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Surveying State Tax Policy Changes Thus Far in 2016


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

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

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

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

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

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

Tax Increases

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

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

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

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

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

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

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

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

Tax Cuts

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

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

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

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

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

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

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

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

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

Stalled Tax Debates Likely to Resume in 2017

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

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

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

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

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

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

What Lies Ahead?

Key Tax-Related Measures on the Ballot in November

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

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

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

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

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

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

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

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


State Rundown 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.

State Rundown 6/10: Ballots and Budgets


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Thanks for reading the State Rundown! Here's a sneak peek: Oregon officials approve ballot initiative to increase corporate taxes. Rhode Island legislative committee approves state budget. Local officials in Delaware worry about state shifting costs, need to raise property taxes. Minnesota special session looks less likely.

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


Voters in Oregon will have the final say on a proposal to increase taxes on corporations this fall after state elections officials certified that Initiative Petition 28 (IP-28) has enough support to appear on the ballot. 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 minimum tax on sales ($150 to $100,000) or a tax on income (6.6 percent on income up to $1 million and 7.6 percent on income above $1 million). IP-28 would eliminate the $100,000 cap on the corporate minimum tax and apply a 2.5 percent rate to sales above $25 million.  If passed IP-28 would generate $3 billion in new revenue earmarked specifically to education, health care and services for senior citizens. Gov. Kate Brown released a plan this week that outlines her vision for how the money should be spent if IP-28 is approved. The governor would spend more on vocational and technical education, expand the state's Earned Income Tax Credit, and reform business taxes by creating new deductions and closing existing loopholes.

A Rhode Island House committee approved a state budget this week. The House Finance Committee approved the $9 billion measure in the wee hours of Wednesday morning, rejecting Gov. Gina Raimondo's proposed cigarette tax increase but embraced her recommendation to increase the state's earned income tax credit from 12.5 to 15 percent of the federal.  The budget also included a $15,000 exemption on retirement income for taxpayers who have reached full Social Security retirement age and have less than $100,000 of income.

County officials in Delaware worry that the state could shift costs to them due to a revenue shortfall. State legislators want county governments to assume more responsibility for public services in the face of lower-than-expected tax revenue. Lawmakers have $75 million less than anticipated when Gov. Jack Markell released his budget in January. While the revenue outlook is not as dire as that faced by other states – Delaware will spend $200 million more this year than last year – most of the new revenue will be eaten up by automatic cost increases (school enrollment, state employee health insurance, and other categories). A panel of state and county officials is studying which state services counties could absorb. Local officials could be forced to increase property taxes.

Talk of a special session in Minnesota to tackle tax reform and public works funding was dead on arrival in St. Paul this week. Gov. Mark Dayton and legislative leaders were unable to reach a deal on holding a special session following Dayton's pocket veto of a tax package that would have reduced state revenues by $100 million. The bill included tax breaks for farmers, working families, businesses, college graduates and professional sport stadiums. Amazingly, the revenue reduction came down to a wording error in the bill's language ("or" instead of "and" in a crucial clause) due to the rushed nature of the bill's passage at session's end. Dayton refused to sign the bill and initially said the measure could be taken up again in special session. Legislative leaders balked, wary that the governor would use the session to win passage of a larger package of public works spending. The impasse makes the prospect of a state EITC expansion this year – a measure included in the bill vetoed by the governor –  far less likely.

 

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


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


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

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

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

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

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

Enacting state EITCs:   

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

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

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

Enhancing state EITCs:   

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

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

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

Protecting state EITCs:  

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

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

 


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


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

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

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

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

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

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

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

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

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

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

Trigger Warning

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

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

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

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

And Speaking of Driving on Flats

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

Up Next

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


What to Watch for in 2016 State Tax Policy: Part 1


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State legislative sessions are about to begin in earnest.We expect tax policies to get major playin statehouses across the nation this year with many states facing revenue surpluses for the first time in years and others having to grapple with closing significant deficits. Regardless, officials should focus on policies that create fairer, more sustainable state tax systems and avoid policies that undermine public investments.

ITEP this year once again will be taking a hard, analytic look at tax policy proposals and legislation in the states. This is the first in a six-part blog series providing analyses on the implications of policy proposals, as well as thoughtful commentary on best policy practices.

 Part 2: Revenue Surpluses May Prompt Tax Cut Proposals

In some states, economies have recovered well since the economic downturn, and lawmakers are considering spending surpluses on tax cuts instead of providing much-needed boosts to public investments that were scaled back during the recession. The economic recovery has been uneven, however, and some states that find their economies still struggling or newly sputtering may consider tax cuts on high-income residents under the misguided premise that tax cuts at the top trickle-down and stimulate economic growth.

One trend we expect to see is tax cuts that take effect in small increments over a very long period based on revenue performance or some other automatic "trigger." The effect of these incremental cuts is to push the brunt of revenue losses into the future. Another trend is to move toward single-rate income taxes, negating the chief advantage of the income tax: its ability to reduce tax unfairness by requiring people with higher incomes to pay higher rates and those with less income to pay lower rates. Keep an eye in 2016 on Georgia where there is a proposal to cut and flatten the income tax and then further reduce it in future years based on automatic triggers.

Part 3: Revenue Shortfalls Create Opportunities for Meaningful Tax Reform

A number of states including Alaska, Connecticut, Delaware, New Mexico, Vermont, West Virginia, and Wyoming are grappling with current and future year revenue shortfalls. Pressed for revenue, we anticipate that some states may turn largely to spending cuts or more regressive and less sustainable tax options (like a small hike in the cigarette tax) to close their budget gaps. The scale of the problem in many of these states could also present a real opportunity for lawmakers to debate and enact reform-minded tax proposals that could raise needed revenue, improve tax fairness, and craft more sustainable state tax systems for the future. 

The most significant revenue downturns and best opportunities for reform are in states dependent on oil and gas tax revenue, most notably Alaska and Louisiana. Alaska Governor Bill Walker unveiled a proposal in December that would among other things bring back a personal income tax. Louisiana's new governor, John Bel Edwards, will call a special session next month to pitch short- and long-term revenue raising ideas, including much-needed reforms to the state's income tax. We are also watching Illinois and Pennsylvania where lawmakers are now more than seven months overdue on putting together a budget for the current fiscal year, largely over disagreements on how to find needed revenue to pay for public investments.

Part 4: Tax Shifts in All Shapes and Sizes

Tax shifts, which reduce or eliminate reliance on one tax and replace it with another source, are one bad policy idea we expect to continue to rear its ugly head. The most common tax shifts in recent years have sought to eliminate personal and corporate income taxes and make up the lost revenue with an expanded sales tax. Such proposals result in a dramatic reduction in taxes for the wealthy while hiking them on low- and middle-income households, increasing the unfairness of state tax systems and exacerbating already growing income inequality.

Lawmakers in Mississippi  and Arizona  have expressed support for lowering and eliminating income taxes. Changing political and revenue pictures in both of these states could lead to lawmakers finally making good on their promises in 2016. Also watch for smaller scale shifts like a plan in New Jersey where lawmakers want to pair a much needed increase in the state’s gas tax with an elimination of the estate tax to “offset” the tax hike.

 Part 5: Addressing Poverty and Inequality Through Tax Breaks for Working Families

In 2016, we expect states to focus on a range of policies to support working families, building off the momentum of their 2015 reforms and national dialogue on poverty and income inequality. In particular, developments to enact or improve state Earned Income Tax Credits (EITCs) are likely in a dozen states across the country. For instance, Louisiana’s new governor John Bel Edwards called for doubling the state EITC as part of his commitment to reduce poverty. Maryland’s governor, Larry Hogan, called to accelerate the planned EITC increase. Delaware lawmakers are looking to take a step forward by making the state’s EITC refundable, but unfortunately are also considering a drop in the percentage of the credit.

Tax breaks for working families may also appear as proposals to provide targeted cuts to offset regressive tax increases in states where lawmakers plan to raise revenue. We suggest also keeping an eye on working family tax break proposals in the following states: California, Georgia, Illinois, Minnesota, Mississippi, Missouri, Oregon, Rhode Island, Utah, Virginia, and West Virginia.

Part 6: Overdue Increases in Transportation Funding

The recent momentum toward improvements in funding for transportation infrastructure is likely to continue in 2016. Governors in states such as Alabama, California, and Missouri have voiced support for gasoline tax increases, and gas taxes seem to be on the table in Indiana and Louisiana as well. These discussions on a vital source of funding for infrastructure improvements are long-overdue, as many of these states haven’t updated their gas taxes for decades

But not all transportation funding ideas being discussed are worth celebrating. Arkansas Gov. Asa Hutchinson, for example, has proposed that additional infrastructure funding come from diverting significant revenues away from education, health care, and other services. Meanwhile, lawmakers in other states (Mississippi, New Jersey, and South Carolina) would like to leverage a gas tax increase to slash income or estate taxes for high-income households. While these plans would result in more funding for transportation, their overall effect would be to worsen the unfairness and unsustainability of these states' tax codes.

