This week, Kansas lawmakers found that they'll have to roll back Gov. Brownback's tax cuts and then some to adequately fund state needs. Nebraska legislators took notice of their southern neighbors' predicament and rejected a major tax cut. Both Hawaii and Montana's legislatures sent new state EITCs to their governors, and West Virginia began an uncertain special session as other tax debates also continued around the country.

-- Meg Wiehe, ITEP Deputy Director, @megwiehe

  • Efforts to slash taxes in Nebraska using a "trigger" mechanism have been defeated for the year after a bill failed to come close to overcoming a filibuster Tuesday. The bill, favored by Gov. Pete Ricketts and Revenue Committee Chair Jim Smith, would have primarily benefited high-income Nebraskans, worsened the state's projected budget shortfall, and could have triggered tax cuts in economic hard times. Lawmakers turn to the budget today.
  • Back from spring recess, Kansas lawmakers are working to find tax reform solutions that raise enough revenue to close budgetary shortfalls and meet constitutional requirements to adequately fund public education, all while receiving the necessary legislative votes to override a gubernatorial veto.
  • Big news out of Hawaii this week: both the Senate and House voted to pass HB 209 yesterday. The bill, which would make permanent the top personal income tax brackets and rates on high-income earners and create a 20 percent nonrefundable Earned Income Tax Credit (EITC), now heads to the governor.
  • Under a bipartisan effort, lawmakers in Montana have also passed a bill creating a state Earned Income Tax Credit (EITC) that would be 3 percent of the federal credit (and refundable). The governor is expected to sign the bill.
  • Tomorrow marks the first day of West Virginia's special session. Yet, uncertainty remains regarding how the divided leadership will come to a budget and tax resolution.
  • Despite a tight budget this year and ever present concerns about property taxes in the state, the Texas House has voted to phase out its franchise tax, which is currently one of three major revenue sources in the state. The approved House bill now makes its way to the Senate, which passed a similar elimination bill earlier this session.
  • In a renewed effort to shore up funds, a hiring freeze on almost all state agencies went into effect this week in Wyoming. Lawmakers’ opposition to tax increases has left them with limited options for dealing with declining oil prices.
  • Florida's legislative session is nearly complete. Most of Gov. Rick Scott's proposed tax cuts have been ignored this year, but the latest package in the House still amounted to nearly $300 million in cuts, and the Senate is expected to approve about $142 million. A bill did pass to send an expansion of the state's homestead exemption to voters in November 2018, which would cut property taxes and would sap an estimated $750 million of funding for local services that rely on property tax revenue and shift taxes onto businesses.
  • A Wisconsin lawmaker is expected to release details soon for a plan that likely proposes to garner more funding for infrastructure investments by raising the gas tax and cutting the income tax through switching to a flat tax structure. Gas tax swaps like this have become increasingly popular, but all suffer from the same problem of boosting infrastructure funding at the expense of core public services like education and public health.
  • In Oklahoma, a bill to raise the state's cigarette and fuel taxes moves forward. If advanced, the bill would increase the cigarette tax rate by $1.50 per pack and the gasoline and diesel fuel by $0.06 per gallon. However, the Senate also passed a bill to reduce road funding in hopes that the fuel tax increase will fill the gap.
  • The Seattle City Council has passed a resolution expressing intent to pursue a local income tax. Under a coalition's proposal, adjusted gross income in excess of $250,000 would be taxed at 1.5 percent. In addition to shoring up the finances of Seattle, the income tax would provide a test legal case for the constitutionality of an income tax in the state of Washington.
  • A proposal to tax sugary drinks in Santa Fe, New Mexico failed at the ballot yesterday.

What We're Reading...  

  • A new report from the California Budget & Policy Center explains the importance of raising awareness of the state's Earned Income Tax Credit (EITC). The credit has been available since 2015.
  • A new working paper from Columbia University law professor David Schizer explores the benefits of taxing both corporations and their shareholders, though in a coordinated fashion.

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


Time to Repeal State Deductions for Federal Income Taxes


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Three of the biggest needs facing state policymakers right now are new revenues to fund their priorities in the face of budget shortfalls and federal funding cuts, ways to insulate those revenue streams from unpredictable tax changes at the federal level, and approaches to meet these needs without leaning even more heavily on low- and middle-income families for revenue than they already do. As our newly updated brief shows, the six states that still allow an income tax deduction for federal income taxes paid can advance all three of these important goals. Lawmakers in Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon should strongly consider repealing this costly, regressive, and volatile tax break.

As our brief outlines, these six states collectively will lose about $3.8 billion in revenue in 2017 due to this deduction. In three of the states—Alabama, Iowa, and Louisiana—the deduction is unlimited, allowing every dollar paid in federal income taxes to be deducted from income for state tax purposes. In the other three states, caps or phase-downs limit how much any one taxpayer can take advantage of the tax break. Not surprisingly, the three states without any limits on the deduction lose the most revenue ($2.7 billion combined). Those three states also give more of the break to their highest-income taxpayers than the states that limit it, with around 80 percent of the benefit going to the highest-income 20 percent of residents, though high-income families receive an outsized share of the benefit in every state that allows the deduction.

