Oklahoma News


State Rundown 4/19: Alaska's Long Income Tax Freeze May Be Thawing


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This week Alaska's House advanced a historic bill to reinstate an income tax in the state, Oklahoma's House voted to cancel a misguided tax cut "trigger," West Virginia's governor colorfully vetoed his state's budget, tax reform debate kicked off in Louisiana, and gas tax updates were considered in South Carolina and Tennessee, among other tax-related news from around the country. And in our "what we're reading" section you'll learn about a new book on American attitudes toward taxes and a new effort to make public finance data readily available online.

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

  • The Alaska House voted 22-17 to reinstate a personal income tax for the first time since 1980. An ITEP analysis found that the income tax contained in House Bill 115 would be the fourth lowest in the nation when measured relative to overall personal income. But the progressive nature of the tax (with rates ranging from 0 to 7 percent) would play an important role in counterbalancing the regressive measures also being considered by Alaska lawmakers. The bill now moves to the Senate, where legislative leaders have expressed resistance to new revenues and would instead like to slash the state's Permanent Fund Dividend (PFD) payout and hold out hope for a rapid increase in oil prices. Gov. Bill Walker, by contrast, supports enacting a state personal income tax.
  • Oklahoma’s House passed a bill to repeal the arbitrary tax cut “trigger” created in 2014 that will worsen the state’s $878 million revenue shortfall if left in place.
  • Calling it a "bunch of political bull you-know-what," West Virginia Gov. Jim Justice vetoed the legislature's budget, which relied on spending cuts and a withdrawal from the state's Rainy Day Fund. All eyes are now on the "compromise plan" for tax reform that will play out in special session. It could potentially include the creation of a commercial activities tax, an increase and expansion of the sales tax, and lower reliance – and eventual elimination – of the state's personal income tax.
  • Lawmakers in Louisiana are beginning to chip away at tax reform, starting with examining various tax expenditures early this week. The state exempts almost as much as it collects in taxes, leaving significant holes in the tax structure. Closing these loopholes offers significant opportunities for filling the $1.3 billion revenue gap that the state faces upon the expiration of the temporary sales tax increases enacted in 2016.
  • As Minnesota policymakers return from recess to finalize a budget, there are many divergent ideas regarding the treatment of the state's surplus. In response to proposals for either large tax cuts or spending increases, the Star Tribune Editorial Board has a wise word of advice for lawmakers facing surpluses anywhere--"modest tax cuts and spending increases are affordable; big moves are not." Among their list of priorities: targeted tax relief for low-income workers and families through expanding the Working Family and Child Care Credits.
  • The Senate tax plan in North Carolina would worsen he state’s budget situation by $600 million and likely lead to dwindling reserves and funding cuts to education and other priorities.
  • South Carolina's gas tax debate heated up today, with House lawmakers urging their Senate counterparts to follow their lead and vote to update the gas tax. Some in the Senate continue to hold out for income tax cuts to be added to the package, and Gov. Henry McMaster remains opposed, preferring to fix the roads with borrowed money.
  • Tennessee Gov. Bill Haslam's gas tax bill still has a fighting chance as well and is also being debated, and possibly voted on, in the both houses before the end of the week.
  • Lawmakers in Rhode Island are considering a proposal to cut the state's sales tax rate – from the current 7 percent to 3 percent. The impacts will be studied in a special legislative commission.
  • Ohio lawmakers recently announced that they need to cut $800 million from the state budget over the biennium. Some legislators have pointed to recent tax cuts and tax shifts, that have taken place over the past five years, as key drivers of the state's budget woes.
  • Nebraska legislators debated a property tax and school funding bill Tuesday that would have redirected funding from an existing property tax credit to increase school aid in rural areas. The bill did not appear to have enough support to overcome a filibuster and will likely not advance.
  • Alabama's effort to update its gas tax was declared officially "dead" for the year after the bill failed to pass a procedural hurdle in the House, but proponents are still working to resuscitate it.

What We're Reading...  

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


State Rundown 3/29: More States Looking to Raise or Protect Revenues Amid Fiscal and Federal Uncertainty


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This week we see West Virginia, Georgia, Minnesota, and Nebraska continue to deliberate regressive tax cut proposals, as the District of Columbia considers cancelling tax cut triggers it put in place in prior years, and lawmakers in Hawaii, Washington, Kansas, and Delaware ponder raising revenues to shore up their budgets. Meanwhile, gas tax debates continue in Oklahoma, West Virginia, and South Carolina, among other news.

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

  • It's been another whirlwind week for tax policy in West Virginia. Down to the wire on "crossover" day, the West Virginia Senate voted down the party line to overhaul the state tax system. SB 409 would raise the state sales and use tax to 7 percent (increasing the food tax to 3.5 percent) and step-down the state income tax, phasing it out over time. Ultimately this would shift the state's reliance on the personal income tax to the sales tax, benefiting those most well-off.
  • Georgia lawmakers will end their session Thursday and may pass a major income tax cut then. The plan, which was initially a very regressive flat tax proposal, has morphed into a more fair but also more costly package that eliminates the state deduction for state income taxes, lowers the top personal income tax rate to 5.65 percent, and indexes tax brackets and other provisions for inflation. It is projected to reduce state funding for services by $292 million in 2019, growing to $526 million annually by 2022.
  • Minnesota lawmakers have no shortage of plans for the state's surplus—with House Republicans proposing $1.35 billion in cuts and Senate Republicans aiming for $900 million. Both plans include exempting portions of Social Security income, tax breaks for student debt, and reducing the statewide property tax on business. The Senate plan also includes a provision to cut the lowest marginal tax rate—a policy change that is sold as providing tax relief to low income families but that disproportionately benefits the wealthy while undermining the progressivity of the income tax.
  • The current situation in the District of Columbia highlights two major trends in tax policy this year: tax-cut triggers and federal uncertainty. A trigger has been tripped that will cut DC taxes to the tune of $100 million unless the city council and mayor's office cancel those cuts, and at the same time, the city estimates it will lose at least $100 million under federal budget cuts outlined by President Trump. Such arbitrary automatic cuts undermine states' ability to respond to changing circumstances such as federal policy changes.
  • Nebraska legislators may be inching closer to a destructive tax-cut package that would use triggers like those in DC to ratchet down the state's income tax rates.
  • Advocates for low-income families in Hawaii are hopeful as bills that would boost taxes on the wealthy to pay for tax breaks for low-income people continue to move through the Legislature.
  • The Washington House released a budget that requires $3 billion in new revenues over the next two years from new taxes on capital gains and increases in business taxes. New revenues are necessary for the state to be in compliance with court mandates to adequately fund public education in the state.
  • In other state budget news, the Kansas House budget similarly requires $800 million in new revenues over the next two years in order to remain in the black and Gov. Walker's proposed budget in Wisconsin would increase the state's structural deficit to over $1 billion by 2021. While agitation for tax reform continues in Kansas, there is no similar activity in the Badger state.
  • Delaware Gov. Carney presented his budget-balancing proposal last week after holding "budget reset" listening sessions throughout the state and settling on an approach based on a mix of funding cuts and revenue increases. The tax proposal includes small rate increases of 0.2 to 0.4 percentage points, elimination of itemized deductions, and an increase in the standard deduction, while also raising the cigarette tax and a cap on corporate franchise taxes.
  • Oklahoma's Senate passed a measure that would increase teacher pay through a fuel tax increase (from $0.17 to $0.23 for unleaded gas and $0.14 to $0.21 for diesel). Similarly, West Virginia's Senate approved a gas tax increase of 4.5 cents, coupled with vehicle fees, to fund the state's Road Fund. Both bills now head to their respective Houses for consideration.
  • Chances diminished this week of South Carolina passing a needed gas tax update without tacking on harmful tax cuts that will shift taxes to low-income residents and undermine funding for schools, public safety, and other needs, as advocates for such cuts voted against giving the gas tax update priority status.
  • Idaho lawmakers in both chambers have approved legislation that would eliminate the sales tax on groceries along with a $100 grocery credit. The bill now goes to the governor who is opposed to eliminating the tax on food but who has not said he will veto the bill.
  • The Minnesota Revenue Department released its 2017 Tax Incidence Study, showing that while the overall state and local tax system remains regressive, there was a significant decrease in overall regressivity from 2012 to 2014, thanks in large part to refundable income tax credits and property tax refunds for homeowners and renters.
  • Iowa legislators have settled on $118 million in budget cuts to balance the current year budget.
  • Maryland, Virginia, and the District of Columbia are considering a regional sales tax to improve public transit in the area, an idea that people surveyed in Maryland narrowly support.

Governors' State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Kasich of Ohio on April 4.

What We're Reading...  

  • A new brief from the Corporation for Enterprise Development (CFED) outlines steps legislators can take to make the federal EITC even more successful at reducing poverty and encouraging work.
  • Tulsa World's editorial board asks Oklahomans to "eliminate the false idea that prosperity comes from whittling away at state income tax rates."
  • Ted Boettner, executive director of the West Virginia Center on Budget and Policy explains how the state's tax proposals result in a tax shift from the wealthy to low-income families.
  • A new paper to be published in the N.Y.U. Law Review explores the political popularity and danger of marginal rate cuts at low levels of income and how these policy changes actually disproportionately benefit the wealthy and undermine progressivity while being perniciously sold as "low income tax cuts."

 

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


State Rundown 3/15: Responses to Revenue Shortfalls Vary Widely


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State tax debates have been very active this week. Efforts to eliminate the income tax continue in West Virginia. Policymakers in many states are responding to revenue shortfalls in very different ways: some in Iowa, Mississippi, and Nebraska seek to dig the hole even deeper with tax cuts, while the Missouri House's response has been to slash funding for a property tax program that helps low-income seniors remain in their homes. Other responses include Oregon lawmakers considering sensible reforms to broaden the income tax base and Delaware's governor who wants to engage the public and "reset" the budget and tax conversation altogether. In other news, Florida and Oklahoma legislators are reconsidering tax breaks and credits given out in previous years, and several states continue to look at their gas taxes for transportation funding needs as well as reforming other consumption taxes.

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

Major Tax Overhauls Being Debated

  • In West Virginia new changes to SB 335 will be moving on to the state's full Senate Finance Committee for consideration. The bill would still eliminate the state’s income taxes, but over a longer period. Personal income taxes would be decreased to a flat rate of 2.5 percent before phasing out, inching toward elimination if certain triggers are met, between 2023 and 2032. Post personal income tax elimination, if triggers are met, the corporate net income tax would then phase out, followed by a reduction in severance taxes. The elimination/reduction of these taxes would be replaced by an 8 percent general consumption tax and soda and alcohol tax increases.
  • Meanwhile, the West Virginia House of Delegates is considering a 5.1 percent flat tax rate for the state's personal income tax coupled with a 5.5 percent sales tax rate and base broadening.
  • Georgia lawmakers are considering a slew of tax changes, including a harmful regressive proposal to flatten the state's income tax, though that bill includes positive aspects and could be improved with a simple fix.

Varied Responses to Revenue Shortfalls

  • Some Nebraska legislators continue to seek tax cuts despite a large and growing revenue shortfall and political disagreement over tax and funding priorities.
  • Even after sweeping several special funds into the General Fund, Mississippi lawmakers are still faced with a budget gap, and the state is likely to "collect less revenue than it did the previous year for only the second time in modern history," a largely self-imposed problem due in part to repeated tax cuts. Some are arguing this needs to be the wake-up call to convince the legislature to cancel the harmful tax cuts passed last year that are to be phased in over the next ten years.
  • Soon-to-be Iowa Gov. Kim Reynolds indicated recently that she is on the tax-cut train and plans to cut income taxes under the long-debunked belief that doing so will grow the state's economy. Meanwhile the revenue forecast has been reduced again, growing the state's revenue shortfall by $131 million for the current fiscal year and $191 million for the upcoming budget.
  • Rather than consider revenue solutions to Missouri's fiscal woes, the House has opted to eliminate funding for a property tax circuit breaker program that helps low-income seniors and people with disabilities stay in their homes as their property taxes rise and their incomes remain fixed. A major contributor to the revenue shortfall appears to be unintended consequences of corporate tax measures passed in 2013 and 2015.
  • Facing a $1.6 billion budget deficit, some lawmakers have suggested limiting Oregon's mortgage interest deduction, which currently costs the state $500 million a year and disproportionately benefits taxpayers in the highest income tax bracket. The bill would cap the deduction at $15,000 and eliminate it altogether for homeowners making over $200,000 (MFJ).
  • Delaware Gov. John Carney is holding "budget reset" conversations around the state, asking for input on how to best fill the state's $350 million budget gap and promoting a balanced approach that includes funding cuts for services as well as additional revenues.
  • North Dakota's revenue shortfall grew again as the official forecast was reduced due to a "double whammy" of low oil prices and farm commodity prices.

Reconsidering Tax Breaks

  • The Oklahoma Senate, struggling with the negative effects of recent tax cuts, approved legislation that would repeal the tax cut's trigger and stop the state's top 5 percent income tax rate from dropping to 4.85 percent next year.
  • The Florida House passed a bill last week with a veto-proof 87-28 vote to eliminate Enterprise Florida, an agency used primarily by Gov. Rick Scott to hand out tax subsidies to businesses.

Transportation Funding Needs

  • South Carolina's glaring need for a gas tax update to fund repairs to its ailing roads and bridges has been fairly uncontroversial so far, as one version passed the House last week and a slightly larger version has now advanced from a Senate committee, but Gov. McMaster has thrown a potential wrench in the plan by hinting he may veto the bill. Local jurisdictions that share in those costs will be watching closely, especially considering a proposed fix to the state's underfunded pension system would push costs onto cities, towns, schools, and other local jurisdictions in what one mayor is calling a local "bailout" to cover for state mistakes.
  • In other transportation funding news, West Virginia's Senate Transportation Committee has advanced a bill to increase some fees and taxes, including a 4.5-cent gas tax increase, to fund the state's roadways, and both California and Colorado have introduced bills that would respectively increase the gas and sales taxes in order to fund infrastructure.
  • Lawmakers from Connecticut, Massachusetts, Rhode Island, Vermont, and New Hampshire are all considering proposals to reduce carbon emissions, possibly moving toward a regional initiative.

Consumption Taxes and More

  • Some Connecticut legislators are looking to marijuana as a revenue raiser, using Colorado's experience as a blueprint.
  • The South Dakota Supreme Court has struck down a law requiring online retailers to collect sales taxes, an expected result that puts the question one step closer to being reconsidered in the U.S. Supreme Court.
  • Arizona's Governor Doug Ducey has signaled his support for extending a 0.6 percent sales tax hike that is set to expire in 2021. In FY 2016, the tax brought in $644 million.
  • Struggling to retain qualified teachers, two California senators have introduced a bill that would completely exempt teacher income from the personal income tax.
  • A New Jersey lawmaker has introduced a bill to give a $100 tax credit to people who donate blood at least four times per year.
  • Nevada lawmakers are now debating adding a property tax floor to some types of properties to help make up for the revenue issues their two property tax caps have caused, adding further complexity and highlighting why these arbitrary caps are not considered good policy solutions.
  • The Florida House has advanced a bill to the Senate that would restrict local jurisdictions' ability to set their own tax rates.

 Governors' State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Kasich of Ohio on April 4.

What We're Reading...  

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


State Rundown 2/23: Regressive Tax Proposals Multiplying


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This week saw a nearly successful attempt to right the fiscal ship in Kansas; regressive tax proposals introduced in West Virginia, Georgia, and Missouri; ongoing gas tax fights in Indiana, South Carolina, and Tennessee; and further tax and budget wrangling in Illinois, New Mexico, Oklahoma, and beyond.