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

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

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

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

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

 

Wins for Working Families

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

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

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

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

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

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

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

 

Significant Revenue Raising:

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

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

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

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

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

 


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


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

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

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

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

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

 

Tax Shifts

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

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

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

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

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

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

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

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

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

 

Tax Cuts 

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

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

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

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

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

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

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

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

 


Gas Tax Changes Take Effect July 1


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

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

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

View chart of states raising gasoline taxes 

View chart of states raising diesel taxes

 

 

 


State Rundown 6/18: Promising Gas Tax Developments, Pandering Tax Cuts


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Wisconsin lawmakers are considering eliminating the state’s Alternative Minimum Tax (AMT), a move that would send tax breaks to the rich and nothing to more than 80 percent of Wisconsinites. The AMT is meant to ensure that wealthy individuals pay a minimum level of income tax, and is therefore assessed at higher incomes. Ironically, as state lawmakers and Gov. Scott Walker slashed top marginal income tax rates for the wealthy, more of these taxpayers were subjected to the AMT. The proposal to eliminate the tax would cost more than $27 million annually in lost revenue.

The Rhode Island House of Representatives unanimously approved the 2016 budget deal on Tuesday night, sending the measure to the Senate Finance Committee for consideration. The unanimous approval cleared the House by 7:30pm, and has been touted as the quickest budget vote in at least 30 years. The $8.7 billion bill exempts Social Security income from the personal income tax for Rhode Islanders over 65 if their income is below $80,000 (single) or $100,000 (married) – a change that will benefit mostly wealthy retirees, as we’ve argued before. The plan also phases out sales taxes on utility bills for non-manufacturing businesses. On a positive note, the budget increases the states refundable Earned Income Tax Credit (EITC), a tax break for working families, from 10 to 12.5 percent.

The Florida Legislature approved a $400 million package of tax cuts on Monday, and Gov. Rick Scott is expected to sign the measure even though it reduces taxes by less than he wanted. Passage of the measure comes 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 what Scott proposed was reduced by almost half in order to cover healthcare costs. The package of cuts includes tax cuts for cellphone purchases and cable bills, college textbooks, and sailboat repairs that cost more than $60,000.

As the summer travel season heats up, lawmakers in states across the country are mulling gas tax increases as a way to boost road construction and maintenance budgets. Tennessee Gov. Bill Haslam plans to barnstorm the state to stress the need for more transportation funding, though he’s stopped short of endorsing a gas tax increase. Tennessee’s gas tax hasn’t risen in decades, and the average motorist there is paying a third less per mile for roads than a generation ago. An editorial in The New York Times, meanwhile, argues that New Jersey lawmakers must raise their state gas tax to pay for crumbling roads. At 14.5 cents a gallon, the state tax is less than a third of New York’s tax and trails Pennsylvania and Connecticut by similar margins. Meanwhile, New Jersey has 577 structurally deficient bridges and 300,000 potholes. Efforts to increase state gas taxes also received a boost from a recent study that finds gas tax increases do not result in penny-to-penny increases in the price that motorists pay at the pump.

A Delaware House committee will consider a bill that would make their income tax rate structure more progressive. Currently, the top personal income tax rate is 6.6 percent for income above $60,000. The new proposal would institute a rate of 7.1 percent for income between $125,000 and $250,000, and a rate of 7.85 percent for income above $250,000. State officials say the changes would increase revenue by $97.5 million over the next two years. 


State Rundown 6/8: Compromise and Defeat


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As legislative sessions across the country enter the final stretch, many states are buzzing with activity around tax policy. Lawmakers in Kansas and Maine are still working on behind-the-scenes negotiations aimed at resolving differences around major tax deals, while Ohio and North Carolina lawmakers are expected to release budgets with more personal income tax cuts (on top of the cuts enacted in recent years). Meanwhile, Alabama, Minnesota, Florida and Illinois are headed into special sessions to tackle thorny budget and tax issues and, in some cases, enduring budget shortfalls. 

Iowa lawmakers reached a budget compromise last week, ending a stalemate that took the state legislature a week beyond its expected adjournment. The debate centered on how to spend a budget surplus. Republican legislators were reluctant to increase spending on ongoing expenses using one-time money, while Democratic legislators and Gov. Terry Branstad wanted to use the surplus to invest in education and human services. The deal includes a 1.25 percent increase in K-12 spending next fiscal year as well as $55 million in one-time expenditures for public schools this fiscal year. In all, the budget next fiscal year will increase by about $299 million.

Rhode Island lawmakers are considering various tax breaks, among them proposals to exempt retirement income from the personal income tax. State Rep. Robert Craven has proposed exempting all state, local and federal retirement income, including Social Security and military pensions paid to those 65 and older, from state income taxation. Craven argues that the measure will keep retirees from moving out of state, though research shows that retirees don’t move for tax reasons. Critics of the plan argue that most of the benefits would go to wealthier citizens. Gov. Gina Raimondo has proposed a more targeted retirement income exemption that would fully exempt Social Security income from taxation for single filers with annual household incomes of $50,000 or less and married filers making $60,000 or less.  House Speaker Nicholas Mattiello supports a similar approach, although married couples earning $100,000 or less ($80,000 for singles) would be exempt from paying taxes on Social Security under his plan. The speaker also supports raising the state EITC to 12.5 percent of the federal credit, an improvement but less than the 15 percent proposal included in Gov. Gina Raimondo’s budget.

Louisiana legislators narrowly rejected a bill that would have doubled the state’s Earned Income Tax Credit (EITC) from 3.5 to 7 percent of the federal credit. If enacted, the change would have benefitted 515,000 Louisianans every year. So far this year, lawmakers in the state have approved or extended a variety of credits for business owners and corporations. One state representative called the EITC “essentially welfare written into the tax code” and sought to do away with the credit altogether. Other representatives rebuked their colleagues for doing nothing to help working families in the state, noting that Louisiana has a starkly regressive tax system.

 

States Ending Session This Week:
Louisiana

 

goldengirls1.jpgWhether you indentified with Dorothy, Blanche, Rose or Sophia, The Golden Girls was a shining moment in television history. The show was groundbreaking in its portrayal of senior citizens as fully complex individuals, and has inspired a devoted following decades after the end of its run.

Life imitates art, and senior citizens are a favorite target of legislator largesse. Almost every state that levies an income tax now allows some form of income tax exemption or credit for citizens over 65 that is unavailable to non-elderly taxpayers. But many states have enacted poorly-targeted, unnecessarily expensive elderly tax breaks that make state tax systems less sustainable and less fair.

Poorly targeted tax breaks for the elderly are a costly commitment for many states—and long-term demographic changes threaten to make these tax breaks unaffordable since older adults are the fastest growing age demographic in the country. Moreover, while poverty has often been associated with advanced age, a 2014 US Census report found that Americans over 65 are less likely to be poor than people in their prime working years, further exacerbating the mismatch between the tax breaks offered and needs within the population.

Despite these concerns, lawmakers in many states have proposed further tax breaks for the elderly (click here to read an ITEP brief on this topic). Here are five states where senior tax proposals are on the table:

Iowa: State Sen. Roby Smith recently filed legislation (SF 277) that would remove pensions, annuities, and retirement income from the personal income tax base. So far, the legislation has 23 cosponsors and a similar bill is being sponsored in the House. Note that Iowa already allows a $6,000 exclusion ($12,000 for married couples) for retirement income.  

Maine: There is a lot of coverage of Gov. Paul LePage’s sweeping tax shift package that would hike sales taxes to help pay for significant personal and corporate income tax cuts and the elimination of the estate tax.  One part of the plan that has received less attention is an increase in the state’s current pension exclusion from $10,000 to $35,000 per each taxpayer over 65.  An ITEP analysis of this increased pension tax break found that more than 60 percent of the benefit would flow to the wealthiest 20 percent of Maine residents.

Maryland: Gov. Larry Hogan would like to eventually exempt all pension income from state income taxes, but due to a tight budget situation he is starting with a more limited proposal targeted toward politically popular beneficiaries: military veterans, police, and firefighters.  It’s important to note that Maryland already has a generous exemption on the books for pensions. Under current Maryland law, the first $29,000 in pension income collected by disabled taxpayers and those over age 65 is exempt from tax, and for military veterans that amount is even higher, at $34,000.  Of course, these breaks come on top of the normal personal exemption ($3,200) and standard deduction ($2,000) that all Marylanders can claim. As a result, Hogan’s plan would mostly benefit taxpayers with above-average pensions (the average military pension is $28,000 according to official statistics) and people with the financial means to retire early.  Fortunately, State Senate President Mike Miller thinks that the plan is unlikely to gain passage.

Minnesota: Lawmakers are debating a variety of bills aimed at eliminating or reducing taxes on Social Security benefits. As this article notes, the cost of cutting the tax on Social Security benefits will grow over time because the number of Social Security beneficiaries is growing.

Rhode Island: Lawmakers want to reduce taxes for Ocean State retirees this session, but the proposals that have emerged from the state’s House chamber and the governor’s office differ greatly in their cost and scope.  A bill introduced in the House would exempt all state, local and federal retirement income, including Social Security benefits and military pensions, from the state’s personal income tax. An initial ITEP analysis of the bill found that the lion’s share of the benefits would go to well-off elderly taxpayers.  Since some Social Security income is already exempted from Rhode Island taxes, low-income seniors already owe no personal income taxes on those benefits and often have no other retirement income. The House plan could cost more than $60 million if enacted.  Gov. Raimondo’s budget includes a much smaller and more targeted retirement income tax break which would fully exempt taxpayers with incomes less than $60,000 from paying taxes on Social Security.  Not only would her plan cost significantly less (around $4 million), it would ensure that 100 percent of the benefits from the tax break flow to moderate-income older adults who depend primarily on Social Security for their income.

