Pennsylvania News


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


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

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

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

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

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

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

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


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.  


Pennsylvania Passes Revenue Plan Necessary to Fund State Budget


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The good news: Pennsylvania lawmakers took steps to fund state services, supporting an increase in basic education and likely guarding the state from a credit downgrade.

The bad news: rather than doing so through broad-based tax changes, they opted to rely on revenue-raisers that fall hardest on the average Pennsylvanian.

Last week Pennsylvania lawmakers enacted a revenue package that funds the state’s $31.5 billion spending plan that went into effect the week prior without Gov. Tom Wolf’s signature or veto. While the complete package, including both a spending and revenue plan, came together after the state’s June 30th deadline, Pennsylvanians’ were thankful to avoid another drawn out budget standoff after last years’ nine-month impasse.

Most notably, the state’s budget agreement marks the first time under Gov. Wolf that lawmakers agreed to raise revenue, but it lacks any broad-based tax changes and relies too heavily on regressive tax options, dubious revenue raisers, and one-time funds. The revenue package draws primarily from expanded sales and excise taxes. In particular, it includes a $1 per pack cigarette tax increase, bringing the tax from $1.60 to $2.60, a $0.55 per ounce tax on self-rolled and smokeless tobacco, and a 40 percent tax on the wholesale price of electronic cigarettes and other vaping devices. As the share of the overall population that smokes continues to decline, the cigarette tax is often seen as one of the more politically feasible revenue options available to states. But the tax’s regressive nature, and the fact that it is a declining source of revenue, make it an imperfect tax.

Pennsylvania’s move to include digital downloads under the state’s 6 percent sales tax is a move in the right direction. A broad base is key for a successful sales tax, and in today’s increasing digital economy there’s no reason for the exemption on the download of digital videos, books, games, music and applications to remain. However, the $47 million raised under that change is far from what was needed. Early last year Gov. Wolf put forth an extensive proposal to raise the sales tax and expand it to dozens of items and services. A more recent iteration of that plan narrowed the reach, broadening the base to include cable television services, movie theater tickets, and digital downloads (mentioned above). While one was broad and the second much more narrow, both of these approaches coupled with a proposed increase to the state’s flat personal income tax from 3.07 to 3.4 percent serve as much more significant revenue raisers, and good tax policy.

Also of note was lawmakers’ decision to end the “vendor discount” under the sales tax—an unnecessary giveaway that allowed retailers to keep a portion of the tax they collected from their customers.

Additional state funds will be raised through changes to the state system for wine and liquor sales, expanded gaming, a tax amnesty program, and an extension of the personal income tax to state lottery winnings. These, coupled with a $200 million loan from the state’s medical malpractice insurance fund surplus and a few expected revenue raisers that have yet to become law, largely close the state’s $1.3 billion revenue shortfall.

While raising some new revenue in Pennsylvania represents real progress, the extensive use of one-time funds will likely result in another debate next year over long-term sustainability and how to permanently close what has become a structural revenue gap. Further, the choice to use of regressive tax options – that have a far greater impact on the state’s low- and middle-income families – is a disservice to most Pennsylvanians. According to ITEP’s Who Pays? report, Pennsylvania has the 6th most unfair state and local tax system in the country. That ranking will not improve unless lawmakers enact more equitable revenue solutions in the years ahead.


Political Conventions in Cleveland and Philadelphia Spark Move Toward Better Tax Policy


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Of all the principles of good tax policy, none should be less controversial than “neutrality.”  Rather than picking winners and losers, tax systems should strive to treat similar situations in a similar way.  It makes no sense, for example, to charge tax on a DVD while offering an exemption for a movie theater ticket to view that same film.  Likewise, there’s no reason that hotel guests should pay tax on their room while fellow travelers that book rooms or homes through websites like Airbnb are allowed to stay in a city tax-free.

Apparently, lawmakers in both Pennsylvania and the city of Cleveland agree on this last point—though it took a major surge in Airbnb bookings to spur them to act.  This week Cleveland plays host to the Republican National Convention and next week Philadelphia will be doing the same for the Democratic National Convention.  The number of Airbnb bookings made in Cleveland this week is roughly four times above normal, while in Philadelphia bookings have increased threefold.  Not wanting to miss the potential tax revenue gain associated with these bookings, Cleveland and Pennsylvania both took action, just in the nick of time, to ensure that their lodging taxes will apply to room rentals booked via Airbnb.

Airbnb’s agreement with Pennsylvania to begin collecting the state’s 6 percent lodging tax was struck barely a month ago.  The city of Philadelphia, for its part, has been collecting its 8.5 percent tax from Airbnb guests for over a year.  Philadelphia’s tax was initially proposed by Councilman Bill Greenlee after he realized that Airbnb bookings were going to “hit the roof” last September during Pope Francis’ visit to the city.

In Ohio, Cleveland extended its 3 percent occupancy tax to include Airbnb rentals in a vote just last month, though Cuyahoga County (in which Cleveland resides) managed to work out an agreement regarding its 5.5 percent tax a bit earlier, taking effect in April.  Unlike in Pennsylvania, however, it does not appear that the state government will be receiving any direct tax revenue from Airbnb rentals.  While the state does apply its 5.75 percent general sales tax to hotels, Airbnb offers no indication that this tax is currently being charged on its bookings.

Nonetheless, most applicable taxes will be charged on Airbnb rentals during the conventions in Cleveland and Philadelphia.  This is a victory for good tax policy, but most jurisdictions still lag behind.  Far too many states and localities still need to update their tax systems (and regulations) to account for Airbnb and similar companies.

The lesson learned from Cleveland and Pennsylvania is that, at least in regard to tax policy, reform is within reach.  But while the revenue gain associated with a major event such as a political convention is helpful in focusing lawmakers’ attention, other state and local governments should not continue procrastinating until such an event comes to town.  With the current boom we’re seeing in the sharing economy, it’s time for lawmakers across the country to begin dealing with these issues.


State Rundown 7/14: Pennsylvania Lawmakers Finally Agree to Raise Taxes Yet Many States Continue to Seek New Revenue


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This week we bring you tax and budget news in Alaska, Pennsylvania, New Jersey, and Massachusetts plus look at the growing trend in states turning to cigarette taxes. Check out the What We’re Reading section below for a piece on the impact tax cuts in Kansas have had on the Sunflower State’s budget. Thanks for reading the State Rundown! 

— Meg Wiehe, ITEP State Policy Director, @megwiehe  

  • Gov. Bill Walker called Alaska lawmakers back to Juneau this week for yet another special session to weigh options to fill the state's multi-billion dollar revenue gap. ITEP released a report "Income Tax Offers Alaska a Brighter Fiscal Future" to inform the debate over the merits of a personal income tax vs a general sales tax. Sneak preview: four out of every five Alaskans would pay less under an income tax. Read the report here. (PDF) 

  • Yesterday Gov. Tom Wolf signed a revenue package to fund Pennsylvania's $31.5 billion spending plan. It includes an increase to the cigarette tax ($1/pack) and other tobacco products, liquor modernization, expanded gambling, and an extension of the sales tax to digital downloads. The second half of the puzzle is now complete. Earlier this week, before the legislature reached agreement on how to fund the budget, the governor allowed the state's spending plan to become law without his veto or signature.
  • "Nonessential" road and bridge repair and construction continues to be shut down across New Jersey as lawmakers and Gov. Christie were unable to reach a gas tax deal before the end of June. They now project they can run the Department of Transportation on a shoe-string budget until the end of August, and negotiations could go that long. Lawmakers are back in session now and hoping to reach a compromise this week that restores the Transportation Trust Fund to solvency without blowing too large a tax-cut hole in the rest of the budget.  

  • More states are looking to the cigarette tax to provide fast cash while promoting public health objectives. West Virginia and Louisiana both raised their cigarette taxes during special sessions to plug budget holes. A $2 per pack increase has qualified for the ballot in California and a $1.75 per pack increase has just been proposed in Colorado. Signatures have been gathered to put a $1.76 per pack increase on the ballot in North Dakota and efforts are underway to get a 60-cent per pack increase on Missouri's ballot as well. 

  • The Massachusetts Senate Ways and Means Committee has proposed increasing the state's Earned Income Tax Credit from 23 to 28 percent of the federal benefit (the state increased the tax break for working families last year as well). They would partially pay for the improved credit by applying the state's 5.7 percent hotel tax to short-term rentals, most notably those via Airbnb. For more information, check out the Massachusetts Budget Project's brief. 

 What We're Reading...   

  • Bloomberg BNA reports on the increasing significance of capital gains income to high-income taxpayers based on 2015 IRS data. 

  • The Kansas Center for Economic Growth explains how state income tax cuts broke the budget. 

  • Arkansas Advocates for Children writes about the uncertain impact recent and potential new tax cuts could have on funding public investments.  

  • Villanova Professor Maule on potholes and the long-term financial costs to individual taxpayers when lawmakers cut, freeze, or avoid tax increases. 

State Rundown 7/6: Most Legislative Sessions Come to a Close: Budget Problems Remain


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This week we bring you tax and budget news in Alaska, California, Illinois, New Jersey, North Carolina, and Pennsylvania. Check out the What We’re Reading section below for a good piece on Kevin Durant and the minor role tax rates played in his decision to take his talents to Golden State. Thanks for reading the State Rundown!

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

  • In advance of bringing the Legislature back for yet another special session next week, Alaska Gov. Bill Walker capped the state's Permanent Fund dividend (a flat payment made to all Alaskans) at $1,000 next year, down from the 2015 payout of $2,072, and vetoed $1.29 billion in state spending. The dividend cap and service cuts will hit low-income Alaskans the hardest. However, an income tax, proposed in the governor's New Sustainable Alaska Plan could provide some balance.
  • Lawmakers in Pennsylvania agreed on a $31.5 billion spending plan in advance of the midnight June 30 deadline. SB 1073 increases funding to public schools and funds efforts to combat the state's opioid crisis. However, there is little agreement over how to find the $1 billion plus in new revenue needed to fund it. Gov. Tom Wolf said he will sign the bill "as soon as there is a sustainable revenue package to pay for it...", but lawmakers only have until Monday, July 11 to reach a compromise before the governor must start using his veto pen.
  • On the last day of the 2016 fiscal year, Illinois lawmakers approved stop-gap measures providing long-overdue funding to higher education and human services for FY '16, six months of FY '17 funding for the above mentioned and state agency operations, and a full year of FY '17 funding for K-12 education. While providing some relief for services that have been operating sans funding for the past year, these measures prolong uncertainty and instability by pushing the state's day of revenue reckoning past the November elections.

  • North Carolina lawmakers closed the state's short session on July 1 without giving final approval to a proposal to enshrine a cap on the state's income tax rate in the constitution via voter referendum.  However, the agreed upon budget for the new fiscal year includes a new, small income tax cut by increasing the standard deduction from $15,500 to $17,500 (married couples) continuing the state's march away from reliance on the progressive tax.   
  • In New Jersey, after rejecting a weird plan to pair a needed gas tax increase with a mish-mash of tax cuts that would have primarily benefited wealthy New Jerseyans, and then rejecting an even more destructive plan that would have slashed the state sales tax and blown a hole in the state general fund even bigger than the one they need to fill in the Transportation Trust Fund, lawmakers ultimately chose no plan at all and went on vacation. The state has been forced to declare a state of emergency and shut down most roads maintenance and construction. The bizarre saga will continue when the next scheduled Senate session begins on July 11.

 What We're Reading...

  •  The Washington Post's Wonkblog has a piece explaining that state tax rates were just one very small part of the calculation in Kevin Durant's decision to sign with the Golden State Warriors over the Miami Heat or Oklahoma Thunder.
  • Emmanuel Saez at the Washington Center for Equitable Growth has a new analysis on disproportionate income growth among the top 1 percent and the bottom 99 based on 2015 SOI data. Read the full analysis here.

State Rundown 6/29: State Budgets Come Down to the Wire


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We've got a jam-packed Rundown for you with legislative action coming down to the fiscal year wire. Read about tax happenings in New Jersey, North Carolina, Pennsylvania, California, and Wisconsin. Thanks for reading the State Rundown!

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

  •  New Jersey lawmakers are coming up against a hard deadline at the end of the month to raise the state’s gas tax and shore up its Transportation Trust Fund (TTF), but continue to insist on pairing it with cuts in other taxes. They appear to have abandoned the weird mix of tax policies they were considering last week, but the new plan backed by Gov. Christie and Assembly leadership is even more destructive. The plan would slash the state sales tax rate from 7 percent to 6 percent and quintuple an existing tax break for retirement income, and is a net revenue loss for the state as a whole, draining the General Fund of more than $17 billion over 10 years.

