Wyoming News


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


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

What do these states have in common?

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

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

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

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

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

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

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

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

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

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

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

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


State Rundown 5/6: Energy Boom Goes Bust


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Thanks for reading the State Rundown! Here's a sneak peek: Wyoming and North Dakota grapple with declining revenue amid an energy bust. Arizona lawmakers reach a budget agreement. Missouri legislators consider a state EITC, and Missouri judges rebuff Krispy Kreme.

-- Carl Davis, ITEP Research Director


 

State governments across the country continue to grapple with bottom-barrel energy prices, with Wyoming the latest to deal with the fallout. March revenue collections were worse than expected, with sales and use tax receipts $9.3 million below projected levels and severance taxes falling $17.4 million short. Wyoming, which is one of nine states without a broad-based personal income tax, is unusually dependent on the fossil fuel industry to support the state budget. Making matters worse, declining fossil fuel production could also have a secondary impact on sales tax revenue – the largest source of government funding – if demand for goods and services also decreases. Gov. Matt Mead has asked state agencies to cut their FY 2017 budgets by an additional 8 percent as revenues are expected to come in $300 million short over the biennium. Meanwhile, legislators are considering a number of tax increases to shore up the budget. One proposal would allow local jurisdictions to impose a sales tax on groceries—a development sure to worsen the stark regressivity of Wyoming's overall tax system. Another proposal would increase the tax on producing wind energy, and lawmakers have also considered an increase in the state's property tax to fund school construction.

North Dakota faces a similar predicament as a result of its extraordinary reliance on the fossil fuel industry coupled with historically low energy prices. This week, Gov. Jack Dalrymple asked state agency heads to hold 2017-2019 budget requests to 90 percent of current spending levels, but made exceptions for the departments of corrections and human services and K-12 spending. It is the first time since 2002 that a governor has issued budget guidelines mandating cuts. North Dakota was the only state to weather the recession thanks to the oil boom. Instead of sound fiscal management, leaders there cut taxes repeatedly when times were good and severance tax revenues were high. Now, the governor refuses to consider tax increases. Agency budgets were already reduced by $245 million in February to help balance a mid-biennium $1.03 billion revenue shortfall.

After an extended session, Arizona lawmakers have reached a budget deal. The Arizona Legislature approved a $9.6 billion budget that includes $29 million in (mostly) business tax cuts. If the budget is signed by Gov. Doug Ducey, corporations will get a number of perks, including $8 million in bonus depreciation and $7 million in sales and use tax exemptions for manufacturers. However, the budget does not include a children's health insurance program for 30,000 kids that would have been funded by the federal government at no cost to the state.

Missouri legislators will consider legislation that would cut taxes for working families in the state. Senate Bill 1018 and House Bill 1605 would both create a state Earned Income Tax Credit (EITC) based on the federal credit. Households that qualify for the federal EITC would receive a non-refundable state EITC equal to 20 percent of the federal EITC. Most of the benefits would support families with income ranging from $20,000 to $37,000 annually. The Missouri Budget Project, citing ITEP numbers, estimates that these families would see an average tax cut of $54 to $289, giving a needed boost to these families and Missouri businesses.

In wackier Missouri tax news, the Missouri Supreme Court ruled against pastry purveyor Krispy Kreme. In what some observers termed the "doughnut hole loophole," Krispy Kreme demanded a state refund on sales taxes paid after arguing its products were groceries. State law places a 1 percent tax rate on groceries but a 4 percent sales tax on foods made to be immediately eaten. The firm noted that many customers take their doughnuts home to consume later, but the judges didn't buy it. 

 

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


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.


State Rundown 9/30: The Gas Tax Cometh?


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WP-Gas-Pump-1.jpgPolitical leaders in New Jersey could be close to figuring out a fix for the state’s transportation funding crisis. The Transportation Trust Fund is set to run out of money soon, and Gov. Chris Christie has declared that all options are on the table -- including, perhaps, an increase in the gas tax, which is currently second lowest in the nation (it has been more than 20 years since the tax was increased). The pledge represents a softening of the governor’s position; he has opposed any increase in the gas tax in recent years, and has also raided the trust fund to balance the state budget. State lawmakers could also consider indexing the gas tax to inflation, as they’ve done in Massachusetts, or applying the state’s sales tax to gasoline purchases, as advocated by New Jersey Policy Perspective, a leading nonpartisan think tank in the state.