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

  • Both Chambers of the Kansas legislature approved a tax bill that would repeal the exemption for business pass-through income, restore a third income tax bracket at a higher rate, and remove haircuts to itemized deductions for medical expenses. After the governor's veto of the bill, the House voted to override the veto but the Senate vote to override fell three votes short.
  • Senate Bill 335, proposed last week, would create a general consumption tax in West Virginia (a broader, higher sales tax), eliminate the state’s personal and corporate income taxes and sales and use tax, and reduce the state’s severance tax. The result of such a dramatic shift would result in low- and middle-income West Virginians paying more while wealthy earners benefit. Read more on how this misguided policy would impact West Virginia families.
  • All the while, for the third time this past year, West Virginia braces for another credit downgrade. This week Gov. Jim Justice announced Moody’s decision to downgrade the state’s general obligation debt. The state’s growing structural imbalance between revenue and expenditures was cited as a main concern.
  • A regressive proposal in Georgia would flatten the state's income tax to a single 5.4% rate, eliminate the deduction for state income taxes, and create a small non-refundable Earned Income Tax Credit at 10% of the federal credit.
  • A proposal has been floated in a Missouri Senate committee to amend the state constitution to slowly eliminate the state's income tax, which brings in more than 60 percent of general revenues, and place a cap on state spending.
  • A proposal to eliminate the personal income tax over several decades has died in the Michigan House, which is now fast-tracking alternative legislation to cut the personal income tax rate from 4.25% to 3.9% over four years.
  • Representatives of 16 Nebraska agriculture and education groups joined to push back against attempts by Gov. Ricketts and others to cut income taxes, arguing that property taxes and school funding issues are higher priorities.
  • The Indiana House passed a bill that would raise fuel taxes by 10 cents and increase vehicle registration fees to fund improvement to the state's infrastructure. The bill now moves to the Senate, which may require smaller increases to ensure passage.
  • Proposals to raise Tennessee's gas tax while cutting other taxes, or instead divert sales tax revenue to infrastructure needs, will be on hold for a week after a procedural maneuver.
  • South Carolina business leaders are coming together to advocate for a gas tax increase to improve funding for the state's roads and bridges, warning of job losses if the state doesn't act.
  • Louisiana lawmakers reached a budget agreement for closing the mid-year deficit of $304 million, through a combination of agreed cuts, use of rainy day funds, and shifting around other revenue. The special session ended Wednesday.
  • Delaware's revenue shortfall is now a $350 million gap.
  • Lawmakers in New Mexico are considering a bill that would eliminate exemptions to the gross receipts tax and enact a flat rate for both personal and corporate income taxes. Democratic House members are wary of the inclusion of food and drugs in the proposed base expansions. 
  • Oklahoma Gov. Mary Fallin’s tax plan, which included proposals to expand the state’s sales tax base, eliminate the state sales tax on groceries, eliminate the corporate income tax, and increase cigarette and gas taxes, has been faced with strong opposition. Raising any revenue at all has been described as the last resort for a number of Oklahoma Legislators.
  • The Utah Senate has approved a bill to require more businesses to collect sales taxes for online purchases. In the neighboring chamber, lawmakers have proposed a plan for tax reform without much time for debate or analysis.
  • Following up on a promise from his State of the State address, Alabama's Gov. Bentley has launched a task force to study potentially eliminating the state's sales tax on groceries. He has no plans to replace the revenue.

Budget Watch

  • For his proposed budget to balance, Illinois Gov. Rauner needs $4.6 billion from a "grand bargain" still being worked out in the Senate. But the governor doesn't support major components of the latest iteration of the plan, such as taxing food and drugs at the general sales tax rate. He also is calling for a permanent property tax freeze in exchange for any increase in the income tax rates.  

Governors' State of the State Addresses

  • Most governors have now given their addresses for the year. The next scheduled address is Gov. Scott of Florida on March 7, followed by Gov. Kasich of Ohio on April 4, with Gov. Carney of Delaware and Gov. Cooper of North Carolina's speech dates still to be announced.

What We're Reading...  

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


On Revenues and Referenda: Oklahoma Question 779, Guest Blog Post


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This post originally appeared on OKPolicy.org and is reposted here with permission.

The Gist

SQ 779 is a constitutional amendment that would raise the state sales and use tax by one percentage point. Of the total revenue generated by the new tax, 60 percent would go to providing a salary increase of at least $5,000 for every public school teacher. The remaining funds would be divided between public schools (9.5 percent), higher education (19.25 percent), career and technology education (3.25 percent), and early childhood education (8 percent). The State Board of Equalization would be required to certify that revenues from the new tax are not being used to supplant existing funds.

Background Information

The ballot initiative is responding to concerns among educators, parents, and others about teacher salaries and education funding.

Average compensation for Oklahoma teachers has fallen to 49th in the nation, and school districts are struggling to recruit and retain enough qualified teachers. Since 2008, Oklahoma has cut state support for the school aid formula by more than $170 million, and funding for higher education and career tech has also been cut.

This year about 1,500 teaching positions and 1,300 support worker positions have been lost to budget cuts in Oklahoma schools, yet schools still report about 1,000 unfilled teaching positions. Hundreds more positions are being filled by emergency certified teachers who do not meet the state’s legal qualifications to be a classroom teacher.

SQ 779 was placed on the 2016 ballot through a successful initiative petition effort that gathered over 300,000 signatures, more than double the required number (123,725). An effort to block the initiative as a violation of the single-subject rule of the state Constitution was rejected by the Oklahoma Supreme Court.

If approved, the new sales tax would take effect July 1, 2017 and is projected to raise $615 million in its first full year.

Supporters Say…

  • Since lawmakers have made large cuts to education funding and repeatedly failed to approve a teacher pay raise, there is no other solution to the education funding crisis than passing a ballot initiative that includes a dedicated revenue source.

  • Higher teacher salaries are needed to stop the flow of teachers to other states and other professions and to ensure a high-quality education for Oklahoma children. Low-income students are being harmed most by heavy teacher turnover and would benefit most from teachers being paid competitive salaries.

  • The ballot measure includes strong constitutional safeguards to make sure the dollars will be spent as intended.

  • In addition to the $5,000 pay raise for teachers, the measure would provide funds for such worthwhile purposes as improving reading, increasing high school graduation rates, creating a merit pay system, improving college affordability, and strengthening early childhood education.

Opponents Say…

  • While teachers deserve a raise, there are ways to fund a pay raise without raising taxes and without committing to more spending on higher education and career tech.

  • The sales tax is regressive, which means that the tax increase will affect low- and moderate-income households more than wealthier households.

  • Oklahoma already has one of the highest combined state and local sales tax rates in the nation. A one percentage point increase will give Oklahoma the nation’s highest sales tax rate and push the rate above 10 percent in some areas. Cities, which are heavily reliant on the sales tax, will be hindered in their capacity to raise the sales tax for municipal priorities.

  • Even with the measure’s language preventing money from SQ 779 supplanting other funding, there is nothing to prevent the Legislature from enacting further tax cuts that will offset this increase.

Ballot Language

This measure adds a new Article to the Oklahoma Constitution. The new Article creates a limited purpose fund to improve public education. It levies a one cent sales and use tax to provide revenue for the fund. It allocates funds for specific institutions and purposes related to the improvement of public education, such as increasing teacher salaries, addressing teacher shortages, programs to improve reading in early grades, to increase high school graduation rates, college and career readiness, and college affordability, improving higher education and career and technology education, and increasing access to voluntary early learning opportunities for low-income and at-risk children. It requires an annual audit of school districts’ use of monies from the fund. It prohibits school districts’ use of these funds for administrative salaries. It provides for an increase in teacher salaries. It requires that monies from the fund not supplant or replace other education funding. The Article takes effects on the July 1 after its passage.


Links to Other Resources

Text of Measure and Background Information: Ballotpedia

Text of Initiative Petition, Legal Challenges: Secretary of State

Supporters and Opponents

Oklahoma’s Children, Our Future: Yes on SQ 779 Website

Oklahoma State School Boards Association SQ 779 Information

Vote No on SQ 779 Facebook page

Other OK Policy Information

“Our statement on the proposed initiative to fund education with 1 cent sales tax increase”: OK Policy

“The progressive case for State Question 779”: David Blatt, Journal Record

In The Media

“City of Edmond Formally Opposes Sales Tax Increase to Pay for Education”:  KOSU

“We have a moral responsibility to our children”: Rev. Ray Owens, Tulsa World

“‘Watch-Out’ Video: The Arguments For, Against the Education Sales Tax”: Oklahoma Watch

“Opponent says education tax proposal aims to return Oklahoma to its ‘Dark Ages'”: Tulsa World


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 8/3: Looming Revenue Shortfalls and Short-Sighted Tax Reform Talk


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This week’s Rundown features a reiterated commitment to no new taxes in New Mexico, talk of a special revenue session in Oklahoma, tax shifting debates in Mississippi, and a looming shortfall in Missouri. Be sure to check out the What We’re Reading section for a guide to income inequality trends and an article examining studies on tax and spending levels. Thanks for reading the Rundown!

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

  • With New Mexico facing revenue shortfalls, some lawmakers are urging Gov. Susana Martinez to consider revenue solutions and save the state's schools, roads, and public safety services from further funding cuts. But so far, Gov. Martinez has rejected these pragmatic pleas and only reiterated her devotion to her ideologically driven no-tax pledge.
  • Oklahoma Gov. Mary Fallin is weighing whether to call the Legislature into special session to consider an alternative plan to fund teachers’ pay. Already under consideration is a 1 percentage point increase to the state’s sales tax, a proposal that will appear on the ballot this fall. Fallin's proposed alternative would use, in part, $140.8 million that the state collected from cuts to state agencies. The call for a special session, however, faces criticism across the aisle.
  • A Mississippi legislative "working group" has begun looking at the state's tax structure with an intent to shift the responsibility to fund state services even further onto low- and middle-income families by slashing income taxes and replacing them with regressive sales taxes. And some are already hoping for "an overall reduction in taxes" despite the massive, regressive, and short-sighted tax cuts already enacted earlier this year.
  • Results are in from a state study showing Missouri's state workers are some of the lowest-paid in the nation, and that these low wages "have led to high turnover rates, costing taxpayers additional money in overtime and training." And the Missouri Budget Project reports that more revenue shortfalls could be looming. But one silver lining on this cloudy outlook is that slow revenue growth has so far saved the state from a tax-cut "trigger" enacted two years ago, buying legislators time to change course and avoid reducing the revenues used to pay state workers even further.

 What We're Reading... 

  • The Florida Policy Institute's latest report calls for the state to carefully examine the "silent spending" it undertakes in the form of tax expenditures that total nearly $18 billion per year but receive very little scrutiny.
  • CBPP's guide to historical trends in income inequality.
  • The New York Times reviews recent studies on tax and spending levels, including one important study that asks "How Big Should Our Government Be?" and concludes that a significantly higher level of public investment would improve security, opportunity, and middle-class lives without sacrificing economic growth.
  • The Center for American Progress released a report this week, making the case for rainy day funds as a tool to help enact progressive policies.

 

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 6/2: Austerity Budgets By Choice


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Thanks for reading the State Rundown! Here's a sneak peek: West Virginia lawmakers reject cigarette tax increase but still negotiating. Alaska legislature passes compromise budget, punts on oil and gas credits. Louisiana legislature will enter second special session to discuss tax reform. Oklahoma lawmakers gut EITC, use budget cuts, and one-time gimmicks to close budget gap. Progressive policy advocates win expansion of working family tax credit in Minnesota.

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


 

West Virginia lawmakers resumed budget talks this week after a failure to reach a deal before Memorial Day weekend. Previous efforts to pass a budget stalled when House lawmakers rejected Gov. Earl Ray Tomblin's proposed increase of the cigarette tax. The 45-cent-per-pack increase, along with similar percentage increases on other tobacco products, would have raised $76 million in new revenue. The House instead passed a budget bill with no new tax increases but $143 million taken from the state's rainy day fund, an amount that Gov. Tomblin is unlikely to approve. The Senate will now take up the House measure in addition to a proposal to increase the sales tax. Lawmakers need to close a $270 million budget gap, the result of ill-advised tax cuts and low energy prices. If they do not pass a budget by July 1, the state government will shut down. Some political observers believe the cigarette tax hike is not yet dead, and business groups lent their support in a letter to lawmakers.

Oklahoma lawmakers finalized a budget last week, closing a $1.3 billion gap also caused by plummeting energy prices and big tax cuts enacted in better times. The legislature managed to pass a budget with limited tax increases by slashing spending on core programs and instituting a number of one-time revenue-raising gimmicks. Lawmakers made up a small portion of the budget deficit by eliminating the refundabability of the state's EITC, saving just $29 million but reducing aid to 200,000 working families. This move has rightly been described as an “empathy gap” and a move that “makes the poor poorer.” Efforts to increase the gas tax for transportation spending, the sales tax for teacher salaries, and the cigarette tax for healthcare expansion all failed. Legislative leaders acknowledged that the state's structural budget gap will remain next year. One positive outcome was the state's elimination of its nonsensical “double deduction,” a law that primarily benefits wealthy taxpayers who itemize their deductions. For more details on tax and budget policy in Oklahoma, check out Aidan's recent blog post.

The Alaska Legislature passed a compromise budget this week in an attempt to prevent layoffs for state government workers. Lawmakers broke an impasse by postponing decisions to cut tax credits for oil and gas producers and a range of revenue raising options. Instead, they agreed to restore budget cuts to senior benefits and K-12 and higher education, and to draw $3 billion (more than 40 percent of the fund) from the state's Constitutional Budget Reserve to cover FY 2017 expenditures. The $8.8 billion compromise budget is still significantly below last year's spending levels of $9.3 billion, largely due to overhauls of criminal justice and Medicaid spending. It is unclear how Gov. Bill Walker will respond to the spending plan. The legislature will remain in session to continue to address the state's structural deficit.

Legislators in Louisiana will begin a second special session next week to address tax reform and the remaining budget deficit. Gov. John Bel Edwards issued the call for an extraordinary session from June 6th to June 23rd  to close a $600 million shortfall for FY 2017 and to resolve the state's structural deficit. The governor also issued a plan for the session that includes possible changes in corporate and personal income tax rates, taxes on healthcare entities and reforming tax credits.

Progressive advocates in Minnesota won a big victory last week when legislators passed a significant expansion of the Working Family Credit, Minnesota’s version of the EITC. Under the changes, the size of the credit will grow for most eligible 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 portion of the state EITC granted to childless workers. About 386,000 Minnesota families and individuals will benefit from the credit expansion, which will reduce taxes by $49 million. The Minnesota Budget Project, which led the effort to expand the Working Family Credit, notes that the credit promotes work, helps kids succeed, and reduces racial income disparities.

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.


Oklahoma Lawmakers Fail to Rise to the Challenge


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Oklahoma’s legislative session came to a disappointing end late last week. Legislators now await Gov. Mary Fallin’s signature on a $6.8 billion budget that harms the state’s poorest residents and sets the Sooner State on an unsustainable fiscal path. Rather than delaying or canceling unaffordable cuts to the state’s income tax, lawmakers opted to rely heavily on one-time funds to fill a $1.3 billion shortfall. And despite the painful cuts being made to vital state programs, lawmakers still only managed to postpone, not solve, the state’s fiscal problems.

Over the past decade, Oklahoma lawmakers have repeatedly cut the state’s income tax – now resulting in more than $1 billion in lost revenue every year. The most recent reduction took place this January when the top tax rate was cut from 5.25 to 5 percent despite an official “revenue failure”. Attempts to roll back this tax cut were met with defeat—a fate that many other revenue raising options faced as well. Ultimately, proposals to increase taxes on cigarettes, alcohol, motor fuel, and purchases of services were all rejected.

Worse still, in a move that the Oklahoma Policy Institute rightly described as “deplorable,” the legislature changed 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. This blow to Oklahomans who struggle to make ends meet on low wages has been referred to as a result of an “empathy gap” and as move that “makes the poor poorer.” This damaging policy change comes despite the EITC’s proven effectiveness and traditional enjoyment of bipartisan support, and despite the fact that it frees up only one fifth of what could have been raised by rolling back recent cuts to the personal income tax.

But what’s bad could have been worse. Thankfully, 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. Another ray of light was repeal of the state’s “double deduction.” The bill, signed by Gov. Fallin, eliminates a nonsensical law that allowed Oklahomans to deduct their state income taxes from their state income taxes, primarily benefiting wealthy taxpayers who itemize their deductions.

Nonetheless, the overall budget – expected to be signed by Gov. Fallin this week – is a major step backward for Oklahomans. Rather than taking steps to avoid deep budget cuts, lawmakers refused to soften the blow by rolling back recent tax cuts, raising significant new revenue, or drawing on the full amount available from the Rainy Day Fund. No structural reforms were made to prepare the state for the long-term. There is no question that additional challenges still loom in Oklahoma.


Nation's Most Irrational Tax Break Falls Out of Favor


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A constant refrain among advocates for tax reform is that there are too many special breaks built into our nation’s tax system.  While some tax breaks are worthwhile, far too many are ineffective, unfair, complicated, or politically motivated.

But even the most flawed tax break typically has some kind of rationale—however flimsy—that its supporters can trot out in its defense.  Without a rationale or purpose, why would a tax break ever be enacted in the first place?

The answer is that sometimes tax breaks get enacted by accident.

Last week, the Oklahoma legislature sent Gov. Mary Fallin a bill—at her request—eliminating just such a break: a state income tax deduction for state income taxes paid.  Oddly enough, Oklahoma taxpayers who happen to claim itemized deductions can currently write off their state income tax payments when calculating how much state income tax they owe.  This bizarre, circular deduction did not come into existence because of its policy merits (there are none), but rather because Oklahoma accidentally inherited it when lawmakers chose to offer the same package of itemized deductions made available at the federal level.

The federal deduction for state income taxes paid exists primarily as a way for the federal government to aid state governments.  In effect, by letting taxpayers write off their state income tax payments, the federal government is indirectly providing states with a portion of the income tax revenue they collect.  Since a state obviously cannot provide aid to itself, however, this rationale is thrown out the window at the state level.  Accordingly, state deductions for state income taxes paid have been described as irrational, absurd, (PDF) and lacking “economic justification” (PDF).

Making matters worse, these purposeless tax breaks actually exacerbate the unfairness built into state and local tax systems.  According to an ITEP analysis, over half (58 percent) of the revenue lost through Oklahoma’s deduction flows to just the wealthiest 5 percent of taxpayers.