  • The North Carolina Senate gave final approval on Tuesday to its radical measure to enshrine in the state constitution a 5.5 percent cap on the personal income tax rate.  If the House signs off, the fate of the state's ability to fairly and adequately fund vital public services will be in the hands of voters in November.   As our guest blogger Cedric Johnson wrote earlier in the month, the cap would forever lock in recent tax decisions that have primarily benefitted wealthy North Carolinians, force higher sales and property taxes, tie the hands of future lawmakers, and cut off a vital source of revenue needed to invest in education and healthy communities. 
  • Up against tomorrow's budget deadline, Pennsylvania lawmakers are charging ahead with a budget bill. The bill passed the House Tuesday evening and now moves to the Senate where it will likely face scrutiny over whether it is truly balanced. The $31.6 billion budget includes a dollar per pack increase to the cigarette tax, revenue gains from changes to liquor laws, expanded casino gambling, and a one-time tax amnesty program.
  • California Gov. Jerry Brown signed the FY17 budget bill on Monday, which includes added investments in higher education and child care, an additional $3 billion for the state's rainy day fund, and a $1.75 billion cushion to account for lower-than-expected revenues or higher-than-expected costs. While in good standing this year, the state faces a $4 billion deficit if higher income tax rates for the wealthy aren't extended in November.

  • Deficits, delays, and more short-term borrowing appear to be Wisconsin Gov. Scott Walker's continued approach to the state's transportation funding crisis. The governor recently reiterated his opposition to raising the gas tax or vehicle registration fees without an equal cut elsewhere when advising agencies on their 2017-2019 budget requests, signaling that the long-term transportation funding solution lawmakers have been working for over the past several years is likely still a ways off. 

What We're Reading...

  • The Washington Post on a growing trend among states to explore mileage taxes to address inadequate gas tax revenues.
  • With growing income inequality, the Institute for Policy Studies identifies significant tax reform campaigns to watch.
  • Mayors grapple with new economy player Airbnb and how to respond to disruption of hospitality industry tax collections.
  • The annual KIDS COUNT Data Book identifies the EITC as one of the best policies to encourage work while improving the lives of children in low- to middle-income families.
  • Check out ITEP’s updated policy brief on state corporate tax disclosure. 

State Rundown 6/23: Budget and Tax Happenings


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Thanks for reading the State Rundown! Here's a sneak peek: Alaska’s legislative session continues to drag on, sessions in Louisiana, New Jersey, Pennsylvania, and Rhode Island are potentially nearing their end and Philadelphia’s got a new soda tax. Don’t forget to check out What We’re Reading.

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

  • There is no immediate end in sight for Alaska’s legislative session, originally set to end in mid-April. This week Gov. Bill Walker called the Legislature back for yet another special session to consider tax and Permanent Fund legislation. Scheduled to reconvene in July, the Legislature will continue to grapple with ways to close the state’s $4 billion budget deficit. ITEP's analysis of revenue options finds that an equitable solution cannot be reached without a personal income tax.
  • Louisiana’s special session to address a FY17 $600 million budget gap ends tonight at midnight. The House has approved $284 million in new revenue, the majority from an increased tax on HMOs and revised business tax credits. All significant income tax reform measures failed in the House, and the Senate has given up on reviving the proposal to eliminate the personal income tax deduction for state taxes. With $200 million less than expected corporate income and a $27 million accounting error, new revenues fall significantly short of what is needed to fill the hole—the TOPS scholarship program and safety net hospitals will likely feel the most significant cuts.
  • New Jersey’s tax debate and fiscal crunch are coming down to the wire this week and next, as the state’s Transportation Trust Fund (TTF) is set to run out of money for repairing and maintaining roads and bridges in the Garden State on June 30th. Raising the state’s gas tax, which has not been adjusted for inflation or changing needs since 1988, is the obvious way of shoring up the TTF. Yet in what the New Jersey Star-Ledger is calling “an astonishing capitulation,” the debate continues to focus largely on using the TTF crisis as an opportunity to pass tax cuts that primarily benefit the most well-to-do New Jersey residents.
  • Pennsylvania's Gov. Tom Wolf abandoned calls to raise revenue through the state sales or income tax this year. This is an unfortunate turn of events for the Keystone State. ITEP analysis found that the Governor's proposal to increase the state's flat personal income tax rate from 3.07 to 3.4 percent, coupled with increases to the state's tax forgiveness credit to mitigate the impact on low-income families, would be an equitable solution to help address the state's revenue shortfall.
  • The Philadelphia City Council approved a new tax on soda and sweetened beverages last week making it the first major US city to impose this additional levy. The estimated $91 million raised from the 1.5 cent per ounce tax will primarily be used to fund an expansion of the city's early childhood education program.
  • The Rhode Island House and Senate approved an $8.9 billion budget that has already received praise from Gov. Gina Raimondo. The budget, in brief, provides a tax break for retirees, reduces the corporate minimum tax down to $400 from $450, cuts beach parking fees, increases education aid and expands the state's Earned Income Tax Credit from 12.5 to 15 percent of the federal credit. 

What We're Reading...

  • This Washington Post Wonkblog piece examines the impact of opposite approaches to tax policy in Kansas and California (bonus- it also features ITEP data).
  • The Kansas City Star takes down false claims from some lawmakers who are peddling misleading”'facts” to constituents about the state's fiscal and economic health.
  • A new report from the Economic Policy Institute documents growing income inequality across the states.

Pennsylvania's Budget Countdown: Will It Be Ready by July 1?


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With the recent nine-month budget stalemate fresh in everyone’s memory, Pennsylvania legislators are vigorously working to avoid another multi-month budget impasse as fiscal year 2017 quickly approaches. With a $1.8 billion structural revenue gap and deep cuts to services at stake, time is of the essence. 

No one seems to know how Pennsylvania’s budget negotiations will shake out this year, including the Governor. House and Senate Republican leaders push to resist tax increases and focus on changes to the retirement system and the state system for wine and liquor sales seems to be setting the stage, but advocates for good tax policy are on the ground making the case for a responsible budget and a fairer state tax system.

I spent some time last week in Harrisburg discussing the state’s budget and the potential for tax policy changes at the Keystone Research Center’s 20th Anniversary Conference. As I emphasized at the conference, Pennsylvania lawmakers have plenty of progressive revenue raising options to choose from to help maintain adequate and equitable levels of funding for vital public services and close their $1.8 billion budget gap.

Since taking office in 2015, Gov. Tom Wolf has proposed several revenue raising options to address the state’s revenue crisis, including: a $1 per pack cigarette tax increase; 40 percent tax on the wholesale price of other tobacco products; expansion of the state’s sales tax base to include cable television services, movie theater tickets, and digital downloads; and a 6.5 percent shale tax on natural gas reserves. Most recently, he proposed increasing the state’s flat personal income tax rate from 3.07 percent to 3.4 percent, coupled with increases to the state’s tax forgiveness credit that would mitigate the impact on low-income families. According to our analysis, this proposal would raise more than a billion dollars of much-needed revenue for state services each year. 

However, these revenue raising proposals have gained little traction. The 2015-16 budget passed by default when Gov. Wolf neither signed or vetoed the bill claiming that it did nothing to tame the state’s structural deficit. Tax increases will, however, continue to play a role in the ongoing budget debate. And the way in which proposed taxes impact low- and middle-income families should be at the forefront of that conversation.

Pennsylvania has one of the most regressive tax systems in the nation. In 2015 the lowest-income taxpayers paid 12 percent of their income in taxes – this is nearly three times the 4.2 percent rate paid by the top 1 percent of earners. This imbalance is largely due to Pennsylvania’s reliance on a flat personal income tax rate and its lack of refundable tax credits. The state’s flat tax does very little to offset the regressivity of the rest of the taxes the state levies, including its heavy reliance on sales/excise and property taxes.

There are a number of steps Pennsylvania lawmakers can take to move toward a “fairer” tax system. If the goal is to raise revenue in an equitable fashion, here are a few possible approaches:

  • Increase the personal income tax rate.
  • Levy higher rates on capital gains or other forms of nonwage income.
  • Revisit costly exemptions already on the books – such as the complete exemption for retirement income.
  • Expand the sales tax base to include services and pair that reform with a targeted tax credit to mitigate the effect on low-income Pennsylvanians.
  • Amend the restriction against taxing any given class of income at different levels (thereby allowing for a more progressive, graduated rate income tax).

To offset the impact on those families least able to afford a higher tax bill, any of these options could be paired with expanded tax forgiveness credits, a new personal exemption or, better yet, refundable low-income credits such as the Earned Income Tax Credit (EITC).


Pennsylvania's Budget Leaves Long-Term Issues Unresolved


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A nine-month standoff between the Keystone State’s Republican legislature and Democratic governor will come to a close this Monday when a budget passed by the legislature lapses into law. Gov. Tom Wolf has said that he will neither sign nor veto the bill, so it will pass by default.

The passage of this 3-month budget does delay some potentially serious shutdowns, including the possibility that some schools would need to close their doors mid-year. But overall the package represents a missed opportunity. The legislature’s unwillingness to consider new revenues, reliance on accounting gimmicks, and heavy budget cuts will ultimately harm Pennsylvanians without offering a long-term solution to the state’s possible $2 billion structural budget gap.

Gov. Wolf recently explained that the state “cannot afford a budget that doesn’t provide the things Pennsylvanians need from their government.” He is now asking legislators to look ahead and begin making budget decisions for the impending arrival of fiscal year 2017, which starts on July 1.  

For the new fiscal yearWolf has proposed $2.7 billion in tax and revenue modifications, including: an increase in the state’s flat rate personal income tax from 3.07 to 3.4; expanded tax credits for low-income families; a $1 per pack cigarette tax increase; a 40 percent tax on the wholesale price of other tobacco products; an expansion of the state’s sales tax base to include cable television services, movie theater tickets, and digital downloads; a 6.5 percent shale tax on natural gas reserves; a 0.5 percent surcharge on insurance premiums, now taxed at 2 percent; an 8 percent tax on promotional play at casinos; and an 11 percent tax increase on banks and other financial businesses.

The income tax components in particular could go a long way toward narrowing the state’s budget gap while also somewhat reducing the fundamental unfairness of a state tax system that asks far more of low- and moderate-income Pennsylvanians than of the wealthy.

In short, Pennsylvania lawmakers do have reasonable options, beyond quick-fix fiscal bandages, available for addressing the state's long-term revenue challenges.


State Rundown 2/17: Cuts and Crises


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Thanks for reading the Rundown. Here’s a sneak peek: Despite a revenue shortfall, lawmakers in West Virginia are moving forward with their corporate tax cuts. North Carolina lawmakers are once again talking tax cuts, Pennsylvania lawmakers are barely talking – after legislative leaders declared Gov. Wolf’s budget bill DOA. Louisiana Gov. Edwards is threatening that if his state doesn’t balance its budget the end of college football is near.  Thanks for reading.

-- Meg Wiehe, ITEP's State Tax Policy Director

 


 

North Carolina lawmakers are looking at cutting income taxes – again. This time, a House committee considered a proposal to increase the standard deduction for the second time since last year. Joint filers would see an increase of $2,000, while individuals would get an increase of $1,000. If enacted, the change would mean an additional 70,000 to 75,000 filers would owe no income tax since their income would be below the standard deduction. State revenues would decline by $195 million to $205 million annually. An editorial in The News & Observer makes the case that lawmakers should restore the state's Earned Income Tax Credit (EITC) rather than raise the standard deduction. The EITC is better targeted to those families hit hardest by regressive sales, excise, and property taxes, and it would be less costly than increasing the standard deduction, as has been pointed out by our friends at the North Carolina Justice Center.  An ITEP analysis found that the bottom 40 percent of taxpayers in the Tarheel state would receive just 28 percent of the tax cut from a change to the standard deduction, but would see more than 87 percent of the cut from reenacting a state refundable EITC.

Pennsylvania legislative leaders declared Gov. Tom Wolf's budget dead on arrival last week after the governor unveiled his plan in a speech to the legislature. Pennsylvania has not had a budget since July 2015; negotiations between legislators and the governor have broken down multiple times over the past few months. Wolf's budget address was a fiery rebuke to lawmakers with dire predictions of chaos for state workers and services if a deal is not reached soon. Wolf's proposed $33.3 billion budget includes $2.7 billion in new revenue. Under his plan, the state's flat income tax rate would increase from 3.07 to 3.4 percent, and the sales tax base would be expanded to include basic cable television, movie tickets and digital downloads. The governor would also levy a new 6.5 percent severance tax on natural gas extraction, increase the cigarette excise tax by $1 per pack, and raise taxes on other tobacco products.

Despite a major budget shortfall, West Virginia lawmakers are moving forward with a corporate tax giveaway to coal and natural gas companies. Senate Bill 419 would repeal two severance tax increases first implemented in 2005 to pay off the state's workers compensation debts. One tax is a 56-cents-per-ton levy on coal producers while the other is a 4.7-cents-per-thousand cubic feet tax on gas producers. Together, the two taxes brought in $122 million in revenue during fiscal year 2015. If repealed, the state will lose $110 million next fiscal year. The Senate Finance Committee unanimously approved the tax cuts by voice vote, "in a committee room largely empty save for members of the governor’s staff and coal and gas lobbyists." The state will finish the current fiscal year $353 million in debt.