The president of the South Carolina Chamber of Commerce recently announced that his group would support the first state gas tax increase in over 25 years (lowest in the nation -- take that New Jersey). Otis Rawl says the chamber will push for a 1-cent-per-year increase for the next 10 years to address the state’s crumbling infrastructure, citing a poll that shows a majority of the state’s Republican voters would support such a measure. Both candidates for governor are on the record as opposing an increase in the gas tax, though their alternatives haven’t been well-received by state leaders. Incumbent Nikki Haley (R) has been criticized for refusing to reveal her “secret” plan to fix the state’s roadways, while challenger Vincent Sheheen would rely on anticipated revenue increases from the state’s general fund.

An analysis from Wyoming finds that the state’s 10-cent increase in the gas tax has not been entirely passed to consumers. The Casper Star-Tribune found that after the tax on gas and diesel was increased by 10 cents in 2013, the price of unleaded gasoline increased only 5 cents per gallon in 2014 while the price of diesel increased by 8 cents. Gov. Matt Mead (R), who signed the tax increase, has long argued that infrastructure investment is the conservative approach, since maintenance costs increase with less investment.

Transportation spending is a big issue in the Michigan governor’s race, with challenger Mark Schauer (D) calling out incumbent Rick Snyder (R) for his failure to convince state legislators to fix the states’ potholes and bridges. Snyder supports an increase in the state’s gas tax and wants to hike vehicle registration fees, while Schauer opposes an increase on the grounds that the governor has already raised taxes on ordinary Michiganders to pay for business tax cuts. Michigan’s gas tax is which is one of the nation’s highest at ten cents above the national average, but state road spending per driver is far below average. Meanwhile, the sale of tire and wheel insurance has skyrocketed across the state.

If you have a great state news item that we missed here, please send it to Sebastian at sdpjohnson@itep.org so we can spread the word.


 


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

Despite holding a supermajority in Missouri’s House and Senate, Republican lawmakers failed this week to muster enough votes to overturn Governor Nixon’s veto of their $700 million tax cut (which passed overwhelmingly in both chambers just a couple of months ago).  A misguided effort supporters touted as a way to keep up with neighboring Kansas, opponents of the measure accurately described it as little more than a big give away to the state’s wealthiest residents at the expense of vital public services, primarily K-12 education. Tally this one as a victory for state tax fairness and adequacy. And watch Governor Nixon, who’s getting national kudos for holding the line on this.

Florida Governor Rick Scott isn’t sure what policy agenda he wants to pursue in 2014, but he knows it has to involve more tax cuts of some kind. How’s that for original thinking?  In related news, Politifact recently chided the Governor for exaggerating the health of the state’s revenue collections, and for claiming that his policies had anything to do with the modest revenue growth Florida has seen.

The ink is barely dry on North Carolina’s regressive tax overhaul and yet lawmakers are already discussing fully eliminating the state’s personal income tax and replacing it with an even more regressive broader consumption tax in 2015. Senator Bob Rucho told a Washington Post reporter that he thinks the state will  “go to zero” with the income tax in a matter of time.  Speaker of the House and US Senate Candidate Thom Tillis agreed, “I think moving to a consumption-based model is something we all agree on.”

Wyoming lawmakers are considering raising the state’s tax on beer in order to pay for alcohol abuse programs. The 2 cent per gallon tax hasn’t been raised since 1935 and is currently the lowest in the nation.  After almost eighty years of neglect, it’s safe to say that the tax is probably in need of another look.