Some of these states are wisely taking notice and working to address these issues. In Louisiana, Gov. John Bel Edwards, a legislative tax study task force, and the state’s leading tax policy experts have all called for eliminating the deduction. In Iowa, although no major tax changes were ultimately approved this year, the deduction was targeted there as well. And repealing the deduction has also been considered in Alabama as a way of offsetting the revenue loss that would occur if the state repeals its tax on groceries.

With federal tax and budget debates heating up and rampant uncertainty about where those debates may lead, these six states have a clear opportunity to bring in needed revenue, protect that revenue from the whims of Congress, and advance tax fairness at the same time.


State Rundown 4/27: States Finally Reaching Resolution on Gas Taxes


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This week, transportation funding debates finally concluded with gas tax updates in IndianaMontana, and Tennessee, and appear to be nearing an end in South Carolina. Meanwhile, Louisiana and Oregon lawmakers debated new Gross Receipts Taxes, and Texas legislators considered eliminating the state's franchise tax. 

-- Meg Wiehe, ITEP Deputy Director, @megwiehe  

  • Louisiana Gov. Bel Edward's Commercial Activities Tax (CAT) was pulled from committee early this week without a vote due to opposition, and it won't be making any comebacks this legislative session. What comes next? The most concrete idea from the House right now appears to be a "standstill budget," which would close half of the $1.3 billion hole the state faces with the expiration of the temporary sales tax increase. Bills based on the Task Force for Structural Change recommendations for budget and tax reform have been filed but have yet to be taken up. 
  • While the Gross Receipts Tax debate is wrapping up in Louisiana, it's just warming up in Oregon, where Sen. Hass has proposed replacing the state's corporate income tax with a GRT like that used in Ohio, Texas, or Washington. 
  • Texas lawmakers are considering bills in both the House and Senate that would phase out the state's franchise tax with money from surpluses over a number of years until the tax is eliminated. The franchise tax is the state's third largest source of income, projected to bring in $7.8 billion over the 2018-2019 budget year. These actions follow the passage of a budget for the coming year that cuts or underfunds health care, financial aid, and more
  • As Nebraska legislators took a break from debating tax proposals this week to focus on the budget, the revenue forecast was adjusted downward yet again, shedding even more doubt on the tax-cut bills debated last week. 
  • Efforts to prevent localities in California from enacting so called "Netflix taxes" (sales taxes on digital streaming services) has failed for the year due to opposition raised by local governments and cable companies. 
  • Tennessee Gov. Bill Haslam's "IMPROVE Act" -- a gas tax update combined with cuts to business taxes, sales tax on groceries, and the Hall income tax – finally passed both houses of the legislature and was signed into law this week. One sticking point in the negotiations, a property tax cut for veterans, was added to the bill in the end. 
  • South Carolina's gas tax debate is nearing an end, as the Senate approved a 12-cent-per-gallon increase with a veto-proof majority. However, the bill still has to go to conference committee to work out differences from the House bill, of which there are many. 
  • In other transportation funding news, Montana and Indiana legislatures have approved infrastructure plans that include increases to their fuel taxes. Both plans are expected to receive the signature of their respective governors. Meanwhile, a new report in California shows that the gas tax increase passed by lawmakers earlier this month is a good start but falls short of what is needed to maintain roads in the long-term. And in Colorado, a plan to  raise the sales tax for road funding has met its end in the Senate. And after the effort to raise Alabama's gas tax was declared "dead" last week, the latest attempt is a bill to allow counties to put local increases on the ballot for local voters. 

What We're Reading...   

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


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


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

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

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

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

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

 

Tax Shifts

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

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

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

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

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

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

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

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

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

 

Tax Cuts 

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

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

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

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

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

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

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

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

 


State Rundown 3/16: Win Some, Lose Some


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Nevada Gov. Brian Sandoval will make his case for expanding the state’s business license fee before a joint legislative committee on Wednesday. The governor wants to change the fee from a flat rate of $200 per year to a tiered system with rates from $400 to $4 million per year, with a company’s revenue and industry type determining the fee level. Sandoval argues that the change is necessary to support investments in K-12 education throughout the state.

Rhode Island Gov. Gina Raimondo’s budget proposal received positive reviews last week for its emphasis on job creation and education. Notable tax changes include a two-step increase in the state’s Earned Income Tax Credit (EITC) and a targeted tax exemption on social security income for couples who make up to $60,000. An ITEP analysis shows that all of the benefits of the governor’s proposed social security exemption would go to seniors in the bottom 80 percent of the state’s income distribution, whereas a rival plan to exempt all social security income from taxes would deliver half its benefits to the top 20 percent. To help raise revenue, Gov. Raimondo also proposed a new property tax on second homes worth over $1 million, as well as increases in the cigarette excise tax and taxes for online rental companies.

