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Surveying State Tax Policy Changes Thus Far in 2016


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

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

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

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

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

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

Tax Increases

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

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

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

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

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

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

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

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

Tax Cuts

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

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

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

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

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

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

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

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

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

Stalled Tax Debates Likely to Resume in 2017

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

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

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

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

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

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

What Lies Ahead?

Key Tax-Related Measures on the Ballot in November

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

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

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

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

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

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

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

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


State Rundown 7/27: Stalemates and Tax Cut Talk


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This week’s Rundown features an ongoing stalemate in New Jersey, talk of new tax cuts in Arkansas, "tampon taxes," and the taxation of fantasy sports. Be sure to check out the What We’re Reading section for new research on public attitudes toward tax and budget issues. Thanks for reading the Rundown!

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

  • The gas tax stalemate continues in New Jersey after Gov. Chris Christie voiced his disapproval on Monday of a tax package supported by the leaders of the state's Senate and Assembly. While Gov. Christie's opposition is focused mainly on the gas tax increase contained in the package, New Jersey Policy Perspective (NJPP) has voiced its disapproval of a different component: the "financially reckless" proposal to repeal the state's estate tax. As the debate over transportation funding drags on, some observers are now speculating that by canceling construction projects, the state may be opening itself up to breach-of-contract lawsuits.
  • Gov. Asa Hutchison hopes to lead Arkansas in another round of income tax cuts. This week the governor suggested that cutting the state's top tax rate to 5 percent would make the state "competitive," despite considerable evidence to the contrary. In reality, the most likely practical effect of such a change would be to increase the regressivity of the Arkansas tax code.
  • New York Gov. Andrew Cuomo signed a bill into law last week that will repeal the state's so-called "tampon tax," thereby joining five other states in extending sales tax exemptions for feminine hygiene products. Removing these items from the state's sales tax base is estimated to reduce New York tax receipts by $10 million per year. Lawmakers in Florida and Illinois, among other states, have also contemplated similar exemptions in recent months.
  • Without a broad-based income tax, Tennessee sometimes finds itself looking for revenue in unusual places. To that end, the state's new fantasy sports privilege tax took effect this month. The tax sets clear rules for the taxation of daily fantasy sports sites like DraftKings and FanDuel. While five other states also took action this year to regulate and/or tax fantasy sports websites, the topic remains a gray area in most states for the time being.

What We're Reading... 

  • The Oklahoma Policy Institute released a two-part report this week that outlines proposals to improve the state's fiscal policies and expand economic opportunity in the Sooner State.
  • The Washington Post reports on a new study revealing public attitudes on how to fund transportation improvements.
  • A new poll shows that Utah voters are willing pay more income taxes to better fund public education.
  • The OECD calls on the G20 to lead reforms that will create more socially equitable tax systems.

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 5/26: Bad Ideas, Worse Budgets


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

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


 

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

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

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

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

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

 

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


State Rundown 4/1: Foolish Games


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Thanks for reading the State Rundown! Here's a sneak peek:  New York lawmakers reach agreement on a $4 billion per year income tax cut. Connecticut lawmakers want to repeal their estate tax despite a major budget deficit. Oklahoma lawmakers are dragging their feet on tax increase proposals to close the state's billion-dollar shortfall. Missouri's Senate passes a gas tax increase for the first time in decades but the state House and voters will have the final say.

-- Carl Davis, ITEP Research Director


 

Last night, New York's legislative leaders agreed to a plan to cut personal income taxes by $4 billion per year. The plan, which is being described as geared toward taxpayers earning between $40,000 and $300,000 per year, will be phased-in between 2018 and 2025. Gov. Andrew Cuomo said that the plan "is not being paid for" since its delayed start date pushes its cost outside of the current budget window. A previous proposal championed by Democratic members of the Assembly would have combined $450 million in tax cuts for middle and working-class families with a tax increase on millionaires. Additionally, a group of 40 New York millionaires recently petitioned the state government to raise their taxes, saying they were "deeply concerned that too many New Yorkers are struggling economically, and the state’s ailing infrastructure is in desperate need of attention.”

Despite a looming budget deficit, some Connecticut lawmakers are pushing for repeal of the state's estate and gift taxes. If the taxes are repealed, the result would be a major giveaway to the state's wealthiest families at a time when the legislature's non-partisan Office of Fiscal Analysis projects a $2 billion revenue shortfall over the next biennium. Proponents of repeal argue that the tax encourages well-heeled Nutmeggers to flee to more welcoming climes, but research shows that tax flight is largely a myth. Opponents of repealing the estate tax argue that the state's tax system has favored the wealthy for decades, and that the hundreds of millions in revenue the tax generates annually are a lifeline for crucial public services. The estate tax is expected to bring in $217 million in FY 2017, and applies only to estates worth more that $2 million.

Legislators in Oklahoma are squeamish about tax increases during an election year, despite the state's budget woes and the advocacy of Gov. Mary Fallin. Many legislators are dragging their feet on considering the governor's proposed tax increases or bond issues until they know if they'll face opposition. Fallin has made a number of suggestions to close the $1.3 billion budget gap, including an increase in the per-pack cigarette tax and expanding the sales tax base to include some currently-exempt services. Without new revenue, state agencies could face cuts of 15 percent or more next fiscal year. Some lawmakers argue that increasing regressive sales and cigarette taxes makes no sense when the legislature recently cut taxes on income and oil and gas production by billions of dollars.

The Missouri Senate approved an increase in the state's gasoline excise tax for the first time in almost 20 years. The current rate of 17-cents-per-gallon is among the lowest in the country. The Senate would increase the tax by 6 cents to 23-cents-per-gallon, and the new revenue would pay for road and bridge projects. The plan would also require voters to approve the measure at the ballot box. The tax increase now moves to the Missouri House, where it is expected to face opposition.


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


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


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

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

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

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

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

Enacting state EITCs:   

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

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

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

Enhancing state EITCs:   

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

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

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

Protecting state EITCs:  

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

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

 


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


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

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

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

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

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

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

Alaska

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

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

California

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

Illinois

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

Louisiana

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

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

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

Massachusetts

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

New Mexico

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

New York

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

Oklahoma

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

Oregon

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

Pennsylvania

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

South Dakota

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

Utah

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

West Virginia

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

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

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


State Rundown 2/5: Three Revenue Raisers and A Tax Cut


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Today we are taking a look at revenue raising proposals in New York and Oregon, fast-moving tax cuts in Idaho (with some ITEP numbers), and highlighting the impact of state tax cuts on local governments in Ohio. Have a great weekend!


As always, thanks for reading.
-- Meg Wiehe, ITEP's State Tax Policy Director

A local official in Ohio says citizens have no choice but to raise local taxes in the wake of state budget cuts--the latest reminder that tax-cutting states such as Ohio are often just passing the buck to localities. Cleveland Mayor Frank Jackson said that city residents will have to approve a 0.5 percent local income tax rate increase (from 2 to 2.5 percent) to avoid cuts in services. The increase would generate $85 million in revenue that Jackson pledges will go to expanding services. Otherwise, the city faces a deficit next fiscal year thanks to cuts in state funding and declining property tax revenues.  If approved by the city council, the income tax increase would then be put before voters in November.

Oregon  Sen. Mark Hass introduced a revenue proposal this week that he sees as an alternative to a corporate income tax initiative that will likely be on the ballot in November.  The ballot initiative, sponsored by Our Oregon, would create an additional minimum tax on corporations with Oregon sales of at least $25 million (a 2.5 percent tax would apply to sales in excess of $25 million).   If the initiative wins approval, it would raise close to $3 billion annually in new revenue for public education and senior health care programs. Currently, corporations doing business in Oregon pay the greater of a minimum tax based on relative Oregon sales or a corporate income tax rate of 6.6 percent on income up to $1 million and 7.6 percent on income thereafter. Hass' proposal would eliminate the current system of corporate taxation and replace it with a Commercial Activity Tax of 0.39 percent on gross receipts. Hass would also cut taxes for households earning $58,000 or less and increase the state's Earned Income Tax Credit from 8 to 18 percent of the federal credit. Hass' measure would raise $1 billion in new revenue each biennium with half of the revenue going towards public education spending and the other half to pay for his targeted low- and middle-income tax cuts.

An Idaho House committee approved a tax cut bill from House Majority Leader Mike Moyle that would cut the corporate income tax rate, and top two personal income tax rates, by a tenth of a percentage point each. If passed, the top two personal income tax rates would fall to 7.3 and 7 percent, while the corporate rate would drop to 7.3 percent. The bill would also increase the grocery tax credit by $10 for some Idahoans of more modest incomes. On net, however, the proposal would primarily benefit the state's wealthiest taxpayers. ITEP estimates that while most families would receive tax cuts of $35 or less, the top 1 percent of earners would take home an additional $815 per year, on average.

The New York Assembly will consider a proposal to raise taxes on millionaires and cut taxes for working families. Under the proposal, individuals earning between $1 million and $5 million would pay a tax rate of 8.82 percent on that income. Income between $5 million and $10 million would be taxed at 9.32 percent, and income over $10 million would be taxed at 9.82 percent. If enacted, the tax increases would raise $1.7 billion in revenue. Middle class earners who make $40,000 to $150,000 would get a modest tax rate reduction, from 6.45 to 6.25 percent. The state's Earned Income Tax Credit would also be increased, with the average recipient seeing a boost of $110.

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 in 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 

 

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

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

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

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

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

 

Wins for Working Families

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

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

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

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

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

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

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

 

Significant Revenue Raising:

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

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

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

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

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

 


State Rundown 6/24: High-End Boats and Low-End Credits


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In a textbook example of a silver lining, working families in Colorado could see an Earned Income Tax Credit (EITC) enacted this year thanks in part to the state’s Taxpayer’s Bill of Rights (TABOR). Enacted in 1992, TABOR limits the amount of revenue that the state and local governments can collect and spend. Any revenue over the TABOR limit must be sent back to taxpayers through a complex set of formulas. While TABOR is inflexible and prevents the state government from responding effectively to crises, in this case it has worked to the benefit of Coloradans near the bottom of the income scale. Once the state EITC is triggered as a TABOR rebate, it becomes a permanent tax credit set at 10 percent of the federal level. The EITC will benefit 300,000 working families in the state and boost 75,000 individuals – half of them children – out of poverty.

States all along the East Coast are competing for a slice of the yacht business through hefty sales tax breaks, as reported in The Washington Post. New York recently passed a law limiting sales taxes on yacht purchases to $20,000 to counter Florida’s 2010 sales tax limit of $18,000. (For context, an owner purchasing a $2 million yacht would save $150,000 in taxes under New York law.) Florida struck back at New York by adopting a $60,000 sales tax limit on yacht repairs, and New Jersey copied their rival to the north by adopting the same $20,000 limit on purchases. While such sales tax breaks are usually justified as protecting the jobs of yacht builders, in reality the primary beneficiaries are yacht owners. As ITEP’s Matt Gardner notes in the article, "It's just a deluded approach to tax policy to say that you have to exempt these transactions or else they will move elsewhere." 

Lawmakers in Washington are facing a budget impasse ahead of their July 1 deadline. Initially, House lawmakers sought to levy a state capital gains tax on investors who earn more than $25,000 a year from investments. But the House dropped that plan this week when the state Senate refused to pass a new tax but indicated a willingness to get rid of some tax exemptions. Lawmakers have a little over a week left to agree on the budget before the state government begins a partial shutdown.

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

 


State Rundown 5/28: Deals Made, Dreams Fade


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Efforts to tie property taxes to household income face long odds in New York. Back in January, Gov. Andrew Cuomo proposed a $1.7 billion property tax circuit breaker for New York homeowners and renters meant to offset the cost of property taxes with an income tax credit. The measure enjoyed support in the state Assembly, but has since stalled in the conservative state Senate where lawmakers would prefer a broader property tax rebate not tied to income. The Senate plan, however, would provide less targeted relief and would only apply to homeowners. Supporters of Cuomo’s proposal say a property tax circuit breaker would help keep people in their homes in a state with some of the highest property taxes in the nation, while critics say the plan is a giveaway to suburban districts that doesn’t address the root cause of New York’s high taxes. ITEP has long advocated property tax circuit breakers as a way to fight poverty and make tax systems fairer – for more, check out this report.

A number of tax policy developments have come out of Alabama as the state nears the end of the legislative session. State Sen. Bill Hightower, who initially proposed replacing Alabama’s personal income tax with a flat tax version, scaled back his ambitions to a resolution that calls for a new taskforce to study the issue. Hightower’s initial proposal received pushback from groups who argued that a flax tax would increase the contributions of poor. A recent op/ed in The Huntsville Times notes that Alabama is among the few states that ask families below the poverty line to pay income taxes, noting that “the social and economic cost of taxing the poor might actually be higher than the dollar value of the revenues the state is collecting from them.” Meanwhile, Hightower also sponsored a successful bill that would require annual reports on the effectiveness of various tax credits, deductions and special rates, earning praise for going after ineffective tax loopholes that are used mainly by the wealthy.

Texas legislators reached a deal on transportation legislation that could send more revenue to road and bridge construction but reduce funding available for crucial investments in education and human services. House and Senate negotiators agreed on a proposed constitutional amendment that would divert $2.5 billion in sales tax revenue to roads if approved by voters. Sales tax revenue must exceed $28 billion for the measure to take effect, and the law will be on the books for 15 years. The deal also diverts 35 percent of any vehicle sales tax revenue over $5 billion to road construction, a measure that is expected to deliver an additional $250 million in new road money. 


State Rundown 2/5: State of the States


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

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

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

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

 

Following Up:

  • Maine: As expected, Gov. Paul LePage used his state of the state address to make a case for his tax reform proposal, arguing that the state should adopt a constitution amendment that commits future revenue growth to income tax cuts. LePage appears to be following a broader national strategy for Republican governors to cut income taxes and raise sales and other taxes on a promised “path to prosperity.”  
  • Ohio: Gov. John Kasich’s budget proposal received pushback from school districts concerned that his new funding plan will unfairly redistribute state resources. The governor and his staff claim the plan will send more money to poorer districts, but school officials have criticized the opacity of his funding formula. Look to the Tax Justice Digest next week for full coverage of the plan, including an analysis of who wins and who loses.
  • Texas: Gov. Greg Abbott vowed to veto any budget that does not include tax cuts for businesses, arguing that cutting or eliminating the state’s franchise tax would stimulate job growth.
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    State Rundown 1/22: Twists, Turns and Intrigue


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

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

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

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

     

    Following Up:

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

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

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


    State Rundown 1/20: Plenty of Tax Cut Proposals


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

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

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

     

    Things We Missed:

     

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

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

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


    New Year, New Gas Tax Rates


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

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

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

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

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

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

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

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


    The Best and Worst State Tax Policies of 2014


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

    The Best

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

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

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

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

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

     

    The Worst

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

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

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

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

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


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


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

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

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

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

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


    State News Quick Hits: Migration, Film Tax Credits and More


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    On the same day that the New York City Independent Budget Office released a report showing that wealthy New York City residents who move are overwhelmingly choosing high-tax states to live in journalist David Cay Johnston penned an editorial in the Sacramento Bee again making the point that taxes are far from the major consideration in wealthy households’ location decisions. Examining the supposed economic destruction that never materialized as a result of California’s 2012 sales and income tax hikes, Johnston points out that quality “commonwealth amenities” like schools, law enforcement, and parks, are far better draws than low taxes.