 


State Rundown 3/16: Win Some, Lose Some


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

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

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

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

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

 

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

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

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

 

States Ending Session This Week:
New Mexico (Saturday)

 


State Rundown 1/8: All Eyes on the Governors


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Happy New Year and welcome back to the State Rundown, your statehouse insider and source for all things state tax policy related. We’ll provide a preview of the week’s big debates every Monday afternoon, as well as a follow-up post on Thursday afternoons. Eighteen states began their legislative sessions this week, so let’s hit the ground running!

California Gov. Jerry Brown was sworn in Monday to a history-making fourth term, delivering his annual State of the State speech at the state Capitol in Sacramento. Brown touted his success in leading California through the Great Recession, turning a severe budget deficit into surplus and presiding over impressive economic growth. However, budget fights over the state’s high speed rail project and temporarily enacted sales and income tax increases, set to expire in 2018, loom this session.

North Dakota Gov. Jack Dalrymple struck a defiant tone in his State of the State address Tuesday, despite the threat to his spending plans posed by the continuing slide in oil prices. The governor announced plans to increase state support for counties by $1 billion and pledged to make further tax cuts a priority this legislative session. Since 2009, North Dakota has cut taxes by $4.3 billion, and some lawmakers are pushing to eliminate the state income tax. A property tax reform measure has a likelier chance of passage, however.

Lawmakers in the Rhode Island House of Representatives want to pass a major and costly tax cut for Ocean State retirees. Yesterday, a bill was introduced to exempt all state, local and federal retirement income, including Social Security benefits and military pensions, from the state’s personal income tax. An initial ITEP analysis of the bill found that the lion’s share of the benefits would go to well-off elderly taxpayers.  Since some social security income is already exempted from Rhode Island taxes, fixed-income seniors already owe no personal income taxes on those benefits and often have no other retirement income. 

The bad economic news keeps coming for Kansas Gov. Sam Brownback. A recent report from the Bureau of Labor and Statistics on employment growth in metropolitan areas shows that the governor’s tax cuts have failed to produce jobs – in fact, Kansas City, Missouri added jobs at four times the rate of Kansas City, Kansas, right across the state line. Back in 2012, Gov. Brownback promised Johnson County business leaders that steep tax cuts would draw economic activity from Missouri. In another setback for the governor (and victory for Kansas schoolchildren), a state judicial panel ruled that Kansas inadequately funds public schools. The ruling could mean that state leaders need to pony up another $548 million in school funding when they already face a $1.1 billion deficit. Of course, these are self-inflicted wounds that could be reversed through a prudent fiscal policy.

Newly-elected Illinois Gov. Bruce Rauner is on a gloom-and-doom tour, hoping to drive home just how terrible his state’s finances are and prepare voters for the worst. The governor will inherit a budget short by $1.4 billion, and some state agencies are expected to run out of money in a month. The state’s budget deficit is expected to almost double to $12.7 billion. Rauner, who ran on a platform of lower taxes and higher school spending, has his work cut out for him. A temporary income tax increase is slated to expire this month, which will mean $5 billion less in revenue for a state that desperately needs it.

States Starting Session this Week:
California
Connecticut
Indiana
Kentucky
Massachusetts
Minnesota
Mississippi
Missouri
Montana
Nebraska
New Hampshire
New York
North Dakota
Ohio
Pennsylvania
Rhode Island
Vermont
Wisconsin

State of the State Addresses this Week:
California Gov. Jerry Brown (watch here)
North Dakota Gov. Jack Dalrymple (watch here)
Maine Gov. Paul LePage (watch here)
Connecticut Gov. Dannel Malloy (watch here)

Governor’s Budgets released this Week:
California Gov. Jerry Brown (Friday)
Maine Gov. Paul LePage (Friday)


State News Quick Hits: Undocumented Immigrants, Tax Deform and More


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This shouldn’t be news to anyone, but undocumented immigrants do pay taxes. This week the Iowa Policy Project (IPP) released a report detailing their contributions to Iowa revenues using ITEP data. IPP found that undocumented immigrants pay an estimated $64 million in state and local taxes. Read IPP’s full findings here.

A News & Observer editorial last week lamented the revenue boom North Carolina might have enjoyed this year but for the package of steep income and corporate tax cuts passed in 2013. While numerous other states, including California, are beginning the fiscal year with healthy reserves, the N.C. Budget and Tax Center, using ITEP data, estimates that the cost of their state’s tax cuts could balloon to over $1 billion this year (almost double the reported amount of the tax cuts).

Rhode Island lawmakers recently enacted a budget for the new fiscal year which received a lot of attention for changes made to the corporate income tax (rate cut and adopting combined reporting) and cutting the state’s estate tax for a few wealthy households.  But, as Kate Brewster of the Economic Progress Institute helps to explain in this op-ed, the budget deal also quietly hiked taxes on many low- and moderate-income families by eliminating a refundable credit used to offset regressive property taxes for non-elderly homeowners and renters.  Brewster opines: “Given the struggles facing middle class Rhode Islanders — enduring unemployment, stagnant wages and a lack of affordable housing — it is hard to believe the state’s new budget includes huge giveaways for a handful of heirs while quietly taking money directly out of the pockets of low- and middle-income Rhode Islanders.

Next month Missouri voters will be asked to decide whether the state’s sales tax rate should be increased to pay for transportation improvements. The debate is raging, though no one seems to dispute Missouri has huge transportation needs. Tax justice groups like the Missouri Association for Social Welfare and even Governor Jay Nixon have argued that hiking the sales tax in the wake of income tax reductions would make the state’s tax system even more unfair. In a statement Nixon said, “This tax hike is neither a fair nor fiscally responsible solution to our transportation infrastructure needs.” It’s worth noting that the state has gone 18 years without an increase in their gas tax.


State News Quick Hits: Governors Misguidedly Oppose Progressive Taxes


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New Jersey Governor Chris Christie signed a FY15 budget on Monday after nixing Democratic bills which would have fully funded the state’s promised pension payments through a new “millionaire’s tax.” The effects of the governor’s decision to forgo making the full payments required under his much-lauded 2011 pension reform law are yet to be seen - Standard & Poor’s has threatened to downgrade the state’s debt again while a judge could still reverse Christie’s decision and require the payments to be made.

Indiana Governor Mike Pence pledged to make tax reform a priority during the next legislative session at a conference last week attended by infamous supply siders Arthur Laffer and Grover Norquist, and former Bush administration economic advisor Glenn Hubbard. Pence claims that the tax code must be simplified in order to create a better environment for economic growth, but Indiana House Minority Leader Scott Pelath argues that the language of “simplification” is really just a ruse to disguise the objective of reducing the progressive personal income tax.

Rhode Island and Indiana saw drops in their corporate tax rates Tuesday, a misguided tactic used by states to promote job creation with little proof of success. Rhode Island will drop its rate from 9 to 7 percent, while Indiana’s rate will gradually be reduced to 4.9 percent (this is on top of a gradual reduction from 8.5 to 6.5 percent enacted a few years ago).  However, at least Rhode Island lawmakers sensibly coupled the corporate rate drop with base broadening policies including mandatory combined reporting  which requires a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report.

Kansas’s June revenue collections came in $28 million under projections, according to officials. The state ends the fiscal year $338 million short of total projected revenue amid concerns that Governor Brownback’s income tax cut package is causing more bleeding than initially anticipated. Concerned that the state may be spiraling into a budget crisis, House Democratic leader Paul Davis has proposed postponing the next phase of the governor’s tax cuts.


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


Are Special Tax Breaks Worthwhile? Rhode Island Intends to Find Out


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Rhode Island is about to put seventeen of its “economic development” tax breaks under the microscope, thanks to a new law (PDF) signed by Governor Chafee last week.  This reform is a welcome step forward in a national landscape where states often do nothing at all to figure out whether narrow tax breaks are really helping their economies.

Under Rhode Island’s new reform, state analysts must estimate how many new jobs were actually created as a “direct result” of the $45 million worth of tax breaks within the new law’s scope.  Those analysts must also make a bottom-line recommendation on whether each tax break should be allowed to continue, based on how cost-effective it’s been in achieving its intended goals.

Of course, it remains to be seen how rigorous Rhode Island’s analysts will be in conducting these evaluations, and whether their work will actually be used by lawmakers to inform policy.  After all, as the Pew Charitable Trusts has shown, not all tax break evaluations are of equal quality or influence.

But there are reasons to think that Rhode Island’s evaluations will make a difference.  For starters, the new law requires a much more systematic and rigorous evaluation than what most other states require.  Rhode Island’s evaluations, for example, must investigate whether the benefits of the tax break are flowing largely to businesses or investors outside of the state, and whether changes in data collection laws could allow for even better evaluations in the future.  Rhode Island’s reform also requires the Governor to provide their own recommendation on each newly evaluated tax break when she or he submits budget recommendations to the state legislature each year.

But Rhode Island’s new reform isn’t perfect.  Requiring the Governor’s budget to include recommendations is a good way to get lawmakers to acknowledge the evaluations, but a more effective check is attaching a “sunset” provision (or expiration date) to each break; that’s the best way to ensure these tax breaks come up for a vote after new evidence on their effectiveness is released.