The Montana House of Representatives failed to override Gov. Steve Bullock’s veto of HB166, a bill that would have cut income taxes. Under the proposal passed by the legislature, income tax rates would have been reduced by 0.2 percentage points across all brackets. Opponents of the bill argued that the state already faces a $47 million deficit and that most of the benefits of the income tax cut would accrue to high-earners; almost 50 percent of the cuts would have gone to the top ten percent of Montanans. Gov. Bullock also pointed out that “the experience of other states shows that decimating your revenue base to benefit large corporations and the wealthiest individuals does not work to stimulate the economy.” A smattering of other tax cut proposals are still making their way through the legislature, including a measure that cuts income taxes and reduces breaks for capital gains, and another that would increase the exemption allowed for business equipment.

The Oklahoma House of Representatives, by contrast, voted to allow a scheduled income tax cut to proceed despite facing a $611 million budget deficit. The tax cut will reduce the top income tax rate from 5.25 to 5 percent beginning in January 2016. After that, if revenue conditions are met, the tax rate will fall to 4.85 percent in 2018. Since the Oklahoma Tax Commission says the state will lose $404 million in revenue from 2016 to 2018 due to the cuts, that’s a big “if.” ITEP data show the tax cut will put an average of just $29 back into the pockets of middle-income households, while the top 1 percent of Oklahoma earners will get an average benefit of $2,009 each.

A bill that would cut income taxes in Arizona if online shoppers lose their ability to evade sales taxes passed in the House after being defeated twice in the same chamber.  Sponsored by state Rep. J.D. Mesnard, the income tax cut proposal will only go into effect if Congress passes the Marketplace Fairness Act (which has little chance of happening soon).

 

Following Up
Massachusetts: Gov. Charlie Baker’s budget faces a tough road in the legislature; Senate President Stanley Rosenberg has said it fails to “invest in the future,” while other state officials have claimed that the cuts proposed by the governor would endanger everything from the lottery to elections.

Texas: The budget drafted by leaders of the state’s House Appropriations Committee reportedly includes more money for public schools than the Senate budget does. The Senate plan would cover additional costs from surging school enrollment, but would direct more revenue to tax cuts than the House proposal.

South Carolina: A Senate panel headed by Sen. Ray Cleary approved a bill that would increase the gas tax by 20 cents over five years and index the tax to inflation. The measure is expected to be vetoed by Gov. Nikki Haley, who has said she will not approve an increase in the gas tax unless it’s paired with a big cut in the state’s income tax.

 

States Ending Session This Week:
New Mexico (Saturday)

 


State Tax Policy Trends in 2015: Not All That "Trickles Down" Is Rain


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The theory that tax cuts for the affluent will eventually trickle down to everyone else is shopworn, yet supply-side adherents keep promising the public that the rich can have their tax cuts and the rest of us will eat cake too.

Despite 35 years of data showing this to be false, the notion has seduced enough policymakers to keep the lights on at Art Laffer’s house.

At least 10 states have tax cut proposals in motion that, unlike the tax shifts we reviewed previously, will not offset cuts by raising other taxes but by raiding surpluses or reducing spending. The overwhelming majority of these proposals will reduce taxes for the best off while doing nothing or little for everyone else, making a regressive tax landscape worse.  Gov. Asa Hutchinson’s overhaul of his state’s income tax and Mississippi Gov. Phil Bryant’s proposal to introduce a state Earned Income Tax Credit (EITC) would actually benefit low- and moderate-income families, but most of the other proposals would lead mainly to benefits for the wealthy.

Over time such tax cuts exacerbate income inequality and stymie opportunity for the masses. Taxes and spending are on a balance scale. Top-heavy tax cuts and their purported economic benefits do not trickle down a rolling hill; they tip the scale in favor of the rich while depriving states of necessary revenue to adequately fund basic services, including education, public safety, infrastructure health and other priorities. Below are some pending proposals:

Arkansas: Gov. Asa Hutchinson fulfilled his campaign promise of passing a middle class tax cut. The governor’s plan introduces a new income tax rate structure for middle income Arkansans. To help pay for the measure the capital gains exemption was reduced from 40 to 50 percent. Using data from ITEP, Arkansas Advocates for Children and Families explains that the taxpayers who benefit from capital gains exemptions are wealthier families.

Florida: Once again, Florida Gov. Rick Scott is pushing lawmakers to enact an unusual hodgepodge of tax cuts.  Under his proposal, taxes on cable TV and cell phone usage would drop by 3.6 percentage points, manufacturing machinery and textbooks would both be exempted from the sales tax, the corporate income tax exemption would be raised from $50,000 to $75,000, and yet another back-to-school sales tax holiday would be held this summer.  The overall cost of this package would be roughly $700 million, and while it’s too early in the session to gauge the chances of passage, there is apparently some skepticism toward the plan in the state legislature.

Idaho: The big tax shift sought by some Idaho lawmakers is off the table for now, but Gov. Butch Otter made clear all along that he prefers a straight-up cut to the state’s corporate income tax rate, and its top personal income tax rate, from 7.4 to 6.9 percent.  Our analysts recently found that such a tax cut would make Idaho’s decidedly regressive tax system even more unfair.  More than three out of every four dollars in personal income tax cuts would flow to the wealthiest 20 percent of households, and members of the top 1 percent would see an average tax cut of over $3,500 each year.  These cuts would come on top of a very similar package of regressive income tax reductions enacted in 2012.