    Getting a 43 cent return on every dollar invested would seem like a bad deal to most of us, but that doesn’t seem to be the case when in comes to subsidizing the film industry in New Mexico. A new study finds that the state’s film tax breaks generated just 43 cents in tax revenue for every incentive dollar spent between 2010 and 2014. Read the full study here.

    Moderate Republican lawmakers in Missouri are feeling the wrath of conservative donor Rex Sinquefield during this year’s election season. The Missouri Club for Growth, a group funded largely by Sinquefield, has thrown its support (and dollars) behind candidates running against Republican legislators who voted with Democrats this year to uphold Governor Jay Nixon’s veto of an irresponsible income tax cut package. Though the wealthy donor has thus far seen very few victories for his conservative state fiscal agenda, there is evidence that his ideas may slowly gain traction over the years as his money continues to roll in, spelling disaster for anyone concerned with fiscal responsibility and progressive taxation.

    Corporate tax avoidance is back in the spotlight in the wake of an Oregon Supreme Court ruling that allows profitable companies to avoid paying the state’s minimum corporate tax.  The minimum tax, which was sensibly expanded from a trivial $10 to a higher, tiered structure due to a vote of the people in 2010, can now be reduced to zero by companies claiming certain tax credits. The problem is that the statutory language of the minimum tax does not explicitly say that tax credits can never be used to offset the minimum tax. This will likely come as unwelcome news to Oregon voters, who presumably thought that when they approved a measure “establishing a flat $150 minimum tax,” they were doing just that. But this case, led by Con-Way Inc., means that the state can anticipate a $40 million hit this year as corporations rush to amend prior years’ returns to take advantage of the loophole. The good news: the court decision is based on a technical glitch in the minimum tax statute, and glitches are easily fixed. Petitioners are now calling on state lawmakers to modify the language of the law to ensure that companies like Con-Way will pay a “minimum tax” that actually exceeds zero. 


    New Study Shows Rich New Yorkers Not Fleeing High Taxes


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    It is an article of faith among anti-tax activists that cutting taxes makes states more competitive. Texas Gov. Rick Perry and Florida Gov. Rick Scott frequently invoke the gospel of low taxes when they poach jobs in blue states – never mind the fact that some of these states are doing just as well or better on economic indicators like unemployment and economic growth. The media is full of anecdotes of the uber-wealthy – from French actor Gerard Depardieu to pro-golfer Phil Mickelson – fleeing high taxes for greener, cheaper pastures. The only problem is that anecdotes are not the same as empirical evidence.

    A new study released by the New York City Independent Budget Office confirms what countless other studies already have: the wealthy aren’t ditching Manhattan for Manhattan, Kansas. Of households that left the city in 2012, 42 percent of households earning over $500,000 annually moved to other locations in New York State; second place was New Jersey (22 percent), which has had a “millionaire’s tax” since 2004. Third place is Connecticut (12 percent), hardly a tax haven. California took fourth place, with 9 percent. In total, 86 percent of wealthy households moving from NYC went to these “high-tax” states, almost double the proportion of non-wealthy households moving to the same places.

    Again, this is nothing new. In 2012, ITEP issued a report finding that states with high income tax rates outperformed states with no income tax over the past decade. A 2011 study on the effect of New Jersey’s millionaire tax found that there was no difference in migration patterns between high-earners impacted by the tax (those who made over $500,000) and high-earners who weren’t (those in the $200,000 to $500,000 range). And a report from the Center on Budget and Policy Priorities notes that interstate moves are rare, for rich and poor alike; between 2001 and 2010, only 1.7 percent of U.S. residents per year moved from one state to another, and many of these moves were between states in the same metropolitan region. The evidence indicates that people – and companies, for that matter – take into account a variety of non-tax factors when making location decisions.

    Of course, the reason that this pernicious myth persists is that it’s effective in spooking state lawmakers and officials – who are loath to risk job and revenue losses. The threat of losses is enough to convince politicians to slash tax rates for the wealthy and give generous breaks to companies. New Jersey has given out $4 billion in tax subsidies to businesses under Gov. Chris Christie (R), far more than the $1.2 billion given out in the decade preceding his time as governor. Prudential Insurance was given $250.8 million to move its headquarters a few blocks down the street. On average, the state pays $47,916 for each promised job.

    State officials would do better to make the public investments – in infrastructure, education, and workforce training – that make them attractive locations for residents and businesses alike, rather than fretting about the location decisions of the rich and corporations. 

    Continuing a welcome trend, lawmakers in a number of states are showing interest in dealing with chronic transportation shortfalls. New Hampshire Gov. Maggie Hassan signed a 4-cent gas tax increase into law, South Dakota Governor Dennis Daugaard announced that he is now open to a gas tax increase, and a Michigan Senate committee passed a bill that would increase and reform their state’s gas tax.

    Gov. Christie’s administration recently announced two plans for addressing New Jersey’s $875-million budget gap in the current fiscal year as well as next year’s projected shortfall. Rather than increasing income taxes on millionaires, as some Democrats proposed, Christie said he will reduce the amount of two state pension payments scheduled for June of the current year and 2015. The administration will also push back $400 million of property tax relief due this August until May of 2015. The legally questionable pension payment plan faces a potential lawsuit from state labor unions.

    The New York Times recently reported that Madison Square Garden (MSG) has enjoyed an indefinite property tax exemption for the past 32 years, a generous arrangement no other property in the city is afforded. The deal with New York City made in 1982,  which then-Mayor Edward Koch thought would last only 10 years, is set to save the MSG’s owners about $54 million in the next fiscal year.

    On Wednesday, the North Carolina state Senate voted to give preliminary approval to a bill that prohibits municipalities from collecting privilege taxes from businesses. Signed by Gov. Pat McCrory on Friday, the legislation is set to cost local governments $62 million in fiscal year 2016 if leaders don’t find a revenue replacement. Large cities like Raleigh, which may lose $8 million as a result of the bill, would be particularly hard-hit and may have to resort to raising property taxes.


     


    States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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

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

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

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

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

    Read the full report


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


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

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

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

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


    Cuomo Gets His Election-Year, Tax Cut Wish


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    New York Governor Andrew Cuomo got his election-year wish: a $2 billion tax cut package that doles out goodies to Wall Street banks and rich homeowners. Cuomo, a Democrat who likely has presidential ambitions, sold the tax cuts under the false promise that they would help New York businesses “thrive.” Tax cuts have become something of an obsession for Cuomo, despite the fact that important public investments have been neglected by five consecutive years of austerity budgets.

    Here’s a run-down of the tax changes in the budget deal:

    Property tax: A three-year property tax rebate program will cut homeowners’ taxes by $1.5 billion by “freezing” the amount many currently pay. But the cuts won’t be evenly distributed and generally won’t target those most in need of relief. For those living in local jurisdictions that comply with a 2 percent property tax cap and working to consolidate services with neighboring jurisdictions, the state will send homeowners (only those with household income under $500,000 qualify) a check for the amount of any increase in property taxes over the prior year (the checks are conveniently scheduled to be sent out for right before the November elections). For those living in New York City, which is not subject to the tax cap, low-income homeowners and renters will be eligible for a small, refundable property tax circuit breaker credit which will cost $85 million a year. Unfortunately, an expanded circuit breaker tax credit available to homeowners across the state-- one of the best ways to provide targeted property tax reductions-- was dropped from the final bill.

    Business taxes: Corporations will get more than $500 million in tax cuts, including a permanent across-the-board corporate income tax rate cut from 7.1 percent to 6.5 percent. Manufacturers will be zeroed out from paying the corporate income tax altogether and will also receive a new property tax credit. Though Cuomo has heralded his business cuts as a boon to manufacturers, they in fact already pay very low rates (Our recent state corporate tax study found that Corning, for example, paid only a 0.3% state tax rate on $3.5 billion in profits over the past five years) and the primary beneficiaries are predominantly Wall Street banks.  The package eliminates the state’s bank tax, subjecting banks instead to the corporate income tax, and also allows them to pay only 8 percent of their income from qualified financial instruments (securities) under the assumption that 92 percent of their income from these sales comes from customers outside of New York.

    Estate tax: Though there had been talk of also lowering rates, legislators ultimately agreed to cut the state’s estate tax by increasing the exemption from $1 million to $5.25 million, the threshold currently used at the federal level.

    We’ll let others analyze the budget as a whole, which is worth $138 billion and includes important provisions on charter schools, pre-K, and campaign finance. But on the tax front, the bill falls far short of the type of targeted, progressive reform that is so badly needed.


    State News Quick Hits: To Cut or Not to Cut?


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    A battle over New York Governor Andrew Cuomo’s proposed property tax cuts is heating up, with protesters pouring into the New York State Capitol in Albany last week, a new TV ad hitting the airwaves, and the introduction of alternative tax cut plans from the Assembly and Senate. The governor’s plan would “freeze” property tax increases over the next two years by giving a refundable tax credit to homeowners for the amount of any increase in taxes over the prior year (and only to those living in jurisdictions complying with a 2 percent property tax cap and showing an effort to consolidate services with neighboring jurisdictions). In the third year, the freeze would be replaced with an expanded homeowner circuit breaker property tax credit and new renter’s tax credit. State legislators and many local leaders have voiced unease with the proposal. The Assembly’s plan would skip the freeze altogether and simply offer the homeowner and renter circuit breaker credits with less restrictions.

    Illinois House Speaker Michael Madigan has called for a state constitutional amendment (PDF) to charge millionaires a tax surcharge and use the resulting $1 billion in revenue to fund public education. The proposal is likely the first of many attempts by both political parties to define the electoral turf prior to the gubernatorial election in November, which the Chicago Tribune has dubbed the “governor's race of a generation.” Current Governor Pat Quinn is running for re-election against Republican Bruce Rauner, who happens to be a multimillionaire. Even if the constitutional amendment doesn’t make it on the ballot (it would first have to be approved by supermajorities in the House and Senate), voters will face a stark choice on taxes: the state’s temporary income tax rate increase is set to decrease in 2015, and the two candidates will likely have different views on how to make up the lost revenue.

    Most Oklahomans don’t want lawmakers to enact the income tax cut approved by the state Senate last month. A new poll reveals that when voters are told about the Institute on Taxation and Economic Policy’s finding that much of the tax cut will flow to the state’s wealthiest residents, 61 percent of voters oppose the plan compared to just 29 percent in support. Even among voters who aren’t told about this lopsided impact, less than half support the rate cut, and fewer people support the cut than did so last year.

    Colorado spends roughly $2 billion per year on special tax breaks and a new law just signed by Governor John Hickenlooper (backed by the Colorado Fiscal Institute, among others) ensures that basic information about those breaks will continue to be made public going forward. Colorado’s Department of Revenue published the state’s first comprehensive tax expenditure report in 2012, and now the department is required to update that information every two years. Our partners at the Institute on Taxation and Economic Policy (ITEP) explain that “a high-quality tax expenditure report is a bare minimum requirement for even beginning to bring tax expenditures on a more even footing with other areas of state budgets.”


    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.


    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.  


    How to Understand New York Governor Andrew Cuomo's Proposed Tax Cuts


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    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. Taking his tax cut efforts one step further this election year, Cuomo is now proposing to expend the entirety of his state’s hard-won budget surplus on more than $2 billion in annual tax cuts.

    While the term "budget surplus" may make it sound like that there is extra money lying around in Albany, the reality is that the surplus is the product of five consecutive years of austerity budgets and a budget plan that would continue this austerity for years to come. In other words, rather than using the surplus to restore funding to state and local services that have taken a hit over the past years, Cuomo is insisting that the money be used for tax cuts (many permanent) instead.

    Unfortunately, tax cutting has become a pattern during Cuomo's time as governor. In June 2011, Cuomo pushed through a property tax cap, which severely limited the ability of cash-strapped local governments to raise enough revenue to fund basic services. In December of the same year, Cuomo further starved the state of much needed revenue by killing efforts to fully extend a millionaire's surtax, and instead pushing through a scaled back surcharge that raised half as much revenue as the original. Just last year, Cuomo pushed through a program of unproven and expensive corporate tax breaks, which a CTJ investigation found could actually harm many existing New York companies.

    Even worse, to defend his past and newest tax cut proposals, Cuomo has embraced the cringe-worthy rhetoric of anti-tax governors like Kansas Governor Sam Brownback in arguing that ending "high taxes" and enacting corporate tax breaks will make the state more "business-friendly" and help improve New York's economy. The problem, of course, is that taxes are crucial to funding what really drives economic development: a highly educated workforce, good infrastructure and quality healthcare.

    Cuomo's anti-tax approach is in direct contrast to the newly-elected New York City Mayor, Bill de Blasio, who ran and won a landslide victory on a campaign platform of addressing growing income inequality primarily through hiking taxes on the rich to provide universal citywide pre-kindergarten classes. De Blasio's call for higher taxes has proven not only popular in New York City, but also garnered the support of 63% of New York voters statewide. What de Blasio's election proves is that a significant majority of New Yorkers, unlike Cuomo, are not only willing to forgo tax cuts, but are actually willing to support higher taxes in order to help fund critical public services.

    Cuomo's Tax Proposal a Mixed Bag in Terms of Tax Fairness

    While many of Cuomo’s past tax proposals have offered little or nothing to those in need, Cuomo's new plan does includes a few potentially good ideas as well as few a very bad ones. On the good side of things, Cuomo proposes to substantially expand the state's property tax circuit breaker and create a renters credit, which could potentially provide a well-targeted income boost to low-income families. While the proposals sound good, their effectiveness will really depend on their details, which are yet to be released.

    Regrettably, Cuomo is also proposing a significant cut in the state's corporate income and estate taxes, which will almost exclusively go to only a very small portion of the richest New Yorkers. Considering the recent series of tax cuts already passed by Cuomo and the years of budget cuts, piling on these additional tax breaks for the rich is simply unconscionable and would make an already unfair tax system (PDF) even worse.

     


    Supreme Court Won't Rule on New York's "Amazon Law"


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    This week, the Supreme Court declined to hear the e-commerce industry’s challenge to New York’s trend-setting “Amazon law.”  The law, which was upheld by New York’s highest court, successfully expanded the number of online retailers collecting New York sales taxes.  It did this by requiring any e-retailer to collect the tax if they partner with New York based “affiliates” to generate over $10,000 in sales.  Because of the law, Amazon.com has been collecting sales taxes from its New York customers for more than 5 years, generating millions in revenue for public services and making the state’s sales tax base slightly more rational.