The good news is that this deduction seems to be on its way out.  New Mexico and Rhode Island both repealed their state income tax deductions in 2010 and Vermont followed suit in 2015.  Now, after years of urging from the Oklahoma Policy Institute, it appears that the Sooner State will join this group as well.

Once Gov. Fallin signs Oklahoma’s repeal into law, only four states will offer the deduction in full: Arizona, Georgia, Louisiana, and North Dakota.  A fifth state, Hawaii, allows the deduction only for taxpayers earning under $100,000 per year (or under $200,000 for married couples).  These nonsensical deductions may not last long, however, if tax reform advocates (PDF) in the remaining states are successful in their efforts (PDF).


Energy States Continue to Pay the Price for "Boom Time" Tax Cuts


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Alaska, North Dakota, Oklahoma, West Virginia, and Wyoming.

What do these states have in common?

These are the five states that are most reliant on the energy sector (mining, quarrying, and oil and gas extraction) for their economic output, according to data from the Bureau of Economic Analysis. All of them are also facing budget shortfalls brought on in part by the falling price of energy, and in part by short-sighted tax cuts made by lawmakers that failed to prepare for this decline.

Alaska, Oklahoma, and West Virginia are currently grappling with these issues in contentious legislative sessions. In Alaska, the magnitude of the state’s budget shortfall forced lawmakers to extend their session beyond its scheduled date of completion, while West Virginia lawmakers just returned to their state capital this week for a special session. Lawmakers in North Dakota and Wyoming are not currently in session, but are gearing up to deal with the shortfalls that await them when they return to session in 2017.

In order to close their budget gaps, these states are contemplating whether previous tax cuts should be rolled back, whether new types of tax increases should be enacted, or whether the shortfalls should be closed primarily through deep cuts in public services. On the revenue side, there is also significant variation in the types of tax changes being explored—ranging from progressive income tax reforms to sharply regressive increases in consumption and excise taxes. Each of these five states’ tax and budget debates are discussed below.

In Alaska, lawmakers are facing a budget gap exceeding $4 billion and are currently focused on deep budget cuts and scaling back oil and gas tax credits as part of their extended legislative session. However, those changes alone will not solve the state’s budget problem. Gov. Bill Walker has proposed a broader package of tax policy options, including reinstating a personal income tax for the first time in 35 years and increasing existing taxes on various items and industries. Also on the table are proposals to scale back and restructure the state’s Permanent Fund dividend—an annual cash payment received by the vast majority of Alaskans each year. ITEP analyzed the Governor’s plan in a recent report and found that an equitable solution to the state’s revenue shortfall will require lawmakers to enact a personal income tax.

While Alaska’s tax cutting history is somewhat more distant than in other energy-dependent states, it is also the most dramatic. Following the discovery of oil, Alaska became the only state to ever eliminate a broad-based personal income tax and also started paying out dividends to Alaskans each year from the state’s Permanent Fund. Because Alaska also does not levy a sales tax at the state level, it is forced to rely heavily on oil tax revenues and royalties. For decades, oil revenues filled roughly 90 percent of the state’s general fund, but lower prices and declining production have dramatically reduced the level, and reliability, of those revenues.

West Virginia lawmakers are dealing with a $270 million budget hole this week as part of a special legislative session. During the regular session Gov. Earl Ray Tomblin proposed increasing the state’s tobacco tax and applying the sales tax to telecommunications services. These proposals will be revisited this month, along with a possible increase to the state’s general sales tax rate on either a temporary or permanent basis. Budget cuts and fund sweeps will also be debated, though the West Virginia Center on Budget & Policy notes that the state also has plenty of progressive revenue options worthy of consideration. The decision by previous West Virginia lawmakers to slash business taxes is a major contributing factor to the state’s shortfall. Elimination of West Virginia’s business franchise tax took full effect last year, and over the last several years the state’s corporate income tax was reduced as well.

Lawmakers in Oklahoma, facing a $1.3 billion budget hole with only a few weeks remaining in their legislative session, are weighing changes to income, sales, and excise taxes in addition to reductions in public services. Among the most damaging proposals on the table is an effort to eliminate or pare back tax credits for low-income families such as the state’s Earned Income Tax Credit (EITC) and sales tax relief credit. Oklahoma lawmakers have repeatedly cut the state’s income tax over the past decade, with the most recent reduction triggered this January despite an official “revenue failure.” Today this series of cuts comes with an annual price tag exceeding $1 billion in lost revenue. More sensible options under consideration include rolling back the state’s recent personal income tax cuts or repealing the state’s deduction for state income taxes paid.

North Dakota lawmakers, gearing up for their biennial session in 2017, have seen the state’s revised revenue forecast fall short once again. In response to that shortfall Gov. Jack Dalrymple issued budget guidelines requiring state agency heads to hold budget requests to 90 percent of current spending, signaling that most agencies will face budget cuts of up to 10 percent. This request follows a $245 million reduction this February done in an effort to help balance a mid-biennium revenue shortfall exceeding $1 billion. This is the first time since 2002 a North Dakota Governor has taken such measures. But unlike in other energy-dependent states, Gov. Dalrymple is refusing to consider tax increases and many legislators are promising not to raise taxes. Instead they intend to slash state services and withdraw money from their Budget Stabilization Fund. This painful budget tightening follows multiple cuts to the state’s income taxes over the past decade. In 2015, the most recent cuts led to reductions in both the individual and corporate rates costing the state $108 million over the biennium.

Lawmakers in Wyoming, expecting to be short at least $300 million over the coming biennium, last week weighed whether local governments should be able to impose an optional 2-percent tax on groceries. This tax was rolled back in 2006 in the face of criticism that it disproportionately fell on the state’s poorest residents. Lawmakers also considered raising the state property tax and increasing the tax on wind and energy production. However, only draft bills on the wind tax moved out of committee. In addition to these tax proposals, Gov. Matt Mead recently announced that state agencies must cut their budgets by 8 percent for the biennium. Wyoming has not enacted the same level of tax cuts over the years as in other energy-reliant states, largely because it already relies on such a narrow tax system. Wyoming levies no individual or corporate income tax, relying primarily on taxes on minerals, sales and use, and property.

If lawmakers in any of these states are looking for inspiration to take action, Louisiana and Nevada (ranked #7 and #9, respectively, in terms of their economic reliance on energy) stand out for their willingness to at least begin addressing their shortfalls by increasing tax revenue. Louisiana lawmakers this year, after much negotiation, approved a temporary increase in the state’s sales tax rate, removed sales tax exemptions, raised taxes on cigarettes and alcohol, and extended or reinstated taxes on vehicle rentals, cellphones, and landlines. Louisiana’s Gov. John Bel Edwards plans to call a second special session to continue pursuing revenue solutions. Nevada, in 2015, approved tax measures expected to raise up to $1.1 billion through a cigarette tax increase and the continuation of formerly temporary business taxes. These revenue increases have played a vital role in helping to avoid painful cuts in the face of low energy prices and weakened tax receipts.

States’ heavy reliance on their energy sectors has certainly contributed to their recent budget shortfalls. As energy prices plummeted, tax and royalty revenues fell and lawmakers have been forced to make tough decisions to fill the gaps. But not all of the blame for these states’ bleak fiscal outlooks can be assigned to the volatility of the energy sector. Narrow tax structures and repeated tax cuts, often enacted when energy-related revenues were abundant, have also played major roles in these states’ financial debacles.

Looking ahead, the experience of these states should serve as a cautionary tale for lawmakers prioritizing tax cuts over the long-run sustainability of state budgets.


State Rundown 5/16: EITCs and Estate Taxes


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Thanks for reading the State Rundown! Here's a sneak peek: New Jersey legislative leaders support pairing a gas tax increase with a boost to the EITC. An Oklahoma coalition urges lawmakers to protect state tax credits for working families in possible budget deal. Vermont legislators end their session with a package of tax and fee increases. New CBPP report shows that state estate taxes reduce inequality and support broad prosperity.

-- Carl Davis, ITEP Research Director


 

New Jersey leaders are finally considering an update to the state's decades-old gasoline excise tax rate to pay for needed infrastructure improvements.  But while an update to the gas tax is sorely needed, an increased gas tax will disproportionately impact lower- and moderate income families who spend a significant share of their incomes refueling their vehicles.  To deal with this reality, State Senate President Steve Sweeney and Assembly Speaker Vincent Prieto have proposed boosting the state’s Earned Income Tax Credit (EITC) from 30 to 40 percent of the federal credit to offset some of the impact that higher fuel taxes would have on these families. The development comes after Prieto broke with Sweeney and Gov. Chris Christie on a plan to pair a gas tax increase with a repeal of the state's estate tax. Combining a gas tax increase with enhancements to low-income refundable credits like the EITC is a model worthy of close attention from lawmakers across the country.  This pairing could allow for economically crucial infrastructure projects to move forward without having to pay for them on the backs of working families.

A coalition of clergy and progressive organizations urged Oklahoma lawmakers last week to protect tax credits that benefit over 400,000 working families and seniors in the state. Over the past few months legislators have considered reductions and/or elimination of a variety of tax credits and exemptions in order to close the state's budget gap, including the state's EITC, Sales Tax Relief Credit, and Child Care/Child Tax Credit. Low-income families with children can receive benefits from these credits in amounts as high as $300 or more. While scaling back these credits would have a real impact on the ability of vulnerable families to make ends meet, the proposals under consideration would only reduce the state's current $1.3 billion budget gap by about $76 million. Notably, state legislators have thus far been unable to rein in tax credits and incentives for corporations.

Vermont legislators recently ended their session and passed a $49 million revenue package that relies largely on fees to raise money for home weatherization, increased Medicaid costs, and public sector employee contracts. The package includes a new fee on the registration of mutual funds in the state, which is expected to raise $20.8 million. The package contains a few tax changes as well, including 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 is meant to offset the effect record low fuel prices. Lawmakers also expanded the state's lodging tax to include Airbnb and similar companies.

A new report from the Center on Budget and Policy Priorities (CBPP) makes the case for state estate taxes, arguing that they are "a key tool for reducing inequality and building broadly shared prosperity." CBPP Senior Fellow Elizabeth McNichol notes that only the wealthiest households are subject to the tax – the top 2.56 percent of estates on average in states where the tax is levied. Currently, just 18 states and the District of Columbia tax inherited wealth. You can read the full report here.

 

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 4/21: Scraping the Bottom of the Revenue Barrel


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Thanks for reading the State Rundown. Here's a sneak peek: Illinois lawmakers push to change state's income tax structure to a graduated one, could ask voters to change state constitution. Kansas lawmakers have had it with Brownback, and refuse to cut services anymore unless tax increases are on the table. Strong majority of Oklahoma voters favor tax increases over further budget cuts to solve revenue crisis. Mississippi lawmakers pile new tax cuts on top of old ones.

-- Carl Davis, ITEP Research Director 

Facing a never-ending revenue crisis, Illinois lawmakers have finally suggested the logical solution of adopting a progressive income tax. House Speaker Mike Madigan and top Democratic representatives have offered a bill, approved by the House Revenue Committee, that would replace the state's current flat income tax with a graduated system. Under the new plan, the income tax rate for married/joint filers with income of $200,000 and lower would fall from the current 3.75 percent rate to 3.5 percent. Joint income between $200,000 and $750,000 would be taxed at 3.75 percent, while an 8.75 percent rate would apply to joint income between $750,000 and $1.5 million. Joint income over $1.5 million would be taxed at 9.75 percent. Proponents of the bill say it would raise $1.9 billion in revenue, which would help significantly with the state's $10 billion in outstanding unpaid bills. Unfortunately, Gov. Bruce Rauner has already rebuffed the measure.

The graduated income tax measure is coupled with a proposed constitutional amendment resolution that would ask voters to decide if the state should move to a graduated income tax (the current flat income tax rate is mandated by the state constitution). Previous legislative efforts to implement a graduated income tax in 2014, or to create a new millionaire's tax, fell short. Voices for Illinois Children has come out strongly in favor of the progressive income tax, saying "This will allow the tools we need to not rely on low- and middle-income families. We truly believe this is one of the best ways to move our state forward."

Kansas officials have lost patience with Gov. Sam Brownback's ruinous tax cuts, and many lawmakers who helped him pass those cuts now refuse to cut spending any further. Tax collections were short of projections in 11 out of 12 months last year, and even conservative lawmakers argue that Brownback should scale back his tax cuts to balance the budget. Following the advice of supply-side Svengali Art Laffer, Brownback promised that economic growth would make up the revenue shortfall caused by his cuts, but the rapid growth never materialized. To make up the deficit this year, the governor has cut higher education by $17 million and shortchanged educators' pensions by $93 million. Additionally, $750 million has been transferred from road projects to other areas of the budget, setting the state up for ballooning maintenance and infrastructure costs down the line. Facing an election year, many lawmakers say they will cut no further and plan to leave Brownback holding the bag.

A new poll of Oklahoma voters shows a large majority favor income tax increases over budget cuts in the face of the state's ongoing revenue crisis. The poll, commissioned by the Oklahoma Policy Institute, found that 56 percent of voters "favor increasing state revenues by raising taxes and reducing tax breaks," while just 15 percent want to cut money for education, health care and public safety. At the same time, 59 percent of voters want to maintain broad-based tax credits for working families, like the state Earned Income Tax Credit and the state Child Tax Credit. Two-thirds of voters would support increasing the top income tax rate on incomes above $150,000 and 62 percent say that the income tax cut that went into effect in January of this year should be delayed.

Mississippi lawmakers passed a $415 million tax cut deal this week despite facing a revenue shortfall caused by previous tax cuts. The package would phase out the corporate franchise tax, which brings in $260 million in revenue each year, and would cut the state's bottom income tax rate from 3 to 0 percent. The income tax cut will cost $145 million annually, and while many lower-income families will not benefit from the cut, upper-income families will receive tax cuts averaging $220 or more per year. Legislators also lowered taxes on income from self-employment by $10.2 million over three years. The cuts will begin phasing-in in 2017 but most of the revenue impact is delayed until later years, not taking full effect until 2028.

At the same time, Mississippi is dealing with a large drop in revenue following tax cuts of roughly $350 million that Gov. Phil Bryant initiated in his first term. Those cuts included $150 million in sales tax rebates to developers of retail centers, another $100 million in limits on the taxing of multi-state corporations, and an additional $100 million in cuts to the business inventory tax. One recent editorial called out legislators who "have chosen to pass legislation pandering to different constituencies while ignoring serious issues like crumbling roads and infrastructure needs."

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.


State Rundown 2/26: Tax Changes on the Horizon


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

 – Meg Wiehe, ITEP State Policy Director


 

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

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

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

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

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

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

 


Oklahoma Could Face Showdown Over Ill-Advised Income Tax Cuts


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oklahoma-senate.jpgOklahoma has become yet another regrettable example of what happens when state policy is driven by income tax cuts. Worse, Gov. Mary Fallin and Senate Finance Chairman Mike Mazzei are on a collision course over the fate of a recent income tax cut, raising the specter of a prolonged budget deadlock.

Oklahoma is in the midst of a serious revenue crisis, and it has been since the onset of the Great Recession in 2009.  Just last week, lawmakers learned that the state's projected $900 million revenue shortfall for fiscal year 2017 has ballooned to at least $1.3 billion due to declining oil prices and ill-advised tax cuts. The budget problem is at such crisis levels that the state can’t simply cut even more services to bring the budget into balance. It must raise revenue.

It’s important to note that Oklahoma lawmakers have slashed income taxes repeatedly since 2004. Today, the income tax brings in $1 billion less annually -- more than enough to cover the projected revenue shortfall. The protracted crisis caused by ill-advised tax cuts has meant pain for the state's children and families. According to a report by the Oklahoma Policy Institute, "acute teacher shortages, college tuition and fee hikes, critically understaffed correctional facilities, longer waiting lists for services, and lower reimbursement rates for medical and social service providers are among the harmful consequences of chronic budget shortfalls." Lawmakers have already declared a revenue failure and cut allocations to state agencies by 3 percent across the board. Since 2009, some state agencies have seen their support from the state cut by as much as a third. Without action, state agencies could see a further 13.5 percent cut, with education among the hardest hit priorities.

Gov. Mary Fallin has at least recognized that the state's woes need a revenue solution rather than a "cuts only" approach. Sadly, her proposed tax plan would balance the state's budget problems on the backs of Oklahomans who can least afford it, rather than ask well-off citizens to pay their fair share.

In fact, leaders in the state allowed a $147 million income tax cut to go into effect last month despite the precarious budget situation. Gov. Fallin declared that reversing these tax cuts is off the table. She says “Giving the middle class and the poor a tax break is a smart thing to do, letting them keep more of their hard-earned money” – despite the fact that the top-rate tax cut would save middle income earners just $35 a year.