Mississippi: Lawmakers in the Magnolia State can’t seem to get enough of tax cut proposals. In addition to the tax shift proposal passed by the House recently (and written about here), lawmakers are debating a variety of tax cutting measures, which include decreasing personal and corporate income tax rates, introducing a nonrefundable EITC, and eliminating the corporate franchise tax.

Montana: The Montana legislature has approved a bill that would cut personal income tax rates across the board and reduce state revenues by roughly $42 million per year.  ITEP analyzed similar, earlier versions of the cut and found that high-income households would be the largest beneficiaries and that low-income and middle-income taxpayers, who currently face the highest overall state and local tax rates, would receive little or no benefit.  Governor Steve Bullock is likely to veto the plan because of its impact on the state’s ability to fund vital public services.

Nebraska: With the sheer number and diversity of tax cut bills circulating in Nebraska this winter, it seems certain some cut will be enacted.  Much of the focus so far has been on reducing property taxes, a stated priority of newly elected Gov. Pete Ricketts.  Property tax proposals include creating a new refundable, targeted property tax circuit breaker credit for homeowners and renters, introducing a local income tax to reduce reliance on property taxes for school funding, hiking the sales tax rate to pay for a bump in a statewide property tax credit, and increasing personal and corporate income tax rates to pay for property tax cuts. State business leaders, however, have made it clear that income tax cuts are their main concern, and Governor Ricketts has not ruled out the possibility.  One plan being floated would reduce personal and corporate income tax rates over eight years, giving the biggest benefits by far to the richest Nebraskans.

North Carolina (updated 4/6/2015): Two years after North Carolina enacted a sweeping tax cut package, state lawmakers have returned this year with more tax cutting plans that will bust the budget to benefit wealthy residents and profitable corporations.  Senate Republicans have unveiled another round of personal income tax cuts that cost more than  $1 billion when fully enacted and would slash millions of dollars in corporate income taxes. There has also been talk of reducing taxes on capital gains income, restoring items eliminated in 2013 including a deduction for medical expenses and historic preservation tax credit.  What makes these proposals even more egregious is the state’s anticipated revenue shortfall of almost $300 million this year. Lawmakers were forced to close a $500 million revenue gap last year with deep spending cuts after underestimating the steep cost of the tax cuts passed in 2013.  

North Dakota: Just a few short months ago, North Dakota lawmakers were giddy about the idea of using booming oil and gas tax revenue to pay for an elimination or significant reduction of the state’s personal income tax.  But as gas prices plummeted, reality set in and the House approved a scaled back proposal – a 10 percent across-the-board reduction in personal and corporate income tax rates (Gov. Dalrymple also proposed a 10 percent personal income tax cut).  North Dakota lawmakers enacted similar plans in 2011 and 2013, slowly chipping away at the two taxes.

Tennessee: In what’s becoming an annual tradition, multiple Tennessee lawmakers have proposed (subscription required) repealing the state’s “Hall Tax”—a modest 6 percent income tax on interest, dividends, and capital gains income.  As we showed in our recent Who Pays? report, the Hall Tax is a rare progressive bright spot in a tax system that tilts overwhelmingly in favor of affluent households.  Fortunately, leaders in the state’s House and Senate are reportedly unenthused by the idea since Tennessee’s wealthiest households recently benefited from cuts in estate, inheritance, and gift taxes.  And while it’s discouraging that the governor isn’t making principled tax fairness arguments against these proposals, he is very skeptical that the state can afford to get rid of the Hall Tax right now.

Texas: Lawmakers in the Lone Star State hope to enact a tax cut package that would cost about $4 billion over a two year period.  Governor Greg Abbott’s top priority is cutting the business franchise tax, and he has said that he will veto any budget that does not include such a cut.  So far, the main options for reducing business franchise taxes include cutting the rate from 1 to 0.85 percent or raising the exemption from $1 million to $4 million.  The governor would also like to see school property taxes cut, and the Senate seems happy to go along with that idea.  Options currently under discussion include raising the $15,000 homestead exemption to $33,625, or converting it to equal 25 percent of home value.  As we explain in this policy brief, the percentage-based option is less fair than a flat-dollar exemption.  But it’s also important to keep in mind the context provided by Dick Lavine of the Center for Public Policy Priorities: “There’s better uses of this money … than tax cuts.”


State Rundown 1/22: Twists, Turns and Intrigue


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Although it significantly cut income taxes over each of the last three legislative sessions, the North Dakota Legislative Assembly heard the first of 30 bills this week aimed at income tax cuts, One proposal would reduce all personal income tax rates to zero and collapse the state’s current five income brackets to one. The governor’s income tax plan would reduce personal income tax rates by 10 percent and corporate income tax rates by 4.8 percent across the board. Another proposal currently before Senate would reduce the income tax rate on the bottom income bracket from 1.22 percent to 0 percent, eliminating the tax liability for 170,000 North Dakotans. The tax cut would cost $151 million a year and expire after two years. Sponsors of the bill argue that the tax cut would provide relief to renters, who have seen rents skyrocket as a result of the oil boom. Other legislators have suggested a more targeted approach, through an income tax credit for renters. 