Moreover, the Economic Progress Institute points out that Rhode Island offers a total of 235 different tax breaks, at an annual cost to the state of $1.7 billion.  Evaluating just seventeen tax breaks that cost $45 million leaves the vast majority of the state’s tax law unexamined.  Still, if these initial evaluations prove worthwhile, lawmakers and advocates will have a strong case for expanding this new reform to cover a much larger portion of Rhode Island’s tax code

Tuesday, the Ohio House of Representatives approved their budget bill which included an across the board 7 percent reduction in income tax rates. Though the House tax plan is less costly than the Governor’s original proposal, Policy Matters Ohio, using Institute on Taxation and Economic Policy (ITEP) data, makes the point that this reduction will still benefit the wealthiest Ohioans. “For the top 1 percent, the tax plan would cut $2,717 in taxes on average. For the middle 20 percent, it would amount to a $51 cut on average. For the bottom 20 percent, it would result in $3 on average.”

This week the Minnesota Senate unveiled their tax plan which, (unlike Governor Dayton’s plan and the House plan wouldn’t create a new top income tax bracket,) would raise the current top rate from 7.85 to 9.4 percent. About 6 percent of taxpayers would see their taxes go up under the Senate plan. Both houses of the legislature and the Governor are committed to tax increases and doing the hard work necessary to raise taxes in a progressive way. Senator Majority Leader Tom Bakk recently said, "Some people are probably going to lose elections because we are going to raise some taxes, but sometimes leading is not a popularity contest."

We’d be remiss if we didn’t draw your attention to this study (PDF) by Ernst and Young for the Council on State Taxation which cautions state lawmakers about expanding their sales tax bases to include services purchased by businesses. Louisiana Governor Bobby Jindal’s failed attempt at income tax elimination included broadening the sales tax base to include a variety of services, including business-to-business services. Ironically, Ernst and Young was hired by the Governor to consult about his plan. Toward the end of the tax debate there, the AP pointed out the disparity between the Governor's consultants’ stance on taxing business-to-business services and what the Governor himself was proposing.

Rhode Island analysts are urging lawmakers to take a closer look at the $1.7 billion the state doles out in special tax breaks each year.  A new report from the Economic Progress Institute recommends rigorous evaluations of tax breaks to find out if they’re working. It then recommends attaching expiration dates to those breaks so that lawmakers are voting whether to renew them based on solid evidence about their effectiveness. These goals are also reflected in a bill (PDF) under consideration in the Rhode Island House -- Representative Tanzi’s “Tax Expenditure Evaluation Act.”

We’ve criticized Virginia’s new transportation package for letting drivers off the hook when it comes to paying for the roads they use, and now the Commonwealth Institute has crunched some new numbers that make this very point: “Currently, nearly 70 percent of the state’s transportation revenue comes from driving-related sources ... But under the new funding package, that share drops to around 60 percent ... In the process the gas tax drops from the leading revenue source for transportation to third place; and sales tax moves into first.”

  • The Institute for Research on Poverty at the University of Wisconsin-Madison released a report showing that Wisconsin poverty rates actually dropped between 2009 and 2010 – from 11.1 to 10.3 percent – thanks to safety net programs that were effective in keeping people out of poverty during the recession. The Institute’s director praised the earned income tax credit and food stamp programs saying that they “have done a fantastic job in this recession.”
  • Rhode Island’s House Committee on Finance considered five bills this week that would raise income taxes on the wealthiest Rhode Islanders.  Read ITEP’s testimony to learn how these proposals are the best option for Rhode Island policymakers who want to both raise revenue and improve tax fairness.
  • Massachusetts Governor Deval Patrick created a special Tax Expenditure Commission last year to examine the more than $26 billion in tax breaks the state hands out each year (which amounts to more money than the state is expect to take in this year!).  After months of meeting, the members unanimously approved a report that the Commission Chair referred to as a “comprehensive roadmap” to reforming the system.  Many of the Commission’s recommendations mirror those in CTJ’s recommendations for cleaning up state tax codes – and the process by which they are modified. The 8 formal recommendations in Massachusetts include: reducing the number and cost of current tax expenditures; periodically reviewing expenditures and including an automatic sunset every five years; and identifying and publishing clear policy purposes and outcomes for each expenditure.
  • And this article is about a sales tax holiday for meals that’s been proposed as an actual piece of legislation in Massachusetts.  A week long sales tax holiday on meals purchased at restaurants? Sounds like a boondoggle of a loophole to us. Thankfully, commonsense prevailed and the idea was solidly defeated.

Rhode Island: Just Don't Call It Class Warfare


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Acknowledging he will likely “face accusations of engaging in class warfare,” Rhode Island Representative Scott Guthrie called on wealthy Ocean Staters to pay more in taxes this week to help close the state’s budget gap.

From the Representative’s press release:

“As the state budget deficit continues to loom large, for yet another year, one phrase continues to remain popular from elected officials – shared sacrifice,” said Representative Guthrie. “Well, I see municipalities sacrificing, as well as many of the residents of those communities. I see sacrifices from the poorest and neediest in Rhode Island, the results of continued trimming in the social services funding. What I don’t see is sacrifice from the wealthiest members of our society who could most easily afford to give a little more to help their many neighbors and fellow citizens who are suffering.

“Trickle down doesn’t work. We’ve tried it for years and all the benefits continue to trickle up.  We need a shift back to a more fair tax policy.”

Representative Guthrie filed four different bills offering four different scenarios for raising revenue. Each of them would add a fourth, temporary bracket to the state’s personal income tax and introduce a different marginal rate on income above different thresholds.  That is, the new one or two percent tax bracket would not apply to all income, only that income above either $250,000 or $500,000, depending on the proposal.

The Institute on Taxation and Economic Policy (ITEP) analyzed the representative’s proposals at the request of the Economic Progress Institute.  The two bills that increase the top marginal rate for taxpayers with taxable income greater than $250,000 would impact less than 2 percent of taxpayers.  The bills that increase the top marginal rate for taxpayers with taxable income greater than $500,000 would impact less than 1 percent of taxpayers. 

Representative Guthrie says that his proposals could bring in anywhere between $37.9 and $144 million in revenues for the two year period they are in effect, depending on which is implemented, or $20 to $70 million per year. His plans are outlined here.


Trending in 2012: Admitting Taxes Are Too Low


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Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy will highlight tax policy proposals that are gaining momentum in states across the country.  This week, we’re taking a closer look at proposals which would increase state revenues to pay for important public investments. 

Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

Maryland Governor Martin O’Malley included several revenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim - a recommendation ITEP made last year.

O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

Massachusetts Governor Deval Patrick is promoting some revenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s$88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0


How Rhode Island Didn't Do the Wise Thing When It Had the Chance


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Unfortunately, Rhode Island lawmakers rejected Governor Lincoln Chafee’s balanced and reform-minded approach to closing the state’s budget shortfall for next fiscal year.

Senate members gave final approval to the House’s revised spending plan this week, both chambers choosing significant spending cuts over the governor’s sensible tax package.  Governor Chafee proposed closing half of the budget gap with a $160 million comprehensive sales tax reform package that included adding dozens of services to the state’s sales tax base, lowering the state sales tax rate from seven to six percent, and taxing more than 40 currently exempted goods at a one percent rate.  Chafee also supported mandatory combined reporting which would have helped level the corporate tax playing field for in-state businesses.

Caving to special interests who lined up in April to denounce the Governor’s plan, the final budget only adds five items to the sales tax base including non-prescription drugs and sightseeing tour packages.  Combined with a few other minor tax and fee changes, the final budget raises only $30 million in new revenue and reduces spending by more than $150 million.  According to the Providence Journal, more than half of the budget cuts impact programs for the poor, elderly, disabled and homeless.

Photo via J. Stephen Conn Creative Commons Attribution License 2.0


Rhode Island Sunset Law Would Shore Up Tax Reform


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Last year, Rhode Island’s lawmakers very wisely chose to close a large number of loopholes in the state’s Swiss cheese tax code.  Now Ocean State lawmakers have an opportunity to shore up that newly reformed code against the inevitable flood of special interest tax breaks that’s sure to come.

Read the article.


ITEP Testifies in Rhode Island on Corporate Tax Avoidance and Sunset Bills


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Last week, ITEP testified in front of the Rhode Island House Finance committee on two bills.  One would close down some of the most egregious tax avoidance schemes available to multi-state corporations by mandating “combined reporting.”  The other would ramp up the level of scrutiny applied to Rhode Island’s tax code by requiring that new tax breaks (or “tax expenditures”) be created with a seven-year expiration date, and a specific plan for gathering vital performance data.

The first bill, H5738, would level the playing field between large corporations and mom-and-pop businesses by greatly reducing the ability of multi-state corporations to avoid taxes by artificially shifting income (on paper) to low-tax or no-tax states.  Specifically, H5738 would mandate what’s known as combined reporting, an accounting procedure that’s already required in a majority of states with corporate taxes or similar taxes. 

As ITEP points out in its testimony, combined reporting is already very common in New England.  Massachusetts, New York, and Vermont were each part of a larger wave of states that recently implemented this reform, while two other nearby states—Maine and New Hampshire—have required combined reporting for over two decades.

The other bill, H5737, would require that legislation creating a new tax break include four things: a statement of purpose, detailed performance indicators, data collection requirements, and a provision forcing the tax break to sunset within seven years.  According to ITEP’s testimony, this bill combines a variety of tax expenditure best practices already in use elsewhere around the country. 

For example, Washington State is particularly good about analyzing its tax expenditures in order to judge their efficiency and effectiveness.  Oregon and Nevada, on the other hand, now make use of sunset provisions in order to ensure that tax expenditures are not allowed to continue indefinitely without reconsideration by elected officials.  H5737 combines these two approaches, and in doing so has the potential to produce a framework for scrutinizing tax expenditures more closely than in any other state.

Read ITEP’s testimony on combined reporting in Rhode Island.