Louisiana Gov. John Bel Edwards warned legislators that the continuing revenue shortfall could spell disaster for college athletics. In his state of the state address, Edwards told Louisianans that they could "say farewell to college football" since Louisiana State University is set to run out of money by April 30. Louisiana faces a $2 billion budget shortfall next fiscal year and needs to come up with $850 million to make it through the current fiscal year. Lawmakers have railed against the governor's proposal to increase sales and alcohol and cigarette excise taxes, but the dire situation leaves them with few options.

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.orgClick here to sign up to receive the Rundown in via email 


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 1/7: New Year, New Taxes


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The revenue crisis in Louisiana is worse than anticipated, according to Gov.-elect John Bel Edwards. The state is short $750 million this fiscal year, which must be accounted for by the end of June. Next fiscal year, which starts in July, will put the state $1.9 billion further in the hole. Edwards has said he will unveil a “menu of options” to address the shortfall in advance of a special session he plans to call next month.  He will likely ask lawmakers to consider revenue raising measures to help soften the impact of spending cuts in the current year and to boost available revenue for next year’s budget (which will get sorted out in March). 

A tax cut for the middle class took effect on January 1 in Arkansas. Gov. Asa Hutchinson won approval last year of a 1 percent cut in the income tax rate for those making between $21,000 and $75,000, at a cost of $135.7 million over the biennium. Hutchinson sees the cut as the first step toward a broader income tax reduction, but he has no plans to propose new cuts before the 2017 legislative session. But some lawmakers and advocates warn that the income tax cuts will lead to further cuts in state services such as the state’s severely underfunded preschool and child welfare programs. "That's just a huge amount to come out of the budget and we're seeing a lot of current unmet needs in Arkansas," noted Ellie Wheeler of Arkansas Advocates for Children and Families.

Pennsylvania officials still haven’t reached an agreement on their state’s budget (now almost seven months past due), but that hasn’t stopped them from approving the funding of tax breaks for corporations. Gov. Tom Wolf conditionally approved several requests for tax credits from businesses, including breaks for donations to private schools, film tax credits and credits for research and development.  Apparently, this represents a reversal for the governor, who said last Tuesday that emergency funds recently made available for school districts and social services would not be used to fund tax credit programs. The state government approved 3,000 requests for the education tax credit, up from 2,700 last year. Businesses can take a 75 percent credit on their donations (up to $750,000) to organizations that provide scholarships to low-income students to attend private schools.

Utah Gov. Gary Herbert wants his state’s legislature to reconsider its earmarking practices, saying that automatically directing new revenues to specific purposes can reduce flexibility in funding state priorities. Herbert specifically argued that money earmarked for transportation could be better spent on educational priorities. "We're coming to a point where there's a crossroads decision, because if we don't reduce some of the earmarks, we will have a difficult time funding education, particularly higher education,” noted the governor. Some lawmakers have also argued that the automatic earmarking practices prevent the state from regularly reviewing if funds are being spent efficiently.

Snack lovers in Maine will pay a little more at the register this year. Since Jan. 1, a number of products including marshmallow fluff and beef jerky were added to the sales tax base. The sales tax base expansion was one element of the tax reform package passed by the legislature last summer which also included a permanent hike in the sales tax rate, significant changes to the state’s personal income tax, and the introduction of a refundable sales tax credit. 


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


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

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

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

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

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

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

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

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

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

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

 


State Rundown 12/3: Who Needs A Budget?


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Pennsylvania leaders have again pledged that a budget deal is in reach, despite the collapse of a recent compromise (and, of course, the compromises before that). The state is also in its sixth month of stalemate. Gov. Tom Wolf says that negotiations are down to “details and language,” with revenue raising measures being a sticking point. Legislative leaders have ruled out a broad-based tax increase so negotiators are working on a way to raise $600 million without a sales tax rate increase. Rather, a wider range of goods and services will be subjected to sales tax, including admission to museums, amusement parks, and golf courses. A proposed property tax reduction is no longer under consideration. Both houses of the legislature plan to work through the weekend on reaching a deal.

Mississippi leaders will push forward with tax cuts next legislative session even though revenue collections are sluggish enough to threaten mid-year budget cuts. Gov. Phil Bryant and Lt. Gov. Tate Reeves, both recently reelected, will try again to push tax cuts after being defeated during the last session. A likely target is the state’s business franchise tax, which is a levy on a business’s property used, invested, or employed. Eliminating the tax, which brings in $245 million annually, is a prime item on both men’s agenda, and bigger Republican majorities in the legislature make it a possibility. House Republicans are just on vote shy of the 3/5 supermajority required to pass a tax cut. Mississippi’s Legislative Black Caucus warned that the state would be unable to afford a deep tax cut like the ones proposed by leaders last session.

Florida Gov. Rick Scott has never met a tax cut he doesn’t like, and if he has his way the upcoming legislative session will give him plenty to love. Scott wants the legislature to pass $1 billion in tax cuts aimed at businesses to fulfill a campaign promise. So far, leaders in the Senate have balked at the hefty price tag, arguing that the governor shouldn’t push business tax cuts at the same time he wants to rely on property tax increases for more school funding. Budget officials estimate that Florida will see a surplus of $635 million this fiscal year, but some argue it would be irresponsible to use that one-time money for permanent cuts. In a rare move, Scott appeared before a House panel to argue that his tax cuts would be good for the state’s economy. A recent editorial in the Sun-Sentinel pushed back on the governor’s claims, saying that eliminating corporate income taxes for manufacturers and retailers won’t address Florida’s problems. 

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Do you have a exciting piece of state tax news that should be featured in the State Rundown? Send it to Sebastian at sdpjohnson@itep.org. And don't forget to sign up for the Tax Justice Digest and follow ITEP on Facebook and Twitter!


Pennsylvania Budget Stalemate and the Hard Work Ahead


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Pennsylvania Gov. Tom Wolf and House and Senate lawmakers continue to grapple with how to balance the state’s books more than 90 days past the budget due date. The state’s fiscal year started July 1, but policymakers have yet to agree on a fiscal path forward that manages the state’s $2.3 billion deficit. 

The House voted this week against a new tax plan proposed by the governor, which, he said, provided an “opportunity to move forward and away from the failed status quo.” Conservative members of the legislature (who control the House and Senate) support a “no new taxes” solution and instead want to privatize state-run wine and liquor stores and reduce pension spending to close the gap.  The governor’s latest tax proposal was seen as an attempt to gain some conservative support for a revenue solution as he abandoned his plan to broaden the sales tax base and pared back his proposed new severance tax on natural gas extraction.   The centerpiece of his proposal was an increase in the state’s personal income tax rate from 3.07 to 3.57 paired with an increase in a tax forgiveness credit.  According to an ITEP analysis, the income tax changes would have held the state’s lowest income residents harmless while the rest of the hike was spread evenly across the income distribution. 

The Pennsylvania Budget and Policy Center notes that there is now more (and harder) work to be done:  “The weight of responsibility for guiding us to the budget Pennsylvania needs now rests more heavily than ever with the legislative majority, including with the members who, at various times, have expressed support for a severance tax, increased education funding and more investment in human services. Today they voted no. That was the easy part. The hard part will be getting to yes, to a vote for a responsible budget that invests in Pennsylvania’s schools, communities and future.”

Pennsylvania already has the sixth most unfair state tax structure in the country, so while there is harder work ahead for policymakers there are certainly clear options available that both raise money and increase the overall fairness of the state’s tax structure. 


State Rundown 9/30: Fall Budget Tumbles


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Michiganders will pay sales and use tax on online purchases for the first time when a new law goes into effect this Thursday. The Main Street Fairness Act, signed by Gov. Rick Snyder in January, requires out-of-state companies with a physical presence in the state, such as a warehouse or distribution center, to collect and remit sales and use taxes on online purchases made by Michigan residents. State analysts estimate that the measure will increase revenue by $60 million annually. The Michigan law is the latest in a series of so-called “Amazon laws,” named after the largest online retailer most likely to be affected by such measures. For more on this story, check out this ITEP blog post.

Conservative lawmakers in Arizona could be gearing up for a push to eliminate the state’s income tax, according to trial balloons in Forbes and by the Arizona Free Enterprise Club (AFEC). The recent advocacy comes from none other than Travis Brown and Stephen Moore, the Scooby Doo villains seemingly behind every terrible state tax plan. In Forbes, Brown uses praise for Gov. Doug Ducey’s education plan as an excuse to argue that Arizona should eliminate its income tax because “now is the time to end the price on work…. There’s no need for such an innovative and financially attractive place as Arizona to slap a growth-discouraging premium on doing business in the state.” Moore argues in a paper on behalf of AFEC that eliminating the income tax would make Arizona more competitive and attract jobs, investments and new residents. Left unmentioned were the disaster in Kansas, where lawmakers took such advice to heart, or the numerous studies showing that businesses and residents don’t follow income tax cuts. 

The budget impasse in Illinois continues with no end in sight. This week, Illinois Sec. of State Jesse White warned that the lights at the state capitol could be cut off if lawmakers can’t reach a deal. Moody’s noted that even reinstating the income tax increase that expired in January, a source of continuing conflict between Gov. Bruce Rauner and the legislature, won’t be enough to close the $5 billion gap. Illinois Comptroller Leslie Munger says the state’s backlog of unpaid bills could hit $8.5 billion by the end of December. Meanwhile, Chicago Mayor Rahm Emmanuel has proposed a city property tax increase of $543 million over the next three years to avoid huge spending cuts.

Deadlock is the name of the game in Pennsylvania, too, where Gov. Tom Wolf and the legislature have yet to agree on a new budget. The governor and key lawmakers met on and off on Monday, which marked 90 days since the start of the fiscal year, but there were no breakthroughs. Gov. Wolf has proposed a tax plan  that would increase education funding and eliminate the budget deficit, while legislators want to privatize state-run wine and liquor stores and reduce pension spending. Wolf says he plans to veto a continuing resolution passed by the legislature since the state has waited too long for a permanent solution. Yields on state bonds have increased as investors see Pennsylvania’s financial situation as increasingly risky


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


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

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

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

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

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

 

Tax Shifts

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

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

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

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

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

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

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

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

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

 

Tax Cuts 

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

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

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

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

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

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

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

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

 


State Rundown 7/1: Fiscal Year Blues


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The budget showdown between Pennsylvania Gov. Tom Wolf and the state legislature continues. Republican lawmakers want to close a large budget gap without new taxes, while the governor has proposed a property tax reform measure and a new tax on natural gas extraction. Wolf has threatened to veto a budget with no tax increases. With the fiscal year ending today, pressure is on for leaders to make a deal. If that deadline is passes without a resolution, most observers expect business to continue as usual for state workers in the short term.

Washington state legislators reached an agreement on transportation spending that includes an increase in the state’s gas excise tax. The $15 billion package will increase the tax by 11.9 cents-per-gallon over three years. Gov. Jay Inslee previously pledged to sign any deal between the House and Senate, making enactment of this deal likely.

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

Connecticut lawmakers reached a deal on the budget in a special session after Gov. Dannel Malloy called lawmakers back to the capital at the behest of corporate lobbyists. At issue was an increase in the state’s sales tax on computer and data processing services from 1 to 3 percent, as well as new combined reporting rules for businesses operating in Connecticut. The legislature backed down on those changes after corporations decried the measures and leaned heavily on the governor. The new deal maintains the sales tax rate on computer and data processing and delays the start of combined reporting by one year.  To make up the lost revenue from those changes, lawmakers reduced Medicaid spending by $12.5 million, reduced a scheduled state employee pay increase by .5%, partially delayed a transfer of sales tax revenue to transportation projects, and delayed some new municipal revenue sharing.  

Oregon will launch a new experiment this month that aims to change the way we fund road construction and repair. The program, called OReGO, will charge 5,000 volunteer drivers a 1.5 cent-per-mile road usage charge, also known as a vehicle miles traveled (VMT) tax, rather than the traditional state gas excise tax at the pump. The program is meant to address declining revenues from the gas tax, as vehicles become more fuel-efficient and the maintenance needs of aging infrastructure skyrocket. While some observers are optimistic that VMT taxes could prove to be a more sustainable revenue source, there is reason to be more skeptical. As ITEP’s Carl Davis points out in a new report, “[Oregon’s] new VMT tax is an unsustainable revenue source because it contains the same design flaw that has plagued the state’s gasoline tax for almost a century—a stagnant, fixed tax rate that is incapable of keeping pace with inflation.” Davis suggests indexing current state gas excise tax rates to inflation before beginning to experiment with entirely new funding mechanisms.