South Carolina Gov. Nikki Haley endorsed an increase in the state’s gas tax in her state of the state Wednesday. Previously, the governor pledged to veto any increase in the state’s gas tax, which has not changed since 1987. The catch (and there’s always a catch) is that Haley will not support a gas tax increase without an income tax cut for top earners (from 7 to 5 percent).  Hiking gas taxes while cutting the top income tax rate would result in a tax shift from well-off South Carolinians to middle income and working families. State legislators had varied reactions to the governor’s plan; while Republicans were enthusiastic, Democrats pointed out that the plan would result in a net revenue loss of $117 million.

A state Senate committee approved Arkansas Gov. Asa Hutchinson’s tax plan Wednesday  with an amendment that would eliminate a planned capital gains tax cut. The amendment, offered by Sen. Bill Sample, would reverse a measure passed in 2013 to increase the exemption on capital gains from 30 percent to 50 percent and eliminate the tax on capital gains above $10 million. The amendment reduces the total cost of the governor’s tax plan to $93.4 million, according to the state’s Department of Finance and Administration. Local political prognosticators have noted the unorthodox nature of a Republican governor and legislature introducing a bill with tax increases.

Michigan Governor Rick Snyder signed a package of bills last week related to a ballot question that voters will decide on in May.  If approved, the package will generate $1.2 billion per year for roads and $300 million per year for schools by raising sales taxes, gas taxes, and vehicle registration fees.  In sharp contrast to Governor Haley’s proposal for South Carolina (described above), this package includes an income tax cut targeted toward low-income taxpayers, rather than the wealthy.  If approved, the state’s Earned Income Tax Credit (EITC) would rise to equal 20 percent of the federal credit.

 

Following Up:

MontanaDebate over tax cut measures continues in the legislature, and Gov. Steve Bullock’s budget director opposed the measures in committee hearings, saying they would endanger the state’s surplus. The Montana Budget and Policy Center, citing ITEP numbers, said that the top 1 percent of Montana taxpayers would see a tax cut of $2,200, while low-income Montanans would see a cut of just $12.

New Hampshire – Gov. Maggie Hassan has announced she opposes  proposed corporate tax cuts, saying that the bills currently before the state senate would create a significant budget hole. It is uncertain if Hassan will veto the bills should they reach her desk.

New York – In a stunning turn of events, state assembly speaker and Cuomo ally Sheldon Silver was arrested this morning on corruption charges. The charges stem from investigations related to the Moreland Commission, which the governor shut down prematurely last year amid controversy. Needless to say, this development will have an impact on Gov. Cuomo’s legislative agenda.


State Rundown 1/20: Plenty of Tax Cut Proposals


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Legislators in Montana have a full plate this week, including several proposals to cut taxes. One plan would cut state income taxes by 5 percent across the board at a cost of $79 million in lost revenue, while a more modest proposal would cut income tax rates at a cost of $26 million. An ITEP analysis found that the rate cuts in both plans would overwhelmingly benefit high-income taxpayers; in each case, the top 20 percent of taxpayers would receive roughly two-thirds of the tax cut.

Two proposals in the New Hampshire Senate would lower the business enterprise and business profits taxes. Sponsors of the proposals have argued that the state’s corporate tax rates deter investment, but as the New Hampshire Fiscal Policy Institute points out business tax cuts are an ineffective economic development strategy. One bill proposes a reduction in the business profits tax rate from 8.5 to 8 percent. The profits tax falls on businesses with gross receipts over $50,000, though only one percent of filers actually pay it after credits are applied. The other bill would reduce the business enterprise tax, which is levied on businesses’ wages, dividends and interest, from a rate of 0.75 percent to 0.675 percent. Combined, the two measures could cost $35 million in lost revenue each year. Opponents of the cuts complain the lost revenue would mean fewer services and worse infrastructure.

New York Gov. Andrew Cuomo will address state legislators and interested citizens in a joint State of the State and budget address this Wednesday. A key element of his budget proposal is a $1.7 billion property tax circuit breaker credit that would be available to homeowners and renters if their property tax payments exceed 6 percent of income. The circuit breaker would phase out for homeowners with $250,000 or more of income and for renters at $150,000 (13.75 percent of their rent would be considered property taxes). The governor estimates that over 1.3 million New Yorkers would receive an average credit of $950 if his plan is fully implemented. The governor may also express his support for a bill that offers tax credits to individuals and corporations who donate money to public schools or scholarship programs for poor and minority students to attend private schools. The bill is contentious, as some see it as a way to divert state money to private education.