Read ITEP’s testimony on tax expenditure procedural reform in Rhode Island.


Rhode Island Considers Progressive Approach


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Rhode Island remains one of a handful of states seriously considering revenue increases to help address significant state budget shortfalls. 

In March, Governor Lincoln Chafee put forth a plan that would expand the state’s sales tax base to several dozen services currently not taxed and lower the state sales tax rate from 7 to 6 percent.  He also proposed a new 1 percent sales tax on some currently exempted goods and a variety of changes to business taxes.  Altogether, his revenue plan would have closed around half of a $331 million budget gap.

At legislative hearings in April, dozens of special interests lined up in opposition to Chafee’s sales tax expansion plan, which has since stalled in the legislature. 

Last week, an alternative revenue-raising plan emerged.  Representative Larry Valencia filed a bill for a temporary personal income tax surcharge of 4.1 percent on the state’s wealthiest residents, which would raise around $130 million. 

Rhode Island’s top marginal tax rate of 5.99 percent currently applies to taxable income of $125,000 and above for all taxpayers.  Under Rep. Valencia’s plan, a fourth bracket would be created.  Married couples with taxable income of $250,000 and single people with taxable income more than $200,000 would pay 10.09 percent on their incomes above those amounts.  

An Institute on Taxation and Economic Policy analysis of the proposal found that only 2 percent of the state’s taxpayers would be impacted by the tax increase.  More than 90 percent of the increase would be paid by the wealthiest 1 percent of Rhode Islanders, who have average incomes of close to $1 million.

Representative Valencia considers his bill a reversal or ‘recapture’ of the federal tax cut wealthy Rhode Islanders will receive as a result of the extension of the Bush tax cuts Congress enacted last December.


Sales Tax Reform Debated in Rhode Island


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Will Rhode Island be the next state to allow special interests to prevent it from bringing its sales tax into the 21st century? 

Despite near-universal agreement among economists on the wisdom of broadening sales tax bases and dozens of state tax commissions recommending such a move, state lawmakers across the country have crumbled under the pressure from service providers who do not believe their products should have to compete on the same playing field as goods. 

As a result, no state in recent years has succeeded in implementing a comprehensive sales tax base broadening plan.  The political ramifications of taking on previously untaxed businesses may make some policymakers wary.

This must change. As states shift from manufacturing economies to service economies, it's essential that tax structures change too.

Rhode Island Governor Lincoln Chafee included an expansive sales tax modernization plan in his budget proposal this year which would broaden Rhode Island’s sales tax base to include dozens of services, lower the general state sales tax rate, add a one percent tax on most currently exempted goods, and raise additional revenue to help mitigate budget cuts. 

Governor Chafee is one of only a handful of governors willing to protect vital public services by supporting new revenues as part of a balanced budget plan. He is also one of just two governors willing to consider making long-term and necessary improvements to his state’s sales tax rather than just simply raising the rate.

Rhode Island House and Senate Finance members took up the governor’s proposal this week.  More than 90 individuals spoke against the plan at the House Finance Committee hearing on Wednesday with hundreds more on site to voice their opposition.  As to be expected, everyone from the auto mechanics to landscapers to salon and bowling alley owners lined the halls to say, “Don’t tax me.” 

ITEP submitted testimony
to both committees in support of the modernization proposal.

Democratic Representative Jan Malik, who asked business owners during the hearing why they should not be taxed while other businesses are, said “I feel their pain… But I understand what the governor is trying to do here. Why is it fair for my business to get taxed [Malik owns a liquor store] but not your business? These are the questions that have to be answered. We all have to share the pain in this state.” 

Kate Brock of Ocean State Action, one of the few to speak in favor of the governor’s plan, asked why the state taxes lawnmowers but not landscapers, and nail polish but not nail salons. She said, “It is illogical to tax a good but not a service that results in the same outcome.”

It looks like the special interests triumphed at least in the short term in Rhode Island. House Speaker Gordon Fox said that the majority of house members will not be supporting the governor’s plan in its current form, but will work with him to come up a viable alternative.  Senate President M. Teresa Paiva Weed also announced that the Senate is working on alternative ways to address the state’s budget shortfall.  Neither would say that changes to the sales tax are altogether off the table. 

Governor Chafee said he was open to hearing suggestions from the House and Senate, but reasserted the need to update the sales tax to “stabilize the state’s revenues during downturns in the economy and to better align it with modern-day customer’s spending habits.”

Many lawmakers are not only rejecting the governor’s sales tax overhaul proposal, but are also objecting to the idea of raising revenue at all to address the state’s $300 million budget gap.  One of the "alternatives" will likely be more cuts to education and other core services.

If there’s one valid criticism of the proposal, it’s that even though taxing services is generally less regressive than a sales tax rate increase, it remains a regressive tax no matter how broad the base. The governor’s plan therefore asks more of low-income households than of the wealthiest in the state. 

Coupling the base expansion with a fully refundable state Earned Income Tax Credit would ensure low-income households are not disproportionately impacted by the governor’s (otherwise sensible) sales tax modernization proposal.

Rhode Island’s sales tax base is one of the narrowest in the country, largely limited to tangible goods and even many of those are exempted from taxation.  As currently structured, Rhode Island’s general sales tax is unsustainable, inadequate, and unfair. Governor Chafee’s proposed reforms would take important steps towards repairing each of these problems, and in particular would help stabilize revenue.

If Rhode Island (or any state for that matter) wants to continue relying on a sales tax as a substantial and reliable revenue source, lawmakers are going to have to take a stand against the service industry sooner rather than later.

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

Read the ITEP brief.


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


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

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

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

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

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

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

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


Rhode Island Governor Would Improve Tax System, But Could Do Better


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This week, Rhode Island Governor Lincoln Chafee joined the very short list of governors supporting a balanced approach to addressing significant revenue shortfalls.  Like governors in Connecticut, Minnesota, Illinois, Hawaii, and North Carolina, Chafee included new revenue in his budget proposal, which will help mitigate the impact of otherwise devastating spending cuts. 

Significant changes to Rhode Island’s sales tax would raise enough revenue to close roughly half of the state’s $331 million budget gap.  Chafee proposes a two-tier sales tax rate structure, a 6 percent rate on most goods and some services and a 1 percent rate on certain additional items currently not taxed. 

The 6 percent sales tax would be a broader version of the existing tax. Chafee would expand the base of the sales tax to include an array of services currently not taxed as well as some goods that are legislatively exempt from the sales tax, including newspapers, live entertainment, car washes, and dry cleaning services.  The main sales tax rate would be lowered from 7 percent to 6 percent and the combined change would raise around $78 million for next fiscal year.

Chafee’s plan would also apply a new 1 percent sales tax to more than 40 goods currently exempt from the sales tax including clothing, boats, flags and farm equipment. 

Under the plan, food, prescription drugs, durable medical products and gasoline would continue to be exempt from state sales taxes. 

Chafee’s budget proposal also included an overhaul of business taxation, including enacting combined reporting, phasing down the corporate income tax rate from 9 to 7.5 percent, and restructuring the corporate minimum tax so that corporations pay differing amounts based on their total sales in Rhode Island.  These combined changes would result in a net revenue loss of $14.5 million once fully implemented in FY16, but Chafee champions the package as one that will make the state more business-friendly and competitive with neighboring states.

Kate Brewster, Executive Director of the Poverty Institute, commented on the governor’s budget proposal to GoLocalProv: “We are pleased that our Governor has taken a balanced approach to balancing the budget that includes revenue raising proposals rather than relying on a cuts-only strategy… His proposals to close corporate loopholes through combined reporting and bring our sales tax into the 21st century are responsible tax policies.”

While we agree Governor Chafee should be applauded for embracing a balanced approach to the budget that includes important tax modernization changes, relying solely on the sales tax to raise revenue inevitably means that the state’s poorest residents will shoulder the largest share of the tax increase.  An ITEP analysis found that the bottom 20 percent of taxpayers will pay on average an additional 0.8 percent of their incomes in sales taxes while the top 1 percent on average will only pay an additional 0.2 percent. 

In order to lessen the impact of the sales tax changes on low- and moderate-income households, Rhode Island lawmakers should consider increasing their state Earned Income Tax Credit (EITC).  Rhode Island currently allows for a 15 percent refundable EITC or an optional 25 percent non-refundable EITC.  According to ITEP analysis, eliminating the optional non-refundable EITC and increasing the refundable credit to 25 percent (in other words, all eligible taxpayers would receive a refundable EITC that is 25 percent of their federal credit), would offset the impact of the sales tax changes on the poorest 40 percent of households.  This change would cost an estimated $26 million, which could be paid for by scaling back the governor’s corporate income tax rate reduction.

It is also curious that Governor Chafee chose a two-tiered sales tax rate structure rather than simply applying his entire list of currently exempt items to the higher sales tax rate.  If Rhode Island had one sales tax base, the main sales tax rate could be reduced even lower than 6 percent while still raising a significant amount of revenue.


Millionaire Migration Claims Fall Flat in the Media


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

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

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

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

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

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

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

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

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

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

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

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


Migration Myth Moves to Rhode Island


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There’s a definite trend forming among conservative ideologues when it comes to exaggerating the effect of taxes on individuals’ decisions about where to live.  Maryland, New Jersey, and Oregon have all seen bogus claims of this type arise in the last year or two, and Illinois’ recent tax increases have sparked some empty chatter of a similar type.  Unfortunately, Rhode Island can now be added to that list as well.