 

States Still In Legislative Session:
Alabama
Illinois
Maine
Massachusetts
Michigan
New Hampshire
North Carolina
Oregon
Pennsylvania
Washington
Wisconsin

 


State Rundown 4/20: State Houses Consider Cuts


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Legislators in the Pennsylvania House released an alternative to Gov. Tom Wolf’s tax reform plan last Tuesday. The House plan would increase income and sales tax rates to provide significant property tax cuts, as would the governor’s plan. One difference is that the House plan would raise the sales tax rate to 7 percent but leave the base unchanged, while Wolf’s plan would increase the sales tax rate to 6.6 percent and expand the sales tax base. The House plan also would not provide property tax rebates for renters as the governor’s plan would. While the House plan would provide even more funding for property tax cuts, ($4.9 billion vs. $3.9 billion under the governor’s plan) their package is essentially revenue neutral and does not include increased investments in public education which is a signature piece of the governor’s plan. The House Finance Committee is expected to vote on the House plan next week. Stay tuned to the Tax Justice Blog for a more in-depth analysis of tax reform efforts in Pennsylvania.

The Ohio House is set to approve Gov. John Kasich’s proposed tax cuts while nixing his proposals for new tax revenue. Kasich originally proposed $5.7 billion in income tax cuts and $5.2 billion in consumption tax increases over two years– specifically an increase in the sales tax rate from 5.75 percent to 6.25 percent, an expansion of the sales tax base, and increases in the commercial activities tax and severance tax on natural gas extraction. The House is expected to pass a smaller income tax cut and to reject all of the proposed tax increases; whereas the governor wanted to lower the top personal income tax rate to 4.1 percent, the House will likely reduce the rate to just under 5 percent. At the same time legislators blocked the governor’s proposed cuts in public school funding, a welcome but contradictory move.  Stay tuned to the Tax Justice Blog for a more in-depth analysis of tax cutting efforts in Ohio.

The South Carolina House approved a bill by a veto-proof majority that would increase the states gas tax by 10 cents and provide most residents with a modest income tax cut of $48. It is expected to generate $400 million in new revenue for road construction, tax cuts excluded. The margin of passage is important because Gov. Nikki Haley, who vowed not to increase the gas tax without significant income tax cuts, feels that the cuts passed by the House are not enough. The bill also does not contain the Department of Transportation reform measures demanded by Haley, who seeks to assert more control over road funding and construction. The Senate is also considering a road funding plan.

 

Following Up:
Florida: Senate President Andy Gardiner says the $600 million in tax cuts championed by Gov. Rick Scott and passed by the House last week are “on the shelf” until the fight over Medicaid expansion is resolved. Federal subsidies to Florida for healthcare providers who treat the poor are scheduled to expire, but the governor is resistant to expanding Medicaid coverage under Obamacare to make up for the lost revenue.

 

In Case You Missed It:

  • ITEP released a report on undocumented immigrants’ contributions to state and local tax systems. The report found that undocumented immigrants paid an estimated $11.84 billion in taxes in 2012. Check out this blog post for more!
  • In honor of Tax Day, the Tax Justice Blog highlighted the great work done by our state partners around tax issues.  

 


State Rundown 3/9: Revenue Strikes Back


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Massachusetts Gov. Charlie Baker unveiled his budget last Wednesday, and while it calls for some distressing cuts to state services it also includes a worthy tax policy shift that would help working families. The governor wants to double the state’s Earned Income Tax Credit over three years. Currently, low-income families with three or more children can receive up to $937 under the credit; Baker’s proposal would increase this figure to $1,873. To pay for the EITC expansion, Gov. Baker would phase out the state’s film tax credit, which state reports have found to be inefficient and a waste of taxpayer money. One Department of Revenue report concluded that in 2012 the majority of credits went to just three movies, at a cost of $60.1 million. Attempts to curb the film credit by Baker’s predecessor Deval Patrick were unsuccessful.

Some Texas municipalities fear that state officials have pushed through too many tax cuts, according to a recent Bloomberg Business article. The disconnect, according to some political observers, arises from the popularity of conservative messages around taxation at the state level and the focus on providing services at the local level. While state spending has fallen – Texas is ranked 48th in per-capita spending according to the Kaiser Family Foundation – local governments have borrowed to pick up the slack. According to figures from the state government, local borrowing has increased by 75 percent since 2005 to fund public works necessary for managing economic and population growth.

A South Carolina lawmaker has a new plan that he says will raise an additional $800 million for roads and highways in the state. State Sen. Ray Cleary’s bill would increase the gas tax by 10 cents and index it to inflation, raise the sales tax cap on car purchases from $300 to $1,400, close some sales tax exemptions, and increase fees for licensing and registration. He estimates the changes will cost South Carolina drivers $65 more each year on average. Cleary’s plan would raise revenue, while a proposal offered by Gov. Nikki Haley would result in a net revenue loss. Haley called for an increase in the gas tax coupled with an income tax cut in her state of the state address earlier this year.

 

Following Up:
Pennsylvania: Gov. Tom Wolf’s budget proposal met mixed reviews from state editorial boards. The Pittsburgh Post-Gazette though his budget was unrealistic and partisan, while The Philadelphia Inquirer called his plan ambitious and a necessary departure from his predecessors.

Mississippi: House Speaker Philip Gunn used a bizarre biblical analogy to assert that his plan to eliminate the state income tax would not lead to lost revenues. Opponents of his plan remain unconvinced.

Florida: House and Senate leaders appear to be on a collision course over balancing the state budget, jeopardizing Gov. Rick Scott’s proposals to cut taxes and increase education spending.

 

Things We Missed:
Massachusetts Gov. Charlie Baker released his budget last Wednesday – read it here.

Governors’ Budgets Released This Week:
Rhode Island Gov. Gina Raimondo (Thursday)

States That Will End Legislative Session This Week
Arkansas (Thursday)
Utah (Thursday)
West Virginia (Saturday)
Wyoming (Monday)

 

 

 


State Rundown 3/4: Other, Less Controversial Speeches before Legislatures


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Pennsylvania Gov. Tom Wolf unveiled his budget proposal this week, delivering his state of the state address before a joint session of the state legislature. Wolf’s proposal would largely shift the responsibility for funding  public education from local property taxes to the state sales and income tax. The flat personal income tax rate would increase from 3.07 to 3.7 percent, and the sales tax rate would rise from 6 to 6.6 percent and would apply to additional goods and services. These changes would bring in an additional $3.9 billion in general fund revenue, most of which would be dedicated to reducing property tax bills by an average of $1,000 per household. About $540 million in new revenues would go to public schools and universities. Wolf also proposed a new severance tax on oil and gas extraction that would replace the state’s one-time impact fee on drilling new wells, with new revenues also earmarked to public education. In a bid to gain bipartisan support, Wolf also proposed significant corporate income tax cuts paid for by closing loopholes and continuing former Gov. Tom Corbett’s plan to phase out the state’s capital stock and franchise tax. (Stay tuned to the Tax Justice Blog for our take on the plan.)

Alabama Gov. Robert Bentley presented his budget proposal to the state legislature this week under the cloud of a $700 million deficit. The governor proposed $541 million in tax increases across eight areas, including the corporate and individual income taxes, excise taxes on tobacco products, and sales and rental taxes for cars. The cigarette tax would increase by 82.5 cents per pack, with commensurate increases for other tobacco products, bringing in $205 million in additional revenue. Increasing the tax rate on automobile sales and rentals from 2 to 4 percent would increase revenues by $231 million. The governor’s finance director assured legislators that the proposed changes would still leave Alabama near the bottom in rankings of tax revenues per capita, but Bentley’s plan will do little to address the regressive nature of the state’s tax system.  (Stay tuned to the Tax Justice Blog for our take on the plan.)

Florida Gov. Rick Scott was the third governor to give a state of the state address today, pitching a combination of tax cuts and spending increases to leery legislators. Scott touted his “Keep Florida Working” budget proposal, which includes $673 million in tax cuts from a variety of sources, including the tax on communication services, sales taxes on college textbooks, and taxes on businesses and manufacturers. The bulk of the cuts -- $470.9 million in lost revenue – come from decreasing the tax rate on communication services (cell phones, cable, and satellite television) by 3.6 percent. Scott also pushed for more education funding and a tuition freeze on postgraduate education at state universities.

A new report from the North Carolina Budget and Tax Center reveals that tax cuts pushed by Gov. Pat McCrory (who is expected to release his budget plan this week) and the state legislature have hurt economic growth by starving the state of needed revenues. According to the report, if tax levels in the state were at pre-recession levels, North Carolina would have $3.2 billion additional dollars to invest in early childhood education, access to higher education, anti-poverty measures for senior citizens, affordable health care, wage subsidy programs and court access. The Budget and Tax Center also points out that even though middle- and low-income families saw their overall tax responsibility increase, the massive cuts for wealthy individuals left the state with an annual $1 billion budget gap.

 

States Starting Session This Week:
Alabama (Tuesday)
Florida (Tuesday)

State of the State Addresses This Week:
Alabama Gov. Robert Bentley (watch here)
Florida Gov. Rick Scott (watch here)
Pennsylvania Gov. Tom Wolf (watch here)

Governors’ Budgets Released This Week:
Alabama Gov. Robert Bentley (read here)
Pennsylvania Gov. Tom Wolf (read here)
North Carolina Gov. Pat McCrory (Thursday)

 


New Year, New Gas Tax Rates


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

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

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

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

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

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

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

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


State Rundown 11/14: Here Comes the Judge


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


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


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


 


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


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

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

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

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

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

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

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

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

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

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

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


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


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

Pennsylvania.jpgPennsylvania Gov. Tom Corbett (R) is fighting for his political life in the Keystone State, where he has trailed his challenger, businessman Tom Wolf (D), by double digits for much of his reelection campaign. With election only months away, Corbett has sought to portray Wolf as a tax-and-spend hypocrite – eliciting a sharp response from Wolf and pushing tax issues to the forefront of the race.

There are many competing theories for Corbett’s unpopularity with voters, from the fallout over the Penn State abuse controversy to his overly conservative views on social issues, but his tax and spending policies have alienated liberals and conservatives alike. Progressives expressed outraged when he cut more than $1billion from education budgets at the beginning of his term – disproportionately harming districts with large numbers of low-income students – while anti-tax conservatives were equally dismayed by his transportation plan, which raised the gas tax and motorists fees to fund roads and bridges. Wolf has also assailed Corbett’s gas tax increase (though critics point out Wolf has also praised the bipartisan transportation plan of which the tax is a key component.)

Earlier this month, Wolf released the vague outlines of his plan to make the state’s tax system more progressive, while still providing middle-class Pennsylvanians a tax break. Pennsylvania has a flat income tax rate of 3.07 percent and the Pennsylvania Supreme Court has ruled that the constitution bars the adoption of a graduated income tax. Wolf’s plan would raise the income tax rate but exempt income below a certain level. In an interview, Wolf gave a hypothetical scenario with a 5 percent income tax rate and a uniform exemption of the first $30,000 of income. An individual making $40,000 could expect a tax break of $421, while an individual making $250,000 would pay an additional $4,825. Wolf plans to use the extra revenue generated by his tax reform to increase the level of state aid to public schools and provide Pennsylvanians with property tax relief. It is uncertain if his plan will survive legal and financial scrutiny.

Because of the regressive nature of the state income tax, Pennsylvanians have one of the highest property tax rates in the nation. Wolf wants to see the state’s share of local education spending increase to 50 percent -- currently, the state foots a third of the bill for schools, while property taxes cover 40 percent. Corbett argues that local jurisdictions have raised property taxes to cover the increasing cost of pensions rather than the schools themselves, and that an increase in the income tax is not necessary. Corbett has also accused Wolf of scheming in increase taxes on the middle class, rather than lower them.

Another flashpoint between the two candidates is a potential severance tax on the extraction of oil and natural gas – a potent issue in Pennsylvania, where the economy has been buttressed in recent years by hydraulic fracking along the Marcellus Shale. Wolf has campaigned on a 5 percent severance tax to fund education, arguing that the tax would be passed onto consumers in other states, rather than Pennsylvania residents. Corbett has refused to endorse a severance tax, despite calls for such a tax from some members of his own party. In 2012, Corbett enacted an impact fee on oil and gas companies that has since raised $630 million, which critics allege is much less revenue than a severance tax would raise. Recently, Corbett has backed off of his staunch opposition to a severance tax, given the state’s $1 billion budget shortfall, though he insists that any new taxes be tied to efforts to reduce the cost of pensions for educators and state employees.

 


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

The natural gas extraction industry’s free ride in Pennsylvania may finally be coming to an end. Five years after natural gas companies entered the state to take advantage of the Marcellus Shale, legislators are considering an extraction tax (aka, a severance tax) to make up for lower than expected revenues and an otherwise tight budget. Drillers currently face what’s called an “impact fee,” but it raises little revenue, especially when compared with other energy-producing states. While a severance tax is still far from becoming law (the Governor still needs to be convinced, for example), some savvy observers are convinced the coming debate will not just be idle talk.