Instead, Fallin has borrowed a page from Kansas Gov. Sam Brownback’s playbook -- suggesting a solution of budget cuts and regressive tax increases.  The governor would expand the sales tax and increasing the excise tax on cigarettes by $1.50 per pack, two measures that would fall more heavily on low-income Oklahomans. Expanding the sales tax to include services and items delivered electronically, like music downloads, would raise $200 million. The cigarette tax increase would raise $181.6 million. Other than a proposal to eliminate a truly nonsensical income tax deduction, her plan mostly ignores income tax options.  Gov. Fallin would still have to cut appropriations to most agencies by 6 percent. Someone should tell her how this policy is working in Kansas City.

The governor has gotten pushback from her own party for defending income tax cuts during a budget crisis. Sen. Mike Mazzei, who chairs the Senate Finance Committee and is serving his last legislative term due to term limits, appealed to the public for help in stopping the cuts. Last week, the senator told businesspeople in Tulsa that the revenue levels required to trigger the most recent cuts were never met, and that the state simply can’t afford them. “If you really want us to have financial reform...we need you to email your Oklahoma state senator.... We need you to email your Oklahoma state representative and give them the support they need to reform our state financial system,” he implored.

Yet a Senate Finance Committee bill championed by Mazzei would also "suspend the state earned income tax credit, low-income sales-tax relief and the state child-care tax credit," among others. Suspending these three measures next fiscal year will raise less revenue than suspending the top income tax rate cut over the same period. Coupled with the increases proposed by the governor, these changes would make Oklahoma's tax system even less fair.

An ITEP analysis of the impact of the proposed EITC, sales tax credit, and child-care related changes found that the lowest income taxpayers in the state would see their taxes go up by close to 1 percent of their incomes paying an average tax hike of more than $100 while upper-income taxpayers would not pay a penny more. 

Oklahoma, like Kansas and other states before it, is a lamentable example of what happens when lawmakers promise constituents that they can slash taxes with abandon without any fallout. After years of doubling down on tax-cutting policies, the state now has to figure out how to raise revenue to stave off deep cuts to necessary services. Unfortunately, like many other states, Oklahoma lawmakers are  asking working families to bear the bulk of the cost of crucial services by primarily looking at regressive taxes that take a greater share of income from low- and middle-income families.

There is a better way. Oklahoma lawmakers should secure the prosperity of all of their residents by reversing some of the revenue-losing income tax cuts enacted in recent years. This would allow the state to fund education, public health and other critical priorities, ultimately leading to economic growth and improvements in workforce quality that truly attract businesses. The regressive solutions proposed by Gov. Fallin and lawmakers are more than a scandal – they're an outrage. 

 


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 OK, KS, and IN: Tax Cut Groundhog Day


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Thanks for reading this Groundhog day edition of the State Rundown. Today we are taking a close look at developments in OklahomaKansas, and Indiana.  There's a link below to an especially good editorial in The Witchita Eagle outlining  critiques of Kansas Governor Brownback's regressive tax policies. You'll also find a helpful listing of State of the State addresses happening this week. 

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

 


Oklahoma legislators fear the state could be headed for a second revenue failure before the end of the fiscal year if oil prices continue to drop, forcing spending cuts across the board for all state agencies. The state's previous revenue failure required a cut of 3 percent and the state's school superintendent says another cut might mean schools running out of money and shutting their doors. To help deal with the state's bleak fiscal situation, Gov. Mary Fallin has proposed raising significant new revenues by expanding the state's sales tax base, increasing the cigarette tax by $1.50 per pack, and eliminating the state's bizarre state income tax deduction for state income taxes paid. While describing Fallin's proposal as a "good starting point," the Oklahoma Policy Institute also observes that Oklahoma's current revenue crisis was partly brought on by the legislature's decision to allow a regressive and unaffordable income tax cut to take effect this January. Unless lawmakers reverse that decision, state revenues will decline by $147 million during the upcoming fiscal year.

An editorial in The Wichita Eagle calls out Kansas Gov. Sam Brownback and legislators for their continued reliance on regressive food taxes to shore up the budget. In 2012, when Brownback pushed through his tax cut experiment, the state sales tax on food was scheduled to drop to 5.7 percent; today, the sales tax on food is 6.5 percent. When local taxes are included, the combined rate can be as high as 10 percent -- the nation's highest. A recent study (PDF) found that "A household in the lowest income group pays anywhere from 2.7 percent to 8.4 percent more of their income in taxes on groceries than does a household in the highest income level.” Representative Mark Hutton has proposed cutting the state sales tax rate on groceries to just 2.6 percent and would make up the revenue by eliminating the state's costly and ill-targeted personal income tax exemption for all non-wage business income.

Indiana lawmakers seem to have taken a page out of South Carolina (and Michigan's) playbook in considering a transportation package pairing gas tax increases with income tax cuts. House Bill 1001 would increase the state's gasoline excise tax by 4 cents to 22 cents per gallon, the first increase in over thirteen years. The tax on diesel fuel would increase by 7 cents per gallon. House Republicans inserted a phased-in 5 percent income tax cut into the transportation package to entice Gov. Mike Pence and other lawmakers who might be on the fence to support the gas and diesel tax increases. The package also raises more than $200 million through a $1 per pack cigarette tax hike.  An ITEP analysis of the proposal found that the average taxpayer among the bottom 80 percent of earners would see a tax hike under this plan while the wealthiest 20 percent of taxpayers would benefit from a tax cut on average.

 


State of the State Addresses This Week:

Alabama Gov. Robert Bentley -- Tuesday, Feb. 2

Connecticut Gov. Dannel Malloy -- Wednesday, Feb. 3

Maryland Gov. Larry Hogan -- Wednesday, Feb. 3

New Hampshire Gov. Maggie Hassan -- Thursday, Feb. 4

Oklahoma Gov. Mary Fallin -- Monday, Feb. 1 (link here)

Rhode Island Gov. Gina Raimondo -- Tuesday, Feb. 2

Tennessee Gov. Bill Haslam -- Monday, Feb. 1 (link here)


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

 


State Rundown 11/20: Incentives, Deficits and Unexpected Windfalls


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Oklahoma officials want an independent review of business incentives that cost the state more than $355 million each year. A new law that took effect at the beginning of this month established an Incentive Evaluation Commission charged with looking at tax credits, deductions, expenditures, rebates, grants and loans intended to promote business relocation and expansion. Under the law, each business incentive will be reviewed every four years. Currently, just two incentives – the Investment/New Jobs Tax Credit and the Quality Jobs Program – account for over $180 million in lost revenue for the state, and have failed to meet rosy job creation projections. State Auditor Inspector Gary Jones is cautiously optimistic about the independent review process, saying, “Some of these things ought to be eliminated….The problem is, you’re leaving so much to people whose jobs depend on campaign contributions.”

Gov. Bobby Jindal, who recently abandoned his bid for the presidency, returns to a state in budget turmoil. Louisiana’s budget officials predict the state faces a deficit of $370 million after downgrading their projections for 2015-2016 fiscal year revenue. The shortfall is due to freefalling oil and gas prices as well as anemic business tax collections. The state must also contend with a $117 million deficit from last fiscal year that has yet to be addressed. This mid-year deficit is the eighth time in Jindal’s eight years in office that revenue has come in under projections. There will likely be cuts to critical services. Both of the candidates vying to replace Jindal have said they will call a special session in 2016 to deal with the budget and revenue crisis.

Improved budget numbers in South Carolina have caused some officials to question whether the state needs to raise its gasoline excise tax – last increased over 26 years ago. Forecasters say the state will see an additional $1.2 billion next year in unallocated money and new tax revenues. State Sen. Tom Davis says that rather than increase the gas tax, road repairs should be funded with this unexpected revenue.  Of course, funding long-term infrastructure projects with what appears to be a one-time windfall will create sustainability problems down the road.  In the last session, Haley attempted to use the push for a gas tax increase as an opportunity to enact a significant income tax cut for high-income households. A similar “tax shift” will likely be on the table once again during the upcoming session.


State Rundown 10/16: More Cuts, Less Funding


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The Clarion-Ledger reports that transportation funding could be a “sleeper issue” in Mississippi’s upcoming election. The state has not raised its gas tax, right now at 18.4 cents per gallon, since 1987 and road conditions reflect the lack of investment. Last fall, state highway officials were forced to tell farmers and other businesspeople that crucial bridges connecting fields and ports were off limits to heavy trucks. Many decided to flout the state’s rules and send heavy trucks across the deteriorating bridges, which have collapsed on occasion. The Department of Transportation estimates that $400 million a year in additional revenue will be needed just to maintain current road conditions.  

Low oil prices pose a challenge for state budgets in Texas and Oklahoma. Texas Comptroller Glenn Hegar lowered revenue projections by $2.6 billion from his January estimate, citing lower economic growth than anticipated and undercutting the fabled “Texas Miracle” narrative of low taxes leading to gangbusters economic expansion. Meanwhile, Oklahoma Finance Secretary Preston Doerflinger reported that general fund apportionments were below projections last month due to falling oil prices and accompanying job loss. Notably, while personal and corporate income tax revenues exceeded projections, sales and gross receipt tax revenues were far below projections. Many conservative lawmakers advocate a move from income to consumption taxes, but Oklahoma’s example indicates that such a move could be bad for budget stability.

Florida Gov. Rick Scott wants more tax cuts and additional funds for corporate tax incentives, but so far the legislature is not biting. Scott pledged during his reelection campaign last year to cut taxes by $1 billion. He is almost halfway there after lawmakers passed a $427 billion package of tax cuts during the most recent legislative session, but even conservatives have yet to endorse a further round of cuts and more corporate giveaways. Senate President Andy Gardiner says $250 more in cuts could be possible, but balked at more money for corporate incentives. Meanwhile, Senate Democratic Leader Arthenia Joyner decried new tax cuts and more “corporate welfare” as “grand abdications of the public trust.”

Florida House lawmakers are considering a different tax plan that would not cut taxes but swap revenue sources. The House Tax and Finance Committee is exploring options that would allow it to reduce property taxes by increasing sales taxes. One proposal would exempt the first $1 million of a property’s appraised value from property tax liability and cover 98 percent of property in the state. In return, the sales tax rate would have to increase by 4.93 percentage points. Some lawmakers were outraged at the proposals, as poor Floridians already pay eight times as much of their income in sales taxes as the wealthy. An editorial in The Gainesville Sun notes that “Florida already has one of the most unfair tax systems in the country, and the sales-tax plan would only make it worse. Making Florida even more reliant on the sales tax would also force greater cuts of schools, safety-net programs and other government expenses whenever the state experienced a recession.”


State Rundown 5/22: Last-Minute Fireworks


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A Louisiana Senate committee passed a package of eleven bills that would raise an additional $615 in revenue next fiscal year. If passed, the package will raise the state cigarette tax by 32 cents per pack, scale back business subsidies, and decrease 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 would go toward preventing deep cuts to higher education and healthcare programs. The bills have garnered opposition from many business groups, and are likely to have a tough time gaining the governor’s signature. Gov. Bobby Jindal has pledged to veto any measure considered a net tax increase by Grover Norquist, who is the head of Americans for Tax Reform and not a resident of Louisiana.

Minnesota’s lawmakers are headed for a special session after Gov. Mark Dayton pledged to veto a $400 million education spending bill that does not include additional funds for universal pre-kindergarten. The veto comes after an offer by Dayton to drop his insistence on universal pre-kindergarten in exchange for $125 million in additional educational funding was rebuffed by conservative lawmakers. The veto and call for a special session cap five months of negotiations and failed compromises over the budget. In the press conference announcing his planned veto, Gov. Dayton railed against lawmakers for considering billions of dollars in tax cuts but balking at funding education, saying "It's astonishing that with a $1.9 billion projected surplus and more than $1 billion on the bottom line for future tax cuts, there would not be more invested in our schools this year."

Oklahoma lawmakers passed an unbalanced budget deal that would cut the higher education budget deeply but allow disastrous tax cuts to take effect. Facing a $611 million budget deficit, the legislature decided to address most of the shortfall through the use of $589 million in agency and reserve funds. The rest of the shortfall was made up in cuts to higher education ($24.1 million). Some agencies will see budget cuts of up to 7.25 percent, while a proposal to increase teacher pay and add days to the school year will likely be scrapped. Meanwhile, a cut in the top personal income tax rate from 5.25 to 5 percent will continue as planned, despite the revenue shortfall and its cost of $200 million over two years. The cut will overwhelmingly benefit the wealthy, with ITEP data revealing that the top 1 percent of Oklahoma taxpayers will receive an average cut of $2,127 while those in the middle will get an average cut of just $31. The Oklahoma Policy Institute called for the rejection of the budget deal  as it “barely maintains some vital services only by using up hundreds of millions in one-time revenues that will immediately dig another large budget hole for next year. Oklahoma will not be able to kick this can down the road much longer. Legislators should reject this budget and demand a balanced plan that includes sustainable revenue options.”

 


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


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

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

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

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


State Rundown 3/16: Win Some, Lose Some


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

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

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

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

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

 

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

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

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

 

States Ending Session This Week:
New Mexico (Saturday)

 


State Rundown 2/13: Snow Way Forward


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Massachusetts Gov. Charlie Baker is facing a blizzard of criticism in the wake of a series of massive snowstorms that have revealed the inadequacy of public transit in Boston. The MBTA – which runs the city’s fleet of subways, busses, commuter trains and ferries and currently faces $9 billion in debt and a $3 billion backlog in maintenance – was forced to suspend service on Tuesday after riders were stranded on a train for two hours. Yesterday, the MBTA’s embattled general manager resigned, but not before revealing in a press conference that the governor hadn’t spoken to her directly about her agency’s woes. Baker, who ran on an anti-tax platform, recently proposed cutting the state’s transportation budget by $40 million (including $14 million from the MBTA), but insisted that it wouldn’t impact service. Given the depth of the problems exposed over the past week and the ire of disgruntled passengers, Baker may have a hard time selling his proposed cuts.

Mississippi Lt. Gov. Tate Reeves introduced the Taxpayer Pay Raise Act, which is mostly a package of tax cuts aimed at business and corporations. His measure would eliminate the 3-percent income tax on the first $5,000 of taxable income, which would benefit working families. However, the proposal would also cut taxes for business owners and eliminate the state’s franchise tax on property and capital owned by corporations. Reeves’s plan would cost Mississippi $400 million in revenue every year, and over half of that money would go back to corporations – the franchise tax brings in $242 million in revenue and accounts for 45 percent of corporate tax revenue in the state. As the Mississippi Economic Policy Center points out, corporate tax cuts are unlikely to make Mississippi more competitive since the state has failed to adequately invest in the quality of its workforce.

The latest revenue forecast out of North Carolina shows that the state will collect $271 million less than estimated due to lower-than-expected income tax receipts. This measure is higher than the $199 million shortfall projected in December. State officials have blamed weak growth in wages for the gap, but the North Carolina Budget and Tax Center, using ITEP data, points to the 2013 tax plan as the real culprit. The income tax cuts included in the plan will cost the state almost $1 billion this fiscal year, almost twice what the plan was originally estimated to cost.

The Arizona House considered a bill this week that would force the state to cut income taxes if Congress passes the Marketplace Fairness Act, which would allow states to collect sales tax on online purchases. The bill failed by a close margin on Tuesday, but received a reconsideration vote after one was requested by sponsor Rep. J.D. Mesnard. The Arizona Children’s Action Alliance came out against the bill, arguing that it would tie the hands of future legislators and eliminate a possible revenue source. Citing ITEP data, they note that two-thirds of the income tax cuts would go to those with incomes above $94,000. With the combined impact of lower income taxes and higher sales taxes, 80 percent of Arizona taxpayers would see a net increase in their tax bill.

Following Up:
Oklahoma: A tax exemption for manufacturers and wind farms came under fire as being too generous before a House committee this week. 

 


State Rundown 2/10: Semi-Encouraging News


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Rumors abound in Springfield that a gas tax increase could be in the works. Though Illinois Gov. Bruce Rauner has downplayed reports that he supports such a measure, in his state of the state address last week he said the state needs to “restructure” its motor fuel tax to pay for infrastructure investments. Leaked documents from Rauner’s business allies detail possible fixes, including a 13-cent increase in the gas excise tax and increasing the cost of registering, titling, and driver’s licenses.

Arkansas Gov. Asa Hutchinson signed his proposed middle-class tax cut into law on Friday after the measure passed both chambers of the legislature by wide margins. The bill passed with a proposed capital gains tax measure intact. The exemption for capital gains will fall to 40 percent from 50 percent – less than the 30 percent proposed in the Senate version of the bill, but still a significant improvement in making the state’s tax system fairer. The tax cuts exclude the 40 percent of Arkansans earning less than $21,000 per year. If no additional changes are made, the disparity between the tax rate paid by low-income workers and other Arkansans will worsen; Arkansas ranks 11th in the Who Pays Inequality Index.

Oklahoma lawmakers have turned their sights on a glut of tax credits and incentives that cost the state more than $1 billion annually. Facing a $300 million shortfall, some legislators argue that many of the incentives, though well-intentioned, do not perform well or live up to their promises. Leaders in the House and Senate have proposed a four-year review process for tax credits and incentives. Meanwhile, policymakers have taken the Kansas lesson to heart and pushed proposals to slash the state’s income tax to the backburner.