    In the wake of the Court’s refusal to hear Amazon.com and Overstock.com’s appeals, some observers are already predicting that more states will be tempted to follow New York’s lead.  And follow it they should.  More than a dozen states have “Amazon laws” patterned after New York’s and while they’re not a panacea for the tax base erosion that online shopping has caused, they are the best option states have available to them right now.

    If anybody needs to pay attention to the Court’s ruling, though, it’s the U.S. House of Representatives.  Almost seven months ago the Senate passed a bipartisan bill that would have made New York’s law irrelevant by empowering all states to apply their sales tax collection laws more broadly to all e-retailers above a certain size.  The bill has widespread support among traditional retailers and a broad coalition of state-level lawmakers, but has so far been stopped—like many other reforms—by the House’s aversion to virtually anything that would improve tax collections at any level of government.


    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.


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


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    Happy Halloween to our readers!

     

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

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

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

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


     


    Illinois Ruling Strengthens Case for a Federal Solution to Online Tax Collection


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    Last week, the Illinois Supreme Court struck down a state law (commonly called the “Amazon law”) that would have helped solve some of the sales tax enforcement problems surrounding online shopping.  As things currently stand in Illinois (and most other states), traditional retailers with stores, warehouses, or actual employees in Illinois are required to collect  state sales taxes from their customers, while online retailers who don’t employ any Illinois residents (or have any other “physical presence”) are given a free pass.  Online shoppers are supposed to pay the sales tax directly to the state when e-retailers fail to collect it, but few shoppers actually do this in practice.

    Illinois, along with nine other states, had tried to strengthen its sales tax enforcement by requiring more online retailers to collect the tax (specifically, those retailers partnering with Illinois-based “affiliates” to market their products).  But this court ruling strikes down Illinois’ law on the grounds that it treats companies partnering with online affiliates differently than companies who advertise in Illinois through traditional media.  According to a majority of the justices, this feature of Illinois’ “Amazon law” violates a federal law enacted in 2000 that bars “discriminatory taxes on electronic commerce.”

    In his dissent, Justice Lloyd Karmeier points out that Illinois’ “Amazon law” didn’t actually impose any new taxes—it simply required a larger number of retailers to be involved in collecting and remitting sales taxes that are already due.  Karmeier went on to say that he would have upheld the law – in much the same way that New York’s highest court did with a similar law in that state earlier this year.

    With Illinois’ and New York’s courts disagreeing on this issue, legal observers seem to think there’s a growing chance that the U.S. Supreme Court will consider the case next year.  But it’s a shame it’s come to this.  The Supreme Court already made clear over two decades ago that Congress has the authority to set up a more rational, nationwide policy for how states can tax purchase made over the Internet.  The U.S. Senate did exactly that this May with a bipartisan vote in favor of the Marketplace Fairness Act, but so far the U.S. House of Representatives has yet to act on it.  We presume it’s the political disagreements among activists and lobby groups that’s prevented the House from acting so far, but it’s increasingly urgent that states finally be allowed to resolve the mess that is tax collection for online shopping.

    Cartoon by Monte Wolverton, available at and courtesy Cagle Cartoons.


    State News Quick Hits: Andrew Cuomo Loves Tax Cuts, So Does ADM, and More


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    States are just beginning to come to terms with the impact that the shutdown of the federal government will have on state residents. This informative blog post from the Wisconsin Budget Project tells us what programs folks should and shouldn’t be worried about on the state level and links to several resources from The Center on Law and Social Policy (CLASP) that readers might find helpful.

    Another day...another company asking for enormous state corporate tax breaks. This time Archer Daniels Midland Company (ADM) is asking Illinois lawmakers for $20 million in tax breaks to keep their headquarters in Decatur. During a House Revenue and Finance Committee hearing, Rep. Barbara Flynn Currie characterized testimony of an ADM executive as “essentially blackmailing the state ... saying if you don’t go through this hoop for us, we may think about going somewhere else.”  (H/T POLITICO's Morning Tax.)

    The Tax Foundation and the National Taxpayers Union are urging the U.S. Supreme Court to hear a case that could allow Overstock.com -- and other online vendors like Amazon.com -- to shirk  their responsibility for collecting state and local sales taxes. While a previous Supreme Court precedent bars states from requiring sales tax collection by vendors who have no “physical presence” in the state (a ban which Congress is considering lifting via the Marketplace Fairness Act, which passed the Senate by a rare bipartisan vote in May), some states have chipped away at e-tax-evasion by interpreting “physical presence” more broadly than others. In New York, for example, Overstock.com has agreements with in-state affiliates to pay for customer referrals, thus requiring the company to collect sales taxes from its New York customers under a 2008 state law that has been upheld by the New York Court of Appeals. While a national solution that levels the playing field between all online vendors and the brick-and-mortar stores who have always collected sales tax is preferable, states should be free in the meantime to require sales tax collection from online retailers who have legitimate ties to their local economies. Hopefully the Supreme Court agrees.

    Having already made some backwards moves on the tax policy front, New York Governor Cuomo now appears to be abandoning his commitment to study and improve the state’s tax structure. In December, he announced the New York State Tax Reform and Fairness Commission. The Commission was “charged with addressing long term changes to the state tax system and helping create economic growth.” But instead of going forward with this thorough examination, the Governor has just appointed former Governor George Pataki and Controller Carl McCall to head a task force whose sole objective is to find a way to cut between $2 and $3 billion in taxes next year, in just one year! Maybe the junior Cuomo really does plan on running for President -- of Texas.

     


    Governor Cuomo's Tax-Free Zones Scheme Is More Cost than Benefit


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    Earlier this summer, we tracked New York Governor Andrew Cuomo’s state-wide promotional tour where he touted the benefits of his beloved “START-UP New York” (originally called “Tax Free NY”) – a plan to turn college campuses throughout the state into enterprise zones where new businesses would be exempt from all state taxes. The Governor claimed this would be an innovative way to revitalize the up-state economy while costing the state nothing. We, however, found these claims unwarranted at best, showing they were only a call for more of the same unproven corporate tax breaks that would cost the state millions while putting existing local businesses at an extreme disadvantage.

    Nonetheless, Governor Cuomo ignored our warning (and the warnings of others) and rapidly pushed the plan through the legislature where it was introduced, approved, and subsequently signed by him, all in the course of a few weeks in June.

    Now, less than two months after its passage, a new analysis shows just how poorly conceived START-UP NY really is. This time, however, the analysis comes directly from the Governor’s own budget office – and its findings are in stark contrast to what the Governor promised during his promotional tour.

    While Cuomo campaigned on the notion that his tax-free campus scheme wouldn’t cost the state a nickel, the budget office’s projections (PDF) show the plan will cost $323 million in lost revenue over its first three years alone (projections only go through Fiscal Year 2017, and show costs rapidly ballooning over this period of time).

    And in a cartoonesque twist, this lost revenue is not from businesses that will move to New York because the START-UP program incentivized them to do so. According to the report, the $323 million in lost revenue is the result of companies that would have come to New York and paid full taxes anyway, but are now exempt thanks to the Governor’s tax-free program.

    With projected budget gaps of $1.74 billion in FY 2015 and $2.9 billion in both FY 2016 and FY 2017, START-UP NY has exacerbated the state’s poor fiscal health – making it even more difficult to invest in government services that are proven to grow the economy, like education and infrastructure. Calling START-UP NY an overpriced gimmick, one assemblyman has announced his plan to repeal the program altogether – a move we think should be taken as soon as possible.

    Our partner organization, the Institute on Taxation and Economic Policy (ITEP), has shown in detail how rolling back business and corporate taxes is not an effective economic development tool and that public investment in schools, transportation systems, public safety, etc. are the real keys to development. Even in practice, enterprise-zone programs like START-UP NY have demonstrably failed to create jobs while costing states billions.

    Thus far, Governor Cuomo has demonstrated an unwillingness to listen to experts or look at the evidence. Will he also ignore his own budget team’s assessment and move forward with his plan? If so, it would be hard to conclude that his governing agenda is anything but reckless and self-serving.

    Front page Photo via  Governor Andrew Cuomo Creative Commons Attribution License 2.0


    State News Quick Hits: Texas, New York and Hollywood


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    Last week, the Texas Legislature voted on a transportation funding bill that would raise an estimated $1.2 billion annually to help pay for highway improvements. Technically, it doesn’t raise new revenues but rather diverts half of oil and gas severance tax revenues from the state’s Rainy Day Fund to the highway department. Contingent on voter approval and scheduled for the November 2014 ballot, this bill hardly meets the $4 billion annual shortfall the highway department currently faces. The Institute on Taxation and Economic Policy (ITEP) has shown that an equitable and sustainable way to pay for transportation is to modernize the state gas tax by increasing rates to meet current demand and then peg them to rise with transportation construction costs.

    Between 2003 and 2012 the average Hollywood movie earned a 452 (!) percent return on investment. Still, 40-some states offer generous film tax credits in a misguided effort to invite productions. While we have shown these subsidies are mostly false promises, last week the Los Angeles Times illustrated another way in which they are wasteful – this time with the All-American Jackie Robinson story “42.” Collecting millions of dollars in tax subsidies from several states including Georgia, Alabama, and Tennessee, “42’s” producers proudly touted their patriotism and dedication to promoting the communities in which they filmed… only to turn around and conduct a significant component of their post-production work abroad, including recording the musical score in London. While some conclude this means the tax credit should be expanded to include post-production, all that would do is hasten the race-to-the bottom of tax incentives.

    Last week, New York Governor Andrew Cuomo announced an unusual plan that would allow the state to suspend the driver’s license of about 16,000 taxpayers who owe more than $10,000 in state taxes. While overdue tax bills amount to $1.1 billion, the program is expected to bring in just $26 million in uncollected income taxes this fiscal year and $6 million in following years. Delinquent taxpayers are defined as individuals who have unpaid income taxes and businesses with unpaid sales tax bills.

     

     

     


    Governor Cuomo, Meet Governor Brown


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    California Shows that Geographically Targeted Tax Incentives Don’t Work

    Last week, the New York State Legislature overwhelmingly passed START-UP New York (previously known as Tax-Free NY). The approval came after nearly a month of Governor Cuomo’s state-wide campus PR tour where he touted the plan’s infallible greatness, a claim we have explained is almost completely unjustified.

    3,000 miles to the west, in California, fellow Democratic Governor Jerry Brown is telling a different story. He has proposed eliminating the state’s costly Enterprise Zone (EZ) Program, citing its ineffectiveness and huge cost as the rationale for the move.

    California’s EZ Program was created in 1986 and has been the state’s primary policy tool in attempting to promote economic development in distressed areas. Like START-UP NY, California’s EZ Program provides geographically targeted tax breaks to 40 “zones” determined by the state. (START-UP NY provides tax breaks to over 70 zones, primarily college campuses.)

    According to the Public Policy Institute of California, however, the EZ Program has had “no effect on business creation or job growth.” Furthermore, the California Budget Project has found that EZs “have cost the state a total of $4.8 billion in lost revenue since the program’s inception” while benefiting “less than half of one percent of the state’s corporations.”

    Governor Brown’s proposal – initially outlined in his May budget revision (PDF) – signifies an important shift away from using geographically targeted tax breaks as an economic development tool. A growing body of research has shown (and shown again) tax incentives of most kinds to be poor tools for economic development, and California’s three decades of experience with its EZ Program is a case in point.

    “California’s thirty-year-old Enterprise Zone program is not enterprising, it’s wasteful. It’s inefficient and not giving taxpayers the biggest bang for their buck,” said the Governor in a meeting with business leaders and labor groups. “There’s a better way and it will help encourage manufacturing in California.”

    It must be noted, of course, that Governor Brown’s “better way” is only half better; it throws half of those EZ Program dollars at similarly unproven tax breaks while spending the other half – wisely – on a reduction in the sales tax (PDF) businesses pay.  Still, a governor who is beginning to listen to policy experts over pollsters deserves some credit for moving in the right direction.

    If Governor Brown’s proposal is enacted (it may be on the ballot next year), it appears we will have a tale of two states: in California, a state trying to learn from the past; in New York, a state blindly shaping policy based on political interests.


    Lots of Losers in Governor Cuomo's "Tax-Free New York"


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    Last week we wrote about Governor Cuomo’s ill-conceived Tax-Free NY initiative.  We reserve judgment as to whether it’s politically motivated ( a New York Post column called him “Gov $uck-up”, for instance, and this column also questions the motivation) but we can be pretty sure it will cost more than it will benefit the people of New York, because this is what business tax credits do.

    Still, since that post, the Governor has continued his promotional tour of New York campuses, so we spent some time digging into how actual businesses would fare under his plan. As it turns out, the Governor’s focus on rewarding new investment could end up arbitrarily discriminating against existing small businesses (and their employees) who are already doing the same things Cuomo’s plan will reward others to start doing.

    Capraro Technologies, Inc. (CTI), for example, has been based in Utica (home to SUNY Institute of Technology) for almost two decades. The company shares the SUNY-IT mission of advancing the field of information technology through research and innovation, and appears to be a model of the kind of business the Governor hopes to attract. But CTI would be ineligible for any benefits under Tax-Free NY, and the company could find itself at a disadvantage relative to other firms who do qualify for the tax-free treatment.

    To gain eligibility, CTI would need to “expand its New York operations while maintaining its existing jobs.” But such an expansion would need to take place within one mile from the SUNY-IT campus. Unless CTI were able to obtain a special waiver, this would mean having to open a new office about two miles down the road from its current location; hardly an example of economic efficiency.

    CTI is only one of many existing companies throughout the state that could be placed at a disadvantage relative to new competitors. BlueRock Energy, a Syracuse-based company that helps customers lower their energy costs and environmental footprint and would be ineligible for Tax-Free NY benefits if it expanded at its current lots, is another case-in-point. Located about 2.5 miles away from the SUNY College of Environmental Science and Forestry, BlueRock Energy shares a common mission with SUNY-ESF.

    And the list goes on. From mobile app creator miSoft Studios near SUNY Binghamton to software developer Wetstone Technologies near SUNY Cortland, existing local businesses across the state will all reap zero rewards for having already done exactly what the Governor will allegedly incentivize other businesses to do in the future.

    And of course, you are not only out of luck if you started your business at the wrong time, but place matters, too. State tax expert David Brunori at Tax Analysts summed up one of Tax-Free NY’s absurdities by highlighting, “if you are in the community you don’t pay taxes. If you are outside, even by six inches, you do.”

    Existing small businesses are not the only losers because the plan extends to employees, too. Professor John Yinger, an expert in fiscal policy from Syracuse University, says the Governor’s plan “means some businesses are getting lower taxes than others and in this case it means some people are getting much lower taxes than others, those are new sources of inequities.”