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


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

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

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

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

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

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

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

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


Mid-Session Update on State Gas Tax Debates


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

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

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

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

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

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

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

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

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

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


Gas Tax Gains Favor in the States


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

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

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

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

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

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

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

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

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


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

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

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

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

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

Example:


State Transparency Report Card and Other Resources Released


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

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

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

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Leaving Money On the Table


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Since the passage of the 1986 Tax Reform Act, federal tax law has given state lawmakers a clear incentive to rely on income taxes, instead of sales taxes, to fund public investments. This is because state income taxes can be written off by federal taxpayers who itemize their deductions, and sales taxes generally cannot. Even with temporary legislation in place that does allow a sales tax deduction, states that rely heavily on sales taxes — and not at all on income taxes — are essentially choosing to ignore what amounts to a federal "matching grant" for states that rely heavily on progressive income taxes.

A new joint report from ITEP and United for a Fair Economy's Tax Fairness Organizing Collaborative quantifies the cost of this choice in seven states that currently have no broad-based income tax — and that make up the gap by leaning heavily on the sales tax. The report shows that collectively, these seven states could reduce the federal taxes paid by their residents by $1.7 billion a year if they enacted a revenue-neutral reform that replaces sales tax revenue with a flat-rate income tax, and that the same states could save their residents $5.5 billion a year in federal taxes by enacting a similarly revenue-neutral shift to a graduated-rate progressive income tax.

Read the report.


New Jersey Finally Joins Majority of States Producing Tax Expenditure Reports


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Until this week, New Jersey was one of just nine states refusing to publish a tax expenditure report – i.e. a listing and measurement of the special tax breaks offered in the state.  Such reports greatly enhance the transparency of state budgets by allowing policymakers and the public to see how the tax system is being used to accomplish various policy objectives. 

Now, with Governor Jon Corzine’s signing of A. 2139 this past Tuesday, New Jersey will finally begin to make use of this extremely valuable tool.  Beginning with Governor-elect Chris Christie’s FY2011 budget, to be released in March, the New Jersey Governor’s budget proposal now must include a tax expenditure report.  The report must be updated each year, and is required to include quite a few very useful pieces of information.

The report must, among other things:

(1) List each state tax expenditure and its objective;
(2) Estimate the revenue lost as a result of the expenditure (for the previous, current, and upcoming fiscal years);
(3) Analyze the groups of persons, corporations, and other entities benefiting from the expenditure;
(4) Evaluate the effect of the expenditure on tax fairness;
(5) Discuss the associated administrative costs;
(6) Determine whether each tax expenditure has been effective in achieving its purpose.

The last criterion listed above is of particular importance.  Evaluations of tax expenditure effectiveness are extremely valuable since these programs so often escape scrutiny in the ordinary budgeting and policy processes.  Such evaluation can be quite daunting, however, and the Governor’s upcoming tax expenditure report should be carefully scrutinized in order to ensure that these evaluations are sufficiently rigorous.  One example of the types of criteria that could be used in a rigorous tax expenditure evaluation can be found in the study mandated by the “tax extenders” package that recently passed the U.S. House of Representatives.  For more on the importance of tax expenditure evaluations, and the components of a useful evaluation, see CTJ’s November 2009 report, Judging Tax Expenditures.

Ultimately, New Jersey’s addition to the list of states releasing tax expenditure reports means that only eight states now fail to produce such a report.  Those states are: Alabama, Alaska, Georgia, Indiana, Nevada, New Mexico, South Dakota, and Wyoming.  Each of these states should follow New Jersey’s lead.


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.


CBPP Report on Tax Expenditure Reporting Encourages Smarter Thinking About Special Tax Breaks


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The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report. For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers. Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions. Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions. Shockingly, the CBPP found that nine states publish no tax expenditure report at all. Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue. All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.


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


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

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

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

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


Gloom & Boom


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States' collective fiscal outlook appears to be quite dim and could get even darker in the months ahead according to a report released this week by the National Conference of State Legislators (NCSL). The report notes that, in the aggregate, states experienced a $40 billion budget gap for fiscal year 2009, a chasm that has been bridged largely through reductions in spending.

Not every state's budget is shrouded in gloom, however. Some states derive significant revenue from severance taxes (taxes imposed on the extraction of natural resources like oil and natural gas) and have economies closely tied to these industries. These states, Louisiana, North Dakota, and Wyoming for example, are enjoying substantial budget surpluses.