 

Governor’s Budgets Released This Week:
Kentucky Gov. Steve Beshear (Tuesday)
Texas Gov. Greg Abbott (Wednesday)

 


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! 


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


Déjà vu: Oklahoma Enacts Tax Cut Voters Don't Want


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Oklahoma voters have had a rough year.  In the span of less than twelve months, their elected officials passed an income tax rate cut that a majority of Oklahomans opposed, saw that cut thrown out by the state’s supreme court for technical reasons, and then watched their elected officials re-pass the cut even though opposition had increased among Oklahoma voters.

The cut gradually lowers the state’s top personal income tax rate from 5.25 to 4.85 percent, and is likely to take full effect in 2018.  Our colleagues at the Institute on Taxation and Economic Policy (ITEP) analyzed the cut, and found that the top fifth of Oklahoma households will receive a whopping 71 percent of the total benefits.  The bottom 60 percent of Oklahomans, by contrast, will see just 9 percent of the benefits.

After being told about the plan’s lopsided distribution, 61 percent of Oklahoma voters polled said they opposed the cut this year—slightly more than the 60 percent share who opposed it the year before.  And even among Oklahomans who were not told any details about the cut, less than half of all voters polled said they currently support it.

The Tulsa World reacted to the re-passing of this regressive and unpopular tax cut by calling it “a bad choice for a state that is desperately short on money for essential services, including schools, roads and public safety,” and by explaining that those public services are more important to the state’s economy than income tax cuts.

That same editorial also shined a bright light on the absurdity of lawmakers opting to yet again prioritize income tax cuts: “we saw no public groundswell to cut taxes this year. On the contrary, a few weeks ago the largest public political demonstration in state Capitol history brought an estimated 25,000 supporters of public schools to Oklahoma City.”


State News Quick Hits: Tax Breaks for Expensive Artwork and Apple Inc.


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Have you recently purchased a multimillion dollar piece of artwork (say, a $142 million Francis Bacon)? If the answer is yes, we have a great tax loophole for you. Rather than immediately bringing the piece of art home with you -- in which case you would be expected to pay use or sales tax on the purchase -- first loan it for a few months to a museum in a state that doesn’t have a use or sales tax. Museums in these states aren’t complaining about this “first use” exemption, which is found in many state tax codes, but taxpayers across the country should be. The buyer of the aforementioned Bacon painting will likely save $11 million in Nevada use tax by loaning it for 15 weeks to a museum in Oregon.

The most recent development in the income tax fight in Illinois comes from Chicago Mayor Rahm Emanuel, who ruled out a city income tax last week. Emanuel faces serious pension gaps in his municipal budget, which is why he is pushing for a $250 million increase in property taxes. But some, including Chicago Tribune columnist Eric Zorn and Center for Tax and Budget Accountability Executive Director Ralph Martire, think the mayor’s position is misguided and that a city income tax is worth considering. Regular Quick Hit readers will find Zorn’s and Martire’s arguments familiar: unlike property taxes, income taxes can be easily targeted at those most able to pay. ITEP’s own Matt Gardner was quoted in Zorn’s column, rebuffing arguments on the other side that a city income tax will drive people out of the city and kill jobs.

Arizona Governor Jan Brewer signed a pair of business tax cuts into law last week. In addition to a sales tax exemption for electricity used by manufacturers, she also signed a $5 million tax break that many expect will only benefit Apple, Inc. Regular readers may recall that Apple currently has billions of dollars stashed in foreign tax havens.

Oklahoma lawmakers have gone over a quarter century without approving an increase in their state’s gasoline tax, and have instead opted to fund transportation by redirecting money away from other areas of the budget. But that redirection of funds may have gone too far, as the Oklahoma Policy Institute explains that “Oklahoma’s transportation spending has grown considerably at a time when almost every other area of public services has seen cuts or flat funding.” Now lawmakers, at the urging of 25,000 Oklahomans who recently rallied at the state capitol, are considering legislation that would boost funding for schools by scaling back the amount of general fund money being spent on transportation.


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.”


Film Tax Credit Arms Race Continues


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

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

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

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

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

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

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

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

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

Picture from Flickr Creative Commons


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


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

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

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

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


A New Wave of Tax Cut Proposals in the States


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Oklahoma Shows How Not to Budget


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A fascinating analysis published by the Tulsa World reveals how a growing share of Oklahoma’s budget has been put on auto-pilot, and how other areas of the budget have suffered as a result.  Despite actually seeing an increase in tax revenues this past year, Oklahoma’s elected officials now have $170 million less to appropriate, and state agencies are bracing for potential cutbacks as a result.

The biggest offender here is one we’ve explained before: the growing trend of funneling general tax revenues toward transportation in order to delay having to enact a long-overdue gas tax increase.

A spokesman for Governor Fallin recently paid lip service to the problem, explaining that “the governor … believes … the more money we skim off the top of general revenue, the less flexibility the state has to respond to situational needs and concerns. We certainly don't want taxpayers to lose influence into how their money is used by their government.”  But when it comes time to talk specifics, Fallin stands firmly behind her decision to direct a growing share of the state’s limited revenues toward roads and bridges.

The Tulsa World details how the portion of formerly “general fund” spending now swallowed up by transportation has grown almost fivefold since 2007, and how more increases are planned in the years ahead.  It’s hard to see how that trend will ever be reversed unless Oklahoma lawmakers finally address the fact that their traditional source of transportation revenue—the gasoline tax—hasn’t been raised in nearly 27 years.


State News Quick Hits in Wisconsin, Illinois, Kentucky and Oklahoma


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The LaCrosse Tribune gets it right in this editorial titled, “Don’t Conduct Tax Talks in Private.” As we told you last week , Wisconsin  Governor Scott Walker asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Unfortunately, the first invitation-only discussion happened behind closed doors. We couldn’t agree more with the Tribune that, “true tax reform deserves feedback and input from all Wisconsin citizens because while we may not all contribute to political candidates or align ourselves with political parties, we all pay taxes.” Now we hear that the Governor is interested in  income tax repeal. Let’s hope this debate doesn’t happen behind closed doors.

 

Illinois Governor Pat Quinn has come out in favor of reviewing tax breaks given to businesses over the last several years in order to see if they really had a positive impact on the state’s economy.  We’ve been critical of the Governor for offering such tax incentives to specific companies.  Reviewing those giveaways for effectiveness is long overdue.

 

In more good news for those of us concerned with the “race to the bottom” in which states are doling out massive tax incentives to businesses with little oversight, Archer Daniels Midland is set to announce that they will move their headquarters to Chicago without receiving any state or city incentives in return.


Kentucky Governor Steve Beshear is (again) committing himself to tax reform. He recently said in 

an interview, “Tax reform remains a top priority of mine, and I am hopeful that we can address it in some way in the upcoming session.”

The Oklahoma Supreme Court recently struck down a regressive and unpopular cut to the state’s top income tax rate that Governor Mary Fallin signed into law earlier this year.  According to the court, the bill containing the tax cut violated a provision in the Oklahoma constitution requiring each bill to be focused on a “single subject.”  In addition to cutting the state’s income tax, the bill would have also provided funding to repair the state’s Capitol building. 


Oklahoma Poised to Implement Tax Cut Voters Don't Want


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The Oklahoma legislature recently approved a cut to the state’s top personal income tax rate, at the urging of Governor Mary Fallin. When the plan is fully implemented in 2016, the state’s top tax rate will fall from 5.25 to 4.85 percent, at a cost to the state of $237 million per year.  While a slim majority (52 percent) of Oklahomans support the idea of an income tax cut in the abstract, that support evaporates (falling to 31 percent) once the plan is explained in more detail.

That detail is as follows. According to an analysis by our partner organization, the Institute on Taxation and Economic Policy (ITEP), roughly 4 in 10 Oklahomans—generally lower- and middle-income families—will receive no tax cut at all under the plan, while the average tax cut for a middle-income family will be just $30.  The wealthiest 5 percent of taxpayers, by contrast, will receive 40 percent of the benefits, with the state’s top 1 percent of earners alone taking home a tax cut averaging over $2,000 per year.

When these basic facts about the tax plan now on Governor Fallin’s desk were explained to a random sample of registered Oklahoma voters, 60 percent of them said they opposed it, with a full 47 percent describing themselves as “strongly opposed.”

Voters’ reaction was similar upon being informed that the plan will require reducing state services like education, public safety, and health care. This vital piece of information resulted in support for the tax cut dropping to just 34 percent, and opposition rising to 56 percent (with 44 percent “strongly opposed.”)

These polling results are backed up by interviews with Oklahoma citizens conducted by the state’s largest newspaper, The Oklahoman. One Oklahoma resident explains, for example, that “If [the tax cut] harmed education I don't want it. I have a niece that is a schoolteacher and I'd rather have more teachers than the little bit of money.” Another says that “It sounds like the rich are just getting richer.”

Meanwhile, the Oklahoma Policy Institute (OPI) explains that the plan isn’t just unpopular—it’s fundamentally irresponsible: “We have seen no evidence that Oklahoma will be able to afford a tax cut in [2015, when the first stage of the cut takes effect]. Indeed, we are already seeing signs of faltering revenue collections, with revenue falling below last year.” Concern about the sustainability of Oklahoma’s revenues is compounded by the possibility that “the state could be on the hook for as much as $480 million” in additional expenses if a court ruling against its tax break for capital gains is upheld. The Associated Press reports that when the impact of this court ruling is “combined with an estimated $237 million price tag for a tax cut approved by the Legislature this year and expected to be signed into law by Gov. Mary Fallin… the cost to the state could amount to 10 percent of the total state appropriated budget.”

Given these challenges, it’s hard to argue with OPI’s policy prescription: “Now that cuts are scheduled, the only responsible path forward is to pursue real tax reform that goes beyond the top income tax rate. To fund education and ensure a prosperous future for Oklahoma, we need real action to reign in unnecessary tax credits and exemptions that cost us hundreds of millions of dollars every year.”


Oklahoma Governor & Leadership Reach Regressive Tax Deal


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Oklahoma Governor Mary Fallin and legislative leaders recently announced their intention to repeal the state’s top personal income tax bracket, bringing the top rate down from 5.25 to 5.0 percent in 2015. The rate could be dropped even more by 2016 if a revenue growth target is hit. The Institute on Taxation and Economic Policy (ITEP), analyzed the initial cut down to 5.0 percent when it was proposed earlier this year, and found that its benefits would be heavily tilted in favor of the state’s wealthiest taxpayers. This is despite the fact that Oklahoma’s high-income taxpayers already pay far less (PDF) of their income in state and local taxes than any other group.

ITEP found that almost two-thirds of the tax cuts distributed under this plan would flow to the wealthiest 20 percent of Oklahomans, while the vast majority of the state’s poorest residents would receive no tax cut at all.  Moreover, while a family in the middle of the income distribution could expect about $39 in tax cuts per year, Oklahoma’s most affluent taxpayers would receive tax cuts averaging $1,870 every year.

A new statement from the Oklahoma Policy Institute provides some important context for understanding the budgetary impact of this proposal (excerpt below).

Since 2008, Oklahoma public schools have endured the third largest budget cuts in the nation. Out of control tax breaks contributed to a collapse in revenue from oil and gas drilling. We still don’t know what will be the full cost of State Question 766 or what impact federal budget cuts will have on Oklahoma’s core services.

In this situation, it’s not the time for more tax cuts that would do little to help average Oklahomans, take $237 million from schools and other core services, and make Oklahoma more vulnerable to an energy bust or economic downturn. … Yet the proposal announced today would commit us to tax cuts two years from now, when we have no way of knowing what Oklahoma’s needs or economic situation will look like.

 

 

 

Oklahoma Governor Mary Fallin’s proposal to repeal the state’s top personal income tax bracket is “gaining traction,” according to The Oklahoman.  The plan has already passed the House, and has the support of the state Chamber of Commerce. But the Oklahoma Policy Institute explains that this cut is stacked in favor of high-income residents: “the bottom 60 percent of Oklahomans would receive just 9 percent of the benefit from this tax cut, while the top 5 percent would receive 42 percent of the benefit.”  

Texas and Washington State are continuing to search for ways to make it easier to identify and repeal tax breaks that aren’t worth their cost.  The Texas Austin American-Statesman reports on a bill that “would put the tax code under the microscope, examining tax breaks in a six-year cycle similar to the Sunset process that evaluates whether state agencies are performing as intended.”  And the Washington Budget and Policy Center explains in a blog post how “all three branches of state government have taken, or are poised to take, actions that could greatly enhance transparency over the hundreds of special tax breaks on the books in Washington state.”

This Toledo Blade editorial gets it right about Ohio Governor Kasich’s plan to broaden the sales tax base to include more services: “There is merit, in theory, to expanding the sales tax to include more services. But the experience in states such as Florida — which broadened its tax base, then abandoned the effort as unworkable — suggests it should be done slowly and for the right reasons.” Broadening the sales tax base is good policy, but the Kasich plan is bad for Ohioans because overall the plan (according to an Institute on Taxation and Economic Policy analysis) increases taxes on those who can least afford it while cutting taxes for the wealthy.

ITEP is waiting for full details of Louisiana Governor BobbyJindal’s tax swap plan, but already clergy and ministers in the state are weighing in against the Governor’s plan to eliminate state income taxes and replace the revenue with a broader sales tax base and a higher rate. In this commentary, the Right Rev. Jacob W. Owensby, (bishop of the Episcopal Diocese of Western Louisiana), worries: “It is difficult to see how increased sales taxes will pass the test of fairness that we would all insist upon. Our tax system has lots of room for improvement. But relying on increased sales tax will not give us the fair system we need. Raising sales taxes will increase the burden on those who can least afford it.”


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


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

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

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

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

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

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

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


Ballot Measures in Eleven States Put Taxes in Voters' Hands


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California is not the only state this election season taking taxing decisions directly to the people on November 6.  The stakes will be high for state tax policy on Election Day in nine other states with tax-related issues on the ballot. With a couple of exceptions, these ballot measures would make state taxes less fair or less adequate (or both).

Arizona

  • Proposition 204 would make permanent the one percentage point sales tax increase originally approved by voters in 2010.  The increase would provide much-needed revenue for education, particularly in light of the worsened budget outlook created by a flurry of recent tax cuts.  But it’s hard not to be disappointed that the only revenue-raising option on the table is the regressive sales tax (PDF), at a time when the state’s wealthiest investors and businesses are being showered with tax cuts.
  • Proposition 117 would stop a home’s taxable assessed value from rising by more than five percent in any given year.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains (PDF), “Assessed value caps are most valuable for taxpayers whose homes are appreciating most rapidly, but will provide no tax relief at all for homeowners whose home values are stagnant or declining. As a result, assessed value caps can shift the distribution of property taxes away from rapidly appreciating properties and towards properties experiencing slow or negative growth in value - many of which are likely owned by low-income families.”

Arkansas

  • Issue #1 is a constitutional amendment that would allow for a temporary increase in the state’s sales tax to pay for large-scale transportation needs like highways, bridges, and county roads. If approved, the state’s sales tax rate would increase from 6 to 6.5 percent for approximately ten years, or as long as it takes to repay the $1.3 billion in bonds issued for the relevant transportation projects. Issue #1 would also permanently dedicate one cent of the state’s 21.5 percent gas tax (or about $20 million annually) to the State Aid Street Fund for city street construction and improvements. It’s no wonder the state is looking to increase funding for transportation projects. ITEP reports that Arkansas hasn’t increased its gas tax is ten years, and that the tax has lost 24 percent of its value during that time due to normal increases in construction costs. Governor Beebe is supporting the proposal, and his Lieutenant Governor Mark Darr recently said, “No one hates taxes more than me; however, one of the primary functions of government is to build roads and infrastructure and this act does just that. My two primary reasons for supporting Ballot Issue #1 are the 40,000 non-government jobs that will be created and/or protected and the relief of heavy traffic congestion.”

California

  • Thus far overshadowed by the competing Prop 30 and 38 revenue raising proposals, Proposition 39 would close a $1 billion corporate tax loophole that Governor Brown and other lawmakers have tried, but failed to end via the legislative process.  Currently, multi-national corporations doing business in California are allowed to choose the method for apportioning their profits to the state that results in the lowest tax bill.  If Prop 39 passes, all corporations would have to follow the single-sales factor apportionment (PDF) method.  Half of the revenue raised from the change would go towards clean energy efforts while the other half would go into the general fund.

Florida

  • Amendment 3 would create a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on revenue growth, based on an arbitrary formula that does not accurately reflect the growing cost of public services over time.  As the Center on Budget and Policy Priorities (CBPP) explains, Amendment 3 is ““wolf in sheep’s clothing” because it would phase in over several years, which obscures the severe long-term damage it would cause.  Once its revenue losses started, however, they would grow quickly. To illustrate its potential harm, we calculate that if the measure took full effect today rather than several years from now, it would cost the state more than $11 billion in just ten years.” The Orlando Sentinel's editorial board urged a No vote this week writing that voters “shouldn't risk starving schools and other core government responsibilities that are essential to competing for jobs and building a better future in Florida.”
  • Amendment 4 would put a variety of costly property tax changes into Florida’s constitution, including most notably an assessment cap (PDF) for businesses and non-residents that would give both groups large tax cuts whenever their properties increase rapidly in value.  Moreover, as the Center on Budget and Policy Priorities (CBPP) explains, “Amendment 4’s biggest likely beneficiaries would be large corporations headquartered in other states, with out-of-state owners and shareholders,” including companies like Disney and Hilton hotels.