    There are so many problems with Governor Cuomo’s idea for tax-free zones, it’s hard to know where to begin. But the Institute on Taxation and Economic Policy’s (ITEP) policy briefs library is a good place to look, and we invite the Governor to consider this guidance (all links are PDF’s).

    Taxes and Economic Development 101: “Lawmakers are under intense pressure to create a healthy climate for investment. But the simplistic view that tax cuts are the best medicine can result in unintentionally making this climate worse. Unaffordable tax cuts shift the cost of funding public services onto every business that isn’t lucky enough to receive these tax breaks—and makes it harder to fund the public investments on which all businesses rely.”

    Accountable Economic Development Strategies: “Some lawmakers are wising up to the idea that subsidies don’t work. But for policymakers who insist on offering incentives, there are some important, simple, and concrete steps that can be taken to ensure that subsidies aren’t allowed to go unchecked.”

    Tax Principles: The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment.”


    Governor Cuomo Hearts Tax Cuts


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    First it was the ill-advised TV campaign to lure new business to his state by bragging about tax cuts, and now New York  Governor Andrew Cuomo has launched his “Tax-Free NY” initiative which would turn many of the state’s public universities, private universities, and community colleges into tax-free havens. Providing a full complement of tax breaks, the Governor’s plan would exempt qualified businesses from paying any sales, property, and corporate taxes for a decade, and would exempt employees of those businesses from the personal income tax.

    These no-tax zones include all state university campuses outside of New York City, some private colleges, up to 200,000 square feet in certain campus-adjacent zones, and 20 undisclosed “strategically located” state-owned properties. The Governor’s plan vaguely defines eligible businesses as companies with a relationship to the academic mission of the university and then includes: new businesses, out-of-state businesses that relocate to New York, and existing businesses that expand their New York operations.

    Touting the plan as a way to revitalize the upstate economy, the Governor claims the free pass on taxes would “attract start-ups, venture capital, new business, and investments from across the world.” However, economists from across the political spectrum have their doubts (and so do we).

    Professor John Yinger of Syracuse University said in response to Cuomo’s plan that: “In New York we have a dizzying array of tax breaks with no evidence they help, and now here’s a new version. You’d do much better improving our schools and infrastructure than giving tax breaks to businesses who would be in the state anyway.”

    Others, such as Danny Donohue of the Civil Service Employees Association, argue the plan is another tax giveaway to businesses at the expense of local communities and the middle-class. Donohue says: “The governor doesn’t get the fact that more corporate welfare is no answer to New York’s economic challenges… it’s outrageous that the governor and legislative leaders think we can give away even more to businesses without any guarantee of benefit to taxpayers.”

    In addition to creating little if any economic growth, the plan is likely to worsen the state’s already precarious fiscal situation. With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible.

    To move the plan forward, the Governor will need legislative approval before the state’s legislative session ends on June 20th. Quick – someone get this policy brief (PDF) up to Albany!


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


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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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


    Groupon Is a Headache for State Tax Administrators


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    While the sale of online coupons for local merchants boomed in 2011 – Living Social sold $750 million and Groupon sold an astounding $1.62 billion in online coupons last year – state governments are still trying to play catch up and figure out how to ensure these sales are taxed fairly.

    The central question facing the states is whether a state or local sales tax should be applied on the cost of the online coupon, or on the face value of the coupon, meaning the list price of the product for which the coupon is being redeemed. For example, if you were to buy a Groupon for $25 that allows you to purchase $50 worth of books at a local bookstore, the question is whether sales tax should be assessed on $25 (the cost of the coupon) or $50 (the face value of the coupon). Whatever the amount, the tax could be collected either at the time of coupon purchase or product purchase.

    As Forbes’ Janet Novack reports, right now states are treating online coupons for sales tax purposes differently, or in many cases don’t even have a definitive answer to this question. For example, New York requires that sales tax be collected by retailers on the full face value of the items purchased with coupons, but only in the case where the coupons are for a specific dollar amount of spending. California, by contrast, only applies the sales tax to the price paid for the coupon itself in any case.

    So why isn’t Groupon itself collecting sales tax on the original coupon purchase, rather than having the tax collected by the merchant?  After all, it’s reasonable to compare their service to the one provided by  Expedia, Orbitz, Priceline and other travel sites who sell discount hotel rooms, as should be done in our view. The difference is that online coupon sites consider what they do to be advertising and, in fact, it’s part of Groupon’s contract with merchants that merchants handle all the taxes. Discount travel sites are more properly reselling those hotel rooms.

    A promising development is that 24 states who collaborate in the Streamlined Sales and Use Tax Agreement, which grapples with state sales tax issues, are moving to tackle the coupon question head on by surveying member states and putting out model policy for all states, possibly as soon as May. The Streamlined Sales Tax Governing Board, of course, faces a difficult task because it’s a brave new world of e-commerce.  While there is more than one good way to solve the problem – as states like New York and California have shown – states need to act sooner rather than later.

    Photo of Movie Ticket Groupon via Groupon Creative Commons Attribution License 2.0


    Naughty States, Nice States: The Institute on Taxation and Economic Policy's 2011 List


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    Naughty

    Michigan’s legislature and Governor Snyder top the naughty list by giving away more than $1.6 billion in tax cuts for business and paying for it with tax increases on low-and middle-income working and retired families.

    Florida continued to dole out more corporate pork this year, including a property tax break that happens to benefit huge commercial land owners, like Disney World and Florida Power and Light, and other corporations (that also happen to be major donors to the state’s Republican governor and legislative majority party).

    Minnesota’s legislature missed an opportunity to do the right thing when it rejected a tax increase on the state’s wealthiest residents. The plan was proposed by Governor Dayton and supported by 63 percent of Minnesotans over the alternative, which was cuts to spending on education, health care and other vital public services.

    Anti-tax activists in Missouri were hard at work again. This year they were collecting signatures for a ballot initiative that would eliminate the state’s personal income tax and replace it with a broadened and increased sales tax.

    Nice

    Connecticut’s Governor Malloy and the legislature adopted a $1.4 billion tax increase that improved tax fairness in the state and protected public investments like education and health care.  Most notably, the state added an Earned Income Tax Credit, a significant tax break for low-income working families.

    District of Columbia lawmakers greatly reduced the ability of corporations to dodge their fair share of taxes by adopting combined reporting (which makes it harder to hide profits in other states) and a higher corporate minimum tax. The Council also temporarily increased taxes for individuals making more than $350,000 a year and limited itemized deductions, which are most often taken by high income filers.

    Hawaii lawmakers also limited upside-down tax giveaways (itemized deductions) for their state’s richest residents and passed other tax changes to raise much needed revenue.

    A Little Bit Naughty and Nice

    New York’s Governor Andrew Cuomo reversed his campaign vow not to raise taxes and supported a tax increase on residents earning more than $2 million a year.   The plan, passed by the legislature, also included a tax break for those with income under $300,000.

    However, New York lawmakers passed the governor’s cap on property taxes this summer, which is predictably creating crises and forcing dramatic cuts in local education, medical, and public safety services.

    Illinois raised significant revenue earlier in the year through temporary personal and corporate income tax rate increases, all designed to stave off harsh spending cuts, but then turned right around and gave away hundreds of millions of dollars to Sears and CME, allegedly to keep them in the state.


    Cuomo Reverses Course on Millionaires' Tax


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    After long opposing the extension of a tax on millionaires supported by 72 percent of New Yorkers, Democratic Governor Andrew Cuomo partially reversed himself and proposed a plan that would raise more revenue from the very wealthy and make the state’s tax system less regressive.

    On Wednesday and Thursday, the New York Senate and General Assembly approved Cuomo’s plan to raise taxes on joint filers making more than $2 million, while cutting them for those making under $300,000.

    The move by Cuomo represented a stunning reversal of his pledge to oppose any tax increases, which he backed up in March by effectively killing the extension of New York’s popular millionaire’s surcharge.

    For his part, Cuomo explains his reversal by noting that the state faces a $3.5 billion deficit and that as a result “there is not an intelligent or productive way to close the current gap without generating revenue.” The new tax plan will raise $1.9 billion, of which $1.5 billion is slated to go directly to deficit reduction.

    Cuomo’s decision also comes after months of increasing pressure to extend the temporary millionaires’ tax from the New York Democratic Party establishment, Occupy Wall Street protestors, and overwhelming majorities of New Yorkers generally.

    Compared to the tax rates that would be in effect if New York simply allowed the millionaires’ surcharge to expire, the tax deal reduces taxes for joint filers making under $300,000, keeps them the same for joint filers making between $300,000 and $2 million dollars, and increases the rate by almost 2 percent on joint filers making more than $2 million dollars. However, supporters of the millionaires’ surcharge point out that a straight extension of that provision would have raised more than twice as much revenue from the wealthy.

    In any case, Cuomo’s tax plan should be applauded and will definitely benefit a wide-swath of New Yorkers. We only wish that anti-tax New Jersey Governor Chris Christie would follow suit and reinstate a millionaires’ tax in his state.

    Photo of Governor Andrew Cuomo via Gov Andrew Cuomo Creative Commons Attribution License 2.0


    New York and New Jersey Governors Favor Unpopular Toll Increases, But Oppose Popular Tax Increases


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    Last week, Republican New Jersey Governor Chris Christie and Democratic New York Governor Andrew Cuomo together approved a substantial increase in the toll rate paid to cross bridges and tunnels between New York and New Jersey.  The increase of $1.50 on EZ pass users (or $2 for cash payers) will go into effect next month.  This will be followed by four consecutive increases of 75 cents each annually from 2012 through 2015, for a total hike of at least $4.50 over five years.

    Both governors supported the toll increases, saying that the dire fiscal situation facing the Port Authority, which is reliant on toll revenue, means that the “increase cannot be avoided.” The governors’ willingness to shore up revenue for the Port Authority through toll increases stands in sharp contrast to their reputations as “anti-tax” governors who have relentlessly refused to increase any taxes to deal with their states’ current fiscal disparities.

    As the Institute on Taxation and Economic Policy explains, increases in tolls or other “user fees” are often used by politicians to increase revenue while avoiding having to enact anything that could be called a “tax increase.”

    Josh McMahon, writing for the New Jersey News Room, argues that Christie is just playing “a game of semantics” so that he can continue the “charade that he’s not raising any taxes.”

    The move by the governors is proving relatively unpopular with New Jersey voters, 54% of whom oppose the increases, according to a recent poll.

    In contrast, 72% of New Jersey voters and 64% of New York voters support ‘millionaires tax’ proposals, which would help counterbalance some of the regressive features of both the New Jersey and New York tax systems. Both Cuomo and Christie went out of their way to torpedo these proposals in recent months.

    Voters in both states can’t be blamed for wondering whose interests their governors are protecting.

    Photos via Gisele 13 Creative Commons Attribution License 2.0


    New York Localities Already Struggling Under Cuomo's Property Tax Cap


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    As predicted, the bad news about Democratic Governor Andrew Cuomo’s infamous property tax cap is already starting to roll in as local governments begin to grapple with the law’s implications.

    In the Town of Southhampton, for instance, the local comptroller told the town board that on top of several years of tough austerity measures, the cap will likely force another $5 million in cuts. Southhampton Councilwoman Bridget Fleming was so frustrated by the cuts that she accused the area’s state assemblyman of “essentially crippling” the town’s ability to provide services.

    Over in Canadaigua, New York, school officials are worried that the cap may “severely  limit” their options in putting together next year’s budget. The Superintendent of Canandaigua Schools expressed his own frustration with the cap saying that it addresses “only a symptom” of the state’s fiscal challenges as it does not address decreasing state aid or the increasing costs of mandates coming from the state level.

    Looking statewide, a recent report by the credit-rating agency Moody’s noted that the property tax cap could endanger local governments and school districts by putting “additional pressure on local government financial operations already strained by declining state aid, weakened tax revenue, high fixed expenditures and state-mandated services.” The report even pointed to the specific examples of the Town of Fishkill and Monroe and Rockland counties as the governments most in peril from the cap.

    To avoid these eventualities, the Wall Street Journal reports that many local governments are devising ways to “stretch” loopholes to increase the amount of money they can raise. Peekskill city for instance is hoping to use two exemptions -- one for pension costs and another for debt service -- to  raise property taxes as much as 5.9%. The Cuomo administration, however, has disputed interpretations of the cap law that would allow for such extensive exemptions and argues that localities should focus more on cutting spending.

    Meantime, the New York based advocacy group Community Voices Heard (CVH) has it right: they say that the best thing the state government could do to improve schools and other public services would be to extend the millionaire’s tax, a move Cuomo opposes.

    The Institute on Taxation and Economic Policy concurs with CVH in its own report on how to fix New York’s education funding system, noting that a policy like extending the millionaire’s tax would not only make the state’s tax system more fair, but it could go a long way towards improving fiscal sustainability at the state and local level.


    Cuomo's Property Tax Cap is Bad News for New York


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    Last Friday night (6/24/11), New York Governor Andrew Cuomo signed into law the state’s first ever property tax cap, one of the biggest legislative priorities of his administration. As Citizens for Tax Justice noted even before its final passage, however, the new property cap is one of the most extreme in the nation and widely viewed as ill-advised.

    The cap limits annual growth in property tax revenues to 2 percent or the inflation rate, whichever is lower, with comparatively strict limits on exceptions to the cap: chiefly, state pension system increases above 2 percent of payroll. Voters in a given locality could also override the cap by a 60 percent vote.

    Considering that property taxes are rising at about 5 percent annually, the cap will force dramatic cuts in local education, medical, and public safety services.

    Many advocates argue that the enactment of a similar property tax cap in Massachusetts proves that it will not hurt the quality of education or local services, but the Center on Budget and Policy Priorities has thoroughly debunked this claim, showing how the cap has been disastrous in Massachusetts.

    Compounding this, according to the Fiscal Policy Institute (FPI), New York’s cap is actually much worse than the one in Massachusetts considering that it’s 60 percent stricter in terms of reducing revenues, and, is not coupled with significant additional state funding to local governments.

    Even if Cuomo’s goal is just to help low and middle income families with relief from rising property taxes, the FPI explains that a much more effective and less costly approach would be to enhance the state’s property tax circuit breaker.

    Calling the tax cap “a cap on student achievement, especially for the poorest school districts” Karen Scharff, the Executive Director of Citizen Action New York points out that in reality the property tax cap is just “one more fake Albany quick fix.”


    New York Property Taxes: Cap on Common Sense


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    Last week, New York Governor Andrew Cuomo announced a deal with state lawmakers over pending legislation to enact a property tax cap in the state.

    If the deal passes, the cap would be one of the strictest in the nation, capping annual growth in property tax revenues at 2 percent or the inflation rate, whichever is lower. The proposed cap would allow exceptions in limited circumstances, such as public pension shortfalls. Voters in a given locality could also override the cap by a 60 percent vote.