For years, state lawmakers have been falling all over themselves trying to get Hollywood to come to their states to make movies.  But even Virginia, which has a film tax credit, recognizes that not every potential tax credit deal is a good investment for their economy.  When Maryland decided not to expand its film tax credit, Netflix’s “House of Cards” began looking into whether it should film somewhere else.  But Virginia’s Film Office thinks the show is asking for too many incentives without offering enough in return.

John Archibald of the Birmingham News had a great column last week on Alabama’s tragic policy of taxing the poor deeper into poverty. As he explains, “We like to imagine Alabama a low-tax state…. But it's not a low tax state if you're broke.” This is because Alabama relies heavily on the regressive sales tax, making the state’s tax system one of the most upside-down in the country. Archibald’s column comes a few weeks after a similarly powerful editorial in the Montgomery Advertiser, arguing that while state taxes may be low, public investments are suffering as a result.

Starting Thursday May 1, Amazon.com will finally begin collecting sales taxes on purchases made by Florida residents.  As a result, the percentage of Americans living in a state where Amazon must collect sales tax will increase from 60 to 65 percent.  Until the U.S. House of Representatives acts on the Marketplace Fairness Act, however, enforcement of state sales taxes on purchases made over the Internet will not be possible on a comprehensive basis.


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


Gas Tax Reform Draws Close in Pennsylvania as Debate Continues in 3 More States


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Update: Pennsylvania Governor Tom Corbett signed the gas tax increase described below into law on November 25, 2013.

One of 2013’s biggest state tax policy issues—the gasoline tax—continues to make headlines long after most state legislative sessions have come to a close for the year.  We’ve already written about how lawmakers in Maryland, Massachusetts, Vermont, Virginia, Wyoming, and the District of Columbia enacted gas tax increases or reforms earlier this year.  But within just the last week, four more states have been in the news with high-profile proposals to raise their own gas taxes—including Pennsylvania, which appears to be on the verge of both increasing and reforming its tax.  Here’s what’s been happening:  

Pennsylvania is one of a small number of states where the legislature is still in session (most state sessions ended this spring).  This week, both the Pennsylvania House and Senate passed a bill that would gradually raise the gas tax by allowing it to rise alongside gas prices, much like an ordinary sales tax.  This is not a new idea in the Keystone State.  Prior to 2006, Pennsylvania’s gas tax actually functioned in exactly this manner, though the 32.3 cent tax has since run up against a poorly designed gas tax “cap” that the legislature is now seeking to lift.  When combined with increases in vehicle registration fees, license fees, and traffic fines, the overall package is expected to raise $2.3 billion per year for roads and transit.  As of this writing the bill needs to be approved by the House one more time before going to Governor Tom Corbett’s desk where it is expected to be signed into law.

In Washington State, The Olympian is reporting that “a bipartisan transportation revenue package now looks possible” after the coalition of lawmakers in control of the state senate backed an 11.5 cent gas tax increase.  The tax increase would be phased-in over the course of three years and is actually somewhat larger than the 10 cent increase sought by Governor Jay Inslee and House Democrats earlier this year.  As we explained in June, Washington’s gas tax would remain relatively low by historical standards even if the Governor’s 10 cent increase had been enacted into law.  The same is true of an 11.5 cent increase.  Lawmakers could potentially act on the 11.5 cent plan within the next few weeks if a special legislative session is called.

Utah business leaders, local officials, and other stakeholders are continuing to make the case that public investments in infrastructure will help the state’s economy succeed, and that the gas tax is the best way to pay for those investments.  On Wednesday, local officials testified before an interim transportation committee in support of a plan to allow localities to levy a 3 percent gas tax.  Unlike Utah’s fixed-rate gas tax—which actually stands at its lowest level in history as a result of inflation—this 3 percent tax should do a reasonably good job keeping pace with future growth in the cost of transportation construction and maintenance.  At the same hearing, a Republican state representative testified in support of his own plan to raise the state’s gas tax by 7.5 cents per gallon, phased-in over the course of five years.

The gas tax has been a frequent topic of discussion in Iowa these last few years, and it doesn’t seem like that’s about to change any time soon.  As in Utah, Iowa’s gas tax is at an all-time low (after adjusting for inflation), but one of the state’s candidates for governor in 2014 would like to change that.  Democrat Jack Hatch has proposed raising the tax by a total of 10 cents over the course of 5 years.  Current Governor Terry Branstad, who is eligible to seek reelection next year, is noticeably less excited about the idea.  But Branstad has said he won’t veto a gas tax increase if one makes it to his desk.


State News Quick Hits: Maine's Millionaires Abandon the 47%, and More


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Colorado’s Child Care Tax Credit would be expanded for low-income families under a bill approved by a special task force of legislators last week.  As the Colorado Center on Law and Policy explains (PDF), some Colorado households are actually too poor to benefit from the federal credit right now because it's only available to families who make enough to have some income tax liability; if you don't pay income taxes, you can't receive any state tax credit.  This bill would fix that problem at the state level by letting families earning under $25,000 claim a credit equal to 25 percent of their child care expenses, regardless of what credit they did (or did not) receive at the federal level.

Montgomery County, Maryland continues to make progress toward restoring its Earned Income Tax Credit (EITC) to its pre-recession level: 100 percent of the state’s EITC.  The enhancement was approved by a committee on Monday and will now go before the full council.  For more information, see our blog post on the history, and the benefits, of Montgomery County’s EITC.

Maine Governor Paul LePage is coming under fire for wildly inaccurate comments he made (which were secretly recorded) at a meeting of the Greater Portland chapter of the Informed Women’s Network.  Gaining him national attention, LePage told his audience  that “47 percent of able-bodied people in Maine don’t work,” a claim that is ridiculous.  At the same meeting LePage also said the following to justify his proposals to cut taxes for wealthy Mainers: “25 years ago Maine had about 2,000 millionaires. Maine has 400 now. New Hampshire at the time had about 500, right now they have 4,000. That’s the difference. That’s when you talk about prosperity and you talk about building an economy those are the things that you need to concern yourself with. So, I am looking at taxation as a big issue.”  Like his 47 percent claim, LePage evidently pulled these numbers out of thin air as data from the IRS do not back this statement. In fact, the number of tax returns with more than $1 million of income increased more in Maine (83%) than in New Hampshire (64%) between 1997 and 2011 (the years IRS data are available).

Some bad ideas just won’t die. Despite being rejected by the Pennsylvania House of Representatives by a vote of 138-59 last month, a proposal to eliminate school property taxes and reduce spending for schools is now being reconsidered by the state’s Senate. The bill, SB 76, replaces the property tax with higher sales and income taxes but then limits how much of the new revenue would flow to schools. The legislature’s own Independent Fiscal Office warned last week that the bill would create a $2.6 billion funding gap within five years. While reducing property taxes, which have been rising in recent years, may make sense (for low-income renters and fixed-income homeowners in particular), it should not be done at the expense of students, nor in the form of across-the-board cuts that also benefit big businesses. The House-passed HB 1189 at least ensured that the lost property tax revenues would be replaced with some other source, but neither bill addresses the longstanding problem of inadequate and unequal school funding in Pennsylvania.

 

The Philadelphia Inquirer reports on a poll showing that most Pennsylvanians care more about the quality of their schools than about keeping their tax bills low: “The poll found that in order to restore $1 billion in state aid [that was] cut two years ago, more than half the respondents - 55 percent - would be willing to support increasing the state sales tax from 6 percent to 6.25 percent and postponing corporate tax breaks as long as the money went into a dedicated trust for schools... Fifty-four percent said they would favor boosting the state income tax rate from 3.07 percent to 3.30 percent to help the schools.”

In other Pennsylvania news, a proposal by state Senate Majority Leader Dominic Pileggi to uncap that state’s film tax credit failed to garner support during this legislative session. Yesterday, Governor Tom Corbett signed the 2013-14 Executive Budget, maintaining the credit’s $60 million annual cap. Lawmakers must have read our discussion of why film tax credits are a poor economic development tool – hopefully next year the proposal will be to eliminate them entirely.

The Michigan League for Public Policy (MLPP) uses new data to make the case for reversing the 70 percent cut in the state’s Earned Income Tax Credit (EITC) that lawmakers enacted in 2011 to pay for a big cut in businesses’ tax bills.  As the MLPP points out, “One in every four children (25%) in Michigan lived in poverty in 2011, up from one in five (19%) in 2005. Only nine states had bigger jumps in the child poverty rates … The state and federal credits literally lift children in low-income families out of poverty. Studies show a strong correlation between income boosts and good outcomes for kids.”

Goodbye and Congratulations! The Institute on Taxation and Economic Policy (ITEP) often works with the Iowa Policy Project (IPP) on tax and budget issues in the Hawkeye State. The organization’s founding director David Osterberg  announced that he will be stepping away from his director duties to focus on environment and energy policy. Taking over as director will be Mike Owen, IPP’s current assistant director. We wish David all the best and congratulate Mike in his new role.

Our friends at ITEP are busy crunching the numbers for yet another version of tax “reform” in North Carolina. The Senate is expected to approve a revamped bill this week which is more in line with the concepts the House and Governor support.  But, with a more than $1 billion annual price tag and most of the benefits going to wealthy North Carolinians and profitable corporations, the effort still falls far short of being real reform.  Be sure to check out www.ncjustice.org this week for the latest information about the ongoing debate and to see ITEP’s numbers in action.


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


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

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

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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Mid-Session Update on State Gas Tax Debates


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

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

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

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

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

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

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

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

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

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


Gas Tax Gains Favor in the States


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

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

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

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

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

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

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

The Pennsylvania legislature just sent a bill to Governor Corbett that would allow most companies to keep the income tax payments they withhold from their employees as a kind of reward for having hired them. Normally, of course, those tax dollars would go to pay for the public services all Pennsylvanians, including the workers, rely on.  As Sen. Jim Ferlo argues, “All of sudden we're waylaying those employees' wages, almost akin to Jesse James robbing a bank, and we're going to put it back in the pockets of one company, in one locale, in one county, in one jobsite.”  This type of tax break is not uncommon, and it’s explained in Good Jobs First’s “Paying Taxes to the Boss.

The Olympian editorializes against Washington State’s Initiative 1185, the newest attempt by anti-tax activist Tim Eyman to empower a small minority of legislators to block the closing of any tax loophole.  The proposal is known as a “supermajority requirement,” since it would require approval by two-thirds of each legislative chamber to enact any revenue-raising tax change.  But as the editorial explains, “A supermajority gives unprecedented and undemocratic powers to the minority in just one area: tax increases. Lawmakers who oppose a tax proposal get twice the voting power of those who support it.”

Iowa tax revenues appear to be on the rise, but instead of using that money to fill in gaps after years of “starv[ing] state government” or, say, restoring anti-poverty tax credits like the state’s Earned Income Tax Credit (EITC),  Governor Terry Branstad is pushing for proposals that will “dramatically” reduce both personal and corporate income tax rates. This is par for the course with Governor Branstad. He has a history of prioritizing the wrong tax cuts while vetoing those for working families, like an expanded state EITC.

Looking for evidence that states shouldn’t heavily depend on cigarette tax (PDF) revenues as a stable source of revenue? Check out this Clarion Ledger article which reports that “per capita consumption of cigarettes — 67.9 packs a person in 2011 — is the lowest it’s ever been in Mississippi.” Thanks to federal and state tax increases, tax revenues have actually increased, but as fewer and fewer Mississippians smoke, those cigarette tax revenues are bound to decline as well.

In a recent survey, conducted by the Docking Institute of Public Affairs at Fort Hays State University, Kansans said they would rather see property tax cuts than income tax cuts. This finding isn’t surprising given the unpopularity (PDF) of regressive property taxes. Earlier this year, however, Kansas lawmakers did the opposite and passed sweeping reductions to the income tax.  The Institute’s Director said it was clear that, “the tax structure [Kansans] want seems to be completely the opposite of the tax policies coming from the Legislature.”

While Kansas recently repealed its only form of grocery tax relief (a credit for low-income families), West Virginia is moving in the opposite direction.  That state’s sales tax rate on groceries will drop by one percentage point starting on July 1 this year, and be repealed entirely midway through next year.

West Virginia revenue officials aren’t too enamored with any suggestion to increase the state’s already generous property tax breaks for senior citizens.  Using a $300,000 home as an example, the state’s deputy secretary of revenue explained how under today’s rules, a homeowner under 65 would pay $2,334 on that house while a homeowner over age 65 using the credit could pay as little as $764. Moreover, with the state’s eligible senior population expected to grow by 37 percent over the next decade, the cost of any tax breaks for older West Virginians is going to grow dramatically.