Given the volatility of energy markets, these surpluses are likely a temporary phenomenon, but that hasn't stopped states from considering and enacting tax cuts that would permanently reduce revenue. Earlier this year, Louisiana briefly weighed the idea of repealing its income tax altogether, only to settle on an oh-so-modest annual cut of $300 million. North Dakota has not only revived its property tax debate from a few years ago, but may also place on this November's ballot a measure that would slash the personal income tax by 50 percent and the corporate income tax by 15 percent. In this context, a plan backed by West Virginia Republicans to completely exempt groceries from the state sales tax appears far more reasonable in scope - and would certainly help to improve the progressivity of the state's tax system. However, it would still likely leave the Mountain State with inadequate revenues once oil and gas prices come back to earth.

Perhaps the most responsible - and fair - approach to surpluses generated by skyrocketing severance tax revenue comes from New Mexico, where Governor Bill Richardson this past week put forward a proposal to dedicate the majority of the state's projected $400 million surplus to one-time tax rebates and to highway construction. Richardson's proposal does contain some permanent changes in tax law, such as an expansion of the state's working families tax credit, but they appear to be targeted towards those low- and moderate-income taxpayers who are facing the greatest challenges from the nationwide foreclosure crisis and from rising fuel and food prices.


More Misguided Tax Cuts Aimed at Senior Property-Owners


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Wyoming Governor Dave Freudenthal recently proposed a constitutional amendment for his state as well, offering a plan to cut property taxes for the elderly. An amendment is necessary as Wyoming's constitution requires that all property be assigned its full value for tax purposes in one of three classes - mineral, industrial, and personal. More specifically, the Governor's plan would exempt one half of the fair market value of an elderly taxpayer's residence from taxation, up to $100,000, resulting in an average tax cut of $638 for senior property owners and in an annual revenue loss of $15 to $18 million.

Given that Wyoming already has two means-tested property tax relief programs - one targeted to the elderly and another for all taxpayers - and a third not presently funded by the legislature, one could legitimately ask whether the goal of alleviating property taxes for those least able to pay them would be best accomplished through the Governor's amendment. Reed Eckhart of the Wyoming Tribune-Eagle poses that question and others in his recent column, arguing for all Wyomingites to contribute to public structures like schools and roads.


Merry Property Tax Holiday for Wyoming Taxpayers?


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With Halloween and Thanksgiving just around the corner, it's no surprise that state lawmakers are in the holiday spirit. But Wyoming policymakers may have taken the holiday mood one step too far with a property tax holiday proposal. Governor Freudenthal is proposing a one year property tax holiday that would reduce property tax rates by 12 mils. Apparently the state doesn't need to generate property tax revenue next year because surpluses are expected. This proposal leaves low- and middle-income taxpayers with little to celebrate because the tax cuts aren't targeted to those with the least ability to pay. A better policy alternative would be to expand the state's current property tax relief programs.


Wyoming: A Statewide Funding Solution for Community Colleges?


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Wyoming community colleges are funded primarily by county property taxes. Right now, the seven counties containing community colleges levy a special property tax for this purpose, but most other Wyoming counties don't... even though these other counties benefit from the services the community colleges provide. An interim legislative committee is exploring a statewide property tax as an alternative to this inequitable state of affairs. The committee has identified an important tax fairness problem that residents of most major cities are all too aware of: when local governments provide services that benefit a broader geographical area, how can they ensure that other localities pay their fair share of the cost for these services? A statewide property tax seems like a good place to start.


Lesson from Wyoming: "Simple" is Not the Same Thing as "Easy"


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Earlier this spring, Wyoming became the latest state to exempt groceries from its sales tax.

Now businesses are discovering that special sales tax exemptions can be harder to implement than they are to enact. As one local entrepreneur notes, "If the tax exemption is meant for food that's not immediately consumed will his employees need to treat the customer who buys a bagel to eat in the store differently from the customer who takes his bagel elsewhere to eat?" Sales tax exemptions are a progressive (but costly) approach to sales tax relief. ITEP has more on options for progressive sales tax reform here.

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