The Ocean State Policy Institute (OSPI) recently released a report claiming that the estate tax is driving affluent Rhode Islanders from the state.  As Wall Street Journal blogger Robert Frank points out, however, there is very little evidence in the report to support this claim.

The most cited rebuttal to OSPI’s report was issued by the Rhode Island Poverty Institute.  In it, the Poverty Institute starts by making one obvious point that you’d never guess from reading the OSPI report alone: Both the state’s overall population, and the number of wealthy taxpayers contained within its borders, have grown in the last decade.

Moreover, the Poverty Institute points out that “only a handful of Rhode Island taxpayers will ever have an estate that is actually subject to an estate tax, making it highly unlikely that the average Rhode Islander moving to another state is doing so for this reason.”  In fact, Massachusetts, which also has an estate tax, is the favorite destination of outgoing Rhode Islanders.  Admittedly, a sizeable number of Rhode Islanders do move to Florida (which lacks an estate tax), but the same can be said for New Hampshire residents.  And New Hampshire, like Florida, has neither an estate tax nor a personal income tax.

Ultimately, any reasonable person is going to think about a lot more than their tax bill when deciding where to live.  Just don’t expect this fact to be acknowledged by the anti-tax crowd anytime soon.

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.


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.


Bad Tax Ideas from Five Gubernatorial Races


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In an attempt to win votes, lots of gubernatorial candidates have been promising lots of tax cuts — despite the fact that many of their states face very bleak budgetary outlooks.  Here are examples from five states:

Rhode Island — John Robitaille won the Republican nomination for governor this past Tuesday on a platform that includes amending the state constitution to cap property tax increases at 2.5 percent per year.  Massachusetts's experience with a similar cap indicates that this proposal could have a very negative impact on local government services.

Wisconsin — Scott Walker was the winner of Wisconsin's Republican primary on Tuesday.  Walker is also running on an anti-tax platform, including a property tax "freeze" that would only allow revenue growth to the extent that new construction occurs.  Democrat Tom Barrett is also running on a campaign that heavily emphasizes cutting government spending, and enacting so-called "targeted" business tax cuts to create jobs.

Michigan — Republican gubernatorial candidate Rick Snyder's proposal to cut taxes on Michigan corporations by $1.5 billion received some attention in the media this week.  Specifically, Snyder would repeal the Michigan Business Tax and replace it with a much smaller corporate tax.  Recent polling indicates that Snyder holds a substantial lead over Democrat Virg Bernero.

Florida — Some of the most absurd tax proposals we've seen in a gubernatorial race this year have come from Florida Republican Rick Scott.  In his very first year in office, Scott wants to slash both school property taxes and the corporate income tax — to the tune of $2.1 billion total in tax cuts.  Unspecified cuts in government spending would then be made to keep Florida's budget in balance.  After this, Scott claims he would focus his energy on eliminating Florida's corporate income tax entirely. Thankfully, Democrat Alex Sink is opposed to cutting the corporate income tax, though she has jumped on the job-creation tax credit bandwagon.

Maine — Both Democrat Libby Mitchell and Republican Paul LePage are running on anti-tax platforms in Maine.  Neither is open to the idea of using tax increases to balance the state's budget.  Mitchell claims that "Maine's income tax is too high and I will continue the effort to lower it."  LePage has stated that "Reducing the overall tax burden for all Maine citizens and small businesses is my vision for tax reform."


Rhode Island Makes Some Gains for Tax Fairness, But Leaves Revenue Needs Unaddressed


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Earlier this week, Rhode Island Governor Donald Carcieri signed legislation that significantly reforms the state’s personal income tax structure.  An ITEP analysis found that the bottom 95% of Rhode Islanders will see a net tax cut from the revenue-neutral reform, while the richest 5% will pay a slightly higher percentage of their income than under previous law. The problem is that this tax reform generates no new revenue to address the state's budget hole. 

Rhode Island lawmakers and the business community championed the reform as a means to make the state more competitive, convinced that lowering the marginal top rate will make the state more attractive to businesses.  While some of the motivations behind the reform are misguided, the end product has a lot to be said for it.  Starting on January 1, 2011, Rhode Island’s personal income tax will be simpler, more sustainable, and somewhat fairer as a result of the reform passed this week.

Elements of the Rhode Island Reform Package

Perhaps the most significant aspect of Rhode Island’s personal income tax reform is the full repeal of all itemized deductions coupled with a substantial increase in the standard deduction.  Itemized deductions are costly, “upside-down” subsidies with the greatest benefit going to the best-off taxpayers, offering little or no benefit for many middle- and low-income families.   The increased standard deduction along with the state’s personal exemption will phase out for taxpayers with taxable income between $175,000 and $195,000 and will not be available for those with taxable income above $195,000.  These changes alone will make Rhode Island’s income tax fairer and more sustainable over time.

To achieve their "competiveness" goal, lawmakers reduced the number of income tax brackets from five to three and lowered the top marginal rate from 9.9 percent to 5.99 percent.  They also eliminated the alternative flat tax method for calculating the income tax, which had been a windfall for the wealthiest residents in the state.

Dozens of special tax breaks and credits were also eliminated.   Only eight credits remain under the new law, including the state Earned Income Tax Credit and credits for child care and statewide property tax relief.  Much to the chagrin of many advocates, the movie and TV production, scholarship, and historic structure rehabilitation credits also remained intact.

Victory for Fairness and Simplicity, But What about Revenue?

Some proponents of tax reform argue that it should be done in a revenue-neutral manner, meaning it does not result in a net gain or loss of tax revenue. This is how Rhode Island's tax reform works. The cost of rate reductions is offset by reducing credits, deductions and loopholes. This will make the state’s income tax simpler, fairer and more predictable.  

Given the state's current budget difficulties, however, revenue-neutrality is an odd goal.   By not taking the opportunity through restructuring the income tax to raise additional state revenue, state lawmakers passed the tax-raising buck to local lawmakers. This is particularly true in light of a $165 million cut to school districts and municipal governments that will surely force tax increases at the local level in order to preserve investments in public education and other programs.  

In fact, the state budget cut to local governments all but ends the long-standing local car tax exemption program for low-valued cars.  In exchange for the cuts, the budget included a measure allowing municipalities to tax all but the first $500 in value of cars, whereas previous law had exempted the first $6,000 in value.  

This means that while low-income Rhode Islanders may see a slight decrease in their income tax from their state leaders’ reform efforts, they will likely also be paying more in local car taxes.  And, due to the sleight of hand state lawmakers pulled by ending their support for the exemption for low-valued cars, one could argue that on a whole, their tax reform “package” was not revenue neutral at all.

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

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

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

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


Rhode Island: Gubernatorial Candidates Know a Good Idea When They See It


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While the current holder of the office may still be in denial about the best ways to deal with his state’s continued fiscal woes, it now appears that most of the major gubernatorial candidates in Rhode Island support an idea whose time has come. Most would repeal – or at the very least, suspend further changes in – the state’s alternative flat income tax.  

As the Rhode Island Poverty Institute explains, the alternative flat tax was originally enacted in 2006 and gives Rhode Island taxpayers two choices. The first choice is using all available deductions and exemptions and paying taxes using a set of graduated rates that range from 3.75 percent to 9.9 percent or. The second choice is applying a single flat rate to federal adjusted gross income with no exemptions or deductions.  For tax year 2009, the flat rate is 6.5 percent, but it is scheduled to fall to 5.5 percent by tax year 2011.  

At present, only about 9,000 taxpayers choose to use the alternative flat-tax approach, but virtually all of them are among Rhode Island’s wealthiest taxpayers and all of them, by definition, see an enormous reduction in taxes by using the alternative approach.  In other words, repealing the flat tax would not only generate significant revenue for the Rhode Island budget – as much as $53 million according to the Providence Journal – but would also improve tax fairness substantially.

Here’s hoping that Rhode Island doesn’t have to wait until it has a new governor to see such a change made.


Rhode Island: One Bad Idea After Another


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“Hello.  Bad Tax Ideas R Us.  How may I help you?”

“Well, good afternoon, Governor Carcieri.  Good to hear from you again.  What can I do for you?”

“You say you’re looking for a ‘game-changer’? Something that would ‘significantly alter Rhode Island’s tax structure and send a signal that the state wants to promote the growth of business’ and you want to know what we’ve got?”

“Well, how about slashing tax rates on capital gains? That one’s always popular.”

“What’s that?  Rhode Island tried that one already, it didn’t work, and the Legislature went back to taxing capital gains at the same rate as all other income?  I’m sorry to hear that.”

“Wait – didn’t your hand-picked Tax Policy Workgroup come up with a radical idea earlier this year to replace the corporate income tax with a tiered minimum tax?  Why not go with that? After all, the Workgroup spent over six months exploring various options and came up with that at the last minute.

“I beg your pardon?  The Legislature opposed that one as well?  Oh, I see.”

“OK, so how about replacing the corporate income tax with a business net receipts tax or BNRT?  It’s all the rage in California.”

“Yes, it’s true that one Commissioner – one of the leading state tax policy experts in the country – indicated that the BNRT ‘is fraught with economic disincentives’ that he feared would ‘harm California businesses.’”  Yes, I am aware that nine other well-respected tax experts earlier said that 'adoption of the BNRT at this stage would be highly imprudent.'  Yes, I know that the business community in California isn’t exactly thrilled with the idea either.  You can’t make an omelet without breaking some eggs, sir.”

“Well, think it over a bit and let me know what you decide.  I’m sure we can work something out.”