After much debate, South Carolina lawmakers appear to have come to an agreement on a regressive tax change that allows “pass-through” business income (which tends to go mainly to wealthy individuals rather than businesses) to be taxed at three percent instead of the five percent currently levied.

After the legislature overrode Governor John Lynch’s veto, New Hampshire became the latest state to adopt neo-vouchers: tax credits for corporations who contribute money to private school scholarship funds which end up diverting taxpayer dollars into corporate coffers.  In his veto message, the Governor wrote: "I believe that any tax credit program enacted by the Legislature must not weaken our public school system in New Hampshire, downshift additional costs on local communities or taxpayers, or allow private companies to determine where public school money will be spent.”

Tax experts asked by the Associated Press couldn’t find anything nice to say about Pennsylvania Governor Tom Corbett’s proposed $1.7 billion tax break for Shell Chemicals – the largest-ever financial incentive offered by the state – for the company to build an oil refinery. David Brunori from George Washington University said, “There's absolutely nothing good about what the governor is proposing" and a libertarian policy expert pointed out that government shouldn’t be covering the cost of risk for businesses through tax subsidies.

  • Kansas Governor Brownback’s insistence on steep tax cuts has met more resistance.  A group called Traditional Republicans for Common Sense has come out against  even a watered down version of Brownback’s vision in the legislature. One of the group’s members (a former chair of the state’s GOP) said, “Now is not the time for more government intervention. Topeka needs to stay out of the way and make sure proven economic development tools – like good schools and safe roads – remain strong so that the private sector can thrive.” 
  • Stateline writes about the problems with “the spending that isn’t counted” – meaning special breaks that lawmakers have buried in state tax codes.  The article highlights efforts in Oregon and Vermont to develop more rational budget processes where tax breaks can’t simply fly under the radar year after year.  CTJ’s recommendations for reform are in this report.
  • In this thoughtful column, South Carolina Senator Phil Leventis writes, "I have been guided by the principle that government should invest in meeting the needs and aspirations of its citizens. This principle has been undermined by an ideology claiming that government is the cause of our problems and, accordingly, must be starved.” He praises tax study commissions and says being “business friendly” cannot be the only measure of state policy.
  • An op-ed from the Pennsylvania Budget and Policy Center (PBPC) calls on lawmakers to address the issue of rampant corporate tax avoidance, and to do so responsibly. It raises concerns that legislation currently under consideration to close corporate loopholes could be a “cure worse than the disease.”  The legislation takes some good steps but is paired with business tax cuts that could cost as much as $1 billion over the next several years.  PBPC argues for a stronger and more effective approach to making corporations pay their fair share such as combined reporting, which makes it harder for companies to move profits around among subsidiaries in different states.
  • Just four days after Amazon agreed to begin collecting sales taxes in Nevada in 2014, the company announced a similar agreement with Texas that will take effect much sooner – on July 1st.  As The Wall Street Journal reports, “With the deal, the Seattle-based company is on track to collect sales taxes in 12 states, which make up about 40% of the U.S. population, by 2016.”

Picture from Flickr Creative Commons.


Pennsylvania Falls Short in Corporate Tax Reform


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Pennsylvania lawmakers got one step closer this week to closing major corporate tax loopholes.  Or did they?  The House Finance Committee approved legislation that would, in theory, close the infamous Delaware loophole which allows Pennsylvania companies to shift profits earned in the state to holding companies in other states (most frequently Delaware), thus avoiding paying their fair share of corporate income taxes.  However, according to the Pennsylvania Budget and Policy Center (PBPC), the bill as written not only fails to meet its intended goal, but it would in fact create new loopholes and drain the state of much needed revenue.  In PBPC’s words, “the bill is a sign that concern is growing about Pennsylvania’s corporate tax avoidance problem. It is a positive start – but in its current form, it is not a solution.”

House Democrats, led by Representative Phyllis Mundy, attempted but failed to amend the bill.  She advocated mandatory combined reporting, which makes it harder for companies to move profits around among subsidiaries, as a more effective and comprehensive approach to loophole closing, a proposal Mundy has been championing for the past year.

Pennsylvania is in dire need of a corporate tax overhaul.  A recent study by the Institute on Taxation and Economic Policy and Citizens for Tax Justice, Corporate Tax Dodging in the Fifty States, looked at the state corporate income taxes paid (or not paid) by 265 major corporations between 2008 and 2010.  The 14 Pennsylvania based corporations in the study, including H.J. Heinz, Comcast and Hershey, paid very little or even negative state income taxes during the time period.  And, data from the state’s Department of Revenue shows that more than 70 percent of corporations operating in Pennsylvania paid no corporate income taxes in 2007, likely in large part to their ability to hide profits out of state. 

In an attempt to fill in data gaps and get a better picture of what corporations are and are not paying in state income taxes, the Keystone Research Center recently sent Pennsylvania’s 1,000 largest for-profit employers a corporate income tax disclosure survey.  The hope is that the companies will respond (it is voluntary) and lawmakers can use this information in their deliberations about the best means to prevent corporate tax avoidance.


New Resources


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A new website, Oregon Open for Business, was launched this week to help dismiss claims that Oregon's recent voter-approved tax increases are driving corporations away from the state.  The website tracks the numerous businesses, including Google, Facebook, Genentech, IBM and Subaru, that have moved to or expanded their presence in Oregon in the past year.

The Pennsylvania Budget and Policy Center and Keystone Research Center introduced a  joint blog this week called Third and State.  The new progressive blog will present "sharp and timely commentary" on Pennsylvania's economy and help explain how the state budget and other policies impact the lives of Pennsylvanians.


State-Based Coalitions Fight for Budget Fairness


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


State Transparency Report Card and Other Resources Released


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

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

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

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

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

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


Gubernatorial Candidates with Progressive Positions on Taxes Who Won


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

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

Candidates Who Campaigned on Raising Taxes

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

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

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

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

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

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

Incumbents Re-elected After Raising Taxes

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

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

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

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

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


Tax News in Gubernatorial Races Across the Country


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

California

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

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

Illinois

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

Maryland

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

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

Michigan

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

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

Pennsylvania

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

South Carolina

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

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

Tennessee

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

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

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


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


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

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

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

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

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

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

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


Pennsylvania Severance Tax in Trouble


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Pennsylvania is the largest natural gas producing state that does not impose a severance tax on the removal of nonrenewable resources. Such a tax can be an important revenue source, particularly considering the current economic situation. It can also be a means to compensate residents and fund the societal costs associated with extracting a public (and environmentally damaging) resource.

As part of Pennsylvania’s final budget deal in July, state legislators agreed to work out details for a new severance tax on natural gas extracted from the Marcellus Shale reserves by October 1st.  Not surprisingly, with the deadline just a few weeks away, lobbyists led by the industry-backed Marcellus Shale Coalition have descended on Harrisburg to kill or at least weaken the proposed tax.  Governor Ed Rendell has lost all confidence that an agreement will be reached by the deadline and has threatened to veto any plan that does not come close to his preferred structure for the new tax.

The Governor supports a tax modeled on one in neighboring West Virginia, which imposes a 5 percent tax on the value of extracted gas and an additional levy of 4.7 cents per one thousand cubic feet.  A recent report from the Pennsylvania Budget and Policy Center supports adopting the West Virginia model.  According to the report, if Pennsylvania followed the West Virginia approach, the state would raise an estimated $71 million (revenue Governor Rendell is counting on to close a $282 million budget gap for fiscal year 2010-2011) and as much as $400 million by 2014-2015.

Industry supporters want the tax to start at 1.5 percent of the value of the extracted gas for the first three years of the well’s operation and increased to 5 percent only in the following years.  Governor Rendell says that "about 50 percent of all the natural gas is pumped out during the first five years" of a well's producing life and calls the proposal “ridiculous.” 

Only time will tell if policy will trump politics in the Keystone State.

Film tax credits have received a lot of attention in recent days.  Just as Virginia Governor Bob McDonnell was signing the state’s first film tax credit into law, stories out of Iowa and New Jersey, as well as a New York Times article about film credits in Michigan, Texas, Pennsylvania and Utah, provided quite a few good reasons to be skeptical of these credits.

On Monday, Virginia Gov. Bob McDonnell excitedly signed into law the state’s new film tax credit, with sitcom star Tim Reid (from “WKRP in Cincinnati,” “Sister Sister,” and “That 70’s Show”) there to celebrate.  In order to justify enacting this giveaway for the film industry while Virginians are having to make due with reduced state services, Gov. McDonnell made the asinine claim the credit would produce a 1400% return on investment.  Economists everywhere have no doubt been laughing ever since.

Meanwhile, in New Jersey, fellow 2009 gubernatorial election winner Chris Christie took exactly the opposite approach in vowing to eliminate the state’s film credit in order to help balance the state’s budget.  While Christie clearly had his priorities dead wrong in choosing not to extend the state’s income tax surcharge on millionaires (61% of voters favor the surcharge), he has certainly hit the nail on the head when it comes to this wasteful giveaway.  Not even the cast of “Law and Order: Special Victims Unit” appears to have been able to sway him.

Stories this week from the Des Moines Register and New York Times provide some very timely evidence regarding the wisdom of Christie’s approach, as well as the folly of McDonnell’s.  In Iowa, the Register reports that new criminal charges have been filed in the state’s ongoing film tax credit scandal.  Specifically, three moviemakers have been charged with inflating the value of their expenses in order to increase their take from the state’s film credit program.  A $225 broom, $900 stepladder, and 16,000% markup on lighting equipment are among the bogus expenses claimed by the filmmakers. 

The steady drumbeat of discouraging news surrounding Iowa’s film tax credit makes clear that Virginia is facing an uphill battle when it comes to policing this program.

The New York Times this week explored a more specific attribute of state film tax credits: the steps states are taking to prevent movies they dislike from receiving taxpayer dollars.  In Michigan, a sequel to a cannibalism-themed horror movie that was supported by state film tax credits was rejected for subsidy this time around because the state’s film commissioner determined that “this film is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light.”  Michigan is by no means alone in enforcing this standard.  Films made in Pennsylvania can be denied tax credits if the movie in question does not “tend to foster a positive image” of the state. 

Texas possesses a similar requirement, which apparently was used to prevent the makers of a film about the Waco raid from even applying for film tax credits. 

And in Utah, the state’s Film Commission director admitted to withholding credits from films that he wouldn’t feel comfortable taking the governor to see. Whether or not this rule of thumb varies with the theatrical tastes of the governor in office at the time remains to be seen.  Upon reading the Times story, one blogger with the Baltimore Sun went so far as to argue that these provisions show that “states want propaganda from filmmakers.”  They certainly beg the question: If state taxpayers subsidize the film industry, is it inevitable that state governments will censor movies before they're made?


Pennsylvania Turns To Gambling For Quick Budget Fix


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Late last week, Pennsylvania legalized poker, blackjack, roulette, and other table games in an effort to fill the state’s budget hole without having to raise taxes.  Casino owners in the state have been waiting with great anticipation for this moment ever since slot machines were legalized in 2004.  Those owners also scored another win in that the new law allows them to make on-site loans to gamblers.  But with a plethora of gambling options already available next door in New Jersey and West Virginia – and more soon to come in Ohio and Maryland – Pennsylvanians shouldn’t be expecting their newly legal table games to bring in much in the way of tourism or new economic activity.

In this light, Governor Rendell’s continued insistence on a state income tax increase is very sensible.  If Pennsylvanians think that gambling will solve all their budget problems – they should think again.


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.

Read ITEP's New Report: Who Pays? A Distributional Analysis of Tax Systems in All 50 States

By an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy, according to a new study by the Institute on Taxation & Economic Policy (ITEP).

“In the coming months, lawmakers across the nation will be forced to make difficult decisions about budget-balancing tax changes—which makes it vital to understand who is hit hardest by state and local taxes right now,” said Matthew Gardner, lead author of the study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. “The harsh reality is that most states require their poor and middle-income taxpayers to pay the most taxes as a share of income.”

Nationwide, the study found that middle- and low-income non-elderly families pay much higher shares of their income in state and local taxes than do the very well-off:

-- The average state and local tax rate on the best-off one percent of families is 6.4 percent before accounting for the tax savings from federal itemized deductions. After the federal offset, the effective tax rate on the best off one percent is a mere 5.2 percent.

-- The average tax rate on families in the middle 20 percent of the income spectrum is 9.7 percent before the federal offset and 9.4 percent after—almost twice the effective rate that the richest people pay.

-- The average tax rate on the poorest 20 percent of families is the highest of all. At 10.9 percent, it is more than double the effective rate on the very wealthy.

“Fairness is in the eye of the beholder.” noted Gardner. “But virtually anyone would agree that this upside-down approach to state and local taxes is astonishingly inequitable.”