    Even with the exceptions, the 2 percent cap is guaranteed to have a deleterious effect on New York local governments' ability to provide core services.  Funding for schools, which depends heavily on property tax revenues, will bear the brunt of the tax cap.

    According to Gov. Cuomo’s own numbers, property taxes have had to rise well above 5 percent each year to keep up with demand for critical services, so the 2 percent cap would inevitably force harsh cuts.

    According to Richard C. Iannuzzi, president of New York State United Teachers, the state’s education system will be “devastated” by the cap just as it’s already suffered three years of the “toughest cuts” to education.”

    Democratic lawmakers had attempted to stop some of these cuts by extending a popular surcharge on upper-income taxpayers, but Gov. Cuomo favored cuts to education instead and stopped the effort in its tracks.

    The New York Times lashed out at Gov. Cuomo, arguing that the “tax cap is nothing more than a political crutch for politicians who don’t have the courage to argue the case for more taxes or for spending cuts.”

    The Wall Street Journal, on the other hand, has trotted out its usual misinformation campaign in support of the cap, claiming that high property tax rates are causing New Yorkers to move out of the state.

    In the same editorial, the Wall Street Journal also claimed that the tax cap in Massachusetts should be a model for New York, a notion that the Center on Budget and Policy Priorities thoroughly deconstructed a few years ago.

    “Tax caps are not a novel or new approach. They are a tired gimmick with a history of failure,” writes Kevin Hart for the National Education Association, pointing to the devastating effect similar caps have had Massachusetts, Illinois, California and Colorado.

    None of this is to say that New York’s property tax and education funding mechanisms are not in need of change. In fact, the Institute on Taxation and Economic Policy (ITEP) has documented in detail the ways in which New York should pursue systematic reform to improve the fairness and adequacy of its revenue system.

    Even if Gov. Cuomo’s goal was simply to provide New York residents with a property tax break rather than enact fundamental reform, ITEP points out that property tax "circuit breakers", rather than property tax caps, provide the most effective and well-targeted relief to those most in need, without damaging education funding overall.

    Advocates in New York are also making the case for a property tax circuit breaker as a more targeted alternative.  At a press conference this week, school board members, county and local government officials and advocacy organizations joined with some Assembly members to speak out against the tax cap, calling it a "punitive, misguided approach to public concerns about property taxes."


    Report Explains How (and Why) States Must Close Hotel Tax Loophole


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    Expedia, Orbitz, and Priceline are exploiting a major sales tax loophole, and in some states are possibly breaking the law in doing so.  Last week, the Center on Budget and Policy Priorities (CBPP) released a report explaining how this loophole works, and pegging its aggregate size at somewhere in the neighborhood of $400 million per year.  The report urges states and localities to pursue legal action, legislative action, or both in order to remedy this situation.

    In the vast majority of cases, online travel companies (OTCs) like Expedia and Priceline currently remit sales and lodging taxes only on the “wholesale” room rate they pay to hotels — not the “retail” room rate they actually charge travelers.  In doing so, the OTCs claim that the difference between the retail and wholesale price is simply a “facilitation fee” that should not be subject to sales taxes.  But as CBPP rightly points out:

    “The OTCs are providing the same kinds of marketing and room booking services that the hotels themselves engage in.  If the hotels may not deduct a pro-rated amount of their advertising and website operation expenses from the retail room charge prior to calculating applicable hotel taxes when they incur such expenses directly, there is no possible justification for compelling such a deduction when hotels pay an OTC to provide the same services.”

    CBPP recommends that states and localities either sue to recoup the taxes owed by OTCs, or if current statutes are sufficiently unclear with respect to the taxes owed by OTCs, enact new legislation clarifying that taxes should be paid based on the full retail price of the room.  New York City and Washington DC have both taken this latter course of action, while a half dozen states and numerous localities have chosen to pursue legal action.

    Read the CBPP report for more detail, including state-by-state revenue estimates, an explanation of why this reform won’t harm tourism, and a closer look at what states and localities must do to close this inequitable and costly tax loophole.

    In just the last few weeks, Arkansas and Illinois joined New York, North Carolina, and Rhode Island in enacting legislation requiring some online retailers, like Amazon.com, to collect sales taxes on purchases made by their state’s residents.  At least a dozen other states are considering enacting similar policies, and the list of states with a serious interest in this issue seems to be growing by the week.  In a new brief, ITEP explains the basics of so-called "Amazon taxes," and discusses the actions that Amazon, Wal-Mart, Home Depot, and other retailers have taken during this new surge of interest in sales tax reform.

    Read the ITEP brief.


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


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

    Read the full ITEP article in the Huffington Post


    Are Amazon.com's Sales Tax Avoidance Days Coming to an End?


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    Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

    In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

    The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

    Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

    But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

    According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

    For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.


    New York Governor Cuomo Near to Killing Millionaires Tax


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    New York Governor Andrew Cuomo is at odds with his fellow Democrats, who control the state's Assembly, over tax policy.

    The focal point of this conflict is a proposed extension of the temporary income tax surcharge on individuals with taxable incomes over $200,000 (or $300,000 from joint filers), known as the ‘millionaires’ tax because most of it is paid by millionaires. If extended, the measure would raise $1 billion dollars over the next year.     

    There is no doubt that New York’s fiscal situation is dire. But the governor’s budget relies almost entirely on dramatic spending cuts, including cuts to K-12 education aid to the state’s poorest children.

    Some of the opposition to the ‘millionaires tax’ has been driven by initial reporting that such taxation drives wealthy individuals out of the state, though this claim has since been thoroughly discredited.

    In January, Gov. Cuomo explained his personal opposition to extending the millionaires' tax, saying absurdly that “the working families of New York cannot afford tax increases.”  

    Frank Mauro, Executive Director of the Fiscal Policy Institute, responded, “It is unfathomable that those who have profited so tremendously from New York’s economic growth over the past two decades are not in a position to aid poor and working New Yorkers in this time of need.”
        
    Gov. Cuomo is united with New York's Senate Republicans in opposing extending the tax, but is facing increasingly vocal protests and polls showing that nearly two thirds of New Yorkers are in favor of extending it.

     


    Millionaire Migration Claims Fall Flat in the Media


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    CTJ’s critique of claims that wealthy New Yorkers are fleeing the state’s so-called “millionaires’ tax” was publicized by two media outlets this week.  Similar claims being made in Connecticut and Rhode Island were also shot down in the media.

    In last week’s Digest, CTJ pointed out numerous distortions in the Partnership for New York’s claims that wealthy New Yorkers were fleeing as a result of a recent tax increase on high-income earners.  (The Fiscal Policy Institute also issued a detailed rebuttal). 

    For starters, the Partnership erroneously claimed that a “9.4 percent decrease in the state's taxpayers who earn $1 million or more” occurred between 2007 and 2009.  But the data it used (but failed to cite) actually show a 9.4% drop in New Yorkers with wealth exceeding $1 million.  Since New York’s income tax obviously applies to income — not wealth — this is an important distinction. 

    The Partnership has since revised its report to correct this mistake, but it continues to ignore a much more important one: according to the same dataset, every state in the country saw its number of wealthy taxpayers decline between 2007 and 2009 (due to the recession) and 43 states experienced declines exceeding New York’s 9.4% drop.  In fact, Phoenix International – the firm that released the data – made very clear in its 2009 press release that the U.S. as a whole saw its millionaire population decline by nearly 14%.  So it’s a little odd, to say the least, that the Partnership would interpret New York’s 9.4% rate of decline as providing any evidence that could be useful in its crusade against taxing high-income earners.

    Fortunately, Robert Frank at the Wall Street Journal’s Wealth Report quickly publicized CTJ’s analysis, and labeled the Partnership’s migration claims a “myth.”  Frank also followed up with the Partnership’s CEO, who when confronted with the data problems described above retreated by saying: “It’s a very difficult thing to measure… We get a lot of it anecdotally.”

    Crain’s New York Business similarly picked up on the CTJ analysis, ultimately declaring that “the nationwide decline suggests that New York lost millionaires primarily because New Yorkers made less money and saw their property values drop during the recession, not because they moved to other states.” 

    Crain’s does err, however, in claiming that the data might partially reflect the fact that “New Yorkers could have left the state in mid-2009 and filed 2009 tax returns as residents of their new states.”  The 2009 data in question was actually released in early July 2009, and was left unchanged in the September 2010 update.  It is exceedingly unlikely that a dataset released just two months after the May 2009 enactment of New York’s “millionaires’ tax” could have captured the effects of any tax-induced wealth flight.

    In addition to beating back ridiculous claims in New York, the WSJ’s Wealth Report also recently debunked similar claims being made in Connecticut by the Connecticut Policy Institute.  The story is a familiar one:

    “How do we know why or even if high-earners moved out? It is possible that some previously high earners simply fell below the $1 million-dollar-a-year mark because their incomes fluctuated. In the land of hedge funds, this seems to be just as likely as people moving to Florida. It also is unclear whether the population of high-earners in Connecticut is aging and simply moved to warmer, more golf-friendly climes...The report doesn’t break down the destinations. Still, it says many go to Florida and New York. Florida, of course, has no state income tax. But New York state has a top tax rate of 8.97% and New York City’s top rate is 3.876%. Combined that is nearly twice as high as Connecticut’s tax. If the rich decide where to live based on taxes, why would they be moving to a higher-tax city? Perhaps because the quality of their life matters as much or more than the quantity of their taxes—up to a point, of course.”

    Finally, Rhode Island claims of wealth flight ran into similar resistance in the media when Politifact took a lengthy look at the Ocean State Policy Research Institute’s (OSPRI) migration claims, and ultimately found them to be “false.” 

    OSPRI’s report attempts to show that “the most significant driver of out-migration [from Rhode Island] is the estate tax.”  But as Politifact notes, “IRS data cited by OSPRI shows that Florida was increasingly attractive to Rhode Island taxpayers in the years when it had an estate tax. The flow slacked off significantly when the [Florida estate] tax was eliminated. That runs contrary to the trend OSPRI claims to have proven.” 

    Moreover, Politifact points out that even the conservative Tax Foundation — hardly a big fan of the estate tax — hasn’t jumped onto the migration bandwagon: “Kail Padquitt, staff economist for The Tax Foundation … said he hasn’t seen any proof that the prospect of paying estate taxes drives people to move.”  We certainly haven’t either.


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


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

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

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

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

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

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


    Super Bowl Ad about Taxes from Corporate Astroturf Group


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    The last place you would ever expect a discussion of tax policy is in the sea of Super Bowl commercials about beer, cars, and Doritos, yet the organization Americans Against Food Taxes spent over $3 million to change that last Sunday.

    The ad, called “Give Me a Break”, features a nice woman shopping in a grocery store,  explaining how she does not want the government interfering with her personal life by attempting to place taxes on soda, juice, or even flavored water. The goal of the ad is to portray objections to soda taxes as if they are grounded in the concerns of ordinary Americans.

    But Americans Against Food Taxes is anything but a grassroots organization. Its funding comes from a coalition of corporate interests including Coca-Cola, McDonalds and the U.S. Chamber of Commerce.

    It is easy to understand why these groups are concerned about soda taxes, which were once considered a way to help pay for health care reform. The entire purpose of these taxes is to discourage the consumption of their products. As the Center on Budget and Policy Priorities explains in making the case for a soda tax, such a tax could be used to dramatically reduce obesity and health care costs and produce better health outcomes across the nation. Adding to this, the revenue raised could be dedicated to funding health care programs, which could further improve the general welfare.

    These taxes may spread, at least at the state level.  In its analysis of the ad, Politifact verifies the ad’s claim that politicians are planning to impose additional taxes on soda and other groceries, writing that “legislators have introduced bills to impose or raise the tax on sodas and/or snack foods in Arizona, Connecticut, Hawaii, Mississippi, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont and West Virginia.”

    It's true that taxes on food generally are regressive, and taxes on sugary drinks are no exception according to a recent study. It's a bad idea to rely on this sort of tax purely to raise revenue, but if the goal of the tax is to change behavior for health reasons, then such a tax might be a reasonable tool for social policy. We have often said the same about cigarette taxes, which are a bad way to raise revenue but a reasonable way to discourage an unhealthy behavior.

    With so many states considering soda taxes and the corporate interests revving up their own campaign, the “Give Me a Break” ad may just be the opening shot in the big food tax battles to come.


    Anti-Tax Lawmakers Look to Cement Their Legacy


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    In some states, huge budget gaps are making it somewhat difficult to enact the types of large, immediate tax cuts that many lawmakers promised during their political campaigns last year.  Partially as a result, anti-tax lawmakers are increasingly looking toward the longer-term with proposals to cap state spending, cap property tax growth, and mandate a supermajority legislative vote in order to raise taxes.  Four states in particular generated headlines for proposals of this sort over the past week: New York, Wisconsin, Virginia, and North Dakota.

    As we mentioned two weeks ago, New York’s Republican-led Senate has already passed constitutional amendments that would impose a TABOR-style spending cap, and a supermajority requirement for raising taxes.  This week, the Senate added to that list by enthusiastically passing Governor Andrew Cuomo’s property tax cap, which would limit property tax growth to 2 percent per year.  As the New York Times pointed out, property tax caps in general are extremely blunt instruments, and this one is particularly worrisome given the lack of exemptions for things like health care, pensions, debt service, or increased enrollment.  Fortunately, all three of these proposals will be less welcome in the state Assembly, though the Assembly’s speaker has expressed an interest in coming to a “common ground with the governor and the Senate on an appropriate property tax cap.”

    In Wisconsin, the state’s newly elected Republican governor and Republican legislators have enacted relatively minor business tax cuts that some lawmakers have described as merely symbolic.  Not content with these small victories, Republican lawmakers are now turning to the slightly longer-term, as the state Assembly last week passed a bill that would require a supermajority vote in order to raise taxes during the next two years.  Of much more concern, however, is a proposed constitutional amendment that would permanently impose the same restriction on Wisconsin residents’ elected representatives. That amendment has yet to come up for a vote.

    In Virginia, two troubling constitutional amendments made it out of committee last week. One would mandate a supermajority vote to raise taxes and another would impose a TABOR spending cap equal to inflation plus population growth.  Both are being pushed by Del. Mark Cole, and both were the subject of a highly critical editorial in the Roanoke Times this week.

    Finally, in North Dakota, a proposal to cap property tax revenue growth at 3 percent per year received a committee hearing this week and will eventually move to the full House for a vote.  Similar proposals have been rejected in each of the last two sessions, though the fate of this one remains unclear.

    Hopefully, lawmakers in each of these states will eventually decide against reducing their ability to deal with the difficult and often unforeseen challenges that state and local governments must inevitably confront.


    Will New York Extend Its High-Income Tax Surcharge?


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    It looks very likely that the question of whether or not to extend a temporary income tax surcharge on New York’s wealthiest households will be a contentious issue as the budget process moves forward in the state.

    New York Governor Andrew Cuomo released his budget plan this week.  Sticking to his “no tax increase” campaign promise, Cuomo did not include any significant revenue-raisers and instead chose to close a $10 billion budget gap primarily with massive cuts to education and Medicaid spending.

    As a New York Times editorial stated, “without additional revenue… the state’s most vulnerable citizens — the poor, the sick, the elderly and schoolchildren — will inevitably bear the largest burden.”  The editorial endorsed extending the temporary personal income tax surcharge on the state’s wealthiest households, a move also supported by Democratic Assembly members and many advocacy groups who want to lessen the magnitude of proposed spending cuts.  

    The temporary high-income tax surcharge was enacted in 2009 to help address New York’s budget crisis at the time and is set to expire at the end of 2011.  But, clearly, the budget crisis is not behind the state and the $2 billion the temporary tax would raise for the coming fiscal year and $4 billion in the following year could go a long way to protecting core state services.  The surcharge applies only to married couples with taxable incomes over $300,000 a year ($200,000 for single taxpayers).  These very same taxpayers will receive a significant federal benefit from the extension of the Bush tax cuts. 

    For the sake of ensuring all New Yorkers have access to affordable health care, quality education, and safe communities, let’s hope the state’s lawmakers can agree that their wealthiest residents can afford to pay a little more this year.


    What Would the World Look Like If the Tea Party Was In Charge? Look to Nassau County


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    Some Americans respond positively to the anti-tax message of the Tea Party, but is anyone willing to accept the cuts in public services that must logically follow? The Tea Party has been specific about cutting taxes but vague about what programs must be slashed in order to balance the government's books. So what will happen if the Tea Party takes power? The recent experience of Nassau County, New York, shows us that the result will be a disaster.

    When Tea Party-backed Edward Mangano won his election for the Nassau County Executive as a member of the Tax Revolt Party, it was on a platform of vague promises to cut spending and to repeal a $40 million dollar energy tax.

    The voters of Nassau County got what they asked for. Mangano immediately repealed the energy tax, but failed to actually pass any of the substantial spending cuts that he had promised. In doing so, he may have stayed true to his Tea Party roots, but he also drove the second richest county in the nation into fiscal disaster.

    With a $175 million dollar gap in the $2.6 billion budget plan, the Nassau County Interim Finance Authority (NIFA), a New York State oversight board, was forced to take control of the county’s finances. NIFA is tasked with stepping in to correct the county’s finances whenever there is a gap of larger than 1 percent, which the current gap dwarfs by almost 7 times.

    The situation is so dire that Moody’s is putting the county’s municipal securities on watch for a downgrade, a move that portfolio managers said is rare considering how safe these investments are usually considered.

    Despite this, Mangano has refused to yield and in recent days filed suit to stop the takeover, citing his worries that NIFA may force him to raise taxes.

    The consensus against Mangano even transcends normal ideological lines, with the New York Times and New York Post editorial pages finding themselves in rare agreement over the irresponsibility of his actions.

    In a comprehensive special report, Reuter’s called Nassau County’s experience a “cautionary tale,” saying that the fiscal collapse in Nassau and the subsequent takeover represents a “black eye for the Tea Party.”

    As one observer put it, "A lot of people who got elected on this type of anti-tax platform are running into the brick wall of fiscal reality."


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


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

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

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

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

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

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

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

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


    Bad and Less Bad: Business Tax Cuts vs. Grocery Tax Cuts


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    Some politicians in state capitals across the U.S. seem convinced that tax cuts for businesses and the wealthy are the best way to accelerate economic recovery. In two states, governors are proposing instead to cut taxes on groceries, which is a more effective, though not exactly flawless, way to help ordinary families. The tradeoff to any tax cut, of course, is unaffordable cuts to essential services including education, public safety, and health care.

    In Wisconsin, state lawmakers agreed on a business tax cut that would add about $50 million to the budget deficit.  The Republican controlled legislature and newly elected Governor Scott Walker believe that the tax cuts will leave everybody with more money and leave the state with an improved economy.  Incredibly, Walker’s proposal rests on the assumption that the tax cuts will lure businesses away from Illinois, which recently saw an increase in its income tax, rather than fostering young, developing businesses. 

    In Iowa, where a similar $300 million business tax cut is being discussed, critics of Governor Terry Branstad point out that essential social services are being axed in favor of pro-business policies.

    In Arizona, Governor Jan Brewer is proposing to cut taxes on high-wage industries while further reducing funding for Medicaid, universities, community colleges, and K-12 education.  

    Similar tax cuts are being proposed in New York, Washington, Michigan, Minnesota, and South Carolina. All of these plans prioritize tax breaks for business over providing essential services to those most affected by the economic downturn.  

    The Governors of West Virginia and Arkansas have arrived at an entirely different tax-cutting proposal: reducing the sales tax on groceries.  Like lawmakers who support business tax cuts, Governors Tomblin and Beebe believe their brand of tax cuts will circulate quickly throughout the economy, providing necessary relief to the taxpaying public while stimulating the economy. 

    Governor Mike Beebe of Arkansas wants to cut the sales tax on groceries by a half-cent and has said it is the only tax cut he will consider this year.  In West Virginia, Governor Earl Ray Tomblin wants to reduce the grocery sales tax from 3 to 2 cents and would ultimately like to see it eliminated entirely.

    While the proposals to cut the sales tax on groceries are a welcome development compared to proposed tax cuts for businesses and the wealthy, there are still two problems with them. 

    First and foremost, states are in dire need of revenue this year as they face the most significant budget challenge yet since the start of the recession.  Every dollar lost to a tax cut will have to be made up by an even deeper cut in spending. 

    Second, reducing the sales tax on groceries is not the most targeted approach available to state leaders looking to support working families.  The poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. 

    Enacting or increasing a refundable state Earned Income Tax Credit (EITC) or other low-income refundable credit would be a more affordable and better targeted alternative to ensure that tax cuts reach low- and middle-income working families.  Tax cuts that directly benefit low-wage workers are especially beneficial to the general economy because low-wage workers immediately spend their refunds out of necessity.  By pumping the money back into the economy, the tax cut goes further in stimulating the economy than tax cuts for the wealthy or businesses.

    Instead of pursuing tax cuts for businesses and wealthy individuals, state lawmakers should be working to alleviate hardship on the most vulnerable.  Indeed, the governors in West Virginia and Arkansas may end up being much more efficient at helping their state economies rebound than the “business friendly" governors in Wisconsin and Iowa.


    New York's Next Governor Will "Aggressively" Push for Property Tax Cap


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    Over the last few weeks, New York Governor-elect Andrew Cuomo has been pushing legislative and union leaders to support his proposal to cap local property tax increases at 2% per year.  The New York Times has described the proposed cap as “tougher than the tax cap efforts in some other states,” and Governor Cuomo’s campaign literature has promised only “narrow, limited exemptions” to the cap.

    A spokesman for the Governor-elect said that Cuomo will “move aggressively” to see that this “centerpiece” of his agenda is enacted.  Similar caps have been sought by past Governors in New York, but the Times thinks that “Mr. Cuomo may be facing a more favorable political climate for a cap” than have his predecessors.

    In addition to potentially gutting school districts’ most important revenue source, a cap of this sort will also solidify existing inequities between districts.  As Frank Mauro of the Fiscal Policy Institute explains, "when you apply a percentage cap to change, you institutionalize the disparities and you make them worse." Moreover, for fixed-income home-owners and renters who are already facing unaffordable property taxes, capping increases does nothing to remedy the underlying problem.

    Instead, as Mauro and others have pointed out many times, a significant enhancement to New York’s circuit-breaker program could assist those New Yorkers most affected by the property tax, without drastically reducing local revenues.

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

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

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

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

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

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


    State Transparency Report Card and Other Resources Released


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

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

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

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

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

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


    Gubernatorial Candidates with Progressive Positions on Taxes Who Won


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

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

    Candidates Who Campaigned on Raising Taxes

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

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

    Candidates Who Defeated Opponents Targeting Progressive Tax Structures

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

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

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

    Incumbents Re-elected After Raising Taxes

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

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

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

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

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


    News from the Gubernatorial Race in New York


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    New York’s GOP gubernatorial candidate, Carl Paladino, has spent the past month pledging to cut taxes by 10 percent and slash state spending by 20 percent to address the state’s looming budget shortfall. The details of his tax cuts have been sparse, though in campaign stops he has referred to cutting personal income tax rates, reducing corporate minimum taxes, and eliminating the corporate franchise tax for manufacturers.

    Most recently, Paladino has admitted that his plan to reduce spending by 20 percent in one year is “unrealistic” because “closing state agencies, cutting the workforce and trimming Medicaid takes time.”


    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.


    New York State Passes Final Budget, Does Not Take on Hedge Funds


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    Nearly breaking the record for delay, the New York Senate passed the final piece of its budget on Tuesday night. The most significant components of the $1 billion-plus revenue measure are the elimination of the sales tax exemption on clothing and footwear below $110 and a temporary reduction in the itemized charitable contribution deduction for households with incomes above $10 million. The bill however did not include a measure which had been considered to change the taxation of out-of-state hedge fund managers.

    The legislation, which passed 32 to 28 on party lines, also includes a series of smaller measures such as expanded tax breaks for film production, an increase in the taxation of video gambling, new rules allowing casinos to stay open later, and laws forcing online travel companies to collect sales taxes on hotel rooms. The measure did not, however, include a provision allowing State of New York University schools to raise tuition rates.

    The change in the itemized charitable deduction would raise $100 million in revenue by reducing the deduction from 50% to 25% for households with incomes above $10 million for three years including 2010. This builds on a change enacted last year which completely eliminated the use of itemized deductions for households with incomes over $1 million except for allowing them to deduct a maximum of 50 percent of their charitable contributions.

    The failure to keep the $50 million tax change affecting out-of-state hedge fund managers represents a “rare concession” (in the words of The Wall Street Journal) by the New York Legislature to the wealthiest income earners. The measure would have changed the law to tax the carried interest of out-of-state hedge fund managers at ordinary income rates rather than the lower capital gains rates. It ran into controversy as the managers met with Connecticut officials to show their alleged willingness to take their businesses out of New York.

    Besides the larger budget passage, the New York Senate also approved two other bills with important budgetary impacts. The first would allow for across-the-board cuts in spending if federal Medicaid and education funding is not approved by Congress (which seemed more in doubt before the Senate approved it Thursday). More problematically, the Senate passed a 4% property tax cap, which, although relatively loose compared to the one passed in New Jersey, still represents bad policy. If passed by the New York Assembly, this measure would only provide poorly targeted tax cuts while restricting the flexibility of local government to raise the revenue needed to provide basic services.


    New York State Budget Still Unresolved


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    With less than two weeks to go before setting the record for lateness in completing its budget, Democratic Governor David Paterson called the New York state legislature into special session on Wednesday in order to close the remaining $1.5 billion budget deficit.

    The New York legislature has struggled for months to close the $9.2 billion budget gap, working well past the initial budget deadline of April 1st. In order to finish the budget and push his own initiatives, Gov. Paterson has vowed to continue to keep up the special sessions until the budget is done, even if it means pursuing court orders to enforce participation.

    The Governor is pushing for a new tax on sugary drinks, tuition increases for state colleges, allowing grocery stores to sell wine, and property tax caps that have already been rejected by the Assembly.

    On July 1, 2010, the New York State Assembly passed an alternative revenue measure to close the budget gap. The bill raises revenue primarily through suspending the sales tax exemption on clothes and footwear under $110 from October to March, deferring business tax credits, reducing itemized deductions for those with an adjusted gross income above $10 million, and by limiting the STAR property tax exemption program to those with incomes under $500,000.

    The Senate, on the other hand, left for the July 4th holiday weekend without having passed the revenue part of the budget. The roadblock stopping the passage of the bill is two Democratic lawmakers who oppose the effort to allow state colleges to adjust their tuition. With the legislature back in session, Gov. Paterson is hoping the Senate will take a second look at proposals that have failed so far in the Assembly, using the divide to create a competing revenue proposal in the Senate that is closer to his plan. On Thursday, Gov. Paterson met with lawmakers to come up with a compromise on the issue of state college tuition in hopes of finally finishing the budget

    New York is not the only state stuck in budget gridlock. In California, legislators are going into their fifth week of the new fiscal year without a spending plan.

    The organization New Yorkers for Fiscal Fairness has put out a useful outline of the measures that the New York legislature should consider in dealing with the current budget gap and in making future budgets.


    New York: Report Recommends Improvements to Proposed Circuit Breaker


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    The New York Fiscal Policy Institute (FPI) released its twentieth annual budget briefing last week, including, among other things, a list of criticisms of Governor Paterson’s proposed property tax circuit breaker program.  This list serves as a useful checklist for good circuit breaker policy across the country.

    Among the FPI’s criticisms of the Governor’s plan are that it:

    - Excludes county and municipal property taxes, instead applying only to school property taxes;
    - Attempts to provide some relief to a large group of taxpayers, rather than targeting meaningful benefits more toward households struggling to make ends meet;
    - Excludes renters;
    - Utilizes different income brackets for different regions of the state, thereby creating complications and inequities;
    - Reduces the size of the tax credit for taxpayers in districts where the school tax levy has grown faster than inflation, while increasing it for those taxpayers whose levy has grown more slowly.

    When property values inevitably rebound from the recent bursting of the housing bubble, property taxes will almost certainly become a hot button issue in the states once again.  Enacting a circuit breaker (or strengthening an existing one) is the best possible route for states to take when this occurs.  For more on circuit breakers, be sure to read ITEP’s policy brief.


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


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

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

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

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

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

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

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

    More than ever, deficit-plagued states need to find new revenue sources to balance their budgets while simultaneously fostering an economic climate that is conducive to job creation. This week, the New York State Senate Select Committee on Business and Tax Reform sought to move forward on both fronts, and held a hearing to discuss ways in which the state's corporate tax base could be expanded by eliminating corporate tax incentives that don't achieve their stated economic development goals.

    The Institute on Taxation and Economic Policy (ITEP) submitted testimony discussing the contradictory and potentially harmful incentives created by several corporate giveaways. One was enacted by the state less than five years ago (the "single sales factor" for manufacturing companies). Another, the "cancellation of debt income" or "CODI," was foisted on the states by this year's stimulus bill. The CODI provision, which created a new break for corporations in the federal tax code, was ranked by CTJ as one of the worst six provisions in the stimulus bill passed out of the Senate and unfortunately it was included in the final law that was enacted. Because most state corporate income taxes are linked to the federal corporate income tax, this new giveaway reduces state revenue as well as federal revenue.

    The Fiscal Policy Institute also presented testimony on sensible loophole-closing options. The Center on Budget and Policy Priorities released a new paper this week that explains the CODI provisions and identifies the many states that could raise additional revenues by decoupling from this provision.


    State Income Taxes: The Jet Set Stays Put?


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    In the wake of the worst fiscal crisis in decades, several states -- most notably, New York and Hawaii -- have recently adopted income tax increases targeted at upper-income individuals and families. As the Center on Budget and Policy Priorities has documented, they may well be joined by several other states in the coming months as more lawmakers realize that this is the most responsible way to address budget shortfalls.

    Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota. Yet, as ITEP observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (New York, New Jersey, and Connecticut) saw an upturn in the number of affluent taxpayers over the ten year period from 1997 to 2006. Guess it's hard to find the equivalent of Per Se or Le Bernardin in Sioux Falls!


    Progress on Progressive Taxation in the States


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    Few would envy the position most state lawmakers now find themselves in. Nearly every state is required to balance its budget each year and the vast majority of states face substantial budget deficits in the coming years. Those lawmakers will have to support either cuts in essential public services or increases in politically unpopular taxes -- and do so in the midst of a deepening recession.

    Under these circumstances, the best way to eliminate state budget deficits is through tax increases on upper-income individuals and families, as such changes would reduce consumer demand the least. Three states in the northeast -- New York, Connecticut, and Delaware -- seem ready to do just that.

    In the Empire State, Governor David Paterson and members of the legislative leadership this week reached agreement on a plan to close a $17.7 billion budget gap. The centerpiece of the plan is the addition of two new tax rates. A rate of 7.85 percent would apply to income in excess of $300,000 and a rate of 8.97 percent would apply to income above $500,000. While those changes would only be temporary in nature (lasting only through 2011) they are expected to bring in about $4 billion per year in revenue.

    In the Nutmeg State, budget deficits are projected to total $8.7 billion over the next two years. In response, the Assembly's Finance Committee approved legislation that, among other changes, would add four new income tax brackets, with rates ranging from 6 percent to 7.95 percent, all affecting married Connecticuters with incomes over $250,000 annually (and single taxpayers with incomes above $132,500).

    Finally, in the First State, Governor Jack Merkell has put forward a broad-ranging budget plan that would take the constructive step of raising Delaware's top income tax rate from 5.95 percent to 6.95 percent, the first income tax increase since 1974. Even though it would impose pay and benefit cuts on state employees and rely more heavily on gaming and excise tax revenue, this budget plan is a step forward on progressivity.


    Closing State Budget Gaps with Taxes on Upper-Income Taxpayers Gains Popularity


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    As we noted last week, up until now, New York has been the most encouraging example of a state considering a progressive approach to filling its budget gap. Now, with the unveiling of Wisconsin Gov. Jim Doyle's proposed budget, another state can be looked to by progressives as an example to be followed.

    Gov. Doyle's budget includes two main progressive reforms. First, the income tax rate on income over $300,000 per year would be raised by one percentage point. Second, the state's unusual exemption of 60% of capital gains income would be lowered to 40%. While a 40% exemption is still unnecessary and regressive, this change would be a major first step toward taxing those who live off their wealth at a rate more similar to those who work for a living. Both of these changes would primarily affect the upper-income individuals most capable of making it through this economic storm.

    More good news for tax fairness advocates comes from a recent poll of New York State voters conducted by Quinnipiac University. As the poll shows, it turns out that progressive solutions make sense not just on policy grounds, but on political grounds as well. The poll found that nearly 80% of New York voters support raising the income tax on income over one million dollars. That number falls only slightly when New Yorkers are asked if they support raising income taxes on income over $500,000. Additionally, proposals to raise tax rates on income over $250,000 enjoy well over 50% support in New York. Click here for the complete poll results.

    Finally, in addition to the progressive reforms described above, the Wisconsin governor is also pushing a proposal to institute combined reporting of corporate income. Enacting such a proposal is an absolutely vital part of maintaining the viability of any state's corporate income tax.

    Even though the conference committee significantly scaled back state aid relative to the House version of the bill, states can still expect some pretty significant assistance in the near future. Unfortunately, those states are also facing even more significant budget gaps, which are likely to continue to grow larger in the coming months. To make up the difference, states will have to take responsibility for finding ways to close their budget gaps.

    Policymakers in New York are readying themselves for the challenge. As the New York Times reported earlier this week, members of the state Senate are preparing legislation to close $6 billion of the state's roughly $14 billion budget deficit by raising income taxes on individuals and families making more than $250,000.

    In particular, the bill would impose a tax rate of 10.3 percent on those taxpayers with incomes in excess of $1 million. In other words, faced with a mammoth fiscal and economic crisis, legislators in New York seem ready to respond accordingly -- with a proposal that reforms their tax structure in a fundamental and progressive fashion. Their counterparts in other states (many of whom are trying to muddle through with a combination of budget gimmicks, one-time fixes, and minor tweaks to sin taxes) should do the same.

    For more on the steps needed to tackle New York's budget problems, see this commentary by Frank Mauro and James Parrott of the Fiscal Policy Institute.


    Opening for Progressive Tax Options in New York and Illinois


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    The New York Times reported earlier this week that the Empire State may use tax increases on the very wealthiest residents to help close a budget gap of roughly $15 billion. This is common sense, particularly since, as the Times notes, "Over the last 30 years, the trend has been to pare back income tax rates on the rich, federally and in the state. Since the mid-1970s, the state has cut its top tax rate from 15.375 percent to 6.85 percent." For more on New York's fiscal condition and ways to improve it, see this presentation by the Fiscal Policy Institute.

    Progressive tax reform may also be on the horizon for Illinois. Much hope accompanies newly elected Illinois Senate President John Cullerton. Cullerton replaces retiring Senate President Emil Jones who often stood with Governor Rod Blagojevich against constructive tax changes to solve Illinois' budget woes. Senator Cullerton recently hinted that needed tax hikes may be in the state's future, alluding to the fact that all options to solve the state's infamous budget shortfall are on the table.

    In a speech to the Senate Cullerton said, "In recent years, we have seen all the gimmicks and listened to all the quick-fix promises. But, we know they won't solve our problems. Instead we need a cooperative partnership -- and that requires sacrifice." Let's hope Cullerton can work to solve the state's budget with progressive solutions like increasing reliance on income taxes and lowering the state's dependence on property taxes instead of the litany of solutions floated in recent years (like increased borrowing and dependence on gambling) to solve the state's fiscal woes.

    The news out of New York in recent weeks hasn't been especially encouraging for those concerned about the impact of the recent economic downturn on vulnerable lower-income families. Unfortunately, that trend seems to be continuing, as New York Governor David Patterson proposed a budget this week devoid of the type of progressive tax increases the state needs to responsibly make it through the current recession. This is despite the fact that just days earlier, over 100 economists joined the New York-based Fiscal Policy Institute in calling for tax hikes on high-income earners as a way to avoid painful cuts in the state services lower- and middle-income families rely upon. All told, the Governor's budget relies about twice as heavily on spending cuts as it does on tax and fee increases.

    On the revenues side of the budget, the proposal lacks broad-based increases and instead takes a more piece-meal approach. While this is far less than ideal, it is worth noting that some of those piece-meal items are certainly worthy of being included in the final budget deal. An expansion of the sales tax to include more services, limitations on the deductions claimed by wealthy families, and a scaling back of some of the state's "broken" tax breaks for businesses are among the revenue raisers included. The Governor's budget also includes a new "luxury tax" on items such as yachts, jewelry, and furs. While such a tax would most likely be progressive, it's hard to see what advantages it brings over simply enhancing the progressivity of the state's income tax.

    To enjoy an interesting and heated sub-plot, check out this New York Times piece on the tax on "unhealthy" beverages that the Governor has included in his budget plan. Despite insistence that the idea is motivated by concern over the public health ramifications of these drinks, it's hard to take seriously such claims when New York is facing a budget deficit. More meaningful, broad-based tax reform would be a preferable route to addressing the budgetary issues.


    ... and, Some Ideas to Reject


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    Of course, not every idea floated during these tough fiscal times is worth adoption or even consideration. Some are just downright bad. Take New York, for instance. As the National Conference on State Legislatures (NCSL) indicated earlier this week, the Empire State is expected to face a budget deficit of $12.5 billion in the coming fiscal year. Unfortunately, that dire outlook has not stopped Governor David Paterson from continuing to embrace an ill-advised property tax cap. On December 1, New York's Commission on Property Tax Relief issued its final report, recommending a 4 percent limit on annual property tax growth. Governor Paterson had backed the idea previously and does not seem likely to change his position any time soon, remarking upon the report's release that "Property taxes... have been the enabler of Albany's dysfunctional culture." As the Fiscal Policy Institute and others have observed, the problem with tax caps are legion and could be particularly harmful if put in place during a recession.

    Similarly, North Dakota Governor John Hoeven, as part of his budget plan for the 2009-2011 biennium, has proposed cutting property taxes by $300 million and income taxes by $100 million. Fiscal circumstances in North Dakota are, to be sure, markedly different than those in New York; after all, the Peace Garden State is one of the few expected to experience a budget surplus by the end of the current fiscal year. Yet, as the Grand Forks Herald recently warned, "oil prices already have plunged, threatening the energy boom that has dramatically boosted the state's surplus," suggesting that state legislators should proceed slowly and carefully. Caution certainly seems to be what the voters of North Dakota want anyway -- in November, they resoundingly defeated a ballot measure that would have cut income taxes by more than $200 million.

    Legislators in Virginia, despite that state's $2 billion plus budget deficit, seem bent on cutting taxes too, as a special House-Senate subcommittee has recommended that the state offer a new corporate tax break known as single sales factor. Where North Dakota officials should listen to the recently expressed views of their constituents, Virginia should follow the hard-learned lessons of other states. Simply put, single sales factor is a costly and ineffective means of spurring economic activity. Just ask Massachusetts: In 1995, Massachusetts adopted single sales factor for manufacturers, a move that was hailed by some proponents as "a bold step towards restoring Massachusetts as a manufacturing state." After thirteen years -- and millions of tax dollars and thousands of manufacturing jobs lost -- it's clear that that restoration has not occurred.


    Goodbye Old Yankee Stadium, Hello Tax Cheating?


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    Late last month, Rep. Dennis Kucinich (D-OH) held a hearing on Capitol Hill to investigate the nearly $950 million in tax exempt bonds approved to build the new Yankee Stadium. One of the most egregious discrepancies so far is that the appraiser hired by the city estimated the value of the land for the new stadium at about $40 million. The figure used in documents city officials turned in to the IRS to qualify for tax-exempt bonds was $204 million. Even a columnist for ESPN cited New York Assemblyman Richard Brodsky's report which said that taxpayers will be charged between $550 and $850 million for the new stadium. To add to taxpayer outrage, the Yankees have even raised their ticket prices significantly for next year, even though the Yankees didn't make it to the playoffs. Assemblyman Brodsky put it best when he said, "We do things for professional sports we wouldn't do for any other business. When it comes to professional sports, we become socialists; for everyone else, we're capitalists." Good Jobs First New York has followed the development of the new stadium for some time. To read more about how New Yorkers won't benefit from the stadium deal, check out Good Jobs First New York.


    Budget Update: "How Many Times Can We Say No to Taxes?"


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    Four of the nation's most populous states, together home to more than one out of every four Americans, are facing serious budget problems. Important new developments occurred in each of those states this week, the theme of which is perhaps best conveyed through California Republican Mike Villines' question: "How many times can we say no to taxes?" State residents will soon learn that this is really saying "no" to keeping alive public services like education, transportation and health care that families depend on.

    See the following posts on the budget situations in California, Florida, New York, and Virginia.


    New York: Tax Hikes Nowhere Near the Discussion -- Medicaid and Local Aid Get the Axe


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    New York this year has also had to face the reality of declining tax revenues. Without giving a second thought to the idea of reinstituting the higher income tax rates paid by wealthy New Yorkers just a few years back, Governor Paterson this week spear-headed an effort to slash the budget into balance. Legislators and the Governor agreed to cut over $400 million from the budget, primarily from Medicaid and aid to local governments. This is in addition to about $1 billion in administrative cuts the Governor instituted himself over the last several weeks.

    As in Florida, the more relevant question now is what to do about next year's projected deficit. This session also featured the slashing of about $1 billion in spending from next year's budget, though that still leaves a $5.3 billion projected deficit. Will lawmakers decide just to cut deeper next year? With the Governor still supporting tax cuts (in the form of a local property tax cap) despite the condition of the state budget, that prospect unfortunately appears quite likely.


    Tax Foundation State Rankings Continue to Deceive


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    The Center on Budget and Policy Priorities has put out a critical appraisal of the Tax Foundation's latest rankings of states by their relative state and local tax levels. Due to some methodological changes and recently revised data, some states underwent huge shifts in their ranking (changes of 10 to 15 places were not uncommon) which are not explained by the minor shifts in tax policy that may have taken place within the states. They've revised downward their estimates of the overall state and local tax burden by a full percentage point since 2007. They also no longer call 2007 a "25-year high" in state and local tax burdens, now considering the year lower tax than the mid-90s.

    If history is any indication, the Tax Foundation's inconsistent methodology and reliance on early projections without hard data will lead to further rankings revisions in the future. The problem is that when state and national media pick up a juicy story along the lines of, "Your taxes are too high," they don't report the numbers as estimates or tentative. They report them as fact and don't report it when figures for previous years are revised. This is problematic because if politicians take the numbers at face-value, they may overreact to the almost certainly flawed numbers that indicate an enormous shift like, "New Jersey edged out New York to become the highest taxed state in 2008" after being ranked 10th for two previous years.

    But because the numbers used to derive this conclusion are so preliminary and based on a shifting methodology, no responsible policy analyst would confidently claim that New Jersey has higher taxes than New York, Connecticut, or other similarly ranked states. The media don't mention the cautionary details that the Tax Foundation includes in its final report and methodology but excludes in its press releases. Its website even contains a sensational headline that glosses over the limitations of their study.

    There are also several more fundamental problems with the Tax Foundation's ranking scheme. The Tax Foundation attempts to determine the combined tax impact from all states on a given state's residents. This is different from how most organizations would identify an average tax load, by simply dividing total state and local tax receipts by total income within a state. This is an important distinction because states generally cannot influence tax policy in other states. Also, while the Census Bureau takes two years or more to compile the official data for a given fiscal year, Tax Foundation relies on proxies (such as dividend income to estimate capital gains) to obtain data for a fiscal year that has barely ended. Using such fly-by-night estimates as a basis for ranking states against one another is so unreliable as to provide almost meaningless numbers.

    Of course, the most fundamental criticism of the Tax Foundation report is that it lumps all of a state's residents, from the very poorest to the wealthiest, together in one group for purposes of measuring tax levels. As an excellent Birmingham News editorial reminds us, calling Alabama a "low tax" state conceals the harsh reality that it is among the highest-tax states in the nation in its effect on low-income families. As the editorial points out, "[Our tax fairness ranking] is the ranking that most needs to change. "


    New ITEP Report: State Tax Policy a Poor Match for Economic Reality in Key States


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    Earlier this week, the Institute on Taxation and Economic Policy (ITEP) released a brief report using IRS data and revealing that the most unequal states in the country also happen to be states that lack the type of progressive tax provisions that could reduce this inequality and raise badly needed revenue. The most unequal states either don't have a personal income tax or have one in need of improvement. Consequently, these states are left with tax systems that, on the whole, are unsustainable, inadequate, and unfair over the long-run.

    The IRS data show that, in 2006, ten states -- Wyoming, New York, Nevada, Connecticut, Florida, the District of Columbia, California, Massachusetts, Texas, and Illinois -- have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Yet, the tax systems in these states generally ignore that very important reality. Of those ten states, four lack a broad-based personal income tax and three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner. Three do use a graduated rate structure, but of these, two have cut income taxes for their most affluent residents substantially over the past two decades.

    Given this mismatch, it should not be too surprising that over half of these states face severe or chronic budget shortfalls. After all, the lack of an income tax, the lack of a graduated rate structure, or moves to make the income tax less progressive all mean that a state's revenue system will not completely reflect the concentration of income among the very wealthy and therefore will not yield as much revenue.

    Case in point: New York. As the Fiscal Policy Institute observes, over the last 30 years, the state has reduced its top income tax rate by more than 50 percent. Most recently, in 2005, it allowed to lapse a temporary top rate of 7 percent on taxpayers with incomes above $500,000 per year. Today, the state must confront a budget deficit of more than $6 billion for the coming year and more than $20 billion over the next three. New York residents seem to understand the disconnect between the enormous disparities of wealth in their state -- where the richest 1 percent of taxpayers account for 28.7 percent of reported income -- and the state's fiscal woes. A poll released this week shows that nearly 4 out of 5 people surveyed support increasing the state's income tax for millionaires. Hopefully, Governor David Paterson is listening. As it stands, he'd rather cap property taxes than ensure that millionaires pay taxes in accordance with their inordinate share of New York's economic resources.


    Some States Need Special Sessions to Address Fiscal Problems


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    With summer in full swing and state fiscal years largely underway, most state legislators probably think that they're done with the heavy lifting, at least policy-wise, for the year. Yet, due to the poor condition of the nation's economy, tax revenue in a number of states is falling well short of expectations, reopening budget gaps that policymakers thought they had closed. For instance, the Georgia Budget and Policy Institute this week issued a report that estimates that the deficit for the current fiscal year (FY09) could reach as much as $2 billion, due to weak sales and personal income tax collections. The report calls for legislators to return in September to address the shortfall. As the Atlanta Journal Constitution reports, Senate Appropriations Chairman Jack Hill has already indicated that a variety of options for resolving any potential deficit will be considered, including undoing recent tax cuts.

    In New York, where the fiscal year begins in April, the problem may be more prospective than retrospective, but that didn't stop Governor David Paterson from calling this week for a special legislative session to address the Empire State's burgeoning budget deficit. According to the latest analysis from the state's budget office, the expected budget gap for FY 2010 has risen from $5 billion to $6.4 billion in the span of three months, with a three-year deficit now exceeding $26 billion. With his request for legislative action, particularly with the entire Legislature up for election this November, the Governor would appear to be a paragon of fiscal responsibility, except that he is simultaneously demanding a property tax cap that would make matters worse. For more on alternatives to the Governor's property tax plan and on the state's fiscal condition generally, visit the Fiscal Policy Institute's web site.


    Survey Finds New Yorkers Prefer Property Tax "Circuit Breaker" Over Property Tax Cap


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    Advocates of sensible property tax reform can take heart from a new poll released by Siena College last week asking New Yorkers to evaluate Governor David Paterson's proposed school property tax cap and a more progressive measure known as a "circuit breaker." A circuit breaker is a credit that prevents property taxes from exceeding a certain percentage of a homeowner's income. This generally provides much more targeted relief than a property tax cap, which benefits all homeowners no matter how wealthy they are.

    An idea to create a circuit breaker funded by an income tax increase on millionaires is supported by most New Yorkers (75% to 17%). A majority, albeit a smaller one, also supports a state-wide property tax cap of four percent of year (69% to 20%). But the interesting result is that when asked to choose between the two, more people support the circuit breaker (52% to 36%).

    Governor Paterson should take this as a strong signal and press for targeted tax-relief rather than the across-the-board cap. A circuit breaker would guarantee that property taxes are fairly distributed. A property tax cap, on the other hand, could deprive localities of more revenue and will make it likely that they will turn to more regressive revenue sources like the sales tax to fund their needs.

    Other states that have experimented with state-wide property tax caps have had poor results. New York should look to neighboring Massachusetts which imposed a statewide property tax cap under Proposition 2½. Although Massachusetts has indeed avoided massive cuts in school funding, its cap has led to cuts in other areas funded by municipalities (parks, libraries, etc.) and the state has needed to contribute significant funds to prevent cuts to education.

    As the Center on Budget and Policy Priorities reported in May, schools could be hit harder in New York because its proposed property tax limit is solely on school property taxes. New York State has a projected $5 billion budget deficit over the next fiscal year and is unlikely to be able to bail out school districts when they are unable to raise enough revenue to meet their needs. If New York raises taxes to increase education funding, the property tax cap effectively means replacing one tax with another and it's possible that the state will end up with a more regressive tax system in the end.

    The Fiscal Policy Institute has published the poll results here.


    New York: Setting the Stage for a Property Tax Battle


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    New York Governor David Patterson just kicked off what is sure to be a heated property tax debate by proposing legislation to institute a 4% cap on annual increases in school property taxes. His proposal is the result of a report put out by the New York State Commission on Property Tax Relief, released just days earlier.

    As was explained two weeks ago in the Digest and in a recent report from the Center on Budget and Policy Priorities, these caps are bad policy for a number of reasons. Most importantly, to the extent that the caps actually do result in a net tax reduction, (rather than merely a shift toward increased state aid) that reduction is poorly targeted and is done arbitrarily without regard to any district's future needs.

    Oddly, the Commission believes that this "blunt instrument" is precisely what the state needs, suggesting that it will "force some tough, necessary choices". What the Commission failed to realize is that another proposal contained within its report, if used properly, could remedy the property tax problem at a much lower cost that would make far fewer "tough choices" necessary.

    That proposal, of course, is an income-based property tax circuit-breaker. The Commission attempted to minimize the importance of circuit-breakers by claiming that such programs address only the "symptoms of the problem, rather than the problem itself". Apparently, the Commission believes that the "problem" requires crudely slashing taxes for everyone regardless of their financial situation, and that providing fiscally responsible and targeted property tax relief to those who need it is only a band-aid fix. Since circuit-breakers don't provide windfall benefits to wealthy property taxpayers like "blunt instrument" caps do, they are also a much safer route for providing property tax relief that allows policymakers to avoid having to gut school budgets. A property tax system that emphasized this kind of relief would be preferable to one with arbitrary constraints on growth.

    To learn more about property tax caps and their shortcomings, see this ITEP Policy Brief.


    Numerous States Wrestle with Competing Visions of Property Tax Reform


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    The Minnesota legislature approved a property tax bill this week (discussed here by the Minnesota Budget Project) that should be studied very closely by New York, Massachusetts, and any other state looking to improve the fairness of its property tax. The Minnesota bill makes use of what is primarily a two-pronged approach to providing tax relief. However, one of those prongs, the property tax circuit-breaker, is noticeably more effective than the other.

    The first prong of the Minnesota plan is an expansion of the state's property tax circuit-breaker credit that provides refunds to households who spend more than a given percentage of their income on property taxes (for information on the fairness gains to be had from circuit-breakers, refer to this ITEP Policy Brief). For other states interested in enacting or expanding similar programs, a recent report from the Massachusetts Budget and Policy Center proposes a variety of targeted expansions to the Massachusetts circuit-breaker (which, as in many states, is currently available only to low-income seniors) that would greatly improve the fairness of the property tax.

    The second prong of Minnesota's approach to property tax relief was a late addition at the request of Governor Pawlenty: a 3.9% cap on increases in local property taxes. A Center on Budget and Policy Priorities report released this week explains why such caps are a bad idea. The most obvious problem is that caps constrain local government revenues without regard to the cost of providing public services. Tax caps also force localities to become more dependent on state aid, which becomes problematic during an economic downturn when that aid decreases but the cost of providing goods such as education and law enforcement remains the same or even increases. Fortunately, Minnesota's cap is slightly less stringent than some states. It has a higher ceiling on revenue increases, numerous conditions under which a locality can avoid the cap, and a provision to expire after three years.

    This discussion is especially relevant in New York, where a state property tax panel is expected to propose both a circuit breaker and a cap on annual revenue increases sometime in the next two weeks. Thankfully, the influential Working Families Party in New York, as well as teachers' organizations and over thirty state legislators have voiced support for the circuit-breaker idea. The Working Families proposal would pay for this relief by raising income taxes on people earning more than $500,000 annually. Fortunately, the tax cap idea appears slightly less popular, though it is far too early too tell if that proposal will pick up steam as well. To keep up with the debate, which is sure to quickly gain steam, see the New York Fiscal Policy Institute.


    New York and Maryland Consider Taxes on Wealthiest Residents


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

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

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


    Just Hand Over the Shovel, Governor


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    In a speech before the Citizens Budget Commission last week, the Director of New York State's Division of the Budget, Paul Francis, indicated that the Empire State will likely face a budget deficit of at least $3.6 billion for the 2008-2009 fiscal year. One of the main factors contributing to that deficit is an expected slowdown in revenue associated with the financial services and real estate industries. In fact, according to Francis, during some periods, "Wall Street accounts for up to 20 percent of [state] revenues," leaving New York particularly vulnerable to fluctuations in those sectors of the economy. Despite this sobering news, Governor Eliot Spitzer continues to express his desire to cut taxes - and Republicans in the Senate seem bent on doing the same. While property taxes are clearly a hot-button topic in New York, one's first move to get out of a budget hole shouldn't be to dig deeper into it.


    Good News and Bad News in New York


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    First, the good news. According to the New York Times, officials in the Empire State this week issued warnings to about a third of the roughly 10,000 businesses that participate in the state's enterprise zone program for failing to make good on job creation or investment commitments. The enterprise zone program offers a wide range of tax breaks - including sales tax refunds, property tax credits, and investment tax credits - to businesses in hopes that they will boost employment and investment in the state.

    As the Times points out, the program has been around for twenty years - and has cost New York taxpayers $3 billion since 2000 - yet these warnings mark the first real effort to enforce the commitments businesses make to receive those tax breaks. For example, Wal-Mart and Lowes, two of the largest companies cited, pledged to invest $45 million and $9 million respectively, but together have put up only about $4 million. New York has the power to recoup tax breaks from businesses that fail to meet their commitments, but won't attempt to do so until program participants have filed their 2006 reports. Still, given the prevalence of these types of programs around the country - programs that are likely yielding similarly poor results - New York's action will hopefully spur other states or municipalities to do the same.

    Now, the Bad News

    Unfortunately, New York lawmakers haven't exactly been paying attention to the poor track record of the state's enterprise zones and how little the public got in return for the investment of tax dollars in this fashion. Otherwise, when the Yankees came to them looking for help in building a new stadium, they probably wouldn't have given them over $660 million in subsidies. (Just call it "The House that Giuliani Built.") The latest report from Good Jobs New York - entitled Insider Baseball - has all the details.


    Corporate Tax Reform Odd Couple: West Virginia and New York


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    Other than both bordering on Pennsylvania, West Virginia and New York aren't generally seen as having too much in common ... until this past week. In agreeing to a budget for fiscal year 2008, policymakers in New York followed the lead of their counterparts in the Mountain State and incorporated combined reporting into their corporate income tax. Combined reporting, as ITEP's February policy brief explains, is the "most effective approach to combating corporate tax avoidance" available to state lawmakers. West Virginia legislation to institute combined reporting last month and, with New York's more recent step forward, the number of states using this essential approach to corporate taxation climbs to twenty. It could climb higher still by year's end, as North Carolina Governor Mike Easley, like the Governors of Massachusetts, Iowa, Michigan, and Pennsylvania, also now supports combined reporting. See this ITEP table to find out where your state stands on this important tax reform.


    States Growing Tired of Large National Businesses Avoiding State Taxes


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


    How to Stop Corporations from Avoiding State Taxes


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    State corporate income tax reform is gathering momentum in 2007, as more and more states are considering adopting an important corporate tax reform: combined reporting. Governors in New York, Iowa and Pennsylvania have already proposed this important loophole-closing reform, and newly elected Massachusetts Governor Deval Patrick is sending signals that he may follow in their footsteps. Meanwhile, a new paper by the Center on Budget and Policy Priorities' Michael Mazerov gives the lowdown on an equally important corporate tax reform that could productively be adopted by every state with a corporate tax: company-specific disclosure of taxes paid (or not paid). Mazerov's paper includes model legislation for use in any state seeking to shed more light on corporate tax avoidance.


    Two More States Pursue The Most Effective Weapon Against Corporate Tax Avoidance


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    Over the past few years, a number of states have taken incremental steps to reform their corporate income taxes to curtail tax avoidance by large and profitable companies. One such reform, combined reporting, prevents corporations from using a range of accounting schemes to shift profits from one state to another in order to artificially reduce the taxes they owe. The seventeen states that now use combined reporting may eventually get some company, as two Governors - Eliot Spitzer (D-NY) and Chet Culver (D-IA) - have included provisions in their budget proposals for the coming fiscal year to institute combined reporting. To learn more about combined reporting and how it works, see the Institute on Taxation and Economic Policy's updated policy brief.

    Several tax avoidance techniques are available to corporations operating in states that don't have combined reporting. For example, a recent Wall Street Journal article (subscription required) notes that Wal-Mart may have been able to avoid as much as $350 million in state corporate income taxes between 1998 and 2001 due to a loophole that could be countered with combined reporting.


    New York: Holding Corporations Accountable


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    Counties in New York, as in many states, often provide tax-breaks to businesses through Industrial Development Agencies (IDAs). The IDAs were originally created to stop companies from relocating to states with lower wages and benefits. However, a recent study by the New York Comptroller's office has found that companies receiving tax incentives rarely create the promised number of jobs. In fact, two-thirds of all companies show either stagnant or declining employment numbers. The Comptroller's report has received wide media attention and it seems likely that some reforms will be forthcoming.


    Achievng Adequacy: Tax Options for New York in the Wake of the CFE Case


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    ITEP Report: Achievng Adequacy - Tax Options for New York in the Wake of the CFE Case

    This report offers citizens, activists and policymakers a detailed primer on New York's tax system. The report assesses the state's personal and corporate income taxes, property taxes, and sales and excise taxes, with an eye toward evaluating options for revenue-raising tax reform that may help lawmakers comply with the New York Court of Appeals' June 2003 decision requiring the state to raise additional revenues for education.

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