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.


State Spending Done Through the Tax Code Needs to Be Reviewed


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A new report from Citizens for Tax Justice makes the case for a “performance review” system designed to evaluate the effectiveness of special tax breaks in achieving their stated goals. While CTJ's report primarily focuses on the importance of such a system at the federal level, most of its findings are equally applicable to the states.

The special breaks littered throughout state tax codes — or “tax expenditures,” as they are frequently called — are an enormous and often overlooked part of government’s operations.  Although the primary purpose of a tax system is to raise the revenue needed to pay for public services, every state, as well as the federal government, also uses its tax system to accomplish a variety of other policy goals. Encouraging job creation, subsidizing private industry research, and promoting homeownership are just a few of the countless ends pursued via special subsidies contained in state tax codes. Rather than having anything to do with fair or efficient tax policy, these tax credits, exemptions, and other provisions are actually much more akin to government spending programs — hence the term, “tax expenditures.”

A performance review system takes the commonsense step of asking whether these provisions are doing what policymakers intended of them. Under such a system, tax credits designed to encourage research and experimentation, for example, would be regularly examined to determine the amount of new research undertaken as a result of the credits. Shockingly, the vast majority of states, and the federal government, do not currently attempt to answer fundamental questions of this sort with any type of rigorous evaluation.

Among CTJ’s findings are:

— “Procedural biases,” such as the omission of tax expenditures from the authorization and appropriations processes, allow tax expenditures to slip by with a fraction of the scrutiny given to direct spending programs. State legislative systems requiring supermajority consent to “raise taxes” (or eliminate tax expenditures) are particularly biased in this regard.

— “Political biases,” such as the erroneous belief that government can take a “hands off” approach, or reduce its overall size by offering special tax breaks, also contribute to the current lack of oversight.

— A number of states have made strides in recent years to counteract these biases through performance reviews and other, similar means. Washington State’s efforts represent the most complete attempt at tax expenditure performance review yet to be undertaken in the United States. California, Delaware, Nevada, Oregon, and Rhode Island have also made attempts — with varying degrees of success — to enhance the level of scrutiny applied to their tax expenditures.

— The bleak state budgetary outlook makes the implementation of tax expenditure review all the more urgent. States, like the federal government, can no longer afford to deplete their resources with ill-advised and ineffective tax expenditures. By implementing a tax expenditure performance review system, states can pave the way for a reduction in tax expenditures by identifying those expenditures that are ineffective.

— A formal review system could also help to reconceptualize these provisions in the minds of policymakers, the media, and the public as spending-substitutes, rather than simply as tax cuts. This would further help reduce the rampant biases in favor of tax expenditure policy.

— The precise design of a tax expenditure review system is very important. States should be sure to include all taxes, and all tax expenditures within the scope of the review. Additionally, states should exercise care in selecting the criteria to be used in the reviews — Washington State’s criteria represent a good starting point from which to build. Other key design issues include choosing the appropriate body to conduct the reviews, timing the reviews to coincide with the budgeting process, allowing similar tax expenditures to be reviewed simultaneously, and attaching some type of “action-forcing” mechanism to the reviews so that policymakers must explicitly consider the reviews’ results.

— Tax expenditure reviews are necessary, though they may not be sufficient to correct for the biases in favor of tax expenditure policy. A tax expenditure performance review system can play a vital informational role either on its own, or alongside other, more aggressive tax expenditure control techniques such as sunset provisions or caps on tax expenditures’ total value.

Read the full report.

Read the 2-page summary.


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


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

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

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

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

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

 


Rhode Island: Breaking Away from Capital Gains Tax Breaks


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Taxes have been at the forefront of the public debate in Rhode Island for some time now, due both to the depth of the state's fiscal crisis and to the work of Governor Don Carcieri's hand-picked tax commission.

With the release of the House of Representative's budget proposal for fiscal year 2010 earlier this week, it appears not only that the end of that debate may be in sight, but that it will close on a positive note. The House's budget plan contains a number of changes in tax policy, changes that are at once a repudiation and an affirmation of the commission's recommendations. Those recommendations, as embodied in the budget that Governor Carcieri put forward in March, would have eliminated Rhode Island's corporate income tax and dramatically flattened out the income tax's graduated rate structure. Fortunately, the House did not include either of these changes in its budget plan.

The commission recommendation that the House budget plan does include is a major step forward for tax fairness - the elimination of preferential rates for income from capital gains.

In addition, the budget plan appears to include changes in law, similar to those adopted in New York last year, designed to increase the extent to which Internet retailers such as Amazon are responsible for collecting sales taxes on purchases made by Rhode Island residents. It would also provide for an increase in the state's estate tax exemption and index that exemption to inflation.

While the prospect of ending favorable treatment for capital gains taxation should cheer all those concerned about sound tax policy, the House budget plan fails to remove Rhode Island's existing alternative flat tax, which means that both the revenue and equity gains resulting from the capital gains change will be somewhat muted. Policymakers should seriously consider addressing that flaw in the tax code before completing action on the state budget.

To learn more about the shortcomings of the commission's recommendations and the Governor's budget proposal, see this helpful fact sheet from the Rhode Island Poverty Institute -- and this one as well. (In fact, check out the Institute's budget webinar too.) For more on the other states still offering capital gains tax breaks, see this March report from ITEP.

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

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

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

Read the report.


Rhode Island: What Not to Do with Federal Stimulus Funds


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Back in January, Rhode Island Governor Don Carcieri, in introducing legislation to cut spending by $240 million in the five months remaining of fiscal year 2009, remarked that, should Rhode Island "receive Federal stimulus funds, we must ... plan on using most of these funds to lower taxes for individuals and businesses, create jobs and stimulate growth." He further maintained that "to do otherwise would be irresponsible." That's an odd definition of irresponsible. Most people living in a state with an expected budget gap of nearly 14 percent in the coming year might say a plan that including permanent tax cuts and only temporary revenue-raising provisions to pay for them is pretty irresponsible. Apparently the Governor isn't most people.

Definitions of irresponsibility aside, the Governor may be about to put his plan into action. The Strategic Tax Policy Workgroup that the Governor initially convened in May of last year met for the final time last week and will soon present the Governor with a report on its work. For several months it seems that the Workgroup would make revenue-neutral recommendations, but now it appears that they will put forth options that would cut taxes by as much as $140 million. Keep in mind that total tax revenue in Rhode Island is projected to be only slightly more than $2.4 billion for the current year. Among the major cuts to be proposed by the Workgroup are the outright repeal of Rhode Island's estate tax, which would cost $28 million annually, and the replacement of the state's corporate income tax with a graduated franchise tax. The latter would reduce taxes on businesses by $82 million per year and would cap the maximum tax paid by any one business, no matter how profitable, at $10,000.

The Governor has requested -- and will likely receive -- a postponement of the deadline by which he must submit his budget for the coming fiscal year. It seems likely that his "otherwise irresponsible" plan will feature prominently in that document.

For more on Rhode Island's budget situation and on the recommendations of the Governor's Tax Policy Workgroup, visit the Rhode Island Poverty Institute's web site.


Competing Visions for Rhode Island


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Rhode Island, like many states, is facing some tough fiscal and economic times. Its current budget deficit of $357 million is among the largest in the nation (relative to total spending) and its unemployment rate of 9.3 percent is nearly the highest in the country.

So, what does Governor Don Carcieri think the state ought to do in response? Why, repeal the estate tax, of course. After all, repealing it would drain away another $35 million that the state can ill afford to lose and would benefit fewer than 5 out of every 100 people who die in Rhode Island each year.

Others have offered more sensible approaches to addressing Rhode Island's fiscal woes. As Kate Brewster, the Executive Director of the Rhode Island Poverty Institute points out, "revenue problems require revenue solutions." To that end, she suggests modernizing the state's corporate income and sales taxes, by adopting such reforms as combined reporting or by ensuring that services are subject to taxation.

To learn more about the need to preserve federal and state estate taxes, see CTJ's latest report.


New ITEP Policy Brief Explains Why States Need Progressive Personal Income Taxes


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Enacting an income tax would obviously be a step in the right direction for states like Nevada, New Hampshire, and Florida, but it would only be the first step. As ITEP's latest policy brief explains, states' income taxes must also be progressive, in order to balance out the regressive impact of the other types of taxes that states levy, like sales taxes and property taxes. States that do not have a progressive personal income tax will find it nearly impossible, over the long run, to fund public services in a way that is sustainable and fair.

At the very least, this means states' income taxes should provide meaningful exemptions to poor taxpayers and use a graduated rate structure to ensure that the very wealthy are paying their share. Unfortunately, though, as a new report from the Center on Budget and Policy Priorities documents, some states with personal income taxes are actually taxing the poor deeper into poverty. In fact, the Center's report finds that, in 18 of the 42 states that levy income taxes, two-parent families of four with incomes under the federal poverty level actually paid state income taxes in 2007. It also finds that 15 states make single parents with two children living below the poverty line pay state income taxes.

There are some straightforward solutions to this. For example, 23 states and the District of Columbia offer earned income tax credits (EITCs) which reduce income taxes for poor families and sometimes provide a refundable credit that further offsets the regressive impact of other state taxes. Plenty of states with personal income taxes could also make their rate structures more progressive, which would ensure that high-income families pay a bit more, as a share of their income, than low- and middle-income families.