Michigan

  • Proposal 5 would enshrine a “supermajority rule” in Michigan’s constitution, requiring two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  As we explained recently, the many flaws associated with handcuffing Michigan’s elected representatives in this way have led to a large amount of opposition from some surprising corners, including the state’s largest business groups and its anti-tax governor. Republican Governor Rick Snyder wrote an op-ed in the Lansing State Journal opposing the measure saying it was a recipe for gridlock and the triumph of special interests. Proposal 5 is also bankrolled by one man to protect his own business interests.

Missouri

  • Proposition B would increase the state’s cigarette tax by 73 cents to 90 cents a pack. The state’s current 17 cent tax is the lowest in the country.  Increasing the state’s tobacco taxes would generate between $283 million to $423 million annually. The Kansas City Star has come out in favor of Proposition B saying, “It’s not often a single vote can make a state smarter, healthier and more prosperous. But Missourians have the chance to achieve all of those things on Nov. 6 by voting yes on Proposition B.”

New Hampshire

  • Question 1 would amend New Hampshire’s constitution to permanently ban a personal income tax.  The Granite State is already among the nine states without a broad based personal income tax and proponents want to ensure that will remain the case forever. As Jeff McLynch with the New Hampshire Fiscal Policy Institute explains, a Yes vote would mean that “you’d limit the choices available to future policymakers for dealing with any circumstances, and by extension, you’re limiting choices for future voters.”

Oklahoma

  • State Question 758 would tighten an ill-advised property tax cap (PDF) even further, preventing taxable home values from rising more than three percent per year regardless of what’s happening in the housing market.  As the Oklahoma Policy Institute explains, “Oklahomans living in poor communities, rural areas, and small towns would get little to no benefit, since their home values will not increase nearly as much as homes in wealthy, suburban communities.”  And since many localities are likely to turn to property tax rate hikes to pick up the slack caused by this erosion of their tax base, those Oklahomans in poorer areas could actually end up paying more.  
  • State Question 766 would provide a costly exemption for certain corporations’ intangible property, like mineral interests, trademarks, and software.  If enacted, the biggest beneficiaries would include utility companies like AT&T, as well as a handful of airlines and railroads.  The Oklahoma Policy Institute explains that the exemption, which would mostly impact local governments, would have to be paid for with some combinations of cuts to school spending and property tax hikes on homeowners and small businesses.  And the impact could be big.  As one OK Policy guest blogger explains: “In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.”

Oregon

  • Measure 84 would gradually repeal Oregon’s estate and inheritance tax (PDF) and allow tax-free property transfers between family members.  If the measure passes, Oregon would lose $120 million from the estate tax, its most progressive source of revenue.   According to many legal interpretations of the measure, the second component - referring to inter-family transfers of property - would likely open a new egregious loophole allowing individuals to avoid capital gains taxes (PDF) on the sale of land and stock by simply selling property to family members.  Oregon’s Legislative Revenue Office released a report last week that showed 5 to 25 percent of capital gains revenue could be lost as a result of the measuring passing. The same report also found no evidence for the claim that estate tax repeal is some kind of millionaire magnet that increases the number of wealthy taxpayers in a state.
  • Measure 79, backed by the real estate industry, constitutionally bans real estate transfer taxes and fees.  However, taxes and fees on the transfer of real estate in Oregon are essentially nonexistent, prompting opponents to refer to the measure as a “solution in search of a problem.”
  • Measure 85 would eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Instead of kicking back that revenue to corporations, the excess above collections would go to the state’s General Fund to support K-12 education. Supporters of this measure acknowledge that a Yes vote will not send buckets of money to schools right away since the kicker has rarely been activated.  But, it is a much needed tax reform that will help stabilize education funding and peak interest in getting rid of the Beaver State’s more problematic personal income tax kicker.

South Dakota

  • Initiative Measure #15 would raise the state’s sales tax by one cent, from 4 to 5 percent. The additional revenue raised would be split between two funding priorities: Medicaid and K-12 public schools. As a former South Dakota teacher writes, “[w]hile education and Medicaid are important, higher sales tax would raise the cost of living permanently for everyone, hitting struggling households the hardest, to the detriment of both education and health.”  This tax increase is the only revenue-raising measure on the horizon right now; South Dakotans deserve better choices.

Washington

  • Initiative 1185 would require a supermajority of the legislature or a vote of the people to raise revenue. A similar ballot initiative, I-1053, was already determined to be unconstitutional. As the Washington Budget and Policy Center notes about this so called “son of 1053” initiative:  “Limiting our state lawmakers with the supermajority requirement is irresponsible, and serves only  to limit future opportunity for all Washington residents.”

 

Massachusetts taxpayers now have a better idea of where $171 million of their tax dollars are going.  Thanks to legislation enacted in 2010, the state’s Department of Revenue just issued its first-ever report identifying recipients of so-called economic development tax credits.  The biggest winner in 2011 was Columbia Pictures, which received $11.6 million Bay State tax dollars for a movie that, ironically, depicts a teacher trying to raise money for his under-funded public school.

Then there’s the fraudulent use of film tax credits, which is a whole other thing!

Revenue to fund bridge repairs is falling short in Oklahoma, so Governor Mary Fallin signed a bill this week that takes money away from education and other general fund services to cover the costs.  The move follows similar actions taken last year in Nebraska, Utah and Wisconsin (and almost in Virginia).  Oklahoma has gone 25 years without raising its gas tax—the state’s traditional source of transportation revenue.  That’s longer than any state except Alaska.

Calling all Kentuckians! Here’s a chance to make your pitch for tax fairness to the Blue Ribbon Tax Commission, which holds public hearings through the summer.


Oklahomans Reject Laffer Plan, Preserve Their Income Tax


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Oklahoma Governor Mary Fallin admitted last week that she and her allies had failed in their efforts to roll back the state’s income tax this legislative session, despite high hopes among supply siders that the tax would be not only cut but entirely repealed.  As The Oklahoman explains, however, both voters and businesses recognized that reducing taxes would mean further cuts in education and public safety piled on top of those already inflicted in recent years.  Public opposition aside, however, it did seem all too possible that Arthur Laffer (the Governor’s tax advisor) and his colleagues’ pitch that shredding the tax code would lead to economic rebirth was going to be enough to get an income tax cut through the legislature.

Over a half dozen tax cut plans were given serious consideration this year in Oklahoma, most of which would have, in fact, raised taxes on low-income families by repealing important tax credits, and all of which would have tilted Oklahoma’s overall tax system even more heavily in favor of the wealthy.  Some of the proposals, like the modified version of Arthur Laffer’s plan pushed by Governor Fallin, would have repealed the income tax entirely.

In the final days of the session, it looked like lawmakers had come to an agreement on a comparatively modest plan to cut the top personal income tax rate from 5.25 to 4.8 percent, and then possibly to 4.5 percent a few years later.  Noticeably absent from the proposal, fortunately, was any repeal of low-income credits— likely due in part to analyses by the Institute on Taxation and Economic Policy (ITEP) showing that repealing these tax credits would mean a significant tax increase for a large number of the state’s most vulnerable residents.

Instead, lawmakers hoped to pay for their proposed rate cuts with a combination of spending cuts, repealing various business tax credits and eliminating a handful of tax breaks for individuals.  Even then, however, analyses by ITEP and the Oklahoma Tax Commission showed that a significant number of low- and middle-income Oklahomans would see their taxes rise under the plan.  And just as the state’s largest newspaper editorialized about these revelatory analyses, support evaporated in the state House of Representatives.

As the Oklahoma Policy Institute explained last week, “The failure of every tax cut proposal that was debated this session is a victory for Oklahoma… We know, however, that this is just a brief intermission in a long battle over the right tax policy for Oklahoma.  We need to look with renewed seriousness at our outdated tax system and do away with unnecessary tax preferences. And we must improve tax fairness and not allow middle- and low-income families to shoulder a larger share of the load.” 

(Photo from NPR State Impact)

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

Red and Blue States' Commissions Agree on Need to Get Real About Costs of Tax Breaks


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In a span of less than two weeks, commissions in two very different states – Massachusetts and Oklahoma – have issued remarkably similar recommendations on how to deal with the slews of special tax breaks that evade scrutiny and accountability year after year, budget after budget. As CTJ has pointed out, state budget processes are essentially rigged in favor of tax breaks (loopholes, subsidies) and as a result it’s become far too easy for lawmakers to enact (and extend) tax giveaways for virtually any purpose imaginable.

In Massachusetts, the Tax Expenditure Commission just released eight recommendations designed to deal with this very problem.  According to the Commission, lawmakers should clearly specify the purpose of all tax breaks (or “tax expenditures”) so that analysts can begin evaluating their effectiveness on an ongoing basis and providing realistic policy recommendations to lawmakers.  The Commission further urged that those evaluations be carefully timed to coincide with the state’s normal budget process, and even suggested that some tax expenditures be scheduled to sunset (or expire) so that lawmakers are forced to debate those breaks after the evaluations are complete and the facts are out.

In Oklahoma, the Incentive Review Committee recently released its set of recommendations dealing with one category of tax expenditures in particular: those ostensibly aimed at spurring economic development.  As in Massachusetts, the Oklahoma Committee said that lawmakers need to more clearly articulate the purpose of tax breaks, and that evaluations of those breaks should be done in a rigorous and ongoing fashion. One of the Oklahoma Committee’s more important recommendations might sound obvious at first, but it’s actually often overlooked: good evaluations take time and resources, and the state should adequately fund whichever department is charged with completing the evaluations.

Jon Stewart hilariously skewered the phrase “spending reductions in the tax code” as another way of saying taxes need to be raised. These tax commissions (as well those in Minnesota, Missouri, and Virginia), tasked with realistically assessing state budgets, are forcing Americans to recognize that spending through the tax code exists and that it requires the same level of scrutiny as spending through government programs, as previously outlined by CTJ.


Are States Really "Racing" To Repeal Income Taxes?


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Arthur Laffer recently teamed up with Stephen Moore, his friend on The Wall Street Journal’s editorial board, to pen yet another opinion piece on the benefits of shunning progressive personal income taxes.  Most of the article’s so-called “analysis” is ripped from Laffer reports that we’ve already written about, but there was one new claim that stands out.  According to Laffer and Moore, “Georgia, Kansas, Missouri and Oklahoma are now racing to become America's 10th state without an income tax.”  If this is true, it’s news to us.  So let’s take a look at the most recent reporting on these states’ tax policy debates.

In Georgia, the state’s legislative session ended almost a month ago with the passage of a modest tax package.  Last year, Georgia lawmakers debated levying a flat-rate income tax, but that effort (which should have been easy compared to outright income tax repeal) failed and left lawmakers with little interest in returning to the issue.

The debate over the income tax debate in Kansas isn’t quite done yet, but the most recent news from The Kansas City Star is that “lawmakers say the tax reform package they'll consider next week almost certainly will fall far short of the no-income-tax goal.”

In Missouri, a number of media outlets are reporting that the push to get income tax repeal on the November ballot is all but over because a judge ruled that the ballot initiative summary that proponents of repeal proposed to put before voters was “insufficient and unfair.”

And in Oklahoma, what started as an enthusiastic push for big cuts or even outright repeal of the income tax has since been watered down into something less ambitious.  The most likely outcome is a cut in the top rate of no more than one percent, although lawmakers are still toying with the idea of tacking on a provision would repeal the income tax slowly over time (so the hard decisions about what services to cut won’t have to be made for a number of years).  But in any case, budget realities have left lawmakers in a position where they’re hardly “racing” to scrap this vital revenue source.

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

Calling it “a far-out idea that would force Missourians to pay much more for groceries, homes and everything in between, while sparing wealthy citizens the need to pay income taxes,” the Kansas City Star editorial board bids good riddance to an income tax repeal proposal in Missouri.

Apparently not content with the massive business tax cut enacted last year, Michigan lawmakers are continuing to push to repeal the property tax on business equipment – a vital revenue source for local governments who can expect a net, permanent 19 percent revenue loss.

Instead of an immediate income tax cut that will cost significant revenue (that the state can’t afford),  Oklahoma lawmakers are contemplating a “trigger” plan tying cuts to year-over-year revenue growth that would eventually eliminate the tax altogether.  The Oklahoma Policy Institute explains that triggers are sold as a “responsible” way to cut taxes, "but it’s the opposite. It’s an attempt to avoid responsibility by putting the tax system on auto-pilot.“

An important study from the Pew Center on the States showing the lack of accountability in tax giveaways to business keeps getting good press. Here’s a piece from Illinois describing how, despite some very public giveaways to companies like Sears and the CME Group, the state lags in holding companies accountable for the tax breaks they receive.

This great article explains who actually pays Minnesota taxes. It cites data from Minnesota’s own tax incidence analysis report – a report that only a handful of states have the technology to develop, but is vital to understanding how taxes impact people of different income levels.

 


Quick Hits in State News: Tax Myths Take Hits in OK and TX


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  • A letter in the Tulsa World highlights the work done by the Institute on Taxation and Economic Policy (ITEP) to expose the flaws in Arthur Laffer’s recent “research” on the economic benefits of income tax repeal.  The letter also reports on similar critiques of Laffer’s work that were made by a number of prominent economists speaking at an event hosted by the Oklahoma Policy Institute.  Our favorite?  Ken Olson at Oklahoma State University explains that Laffer’s work "does not constitute economic analysis in any real sense. As a consequence, its suggestions should be ignored as economics."
  • Opponents of progressive taxation often point to Texas as evidence that shunning the personal income tax can lead to economic growth.  But the Center on Budget and Policy Priorities (CBPP) explains that Texas’ success is due to factors largely outside the control of state lawmakers, like natural resources, immigration, trade, and the availability of plenty of land for development.  It’s a point that should be obvious, but it’s also one that we’ve found ourselves having to remind people of quite frequently as of late

Transportation Funding Debacles Around the Country


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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

 

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

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

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


Oklahoma Lawmakers Bent on Cutting Taxes for the Rich


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Oklahoma lawmakers are intent on taking an axe to the state’s only major progressive revenue source: the personal income tax.  Last week the Oklahoma House and Senate passed a variety of bills cutting or repealing the tax, and negotiations on a final package could begin in as little as two weeks.

As the Institute on Taxation and Economic Policy (ITEP) and the Oklahoma Policy Institute (OKPolicy) have pointed out, all of the proposals being considered would greatly increase the unfairness of Oklahoma’s tax code without benefiting the state’s economy.

But from a political perspective, perhaps the biggest obstacle standing in the way of Arthur Laffer’s agenda is how to pay for deep cuts to (or total elimination of) a tax that provides one-third of all state revenue.  Originally, lawmakers were optimistic that they could repeal special business tax breaks, breaks for senior citizens, and tax credits for the poor in order to partially fund a large cut in the state’s top tax rate.  But lobbyists representing senior citizens and businesses have talked many lawmakers out of that approach.  The more likely outcome now might be a slightly scaled-back package paid for with deep spending cuts and higher taxes on the poor.

The final outcome is far from certain, but it will likely be ugly as long as lawmakers continue to ignore the reality that income tax cuts won’t help the state’s economy, and that Oklahoma’s richest taxpayers already face an effective tax rate equal to just half of what the poor pay.

Photo of Oklahoma Capitol Dome via BJ McCray Creative Commons Attribution License 2.0


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


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

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

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

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


New Report: Arthur Laffer's Bad Data Misleads Lawmakers


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In an attempt to bolster income tax repeal efforts in states like Oklahoma, Kansas, and Missouri, supply-side economist Arthur Laffer recently teamed up with an Oklahoma-based group to perform an analysis that predicts huge economic gains as a result of cutting state personal income taxes.  A new report from the Institute on Taxation and Economic Policy (ITEP) shows, however, that the analysis is fundamentally flawed.

Bear with us as we guide you through a few methodological weeds.

At issue here is what’s called a regression analysis – a statistical tool used to explain the relationship between one set of variables and another.  In this case, Laffer has attempted to explain how state income tax rates affect economic growth, and, according to Laffer’s regression, the effect is enormous. He shows an inverse relationship between taxes and growth. That is, the lower the tax rates, the greater the economic growth.  Repealing Oklahoma’s income tax, he therefore predicts, will more than double the rate of personal income growth and state GDP growth, and create 312,000 jobs in the process.

If this sounds too good to be true, that’s because it is.

As ITEP’s new report explains, Laffer performs a data sleight of hand to produce his result.  He includes federal tax rates in an analysis supposedly aimed at explaining a state tax system. And as it turns out, this decision hugely distorts the results.  It allows him to include in his overall “tax rate” figures the Bush tax cuts – which caused a 4.1 percent drop in the top federal tax rate.  At the same time, his measure of economic growth just happens to be taken from the early 2000’s, when the country was climbing out of the post 9/11 recession. That is, the economic growth indicators were improving just as the Bush tax cuts were going into effect.

Laffer essentially creates a bogus measure (federal and state tax rates combined) and maps it onto an exceptional moment in economic history.  This allows him to create the illusion that cuts in state tax rates between 2001 and 2003 fueled economic growth later in the decade.  If the analysis is refocused on just state tax rates, the findings fall apart entirely, as the regression no longer shows any relationship between state tax rates and economic growth.

But Laffer’s analysis is plagued by more problems than these.  Also notable, as covered in an earlier report from ITEP, is its complete failure to measure the impact of other factors, from sunshine to oil production, that contribute to state economic growth.  The flaws in Laffer’s analysis are so fundamental that its findings cannot be taken seriously. 

ITEP’s two companion critiques of why Arthur Laffer’s analysis should not be trusted can be found here.

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

Oklahoma’s Governor Mary Fallin finally unveiled her plan for eliminating the state income tax.  Full elimination would take a number of years, but low-income families are likely to be hit hard right away when various refundable credits are repealed.  The Institute on Taxation and Economic Policy (ITEP) plans to conduct a full analysis as soon as sufficient details are made available.

One Michigan lawmaker wants to take money away from Medicaid, education, and other programs to cover the cost of maintaining the state’s roads – costs that the state’s long stagnant gas tax can’t keep up with.  This is not the only such proposal to redirect money to cover up for lawmakers who lack the political courage to raise their state’s gas tax. Nebraska, Utah, Wisconsin, Virginia, and Oklahoma have proposed or enacted similar raids that ITEP warned of in its recent report, Building a Better Gas Tax.

The Colorado legislature is debating a boondoggle of a bill which would create a sales tax holiday the first weekend in August.  The facts are getting out that these events are expensive and don’t benefit the people who need them most.

The Virginia-Pilot has an excellent editorial on the efforts of some lawmakers to ramp up the level of scrutiny applied to billions of dollars in special interest tax breaks.  As the Pilot points out, Richmond is increasingly forcing cities and counties to pick up costs the state can’t cover, yet lawmakers threw away $12.5 billion in corporate tax breaks without any evidence they are helping Virginians.

Two tax increase initiatives appear headed for California’s November ballot that Governor Jerry Brown fears will undermine support for his own initiative to temporarily raise the sales tax and income taxes on wealthier Californians.  The competing measures are both permanent and superior in terms of fairness: a “millionaire’s tax” backed by labor groups who say it will raise $6 to $10 billion for education; and a $10 billion personal income tax hike on all Californians except for low-income families, backed by a wealthy civil rights attorney. But with three tax increasing options on the ballot, there’s a good chance the measures will cancel each other out, leaving California still in a fiscal wreck.

Photo of Jerry Brown via Randy Bayne  and Creative Commons Attribution License 2.0

 

 


New Graphics: State Gas Taxes at Historic Lows, and Dropping


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There are few areas of policy where lawmakers’ shortsightedness is on display as fully as it is with the gasoline tax.  Now, with a series of twenty six new charts from the Institute on Taxation and Economic Policy (ITEP), you can see the impact of that shortsightedness in most states as shareable graphs.

Overall, state gas taxes are at historic lows, adjusted for inflation, and most states can expect further declines in the years ahead if lawmakers do not act.  Some states, including New Jersey, Iowa, Utah, Alabama, and Alaska, are levying their gas taxes at lower rates than at any time in their history.  Other states like Maryland, Oklahoma, Massachusetts, Missouri, Tennessee, Arkansas, and Wyoming will approach or surpass historic lows in the near future if their gas tax rates remain unchanged and inflation continues as expected.

These findings build on a 50-state report from ITEP released last month, called Building a Better Gas Tax.  ITEP found that 36 states levy a “fixed-rate” gas tax totally unprepared for the inevitable impact of inflation, and twenty two of those states have gone fifteen years or more without raising their gas taxes.  All told, the states are losing over $10 billion in transportation revenue each year that would have been collected if lawmakers had simply planned for inflation the last time they raised their state gas tax rates.

View the charts here, and read Building a Better Gas Tax here.

Note for policy wonks: Charts were only made in twenty six states because the other twenty four do not publish sufficient historical data on their gas tax rates.  It’s also worth noting that these charts aren’t perfectly apples-to-apples with the Building a Better Gas Tax report, because that report examined the effect of construction cost inflation, whereas these charts had to rely on the general inflation rate (CPI) because most construction cost data only goes back to the 1970’s.  Even with that caveat in mind, these charts provide an important long-term look at state gas taxes, and yet another way of analyzing the same glaring problem.

Example:


Oklahoma's Newest Tax "Reform" Plan Mirrors National Trend; Grim Details in New Analysis


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Lately, one of the biggest priorities of both conservative state lawmakers and Republican presidential candidates has been the reduction or elimination of the income tax.  But a new analysis of one such plan receiving consideration in Oklahoma should give pause to backers of this “reform.”

According to ITEP, over half of Oklahoma households would actually see their tax bills rise under a plan put forth by The Oklahoma Task Force on Comprehensive Tax Reform (heavily stacked with business interests), and low-income families would face the largest tax increases relative to their income.  Upper-income families, by contrast, would enjoy a bonanza, with the richest one percent taking home over $2,800 in tax breaks per year.

These are the predictable results of a plan that cuts Oklahoma’s top income tax rate and pays for it by eliminating some of the state’s most important and progressive tax credits and exemptions.

We’re usually big supporters of wiping out special tax breaks, but only when it’s done fairly.  And as the numbers above make clear, the Task Force’s plan is far from fair.  It does away with proven low-income provisions like the Earned Income Tax Credit (EITC) and the sales tax relief credit, and it scraps important and very popular breaks like the child tax credit and even the personal exemption.  Meanwhile, itemized deductions, which disproportionately benefit the richest families in Oklahoma – or any state, – are left largely untouched (except for the long-overdue elimination of the ridiculous and rare state income tax deduction for state taxes paid).

The Oklahoma plan is just the latest manifestation of a broader conservative tax platform that thinks the working poor are getting off too easy, and the rich deserve to see their tax rates slashed.  ITEP’s analysis makes a case study of Oklahoma under this disastrous plan; are other legislators listening?


Trending in 2012: Destroying the Personal Income Tax


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Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country. This week, we’re taking a closer look at proposals which would lessen a state’s reliance on progressive income taxes, often by shifting to a heavier reliance on regressive sales taxes. 

Georgia – A legislative proposal gaining traction in Atlanta would undercut the state’s reliance on the personal income tax – its only major progressive revenue source.  It would make up those revenues by raising the sales tax – every state’s most regressive source of revenue.  The plan also includes two other components that hit the poorest Georgians the hardest: taxing groceries and adding a dollar to the cigarette tax.  A sensible, comprehensive proposal from the Georgia Budget and Policy Institute is the template lawmakers should be following. It starts with fairness, ends with increased revenues and is all about modernization and reform. 

Kansas – If the expectations about Governor Sam Brownback’s proposed income tax changes are right, Kansas could have a hard time balancing its books. Tonight, the Governor, (who has received technical assistance from supply side guru Arthur Laffer), is expected to propose drastic reductions to state income tax rates.  Details on how the governor plans to make up the lost revenue haven’t been revealed, but his sidekick Laffer was recently quoted as saying, “It’s a revolution in a cornfield. Brownback and his whole group there, it’s an amazing thing they’re doing. Truly revolutionary.”

Kentucky –  Fresh off his reelection to the Governor’s office, Steve Beshear is expected to propose his own tax reform plan, but Representative Bill Farmer, who’s been itching to change Kentucky’s tax code for years, has already pre-filed his own tax overhaul bill, which would slash the state income tax, expand the sales tax base to include more services and lower the sales tax rate.  ITEP conducted an in depth analysis of an earlier Farmer proposal and found that his proposal would cost the state hundreds of millions of dollars and raise taxes on the poorest 20 percent of Kentuckians by an average of $138. We expect that his current proposal won’t do much to fix the state’s regressive tax structure either.

Missouri – Perhaps the most destructive proposal of this type gaining traction is Missouri’s mega-tax proposal, so called because it amounts to a massive consumption tax hike for ordinary Missourians. Proponents of the related ballot initiative that would eliminate the state’s personal income tax and replace that revenue by adding goods and services to the sales tax base are currently collecting signatures in an attempt to place the initiative on the ballot this November. Show-Me-Staters would be unwise to provide their signatures for this kind of campaign, however, because its passage would result in higher overall taxes for working families. Click here to see ITEP testimony on a similar proposal.

Oklahoma – Two seriously bad proposals that would increase the unfairness of Oklahoma’s tax system are currently under consideration. Working with (the aforementioned supply side guru) Arthur Laffer, the free-market Oklahoma Council of Public Affairs is proposing to eliminate the state income tax altogether. An ITEP analysis found that the bottom one-fifth of Oklahoma taxpayers -- those earning less than $16,600 per year -- would be paying on average $250 a year more in taxes, or about 2.5 percent more of their income. Similarly, the Tax Force on Comprehensive Tax Reform (dominated by business interests) suggests lowering the state’s top income tax rate and eliminating a variety of tax credits, many of which are designed to help low and middle income families. David Blatt, director of the non partisan Oklahoma Policy Institute recently said of the proposal, "This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy.”

Photo of Governor Steve Beshear via Gage Skidmore and photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0


What Are The Costs and Benefits of Oklahoma's Myriad Tax Breaks? No One Really Knows.


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Oklahoma, like most states, has many hundreds of tax expenditures, a.k.a. “spending in the tax code.”  Actually the state offers about 450 special tax credits, deductions or exemptions designed to benefit a specific activity or purchase and, in most cases, the interest group behind it – usually in the name of economic development. There is a growing awareness that these tax expenditures, despite their high costs to the state, aren’t monitored very well.  In fact, no one seems to even know how much the state spends on them. In an attempt to rectify the situation, Oklahoma legislators have formed the Task Force for the Study of State Tax Credits and Economic Incentives. The Task Force is taking a hard look at the breaks, deductions and exemptions Oklahoma offers and asking whether the state really benefits from each of these costly expenditures in terms of economic development and the general public good.

The task force met over the summer and will continue to meet until they present their recommendations around the end of the year. After its first meeting, the Oklahoma Policy Institute reported some good news: “The meeting made clear that it will be a long and sometimes contentious process, but that this Task Force is serious about meeting the challenge. “ Legislators appear to be coming to terms with the difficult political reality that every tax credit or tax expenditure has supporters. State Rep. David Dank was recently quoted saying, “It never ends. The simple truth is that we could exempt almost everything from taxation. And then I suppose we could apply for a historic preservation tax credit to turn this state Capitol building into a casino or something because state government would be broke and out of business.”

The Oklahoma Policy Institute offers a superb report on tax expenditures in the state and recommendations for change. The Institute has long called on lawmakers to ensure that “the state is allocating public resources in the best possible fashion” and the Task Force, if successful, will bring Oklahoma closer to a smart, public interest tax code.  (As long as the chairs fail in their efforts to abolish the personal income tax, but that’s another topic.)

For more on tax expenditures and other games legislators play in the name of economic development read this ITEP brief. To read about the tax expenditure problem on the federal level take a look at this CTJ report.  And if you’re really into tax policy, you can follow the Task Force meetings here, where a local news consortium is live blogging every session! The next meeting is October 20th.

Photo of Oklahoma Capitol Dome via BJ McCray Creative Commons Attribution License 2.0


Arkansas & Oklahoma: "No New Taxes" Pledge Trumps Democracy for Grover Norquist


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You may have heard of the "no new taxes" pledge, which is promoted by the extreme anti-government organization, Americans for Tax Reform (ATR), and its leader, Grover Norquist. What you may not know is that the pledge bars lawmakers from allowing voters to choose for themselves whether or not to raise taxes. At least that's the latest word from Norquist, who is apparently the sole adjudicator of the meaning of the pledge.

In Arkansas, four legislators who signed the pledge are defending their vote to allow Arkansans to decide whether to increase the state’s diesel fuel tax by five cents per gallon. There's an argument to be made that legislators really ought to make these types of decisions on their own. After all, isn't that what they're paid to do? But this is not the sort of criticism that Arkansas lawmakers are hearing these days.

Instead, the criticism is coming from Grover Norquist and ATR. Business Week reports that several legislators actually voted against HB 1902 because they feared the wrath of Norquist.

What many lawmakers probably thought was a political gimmick when they signed onto it has clearly become a ridiculous obstacle to rational, representative government, as lawmakers become fixated with the opinions of Norquist rather than the opinions of their constituents.

And it hardly helps policymaking when lawmakers are tied to simple, black-or-white dogmas that they feel forced to carry to any and all extremes. Elected officials are put in office so they can, in the words of one of the legislators taking heat, “consider all bills based upon their individual merits.”

Oklahomans are asking questions about the “no new taxes pledge” as well. Recently Grover Norquist said that Oklahoma policymakers supporting a hospital provider fee would violate the “no new taxes” pledge.

A recent blog post from the Oklahoma Policy Institute (OPI) asks simple, yet important questions. “When lawmakers sign a pledge, who are they working for?... Should they adhere to the dictates of outside groups that always take the most simplistic and extreme stance on their particular issue, regardless of the context for Oklahomans?”

OPI also discusses members of Congress and their controversies concerning ATR's pledge. When Senator Tom Coburn said that he was in favor of eliminating ethanol tax subsidies and using the revenue to pay down the national deficit, Norquist said that this position was in violation of the tax pledge.

Coburn responded, “The pledge to uphold your oath to the Constitution of the United States? Or a pledge from a special interest group who claims to speak for all of American conservatives, when in fact they really don’t?”

As OPI puts it, “Leaders now have a choice: do they represent Grover Norquist, or do they represent Oklahoma?”


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.


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.


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.

And then there were seven.  With the enactment of a tax expenditure reporting requirement in Georgia late last week, only seven states in the entire country continue to refuse to publish a tax expenditure report — i.e. a report identifying the plethora of special breaks buried within these states’ tax codes.  For the record, the states that are continuing to drag their feet are: Alabama, Alaska, Indiana, Nevada, New Mexico, South Dakota, and Wyoming

But while the passage of this common sense reform in Georgia is truly exciting news, the version of the legislation that Governor Perdue ultimately signed was watered down significantly from the more robust requirement that had passed the Senate.  This chain of events mirrors recent developments in Virginia, where legislation that would have greatly enhanced that state’s existing tax expenditure report met a similar fate. 

In more encouraging news, however, legislation related to the disclosure of additional tax expenditure information in Massachusetts and Oklahoma seems to have a real chance of passage this year.

In Georgia, the major news is the Governor’s signing of SB 206 last Thursday.  While this would be great news in any state, it’s especially welcome in Georgia, where terrible tax policy has so far been the norm this year. 

SB 206 requires that the Governor’s budget include a tax expenditure report covering all taxes collected by the state’s Department of Revenue.  The report will include cost estimates for the previous, current, and future fiscal years, as well as information on where to find the tax expenditures in the state’s statutes, and the dates that each provision was enacted and implemented. 

Needless to say, this addition to the state’s budget document will greatly enhance lawmakers’ ability to make informed decisions about Georgia’s tax code. 

But as great as SB 206 is, the version that originally passed the Senate was even better.  Under that legislation, analyses of the purpose, effectiveness, distribution, and administrative issues surrounding each tax expenditure would have been required as well.  These requirements (which are, coincidentally, quite similar to those included in New Jersey’s recently enacted but poorly implemented legislation) would have bolstered the value of the report even further.

In Virginia, the story is fairly similar.  While Virginia does technically have a tax expenditure report, it focuses on only a small number of sales tax expenditures and leaves the vast majority of the state’s tax code completely unexamined.  Fortunately, the non-profit Commonwealth Institute has produced a report providing revenue estimates for many tax expenditures available in the state, but it’s long past time for the state to begin conducting such analyses itself.  HB355 — as originally introduced by Delegate David Englin — would have created an outstanding tax expenditure report that revealed not only each tax expenditure’s size, but also its effectiveness and distributional consequences. 

Unfortunately, the legislation was greatly watered down before arriving on the Governor’s desk.  While the legislation, which the Governor signed last month, will provide some additional information on corporate tax expenditures in the state, it lacks any requirement to disclose the names of companies receiving tax benefits, the number of jobs created as a result of the benefits, and other relevant performance information.  The details of HB355 can be found using the search bar on the Virginia General Assembly’s website.

The Massachusetts legislature, by contrast, recently passed legislation disclosing the names of corporate tax credit recipients.  While these names are already disclosed for many tax credits offered in the state, the Department of Revenue has resisted making such information public for those credits under its jurisdiction. 

While most business groups have predictably resisted the measure, the Medical Device Industry Council has basically shrugged its shoulders and admitted that it probably makes sense to disclose this information.  Unfortunately, a Senate provision that would have required the reporting of information regarding the jobs created by these credits was dropped before the legislation passed.

Finally, in Oklahoma, the House recently passed a measure requiring the identities of tax credit recipients to be posted on an existing website designed to disclose state spending information.  If ultimately enacted, the information will be made available in a useful, searchable format beginning in 2011.


The Oklahoman Embraces Good Tax Policy Principles, But Can They Apply Them?


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State policymakers don't always get the advice they need to make informed policy decisions. Not so in Oklahoma, where a recent Oklahoma Policy Institute report presents lawmakers with a detailed list of the tax giveaways embedded in Oklahoma's tax system, suggests a set of principles for evaluating these loopholes, and urges the state to evaluate each of these "tax expenditures" as part of their budget-balancing process. The editorial board of The Oklahoman this week laudably expressed a similar view, calling for lawmakers to find "sensible new sources of revenues." Specifically, the board has embraced capping or eliminating any tax credits that are ineffective in accomplishing their intended purposes, which is exactly what OK Policy's report recommends.
 
The Oklahoman's position here is quite sensible, and represents a welcome reprieve from the all too common, yet irrational practice of addressing budget shortfalls by taking the knife to valuable spending programs, while giving the kid-glove treatment to spending that is done through the tax code. But The Oklahoman falls flat when given the chance to apply this important principle to one of the odder tax giveaways in the state's toolbox, a state income tax deduction for state income taxes. They complain that the state’s top income tax rate of 5.5 percent is “uncomfortably high,” and that any proposal that would affect upper-income taxpayers should therefore be rejected. But rejecting a tax base-broadener because the rates are too high is getting it exactly backwards. Tax Policy 101 says if you want to avoid increasing tax rates, you should make sure your tax base is sufficiently broad. Leaving aside the very contestable notion that a 5.5 percent top rate is "uncomfortably high", the fact is that eliminating the state income tax deduction would strengthen the Oklahoma income tax base in a way that would make it a more efficient revenue-raiser, and would reduce the likelihood that lawmakers will be forced to hike rates down the line.
 
The Oklahoman's unwillingness to see this basic inconsistency between principle and practice is all the more maddening because OK Policy has recently shown that eliminating this tax break could raise substantial revenues at little cost to low- and middle-income families, and because one other state, New Mexico, eliminated an identical tax break to help balance their budget earlier this year.
 
If The Oklahoman’s editorial board really wants to see “ineffective” tax breaks eliminated, it should become one of the most fervent supporters of eliminating an illogical state tax break that exists only because the state happens to have built its income tax rules on top of those in place at the federal level.

This week the Oklahoma Policy Institute released a report urging, among other things, that one of the state’s more ridiculous tax breaks be eliminated — specifically, the state income tax deduction for state income taxes.  This deduction was created not as a result of careful consideration and debate among Oklahoma policymakers, but rather as an accidental side-effect of the state’s “coupling” to federal income tax rules.  And as the New Mexico Legislative Finance Committee politely points out, while the deduction may make some sense at the federal level, the rationale for providing it at the state level is “less clear.”

Citing figures provided by ITEP, the Oklahoma Policy Institute notes that only one out of four Oklahomans would be affected by eliminating this deduction, and roughly 58% of the overall tax hike would be borne by those richest 5% of Oklahomans.  This is a predictable result of the deduction only being available to itemizers.  In total, the state could collect an additional $118 million in revenue each year by eliminating the deduction — revenue that could go a long way toward preserving important public services.

State income tax deductions for state income taxes have been receiving a growing amount of attention.  Last year, Vermont limited its deduction to a maximum of $5,000, while just last week New Mexico Governor Bill Richardson signed a budget eliminating his state’s deduction entirely.  The Georgia Budget and Policy Institute (GBPI) also highlighted the benefits of eliminating this deduction in a policy brief released just a few weeks ago.

In total, seven states currently offer this deduction: Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont.  Eliminating the deduction in each of these states is long overdue.


State Budget Deficits Drive Greater Interest in Examining Tax Breaks


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State budget woes appear to be spurring an increasing amount of interest in re-examining state tax breaks.  The Governors of both Michigan and Idaho have taken steps to ramp up the scrutiny directed at their state’s tax breaks, while a new report out of Oklahoma and an editorial highlighting legislation in Georgia this week have urged similar actions.

In Michigan, the Detroit Free Press urged the adoption of Governor Granholm’s proposal to thoroughly analyze the merits of every tax break, and to saddle most breaks with sunset provisions that would force lawmakers to either debate and renew these breaks, or to let them expire.  This proposal would help to remedy the lack of scrutiny given to tax breaks because of their exclusion from the appropriations process.  Notably, the proposal’s use of sunsets as a mechanism for forcing review seems to resemble a law enacted in Oregon just last year.

In Georgia, the need for additional scrutiny of tax breaks is even more desperate.  Because the state lacks a tax expenditure report, Georgia lawmakers are not even aware of the full range and cost of special breaks that their tax system provides.  SB 206, which was endorsed by a Macon Telegraph editorial this week, would remedy this problem by finally requiring the creation of such a report.  The editorial rightly points out that the bill could be strengthened by requiring an analysis of each tax break’s effectiveness, but at this point, even simply producing a list of tax breaks and their costs would be a major step forward.  The Georgia Budget and Policy Institute has been pushing for the creation of such a report for many years.

Idaho governor Butch Otter has also shown some tentative interest in figuring out whether his state’s tax breaks are worth their cost.  While Governor Otter continues to hold out hope that the state’s revenues will rebound soon, he also recently directed the state’s Tax Commission to study sales tax exemptions in the event that closing some of those exemptions becomes necessary to fill the state’s budget gap next year.  If done carefully, the studies produced by the Tax Commission could provide a wealth of information on breaks that have so far received a relatively small amount of scrutiny.
    
The Oklahoma Policy Institute has also added to the progress being made on this issue with a new report outlining what should be done to scrutinize tax breaks in a systematic fashion.  Their report, titled “Let There Be Light: Making Oklahoma’s Tax Expenditures More Transparent and Accountable,” provides twelve specific recommendations for realizing this vision.  Among those recommendations are: improving the state’s existing tax expenditure report, sunsetting all tax incentives, requiring the extension of a sunsetting incentive to undergo a “performance review,” and developing a unified economic development budget.


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.


Rhode Island and Oklahoma Make Headlines for Making Recipients of Corporate Tax Breaks Accountable


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The Rhode Island Department of Revenue recently released its second annual "Tax Credit and Incentive Report," providing the names, addresses, and size of tax breaks received by Rhode Island businesses under six major tax incentive programs.  This report provides a valuable, and unusually detailed look at where over $82 million in state tax subsidies went during the 2009 fiscal year.  CVS, for example, benefited from over $12 million in special tax subsidies over a twelve month period, while the producers of the "Brotherhood" TV series raked in more than $5 million.  More states would benefit by sharing this type of information with their residents.

But while the "Tax Credit and Incentive Report" does provide a valuable source of raw data for Rhode Island residents and policymakers, the Department of Revenue has regrettably dragged its feet in implementing Phases Two and Three of Rhode Island's broader tax incentive accountability program.  Phase Two, which was supposed to have been completed in October 2008, will eventually detail the degree to which state tax incentives have met the job creation, wage, and benefit objectives for which they were created.  The Rhode Island Poverty Institute has rightly pointed out that "it is impossible to judge the usefulness of these tax credits without the information required in Phase Two of the law." 

Phase Three, which also has yet to be implemented, will require adding the tax credit information released by the Department of Revenue to the state's budget, so that these programs can be considered on a more equal footing with traditional spending programs and subsidies.

Oklahoma also recently made some headlines related to its tax incentive programs.  Last spring, the Oklahoma legislature approved new investment tax credits as a means of attracting Mercury Marine, a boat engine manufacturer, to the state.  Recently, Mercury Marine announced that despite the tax credits, it will be moving a significant number of jobs from Oklahoma to Wisconsin.  Since the legislation authorizing the tax credits explicitly allowed for the state to recover those credits in the event that something along these lines occurred prior to 2012, the company has agreed to refund the credits, with interest.  By tying the credits to some measure of performance on the part of Mercury Marine, Oklahoma was able to avoid a situation where the company could simply take the credits and run. 

Be sure to visit Good Jobs First for more on tax incentive best practices such as these.

 

Billionaire George Kaiser, head of Kaiser-Francis Oil Co., recently did something unusual for someone in his line of work. He told the truth about the subsidies that the oil and gas industry receives to the Oklahoma House Appropriations and Budget Committee. During his testimony, "Kaiser said he could "say unequivocally" that the tax subsidies in question have never influenced his companies' decisions to drill or restore any well in Oklahoma." Kaiser even joked, "In fact, I may lose my day job as a result of my testimony."

Kaiser focused his comments on the number of Oklahomans who could receive health care (125,000) and the raises that could be given to teachers ($1,300 each) if the state's priorities changed and the average $75 million in tax credits given to the energy industry over the last four years were put toward other priorities.

Business analysts know that if a company is making business decisions based on tax breaks, then the company isn't on very strong footing to begin with. But comments like these made by billionaire businessmen are quite helpful in cutting through the false claims made about taxes.

Speaking of ineffective subsidies, this week the West Virginia Center on Budget and Policy released an interesting report Money for Nothing: Do Business Subsidies Create Jobs or Leave Workers in Dire Straights? The report details cases of private West Virginia companies cutting jobs even after receiving taxpayer funded subsidies. Accountability and transparency are necessary to ensure that policymakers and the public aren't funding incentives that ultimately do no real good for West Virginia. The author suggests concrete steps that can be taken to ensure both accountability and transparency, including accessible subsidy disclosure, publishing outcome data, enacting claw-back provisions, and the creation of a unified state development budget.


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


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

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

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

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

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


Oklahoma: Desperate Times Call for... Completely Illogical Measures


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Oklahoma's Senate Finance Committee last week approved a bill that would drop the state's top income tax rate from 5.5 to 5.25 percent and that would remove groceries from the state's sales tax base. The proposal to cut the top income tax rate would reduce tax revenue by $44 million and exempting groceries from sales taxes would cost $245 million. With Oklahoma facing a $600 million budget deficit, why make these changes now?

The cut in the top rate was actually adopted several years ago, but was made contingent on state revenues meeting a target to ensure that the state could afford the tax cut. So, back then, lawmakers recognized that this tax cut would be expensive (though they ignored the fact that it is entirely regressive) and took steps to ensure the state could afford it. But now the state is not meeting that revenue target, the Senate Finance Committee wants to remove it and allow the tax cut to be implemented anyway. Will lawmakers actually approve this tax cut now that it is (by their own measure) unaffordable?

Similar questions could be posed about exempting groceries from the sales tax. To be sure, taxing those purchases is quite regressive, but Oklahoma has in place an income tax credit designed to mitigate the impact this policy has on low-income taxpayers. Since Oklahoma clearly can't afford a loss of tax revenue of this magnitude, why not build upon the income tax credit that's already in place -- an approach that would be less expensive and better targeted to those who need it the most? The Oklahoma Policy Institute has the details on this alternative means of helping Oklahomans struggling to make ends meet.


Proposed Change in Oklahoma Sales Tax Could Reduce Hunger


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A report released earlier this month by the Oklahoma Policy Institute offers policymakers in the Sooner State several ideas for negotiating one of the fundamental tensions in state fiscal policy: the inclusion of groceries in a state's sales tax base. On the one hand, including groceries in the base is consistent with the notion that the base for any tax should be as broad as possible. Including groceries in the sales tax base also generates considerable revenue -- in Oklahoma, doing so yielded over $300 million in 2007. On the other hand, taxing groceries is highly regressive. The poorest twenty percent of Oklahomans paid two and a half times as much in grocery taxes, relative to their incomes, as middle income taxpayers in 2007.

Rather than removing groceries from the sales tax base altogether, OK Policy observes that policymakers could expand the state's existing "grocery tax credit," either by raising the value of the credit itself or extending it to additional taxpayers. Such a change would be in line with the recommendations of last year's Oklahoma Task Force on Hunger. To see more of the Oklahoma Policy Institute's work, visit www.okpolicy.org.


Oklahoma: In the Future, Rethink the Past


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With the fall elections a scant two months away, it's never too early to think about the harsh realities and difficult choices that state lawmakers will face once they are sworn in.

As two new fact sheets from the Oklahoma Policy Institute suggest, top on the agenda of Sooner State legislators should be the reconsideration of some of the tax cuts enacted between 2004 and 2006. For instance, reductions in the top personal income tax rate put in place over the past several years have delivered an average tax cut in excess of $11,000 per year for the richest 1 percent of Oklahomans, yet have helped to suppress income tax collections to the point where they have grown by less than half a percentage point each year over the last two fiscal years. As OK Policy observes, those tax dollars, rather than flowing back to the wealthy few, could be devoted to critical public purposes, such as "addressing critical staffing shortages in [Oklahoma's] child welfare and correctional systems."


Poorly Reasoned and Poorly Targeted Property Tax Reductions are Gaining Steam


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This week in the Georgia House, lawmakers voted overwhelmingly (166-5) to approve property tax cuts, including the elimination of the state's car tax, that will cost the state more than $750 million when fully phased in. Republican Speaker Pro Tem Mark Burkhalter doesn't seem concerned with offsetting the lost revenue. Responding to concerns about the plan's price tag, he says, "It's very simple. You cut taxes, the economy grows. The economy grows, Georgians prosper. The best way to stem off any recession is to cut taxes. Not to clam up, go home and wait for the storm to pass." We've learned on the federal level that tax cuts simply don't pay for themselves, but clearly legislators in Georgia want to try their own experiment with this flawed (and dangerous) economic myth. The House-passed bill contains another misguided property tax change... a 2% cap on annual increases in a home's value for tax purposes (the cap would be 3% for businesses).

The Georgia Budget and Policy Institute issued a report adding up the costs of the state House's handiwork related to taxes this year and found that the tax bills passed this session would cost as much as $113 million in FY 2009, $473 million in FY 2010, and $798 million in FY 2011.

Coincidentally, the Oklahoma Senate passed a proposed constitutional amendment last week also dealing with caps on increases in a home's taxable value. In this case, the cap would be decreased from 5% to 3% (the 5% cap would remain intact for businesses). Assessment value caps of this sort have recently received much attention in Florida. The unfair way in which these caps provide the greatest relief to long-time residents (creating vastly different property tax bills between neighbors with similar houses) recently drove Florida residents to amend their constitution to patch over the problem in a very imperfect way.

Rounding out the recent trend in debating poorly reasoned property tax cuts is Arizona, where the House narrowly approved a measure to permanently repeal a portion of the property tax that is currently suspended. Allowing the tax to take effect again would raise about $250 million annually for the state, significantly reducing the projected $1.2 billion revenue shortfall for the current fiscal year. If the plan passes, cuts in public services could be the result.


Victory for Transparency in the Sooner State!


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Earlier this month, Oklahoma Governor Brad Henry (D) signed into law the "Taxpayer Transparency Act" which directs the Office of State Finance to "build a web site detailing virtually all expenditures of state funds, including state contracts and tax credits and incentive payments given to businesses." The proposal received widespread bipartisan praise. According to the Oklahoma Council of Public Affairs, 72 percent of Oklahomans support the creation of the website. Oklahoma Senator Tom Coburn has advocated for a similar website to monitor federal spending. The State Chamber of Commerce opposed this bill saying that the legislation, "will shine an unwanted light on those who invest in Oklahoma, and it will make it much more difficult to attract those investors." Undoubtedly the website will be a helpful tool for legislators, the public, and the media. Mark Thomas from the Oklahoma Press Association says this about letting the sunshine in on government spending: "If you want the people of Oklahoma to give you a tax break, go ahead and ask us, but don't expect us to keep it a secret."


All That Glitters Isn't Gold


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This week the Community Action Project blasted the decision by Oklahoma policy makers to use a temporary surge in revenue to justify permanent, unfair tax cuts. CAP says that when voting on the tax cut proposals, legislators did so "knowing only the short-term fiscal impact and without the information that could allow them to evaluate the long-term fiscal sustainability of their choices." The question before legislators now is whether or not to repeal the tax cuts that were scheduled to take place in 2008. Last fall, the Center on Budget and Policy Priorities published a study which takes a closer look at specific states that enacted tax cuts in 2006 and highlights the potential damages from "tax cuts on layaway."


Tax Credit for Stay at Home Moms?


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Oklahoma lawmakers in the House of Representatives are proposing a tax credit to benefit stay-at-home moms. The theory behind the proposal is that because the state offers a dependent care credit for costs incurred for child care expenses outside the home, stay-at-home moms should be given a similar credit for their work. This proposal brings up issues of discrimination (what about stay at home dads, grandparents?) and perhaps an even larger debate about whether or not the tax code should be used as a mechanism to promote family values. For a provocative article on this issue click here.


Business Turning Against TABOR


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


Oklahoma's Budget Brawl: How to Cut Income Taxes?


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In Oklahoma, Republican and Democratic leaders are feuding over how to dispose of the state's budget surplus, with Republicans pushing for cuts in the top income tax rate and Democrats pushing for an increase in the stand deduction. An analysis by Oklahoma's Community Action Project shows that the standard deduction would be a much better deal for most Oklahomans.

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