The “Terrible Ten” Most Regressive Tax Systems

Ten states—Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada, and Alabama—are particularly regressive. These “Terrible Ten” states ask poor families—those in the bottom 20% of the income scale—to pay almost six times as much of their earnings in taxes as do the wealthy. Middle income families in these states pay up to three-and-a-half times as high a share of their income as the wealthiest families. “Virtually every state has a regressive tax system,” noted Gardner. “But these ten states stand out for the extraordinary degree to which they have shifted the cost of funding public investments to their very poorest residents.”

The report identifies several factors that make these states more regressive than others:

-- The most regressive states generally either do not levy an income tax, or levy the tax at a flat rate;

-- These states typically have an especially high reliance on regressive sales and excise taxes;

-- These states usually do not allow targeted low-income tax credits such as the Earned Income Tax Credit; these tax credits are especially effective in reducing state tax unfairness.

“For lawmakers seeking to make their tax systems less unfair, there is an obvious strategy available,” noted Gardner. “Shifting state and local revenues away from sales and excise taxes, and towards the progressive personal income tax, will make tax systems fairer for low- and middle income families. Conversely, states that choose to balance their budgets by further increasing the general sales tax or cigarette taxes will make their tax systems even more unbalanced and unfair.”

Implications for State Budget Battles in 2010

“In the coming months, many states’ lawmakers will convene to deal with fiscal shortfalls even worse than those they faced last year,” Gardner said. “Lawmakers may choose to close these budget gaps in the same way that they have done all too often in the past—through regressive tax hikes. Or they may decide instead to ask wealthier families to pay tax rates more commensurate with their incomes. In either case, the path that states choose in the upcoming year will have a major impact on the wellbeing of their citizens—and on the fairness of state and local taxes.”


Pennsylvania Budget Signed 101 Days Late


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Pennsylvania finally has a budget, just 101 days late.  But unfortunately, the budget doesn’t include the broad-based income tax increase that Governor Ed Rendell had supported.  And while Governor Rendell was able to convince legislators of the need for new revenue, the revenue sources that were selected leave much to be desired.

One major revenue source, for example, is a $190 million tax amnesty.  Tax amnesties are shortsighted and unfair – as we explained just a few weeks back.

Other revenue is projected to come from the legalization of poker, roulette, and other table games.  Given the seemingly endless delays surrounding the implementation of slot machine gambling in Pennsylvania, it’ll be interesting to see how long it takes before the first hand of poker is played.  The state’s Gaming Control Board is already on the record as saying it will need at least six to nine months just to prepare to regulate these new games. 

Given that significant gambling operations already exist nearby in New Jersey and West Virginia (and could soon be coming to Ohio), Pennsylvania shouldn’t be counting on its gambling expansion to produce much in the way of tourism.  And if casino industry lobbyists have it their way, and the current $20 million license fee is slashed to just $10 million, the $200 million revenue estimate attached to table gaming should be expected to plummet as well.  We wrote about the folly of gambling as a revenue source a few weeks back.

Pennsylvania also chose to increase its cigarette tax, lease state forests to natural gas exploration companies, impose a new tax on Medicaid managed-care organizations, and re-direct some current cigarette tax and gambling revenues into the state’s general fund.

Overall, it’s a pretty disappointing revenue package.  There are a few bright spots, however. The scheduled phase-out of the business capital stock and franchise tax was delayed (now is hardly the time to be cutting taxes), the state’s film tax credit was temporarily cut back, and the rainy day fund was wisely tapped.

All in all, it’s certainly a good thing that Pennsylvania chose not to address its budget shortfall with spending cuts alone…but the deal that was reached leaves more than a little room for improvement.


Pennsylvania: One Is the Loneliest Number


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And then there was one.  A full eleven weeks after the start of its fiscal year, Pennsylvania remains the only state in the union without a budget, as members of the legislative leadership and Governor Ed Rendell continue to negotiate the details of what is shaping up to be a roughly $28 billion spending plan.  (Yes, we know Michigan doesn’t have a budget either, but its fiscal year doesn’t start until next month.)

Still, given what is known about the latest iteration of the Legislature’s proposed FY 2010 budget, perhaps it is better that policymakers do not rush forward to enact it.  The Pennsylvania Budget and Policy Center (PBPC) has expressed concerns that the proposal “postpones Pennsylvania’s budget problems rather than solves them” because it relies on “overly optimistic revenue projections and one-time revenue sources.” These are concerns that Governor Rendell seems to share, at least in part. One example of the wishful thinking in the proposal is its reliance on gambling revenue, which has lately proved to be an unpredictable revenue source for many states. (See last week’s Digest article on gambling revenues.) Even worse, as other observers have noted, the proposed budget depends heavily on reductions in important public services, such as pre-kindergarten and after-school programs, as well as neo-natal care.

To be sure, Pennsylvania is not alone in facing serious budget problems.  However, unlike their counterparts in nearby New York, New Jersey, and Delaware, legislators in the Keystone State have refused to countenance an increase in broad-based taxes, such as the income tax increase put forward by Governor Rendell earlier in the year.  Little wonder, then, that they have to resort to spending cuts, questionable revenue estimates, and one-time sources of funding to try to bring the state’s books into balance.

For more on Pennsylvania’s fiscal crisis and on meaningful reforms the state could enact to generate additional revenue, visit PBPC’s informative web site.


The Exaggerated Promise of Legalized Gambling


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

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

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

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

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

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

It's one thing for the federal government to allow a one-time amnesty for Americans who've hid their income from the IRS in offshore accounts. (See related story.) The "stick" is effective (prison) and the "carrot" is not overly generous (since these Americans will pay taxes, interest, and penalties).

But lately several states are providing their own tax amnesties that are very different and very misguided. According to a recent article in State Tax Notes (subscription required), the thirteen state tax amnesties already conducted or promised this year ties the 2002 record for most amnesties offered in one year.  Assuming that DC Mayor Adrian Fenty signs the budget (which contains a tax amnesty) that was recently passed by the DC Council, that record will be broken.  Pennsylvania and Michigan, however, still have a chance to avoid adding to the list of states enacting these short-sighted measures. Amnesties have been proposed within each state's legislature.

As we've argued before, allowing delinquent taxpayers to pay the taxes they owe with little or no penalty is unfair to those diligent taxpayers who paid their taxes on time.

This unfairness is compounded greatly if the interest owed on the late tax bill is reduced, or even waived entirely, as was done this year in Delaware.  Waiving the interest owed on late tax bills essentially means that delinquent taxpayers are granted an interest-free loan by the state, for no reason other than the fact that the state is now desperately in need of money. Had all taxpayers been aware of the possibility of this interest-free loan, the rate of noncompliance would undoubtedly have skyrocketed. 

Repeatedly offering amnesties, as is increasingly becoming the norm, harms the ability of states to enforce their tax laws.  With record numbers of tax amnesties having been offered in the last seven years, delinquent taxpayers can usually assume that they'll be offered an easy way out eventually -- if only they're patient enough.  As one revenue official from Kansas recently put it, "if you have amnesties too often, you're literally training taxpayers not to pay."


Pennsylvania & Oregon: Substantive Steps Toward Solvency


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While some states continue to believe that they can weather the current fiscal crisis with the budgetary equivalent of a rubber band, a paper clip, and some chewing gum -- yes, we're looking at you, Kentucky -- others, such as Pennsylvania and Oregon, recognize that the deficits spawned by the national recession should, in turn, spur them to shore up their tax codes.

In the Keystone State this past week, Governor Ed Rendell indicated that he would back an increase in the state's personal income tax rate from 3.07 to 3.57 percent. After all, as the Pittsburgh Post-Gazette observes "difficult times require tough action."

On the other side of the country, Oregon legislators gave final approval to changes in their corporate and personal income taxes that are expected to yield more than $700 million in additional revenue; those changes are expected to be signed into law by Governor Ted Kulongoski. Among the changes pending in Oregon are the creation of two new (albeit temporary) top income tax brackets with rates of 10.8 and 11 percent and increases in the state's corporate minimum tax.

For more on the need to raise additional revenue in Pennsylvania, see this statement from the Pennsylvania Budget & Policy Center and an array of other organizations.


Pennsylvania: Rendell Backs Eagles, Opposes Tax Increases -- Notice a Pattern?


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Two thousand nine is scarcely a month old, yet it appears that Pennsylvania Governor Ed Rendell is already backing the wrong horse for the second time this year. In mid-January, Rendell's sporting hopes were dashed, when his beloved Eagles failed to advance beyond the NFC Championship game for the fourth time in five recent tries. Now, he's on the wrong side of history again, announcing last week that his forthcoming budget for FY 2009-2010 will not contain any increases in sales or income taxes, despite a projected budget deficit of some $2.3 billion. Instead, he expects that a combination of budget cuts and federal fiscal relief funds will be sufficient and, in his own words, he doesn't want to hear any "whining" about it.

Of course, as Sharon Ward, the Executive Director of the Pennsylvania Budget and Policy Center (PBPC) has recently explained, this is precisely the wrong approach for states to take in a recession. She notes that "Pennsylvania should actually be spending more, not less, to jumpstart the ailing economy" and argues in favor of tax policy changes that would generate additional revenue while making the state's tax system more fair, such as taxing dividends or closing corporate tax loopholes through the use of combined reporting.

Fortunately, Rendell's opposition to a needed tax increase may turn out to be as effective as the Eagles' attempts to stop Larry Fitzgerald. House Appropriations Committee Chairman Dwight Evans said this past week that he believes that "there will be some sort of a tax increase in order to solve this problem," though it may be the last resort.

For more on the options Pennsylvania lawmakers could use to generate additional revenue, see these recommendations from the PBPC.

As the vast majority of state governments stare down budget shortfalls, new ideas about how to responsibly and fairly fill those gaps should receive an enthusiastic welcome. A new report from Good Jobs First, entitled Skimming the Sales Tax, does exactly that by revealing that states are currently giving away over $1 billion through "vendor discounts" or "dealer collection allowances" that reduce sales taxes.

Vendor discounts allow retailers to legally keep a portion of the sales tax revenue they collect as compensation for the costs involved in collecting and remitting the tax. Twenty six states currently provide retailers with such compensation, amounting to a total of over $1 billion in annual revenue losses for those states.

The policy prescription in many states is fairly clear. While there may be room for debate over whether any compensation is warranted, what is not in question is that there should be a sensible limit on the maximum amount that any one business can receive via this practice. As author Philip Mattera points out, "the main expenses that retailers incur with regard to sales taxes, especially software programs to track them, are fixed costs that do not rise in tandem with growth in receipts."

Those states without such a limitation in many cases forfeit quite substantial amounts of revenue through vendor discounts. Illinois, for example, loses over $126 million annually due to the practice. Texas, Pennsylvania, and Colorado each lose in the neighborhood of $70 - $90 million per year. Thirteen of the twenty six states offering vendor discounts do not cap the amount any individual retailer can claim. In addition, five states that do impose limits on maximum compensation have set those limits at seemingly excessive levels, ranging from $10,000 to $240,000 per retailer.

For state-by-state details on existing vendor compensation practices, as well as other ways in which retailers are being subsidized through the sales tax, see the report here.


A Rocky Transition to a New Transportation Finance Regime


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A number of states are considering funding transportation infrastructure with "direct pricing" on the use of roads -- e.g. by increasing the prevalence of tolling and instituting taxes on "vehicle miles traveled". If coupled with relief for low-income drivers, direct pricing has the potential to adequately and fairly fund transportation while at the same time creating incentives to reduce driving and its corresponding ills (e.g. traffic congestion, environmental damage, and excessive wear-and-tear on the roads).

But a new development in the already drawn-out debate over Pennsylvania's plan to institute "direct pricing" (i.e. tolls) on its Interstate 80 highlights some serious equity issues involved in making the transition to this form of transportation finance.

A national trucking organization this week announced its opposition to the tolling plan, instead offering its support to a ten cent gas tax hike to raise the money Pennsylvania needs. The reasons for their opposition provide some very useful insights into the equity issues associated with a transition to a direct pricing regime.

While tolling every road could distribute the obligation for funding transportation across all drivers, singling out specific roads for tolls disproportionately affects those people who regularly travel on those roads. After all, these people continue to pay gasoline taxes, vehicle registration fees, inspection fees, and various other charges dedicated to funding transportation. While the revenue from all of these other taxes and fees is being sent all over the state to fund various projects, drivers who rely primarily on tolled roads for their commute (as well as businesses who rely on those roads to transport their goods) are forced to pick up their own tab at the tollbooth. As the trucking industry argued, what the state needs are "alternatives that make all Pennsylvanians responsible for paying for our roads, not just a certain segment."

Pennsylvania has to some extent attempted to minimize the impact of these tolls on frequent users of the road by proposing to let drivers with the E-ZPass electronic toll collection system installed in their cars travel some short distance before tolling kicks in. But this benefit would not help those who take longer trips down I-80, nor would it help the trucking industry, which is excluded from this benefit. Much of the responsibility for paying tolls would therefore fall on out-of-state travelers and trucking companies. That is certainly appealing to Pennsylvania lawmakers seeking to please their constituents.