Also troubling is that some states that do the right thing and use fairly progressive income taxes -- such as Rhode Island and California -- are considering fundamental changes to those taxes. As ITEP's Jeff McLynch observes in yesterday's Providence Journal, policymakers in Rhode Island should be strengthening the progressive character of their state's income tax, rather than seeking to diminish it.


Finally, a State Where Taxpayers Know Who They Are Subsidizing


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Rhode Island's Remarkable Tax Credit Disclosure Report

Last week, Rhode Island's Department of Revenue Division of Taxation released a study detailing the tax credits and incentives that nearly 120 companies operating in Rhode Island received over the past year. The report is a result of recent disclosure legislation intended to reveal to the public and policymakers just how much money Rhode Island corporations receive. The Poverty Institute has their own summary of the report here. The release of the report is quite timely as lawmakers are coming to terms with a projected shortfall and may dip into the state's rainy day fund.

The disclosure legislation required the state "to annually report the names, address and amount of tax credits received during the previous fiscal year." Some states have disclosure reports, but including the names of recipients of government largesse is a very unusual -- and positive -- step. Now Rhode Islanders know which businesses received part of the $54.1 million in tax subsidies doled out during the last fiscal year. CVS (the pharmacy chain) saved about $17.2 million through various credits and watchers of Wall Street may be interested to know that Bank of America benefited to the tune of $1.72 million from Rhode Island's attempts to spur development.

The state's tax administrator said, "This report is not intended to provide an analysis as to the effectiveness of the tax credit programs. It is simply aimed at disclosing the amount of tax credits received by taxpayers." But it's almost a certainty that this type of disclosure will affect the politics surrounding these tax credits, since voters actually know who and what they're subsidizing. We'll remain on the edge of our seats until next month when the Department releases a report detailing the, "the full-time and part-time jobs created or retained by each recipient, and the employee benefits provided; the degree to which each recipient has met tax-credit requirements and goals for job creation or retention and employee benefits; and the full cost to the state of each tax-credit awarded." Thanks to this report, policymakers, taxpayers and advocates can now have honest discussions about tax incentives with an understanding about who actually benefits.


FY 2009 State Budget Carnage: Rhode Island


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The House of Representatives in Rhode Island unanimously passed a $6.89 billion budget this week that is expected to receive approval from both the Senate and Governor Carcieri. Unwilling to make responsible choices during an election year, lawmakers settled on a budget that includes across the board spending cuts with virtually no tax increases. Ocean State legislators breezed through statutes that would reduce funding of organizations such as Meals on Wheels, the Rhode Island Community Food Bank and the state's largest homeless shelter, Crossroads Rhode Island. A $17.8 million cut from the state's public universities also received little attention, as did a $12.5 million cut in non-school aid funding for cities and towns. Further blows to Rhode Island's impoverished include the elimination of state-subsidized health care benefits for approximately 1,000 low-income parents, the eradication of a program that subsidizes heating costs for the poor, a cap on welfare benefits at 4 years rather than 5 years, and the removal of 300 poor children from the Head Start program.

Requests to reverse tax breaks for high-income Rhode Islanders, such as the capital gains tax or flat tax alternative were ignored. The one tax increase is on health insurance premiums which would be borne by the major insurers -- Blue Cross, United and Delta Dental. These companies will likely pass on those costs to consumers, as they did last year when the tax was expanded. With no other tax revenue increase, the remaining sources of savings or revenue all come with high degrees of uncertainty. Lawmakers are looking to unspecified state personnel cuts to save about $91 million. But this money is only guaranteed if planned labor negotiations go smoothly. In addition, the state anticipates savings of $67 million on Medicare programs; this money hinges on federal approval. Rhode Island will rely on gambling revenues, in an uncertain economy, to allocate $12.8 million in education funding to cities and towns.

Sen. Paul E. Moura, D-East Providence, happily declares, "I think we are coming out of it looking good. Any time in an election year you knock on someone's door and you haven't raised their taxes, it certainly makes the walk a lot easier." As Senator Moura proudly indicates, the motives behind Rhode Island's budget debates this year were almost completely political. And among the victims were the poor, homeless and children who have little to no say in government.


Working on Tax Reform in Rhode Island


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Rhode Island Governor Don Carcieri last week announced the formation of a Tax Policy Workgroup to consider fundamental changes to the Ocean State 's tax system. While the group has been charged with devising changes that promote "equity, efficiency, predictability, competitiveness, and transparency" - laudable goals all - the Governor's comments regarding the group's aims suggest he may favor one particular outcome over others. In the Governor's view, " Rhode Island cannot prosper if its tax policies hinder the creation of jobs and are a disincentive to investment. Unfortunately, [Rhode Island is] now at a competitive disadvantage with many of the other states in New England, including Massachusetts and Connecticut. That needs to change." In light of the fiscal woes now confronting Rhode Island and the regressive legacy of past tax cuts, changes are clearly needed, but will they be the "business-friendly" sort that the Governor seems to have in mind or will they help to produce the revenue state government needs in a fair and sustainable fashion?


Turning the Tide in the Ocean State


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In recent years, more and more states have come to realize that they often receive little in return for the hundreds of millions of dollars in business tax incentives that they dole out. Rhode Island can now be counted among them. Earlier this month, the Democratic and Republican leaders of the state Senate jointly introduced legislation requiring the agencies administering upwards of $80 million in state tax incentives to compile annual reports detailing the number and quality of jobs attributable to those incentives.

While that legislation - and even more far-reaching companion legislation in the House of Representatives - holds promise, the state Division of Taxation is ready to deliver some measure of reform now. On Monday of this week, the Division proposed new rules that would clamp down on the state's film production tax credit... and with good reason. According to the Providence Journal, a production company that spent less than a month in Rhode Island filming the straight-to-DVD Hard Luck received a tax credit for $2.65 million, even though it spent less than $2 million on Rhode Island businesses and workers. In other words, Rhode Island probably could have saved money simply by employing those businesses and individuals directly. Given that the movie starred Wesley Snipes, this outcome probably isn't all that surprising.

For more on state tax giveaways and what can be done to combat them, see Good Jobs First's new blog, Clawback.


Tax Cuts for Sale


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If the facts aren't on your side, why not just buy yourself a favorable change in tax policy? Well, federal authorities are now investigating whether that sort of approach helped to get legislation to cut capital gains taxes passed in Rhode Island a few years ago. As the Providence Journal reports, former House Majority Leader Gerard Martineau recently plead guilty to two federal corruption charges for the business relationships he maintained with CVS and Blue Cross & Blue Shield while a member of the Assembly and "could still face charges for influencing capital-gains tax-cut legislation" at the request of the former company, the nation's largest retail pharmacy chain.

In 2002, despite scant evidence that tax breaks on capital gains promote economic growth, Rhode Island enacted legislation to gradually eliminate the taxation of capital gains held for five years or more. As the Rhode Island Poverty Institute notes, the Assembly froze the scheduled reduction this year, but in light of the state's continued fiscal problems and the sordid manner in which the initial legislation may have been adopted, restoring the tax should be at the top of the Assembly's agenda in 2008.


Corporate Tax Shenanigans Blocked in Rhode Island and Arizona


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Legislatures in Rhode Island and Arizona approved their state budgets for fiscal year 2008 this past week and, in each case, dealt significant setbacks to corporations seeking to avoid or to reduce their taxes. Rhode Island's budget will close three loopholes that have allowed profitable corporations to use creative accounting measures to pay less than their fair share in taxes. This will generate $12.5 million that will help to close the state's expected budget gap and finance vital public services. In addition, the budget halts the scheduled elimination of the state's tax on capital gains income, though it fails to restore the tax rate on such income to its prior level of 5.0 percent. While Rhode Island Governor Donald Carcieri (R) has vowed to veto the spending plan, that veto will likely be overridden. For more on how Rhode Island could strengthen its tax system, see the Rhode Island Poverty Institute's recent fact sheet.

Meanwhile, in Arizona, Governor Janet Napolitano (D) is expected to sign her state's budget into law soon. While that budget includes $11 million in tax cuts - including a state version of so-called section 529 education savings plans - these tax cuts are far smaller than those proposed by House Republicans, due to legislators' unwillingness to provide businesses with a 2.5 percentage point reduction in the state's corporate income tax.


Sales Tax Holidays: Boon or Boondoggle?


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Thirteen states and the District of Columbia now hold sales tax holidays, which allow shoppers to save money by ignoring the sales tax on selected items, usually school supplies, food, and clothing. In many states these weekend or week-long holidays are scheduled to occur during the next few weeks. Lawmakers promote the holidays as a way to help the poorest residents pay for necessary items. Any sales tax cut will benefit low-income families, for whom these taxes are most burdensome. However, sales tax holidays are very poorly targeted: they provide tax breaks to all consumers, even the most wealthy. Also, the lost revenue from sales taxes can be expensive for the state. This year, Rhode Island had to abandon a proposed sales tax holiday when the state decided it could not afford to lose the revenue.

Many sales tax holiday advocates say the increased business that the holidays encourage makes them worthwhile. However, Dr. Bruce Domazlicky, director of the Center for Economic and Business Research, disputes the idea that the holidays increase sales. "What they're probably seeing is sales being shifted in time," he says. "If they're buying the same items, except that it's all in one weekend, then there's probably very little increase, if any." For more on sales tax holidays, click here.


ITEP Op-Ed: Correcting Myths About RI's Economic Climate


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Read the ITEP Op-Ed: Correcting Myths About RI's Economic Climate

This op-ed sets the record straight on the myths and realities surrounding Rhode Island's economic-development climate.

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