State Tax Issues News


Seeking the Right Balance in Alaska


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It’s been a little over a year since Alaska Gov. Bill Walker proposed implementing a state personal income tax for the first time in 35 years, and the idea is now receiving close attention in the Alaska House of Representatives.

Alaska is the only state to repeal a personal income tax, having done so after it struck oil at Prudhoe Bay in the 1970s. Since then, the state has funded its public services primarily with oil tax and royalty revenues. But this unusual setup has proven unsustainable now that oil prices and production levels have both dropped. Alaska is confronting a $3 billion shortfall—a massive amount in a budget of just $4.3 billion.

 

To end this fiscal calamity, the co-chairs of the Alaska House Finance Committee unveiled a plan (House Bill 115, Version L) that would, among other things, implement a personal income tax with graduated rates ranging up to 7 percent. In an analysis provided to the committee, ITEP found that this tax would collect less than 1.7 percent of Alaskans’ overall personal income, making it the fourth lowest among the 41 states with broad-based personal income taxes.

Despite its small size, the income tax would play at least two very important roles. First, it would generate roughly $680 million in revenue to put toward closing the state’s $3 billion budget shortfall. Second, the progressive nature of this income tax would add some much-needed balance to a plan that also includes a change heavily impacting the state’s low- and moderate-income residents: a significant reduction in the state’s Permanent Fund Dividend (PFD) payout.

Alaska’s PFD is unique among the states. The payment, which typically ranges from $1,000 to $2,000 per person, per year, is received by the vast majority of Alaska households as a way of allowing them to share in the state’s natural resource wealth. But while Alaskans of all stripes are eligible for the PFD, low-income families typically find the income that the PFD provides to be much more important to their ability to make ends meet. Researchers at the University of Alaska Anchorage estimated that the PFD lifts between 15,000 and 25,000 Alaskans out of poverty each year. Among Alaska’s children, the PFD is responsible for reducing the state’s poverty rate from 16.4 to 10.0 percent. For a family of four on the brink of poverty in Alaska (with a household income of $30,750 in 2017), the difference between a receiving a $1,000 PFD payout versus a $2,000 payout represents a sizeable 13 percent gain, or loss, in their household budget.

It appears that a consensus is forming that despite the PFD’s benefits, the payout will have to be scaled back as part of a plan to remedy the state’s dire fiscal situation. Gov. Walker cut the state’s 2016 PFD payout roughly in half, and the Alaska Senate is hoping to rely heavily on reductions in future PFD payouts to fund the state’s budget. But as the Governor and House leadership have recognized, leaning too heavily on PFD cuts would amount to balancing the state’s budget primarily on the backs of low- and middle-income families. A robust personal income tax is vital if lawmakers are to ensure that the state’s most affluent residents also chip in toward a solution to the state’s fiscal problems.

This fact is demonstrated in a new ITEP analysis showing that the House’s fiscal package “when fully implemented … achieves a relatively consistent impact across every income group in Alaska.” In other words, families at different income levels would be asked to contribute similar shares of their incomes toward putting the state’s budget back on a stronger footing. ITEP’s analysis finds that the long-run impact on Alaska families across the income distribution would vary between 1.8 and 2.8 percent of income, on average.

But the bill would take a heavier toll on low-income families in the short-run, when the cuts to the PFD would be the deepest. In a scenario where the PFD is cut by $950 per person, as this bill could do in its first year of implementation, the bottom 20 percent of Alaska families could expect to see their incomes drop by an average of 8.6 percent.

Nonetheless, this plan is more favorable to both low- and middle-income families than most of the alternatives. Unless Alaska adopts an income tax, deeper cuts in state spending or the PFD payout, or new sales or excise taxes, will be needed. Any of these options would have an even larger negative impact on families of modest means. Simply put, if legislators proceed with a fiscal fix that does not include an income tax, a lopsided outcome that asks far less of the wealthy and far more of everyone else is all but guaranteed.

Read ITEP’s analysis of House Bill 115 (Version L)


What to Watch in the States: State Earned Income Tax Credits (EITC) on the Move


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While every state’s tax system is regressive, meaning lower income people pay a higher tax rate than the rich, some states aim to improve tax fairness through a state Earned Income Tax Credit (EITC). Federal lawmakers established the in 1975 to bolster the earnings of low-wage workers, especially workers with children and offset some of the taxes they pay. State EITCs generally match a portion of the federal credit—ranging from 3.5 percent of the federal credit in Louisiana to 40 percent in Washington, D.C.

State EITCs can also be refundable or non-refundable, but the former is among the most effective and targeted tax reduction strategies to help offset states’ upside tax systems. If a credit is refundable, taxpayers receive a refund for the portion of the credit that exceeds their income tax bill. Refundable credits can therefore be used to help offset all taxes paid, not just income taxes, thereby offsetting some of the regressive effects of state and local sales, excise and property taxes.

In 2015, six states adopted or strengthened their EITC (California, Colorado, Massachusetts, Maine, New Jersey and Rhode Island) followed by more expansions in Rhode Island and New Jersey in 2016. By the end of 2016, 27 states offered a state EITC, 22 of which were refundable.

So far in 2017, we’ve seen proposals to establish EITCs in GeorgiaHawaii, Missouri, Montana, South Carolina, Utah, and West Virginia, and a proposal to expand Minnesota and Maryland’s credits for adults without children in the home. (For more details on EITC proposals this year check out this post from Tax Credits for Working Families.)

Unfortunately, sometimes EITC proposals are paired with other proposals that would hurt the most economically vulnerable. For instance, the Georgia House passed a bill with a new nonrefundable EITC in the same legislation that converted the state's graduated income tax to a flat rate.  As a result, many low- and moderate-income taxpayers could still face a tax increase while wealthier taxpayers would see a tax cut.  Separate bills in Missouri would cut the state’s corporate income tax rate, and jeopardize long-term investments in the state.

In addition to making state tax structures more fair, a new study from the University of New Hampshire found that EITCs also serve as an important anti-poverty tool, helping to lift families, particularly children, out of poverty. The study evaluated 17 states that had a refundable EITC implemented from 2010 to 2014. Across the states in the study, the EITC pulled 0.3 percent of the population out of poverty, and 0.7 percent of children out of poverty. These results demonstrate that children in poverty stand to gain the most from refundable EITCs.

The study also estimated the potential poverty reduction if a state were to adopt an EITC. The five states with the greatest potential reductions to child poverty are Arizona, Arkansas, Georgia, Nevada, and Texas. For instance, Arizona’s child poverty rate would have been an estimated 20.2 percent in 2010–2014 rather than 22.0 percent if it had adopted a 30 percent federal match.

State lawmakers should stop thinking of EITCs as a bargaining chip to win over progressives when passing tax cuts for the rich, or as politically favorable enough to pass but not to fund (Colorado and Washington). State EITCs help poor working families stay afloat. Because of their effectiveness, state lawmakers should consider establishing a state EITC, expanding existing credits, or making the credit fully refundable.


Taxing the Gig Economy


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Our ever-changing economy demands that lawmakers update our tax laws to keep pace.

Take, for example, the growth of online sales. As recently as six years ago, Amazon, the nation’s biggest online retailer, only collected sales tax on consumer purchases in five states. This meant that state treasuries were missing critical sales tax revenue, a problem destined to grow as more consumers shifted their shopping habits from brick and mortar stores to online purchases.

But Amazon’s tax collection habits have improved over the last few years, in part because Amazon changed the way it does business, but also because state lawmakers became increasingly frustrated by the sales tax revenue gap created by e-retail and decided to press for change. While online sales tax evasion remains a problem today, progress is being made.

Now, states are facing another challenge as the on-demand or “gig economy” grows. Companies such as Uber and Airbnb are presenting regulatory challenges and the growth of these services has outpaced lawmakers’ ability to update state and local tax codes. A new ITEP report explores tax policy issues related to the on-demand economy and recommends that state and local tax systems treat these companies in a manner similar to their competitors, especially taxis and hotels.

As background, most states exempt a broad range of services from their sales tax bases because of a historical accident. The revenue loss resulting from these exemptions—on services ranging from lawn care to haircuts—has grown substantially as the service sector has expanded, but lawmakers have been slow to update sales tax bases to reflect the shift toward a more service-oriented economy.

Taxi rides are one service that has long been among those typically exempt from most state and local sales taxes, but there are more than half a dozen states that apply their sales taxes to taxis and similar services. In the context of the on-demand economy, this matters because Uber and other transportation network companies (TNCs) are providing a service nearly identical to taxi rides. But their tax treatment has not always reflected this fact.

In Rhode Island, for example, taxis began collecting sales tax under a law enacted in 2012, but Uber delayed doing so until 2015, claiming the law was ambiguous. Today, the company has taken an even more confrontational stance in Georgia, urging its riders to tell lawmakers that the sales tax, which has long been collected on taxi rides, should not apply to Uber’s services. ITEP’s report indicates that a similar battle could soon come to Ohio, where taxis also collect sales taxes but where Uber appears not to be doing so. Uber has recently received negative publicity on a variety of fronts, ranging from allegations of sexual harassment among its engineers to reports of software designed to impede police investigations into its business in jurisdictions where it may have been operating illegally. Disputes over sales tax collection may seem bland by comparison, but they are important nonetheless.

Airbnb has taken a different approach to state and local tax collection. The company has often been willing to collect and remit lodging taxes (which range up to 15 percent) in exchange for regulations (or a lack thereof) favorable to its business model. Affordable housing advocates concerned about the loss of residential housing, and frustrated neighbors living next to what they call “neighborhood hotels,” by contrast, would like to see tighter restrictions on renting homes via Airbnb. Meanwhile, others have noted (PDF) the enforcement problems created by the high level of secrecy surrounding most Airbnb tax collection agreements.

Partly because of these ongoing debates, Airbnb’s tax collection practices are a patchwork. The company is collecting some state and/or local-level lodging taxes in 26 states, but in many of those states the company’s scope of collection is far from comprehensive. Hundreds of millions of dollars in lodging taxes are being lost each year as visitor preferences shift away from traditional hotels (which collect the applicable taxes) to Airbnb rentals (which often do not). For the time being, many of Airbnb’s customers are allowed to pay less than guests of traditional hotels for the public services they enjoy during their visits.

These issues are likely to remain a work in progress for some time to come. The regulatory questions that are often tied to these tax debates are far from trivial. And even if the tax laws related to these services are updated to reflect today’s economy, there is little doubt that new on-demand services with unforeseen tax policy implications will arise in the years ahead.

Nonetheless, the stakes are too high for lawmakers to delay action any longer. Both tax fairness and fiscal responsibility demand that states and localities update their tax codes to better reflect the realities of these on-demand services. Amazon and the e-retail industry are moving in that direction, though universal sales tax collection remains elusive. As a similar debate unfolds regarding the gig economy, states should move even more quickly to recognize change and update their sales tax practices accordingly.

Read Taxes and the on-Demand Economy.


Amazon Will Collect Every State Sales Tax by April 1


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For decades, Amazon.com helped its customers dodge the sales taxes they owed to gain an advantage over its competitors. But as the company’s business strategy has changed, so has its tax collection. As recently as 2011, the nation’s largest e-retailer was collecting sales tax in just 5 states, home to 11 percent of the country’s population. Starting next month, when the company begins collection in Hawaii, Idaho, Maine, and New Mexico, it will officially collect every state-level sales tax in the nation on its direct sales.

 

Despite this progress, the company’s sales tax collection practices are still not comprehensive. It appears that Amazon is not collecting some local-level sales taxes in states such as Alaska, for instance. And Amazon refuses to require sales tax collection by many third-party sellers using its website, meaning that companies with names such as “Buy Tax Free” are using Amazon.com as a way to allow their customers to evade their sales tax responsibilities. Notably, New York Gov. Andrew Cuomo has proposed fixing this  problem by requiring “marketplaces” with more than $100 million in annual sales to collect sales taxes on sales made by third-party retailers.

But despite its shortcomings, this expansion in Amazon’s tax collection practices represents a step forward for rational sales tax policy. It is therefore worth taking a look at the variety of factors that led to this reversal.

First, and perhaps most important, is that Amazon’s effort to shorten delivery times caused it to open distribution centers around the country. Whenever a retailer establishes a physical presence in a state, it comes within reach of that state’s sales tax collection laws.

Second, state lawmakers have become increasingly frustrated by the sales tax revenue gap created by e-retail and some have taken matters into their own hands by enacting laws expanding their sales tax collection requirements. The U.S. Supreme Court has placed limits on states’ authority in this area, but creative lawmakers have found ways to encourage some e-retailers to collect nonetheless.

Third and finally, it appears that Amazon’s pivot away from facilitating sales tax evasion may be helpful in building goodwill with lawmakers from whom it is asking for subsidies. Good Jobs First estimates that Amazon could soon surpass Wal-Mart as the largest retail-sector recipient of state and local government aid, meaning that it would have received over $1.2 billion in public subsidies.

While the nature of the debate surrounding Amazon and state and local tax policy may be changing, it’s certainly not coming to an end.


A Tax Perspective on International Women's Day


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Thursday, March 8 is International Women's Day. The day draws attention to the progress that has been made and the work that still needs to be done in advancing gender equality. Many campaigns on issues like equal pay or paid family leave acknowledge that economic policies impact women and men differently. But we often overlook the role governments’ budgeting and taxation practices can play in advancing or preventing progress.

Researchers in Western developed countries like the United Kingdom have noted how severe budget cuts in that country placed more of the financial burden on women than men. Because we don't yet live in an equal society, women earn less than men, receive more public services than men, and are more likely to bear the responsibility of raising children on their own. This means that revenue cuts that impact public programs disproportionately harm women.

A diverse group of ambitious countries, like Sweden, Uganda, and South Korea, have adopted gendered budgeting which intentionally considers the differential impact of revenue changes on women and men. These practices recognize that you can't address the issue of women's stunted economic gains if you don’t know how policies are contributing to the problem.

In the U.S., we are a long way from incorporating a gendered lens into our budgeting practices. But we do have several tax credits for working families that do practically (even if unintentionally) target women. As a result, policies that decrease the value or narrow the eligibility of these credits disproportionately impact women. Federal credits include the Child and Dependent Care Tax Credit, which offsets some of the child care costs incurred by women who work outside the home; the Child Tax Credit, which offsets some of the additional costs of raising children and recognizes the importance of investing in the next generation of workers; and the Earned Income Tax Credit (EITC) which boosts the wages of low-income workers.

Some states offer state versions of one or more of the federal credits—only New York and Oklahoma offer versions of all three. But in most states the credits are not refundable. This means a low-income woman can only reduce the tax she would owe and cannot use the refund to pay towards the additional expenses related to her health care or child care, or to boost her pay to compensate for the wage gap.

The effectiveness of these credits is in the hands of lawmakers. One way federal lawmakers can improve the credits is by indexing their value to inflation so they keep place with the increasing costs of child care and other living expenses. Lawmakers in states without these credits that support working families should establish them. This year we've seen proposals to establish EITCs in Georgia, Hawaii, Missouri, Montana, and Utah; and a proposal to make Washington state’s EITC fully refundable.

We've got a long way to go before we collect and distribute revenue in a way that's fair and equitable to all women—we haven’t done anything through the tax code to address the economic disparities of women of color or lesbian, bisexual or transgender women—but we have the tools to begin making some progress.


Undocumented Immigrants Pay Taxes


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A newly updated ITEP report released today provides data that helps dispute the erroneous idea espoused during President Trump’s address to Congress that undocumented immigrants aren’t paying their fair share. In fact, like all others living and working in the United States, undocumented immigrants are taxpayers. They collectively contribute an estimated $11.74 billion to state and local coffers each year via a combination of sales and excise, personal income, and property taxes, according to Undocumented Immigrants’ State and Local Tax Contributions.

As working Americans look to policymakers to address a rigged system in which wages for ordinary working people have stagnated over the past decade while corporate profits and executive compensation have soared, some politicians have found an easy scapegoat in undocumented immigrants. Erroneously blaming them for stagnating wages and the growing chasm between the rich and poor detracts from the real problem: too many of our elected officials are responsible for tax and other public policies that favor special interests and corporations. Mass deportation won’t fix a rigged economic system.

Undocumented immigrants pay taxes. On average, the nation’s estimated 11 million undocumented immigrants pay 8 percent of their incomes in state and local taxes every year. In contrast, the richest 1 percent of taxpayers pay only 5.4 percent on average. Even though they pay a tax rate on par with many middle class citizens, undocumented immigrants are ineligible for many of the services that revenue supports.

Just as the horrendous impact of breaking up families under a mass deportation policy should not be ignored, nor should policymakers overlook the significant contributions undocumented immigrants make to our state and local revenues and the economy. It is overly simplistic and wrong to assume every job occupied by an undocumented worker would be readily taken by an American worker. This thinking ignores the reality of our workforce and broader economy. In addition to the disastrous nationwide business and economic impacts of a mass deportation policy, there would also be a tremendous shock to many state and local budgets without the tax contributions of undocumented immigrants.  

Most state and local taxes are collected from people regardless of citizenship status. Undocumented immigrants, like everyone else, pay sales and excise taxes when they purchase goods and services. They pay property taxes directly on their homes or indirectly as renters. And many undocumented immigrants also pay state income taxes.

ITEP’s data on undocumented immigrants’ tax contributions provides critical context at a time when the president is pushing policies and using language that unjustly demonizes our neighbors without legal status. This harmful ideology is reminiscent of other shameful examples of othering in American history. The U.S. has a record of targeting already vulnerable populations in times of crisis (Japanese internment camps during WWII and profiling Muslims post-911) and using malicious stereotypes (e.g. welfare queens and super predators) to unjustly scapegoat and marginalize communities of color.

Public policy—not people—by deliberate design has stacked the deck in favor of the elite and corporations. Castigating undocumented immigrants for our nation’s economic struggles plays into xenophobic and hateful ideology, and it won’t fix our rigged system. Public opinion polling shows that most of us know this and favor a path to citizenship for undocumented immigrants.

ITEP’s new report focuses on state and local taxes, but its findings mirror those at the federal level. Many undocumented immigrants pay federal payroll and income taxes as well as excise taxes on items such as fuel. A study from the Social Security Administration showed undocumented immigrants contributed $12 billion to the social security trust fund—and only drew down $1 billion from the fund. Full immigration reform at the federal level would decrease the deficit and generate more than $450 billion in additional federal revenue over the next decade, according to a 2010 report from the non-partisan Congressional Budget Office.

Immigrants without legal status contribute and help our communities thrive. When it comes to contributing their fair share to state and local revenues, they get the job done.

To view the full report or to find state-specific data, go to www.itep.org/immigration/.


What to Watch in the States: State-Federal Relationship Shifting


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So far in this series on tax policy topics to watch in 2017, we’ve covered important state debates in areas such as attempts to weaken or eliminate progressive taxes and needed updates to gas taxes and sales taxes. As if those topics weren’t enough to keep state lawmakers up at night, they will be making these decisions amid a great deal of uncertainty about the future of federal tax and funding policies that are crucial to the states. How those federal debates shake out, and how states prepare for and react to them, will have lasting consequences for families and businesses in every state, and for the very nature of federalism in the United States.

The first example of this is the very high likelihood of reduced federal funding for aid to states and for services such as health care, K-12 schools, and higher education that have historically been provided through a mix of local, state, and federal efforts. Many states are preparing two-year budgets right now with no clear idea of what to expect from Congress. For example, Governing has noted that states are underprepared for the ramifications of federal retrenchment in healthcare. Details are hazy but with leading federal budget proposals taking major cuts as a given – including the possible block-granting of Medicaid and other programs, repeal of the Affordable Care Act, and even completely eliminating the Department of Education – congressional representatives are sending the clear message that they intend to pull back drastically on their portion of those shared investments.

State leaders will have to decide whether they value their residents’ education, health, and safety enough to step up to these challenges as the federal government backs down from them. Stepping up will require replacing lost federal dollars with new state revenues, which will be particularly hard in states where legislators have been attempting for years to slash taxes and cut back on their share of these investments.

And that’s just the spending side of the federal budget. Federal tax changes could have serious impacts on the states as well.

Tax plans laid out by President Trump and congressional leadership include a number of provisions that could impact the states. Ending the deductibility of state and local taxes, creating a new deduction for child care expenses, changing the taxation of carried interest, altering expensing of business investments, and other corporate tax changes such as “border adjustment” could all have ripple effects on state revenue systems.

Another key example is the estate tax. In the 2000s, as federal tax cuts greatly weakened the federal estate tax and eliminated a credit for state estate taxes that was the basis for most such taxes, states had to decide whether to “decouple” from these changes and preserve their role in promoting equality of opportunity and resisting the growing influence of inherited wealth. Most states declined to act and today only 14 states and the District of Columbia have estate taxes. But in many of those states, a relationship between the state and federal tax estate tax codes remains, as exemption levels and other parameters often remain coupled to federal statute. Should Congress decide in the coming years to fully eliminate the federal estate tax or weaken it further, as both President Trump and congressional Republicans have indicated a desire to do, these states would again find themselves having to choose whether to passively accept such changes to their own tax codes or take action to establish a truly independent estate tax.

Similar “decoupling” questions could face states in respect to multiple other federal tax policies. One example to watch is federal treatment of capital gains interest and dividend income. Speaker Ryan has expressed a desire to exclude 50 percent of this income from federal Adjusted Gross Income (AGI), while another approach with a similar effect would be to simply reduce the tax rate on this income. However, if such a cut is enacted in the form of an exclusion from AGI, state revenues would suffer because many states use federal AGI as the starting point for their own income calculations. A rate cut would not ripple down to states in the same way. State lawmakers and advocates should watch such debates closely so they can either decouple from provisions where they are vulnerable to federal changes or encourage their federal representatives to reconsider the policies or adopt a different approach that does not harm the states. States with “rolling” conformity to the federal tax code could also consider switching to “fixed date” conformity to reduce their vulnerability to such changes.

Another approach some states are taking to proactively address some of these issues is to pass bills that automatically decouple from federal tax changes that significantly threaten state revenues. A thoughtful bill introduced in Nebraska, for example, preempts the adoption of any federal changes to the calculation of AGI that reduce Nebraska revenues by more than $5 million and requires a report to be produced on such changes so that lawmakers can make an informed and deliberate decision on whether to couple to the policy.

Other federal changes could increase revenues in some states. A few states still have an ill-advised state deduction for federal income taxes, which means that federal income tax cuts would reduce the size of that deduction and thereby increase state revenues. And if federal tax changes broaden the tax base by limiting itemized deductions, for example, states that couple to those income calculations will see revenue gains as well. In these cases, states may be tempted to “pass on” the benefit to their residents in the form of tax cuts, but it will be important for them to think twice about such tax cuts given the likely federal funding cuts summarized above and the need in many states to build up reserves before the next recession hits.


States Should Require Combined Reporting of Corporate Income


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An important aspect of a 21st century tax code is ensuring that corporate income taxes are easy for corporations to follow, but not easy for them to avoid. As our newly updated policy brief on Combined Reporting of State Corporate Income Taxes explains, “combined reporting” remains an essential tool for states to achieve these goals. More than half of states with a corporate income tax now implement this common-sense policy to minimize corporate tax avoidance, and at least three more will consider adopting combined reporting this year. Moreover, most states that already require combined reporting can improve it further by taking the policy international through what is known as “worldwide combined reporting.”

Combined reporting works by requiring large companies operating in multiple states to add together all the profits of their various branches and subsidiaries into one single report and then follow existing rules for apportioning those profits to the states in which they operate. Requiring the combined report nullifies certain strategies some businesses use to avoid taxes, such as artificially shifting profits to certain states that tax corporate income at a lower rate or not at all. Because combined reporting renders such strategies pointless, it improves revenue performance of the tax assuring more help to fund services like transportation, education, and public safety, while also simplifying tax compliance for businesses, as they no longer have incentive to engage in behaviors such as creating spin-off companies in new states simply to avoid the taxes they owe.

New Mexico, which has been considering bills to implement combined reporting for more than ten years, will have another chance to take this step to modernize its tax code this year. Pennsylvania’s Gov. Tom Wolf included the policy in his budget proposal earlier this month. And Alabama legislators are making a concerted push to adopt combined reporting as well. As our policy brief explains, these states and others can benefit from combined reporting, and states that have already taken this crucial step can consider additional measures to beef up their defenses against corporate tax avoidance strategies.


Why, West Virginia, Why?


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A recently introduced Senate Bill in West Virginia (SB 335) would ultimately eliminate the state’s personal and corporate income taxes, do away with the sales and use tax, and reduce the state’s severance tax. Under the plan, the revenue lost from this assortment of diverse taxes would be replaced by an 8 percent broad-based general consumption tax.

The result: low- and middle-income West Virginians pay more, much more, while wealthy residents heavily benefit.

In analyzing key components of the proposal, we found the plan to be highly regressive. On average, West Virginians earning less than $84,000 will pay more while those in the top 1% would receive an average tax cut of nearly $28,000.

*This analysis assumes a revenue neutral proposal.

For additional detail on the proposal and what it would mean for West Virginia, visit the West Virginia Center on Budget and Policy’s presentation before the Senate Select Committee and their detailed write-up of the impact.


State Rundown 2/8: Lessons of Kansas Tax-Cut Disaster Taking Hold in Kansas, Still Lost on Some in Other States


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This week we bring news of Kansas lawmakers attempting to fix ill-advised tax cuts that have wreaked havoc on the state's budget and schools, while their counterparts in Nebraska and Idaho debate bills that would create similar problems for their own states, as well as tax cuts in Arkansas that were proven unaffordable within one day of being signed into law. Meanwhile, debates over online sales taxes, Earned Income Tax Credits, and gas tax updates to fund transportation needs continue around the country.

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

  • Kansas lawmakers in both chambers are considering bills this week to roll back Gov. Sam Brownback’s tax cuts primarily via reforming the personal income tax, including repealing the exemption for business pass-through income and raising personal income tax rates in the Senate and a more comprehensive tax reform plan in the House.
  • Nebraska's Revenue Committee will conduct a hearing on Gov. Rickett's proposal to use a trigger mechanism to cut income taxes for the state's wealthiest residents this week. Last week, the committee was presented with two alternatives to slashing taxes on the rich by instead increasing the state's Earned Income Tax Credit.
  • Idaho lawmakers in the House passed bills cutting the corporate and top personal income tax rates and raising the exemption levels for the business personal property tax. The bill faces an uncertain future in the Senate.
  • Alabama lawmakers joined the list of states looking to cut income taxes this year.   
  • Arkansas Gov. Asa Hutchinson signed his $50.5 million tax cut  into law last Wednesday. The following day, the governor told several agencies to prepare contingency plans for budget cuts as the latest revenue reports came in $57 million behind forecast.
  • The Mississippi House has advanced a bill to enforce sales tax collection on online sales and divvy up the revenue with 70 percent going to state roads and other needs, 15 percent to counties, and 15 percent to cities. The need for such a fix is highlighted by the fact that even though Amazon is now collecting sales taxes on its own transactions in the state, many transactions hosted by the site are still not covered. Meanwhile, Tennessee's rule to require such collections has been challenged, adding to the pressure for a new court ruling on the matter.
  • Michigan lawmakers are considering bills to eliminate the sales tax on feminine hygiene products.
  • Wisconsin Gov. Scott Walker has proposed increasing the state's Earned Income Tax Credit for families with one child. Walker decreased the credit six years ago.
  • Wyoming lawmakers are faced with the need to diversify their tax base. Some have already begun considering revenue options: the House recently passed a cigarette tax increase that would increase a pack of cigarettes from $0.60/pack to $0.90/pack.
  • State legislators in both New York and Pennsylvania are pushing back against recent local tax initiatives: the New York City bag tax and the Philadelphia soda tax.
  • A proposal to update the South Carolina gas tax, raising $600 million per year for the state's transportation needs through a 10-cent per gallon increase and other fee changes, has advanced from the House Ways and Means Committee.
  • Tennessee Gov. Haslam's proposal to raise the state's gas tax while slashing other taxes has received criticism lately, as has an alternative plan to divert sales tax revenues away from general fund needs to plug the hole in the transportation fund.
  • Missouri private school advocates are pushing a bill to circumvent the state's prohibition on state money funding religious schools by creating a tax credit for donations to private schools. Read about how these programs are costly and frequently abused in our report here.

Governors’ Budget Watch

  • Faced with an $868 million shortfall, Oklahoma's Gov. Mary Fallin delivered her state of the state address this week. Proposed tax changes include replacing the state corporate income tax with increases in fuel, tobacco, and sales taxes. While details of the sales tax base broadening have not been released, Fallin has called for elimination of the state sales tax on groceries.
  • Pennsylvania Gov. Tom Wolf released his budget proposal this week. As he promised, it was void of any broad-based tax increases. Rather, state spending cuts and a proposal to tax natural-gas drilling are among the ways in which he plans to fill the state's $3 billion shortfall.
  • Today Connecticut Gov. Dannel Malloy is scheduled to unveil his two-year budget proposal. Faced with a $1.7 billion deficit, the plan will likely include a call to eliminate the state's $200 property tax credit and a requirement for cities and towns to pay a third of the annual cost for teacher pensions.
  • Alabama Gov. Bentley proposed studying and ultimately eliminating the state sales tax on groceries, increasing prison construction to deal with overcrowding, and increasing the state's investment in pre-K education in his address this week.

Governors' State of the State Addresses

  • In the past week, Governors Bentley of Alabama, LePage of Maine, Fallin of Oklahoma, and Wolf of Pennsylvania delivered their State of the State addresses.
  • States with addresses scheduled through the end of next week are: Kentucky and West Virginia, both scheduled for today.

What We're Reading...

  • As the Center on Budget and Policy Priorities (CBPP) details in two new reports, state lawmakers are increasingly turning to tax cut phase-ins and triggers as ways to take credit for cutting taxes without having to face the full consequences for years, decades, or in the case of term-limited lawmakers, maybe never.
  • A new report by Ohio Policy Matters uses ITEP research to dig into Gov. John Kasich's tax plan, finding that it would, once again, shift taxes and worsen inequality.
  • Pew Trusts explores the various reasons behind declining state populations in recent years.
  • The Kentucky Center for Economic Policy released a report that provides an overview on how refugees and immigrants are important to the state's economy.
  • The Georgia Budget and Policy Center released two reports showing the importance of immigrants to Georgia's state and local economies and budgets.

 

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


Lawmakers Should Not Use Disproven Trickle-Down Myth to Ramrod Tax Cuts for the Rich


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For more than four decades, supply-side ideologues have promoted the myth that tax cuts for the wealthy are self-financing and the benefits eventually trickle down to everyone else, despite real-life evidence that tax cuts for the rich benefit the rich.

Not even the reality of 40 years of widening income inequality or the current economic expansion in which the benefits primarily flowed to wealthy households have stopped anti-tax proponents from peddling the erroneous idea that top-heavy tax cuts will eventually benefit ordinary working people.

As a new ITEP video shows, this supply-side thinking, also known as trickle-down economics, is a school of thought that claims tax cuts for the rich will trickle down to everyone else and supercharge the nation's economy in the process. Some adherents to this worldview use the Laffer curve or the easily manipulable "dynamic scoring" technique to claim that economic growth will be so explosive that lower tax rates would actually lead to more tax revenue.

We’ve seen this trickle-down experiment conducted in the past, and it hasn’t worked.  Consider President George W. Bush’s 2001 and 2003 tax cuts. Thirty-eight percent went to the top 1 percent of Americans. But the wealth didn’t trickle down. Low job growth, increased poverty, and a growing income gap persisted throughout most of Bush’s tenure. The end of the Bush era also ushered in the worst economic recession since the Great Depression; shattered the myth of a broad, prosperous middle-class, and exposed the fact that a substantial percentage of Americans across the country are one or two paychecks from financial ruin.

Instead of taking this lesson about the majority of Americans’  livelihoods (or lack thereof) and applying it to public policies that promote shared economic prosperity, the nation’s policymakers are back at supply-side square one. Speaker Paul Ryan’s most recent budget plan doubles down on trickle-down, proposing to give a whopping 60 percent of its tax cut to the top 1 percent of earners. On the campaign trail, President Trump touted a tax cut plan that would bestow 44 percent of its benefits to the 1 percent. Either Trump or Ryan’s plan, or even a combination of the two, would transfer more of the nation’s wealth to the rich and force working people to pick up the slack in the form of cuts to vital programs and increased annual deficits. This drive to cut taxes ignores polling that reveals nearly two-thirds of voters think wealthy individuals and corporations pay too little in federal taxes, not too much.

Some state lawmakers have also favored cutting taxes for the rich over investments in broader prosperity. Supply-side-driven tax cuts are particularly dangerous for state budgets because unlike the federal government, most states can’t run deficits. As a result, state-level tax cuts tend to bring about a rapid, unavoidable reduction in vital public services.

Kansas is perhaps the most infamous recent example. Gov. Sam Brownback slashed top tax rates in 2012, but the job growth he promised didn’t materialize, and the state has faced massive budget shortfalls every fiscal year since.

North Carolina eschewed most of those lessons and followed Kansas over the proverbial supply-side cliff. The Tarheel state’s cuts began in 2013 and are set to phase in through 2020—a tactic that delays and masks, but does not eliminate, much of the budgetary consequences. Already cuts of more than $2 billion annually, or 10 percent of the general fund, have resulted in severe reductions to key services such as K-12 and higher education.

The evidence of supply-side economics’ failures is abundant. The promise of broad economic prosperity is too often broken. Instead, ordinary working people have to endure concessions that matter little to the super wealthy who enjoy the tax cuts. At the federal level, lawmakers focus on which vital programs to cut in exchange for maintaining tax cuts for the wealthy. And at the state level, residents endure underfunded schools and crumbling roads. The time for our policy makers to look out for ordinary working people and ensure our local, state, and federal governments have the resources necessary to invest in our communities is long over due.

Watch the video


Dodging Tough Fiscal Decisions with State Tax Cut Triggers and Phase-Ins


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The most challenging problem that tax-cutting state lawmakers face is dealing with the budgetary tradeoffs that tax cuts require. Should education spending be reduced? Should investments in infrastructure be halted? Should the state cut back on transfers to local governments and require them to pick up the slack? Or should other taxes and fees be raised to make up for the lost revenue?  Unpleasant answers to these questions have stopped many tax cut proposals dead in their tracks.

Recently, however, determined tax-cutters have figured out that it’s easier to simply sidestep these questions, at least until after the tax cut is signed into law. As the Center on Budget and Policy Priorities (CBPP) details in two new reports, state lawmakers are increasingly turning to tax cut phase-ins and triggers as ways to take credit for cutting taxes without having to face the full consequences for years, decades, or in the case of term-limited lawmakers, maybe never. These policy tools push the implementation of tax cuts outside the current budget window with a predetermined phase-in schedule or a mathematical formula tied to state revenue trends.

Lawmakers in search of a principled defense for triggers and phase-ins often couch their arguments in the language of “fiscal responsibility.” But as CBPP explains, designing a truly responsible tax cut would require a careful analysis of whether current revenues will be able to sustain state services in the long-term—something that never occurs in practice. In support of its conclusion that these tools provide only the “illusion” of fiscal responsibility, CBPP details that:

  • “None of the ten states that have enacted triggered income tax cuts in recent years estimated the cost of providing existing services over the full period over which tax cuts might take effect, leaving policymakers in the dark as to whether the tax cuts will force cuts in services.”
  • “Only three of the nine states with multiple triggered tax cuts in successive years estimated the combined revenue loss in the first fiscal year in which all of them take full effect.”
  • “In at least five of the seven states with triggers based on attaining a certain revenue level or revenue gain, the targets are almost completely arbitrary; they were not based on any systematic analysis of the revenue needed to allow for recent inflation and growth in population and caseloads.”

Trigger formulas and phase-in schedules are no substitute for careful deliberation by lawmakers with access to up-to-date information. Locking-in tax cuts before all the facts are known is irresponsible budgeting.


What to Watch in the States: Further Attempts to Weaken or Eliminate Progressive Taxes


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This is the third installment of our six-part series on 2017 state tax trends. The introduction to this series is available here.

As we described last week, many states are gearing up for challenging budget debates this year. But the need to address revenue shortfalls has not stopped lawmakers in many states from pursuing harmful tax policies that will drain critical revenues from state coffers and make upside-down state and local tax systems more regressive, leaving low- and middle-income earners paying more to finance tax cuts for the wealthy. At the same time, however, lawmakers in a handful of states are exploring meaningful income tax reforms that could improve the fairness and sustainability of their tax systems.

Efforts to Eliminate State Personal Income Taxes 

Debates over personal income tax elimination are gearing up in both Michigan and West Virginia this year. Repealing this vital revenue source would impede these states' ability to balance their budgets in the long run, and would make their tax systems more regressive. This is particularly problematic because both states already have upside-down tax systems under which the highest effective tax rates are levied on the lowest-income taxpayers.

State personal income taxes are a powerful counterbalance to the regressive nature of most other state and local taxes. As revealed in our Fairness Matters chart book, states without personal income taxes tend to be "high tax" for poor people despite their reputations as being "low tax" states.

Two bills to eliminate Michigan's personal income tax may be at play this legislative session. In the House, a bill has been filed that would reduce the current income tax rate from 4.25 percent to 3.9 percent in 2018 and then phase down the rate by 0.1 percentage point each year over the next 40 years, well after all of the state's current elected officials have left office (Michigan prevents any individual from serving more than 14 years in the legislature). A state senator has also indicated that he will introduce a bill that eliminates the personal income tax within a five-year period. Neither proposal is coupled with tax increases to replace the $9 billion (more than one third of the state's total tax revenue) currently generated through the personal income tax.

West Virginia's Senate created a select committee to examine state taxes and explore comprehensive tax reform. According to the committee's chairman, the legislature is exploring steps to eliminate West Virginians state personal income tax. The committee announced this despite a projected deficit of nearly $500 million that is expected to grow to $700 million by 2019.

A Push Toward Flat Rate Personal Income Taxes

Graduated-rate income taxes allow states to collect more revenues from high-income taxpayers that often face the lowest overall state and local tax rates. The revenue these taxes generate from the wealthy also typically allow states to levy lower rates on low- and moderate-income families less able to afford a higher tax bill, as ITEP’s chart book shows. Yet despite these benefits, lawmakers in Alabama, Arizona, Iowa, Kentucky, Maine, Maryland, Ohio, and South Carolina are considering converting their graduated income taxes to a single flat rate under the guise of tax fairness. In reality, there's nothing fair about a flat tax.



The Task Force on Budget Reform in Alabama has not released its findings and may not do so for another year, but it has reportedly discussed flattening or even eliminating the state's income tax. Arizona lawmakers, heeding recommendations from the state's Joint Task Force on Income Tax Reform, continue to strive toward condensing their moderately progressive, five bracket income tax to a flat rate tax. In Georgia, it remains to be seen whether an attempt to flatten or eliminate the state's income tax will resurface this year after advocates defeated two such proposals last year. Tax reform is also a topic likely to be broached by lawmakers in Kentucky this year, with efforts to flatten or otherwise reduce the personal income tax playing a central role in that discussion. And in South Carolina, a House Tax Policy Review Committee has been looking into a potential 5 percent flat tax.

The main proposals under consideration range from outright tax cuts to revenue neutral swaps or shifts that would change what most income groups pay in taxes. In most cases, "tax shifts" are designed to transfer revenues away from progressive forms of taxation and toward more regressive options, leaving low- and middle-income earners paying more to finance tax cuts for the wealthy.

Maine's Gov. Paul LePage has proposed shifting the state to a flat rate personal income tax of 5.75 percent by 2020.  Moving to a flat rate is an egregious move on its own, but the governor's plan also effectively eliminates the 3 percent surcharge on taxable income above $200,000 voters approved at the ballot box just months ago. How? His plan first calls for a flat rate of 2.75 percent and then redesigns that 3 percent surcharge to apply to all taxable income, for a combined overall rate of 5.75 percent. The biggest beneficiaries, by far, of his flat tax plan are the state's wealthiest residents. In fact, the average lower-income taxpayer will pay more in taxes under this plan because it also increases the sales tax.

In Ohio, a joint committee of the Ohio General Assembly has been tasked with recommending how the state can transition to a flat personal income tax rate of 3.5 or 3.75 percent. Policy Matters Ohio recently released a report using ITEP data, Flat tax would mean more taxes for most, that finds that three-quarters of Ohioans would pay more under a flat tax while the affluent would receive the resulting windfall. Gov. John Kasich's recently released budget proposal does not go quite this far, but it does condense the state's personal income tax brackets and reduces rates across the board. Ultimately, the plan flattens the state's income tax and results in a tax shift away from income taxes and toward the sales tax.

Cutting Taxes at All Costs 

Many states are taking steps to cut their personal income taxes despite revenue deficiencies. Arkansas lawmakers, for example, recently passed Gov. Asa Hutchinson's plan to cut $50 million in taxes for those with taxable incomes under $21,000 despite the fact that revenues are under forecast for the first 6 months of this fiscal year. To achieve balance, the governor's budget proposal includes very optimistic revenue projections, relying on assumptions of robust 4.4 percent growth in general revenues absent any tax increases.

Iowa is another state where income tax cuts are at the top of the agenda for many in the state's new Republican majority despite a budget shortfall caused largely by prior tax cuts and warnings from the nation's longest-serving governor that the state cannot afford them.

But cutting taxes when revenues are already down is often unappealing since doing so would exacerbate painful budget cuts. Recently, however, some lawmakers have developed a slick workaround. Instead of proposing cuts that would result in an immediate revenue loss and require offsetting reduction in public services, they instead offer up proposals with triggers or phase-ins – delaying the need to identify what services will be eliminated to fund the tax cut until some later date (perhaps even a date when the lawmakers voting for that tax cut have already left office).

Oklahoma may be the poster child of tax triggers gone awry. Just last year an income tax rate reduction was triggered despite the presence of a budget shortfall and an official "revenue failure." Reasonably, lawmakers have since questioned the merits of maintaining the trigger.

In Nebraska, despite projected shortfalls of $900 million and $1.2 billion in the state's next two budget cycles, Gov. Pete Ricketts has proposed to slash taxes for the state's wealthiest, but delay implementation and slowly phase them in each time the state hits arguably arbitrary revenue targets.

And as mentioned above, Michigan lawmakers – lacking for ideas on how to fund income tax repeal – are hoping that adopting a very slow phase-in schedule may allow them to repeal the tax anyway.

Some Progressive Revenue Ideas Shine Through

While there seems to be an endless stream of proposals to chip away at state personal income taxes, proposals to strengthen the tax, or even create one from scratch, have also surfaced, along with proposals to generate meaningful revenues through other means.

For instance, last year Alaska Gov. Bill Walker proposed reinstating a personal income tax for the first time in more than 35 years to deal with a downturn in oil tax and royalty revenues. While the governor has yet to officially rerelease an income tax plan this year, he recently voiced support for an income tax yet again and there are indications that this year's fiscal debate will include meaningful discussion of the idea.

In Kansas, advocates have filed a bill to undo many of the harmful changes enacted since Gov. Sam Brownback took office in 2012. Additional tax reforms will also be under consideration by a new coalition in the legislature. The stage is set for tax reform in Louisiana as well, if the political stars can align. The Task Force on Structural Changes in Budget and Tax Policy released its final report last week, including recommendations that the state eliminate regressive exemptions, broaden the sales tax base, and lower the rate.

Governors in Montana, New York, and Washington have introduced progressive revenue-raising ideas to address their lean budgets. In Montana, Gov. Steve Bullock has proposed adding a new top bracket for taxpayers with more than $500,000 in taxable income and limiting a capital gains credit to those with incomes under $1 million. In New York, Gov. Andrew Cuomo's budget proposal includes a 3-year extension of the state's millionaires' tax. New York's Assembly Speaker Carl Heastie has taken the revenue raising potential of the tax even further, proposing to increase the rates on those earning over $5 million and $10 million annually. Gov. Jay Inslee in Washington has put forward a proposal that would generate an additional $4 billion for public education by raising business and occupation taxes on services, expanding the sales tax base, and levying new taxes on carbon and capital gains, though this ambitious proposal faces an uphill battle in the legislature.

Gearing up for 2018, advocates in Massachusetts are backing a constitutional amendment to create a 4 percent tax surcharge on incomes over $1 million. Receiving strong support in public polling, the millionaires’ tax, also known as the fair share amendment, could go before voters on the state’s 2018 ballot.


What to Watch in the States: Gas Tax Hikes and Swaps


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This is the second installment of our six part series on 2017 state tax trends. The introduction to this series is available here.

State tax policy can be a divisive issue, but no area has generated more agreement among lawmakers across the country than the need to raise new revenues to fund infrastructure improvements. The most common way of accomplishing this goal has been to boost gasoline and diesel tax rates paid by motorists at the pump. Nineteen states have raised or reformed their gas taxes since 2013 and over a dozen states will debate doing so this year.

State and federal gas taxes are the cornerstone of our nation’s transportation finance system. But far too many of these taxes are severely outdated and poorly designed.

The good news is that state lawmakers are becoming increasingly aware of these problems. The governors of states such as Alaska, California, and Minnesota, for example, have already begun advocating for meaningful gas tax increases this year. Legislative leaders in Indiana and South Carolina are also making the case for a higher gas tax in their states.

The bad news is that in other states, such as Tennessee and Wisconsin, lawmakers are using the need for a gas tax update as an excuse to push for cuts in other, unrelated taxes. The final effect of this type of swap would be to boost infrastructure funding, but only at the expense of other core services such as education and public health.

The states where gas tax debates are already taking place this year include:

Alabama lawmakers debated a 6 cent per gallon gas tax increase in 2016 and may return to the issue this year. The Association of County Commissions of Alabama recently endorsed a 3-cent-per-gallon increase and there appears to be some support for the idea in the business community.

Alaska Gov. Bill Walker has proposed tripling fuel tax rates to fund infrastructure at a time when the energy-dependent state’s major revenue streams have been hammered by declines in both the production and price of oil. In a report issued last month, ITEP found that Alaska’s lowest-in-the-nation gas tax rate would remain below average even if the governor’s proposal were enacted.

The chairman of Arizona’s House Committee on Transportation and Infrastructure is seeking to boost the state’s gas tax by 10 cents per gallon. This would mark Arizona’s first gas tax increase in over 26 years. While raising the state’s gas tax would require a two-thirds vote of both legislative chambers, the question could be put on the state’s 2018 ballot by a simple majority vote of the legislature.

California’s gas tax rate is tied to the price of fuel and has fallen dramatically in recent years as that price has dropped. Gov. Jerry Brown has proposed (PDF, page 87) restoring the state’s gasoline tax rate to where it stood in June 2014—effectively raising the rate by 11.7 cents per gallon. The governor has also suggested raising the diesel tax rate by 11 cents and creating a new annual vehicle fee. And to prevent further swings in the state’s fuel tax collections, the linkage to fuel prices would be severed and each tax would instead be indexed to inflation. Notably, Georgia and North Carolina also recently abandoned their price-linked gas taxes in favor of more predictable and sustainable formulas.

Colorado lawmakers appear to agree that the state needs to invest more in its transportation network, though the source of that additional investment has yet to be determined. Gov. John Hickenlooper has suggested asking voters to raise the state’s sales tax rate, while some Republican legislators would prefer to transfer money away from other areas of the state’s budget. Another idea being discussed is to raise the state’s sales tax but to simultaneously cut business property taxes or gas taxes to attract votes in the Republican-controlled Senate.

Hawaii Gov. David Ige proposed a modest, 3-cent-per-gallon gas tax increase in 2016 that ultimately fell short in the state’s legislature. The governor is expected to support a similar increase this year, though House Speaker Joe Souki is reportedly opposed to the idea.

Idaho lawmakers took an important first step toward improving their state’s infrastructure when they approved a 7-cent-per-gallon gas tax increase in 2015. But there is widespread agreement that the increase fell well short of what was needed. Contractors in Idaho have floated the idea of an additional 10-cent-per-gallon gas tax hike to resolve the remaining gap, while Gov. Butch Otter seems to prefer shifting dollars away from other public investments so that money could be spent on transportation instead.

Last year the Indiana House of Representatives approved raising the state’s gas tax by roughly 4 cents per gallon and tying the tax rate to inflation. That proposal ultimately fell short because of opposition in the state Senate and from former Gov. Mike Pence. The likelihood of passage seem to have improved this year, however, as opposition in the Senate has softened and as the state’s new governor, Eric Holcomb, has indicated that he is not vehemently anti-tax. The Indiana House is now debating a proposal to raise the gas tax by 10 cents per gallon and index it to inflation.

Kansas tax collections have taken a major hit in the wake of Gov. Sam Brownback’s tax cuts and the governor is proposing cutting spending on transportation in order to remedy part of the state’s general fund deficit. As an alternative to that plan, the Rise Up Kansas coalition has proposed an 11-cent gas tax increase to fund transportation as well as personal income tax reforms that could remedy the state’s general fund shortfall.

Louisiana lawmakers are likely to debate a sizeable gas tax increase this year. An infrastructure funding task force estimated that an increase of 23 cents per gallon would solve the state’s transportation revenue shortfall. Meanwhile, a separate ITEP study found that a 19-cent increase would be needed simply to restore the purchasing power that the tax has lost since 1990. Moving an increase of that size through the legislature would be a politically heavy lift, though Gov. John Bel Edwards is sending signals that he will pursue some level of increase, noting that “we have significant needs … I hope we can find the will to move forward.”

Minnesota Gov. Mark Dayton recently proposed (PDF) levying a 6.5 percent sales tax on gasoline and raising vehicle registration fees. The gas tax increase is expected to raise approximately $600 million, though legislative leaders say they are opposed to tax increases of any kind. Minnesota’s corn growers reportedly support a 10-cent increase in the state’s gas tax.

The influential Mississippi Economic Council voiced support for a gas tax increase last year and the idea is being considered by Lt. Gov. Tate Reeves and House Speaker Philip Gunn. Mississippi has waited over 28 years since last increasing its gas tax—longer than any state except Oklahoma and Alaska. Last year, Mississippi lawmakers considered pairing a gas tax increase with general fund tax cuts but eventually decided to enact the tax cuts without changing the state’s gas tax rate.

Missouri’s Transportation Department Director said that an update to the state’s two-decade old gas tax rate is a “good area to look” when attempting to address Missouri’s infrastructure revenue shortfall. Whether that recommendation will be taken to heart by the state’s new governor, Eric Greitens, has yet to be seen. Lawmakers have already floated the idea of hiking the state’s gas and diesel tax rates by 1.5 and 3.5 cents per gallon, respectively, though the proposal would need to be approved by Missouri voters because it takes the form of a constitutional amendment.

A broad coalition of Montana businesses, unions, contractors, and local governments is urging state lawmakers to raise the state’s gas tax rate by 10 cents per gallon. Montana’s gas tax rate has been allowed to stagnate for more than 22 years. The push to raise the tax has been receiving significant attention in newspapers around the state.

New Mexico legislators are mulling a 10 cent increase in their two-decade-old gas tax rate as well as an alternative proposal to give localities the option to levy their own gas taxes of up to 5 cents per gallon. Gov. Susana Martinez’s opposition to tax increases will be a major obstacle to passage, but the state’s dire budget situation means that lawmakers will likely engage in a serious tax policy debate this year.

Oklahoma lawmakers are facing a deep budget hole, largely because of income tax cuts and underperforming oil tax revenues. Adding to the problem is the fact that Oklahoma’s nearly 30-year-old gas tax rate has seen its purchasing power fall dramatically, and that lawmakers responded by transferring a large and growing share of general fund dollars into the state’s transportation budget. The state legislature is expected to finally debate a gas tax increase this year. Early supporters include the Oklahoma Policy Institute and the editorial board of the state’s largest newspaper.

Oregon Gov. Kate Brown urged lawmakers to pass a significant transportation funding package in her inaugural address. While she has yet to propose a specific funding source, discussions of a gas tax increase are already underway. The League of Oregon Cities is among the groups backing an increase in Oregon’s gas tax. Republican legislators, however, are indicating that they may not support a gas tax increase unless it is paired with cuts in taxes that fund other areas of government.

South Carolina’s House leadership recently proposed raising the state’s gas tax by 10 cents over five years, increasing the vehicle sales tax, and enacting higher registration fees for hybrid ($60) and electric ($120) vehicles. While former Gov. Nikki Haley insisted that any gas tax increase needed to be paired with an income tax cut, the state’s new governor, Henry McMaster, has yet to weigh in on the issue. South Carolina’s gas tax has not been raised in 28 years and an increase is supported by the South Carolina Chamber of Commerce and at least one member the state’s DOT Commission.

Tennessee Gov. Bill Haslam recently unveiled a plan to boost the state’s gasoline tax by 7 cents and its diesel tax by 12 cents. Tennessee would also join the growing group of states that index their gas tax rates to inflation. The governor would also like to raise vehicle registration fees across the board, with larger fees for electric vehicles. Unfortunately, Gov. Haslam has paired these changes with tax cuts for businesses and successful investors, and a reduction in the state’s sales tax rate on groceries. The net result would be a boost in funding for infrastructure and a reduction in funding for education and other public priorities. Some legislators are discussing an alternative plan that would have a similar overall effect: transferring sales tax dollars out of the general fund to be spent on transportation instead.

Virginia localities in some parts of the state are seeing the revenues raised by their regional gas taxes fall millions of dollars short of projections. Regional gas taxes in Virginia are linked to the price of fuel, so low fuel prices have resulted in low tax collections. Some state lawmakers would like to remedy what they call a legislative “oversight” by establishing a minimum regional gas tax rate, or “floor,” that would be collected even when fuel prices are low. Virginia’s state-level gas tax already contains just such a floor, as do the price-based gas taxes levied in many other states.

Wisconsin Gov. Scott Walker firmly opposes any net tax increase, though he may agree to a boost in the state’s gas tax rate if it is accompanied with tax cuts of equal or greater size. The state Assembly tentatively embraced the idea but its leader, Assembly Speaker Robin Vos, has also said that “I don't necessarily favor taking money from income and sales tax dollars that could go to fund schools or the university or somewhere else and transferring that into the transportation fund when we know we have needs there.” Because Gov. Walker is unlikely to sign a gas tax increase unless it includes exactly this type of swap, Speaker Vos is reportedly growing more pessimistic about the chances of reaching an agreement in 2017.

 

For more information on state gas taxes, read:

How Long Has It Been Since Your State Raised Its Gas Tax? (updated January 2017)

Most Americans Live in States with Variable-Rate Gas Taxes (updated January 2017)


And Then There Were Six: Amazon Expands Its Sales Tax Collection


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UPDATE: After this post was published, Amazon announced that it will begin collecting sales tax in Oklahoma on March 1. This post has been updated to reflect this development.

The nation’s largest Internet retailer has made an about-face on its sales tax policy, making consumers’ ability to evade sales tax on online purchases a little less common. By March 1, the number of states where Amazon.com collects sales tax will have leapt from 29 to 40 in a span of just two months.

On Jan. 1, the company began collecting tax in Iowa, Louisiana, Nebraska, and Utah. Starting Feb. 1, the company began collecting sales tax in Mississippi, Missouri, Rhode Island, South Dakota, and Vermont, and on March 1 it will do the same in Oklahoma and Wyoming.

Five states don’t levy state-level sales taxes, so this means there are only five states left where Amazon will still refuse to collect the taxes owed by its customers: Arkansas, Hawaii, Idaho, Maine, and New Mexico.

This is a dramatic reversal in the company’s tax collection practices. As our animated map shows, as recently as 2011 Amazon was only collecting sales tax in five states.

Many of the changes in Amazon’s sales tax collection practices are rooted in its opening of distribution centers around the country. When Amazon, or any retailer, establishes a “physical presence” in a state it unquestionably falls within reach of that state’s sales tax collection laws.

In other cases, it appears that Amazon’s decision to collect sales tax might be related to state-level laws seeking to expand the scope of state sales tax collection statutes. But in Mississippi and Vermont, for example, those laws were not scheduled to go into effect until July and Amazon did not respond to journalists’ questions regarding why the company is beginning tax collection five months early.

Amazon is the nation’s largest e-retailer and its decision to collect, or not collect, sales tax has a meaningful impact on states’ sales tax revenues. But it is worth remembering that Amazon is just one of many e-retailers. As our policy brief on this topic concludes: “Until either Congress or the Supreme Court acts to allow states to require that all Internet retailers collect sales taxes … there is no doubt that the preferential treatment of e-commerce will continue, and that ‘brick and mortar’ retailers, law-abiding taxpayers, and state tax collections will suffer.”


What to Watch in the States Series: Tax Policy 2017


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Over the next few weeks we will be blogging about what we’re watching in state tax policy during 2017 legislative sessions. In this “What to Watch in the States” series, we will look at the following:

  1. State responses to short- and long-term revenue deficits
  2. Boosting funding for infrastructure, though sometimes at the expense of other public services
  3. Proposed measures that weaken or eliminate income taxes
  4. Efforts to modernize sales taxes to reflect 21st century economy
  5. State anticipation of and reaction to potential federal tax policy changes
  6. Tax breaks for working families

We start the series by contextualizing the current fiscal and budgetary climates in the states.

Deficits Abound: Why All This Trouble?

More than 30 states are facing short- or long-term revenue deficits, putting pressure on legislatures across the country to find ways to plug budget holes.

The last time this many states faced deficits was during the Great Recession. In 2017, shortfalls are being caused by a number of different issues with variable impact across states. These include: cyclical issues such as the decline in oil prices and stock market weakness in 2016; structural imbalances years in the making in large part due to prior year tax cuts; court decisions ordering states to more adequately fund public education; and uncertainty regarding tax changes under a new president and Congress.

For example, Alaska, Louisiana, North Dakota, Oklahoma, and West Virginia face budget deficits due to their heavier reliance on revenues from the slumping energy industry. Connecticut and Illinois are grappling with structural deficits independent of the business cycle. States such as Kansas continue to grapple with budget deficits exacerbated by significant post-recession tax cuts. Washington and Oregon are staring down multi-billion dollar deficits due to inadequate funding for public education. And California anticipates a deficit in the coming year, driven in part by the uncertainty of federal tax changes and the hope among high-income taxpayers for more favorable tax treatment of capital gains income.

After the last recession, about 30 states raised taxes to help address the shortfall they faced. States also drew down their rainy day funds, cut spending, and used one-time measures such as fund transfers to achieve balanced budgets.

Like then, current budget pressures may spur substantive tax policy reforms or simply encourage lawmakers to engage in budget gimmicks and other one-time measures that reach the accounting balance needed in the moment but that save the real work of achieving balance for another day. What are we seeing and how do we anticipate states to respond to these various pressures this legislative session?

Long-Term Problems Seeking Long-Term Solutions 

Lawmakers in several states recognize that there are long-term revenue problems behind their problematic deficits and are working to advance sustainable solutions. Keep an eye on the following states where true tax reforms are being debated:

Faced with a shortfall exceeding $3 billion, Alaska is again confronting a monumental budget challenge. Gov. Bill Walker has renewed his call for revenue. He has proposed increasing the state's fuel tax and, in hopes of working with the legislature to fill the gap, continues to push a broad-based tax solution. That could take the form of a personal income tax or a statewide sales tax. If lawmakers choose to punt on a solution and pin their hopes on a rise in oil prices, they risk spending all of the state's savings in a matter of years.

Illinois faces an $8 billion hole with no clear end in sight to the ongoing political standoff between Republican Gov. Bruce Rauner and Democratic lawmakers. While the Senate has advanced a comprehensive tax reform plan that includes raising the personal income tax rate, increasing the state’s Earned Income Tax Credit, and levying a statewide tax on sugary beverages, without larger concessions relating to redistricting, term-limits, or bargaining rights, a “grand bargain” is unlikely to advance.

Kansas has dealt with years of budget crises in the aftermath of Gov. Sam Brownback’s “real life experiment” in tax policy. While the Gov.’s proposed budget plan takes a “business as usual” approach to balance budgeting (i.e., one-time revenue measures such as funding sweeping, budget cuts, and regressive tax increases), a new coalition in the legislature may successfully push for at least a partial rollback of the LLC exemption whereby 330,000 owners of small business owe no income taxes.  

The stage is set for tax reform in Louisiana if the politics can align. Gov. John Bel Edwards's key priority is ending the need for constant mid-year budget adjustments and the continued cuts to higher education and health care that have plagued the state in the years following Bobby Jindal’s administration. After another special session to be held in February 2017 to address the budget gap facing lawmakers this fiscal year, the primary task of lawmakers will be to take on familiar recommendations for structural tax reform. 

Washington state currently faces a half-billion dollar shortfall that could quickly increase to $4 billion depending on how the state’s highest court rules regarding the adequate funding of public education. With the scope of this liability on the horizon, Gov. Inslee has put forward a proposal that would raise an additional $4 billion for public education by raising business and occupation taxes on services, expanding the sales tax base, and levying new taxes on carbon and capital gains. This ambitious proposal faces an uphill battle in the legislature.

Long-Term Problems Seeking Short-Term Solutions

The "kick the can" strategy is always a favorite, with budgets balanced on paper through spending cuts, temporary consumption tax hikes, and other budgeting gimmicks while underlying problems go unsolved. Unfortunately we expect to see this approach taken in many states, particularly in those with "no new tax" majorities.

Colorado faces a $600 million deficit. While proposing an increased tax on recreational marijuana to increase funding for public education, Gov. Hickenlooper’s budget plan primarily depends on fund transfers, budget cuts, and delayed payments to achieve balance. The state has limited options for balancing its budgets due to TABOR, which limits revenue options without voter approval.

With declining oil and gas revenues, New Mexico faces another budget deficit. Long needed structural reforms such as broadening the state’s eroding Gross Receipts Tax face the challenge of a popular governor who views tax increases as “an easy way out” of the state’s ongoing fiscal challenges.

New York, faced with a $3.5 billion projected deficit, has been piecing together a mish-mash of temporary tax fixes for years. Continuing that trend, the Governor's executive budget proposal includes a three-year extension of the state's income tax surcharge, also referred to as the millionaires' tax. While an important, and progressive, source of revenue, many remain disappointed that lawmakers are not tackling a permanent solution.

Oklahoma's budget shortfall nears $900 million this year as both weak oil and natural gas prices weigh on the state's finances. But low energy prices are not the only culprit. Generous corporate tax breaks and repeated, unaffordable, incomes tax cuts over the past decade have also taken their toll. The most recent income tax rate reduction was triggered despite an official "revenue failure." Reasonably, legislators have questioned maintaining the trigger and have floated a range of revenue-raising proposals, including eliminating some exemptions to broaden the state's sales tax base.

Oregon faces an almost $2 billion deficit, half of which Gov. Kate Brown proposes to fill with new revenue from raising taxes on tobacco, liquor, hospitals, insurers, and some corporation owner's incomes. Even if some new revenue measures pass in the wake of the failure of Measure 97, deep cuts and delayed payments to social services and higher education are expected.

Pennsylvania continues to struggle with a growing structural deficit. The shortfall of up to $1.7 billion in fiscal year 2017 is expected to grow to $3 billion per year by 2021. While specifics of a budget proposal are yet to be released, Gov. Tom Wolf has stated that he will not seek major broad-based tax increases.  

With the governor's office and entire Virginia legislature facing elections later this year, lawmakers seem wary of risking controversial tax overhauls. As a result, most proposals so far to address the state's $1 billion shortfall have been focused on funding cuts, withdrawals from the state's Rainy Day Fund, and one-time revenue measures like a tax amnesty period. There remains hope that longer-term perspectives will prevail, but perhaps not until after the November elections.

Faced with low energy prices and a struggling coal industry, West Virginia's projected budget deficit nears $500 million. As in many other energy-dependent states, previous decisions to slash taxes have also eroded the state's revenue base. Over several years West Virginia has eliminated its business franchise tax and reduced its corporate income tax. Lawmakers are now faced with tough decisions on how to raise much-needed revenue.   

Digging A Hole Deeper

Despite revenues being under forecast the first 6 months of this fiscal year, Arkansas lawmakers plan to move forward with the Gov. Hutchinson's plan to cut $50 million in taxes for those with taxable incomes under $21,000. To achieve balance, the governor's budget proposal includes very optimistic revenue projections, relying on a robust 4.4% growth in general revenue funds absent any tax increases.

Nebraska Gov. Pete Ricketts, whose state faces a $900 million shortfall in the budget it is crafting now and a projected $1.2 billion shortfall in the following budget, has nonetheless proposed to cut taxes for high-income Nebraskans. To do so while still balancing the short-term budget, his proposal uses a "trigger" to delay the harm of the tax cut until 2020 and then begin forcing down the top income tax rate whenever revenue growth meets an arbitrary 3.5 percent benchmark.

Lagging revenue collections will make the budget session tighter than anticipated in Texas, though these fiscal pressures don’t seem to be dissuading some very enthusiastic lawmakers from pursuing legislation to further reduce or eliminate the state’s franchise tax.  


Stay tuned for the next post in our series, "Further Attempts to Weaken or Eliminate Progressive Taxes."


An Overview of State Tax Trends in 2017


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Since the 2007-2009 economic crisis, rising income inequality and the role our public policies play in aiding or easing this trend have been an ongoing part of the public discourse. In spite of what we know about the growing gap between the rich and the rest of us, federal and state policymakers continue to sell tax cuts that disproportionately benefit the rich as a panacea that stimulates economic growth and creates jobs. Such tax cuts almost always are touted as a way to put more money into the pockets of middle-income families, in spite of clear evidence that many tax cut proposals are top heavy with benefits that flow primarily to the wealthy. 

While federal lawmakers have signaled individual and corporate tax changes are imminent, less publicized are upcoming state legislative actions on issues as varied as major revenue shortfalls, modernizing decades-old sales and gas tax policies, and flattening or even eliminating revenue sources as vital as the personal income tax.

States’ actions can either make their tax systems fairer or ask more from those who have the least. To help inform statehouse debates, the Institute on Taxation and Economic Policy (ITEP) released a new chart book today that examines how families at different income levels are affected by state and local tax codes. The book, based on ITEP’s Who Pays? study, concludes that states should consider the most sustainable, least regressive tax reforms.

Over the coming weeks, ITEP will publish in-depth blog posts detailing key trends in state tax policy. Below is a broad overview of what we know.

Key Trends in State Tax Policy

Across the nation, more than 30 states face revenue shortfalls this year, including New York, Missouri, Oklahoma, West Virginia, Kansas and Louisiana. The outstanding question is whether lawmakers will tackle budget gaps with comprehensive revenue-raising reform or, instead, continue to kick the can down the road with one-time fixes

Lawmakers in Michigan and West Virginia will debate eliminating their personal income taxes, a move that not only would make their tax systems more regressive, but also would impede their ability to balance their budgets in the long run. Meanwhile, lawmakers in Maine, Ohio, Kentucky, Iowa, Georgia, Arizona, South Carolina and other states will consider converting their graduated income taxes to a flat rate. This move would negate the chief advantages of the income tax: its ability to improve tax fairness and adequacy by requiring people with higher incomes to pay higher rates and those with less income to pay lower rates.

Few trends in state tax policy have been as pronounced as the move to generate new revenues to fund vital infrastructure maintenance and expansion. Since 2013, nineteen states have raised or reformed their gas taxes and more than a dozen states will debate doing the same this year. Unfortunately, lawmakers in states such as Tennessee and Wisconsin are only contemplating gas tax increases as part of broader packages that would slash other taxes responsible for funding schools, public safety, and other services. 

While our economy is changing all the time, state and local sales tax laws are often slow to catch up. Recent debates over how best to collect sales tax on e-retail, the gig economy, and the growing personal service industry are certain to continue in 2017. 

Federal, state, and local fiscal policies are highly intertwined. Expansions to the federal income tax base could widen some state tax bases and revenues as well. On the other hand, new federal giveaways could flow through to the states in much the same manner. And changes in the federal tax treatment of income taxes, property taxes, sales taxes, and municipal bonds are always closely watched by state and local lawmakers.

Tax Reform the Right Way

Each of the 50 states has unique challenges and there is no singular right way to approach tax reform. But there are better practices as ITEP’s Fairness Matters chart book reveals: “Given the detrimental impact that regressive tax policies have on economic opportunity, income inequality, revenue adequacy, and long-run revenue sustainability, tax reform proponents should look to the least regressive states in crafting their proposals.”


A Visual Tour of Who Pays State & Local Taxes


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While it can be hard to look away from the important federal policy debates occurring right now in Washington D.C., state lawmakers across the country will also be debating consequential fiscal policy changes in 2017 that will deserve close scrutiny. The context of those debates will vary by state: from coping with major revenue shortfalls, to modernizing decades-old sales and gas tax policies, to flattening or even eliminating revenue sources as vital as the personal income tax. Despite the varying details, key questions about the fairness and adequacy of state tax systems will be raised in all those discussions.

To help inform 2017 statehouse debates, ITEP released a new chart book today that examines how families at different income levels are affected by state and local tax codes. The book, based on ITEP’s Who Pays? study, concludes that:

When states shy away from personal income taxes in favor of higher sales and excise taxes, high-income taxpayers benefit at the expense of low- and moderate-income families who often face above-average tax rates to pick up the slack. Given the detrimental impact that regressive tax policies have on economic opportunity, income inequality, revenue adequacy, and long-run revenue sustainability, tax reform proponents should look to the least regressive, rather than most regressive, states in crafting their proposals.

The book contains 19 charts and focuses largely on how state tax systems differ between states that chose to rely heavily on sales and excise taxes, or on income taxes, to fund public services. Some of the book’s highlights include:

Chart 4 and Chart 5: The notion that states without income taxes are automatically “low tax” is a myth. Low- and moderate-income families often face above-average tax rates in these states.

Chart 6: Wealthy people fare extraordinarily well when states refuse to levy personal income taxes. The nine lowest-tax states for the wealthy are the nine states without income taxes.

Chart 8 and Chart 9: Flat taxes are beneficial for the wealthy, but at the expense of everyone else. Both low-income and middle-income families tend to pay more in flat tax states than in states with more progressive, graduated-rate income taxes.

Chart 10 and Chart 11: When lawmakers choose to rely heavily on sales and excise taxes to fund government, the typical result is higher taxes for low- and moderate-income families.

Chart 15: The design of a state’s income tax matters hugely in determining the overall fairness of each state’s tax system. Of the 15 most regressive state and local tax systems in the nation, 10 exist in states levying either a flat income tax or no personal income tax at all. By contrast, the 15 least regressive states all utilize a graduated-rate personal income tax.

Chart 19: The large degree of income inequality in our nation is made measurably worse by state and local tax policies. Low-income families’ already meager share of total income actually shrinks after state and local taxes are taken into account.

View the chart book



State Rundown 1/18: Revenue Woes Piling Up Faster Than Solutions


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This week we continue to track revenue shortfalls, governors' budget proposals, and other tax news around the country, finding most proposals to be focused on slashing taxes and reducing public investments despite public opinion and economic research showing the benefits of well-funded state services and progressive tax policies.

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

 

Revenue Shortfalls Abound...

  • Missouri joins the growing list of states staring down major revenue shortfalls – in this case a $456 million gap in the upcoming budget and $146 million of cuts just announced to balance the current budget, largely through higher education cuts. The state may be in better shape than others to handle the issue though, thanks to a tax study commission that heard helpful suggestions throughout the summer and a menu of options provided by the Missouri Budget Project.
  • In Oklahoma revenue receipts miss targets again, marking the ninth month of missed goals in 2016. Will the state consider a higher gas tax?
  • As West Virginia lawmakers wait to hear details of the Governor's plan to address the state's budget woes, they consider the idea of increasing their tax on sugary drinks.
  • With an eye on the state's growing pension debt, S&P reduced Kentucky's credit outlook from "stable" to "negative", increasing the chance of a rating downgrade over the next two years.
  • The Illinois Senate is working to push through a two-year stalemate that has left the state without a regular budget, advancing legislation for an income tax increase among other measures known collectively as the "grand bargain." Whether the measures will pass muster with House Speaker Mike Madigan or Gov. Rauner remains to be seen.
  • The Louisiana Legislature is expected to be called into another special session to address a mid-year budget deficit of $313 million. There is talk of a constitutional convention if lawmakers are unable to address the state's ongoing fiscal challenges this legislative session. 

As Some States Consider Tax Proposals...

  • A recent poll conducted in Maryland confirms that Marylanders support investments in education and “closing corporate loopholes and raising income taxes on the state’s highest earners” to make that possible.
  • A Wyoming lawmaker is proposing legislation that would prohibit lawmakers from covering more than half of any budget shortfall with the use of reserve funds. The state is currently one of two without rules in place to govern how savings are spent.
  • Rhode Island's Gov. Gina Raimondo proposed cutting the state's car tax. Her proposal would cost $55 million rather than the $215 million elimination over five years proposed by House Speaker Nicholas Mattiello.
  • Nevada lawmakers are considering ending or fixing the state’s property tax cap, put in place 2005 to slow property tax growth but now causing big issues for local budgets.
  • Kansas Gov. Sam Brownback has indicated a willingness to reconsider the LLC exemption, suggesting he may be open to a partial repeal.
  • Arkansas Gov. Hutchinson has dropped some of the competition to his $50 million tax cut with the promise of a Blue Ribbon Panel on Tax Reform.
  • The debate over state solutions to untaxed online purchases is heating up around the nation, most recently in Mississippi and South Carolina.
  • An Arizona lawmaker pitched a dime a gallon gas tax increase for the 2018 ballot. The tax would increase the state's current 18 cent per gallon gas tax that was last increased over 25 years ago. 

Budget Watch

  • Nebraska Gov. Ricketts released details of his budget and tax-cut proposal along with his State of the State address. His proposal holds back state school aid growth and makes cuts to higher education and health funding while focusing spending growth on the state's overcrowded prisons. He also proposed changing the way agricultural land is valued and instituting a flawed tax-cut "trigger" that will guarantee income tax cuts for the highest-income Nebraskans.
  • Gov. Andrew Cuomo's state budget would, among other things, extend New York's millionaires' tax surcharge on the wealthy and continue with a "middle-class" tax cut enacted last year.
  • Nevada Gov. Sandoval released the last budget proposal of his term this week. The mixed-bag proposal includes increased investments in higher education, $60 million for a private school voucher program, and a 10-percent excise tax on marijuana, which voters legalized for recreational use in November. 

Governors' State of the State Addresses

  • In the past week, Governors Hickenlooper of Colorado, Deal of Georgia, Holcomb of Indiana, Snyder of Michigan, Bryant of Mississippi, Greitens of Missouri, Ricketts of Nebraska, Sandoval of Nevada, Martinez of New Mexico, Raimando of Rhode Island, Haley of South Carolina, McAuliffe of Virginia, Inslee of Washington, Justice of West Virginia, and Mead of Wyoming delivered their State of the State addresses.
  • States with addresses scheduled through the end of next week are: Alaska today; Hawaii and Minnesota Monday; and Massachusetts and Montana Tuesday. 

What We're Reading...

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


Kansas State of the State: Worlds Apart


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Back in December, Kansas Gov. Sam Brownback gave an interview with the Wall Street Journal and suggested President-elect Trump should follow his state’s example and cut taxes as well as spending.

The sheer gall of the suggestion belies the fact that Kansas’s tax cuts have resulted in credit downgrades, lack of adequate funding for essential services such as education, and ongoing significant revenue gaps (including a $340 million revenue gap to close this fiscal year and an estimated $1.1 billion gap through the end of fiscal year 2019).

Brownback’s distorted reality was on display again last week in his State of the State Address, in which the fact that Kansas has been struggling with perpetual budget crises for the past four years was remarkably absent.

And based on his budget proposal, it seems achieving a structurally balanced budget is not truly a priority for the governor. Proposed measures to achieve a “balanced budget” include more of the same budget gimmicks and increased reliance on regressive sales taxes Kansans have seen over the past few years: hiking tobacco and alcohol taxes; taking money from the Highway Fund to cover general fund expenses; selling off revenue targeted to fund early developmental programs; and liquidating the state’s investment funds (which are intended to boost the state’s interest earnings, not plug budget holes).

These proposals do not put Kansas on a path toward achieving the stable fiscal footing needed to promote broad prosperity for all Kansans. Rather than raise revenues in a manner that asks more of those who reap more economic benefits, his one-time proposals continue to rely on those with the least and will only make the disparity between the rich and everyone else more vast. And ordinary people will continue to pay in other ways for these poor policy choices that have failed to generate promised results and gutted the state of resources needed to fund services for the disabled, mental health, and education.

Instead of acknowledging these fundamental problems, Brownback has dug his heels in, holding up his small business exemption—whereby more than 330,000 business owners pay no income tax—as a model for the nation.

Brownback in his address to Kansans said the state is “the envy of the world.” While Kansas does have beautiful sunsets, from an economic point of view, the state is failing to adequately invest in its infrastructure and people. A state in which much of the rewards flow to the top is hardly an example for others to follow. Kansas should clean its fiscal house before inviting others to follow its example.

Kansans are increasingly realizing the gap between what is, what is promised, and what might otherwise be and they’re opting for the latter. A growing number of lawmakers are doing the same. Hopefully, lawmakers will reject Brownback’s “everything is fine” vision of the state and steer the state toward meaningful tax reform such as the plan proposed by Rise Up Kansas.


State Rundown 1/11: State Legislative Sessions Kick Off Amid Uncertainty


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This week brings still more states looking for solutions to revenue shortfalls, multiple governors' State of The State addresses, important reading on counter-transparency and local-preemption efforts, and more. 

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

  • A Nebraska legislator this week diagnosed the state's $900 million revenue shortfall in plain terms, describing it as "self-inflicted misery" brought on mostly by repeated tax cuts in recent years, and adding that further tax cuts in this context would amount to "visionless activity."
  • Hawaii's tax revenue growth is down, resulting in $155 million less than expected for the upcoming legislative session. The state's Council on Revenues predicts that low visitor spending and an increase in online shopping could be contributing to the shortfall.
  • Ohio again this month saw tax revenues fall short of estimates. Legislators are gearing up for a difficult budget situation.
  • North Dakota's 2016 budget woes will continue into the new year, as a new forecast has reduced projected revenues 7 percent just since the last forecast in December.
  • New York's Gov. Andrew Cuomo proposed expanding the state's child care tax credit. The proposal, another attempt to provide breaks to the middle-class, would benefit 200,000 families making between $50,000 and $150,000 and would cost $42 million.
  • South Carolina lawmakers are putting forth a range of bills to address the state's need for funding to improve roads and bridges. Unfortunately, as we saw in New Jersey last year, one of these ideas is to use the state's infrastructure issues as an opportunity to force through regressive income tax cuts.
  • Pennsylvania's Gov. Tom Wolf, again this session, is proposing a natural gas severance tax. This will be the governor's third attempt to tax the industry since coming into office.

Budget Watch 

  • Gov. Paul LePage's budget would, among other things, cut 500 state jobs, broaden the sales tax base, and shift Maine to a flat tax by 2020, effectively rolling back the state's recent referendum for an education tax surcharge on high-income Mainers.
  • On the heels of his State of the State Address, Kansas Governor Sam Brownback is expected to release his budget proposal this week.  Based on his speech, don’t expect to see an expansion of Medicaid or elimination of his state’s costly pass through business income exemption in the proposal.  He will seek in his words “modest, targeted” tax increases including another hike in the state’s cigarette tax to help address a $342 million revenue shortfall. 

Governors' State of the State Addresses 

  • In the past week, Governors Ducey of Arizona, Hutchinson of Arkansas, Malloy of Connecticut, Otter of Idaho, Branstad of Iowa, Brownback of Kansas, Christie of New Jersey, Burgum of North Dakota, Daugaard of South Dakota, Scott of Vermont, and Walker of Wisconsin delivered their State of the State addresses.
  • States with addresses scheduled through the end of next week are: Georgia, South Carolina, Virginia, and Wyoming today; Colorado and Nebraska on the 12th; West Virginia on the 16th; and Indiana, Michigan, Mississippi, Missouri, Nevada, New Mexico, and Rhode Island on the 17th. 

What We're Reading...

  • The Hill looks at a likely trend of Republican-led state governments passing "preemption" laws to reduce the flexibility of democratically dominated cities in areas such as local minimum wage laws, environmental regulations, and soda taxes.
  • The Missouri Budget Project has created a Policy Framework for Building a Prosperous Missouri and a Strong Middle Class, which includes important tax reforms: creating a refundable state Earned Income Tax Credit, better evaluating tax credits going forward, and rolling back dangerous tax-cut triggers enacted in 2014.
  • Governing reports on a troubling trend of states reducing transparency to avoid shining light on the negative consequences of their own short-sighted tax policies.
  • At the kickoff of the Arizona Center for Economic Policy, Kansans offer a cautionary tale of the negative impacts of deep tax cuts.
  • In a recent report citing ITEP data, Ohio Policy Matters finds that that a move toward a flat tax would mean more taxes for most Ohioans.

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


State Rundown 1/4: Revenue Shortfalls, Gas Tax Changes Dominate Early Debates


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This week we bring you updates on major revenue shortfalls looming in Nebraska, Oklahoma, and Pennsylvania, as well as gas tax changes taking effect in some states and being debated in others.

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

  • Oklahoma lawmakers are weighing options to close the state's $870 million shortfall. Up for discussion are tobacco and gas tax increases, expanding the sales tax to a range of services, and enacting a soda tax. At the same time, there's discussion among lawmakers and a push from the state Auditor to repeal the tax cut trigger that has been chipping away at the state's personal income tax.
  • Pennsylvania lawmakers are turning their attention toward the state's budget deficit. However, steps to address it are unclear as Republicans renewed their pledge to avoid tax increases and Gov. Tom Wolf says he will not seek major tax increases to balance the budget.
  • A new coalition in Nebraska is pushing for a shift from sales to property taxes, but most lawmakers remain focused on the state's $900 million budget gap.
  • Mississippi is in dire need of revenue to repair and maintain its crumbling roads and bridges, but there are doubts that the legislature can come to agreement on a fix despite two obvious options: raising the state's outdated gas tax, or repealing last year's misguided tax cuts.
  • South Carolina continues to debate gas tax increases as well, with proposals that include  a slowly phased in 10-cent increase and an authorization of county-level gas tax increases.
  • Several states saw increases in their gas taxes starting Jan. 1, including large increases in Pennsylvania and Michigan and smaller adjustments in Nebraska, Georgia, North Carolina, Indiana and Florida.
  • Amazon began collecting sales tax on purchases made by residents of Iowa, Louisiana, Nebraska, and Utah on Jan.1.
  • Californians saw a 0.25 percent sales tax cut take effect on Jan. 1 with the expiration of the temporary tax increase approved by voters as part of Proposition 30 four years ago.
  • With Kansas Gov. Sam Brownback advocating that his failed tax policies should be adopted at the national level, federal lawmakers would be wise to follow the lead of Kansas lawmakers, the Kansas electorate, and pundits in not buying it.

 

What We're Reading...


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


New Year's Gas Tax Changes: Seven Up, Two Down


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By all indications, 2017 is shaping up to be a major year for state gas tax reform. Alaska Gov. Bill Walker has already proposed tripling his state’s gas tax. Task forces in Indiana and Louisiana have laid the groundwork for significant gas tax reforms in those states. And Tennessee Gov. Bill Haslam seems to be on the verge of releasing a gas tax proposal as well. Altogether, it appears that more than a dozen states will seriously debate gas tax changes next year.

But 2017 will also usher in a few gas tax changes before state legislative sessions even begin. Specifically, seven states will be raising gasoline tax rates while two states will be cutting them. Three of the increases (in Pennsylvania, Michigan, and Nebraska) are the result of legislation enacted by lawmakers during the last few years. The other four increases, and both of the rate cuts, are automatic adjustments based on various formulas those states use in setting their gas tax rates.

Here are the details on the changes taking place in each state:

Pennsylvania is raising its gasoline tax by 7.9 cents per gallon and its diesel tax by 10.7 cents. These are the final increases associated with legislation enacted by lawmakers in 2013, though further increases could be triggered in the years ahead if gas prices rise.

Michigan is raising its gasoline tax by 7.3 cents per gallon. The state’s diesel tax will rise by 11.3 cents to bring the two tax rates into alignment with each other. These changes are the result of legislation enacted in 2015. No further changes are expected until 2022, when the state’s gas tax rate will begin rising annually to keep pace with inflation.

Nebraska is raising its gasoline and diesel tax rates by 1.5 cents per gallon as part of a four-part, six-cent increase enacted in 2015.

Georgia’s gasoline tax will rise by 0.3 cents, and its diesel tax will rise by 0.4 cents, under a new formula linking the state’s fuel tax rates to growth in inflation and vehicle fuel efficiency.

North Carolina’s gas and diesel tax rates will rise by 0.3 cents under a new formula linking the state’s fuel tax rates to growth in population and energy prices.

Indiana’s gasoline tax rate will rise by 0.2 cents as it varies each month alongside the price of gasoline.

Florida will implement 0.1 cent gas and diesel tax rate increases because its fuel tax rates are tied to inflation.

New York will cut its gas and diesel tax rates by 0.8 cents per gallon as part of an annual adjustment based on the price of gas.

West Virginia, much like New York, will cut its gas and diesel tax rates by 1.0 cents per gallon as part of an annual adjustment based on the price of gas.

New Jersey’s diesel tax rate will rise by 15.9 cents on January 1 due to legislation enacted last year. The state will not change its gasoline tax rate on January 1, though it did implement a 22.6 cent increase in that tax on November 1, 2016.

See chart of gasoline tax rate changes 

See chart of diesel tax rate changes


Governors' Plans for State Taxes in 2017/2018


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In advance of the new year, several governors have released tax and budget proposals for their states’ next two fiscal years. Below, proposals from Montana, Washington, Alaska, Arkansas, and Oklahoma are outlined. While these proposals are not necessarily indicative of nationwide trends we expect to see in 2017, some help to set a good example of progressive solutions to raising revenue and improving tax fairness.

Montana

Montana Gov. Steve Bullock (D) released a budget proposal that aims to address a revenue gap while improving tax fairness. As highlighted by the Montana Budget & Policy Center, the governor’s budget would restore a higher tax bracket on top earners (on incomes over $500,000) and limit the preferential treatment of income earned from wealth rather than work by limiting the lower tax rate applied to capital gains income to the first $1 million of income. And it would increase parity for the treatment of income by capping the deduction for federal income tax paid for income from estates and trusts like it currently does for other types of income. Perhaps most notably, Gov. Bullock’s proposal also called for the creation of a refundable Earned Income Tax Credit (EITC).

Gov. Bullock’s plan is not all rosy. The budget includes across-the-board cuts to services and by no means flips Montana’s overall tax structure from regressive to progressive. But it is an example of how states can remedy revenue shortfalls without placing all the responsibility on low-income families.

Washington

In Washington state, Gov. Jay Inslee (D) proposed a host of revenue raising measures, largely to increase state funding for K-12 education. The state is under a court order to increase contributions to teachers’ salaries. The governor’s proposal would raise revenues beyond the court’s requirements by establishing a capital gains and carbon tax, increasing the business tax on services provided by some professionals, and eliminating several tax exemptions.

It would establish a 7.9 percent tax on some capital gains earnings, like stocks and bonds. (Homes, farms, retirement accounts, and forestry would be exempt from the new tax.) About half of the revenue from a new carbon tax of $25 per metric ton of pollution would go to K-12 education. Inslee’s proposal restores a decades-old rate cut to the business and occupation tax on professional and personal services. It would also expand the definition of business and occupation to capture revenue from certain out of state retailers that currently avoid the tax. Eliminating several state tax breaks, such as a sales tax exemption for nonresidents, would also generate significant revenue for the state. And because of the increase in state contributions to school funding, the local tax levy in most of the state’s school districts would be lowered.

As the Washington State Budget & Policy Center noted, the proposal would raise needed revenue in a forward thinking and equitable manner, but there is still more that needs to be done to create a more equitable and adequate tax system overall.

Alaska

The stated goal of the budget proposal from Gov. Bill Walker (I) is to continue cutting the size of government, restructure the state’s Permanent Fund Earnings Reserve (Permanent Fund) to make it more sustainable and provide funding for services, and generate new revenue through broad-based taxes. To that aim, the governor’s proposal re-introduced a version of a bill that passed the Senate earlier this year to restructure the state’s Permanent Fund. It would establish a formula to draw from the fund to provide funding for government services. The proposal also includes an increase to the gas tax to cover transportation expenses. Alaska currently has the lowest gas tax in the country (8 cents per gallon) so the proposed threefold increase would keep the state under the national average. The proposal did not give specific guidance on what broad-based taxes the governor hopes to utilize for new revenue. Walker departed from his strategy in the last budget of proposing to reinstate an income tax for the first time in 35 years and instead left a $890 million revenue gap that he hopes will be addressed with the help of the legislature.

Arkansas

Arkansas Governor Asa Hutchinson (R) called for a $50 million decrease in revenue from income tax cuts. This proposal follows the previous budget which included a $100 million income tax cut which the administration claims the state budget fully absorbed. (The governor has pushed back against calls from legislators for even more aggressive income tax cuts unless they are paid for by reductions in exemptions and loopholes.) While being billed as a tax cut for families earning less than $21,000 per year, an ITEP analysis shows that the proposal would only give a cut to 45 percent of taxpayers in the bottom two quintiles, with 75 percent of the tax cut going to taxpayers in the top 60 percent. To provide tax relief for low-income families, the governor would be better off proposing a targeted tax cut like a state EITC.

The governor’s budget proposal has been appropriately praised for its increased funding for critical services, such as the state’s foster care and mental health services, but it missed an opportunity to use sensible tax reform as a source for the needed revenue. Arkansas’s tax structure already suffers from a fundamental mismatch – it’s a low-tax state that’s high-tax for many low-income families – and further cutting the state income tax will not help.

Oklahoma

Oklahoma is expected to face a shortfall of more than $800 million. Gov. Mary Fallin (R) has not released a formal budget, but she has hinted at a few proposals. The first is wishful thinking that the price of oil and gas will rebound by February so the state can cash in on its oil and natural gas production tax. Another includes ideas to generate new revenue – including a cigarette tax, expanding the sales tax to services, and eliminating $8 billion in sales tax exemptions. Since Oklahoma has not met revenue projections it will not reduce its top income tax rate – yet another example contrary to the idea that tax cuts always increase revenue.


A Strong Case for State Estate Taxes


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Keep an eye on state estate and inheritance tax debates in 2017. Our newly updated policy brief explains the mechanics, history, and current status of state estate and inheritance taxes, and how states can adapt or improve them.

Debates over estate and inheritance taxes in the states will be important barometers of at least three major questions:

Are state legislators committed to promoting equality of opportunity? Estate and inheritance taxes are two of the most progressive revenue options available to states, applying only to the very wealthiest estates while protecting family farms and small businesses. As such, they are an important tool for states that wish to equalize opportunities and build broad prosperity for all their residents. Unfortunately, the most recent state developments have worked in the opposite direction. New Jersey legislators, for example, voted just this year to phase out their estate tax entirely by 2018 as part of a regressive tax package skewed to the benefit of wealthy families.

Will states step up to the challenge of taking on more responsibility in an era of likely federal retrenchment, or allow the whims of Congress to determine their fates? State and federal estate tax laws worked in harmony for about 75 years, as most states designed their estate taxes to match a federal credit so that the revenue from breaking up the country's largest fortunes was shared between them. When federal lawmakers phased out that credit between 2001 and 2005, however, states had to decide whether they wanted to continue playing a part in that effort. Most states declined to act, resulting in only 18 states currently having estate or inheritance taxes, many of which are still tied to federal statute in some way. If Congress moves to further weaken or repeal the federal estate tax, the responsibility will fall even more on states. With possible major federal budget cuts also likely harming states, estate tax fights could set the tone for whether states will passively accept such harmful federal changes or make an effort to take matters into their own hands.

Will our communities be strengthened by increased investments in education, health care, and public safety made possible through this progressive revenue source, or weakened by single-minded devotion to tax cuts that undermine those investments? States play a crucial role in paying for the education, health care, public safety, and infrastructure that build strong communities and economies. Estate and inheritance taxes are rarely major portions of state budgets, but nonetheless represent significant revenue streams that promote these values. States that wish to protect and strengthen their communities and economies will have the opportunity to show it as these estate and inheritance tax debates proceed.


ITEP Staff Holiday Entertainment Selections 2016


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Whether you're looking for connection with loved ones over the winter holidays, escapism during trying times, or gift ideas for policy wonks and others in your life, the ITEP list has something for you! Please see below for what our staff members are into this year:

Read Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely
Who isn't in the mood for some behavioral economics this holiday season? This year I'm revisiting Ariely's work that in an entertaining, accessible manner explores human motivation–which, as he finds, is often irrational. - Aidan Russell Davis

Watch The West Wing and Listen to The West Wing Weekly Podcast
For those not keen on the incoming administration, watching The West Wing may provide a needed escape into a world of a more humorous and progressive presidential administration. If you want to dig deeper into the show, there is a new weekly podcast that provides thoughtful commentary on each episode and includes guest appearances by people who worked on the show and in politics. You might also find it interesting to skip to Season 2 Episode 20 in the TV show, where the West Wing staff run into trouble with the organization Americans for Tax Justice, a group inspired by a certain real life tax advocacy group you may be familiar with. - Richard Phillips

Watch 13TH
If you haven’t watched it already, take an hour and a half over your winter break to watch Ava Duvernay’s 13TH (a reference to the 13th Amendment of the U.S. Constitution, which outlawed slavery), a documentary film that explores mass incarceration in the United States, and its disproportionate and pernicious effect on the African American community. The film traces how the U.S. prison population exploded over the last century while simultaneously showing how federal policy funneled billions of dollars to the prison industrial complex, creating financial incentive for the U.S. to have the world’s largest prison population. For-profit prisons continue to find ways to profit from the penal system, including GPS home-based incarceration and detention centers (a euphemism for prisons) for undocumented immigrants. 13TH is available to stream on Netflix. – Jenice R. Robinson 

Listen to the 99% Invisible Podcast with Roman Mars
No matter your interests, you should be able to find at least a few episodes of this podcast about "all the thought that goes into the things we don't think about" that you'd enjoy. One of my favorites is titled U.T.B.A.P.H. – which is all about new uses for buildings that Used To Be a Pizza Hut. Other memorable episodes explore topics such as the invention of elevators, the I Heart NY trademark, and the art of naming. But I've always been particularly impressed by how the podcast manages to keep my attention even when exploring topics that I never thought I was interested in, like barcodes - Carl Davis

Listen to the Invisibilia Podcast with Lulu Miller, Hanna Rosin, and Alix Spiegel
Carl and I are apparently on parallel podcast wavelengths these days! Fans of accessible and fascinating science stories like those in Radiolab will enjoy NPR’s podcast Invisibilia if they’re not already doing so. It focuses on “the invisible forces that control human behavior – ideas, beliefs, assumptions and emotions” – and is delightfully hosted by three women (Lulu Miller, Hanna Rosin, and Alix Spiegel), who even include a dance party at the end of many episodes. Season 1 was excellent and after a long break, Season 2 was even better this year. – Dylan Grundman

Gather Wisdom from Elder Social Justice Advocates at The Veterans of Hope Project
Vincent Harding was a scholar, historian, and activist working to build an America that lived up to its own vision of itself. Among his work, he cofounded The Veterans for Hope Project — a collection of interviews with educators, religious leaders, community activists, and artists who have worked for decades to advance freedom, peace, and human rights in the U.S. and abroad. Their perspectives and wisdom can be very grounding at a time of political uncertainty.  - Lisa Christensen Gee

Read Mothership: Tales from Afrofuturism and Beyond, edited by Bill Campbell and Edward Austin Hall
Engage in some productive escapism with this collection of science fiction stories featuring minority authors, characters, and issues. Short science fiction is a genre I hadn't explored before and turned out to be just the ticket for these times. These stories challenge the reader to think flexibly in order to adjust to a wildly different setting and context for each story, a helpful exercise for those of us feeling disoriented in these trying times. With entries by Junot Diaz and many others, and a wide range from pulpy action stories to intellectual thought experiments, some of these stories are sure to stick with you well after reading. - Dylan Grundman

Listen to A Tribe Called Quest's new album, We Got it From Here... Thank You 4 Your Service
Somehow simultaneously nostalgic and prescient, Tribe's first (and last) new album in 18 years is excellent and timely. - Dylan Grundman

Listen to The Uncertain Hour, podcast from the producers of NPRs Marketplace
This six episode docupod series (one story told over many episodes, think Serial) is produced by the folks at Marketplace's Wealth and Poverty Desk. Reporter Krissy Clark takes an in-depth look at "welfare as we don't know it." In post-fact America, a podcast that is driven by the idea that we know the least about the things we feel most strongly about seems especially appropriate. Listen in order. - Misha Hill

Listen to 2 Dope Queens, podcast from comediennes Phoebe Robinson and Jessica Williams
If you want to escape from reality, but not go too far, this stand-up style podcast is for you. Phoebe and Jessica invite a rotating cast of diverse comics to perform in front of a live audience. They talk about everything from the obsession with dad bod to frustration with white people asking to touch their hair. While the range and style of comedy is broad, most of the comics manage to be socially conscious, politically aware, body positive, gender inclusive, and hilarious. But it's definitely not safe for kids. It's heavy on adult content and language. - Misha Hill

Listen to the Death, Sex and Money Podcast with Anna Sale
This podcast deals with "the big questions and hard choices that are often left out of polite conversation." You never know what to expect from week to week topic-wise, but you can always count on a thought provoking conversation that will leave you with fodder for your next dinner party conversation. It also fosters an unexpected sense of community via listener generated lists such as a google doc with favorite short stories and an "Anthems of Change" playlist and through encouraging listener input on topics and feedback on shows. - Meg Wiehe

Happy Holidays! If you enjoy any of our selections let us know! Write to jenice@itep.org or find us on twitter at @iteptweets


Rise Up Kansas Coalition Calls for Comprehensive Tax Policy Reform


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A statewide coalition is calling for the end of the Brownback tax experiment in Kansas with the release of its 2017 comprehensive plan for tax reform.

 

The “Rise Up Kansas” coalition includes advocacy organizations representing educators, transportation contractors, state employees, early childhood providers, and tax policy experts who want to see an end to the state’s budget crises and tax policies that benefit the few at the expense of critical public investments.

 

The coalition proposes the following: 

 

• End the "March to Zero," stopping the eventual elimination of the individual income tax and preventing future budget crises.

 

• Re-instate the top income bracket of 6.45% for single filers earning $40,000 a year or more ($80,000 for married couples), turning the tax code "right side up" so everyone chips in.

 

• Close the "LLC loophole," cleaning up the tax code and ensuring it's not benefiting a select number of Kansans at the expense of the common good by ending the ability for taxpayers to shield business pass thru income from taxation.

 

• Hold the Kansas Highway Fund harmless for the first time since Gov. Sam Brownback took office by temporarily diverting the 4/10 of a cent sales tax currently dedicated to the State Highway Fund to the State General Fund for a period of three years while also pairing the sweep with an equivalent increase in the state gas tax of $0.11 per gallon.

 

• Reduce the state sales tax on food by 1.5 percent, taking the rate from 6.5 percent to five percent.

 

ITEP analysis shows that the proposal would restore approximately $820 million to the state’s general revenue fund while putting $100 million back into the pockets of Kansas families by reducing taxes on groceries.

 

Gov. Brownback’s recent proposals for addressing the state’s ongoing budget shortfall have included shifting money from the transportation to the general fund, deepening cuts to higher education, K-12 public schools, and community colleges, not making required pension contributions, and selling tobacco settlement dollars.

 

In contrast, the Rise Up Kansas coalition is calling for long-term solutions to the address the state’s long-term fiscal woes, cautioning lawmakers that “[t]he only proposal lawmakers should be willing to accept is one that will restore our state’s financial stability and allow us to once again invest in our future.”


The Road Ahead for State Tax Policy


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Tax policy figured prominently during the national election and likely will be high on the agenda of President-elect Donald Trump and Congress.  And while state and local elections didn’t receive as much national media attention as the presidential race, shake-ups in statehouses will pave the way for significant tax policy debates in a number of states. Just as the election results will shape the direction of the nation’s tax policy in the coming year, it also will affect the direction of tax policy debates in a number of states next year. 

In coming weeks, ITEP will provide a comprehensive overview of state tax policy trends to anticipate in 2017 as well as a look at other states where tax policy will be a dominant issue.  For now, here’s a glance at some of the most important states to watch where the election made a mark on potential tax changes:

Kentucky

The recent election shifted the state exclusively to Republican control. The Kentucky GOP now holds the governor’s mansion, the Senate, and a supermajority of the House of Representatives. Gov. Matt Bevin has announced that Kentucky’s new Republican legislature will overhaul the state’s tax code in 2017. Specifics of what such a reform would look like are unclear, but the governor remains open to eliminating the state’s income tax, and supply-side guru Arthur Laffer is helping to shape the plan.

Alaska

After the election, lawmakers in Alaska formed a new 22-member majority caucus comprised of 17 Democrats, two Independents, and three Republicans. This newly formed majority in the House of Representatives has pledged to set aside party labels to address the state’s fiscal challenges, largely the result of declining oil revenue and legislative inaction. Their focus will be on a sustainable budget that will not abandon core state services. ITEP has weighed in on potential revenue options in two recent reports: Distributional Analyses of Revenue Options for Alaska and Income Tax Offers Alaska a Brighter Fiscal Future, both of which make the case for reinstating a personal income tax.

Iowa

Republicans in Iowa now have control of the House and Senate for the first time since 1998, in addition to the governorship. The 2016 session ended without significant tax changes and many of this year’s issues are likely to resurface when the legislature reconvenes in 2017. For example, the state has not resolved its need for water quality improvements, for which a small sales tax increase has been proposed. But the push to cut taxes for the wealthy will likely have more strength than ever. Legislative action may includeproposals to convert the state’s graduated rate structure to a flat tax, and the new legislature may demand regressive income tax cuts in exchange for funding water quality improvements. Such a compromise, of course, would further weaken the state’s historically low levels of school funding, especially if revenues continue to underperform.

Kansas

Gains by moderate Republicans and Democrats in Kansas’s legislature could usher in a new ideological majority more resistant to Gov. Brownback's tax and economic policies. Though far from the votes needed to override a gubernatorial veto, these shifts could result in a new bipartisan majority coalition that is likely to work together to raise significant revenue to address the state’s continuing revenue problems stemming from the governor’s failed supply-side tax cuts.

Montana

Incumbent Gov. Steve Bullock won re-election in a pricey contest against Republican candidate Greg Gianforte. With the election behind them, lawmakers are now preparing for the 2017 legislative session that starts in January. This week Gov. Bullock released his two-year budget plan, which includes several revenue measures to help plug the state’s revenue gap. Proposed tax cuts include tax incentives for new or expanding businesses touted on the campaign trail, as well as the creation of a state Earned Income Tax Credit (EITC) at 3 percent of the federal EITC. Proposed increases include consumption tax reforms (increased alcohol and taxing medical marijuana) and progressive reforms of adding a new top bracket and rate for income over $500,000 and limiting the tax credit for capital gains to income under $1 million. These proposals face Republican majorities in both the House and Senate.

Missouri

Missouri will go into session with both legislative chambers and the governorship in the hands of Republicans. It is unknown if a major push to cut taxes in Missouri will occur this year, however, as Missouri is one of the states that joined (in 2014) the fiscally irresponsible trend of passing tax cuts that won’t take effect until future years. Those cuts are one reason the state is already looking at revenue shortfalls in coming years, and will also make it all the more difficult to solve issues like the fact that the state’s employees are the lowest-paid in the nation. But some aspects of Missouri’s tax code are woefully out of date, and any reform efforts this year will benefit from the hard work of a special tax study commission that has been meeting all year to identify tax-related issues and options for reform.


At Amazon.com, Sales Tax Evasion is No Longer an Option for Most Shoppers


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UPDATE: A new post on this topic is available here.

This holiday season, the media will cover throes of consumers who will wait in line for door-buster specials, but a large and growing number of shoppers will opt to avoid the crowds by making their purchases over the Internet. 

For Amazon.com customers, this used to mean additional “discounts” because while shoppers have always owed sales taxes on their online purchases, the company didn’t bother to collect the tax in most states.  In fact, as recently as 2012, the bulk of American consumers lived in states where Amazon.com refused to collect sales tax.  The practical result was an automatic price advantage of around 5 or 10 percent (depending on each state’s sales tax rate) for the e-retailer, and less money in the coffers of state and local governments.

But Amazon.com’s sales tax collection practices have changed dramatically in the last five years.  As of 2016, the company collects sales tax from its customers in 29 states, including 19 of the 20 most populous states in the country.  Altogether, about 86 percent of the U.S. population lives in states where Amazon.com collects sales tax.

This change, unfortunately, isn’t due to the company seeing the error of its ways.

Thanks to a decades-old Supreme Court case, e-retailers operating outside of a state’s borders cannot be compelled to collect the sales taxes owed by their customers.  For years, Amazon.com took advantage of this provision.  In fact, in 2011, the nation’s largest e-retailer collected sales taxes from its customers in just five states, home to 11 percent of the country’s population. 

This recent change in Amazon.com’s tax collection practices is a side effect of its effort to cut down on delivery times by opening distribution centers near its customers.  As the company expanded its physical footprint to more states, it has increasingly lost the ability to hide behind its out-of-state status as a way of avoiding sales tax collection requirements.  The result is a somewhat more rational application of the sales tax in most states: today most Amazon.com shoppers are paying the same sales taxes as their neighbors who prefer to shop at local “brick and mortar” stores.

But the march toward a more reasonable sales tax is far from over.  Online shoppers can still evade the sales tax by buying from smaller e-retailers that lack a physical presence in their state.  And even Amazon.com, despite proving itself capable of collecting sales tax from the vast majority of its customers, is refusing to participate in the sales tax collection systems of 17 states where it lacks a physical presence: Alaska, Arkansas, Hawaii, Idaho, Iowa, Louisiana, Maine, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, and Wyoming.  (The company also does not collect tax in Delaware, Montana, New Hampshire, and Oregon since these states lack a state or local-level general sales tax.)

As we explain in an updated policy brief, the sales tax collection practices of e-retailers will remain a messy patchwork until the federal government gets involved.  That involvement could take the form of legislation allowing states to require sales tax collection by out-of-state e-retailers.  Or it could come through a future decision by the Supreme Court to expand the circumstances under which states can require sales tax collection.  While some holiday shoppers may not like it, either of these outcomes would bring about a major improvement in the enforcement of our state and local sales tax laws.

Read ITEP’s policy brief on the sales tax issues associated with online shopping

  1.  
    1. UPDATE: Amazon began collecting sales tax in four additional states on January 1, 2017: Iowa, Louisiana, Nebraska, and Utah. In total, the company now collects sales tax in 33 states that are collectively home to almost 90 percent of the US population. The map below has been updated to reflect these changes.

Chicago, Bay Area, and Boulder Adopt Soda Taxes


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Ballot measures to levy a tax on sugar-sweetened beverages passed in three Bay Area, Calif., cities – Albany, