Nebraska News


State Rundown 3/22: Springtime Tax Debates Blossom Nationwide


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This week in state tax news saw major changes debated in Hawaii and West Virginia and proposed in North Carolina, a harmful flat tax proposal in Georgia, new ideas for ignoring revenue shortfalls in Mississippi and Nebraska, an unexpected corporate tax proposal from the governor of Louisiana, gas tax bills advance in South Carolina and Tennessee, and property tax troubles in Missouri, Nevada, and New Jersey.

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

  • The North Carolina Senate has released its preferred tax plan, a billion dollar so-called “middle-class” tax cut featuring a drop in the state’s personal and corporate income tax rates and other reductions.  An ITEP analysis found the top 20 percent of North Carolinians would receive nearly half of the personal income tax cuts under the proposal despite lawmakers claiming the cuts are targeted to low- and middle-income taxpayers.  The Senate’s proposal would come on top of years of tax cuts in the Tarheel state that have already reduced revenues by more than $2 billion annually.
  • Louisiana's Gov. Bel Edwards is out with a surprising proposal in advance of the state's legislative session--scrap the state's corporate and franchise taxes and adopt instead a Gross Receipts Tax (like in Ohio). This proposal comes from left field, a very different direction from reforms suggested by many groups, including the governor's own Task Force on Structural Changes in Budget & Tax Policy. More details are expected to be released next week.
  • Legislators in West Virginia are taking up an extreme constitutional amendment resolution, Senate Joint Resolution 8, this week that would, among other things, repeal the state's personal property tax, alter the real property tax, apply limitations to the personal income tax, and limit excise, sales and use, and corporate net income taxes. Under the resolution, three-fifths majority vote in each house would be needed to reinstate any repealed tax.
  • Sources in Georgia report that the latest change to a harmful regressive income tax cut bill there creates a larger nonrefundable credit to deliver more help to low- and middle-income residents and those without children who were overlooked in the original bill. But the heart of the bill remains a flat 5.4 percent income tax that slashes taxes on the wealthy while raising them for many lower-income people and reducing revenue for education and other priorities by hundreds of millions.
  • After crossover, Hawaii legislators are still considering over a dozen tax change bills. Proposals include establishing a state earned income tax credit, reinstating high income tax brackets that were repealed in 2015, and changes to low-income credits. Lawmakers are also weighing possible tax increases to fund the state highway system, including a tax based on car value and fuel tax increases.
  • Nebraska lawmakers dead set on massive income tax cuts are trying to get creative to get them passed despite the state's billion-dollar shortfall and general focus on property taxes. The latest idea floated is to repackage an existing property tax credit and then phase in the income tax cuts in future years using an arbitrary "trigger" mechanism.
  • Mississippi's shortfall in its Medicaid budget is still $89 million with just a few months to go in the fiscal year and a key legislative deadline coming up this weekend. Lawmakers are now considering simply not paying health providers for several weeks to push the problem off until next year.
  • Tennessee legislators have reverted back to Gov. Haslam's original regressive tax shift plan, which is now advancing through committees in both houses, after failing to replace it with a raid of the general fund for infrastructure needs.
  • A bill to raise South Carolina's gas taxes and vehicle fees to shore up that state's infrastructure needs is likely to pass the legislature soon, but could be vetoed by Gov. McMaster.
  • New Jersey's property tax cap may be revised this year because it is hamstringing local budgets to such an extent that they cannot qualify for state and federal matching funds for local services like public safety needs.
  • Efforts to reform Nevada's property tax cap that has been undermining local budgets have shifted from various band-aid fixes to a likely study committee to seek solutions over the summer.
  • The Missouri House advanced a bill mentioned in this space last week to eliminate a property tax circuit breaker that helps low-income seniors remain in their homes.
  • Alabama is seeking to modernize its tax structure to include streaming services like Netflix, Hulu, and music services.
  • In an effort to make money managers pay their fair share, Rhode Island legislators have introduced legislation to tax carried interest income the same as earned income.
  • In Texas, a bill to limit the increase of local government budgets has passed the Senate and is expected to receive support of the House. Senate Bill 2 would limit county and local government budget increases to 5 percent annually as a way to limit property tax increases. Any increase above 5 percent would trigger an automatic vote.
  • Seventy percent of New Jerseyans polled were in favor of raising taxes on the state's wealthiest residents to restore pension funds the legislature has failed to make adequate contributions to for years.

What We're Reading...  

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


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


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

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

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

Budget Watch 

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

Governors' State of the State Addresses 

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

What We're Reading...

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

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


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


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

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

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

Governors’ Budget Watch

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

Governors' State of the State Addresses

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

What We're Reading...

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

 

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


State Rundown 8/17: Oregon, Louisiana, Nebraska, Alabama and California


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This week we’ve got updates on tax and budget news in Oregon, Louisiana, Nebraska, Alabama and California. Be sure to check out the What We’re Reading section for links about the latest on Kansas, an editorial from the Wall Street Journal and a new report from The Brookings Institution. Thanks for reading the Rundown! 

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

 

  • With rising costs currently projected to outpace new revenueOregon faces the challenge of cutting $1.35 billion in services from the 2017-2019 budget or raising additional revenue. Taxpayers will have a significant say on this matter in November as they decide the fate of ballot Measure 97 (formerly IP 28), a proposed increase to the corporate minimum tax on large businesses. 

  • Although Louisiana lawmakers held three sessions in 2016 to resolve several budget deficits, their solutions will provide only momentary relief as the state is projected to face a $1.5 billion deficit in 2018 when many of the temporary taxes passed this year expire.   

  • The new fiscal year in Nebraska is off to a sputtering start, with revenues already running 7.6 percent behind the forecast, contributing to rumblings about a special session this fall to balance the books before legislators start debating the next two-year budget in January. State agencies are already being told to identify potential 8-percent cuts for that upcoming budget cycle. Unsurprisingly, none of this has deterred the state Chamber of Commerce from calling for further tax cuts that would only make these matters worse. 

  • Alabama's legislature convened this week to begin its special session on the state's $85 million Medicaid funding gap, the governor's proposal to create a state lottery system to fill that gap, distribution of settlement money from the BP oil spill, and possibly raising the state's outdated gas tax. Keep an eye on the Tax Justice Blog for more on these developments later in the week.
  • A proposed bill to exempt Olympic medal bonuses from the income tax went nowhere in California this week, but legislation to temporarily exempt diapers from the sales tax was approved by the legislature and awaits the Governor's approval.  

 What We're Reading...    

  • Kansas Center for Economic Growth's Duane Goossen spells out the unavoidable pressure point Kansas has been marching toward—whether to cut services even deeper or raise revenue. 

  • The Wall Street Journal's Editorial Board comes out against what it creatively calls "regressive taxation"--you know, income transfers "from the private economy to the privileged government class." 

  • The Brookings Institution released a report outlining the challenges states face when relying too heavily on oil, natural gas, and coal taxes. 

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 Kelly Davis at kelly@itep.org. Click here to sign up to receive the Rundown via email.

 


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


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

– Carl Davis, ITEP Research Director

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

Trigger Warning

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

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

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

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

And Speaking of Driving on Flats

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

Up Next

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


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


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

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

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

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

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

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

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

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

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

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

 


State Rundown 10/23: Cuts, Roads and Student Kickbacks


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A coalition of Iowa student leaders is calling for a tax incentive to keep graduate and professional students in the state. Student government leaders from the University of Iowa, Iowa State University and the University of Northern Iowa want lawmakers to implement a 50 percent income tax break for graduate and professional students who reside in Iowa for up to five years after graduation. For students who choose to reside in rural areas, the tax break would increase to 75 percent. Student leaders say the measure would address a shortage of healthcare and legal professionals in the state. However, a recent survey of Iowa graduate and professional students found that employment opportunities were the biggest factor in choosing to remain in the state, not tax incentives.

The battle over road funding in Michigan continues. House Republicans managed to pass a road funding plan despite objections by chamber Democrats, though some say the measure is unlikely to pass. The measure would increase the state’s gasoline excise tax by 3.3 cents per gallon, increase the state’s diesel tax by 7.3 cents per gallon over two years, and increase vehicle registration fees by 40 percent. It would also shift hundreds of millions of dollars from the general fund to the roads budget. In a bizarre twist, House Republicans decided to tie these revenue-raising measures to a triggered personal income tax rate cut that would overwhelmingly benefit the wealthy and could ultimately repeal the state’s income tax entirely. Critics say the proposal would fail to raise enough revenue and that the income tax cut and general fund transfer could cause major budget problems down the road. They generally favor a larger increase in the gas excise tax. The bill is the latest salvo in transportation talks between the legislature and Gov. Rick Snyder that have collapsed into impasse. Voters rejected a sales tax increase to pay for road construction in May.

Nebraska Gov. Pete Ricketts will push a package of income and property tax cuts next legislative session, according to a recent address the governor delivered to Lincoln Chamber of Commerce. Ricketts claimed that cutting taxes would be the key to economic growth and would be his “No. 1 issue.” Similar efforts to cut income and property taxes failed in Nebraska during the last legislative session. An ITEP analysis of one of these plans found that wealthier Nebraskans would benefit disproportionately, while revenue losses would be drastic. 


Fiscal Year Finish Line Part III: Transportation Funding


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This is the final installment of our three part series on 2015 state tax trends.  The first article focused on tax shifts and tax cuts.  The second article discussed tax credits for working families and revenue raising initiatives.

Thumbnail image for 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). 

Perhaps the most active area of state tax policy this year was the debate over how to fund the nation’s deteriorating infrastructure.  As Congress continues to drag its feet on a solution to our current revenue shortfall, lawmakers in many states took action by enacting gas tax changes that will fund meaningful improvements to their transportation networks. A total of 17 states have enacted gas tax increases since 2013—including 9 this year alone.

Check out the detailed list after the jump to see which states increased their gas tax to support transportation funding.

 

Transportation Funding

Georgia: A 6.7 cent gas tax increase took effect July 1, 2015 as a result of a law signed earlier this year.  That law also positions Georgia for the long-term by allowing future increases to occur alongside growth in inflation and vehicle fuel-efficiency.

Idaho: A 7 cent gas tax increase took effect July 1, 2015—the state’s first gas tax increase in over 19 years.

Iowa: A 10 cent increase finally took effect on March 1, 2015 after years of debate.

Kentucky: Falling gas prices nearly resulted in a 5.1 cent gas tax cut this year, but lawmakers scaled that cut down to just 1.6 cents.  The net result was a 3.5 cent increase relative to previous law.

Nebraska: A 6 cent increase was enacted over Gov. Pete Ricketts’ veto.  The gas tax rate will rise in 1.5 cent increments over four years, starting on January 1, 2016.

North Carolina: Falling gas prices were scheduled to result in a 7.9 cent gas tax cut in the years ahead, but lawmakers scaled that cut down to just 3.5 cents.  The eventual net result will be a 4.4 cent increase relative to previous law (though now there is talk of allowing further cuts to take place and hiking drivers’ license fees to make up some of the lost gas tax revenue).  Additionally, a reformed gas tax formula that takes population and energy prices into account will result in further gas tax increases in the years ahead.

South Dakota: A 6 cent increase took effect April 1, 2015.

Utah: A 4.9 cent increase will take effect January 1, 2016, and future increases will occur as a result of a new formula that considers both fuel prices and inflation.  This reform makes Utah the nineteenth state to adopt a variable-rate gas tax.

Washington: Gov. Inslee signed a recent compromise package approved by the legislature. Washington State’s gas tax will rise by 11.9 cents in two increments: 7 cents on August 1 and an additional 4.9 cents on July 1, 2016. 

 


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.

 


Gas Tax Changes Take Effect July 1


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

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

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

View chart of states raising gasoline taxes 

View chart of states raising diesel taxes

 

 

 


State Rundown 5/14: Helping and Hurting Working Families


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

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

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

 

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

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

 


State Rundown 5/11: Deadlock and Infighting


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

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

 

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

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

States Ending Session This Week:
Missouri (Friday)

 


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


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

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

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

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

 

Things We Missed:

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

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

 


State Rundown 4/7: Bad Ideas Die Hard


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

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

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

 

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

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

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

 

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

 

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



State Rundown 3/31: Tax Cut Throwbacks


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North Carolina lawmakers proposed another round of personal income tax cuts last week that cost more than  $1 billion when fully enacted and would slash millions of dollars in corporate income taxes. The Job Creation and Tax Relief Act of 2015 (a sure misnomer) would reduce the personal income tax rate to 5.5 percent by 2017 and replace the current standard deductions with  a zero percent tax bracket on the first $10,000 in income for single filers by the same year (married couples could apply the zero percent bracket to the first $20,000 in income). The bill would also reduce the corporate income tax rate to 3 percent by 2017 even if the state fails to meet the required revenue targets included in the 2013 tax cut bill along with several other changes. Revenues are $300 million below projections this fiscal year. Opponents of the cuts note that they would do little to stimulate the state’s economy while reducing public investments and providing a windfall for already-profitable corporations.

An elaborate tax proposal from Idaho House Majority Leader Rep. Mike Moyle would cut taxes for the top one percent of Idaho taxpayers by $5,000 according to an analysis by ITEP and the Idaho Center for Fiscal Policy. Moyle’s plan would increase the state’s excise tax on gasoline by 7 cents, remove the sales tax on groceries and eliminate the food tax credit. Combined, the elements of the bill will increase taxes paid by the bottom 20 percent by $68 and taxes on middle-income earners by $192.

Alabama Gov. Robert Bentley embarked on a statewide tour to drum up support for his proposed tax increases. The plan, which received a lukewarm reception from many state legislators, would increase the cigarette excise tax by 82 cent a pack, increase the sales tax rate on automobile purchases from 2 to 4 percent, and would end some tax credits for insurance companies, banks and corporations. The combined measures would raise $541 million in new revenue. The governor argues that his plan is necessary to end the dysfunctional nature of state budgeting.

The Nebraska Legislature will consider a bill that would increase the excise tax on gasoline by 6 cents. The increase would be phased in over four years (1.5 cents per year). Gov. Pete Ricketts opposes the increase in the gas tax, arguing that the state should look to other options for road construction that do not entail tax increases.

 

Things We Missed:
The Mississippi House defeated efforts to pass significant tax cuts this legislative session after Lt. Gov. Tate Reeves’s proposal to cut income and corporate franchise taxes by $555 million over 15 years died on the floor. 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.

Utah Gov. Gary Herbert signed a package of gas and property tax increases that rank as the Utah’s largest revenue increase in 20 years. Proponents of the tax increases say they are necessary to fund important transportation projects and improvements in public education. The excise tax on gasoline will increase by 5 cents per gallon beginning in July, and will be indexed to inflation. It is expected to bring in $100 million for road and bridge repairs over the next two years. The property tax increase will add about $50 in taxes to the bill for a $250,000 house, and the revenues raised are earmarked for education.

 

States Ending Session This Week:
Kentucky (Monday)
South Dakota (Monday)
Idaho (Friday)

 


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


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

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

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

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

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

Following Up:

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

Things We Missed:

 

 


State Rundown 1/16: Kumbaya Caucus


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Newly-elected Arkansas Gov. Asa Hutchinson continued a well-established tradition in the Natural State by beginning the legislative session with a proposed tax cut. Hutchinson’s plan would cut personal income tax rates by one percent for those making $21,000 to $75,000 a year, and would cost $137.8 million once fully implemented (according to Hutchinson's office). The governor has yet to outline how he will pay for his tax cut. His plan will offer virtually no relief to the 40 percent of Arkansans who make less than $22,600 and currently pay a percentage of their income in state in local taxes that is twice as high as that paid by the wealthiest Arkansans, according to the most recent edition of ITEP’s Who Pays report. Legislators predicted that the cuts would receive broad bipartisan support.

North Carolina lawmakers began their legislative session yesterday with the usual pledges of bipartisanship meant to muffle the sharpening of knives. The state’s Republican legislature could face a showdown with Gov. Pat McCrory over Medicaid expansion, a policy that the governor now says he is open to considering. At their traditional press conference, the leaders of the House and Senate reiterated their opposition to expanding Medicaid to cover 500,000 additional North Carolinians, but were non-committal on other issues likely to dominate the session – business incentives, teacher pay and local taxes, among others. Senate President Pro Tem Phil Berger defended previously enacted corporate and personal income tax cuts, saying they are contributing to an improving economic environment despite revenue collections falling $190 million below state projections. This is after state projections were already adjusted downward by close to the same amount last year, so the state is actually bringing in $400 million less than originally anticipated.

Georgia Gov. Nathan Deal urged lawmakers to find money to invest in the state’s transportation system, saying $1 billion was needed to simply maintain the current system. While the governor did not specify where the funding should from, he highlighted the inadequacy of the state’s gasoline excise tax, signaling his openness to a tax increase. Georgia’s excise tax has not increased since 1971, while fuel efficiency has almost doubled. The prospect of a transportation plan passing the legislature is dicey; Republicans are likely to oppose increasing taxes or fees, while Democrats could balk at a plan that doesn’t include funding for mass transit. Democrats enjoy leverage on the issue since their votes could be necessary to overcome Republican opposition.

 

Following Up:

Arizona – A judge ordered lawyers for the Legislature, governor and Arizona public schools to enter into settlement talks over a lawsuit brought by the schools against the state. Gov. Ducey previously called for a resolution in his State of the State address.

New Jersey – Gov. Chris Christie’s State of the State address received mixed reviews for being light on details (the governor did not mention his state’s transportation crisis and punted on unfunded pension liabilities) and targeted toward a national audience. Christie did, however offer dissonant platitudes about the need to make investments and also cut taxes. Perhaps next he will boldly declare his intention to rub his tummy and pat his head at the same time.

Nebraska – The Nebraska Cattlemen Association is monitoring the property tax cut proposals emerging in the legislature after Gov. Pete Rickett’s pledge to offer Nebraskans property tax relief in his State of the State address. They have shown particular interest in Sen. Al Davis’ plan to pay for property tax relief through new local income taxes.

Tennessee – As predicted, plenty of legislators hate Gov. Bill Haslam’s plan to expand Medicaid coverage to 200,000 Tennesseans. House Republican leader Gerald McCormick is particularly unenthused, saying he would sponsor the governor’s bill but only because it’s his job (cue heavy sighing and eye-rolling).

 

Things We Missed: 

New Mexico’s Legislative Finance Committee and Gov. Susana Martinez both released their budget proposals this week. State revenues are expected to continue sliding due to falling oil prices, and less generous spending is expected. (Thanks to Ellen Pinnes for the tip!) 


State Rundown 1/12: When Your Mouth Writes a Check Your State Can't Cash


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Welcome to the State Rundown, your source for the latest in state tax policy! This week, 21 states begin their legislative sessions, including a number of states where newly-elected conservative governors will have to grapple with big budget deficits. Presidential contenders Scott Walker and Chris Christie will deliver highly-anticipated State of the State addresses as well. Here are the top stories we’ll be following this week:

 

Arizona Gov. Doug Ducey, who campaigned on a pledge to cut income taxes, will likely shift his focus from tax cuts to spending cuts in his State of the State address today. His pledge last week not to raise taxes in his inaugural address was widely seen as a concession that promised tax cuts were untenable given the state’s $500 million deficit this fiscal year and projected $1 billion shortfall in FY 2016. Ducey will instead announce a statewide hiring freeze and his intention to push for a resolution to a long-standing school funding dispute.

New Jersey Gov. Chris Christie will attempt to use his State of the State address to stop his recent slide in the polls and seize the initiative on two issues that threaten his legacy – public employee pension reform and transportation funding. So far the governor has been mum about the contents of his speech, but New Jersey political watchers anticipate Christie will defend his decision to cut back on promised payments to state pension plans. A bipartisan commission appointed by the governor has yet to release recommendations on how to deal with tens of billions of dollars in unfunded health benefits and pension liabilities. Christie must also contend with a nearly insolvent transportation fund that will go broke in July without additional funding. Some observers speculate that the governor will call for a state gas tax increase, which, after adjusting for inflation, is currently at its lowest level in history.

Gov. Pete Ricketts of Nebraska, who identified property tax cuts as his first priority in his inaugural address last week, may also welcom efforts in the legislature to push for income tax cuts as well. Business leaders in the state have made it clear that income tax cuts are their main concern, and the state’s projected budget shortfall makes it unlikely Nebraska could afford both property tax cuts and income tax cuts. The release of the Governor’s budget this week will provide more details on his vision for tax cuts. Proposals already circulating in the legislature include reducing the taxable value of agricultural land, capping property taxes, taxing land based on profit generated instead of market value, or increasing the size of the state’s property tax credit fund.            

Tennessee Gov. Bill Haslam could be a victim of his party’s success in the last election, as conservative state lawmakers could push the governor farther to the right than he would like during the legislative session that starts this week. Republicans enjoy supermajorities in both houses of the state legislature, and some lawmakers plan to push to cut or eliminate the Hall Tax over the governor’s objections. The Hall Tax is a six percent tax on income from dividends, interest and capital gains – and a rare progressive feature in a tax system that leans overwhelmingly on the poor. Haslam has repeatedly rebuffed calls from conservative groups to push for repeal, arguing that the $300 million in revenue gained from the tax each year would be difficult to replace. His stance could be complicated, however, by his push to have Tennessee accept Medicaid expansion under his Insure Tennessee plan. Expansion could bring $1.14 billion in new spending and 15,000 jobs to Tennessee, but is a lightning rod among conservatives who oppose the Affordable Care Act. The governor could decide that he lacks the political capital to fight for Insure Tennessee and the Hall Tax at the same time.