But some of the burden would also fall on those living closest to I-80. And in any case, is there any reason why I-80 travelers (Pennsylvania residents or otherwise) in general should be contributing more to transportation than users of other roads? As tolling continues to be gradually implemented in a piece-meal fashion, look for more equity concerns of this sort to arise.


Pennsylvania: Local Governments Singling Out Specific Property Owners for Higher Tax Bills


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A couple of interesting articles out of Pennsylvania recently highlighted a disturbing feature in local property tax assessments: individual property owners are being singled out by localities for reassessment of their property in order to boost tax collections. The practice, done through tax appeal boards traditionally used by property owners to argue for lower assessments, provides a glimpse both into the flawed nature of Pennsylvania's assessment system, and into the unfortunate state in which this system has left Pennsylvania localities.

Aside from when a new home is built, or when major renovations on an existing home are completed, state law specifies that a property can only be reassessed for property tax purposes as part of a locality-wide reassessment of all properties. But reassessing all properties can be a daunting task for a locality, as evidenced by the fact that some localities haven't reassessed in over 30 years.

In the period between reassessments, properties that appreciate in value at an above-average rate can see significant tax benefits. And while "spot reassessments" of specific properties are technically not permitted, localities are allowed to request a "reverse appeal" of the original assessments of specific, apparently "under-assessed" properties. This practice has produced hundreds of millions of dollars in extra tax revenues for many localities (drawn mostly from people whose property tax bills were legitimately too low) though the piece-meal fashion in which those revenues have been raised creates serious inequities between people singled out for "reverse appeals", and those who continue to fly under the radar.

Pennsylvania legislators recently mustered overwhelming support for a bill ending this practice, though the Governor vetoed the bill on the grounds that it would significantly reduce localities' ability to raise revenue. The legislature likely has the support it needs to override such a veto should they try again, but some policymakers are hoping to take things a step further and use this unsettling practice as a springboard for enacting a more comprehensive, frequent, and rational property reassessment system. What precisely that will involve is unclear, though some local officials have already suggested that mandates for more frequent property reassessments should be coupled with state aid to cover the inevitable administrative burden of such a policy change.


Pushing for Tax Cuts in Pennsylvania


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Policymakers in Pennsylvania seem bent on cutting taxes before the year is out... but how and for whom remains to be seen. After proposing his own Protecting Our Progress tax rebates earlier this year, Governor Ed Rendell last week suggested he could support a plan, put forward by Senate Republicans, that would expand eligibility for the state's so-called tax forgiveness credit. At present, single people with incomes up to $6,500 and married couples with incomes up to $13,000 receive a tax credit that completely eliminates any tax liability. (Individuals and families with slightly higher incomes receive credits that reduce, but do not eliminate, their tax liabilities.) The Senate Republican plan would ultimately raise those thresholds to $8,500 and $17,000 respectively. There's a catch, of course... the Senate Republican plan also calls for substantial business tax breaks, such as increasing the state's net operating loss carry forward and giving greater weight to sales in the state's corporate income tax apportionment formula. For more Pennsylvania fiscal information, visit the Pennsylvania Budget and Policy Center.


Illinois and Pennsylvania Governors Advance Proposals to 'Stimulate' Economy


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The governors of Illinois and Pennsylvania are each seeking to follow the feds' lead and stimulate their economy with tax breaks. Governor Rendell's plan in Pennsylvania is to rebate up to $400 to low-income families with children, with the precise amount of the rebate being determined by the number of parents, number of children, and income earned in the family. In Illinois, Governor Blagojevich's plan is similar to Rendell's proposal in that it is only available to families with dependent children, though it differs in that its income eligibility thresholds are much higher: single-parent families earning up to $75,000, and two-parent families earning $150,000 will be eligible for the full $300 per child credit. Blagojevich's plan could be made more effective and less expensive by lowering the income limits to make these credits available primarily to the low and middle income families who would be most likely to immediately spend tax rebates on everyday needs.

Fortunately, both of these stimulus proposals are refundable, meaning that families receive the money regardless of how much, if any, state income tax they paid. This is an extremely important component of any fair credit or rebate since even though those in the greatest need often pay no income taxes because of their low incomes, they do pay huge portions of their incomes in regressive sales and property taxes.

One additional flaw with each plan is that low-income individuals without children will see no benefit. In terms of both stimulating the economy and assisting those in need, both of these plans could be improved by extending the rebates/credits in some form to individuals without children. This could be done very easily in Illinois by lowering the income eligibility criteria and using the resulting savings to assist low-income, childless individuals.


Could an Argument Over a Surplus Lead to a TABOR in Pennsylvania?


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A battle over what to do with projected budget surpluses appears imminent in Pennsylvania. Gov. Ed Rendell proposed Monday to use much of the budget surplus to provide rebates of up to $400 to low-income households. Though much less effective than enacting an Earned Income Tax Credit (EITC), this proposal would do a great deal not only to improve tax fairness and the lives of those most in need, but also to stimulate the economy by putting money back in the hands of low-income individuals sure to spend it on their daily needs.

By contrast, Pennsylvania Republicans have proposed using the surplus to cut the income tax rate. Unlike the Governor's proposal, which involves changes only to the current year's tax collections, the Republican plan would alter the Pennsylvania tax code in a way that would permanently restrict the state's ability to raise revenue. A broad income tax rate cut would also benefit the wealthiest Pennsylvanians far more than it would low and middle income taxpayers, and would completely wipe out the surplus and likely force future legislators to chose between cutting services and raising other taxes.

In addition to this plan, some legislators have suggested a "zero growth budget" where government spending increases would be strictly limited to the rate of inflation. Such limitations have proven disastrous for state governments, the most famous example having taken place in Colorado where a similar measure was suspended after education and other public services sharply deteriorated without adequate funding.


Anti-Tax Lawmakers in PA Make Multiple Attempts to Gut Responsible Funding for Schools


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Pennsylvania lawmakers continue to tussle over how to cut local property taxes -- and how to pay for it (if at all). The principal plan making its way through the state House of Representatives would cut school property taxes for all Pennsylvania homeowners, and increase the state income tax and sales tax rate to pay for it. But Republican leaders have proposed a variety of alternatives, including a more aggressive plan that would completely repeal school property taxes and expand the state sales tax base. The "repeal everything" bill was rejected earlier this week.

But debate nonetheless ground to a halt later in the week after Republicans sponsored a successful amendment to the principal House plan. As amended, the House plan now focuses entirely on eliminating school property taxes for seniors earning less than $40,000 -- but does not include any tax hikes to pay for it, and does nothing for non-elderly homeowners.

Meanwhile, as the Pennsylvania Budget and Policy Center reminds us, truly targeted tax reform alternatives are receiving a hearing as well, with an Earned Income Tax Credit receiving more attention from state lawmakers this year.


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


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

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

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


PA Budget Impasse Resolved but Long-Term Problems Remain


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After a tumultuous legislative session, including a one-day government shutdown, Pennsylvania has a budget. Governor Ed Rendell, who had included an array of tax increases in his budget proposal, ultimately got none of them in the agreed-upon budget. Among the tax hikes left on the cutting-room floor were a 1 percent sales tax increase designed to pay for property tax cuts, a 10-cent cigarette tax hike earmarked for health care spending, an innovative proposal to impose a 3 percent payroll tax on companies that don't provide health care coverage for their employees, and an equally innovative plan to impose a new profits tax on oil companies that would have used combined reporting to curtail tax avoidance by Big Oil.

Rendell's only notable success on the tax front, in fact, was pushing through new tax breaks to encourage filmmakers to shoot in Pennsylvania, at a cost of up to $75 million a year, although the real winner here was actor-turned-lobbyist Paul Sorvino.

But the next six months are not likely to be any easier for the legislature (or for Rendell). Lawmakers have agreed to a September special session to discuss Rendell's energy-independence plans, and Pennsylvania's perpetual property tax problems haven't gone anywhere.


Oil Companies Targeted by Tax State Proposals


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The governors of both Pennsylvania and Wisconsin have proposed new taxes for oil companies. Governor Rendell would subject oil companies' gross profits in his state to a 6.17 percent tax in lieu of the state's corporate income tax. Governor Doyle would tax oil companies' gross receipts at 2.5 percent. It remains to be seen whether state governments can really ensure that the tax will be paid by the oil company shareholders, as both governors claim, rather than being passed onto consumers.

Probably the most important step a state can take to ensure that oil companies (and other businesses) are paying their fair share is to adopt combined reporting of corporate income for tax purposes. This prevents companies from shifting costs and profits (on paper) between subsidiaries in different states to get the lowest tax bill possible. Fortunately for Pennsylvania, Governor Rendell's tax on oil companies would be calculated using combined reporting. Experts like University of Wisconsin-Madison economist Andrew Reschovsky have suggested that Wisconsin needs to move in this direction as well. Reschovsky told the Milwaukee Journal Sentinel, "In my view, if the governor wants to raise more money from oil companies, and other multinational companies, the most effective thing he could do would be to urge the Legislature to adopt combined reporting."


Pennsylvania Proposal: Have Oil Companies Pay Fair Share, Prevent Corporate Tax Avoidance


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Pennsylvania Governor Ed Rendell has proposed a new "Oil Company Gross Profits Tax" on oil companies doing business in the state. The tax, which would be levied in place of the state's regular corporate profits tax, would be calculated using "combined reporting," a loophole-closing technique that has already been enacted in two states this year, and is estimated to raise more than $750 million a year. A new report from the Pennsylvania Budget and Policy Center argues that Rendell's proposal would be a sustainable and fair funding solution for Pennsylvania's transportation funding needs. Read the report here.


States Growing Tired of Large National Businesses Avoiding State Taxes


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


How to Stop Corporations from Avoiding State Taxes


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


Property Tax Assessment: Eye in the Sky or Head in the Sand?


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The all-important first step towards an equitable property tax is figuring out how much each home and business is actually worth. To do this perfectly, a tax assessor would need to visually inspect the inside and outside of every home... which, of course, no one actually does. But as a recent New York Times article notes, governments from Philadelphia to Florida are now relying on computerized aerial images (taken from a small plane) to detect changes in the outside appearance of homes and businesses. A Philadelphia tax administrator notes that the computerized system, which costs the city about $100,000 a year, "probably paid for itself within about two weeks." Assessment by low-flying planes may seem intrusive, but at the end of the day this is how the property tax is supposed to work. This approach is in stark contrast to the head-in-the-sand approach to property tax administration proposed by Alabama Democratic gubernatorial candidate Lucy Baxley, who has proposed ending the annual reassessment of Alabama homes.


Tax Cut Promises on the Campaign Trail


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Philadelphia mayoral candidate Michael Nutter has a plan to make his city more competitive: sweeping tax cuts. The former city councilman has made the repeal of the Business Privilege Tax (BPT) the centerpiece of his campaign. There is just one problem... eliminating the BPT will leave a $109 million hole in the municipal budget and could potentially make the city more unattractive to businesses. Not surprisingly, Nutter has failed to explain how his tax cut will impact city services. Ben Waxman, ITEP's summer intern and Philadelphia-native, takes on Nutter's proposal in an op-ed published in the Philadelphia Citypaper.


Casinos and Competition


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The recent shutdown of New Jersey casinos provided an opportunity for surrounding states to lure gamblers (and tax dollars) away from the Garden State. In Delaware, slot parlors saw an estimated increase of almost 20 percent in revenue. Nearby Pennsylvania has also legalized some forms of gambling and will also soon compete with New Jersey. As more and more states turn to casinos to generate tax dollars, states will probably find it more difficult to depend on revenue from this source. Instead of gambling on the future, lawmakers should focus on more reliable sources of funding. You can read ITEP's policy brief on gambling by clicking here.


Property Tax Reform


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For the first time in almost thirty years, Pennsylvania has passed major property-tax cuts. In an unusual display of election year bipartisanship, Democratic Governor Ed Rendell and the Republican-controlled legislature agreed on a series of measures designed to lower property taxes. There are two components to the legislation. First, the number of senior citizens eligible for property-tax rebate checks was nearly doubled. Second, most homeowners will have their property taxes reduced. Lawmakers are planning to pay for the tax cuts with revenue raised by casino gambling, which was recently legalized in Pennsylvania. Some state residents, however, might like to move in a more progressive direction and rely even less on property taxes and more on income taxes.

Things have not worked out so smoothly for property tax reform in Washington State. A Superior Court Judge has ruled Initiative 747 unconstitutional. The 2001 voter-approved initiative capped increases in state and local property taxes at 1 percent. Governor Christine Gregoire has said that if this ruling survives an appeal she will support some type of property tax reform. Early indications are that the Governor and legislators are specifically interested in reform that would benefit the elderly and low-income families.

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

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