 

Things We Missed:

 

  • Last week, we reported that Rhode Island Gov. Gina Raimondo released her budget proposal. She has decided to release her budget instead in early March.
  • Georgia Gov. Nathan Deal released his budget proposal last Friday; an overview can be found here.
  • South Carolina Gov. Nikki Haley released her budget proposal last Monday; an overview can be found here.
  • Virginia Gov. Terry McAuliffe gave his State of the Commonwealth speech last Wednesday; you can read a transcript and watch the speech here.
  • Oregon Gov. John Kitzhaber gave his State of the State address last Monday; you can read a transcript and watch the speech here.
  •  

     

    States Starting Session This Week:
    Alaska
    Hawaii
    New Mexico

    State of the State Addresses This Week:
    Michigan Gov. Rick Snyder (watch here)
    New Mexico Gov. Susana Martinez (watch here)
    Alaska Gov. Bill Walker (Wednesday)
    Missouri Gov. Jay Nixon (Wednesday)
    New York Gov. Andrew Cuomo (Wednesday)
    South Carolina Gov. Nikki Haley (Wednesday)
    Delaware Gov. Jack Markell (Thursday)
    Nebraska Gov. Pete Ricketts (Thursday)

    Governor’s Budget’s Released This Week:
    Kansas Gov. Sam Brownback (Monday)
    Maryland Gov. Larry Hogan (Wednesday)
    New York Gov. Andrew Cuomo (Wednesday)


    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


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


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

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

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

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

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

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

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

    • Florida Governor Rick Scott is attending grand openings of 7-Eleven® stores but a columnist at the Orlando Sentinel observes that “if incentives and low corporate tax rates were working, Florida wouldn't rank 43rd in employment.”  It’s a common sense column worth reading.
    • As another massive tax cut for Michigan businesses continues to make its way through the legislature, the Michigan League for Human Services chimes in with a report, blog post, and testimony on why localities can’t afford to foot the bill for state lawmakers’ tax-cutting addiction.
    • Bad tax ideas abound in Indianas gubernatorial race.  Democratic candidate John Gregg wants to blast a $540 million hole in the state sales tax base by exempting gasoline; he claims he can pay for it by cutting unspecified "waste" from the budget. And Gregg’s Republican opponent, Mike Pence, doesn’t seem to have any better ideas.  So far he’s only offered a "vague proposal" to cut state income, corporate, and estate taxes – without a way to pay for those cuts.
    • Kansas lawmakers are feverishly working to meld differing House and Senate tax plans into a single piece of legislation. Governor Sam Brownback has endorsed an initial compromise which includes dropping the top income tax rate and eliminating taxes on business profits. Earlier in the week the Legislative Research Department said the plan would cost $161 million in 2018 and new state estimates say the price tag is more like $700 million in 2018.  Senate leaders have said that they aren’t likely to approve a tax plan that creates a shortfall in the long term. Stay tuned....
    • Finally, a USA Today article should give pause to lawmakers hoping that drilling and fracking for natural gas leads to a budgetary bonanza.  It explains how the volatile price of natural gas is creating headaches in energy-producing states like New Mexico, Oklahoma, and Wyoming where a dollar drop in the commodity’s price means a budget hit of tens of millions.

    New ITEP Report on States With Deductions for Federal Income Taxes Paid


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    Earlier this week, the Institute on Taxation and Economic Policy released a new report, Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head.  The report highlights an unusual tax break that currently exists in only six states (Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon): a state income tax deduction for federal income tax payments.  Collectively these states stand to lose over $2.5 billion in tax revenues in 2011 due to these tax breaks, with losses ranging from $45 million to $643 million per state.

    Unfortunately, the high price tag of this tax giveaway yields remarkably little benefit to low-and middle-income families.  In states where the deduction is uncapped, the best off 1 percent of taxpayers enjoy up to one-third of the benefits from this provision, while the top 20 percent enjoy up to 80 percent of the benefits.  Wisely, several states have eliminated or scaled back this expensive and poorly targeted deduction in the last few years.  North Dakota, Oklahoma, and Utah have all eliminated the deduction, and Oregon lawmakers voted recently to further limit their deduction.

    Deductions for federal income taxes seriously undermine the adequacy and fairness of state income taxes. These deductions also leave state budgets vulnerable to changes in federal tax law.  As the recession lingers and states look to enhance their long term fiscal solvency, elected officials in states with a deduction for federal income taxes paid have a real opportunity to close fiscal shortfalls in a way that has minimal impact on low-and middle-income families.

    Read the Report


    State-Based Coalitions Fight for Budget Fairness


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    Faced with huge budget deficits, many state lawmakers are eyeing dangerous short-sighted budget cuts that threaten to gut essential services and state infrastructure.  In response, dedicated advocacy organizations, service providers, religious communities, concerned citizens, and professional associations have formed coalitions in more than 35 states to battle for smart fiscal policies that will protect core services and ensure that states have the resources to meet current and future needs. 

    Here’s a brief overview of the newest of these coalitions:

    In Georgia, the coalition 2020 Georgia officially launched on January 18th to promote a balanced approach to their budget that adequately addresses the long-term needs of the state instead of pursuing damaging cuts to services that can hurt the state’s economy.  The coalition consists of a wide variety of partners, including AARP, the League of Women Voters of Georgia, and the Georgia Public Health Association.  2020 Georgia hopes to maintain smart investments in education, public safety, health, and the environment.

    In Texas, a wide coalition of organizations have created Texas Forward, a group that hopes to spur continued investment in vital public services instead of devastating budget cuts.  Texas Forward believes that smart investment now can prevent future generations from shouldering the burden of the lasting damage caused by disinvesting in services during this time of financial need.  Recently, Texas Forward urged state lawmakers to seek new revenue sources and federal funding to minimize the impact of the projected $24 billion deficit.

    In Iowa, the Coalition for a Better Iowa was formed with the express mission “to maintain and strengthen high quality public services and structures that promote thriving communities and prosperity for all Iowans.”  The Coalition for a Better Iowa includes organizations representing children, seniors, human service providers, environmental organizations, and politically engaged citizens.  The coalition is committed to creating a balanced solution to the budget shortfalls while protecting vital services and investing sustainably in the state’s future.

    In Montana, a group called the Partnership for Montana’s Future offers an extensive list of revenue-raising mechanisms to solve the state’s budge crisis.  The list has many specific proposals, generally categorized as collecting new revenue through improved tax compliance, closing tax loopholes, targeted tax increases, and other miscellaneous options.  The coalition consists of a wide variety of health, education, environmental, labor, and policy organizations.

    In Pennsylvania, Better Choices for Pennsylvania is a coalition of health, education, labor, and religious organizations that recognize that all Pennsylvanians benefit from the services and infrastructure provided by state government.  Like the other coalitions featured, Better Choices for Pennsylvania refutes the proposition that deep tax cuts can solve the state’s budget problems.  Instead, BCP is pushing for closing special tax breaks and loopholes.  The coalition believes that helping working families through hard times will put the state in a better position towards long-term financial stability.

    In Michigan, the revenue coalition, A Better Michigan Future recently issued a press release reviewing Governor Snyder’s budget proposal.  The group supports smart revenue-raising tactics like eliminating redundant and wasteful loopholes and modernizing the state sales tax to reflect the changing marketplace.

    While not a new coalition, North Carolina’s revenue coalition, Together NC, recently launched a web ad.  The ad is meant to remind North Carolinians about the smart budget choices the state has made in the past that allowed it to prosper and spur citizens to take action to protect their state from falling behind (or, as the ad says, to keep North Carolina from becoming its neighbor to the south).


    ITEP Releases New Report on Capital Gains Tax Breaks in the States


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    Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

    The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

    Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

    ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

     


    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.


    Results of Tax-Related Ballot Initiatives


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

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

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

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

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

    Personal Income Tax

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

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

    Business Tax Breaks

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

    Super Majority Voting Requirements

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

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

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

    Earnings Tax

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

    Sales Taxes

    Massachusetts: Question 1PASSED
    Massachusetts: Question 3 - FAILED

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

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

    Property Tax Exemptions

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

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

    Property Tax Caps

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

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

    Real Estate Transfer Fees

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

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

    Government Borrowing

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

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


    State Tax Issues on the Ballot on Election Day


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

    Personal Income Tax

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

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

    Business Tax Breaks

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

    Super-Majority Voting Requirements

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

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

    Earnings Taxes

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

    Sales Taxes

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

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

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

    Property Tax Exemptions

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

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

    Property Tax Caps

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

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

    Real Estate Transfer Fees

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

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

    Government Borrowing

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

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


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


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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.


    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.

    As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

    For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

    This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

    Read the report.


    Three States Focus on Eliminating Regressive Deduction to Raise Much Needed Revenue


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    We've recently highlighted a variety of progressive revenue raising options gaining serious attention in New York and Wisconsin. This week we bring you yet another idea that's recently been the subject of debate, though this one applies to fewer states. Those seven states still offering income tax deductions for federal taxes paid (i.e. Alabama, Iowa, Missouri, Montana, North Dakota, Louisiana, and Oregon), should immediately repeal, or at the very least dramatically scale back, that deduction.

    The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level. Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.

    Iowa Governor Chet Culver most recently drew attention to this problem while urging lawmakers this week to end the deduction. The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction. Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.

    With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.


    Making the News: Progressive Changes to Ohio, Minnesota, and Montana's Income Tax


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    We've been lamenting for the past several years about the folly of Ohio's former Governor Bob Taft pushing through a phased-in 21 percent cut in income tax rates. Of course, the tax reductions made Ohio's overall tax structure less fair. Policy Matters Ohio recently released a report detailing the impact of the Taft tax cuts. Analysts there found that "key economic trends continued to go in the wrong direction after the tax overhaul." Despite this evidence, current Governor Ted Strickland has vowed to continue Taft's tax cutting legacy. But there is some hope brewing in the Buckeye state.

    Representative Michael Skindell has called for freezing the phase-in of the Taft tax cuts for the wealthiest Ohioans. It's estimated that adopting Skindell's recommendation would bring in over $200 million and it's certainly a step toward making Ohio's income tax more progressive.

    For tax justice advocates in Minnesota, it's a bleak time. Governor Tim Pawlenty is vehemently anti-tax, and his 21st Century Tax Reform Commission has largely followed his lead with recommendations to eliminate the state's corporate income tax and enact several investment tax credits, though in fairness the Commission does recommend two revenue raising options: expanding the sales tax base and increasing cigarette taxes. It's too bad that progressive revenue raising options weren't mentioned. It's hardly a surprise that some would like to see income tax cuts for the wealthiest Minnesotans preserved. But Wayne Cox at Minnesotans for Tax Justice argues against tax cuts in a recent commentary, correctly arguing that increasing the progressivity of Minnesota's tax structure would not harm the state's business climate. He warns that "the alternative is carrying out an even riskier plan that trims muscle, not fat."

    There are more good proposals on improving the progressivity of state income taxes. Next we turn to Montana where Representative Dave McAlpin is trumpeting a "fix" to the state's 2003 major tax revision that reduced the top tax rate and bracket. State estimates were that the tax changes were supposed to cost $26 million a year, but in reality they actually cost the state $100 million. His legislation would introduce a new top income tax rate of 7.9 percent on Montanans with taxable incomes over $250,000, and help to right the wrongs of the 2003 revisions. If Rep. McAlpin's bill is adopted, the state could see $26 million in additional revenue and improve the progressivity of Montana's tax structure.

    For more on the importance of progressive income taxes read ITEP's policy brief on this topic.


    Regressive Tax Proposals on the Ballot This November


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    It's that time again. Right-wing activists, unable to convince lawmakers to gut their tax systems, are asking voters to do it themselves through the ballot. This update explains that ballot initiatives to enact regressive tax policies died in Michigan and Montana, but survived to secure spots on the ballot in Arizona, Florida, Massachusetts and Oregon.

    The Good News: Two Regressive Proposals Did Not Make It onto the Ballot

    Michigan "Fair "Tax": The Michigan Fair Tax proposal, a highly regressive measure that was anything but fair, failed to make it onto the November ballot. The proposal would have eliminated both the Michigan Business Tax and the personal income tax, raised the state sales tax to 9.75% and expanded it to include services, food, prescription drugs and out-of-pocket health care expenses.

    Montana Property Tax Limitations: CI-99, a measure that would have capped property tax increases at no more than 1.5% annually, fell short of landing a spot on the Montana ballot. In addition to the limits on tax hikes, the proposal would have ensured that homes can only be reappraised when sold (as opposed to every seven years). Sound familiar? It looks like, at least this year, Montana averted the disastrous path followed by California's Proposition 13.

    The Bad News: Other Regressive Tax Proposals ARE on the Ballot in November

    Arizona Sales Tax Hike: On June 27, the Digest described the Arizona sales tax initiative which will be on the ballot in November. The proposal would hike the sales tax by one cent. The increased revenues would be directed toward a faltering transportation system. Arizona already has sales taxes bordering on 10% and a nearly flat income tax. As a result, its tax policy is already highly regressive and this initiative would make it more so.

    Florida Tax Swap: In November voters will decide on Amendment 5, a 25% property tax cut and a 1 cent sales tax hike. The property tax cut would hit Florida's schools, already in shambles, the hardest. The Amendment would come at a cost of $9 billion in lost revenue and the subsequent sales tax increase would only produce about $4 billion, plunging the Sunshine State even further into debt and shifting the tax burden to lower-income Floridians.

    Abolishing Massachusetts' Income Tax: In Massachusetts, voters will have the opportunity to decide on an initiative that would eliminate the state's income tax. Such irresponsible policy would cost the state $12 billion in lost revenue -- a whopping 40% of its budget. The price would be paid with teacher layoffs, school closings, cuts to higher education, worker training programs and health care services, and delays of road and bridge repairs.

    Cutting Oregon's Income Tax for the Rich: Oregon voters will have the opportunity to vote on a measure that would drastically cut income taxes for its wealthiest taxpayers. The proposal would create an unlimited deduction on the state income tax form for federal income taxes paid.The state's general fund would lose about $4 billion over four years from the proposal. The general fund is used primarily for education, public safety, the justice system, human services (including health care, care for seniors and child protective services) and state parks. Meanwhile, the average tax cut for the top one percent of Oregon earners would be about $15,000. Those who fall among the middle 20% of earners would receive about $1 on average.


    How Not to Deal with the Property Tax Issue


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

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

    Are Rebates the Answer?

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

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

    Itemized Deductions on State Tax Are No Better

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

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


    Dust-Up in Big Sky Country


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    Montana's Special Session adjourned Tuesday after the state's biennial budget received final approval. The regular 2007 legislative session ground to an acrimonious halt late last month. The main stumbling blocks were how to spend a projected $1 billion surplus and whether lawmakers would enact a temporary property tax "rebate," as Democratic leaders proposed, or a more permanent property tax reduction, as Republicans suggested. Ultimately a one-time $400 rebate for homeowners survived the cantankerous debate, but a tax credit of up to $120 for renters failed to win final approval. Property tax cuts for businesses that would have exempted the first $80,000 of business equipment from tax were also left out of the final budget. Ultimately the agreed upon budget is likely to be viewed as a political win for Governor Brian Schweitzer as no doubt he and other policymakers will take credit for "cut[ing] more taxes for more Montanans than any time in history."


    EITC Expansion: A Good Idea in Every State


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    In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits ... or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.


    Upcoming Legislative Activity in the Big Sky State


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    Montana Governor Brian Schweitzer has a plan for disposing of the state's projected budget surplus. On the tax side, he is proposing a one-time property tax rebate for homeowners that would cost about $400 million. His proposal also includes more funding for education, mental health facilities, and corrections. Republicans are skeptical and may push for permanent (and potentially unaffordable) property tax cuts.


    Business Turning Against TABOR


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

    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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