 

States Starting Session This Week:
Arkansas
Arizona
Colorado
Delaware
Georgia
Idaho
Illinois
Iowa
Kansas
Maryland
Minnesota
North Carolina
South Carolina
South Dakota
Tennessee
Texas
Utah
Virginia
Washington
West Virginia
Wyoming

State of the State Addresses This Week:
Arizona Gov. Doug Ducey (watch here)
Idaho Gov. Butch Otter (watch here)
Indiana Gov. Mike Pence (Tuesday)
Iowa Gov. Terry Branstad (Tuesday)
New Jersey Gov. Chris Christie (Tuesday)
South Dakota Gov. Dennis Daugaard (Tuesday)
Washington Gov. Jay Inslee (Tuesday)
Wisconsin Gov. Scott Walker (Tuesday)
Georgia Gov. Nathan Deal (Wednesday)
West Virginia Gov. Earl Ray Tomblin (Wednesday)
Wyoming Gov. Matt Mead (Wednesday)
Colorado Gov. John Hickenlooper (Thursday)
Kansas Gov. Sam Brownback (Thursday)
Nevada Gov. Brian Sandoval (Thursday)
Vermont Gov. Peter Shumlin (Thursday) 

Governor’s Budgets Released This Week:
Idaho Gov. Butch Otter (Monday)
West Virginia Gov. Earl Ray Tomblin (Wednesday)
Nebraska Gov. Pete Ricketts (Thursday)
Nevada Gov. Brian Sandoval (Thursday)
Rhode Island Gov. Gina Raimondo (Thursday)
Vermont Gov. Peter Shumlin (Thursday)
Arizona Gov. Doug Ducey (Friday)


New Year, New Gas Tax Rates


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

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

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

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

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

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

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

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


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


A New Wave of Tax Cut Proposals in the States


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


What to Watch for in 2014 State Tax Policy


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

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

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

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

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

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

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

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

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

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

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

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


State News Quick Hits: Expert Advice Versus Politics in DC, NE, NY and KY


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The District of Columbia’s Tax Revision Commission heard from the Institute on Taxation and Economic Policy (ITEP, CTJ’s partner organization), last week about options for lessening the regressivity of DC’s tax system. In testimony before the Commission, ITEP’s Matt Gardner explained how enhancements to DC’s standard deduction, personal exemption, and Earned Income Tax Credit (EITC) could be enacted without breaking the bank, as long as they’re paired with reforms like phasing-out exemptions and deductions for high-income taxpayers, or eliminating the District’s unusual tax break for out-of-state bond interest.

We got our first glimpse this week of what tax reform could mean for Nebraskans next year.  Members of Nebraska’s Tax Modernization Committee sketched out details of a potential tax reform proposal, but will wait until next month to finalize the plan.  And so far, it looks like the Committee will be sticking to modest, sensible ideas like expanding the sales tax to some household services, indexing tax brackets for inflation, and cutting property taxes (slightly). Considering that Governor Dave Heineman’s commitment to doing away with the personal income tax (or at least significantly cutting it) is the reason for the Committee’s existence, it is a positive sign that its members are steering clear of more radical changes to the income tax.

New York Governor Andrew Cuomo’s first appointed tax commission, the one charged with finding revenue-neutral options to reform the state’s tax system, released its recommendations last week for making the state’s tax code “simpler and fairer”.  Our friends at the Fiscal Policy Institute and New Yorkers for Fiscal Fairness called the recommendations “a smorgasbord of reforms with a little something for everyone."  The ideas include: expanding the sales tax base to services and currently exempted goods and using the new revenue to cut taxes for low- and middle-income families; reforming the corporate and bank franchise tax; and exempting middle-income families from New York’s estate tax. The question now is whether the Governor, (who can hardly find a tax he doesn’t hate), will consider these recommendations. Or, whether he will only focus on ideas coming from a second tax committee he appointed, with former Governor George Pataki at its helm, which is tasked with finding ways to simply cut $2 to $3 billion in taxes next year.

Last September, recommendations from Kentucky’s Blue Ribbon Commission on Tax Reform were released. ITEP deemed the Commission’s 453 page final report filled with tax reform recommendations “worth legislative consideration.” Yet, the Lexington Herald-Leader is reporting that, like the eight other previous tax studies, this report is simply “gathering dust.” Some lawmakers say that 2014 isn’t the year for tax reform, citing a difficult “political climate.” Let’s hope the tide changes and all the Commission’s work doesn’t go unutilized given the fiscal stress the state is already under.


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


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

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

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

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

 

 

 

 


State News Quick Hits: Criticism of "Business Climate" Rankings Grows, and More


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Nebraska’s Tax Modernization Committee, which we promised to keep tabs on in July, is scheduled to hold its final public hearings this week. But rather than wait to hear what the panel has to say, Governor Dave Heineman decided to renew his calls for lower property and income taxes. While some have argued that Nebraska’s property taxes are too high, slashing property taxes without increasing state aid to local governments would put significant strain on vital local services. Today, Nebraska ranks 43rd nationally in the amount of state aid it provides to local governments, and 49th in the aid it gives to schools. If Governor Heineman succeeds in his quest to cut state taxes, increasing local aid will become even more difficult. The Open Sky Policy Institute has issued thoughtful recommendations on this and other issues facing the Committee.

If you’re wondering whether you should put any stock in the Tax Foundation’s newest “Business Tax Climate Index,” the answer is No.  For starters, Good Jobs First has shown that, contrary to popular belief, the Tax Foundation’s rankings aren’t a very good predictor of how much a business would actually pay in taxes if it were located in any given state.  And now Governing magazine has taken a critical look at the rankings in a new article, and concludes that states earning high marks from the Tax Foundation don’t actually have stronger job markets or higher medium wages.

U.S. News & World Report is running an opinion piece by Carl Davis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), highlighting the fact that the federal gas tax has not been raised in exactly 20 years – and has been losing value ever since. The essay draws heavily from research that ITEP published late last month, and concludes that “it's time for our elected officials to accept that keeping the gas tax cryogenically frozen at 18.4 cents per gallon is costing Americans a lot more than it's helping them.”

West Virginia is thinking about how best to use the tax revenues it expects to collect from sales of its natural gas resources. The Associated Press reports that “[f]or decades, coal from West Virginia's vast deposits was mined, loaded on rail cars and hauled off without leaving behind a lasting trust fund financed by the state's best-known commodity. Big coal's days are waning, but now a new bonanza in the natural gas fields has state leaders working to ensure history doesn't repeat itself.” According to the AP, the state’s Senate president, Jeff Kessler, is looking to use some of the severance tax revenues on oil and natural gas to create an enduring trust fund, as other states with significant natural resources have done. “His goal: a cushion of funds long after the gas is depleted to buoy an Appalachian mountain state chronically vexed by poverty, high joblessness, and cycles of boom and bust.”

Arkansas Advocates for Children and Families Executive Director, Rich Huddleston, was one of four Arkansas leaders invited to contribute to Talk Business Arkansas magazine with ideas for how to “construct a fairer state tax code.” His proposal (citing ITEP data) is here, and begins: “The goal of any good tax system is to raise enough revenue to fund critical public investments that improve well-being of children and families while also promoting economic growth and prosperity.”


Watching Nebraska's Tax Modernization Committee


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Months after the complete failure of Nebraska Governor Dave Heineman’s efforts to radically reform his state’s tax code, Nebraska’s Tax Modernization Committee had its first meeting.  Why a committee? Because rather than following their governor into a massive, regressive overhaul of their state’s tax code, lawmakers instead decided in May to form this deliberative committee, which will study the state’s tax structure and issue recommendations for reform by December.

Just as the Institute on Taxation and Economic Policy (ITEP) was highly engaged in Nebraska, generating numbers to explain the impact of the governor’s proposals earlier this year, ITEP’s experts will be monitoring the work of the Committee and contributing to the debate with information on how proposed changes will impact taxpayers across the income spectrum.

The Lincoln Journal Star is keeping close tabs and covering the Committee’s meetings. The Committee’s own web page is here, including a schedule of public meetings in the capital and around the state.

Photo credit, Lincoln Journal Star


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


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

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

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

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

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

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

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

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

In Arizona, The Republic explains the “mixed legacy” left by the temporary, 1 percent sales tax increase that expired last week.  Rather than using the revenue for education, as voters expected when they approved the increase, “the tax revenue also partially subsidized an ambitious $538 million business tax-cut package that lawmakers approved less than a year after passage of [the sales tax increase].”  

Pennsylvania lawmakers are likely to vote this week on a bipartisan bill that would uncap the state’s gas tax. Pennsylvania’s gas tax is supposed to rise alongside gas prices, but an outdated tax cap still on the books prevents that from happening when gas prices exceed $1.25 per gallon. The result has been hundreds of millions in lost revenue as the gas tax has failed to keep pace with the rising cost of construction. The change is supported by Governor Corbett, and is just one of many transportation revenue enhancements that have been debated or enacted this year.

In reaction to the complete failure of radical tax reform this year, Nebraska lawmakers unanimously passed legislation forming the Tax Modernization Committee to study the state’s tax structure. Fourteen senators are expected to sit on the Committee and issue recommendations in December.

Here’s an
interesting piece on the donation “check offs” available on the Wisconsin income tax forms. Interested in knowing which nonprofits are most popular in terms of giving? Check out the article and then ponder whether state Department of Revenues should be burdened with the administration of collecting donations for these (albeit worthy) causes.


Governor Strikes Out with Tax Plan for Nebraska


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We’ve been closely following tax proposals in Nebraska and have been especially concerned that both of Governor Heineman’s plans were of the tax swap variety – reductions in progressive taxes paid for by increases in regressive sales taxes.

This scathing op-ed in the Lincoln Journal-Star points to the tax impact of the Governor’s proposals as one strike against his policy prescription: “Strike one came with release of a study by the OpenSky Policy Institute that said 80 percent of wage earners in the state would pay more in taxes if the bill were implemented. Taxes would go up by an average of $631 a year under LB405 for people earning less than $21,000 a year. Taking the biggest hit were taxpayers earning between $37,000 to $59,999, who would pay an additional $722 a year. Taxes would go down by $4,851 for people earning more than $91,000 a year, the institute said.” CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP), generated those numbers for OpenSky. The editors said the “second strike” against the governor’s plan was business groups’ opposition. (Evidently they want tax rates cut but don’t want to lose their own exemptions to pay for it.)

We learned this week that Nebraska tax policy debates don’t follow the rules of baseball, fortunately, and that two strikes were enough to send the Governor back to the dugout. Now he and legislators seem to be taking a more cautious approach and potentially forming a tax commission to better understand the state’s tax structure and get more expert input on modernizing it.


Beware The Tax Swap


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Note to Readers: This is the second 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. This post focuses on “tax swap” proposals.

The most extreme and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate one or more taxes and replace some or all of the lost revenue by expanding or increasing another tax.  We call such proposals “tax swaps.”  Lawmakers in Kansas, Louisiana, Nebraska and North Carolina have already put forth such proposals and it is likely that Arkansas, Missouri, Ohio and Virginia will join the list.

Most commonly, tax swaps shift a state’s reliance away from a progressive personal income tax to a regressive sales tax. The proposals in Kansas, Louisiana, Nebraska and North Carolina, for example, would entirely eliminate the personal and corporate income taxes and replace the lost revenue with a higher sales tax rate and an expanded sales tax base that would include services and other previously exempted items such as food.   

In the end, tax swap proposals hike taxes on the majority of taxpayers, especially low- and moderate-income families and give significant tax cuts to wealthy families and profitable corporations. For instance, according to an ITEP analysis of Louisiana Governor Bobby Jindal’s tax swap plan (eliminating the personal income tax and replacing the lost revenue through increased sales taxes) found that the bottom 80 percent of Louisianans would see their taxes increase. In fact, the poorest 20 percent of Louisianans, those with an average annual income of just $12,000, would see an average tax increase of $395, or 3.4 percent of their income. At the same time, the elimination of the income tax would mean a tax cut for Louisiana’s wealthiest, especially in the top 5 percent.  ITEP concluded that any low income tax credit designed to offset the hit Louisiana’s low income families would take would be so expensive that the whole plan could not come out “revenue neutral.” The income tax is that important a revenue source.


These proposals also threaten a state’s ability to provide essential services, now and over time. They start out with a goal of being revenue neutral, meaning that the state would raise close to the same amount under the new tax structure as it did from the old.  But, even if the intent is to make up lost revenue from cutting or eliminating one tax, these plans are at risk of losing substantial amounts of revenue due in large part to the political difficulty of raising any other taxes to pay for the cuts. Frankly, it’s taxpayers with the weakest voice in state capitals who end up shouldering the brunt of these tax hikes: low and middle income families.

Proponents of tax swap proposals claim that replacing income taxes with a broader and higher sales tax will make their state tax codes fairer, simpler and better positioned for economic growth, but the evidence is simply not on their side. ITEP has done a series of reports debunking these economic growth, supply-side myths. In fact, ITEP found (PDF) that residents of so-called “high tax” states are actually experiencing economic conditions as good and better than those living in states lacking a personal income tax. There is no reason for states to expect that reducing or repealing their income taxes will improve the performance of their economies; there is every reason to expect it will ultimately hobble consumer spending and economic activity.

Here’s a brief review of some of the tax swap proposals under consideration:

Last week Nebraska Governor Dave Heineman revealed two plans to eliminate or greatly reduce the state’s income taxes and replace the lost revenue by ending a wide variety of sales tax exemptions. ITEP will conduct a full analysis of both of his plans, though it’s likely that increasing dependence on regressive sales taxes while reducing or eliminating progressive income taxes will result in a tax structure that is more unfair overall.

If Kansas Governor Sam Brownback has his way he’ll pay for cutting personal income tax rates by eliminating the mortgage interest deduction and raising sales taxes. An ITEP analysis will be released soon showing the impact of these changes – made even more destructive because of the radical tax reductions Governor Brownback signed into law last year.

Details recently emerged about Louisiana Governor Bobby Jindal’s plan to eliminate nearly $3 billion in personal and corporate income taxes and replace the lost revenue with higher sales taxes. ITEP ran an analysis to determine just how that tax change would affect all Louisianans. ITEP found that the bottom 80 percent of Louisianans in the income distribution would see a tax increase. The middle 20 percent, those with an average income of $43,000, would see an average tax increase of $534, or 1.2 percent of their income. The largest beneficiaries of the tax proposal would be the top one percent, with an average income of well over $1 million, who'd see an average tax cut of $25,423. You can read the two-page analysis here.

North Carolina lawmakers are considering a proposal that would eliminate the state’s personal and corporate income taxes and replace the lost revenues with a broader and higher sales tax, a new business license fee, and a real estate transfer tax. The North Carolina Budget and Tax Center just released this report (using ITEP data) showing that the bottom 60 percent of taxpayers would experience a tax hike under the proposal. In fact, “[a] family earning $24,000 a year would see its taxes rise by $500, while one earning $1 million would get a $41,000 break.” The News and Observer gets it right when they opine that the “proposed changes in North Carolina and elsewhere are based in part on recommendations from the Laffer Center for Supply Side Economics.  Supply-side economics (or “voodoo economics,” as former President George H.W. Bush once called it) didn’t work for the United States…. We wonder why such misguided notions endure and fear where they might take North Carolina.”

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

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

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

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


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


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

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

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

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

  • Last night’s Washington Gubernatorial debate did not answer the call  to shift their focus to the state’s broken revenue system.  Instead, the Republican candidate, Attorney General Rob McKenna said that the Democrats “just keep insisting we need higher taxes.”  Whoever wins, they will have to contend with the fact that Washington State has the most regressive tax structure in the nation.
  • Last week we reported on public scrutiny of a $336 million “small business” tax break in North Carolina that is, in fact, going to benefit some of the state’s wealthiest individuals. Yesterday, Senate Republicans - torn between public outrage and affluent constituents - successfully wiggled out from under having to vote on a measure to modify it so it targets truly small businesses, as intended.  
  • New Hampshire voters will go to the polls in November to decide whether the state’s lack of a personal income tax should be enshrined in the constitution. In better news, the state’s lawmakers heeded the advice of the New Hampshire Fiscal Policy Institute and defeated a constitutional amendment requiring a supermajority to pass any tax or fee increase.
  • Here’s an interesting read on the economic development impact of the arts. A new study contends that not only do the arts make Nebraska (for example) a better place to live, but they also contribute to state and local coffers to the tune of $18 million. For more on the impact of the arts in other states check out the study, Arts & Economic Prosperity IV.
  •  

The Tulsa World takes a look at the growing list of reasons to oppose an income tax cut in Oklahoma, including arguments being made by education groups, businesses, retirees, real estate developers and lawmakers themselves.  As the World puts it, basic public services already “haven't been protected for years and as a result are decimated by recent cutbacks. Protecting them should mean restoring some funding, but that's not how tax-cutters see things.”

The Maryland House and Senate have each passed budgets containing progressive personal income tax increases that roughly hew to the Governor’s original blueprint.  As the Maryland Budget and Tax Policy Institute points out, the Senate plan raises more revenue from across the board increases, while the House plan raises less and targets the state’s highest-income residents.  The differences between these two plans will be worked out in the days ahead.

This great editorial in the Lincoln Journal-Register (Nebraska) calls the newly formed Open Sky Policy Institute “an informed new voice” in Nebraska’s public policy debates. The editorial also shares some of the Institute’s numbers (compliments of ITEP) making the case that “the number of dollars the tax cut would put into the pockets of higher-income Nebraskans dwarfed the amount that would go to low- and middle-income Nebraskans” under a plan the governor has proposed.

  • In this upside down world where closing a corrupt tax loophole is called a tax hike (like that’s a bad thing), some states are moving towards amending their constitutions to require a two thirds supermajority to raise taxes or borrow money. This is a shame. New Hampshire Senators, for example, are expected to vote on a supermajority proposal later this week. Here’s an excellent editorial from the Idaho Statesman and a new report from the Center on Budget and Policy Priorities about the perils of supermajorities.
  • It’s been just over a month since Kansas Governor Brownback unveiled his tax plan and the criticism continues. His plan, which would raises taxes on the bottom 80 percent of the income distribution, was recently called “radical and troubling.” Attention is shifting to the House, where leaders are now introducing their own tax proposal which includes the most costly and regressive elements of the Governor’s proposal.
  • Kudos to Kentucky Governor Steve Beshear for appointing his 23 member blue ribbon commission to study the  state’s tax system and propose ways to reform it.  Let’s hope they heed the governor’s call for "a tax system that produces adequate revenue that meets the needs of our people," and his admonition that there comes a time "when slashing programs and services starts a downward spiral from which recovery is too difficult and too steep."
  • Good news from Nebraska, where it looks like support is weak for the Governor’s proposal to eliminate the inheritance tax.  Legislators know that revenue from this tax goes directly to counties, which would have to cut services or make up the revenues with regressive tax increases.
  • Finally, in planning your Valentine’s dinner, you might think twice about eating at a Yum Brands restaurant (KFC, Taco Bell, and Pizza Hut) or serving Campbell Soup, H.J. Heinz or ConAgra Foods products.  Our Corporate Tax Dodging in the Fifty States, 2008-2010 found that, despite being profitable, these companies didn’t pay any federal corporate income taxes in at least one year between 2008-2010.

 


Trending in the States: Cutting Corporate Taxes Because Lobbyists Say You Should


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Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This article takes a look at efforts to roll back business taxes in states based on the shopworn, erroneous argument that tax cuts are good for the economy.

Robust corporate income taxes ensure that large and profitable corporations that benefit from publicly subsidized services (transit that delivers customers, education that trains workers, electricity that powers industry, etc.) pay their fair share towards the maintenance of those services. But, as ITEP’s recent report, Corporate Tax Dodging in the Fifty States, 2008-2010, found, twenty profitable Fortune 500 companies paid no state corporate income taxes over the last three years, and 68 paid none in at least one of those three years, even as state budgets are stretched to the point of breaking.  

As a new legislative season gets underway, too many political leaders are bashing taxes in general and business taxes in Governor Nikki Haleyparticular.  Here are some states to watch for more bad business tax policy (followed by a few glimmers of hope).

South CarolinaSouth Carolina Governor Nikki Haley is following through on her misguided campaign promise and recently proposed eliminating the state’s corporate income tax over four years. This despite the fact that South Carolina’s corporate income taxes as a share of tax revenue are among the lowest in the country, at a mere 2.4 percent.

KentuckyState Representative Bill Farmer has filed legislation that, instead of strengthening the tax, would repeal the state’s corporate income tax entirely. Farmer worked as a “tax consultant” and has been an anti-tax crusader in the Kentucky legislature since 2003.

Nebraska – Governor Dave Heineman recently unveiled his plan to reduce the top corporate income tax rate from 7.81 to 6.7 percent (and eliminate other key state revenue sources, too).

Florida Governor Rick ScottFloridaIn his recent State of the State address, Governor Rick Scott said that taxes and regulations were “the great destroyers of capital and time for small businesses.”  And – no surprise here – he also called for lowering business taxes.

IdahoGovernor Butch Otter has called for $45 million in tax cuts but is leaving the details to the legislature.  Of course, when a lobbyist from the Idaho Chamber Alliance of businesses calls the governor’s position “manna from heaven,” there’s a good chance some of those cuts will be given to business.

A few signs of sanity. In Connecticut , the governor is looking to improve the return on tax-break investment for the Nutmeg state. Perhaps he’s learned from states like Ohio, where a recent report issued by the attorney general showed that fewer than half of all companies receiving tax subsidies actually fulfilled their commitments in terms of job creation or economic growth.   We also see combined reporting getting attention in a couple of states.  It’s smart policy that discourages companies from creating multi-state subsidiaries to shelter their profits from taxes. We will report on other positive developments as warranted – so watch this space.

Photo of Rick Scott via Gage Skidmore and Photo of Nikki Haley via Mary Austin Creative Commons Attribution License 2.0


Nebraska Governor Proposes Taking State's Tax System From Bad to Worse


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In his recent State of the State speech, Nebraska Governor Dave Heineman unveiled his three-pronged tax reduction proposal:  income tax rate reductions and broadening of income tax brackets, a reduction in the corporate income tax rate, and complete elimination of the inheritance tax. He said that “Our highest priority should be tax relief for Nebraska’s hard-working, middle class taxpayer.”

But the Governor misses an opportunity to help those who feel the brunt of the state’s current tax structure the most and makes it harder for local governments to provide necessary – and often state-mandated – services.

Nebraska’s tax structure is already regressive and asks more of lower income families than better off families. In fact, the Institute on Taxation and Economic Policy (ITEP) found that the poorest 20 percent of Nebraskans pay an average of 11.1 percent of their income in state and local taxes compared to just 6.1 percent, on average, that the top one percent of Nebraskans – those with incomes averaging over $1.4 million – pay. This discrepancy is largely due to the state’s high reliance on property taxes (which are regressive) relative to personal income taxes (which are progressive). The Governor’s proposal does nothing to reduce property taxes, does little to assist the lowest income Nebraskans, and would actually make this disparity worse.

The governor did no favors for local governments either. The state’s inheritance tax generates about $40 million in revenue annually that goes to the state’s 93 counties. The governor’s proposal eliminates this revenue source entirely and doesn’t offer any replacement funds. To make matters worse, his last budget already completely eliminated state aid to local governments. Concern is spreading in county seats across the state, and in Omaha, the Douglas County Board has actually passed a resolution opposing the governor’s plan to kill the inheritance tax because it will “force” them to raise property taxes.

We have documented, however, that this governor is not alone in his campaign to eliminate the state inheritance tax and give the biggest tax breaks to his richest constituents.  


Trending in 2012: Estate and Inheritance Tax Rollbacks


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

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

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

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

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

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


One More Good Reason to Raise the (Regressive) Gas Tax


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 Two states — Nebraska and Utah — recently enacted new laws diverting a sizeable chunk of their state sales taxes to transportation.  Education, human services, and other vital programs are expected to suffer as a result of this diversion.  Instead of siphoning off much-needed revenues from other areas of the state budget, these states should have boosted their traditional transportation revenue sources, most notably the gas tax.

In Nebraska, Governor Heineman reluctantly signed a bill last week that will divert 0.25 percentage points of the state’s 5.5 percent sales tax to road repair and construction.  Just two months ago, Heineman had called the same proposal “risky” and “unwise,” though the state’s improved revenue picture apparently caused him to abandon this position. 

A wide range of people, including both opponents of the bill and the bill’s sponsor, have pointed out that the inadequacy of Nebraska’s gas tax is to blame for the state’s unmet transportation needs. 

However, given the lack of real interest in raising the gas tax, lawmakers ultimately decided to meet those needs by simply prioritizing roads over education, public safety, and other services.

In Utah, a very similar law was enacted earlier this month when the state’s legislature narrowly overrode Governor Herbert’s veto of a measure redirecting up to $60 million in sales tax revenue to transportation each year.  Herbert had vetoed the bill out of concern for its impact on education funding, and on the state’s ability to be flexible in dealing with future budgetary challenges. 

An increase in Utah’s gas tax, which hasn’t been raised in fifteen years despite rising transportation costs, could have precluded the need to redirect such a substantial sum of money away from vital public services.

Making matters worse, an analysis from Utah Voices for Children points out that a significant amount of general fund revenues in Utah are already earmarked for transportation.  These earmarks, as well as additional borrowing, have allowed transportation spending to swallow up an increasing share of the state budget over the last five years, with spending on education, health, and environmental quality suffering as a result.

Unfortunately, this decline in other areas of the budget may not be an accident.  The Utah bill’s original sponsor, Sen. Stuart Adams, has reportedly touted the siphoning-off of revenue from other areas of the state budget as a major benefit, since it shrinks the size of programs he tends to dislike. 

Given that basically every state levies a gas tax that won’t keep pace with transportation cost growth unless its rate is periodically raised, this argument (whether made explicitly or not) will no doubt remain powerful among conservative lawmakers for years to come. 

Raising transportation-specific taxes and fees, while not always the most progressive solution, is no doubt preferable to allowing other areas of state budgets to be gutted in order to fund road repair and construction.

*MAY 28 UPDATE* Wisconsin Republicans are also working hard to redirect revenue away from schools and toward transportation.  The legislature's budget committee recently voted, along party lines, to redirect $125 million in sales and income tax revenue to transportation in 2012, and to redirect 0.25% of such revenue to transportation in 2013 and each year thereafter.  It's important to note that Wisconsin's gas tax used to be indexed to inflation — which allowed it to grow alongside increases in transportation infrastructure costs.  Inflation indexing was eliminated in 2006.


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.


Voters Embrace Higher Taxes at the Local Level


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

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

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

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


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


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

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

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

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

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

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

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


New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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

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

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

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

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

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

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

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

Read the full report.


States Get Serious About Transportation Funding


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Many states across the country have stood idly by while inflation and improving vehicle fuel efficiency have cut into their gas tax revenues, reducing their ability to build and maintain an adequate transportation network.  Fortunately, new developments in at least four states demonstrate an increasing level of interest in addressing the transportation problem head-on.

In Arkansas this week, a state panel created by the legislature endorsed increasing taxes on motor fuels, and taking steps to ensure that such taxes can provide a sustainable source of revenue over time.  Specifically, the panel expressed an interest in linking the tax rate to the annual “Construction Cost Index,” a measure of the inflation in construction commodity prices.  As the committee chairman explained, this method would provide a revenue stream better suited to helping the state maintain a consistent level of purchasing power over time. 

Wisely, the proposal would also ensure that fuel tax rates would not increase by more than 2 cents per gallon in any given year.  Such a limitation should help to prevent the types of political outcries that have surfaced in other states when indexed gas taxes have increased by large amounts in a single year.

In Texas, attention has begun to turn toward a vehicle-miles-traveled (VMT) tax which, as its name suggests, would tax drivers based on the number of miles they travel.  Such a tax is similar to a gas tax in that it makes the users of roadways pay for their continued maintenance.  VMT’s, however, are able to avoid some of the most serious long-run revenue problems associated with gas taxes, since their yield is not eroded as individuals switch to more fuel efficient vehicles.  But Texas Senator John Carona hit the nail on the head in his description of the VMT as an idea “far into the future and way ahead of its time.”  While states like Texas should begin studying this option now, they should also follow Carona’s lead in the meantime by embracing an increase in motor fuel tax rates to address the funding problem already at their doorsteps.

Nebraska legislators have also begun discussing the need for additional transportation dollars.  In a report outlining the testimony given at eight hearings conducted last fall by the Legislature’s Transportation and Telecommunications Committee, 31 separate options for raising transportation revenues are examined.  Among those options are an increase in the gas tax and indexing the tax either to inflation or directly to the costs associated with the continued maintenance and construction of the state’s transportation network.  As the report explains, “there was nearly unanimous support from all testifiers for some type of tax or fee increase to support the highway system.”  Committee Chairwoman and State Senator Deb Fischer expects to have a major highway-funding bill ready for the 2011 legislative session.

Finally, legislators in Kansas this week also pushed forward with proposals to enhance the sustainability and adequacy of their transportation revenue streams.  A joint House-Senate transportation committee advanced two options for raising motor fuel tax collections: (1) applying the state sales tax to fuel purchases and slightly lowering the ordinary fuel tax rate, and (2) raising the fuel tax rate and indexing it to inflation.  While either proposal would be a great improvement to Kansas' stagnant, flat cents-per-gallon gas tax, the inflation-indexed approach would provide a somewhat more predictable revenue stream since its yield would not be contingent upon the (often volatile) price of gasoline.

In addition to these four states, we have also highlighted stories out of South Dakota and Mississippi during the latter half of 2009 that indicated a similar interest in doing something constructive to enhance current transportation funding streams.  And more beneficial debate has occurred in a number of states where progressives have insisted on offsetting the regressive effects of transportation-related tax hikes by enhancing low-income refundable credits.

Virginia is one of the major exceptions to the trend toward a more rational transportation funding debate.  As the Washington Post explained in an editorial this week, “[Governor-elect Robert McDonnell’s] transportation plan, which ruled out new taxes, relied on made-up numbers and wishful thinking to arrive at its promise of new funding.”  Rather than acknowledging the futility of attempting to fund a 21st century transportation infrastructure with a gasoline tax that hasn’t been altered since 1987, McDonnell worked to repeatedly block attempts to raise the gas tax during his time in the state’s legislature. 

Following the leads of policymakers in Arkansas, Texas, Nebraska, Kansas, South Dakota, and Mississippi and keeping higher taxes on the table is absolutely essential to the construction and maintenance of an adequate transportation system.  As the Washington Post cynically suggests, new revenue is so desperately needed that McDonnell should even be forgiven if he has to rebrand new taxes as “user fees” in order to get around his irresponsible campaign promise not to raise taxes.


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.


Gas Tax Changes Pick Up Speed


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Earlier this week, legislators in Minnesota overrode Governor Tim Pawlenty's veto and enacted a $6.6 billion transportation plan, one of the key elements of which is a 8.5 cent per gallon increase in the state's gas tax. While higher gas taxes tend to fall harder on low-income individuals and families, the plan does include a refundable low-income tax credit of up to $25 per family to help mitigate the regressive impact of the larger levy. Other states considering proposals to raise their gas taxes to meet transportation funding shortfalls would do well to follow Minnesota's lead and provide similar credits.

A gas tax increase that will soon be before the Nebraska Legislature may also be worth emulating in some respects. A bill there would effectively increase the state's gas tax by 3 cents per gallon. But it is the means by which that increase would be accomplished that is notable. The bill would reduce the existing gas tax by 8 cents per gallon and instead impose a tax equal to 5 percent of the wholesale price of gas. Using what amounts to a sales tax on gasoline rather than an excise tax is preferable since it ensures that state revenues are more responsive to economic growth.

Lastly, raising the gas tax wasn't envisioned in New Jersey Governor Jon Corzine's transportation or budget plans, but, in a new report, New Jersey Policy Perspective (NJPP) argues that it ought to be part of any comprehensive approach to improving state finances. In observing that the New Jersey gas tax has been raised just once since 1972, the NJPP highlights one of the key flaws with excise taxes like the gas tax... they fail to grow with inflation, the economy, or personal income. NJPP points out that a 20 cent increase in the Garden State gas tax would mean $1 billion in new state revenue, a portion of which could be used to lessen the impact of such a change on low-income residents or to support mass transit improvements for all.


State of the States Roundup


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Nebraska

Governor Dave Heineman delivered his State of the State address on Tuesday and lamented that, despite the tax cuts in recent years, Nebraska "taxes are still too high." He went on to say that, "Tax relief must continue to be a priority for our state" and promised additional property tax relief to the tune of $75 million. But this is hardly a done deal. Some high ranking legislators wonder if the state can really afford this expenditure given increasing costs and a potential recession.


Gas Tax Gimmicks


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It's the start of the summer driving season, and gas taxes are back in the news again across the nation. Gas taxes have long been the main method used by states to fund their transportation system, but recent high gas prices have made gas taxes a hot political issue. Since most states' gas taxes are fixed dollar values, inflation decreases their value every year, forcing lawmakers to pass new laws raising the gas tax every few years. However, this time around, many states just can't seem to find the political will to do so. Nebraska's governor Heineman is threatening to veto the paltry 1.8 cents per gallon gas tax increase passed by the state's legislature. Minnesota's Governor Pawlenty waited less than twenty-four hours to veto an equally modest five cent per gallon gas tax increase. Even worse, some lawmakers in Connecticut and Minnesota have proposed completely suspending their state's gas taxes, for the summer and for one year respectively. While in the short term these gas tax gimmicks may pay political dividends, in the not-so-long term these states cannot afford to play politics with transportation funding.


Nebraska Tax Bill a Mixed Bag


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Nebraska's unicameral legislature gave second-round approval to tax cut bill LB 367 which, over two years, is expected to cost the state $400 million. From a fairness perspective the bill is largely a "mixed bag." The bill includes a measure to lower the tax bills of the very wealthiest Nebraskans by repealing the state estate tax.

However, the bill also contains some tax cuts designed to help many low and middle income Nebraskans, including an expansion of the state refundable EITC to 10% of the federal level. The bill includes a poorly-targeted property tax cut, the tax brackets for some filers are broadened, and the standard deduction is increased. The good news from the Cornhusker state is that costly proposals (like lowering the state sales tax from 5.5 percent to 5 percent) and even more poorly-targeted proposals like lowering the top rate were both left out of the bill.


EITC Update: Victorious in New Mexico, Hopeful in Nebraska


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New Mexico Governor Bill Richardson signed into law an Earned Income Tax Credit equal to 8 percent of the federal EITC. New Mexico becomes the 21st state to offer an EITC. Congratulations to New Mexico Voices for Children and the New Mexico Fiscal Policy Project for making the creation of the Working Families Tax Credit a Legislative Priority.

In other EITC news, the Institute on Taxation and Economic Policy (working with Nebraska Voices for Children) submitted testimony to the Nebraska Legislature's Revenue Committee and submitted several letters to local newspapers in favor of Legislative Bill 683, which would expand the state's refundable EITC from 8 percent to 15 percent of the federal credit. Tax reform and budget negotiations are continuing in Lincoln and it's unclear whether the EITC will be expanded. For more on the value of the Earned Income Tax Credit read ITEP's policy brief.


ITEP Testimony on Nebraska EITC Proposal


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ITEP Testimony on Nebraska EITC Proposal

"... when we measured the impact of all the Nebraska state and local income, property, sales and excise paid by Nebraskans at different income levels, we found that low- and middle-income taxpayers paid substantially more of their income in tax, on average, than the wealthiest taxpayers..."


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.

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

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

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

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

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

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

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

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

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


Business Turning Against TABOR


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

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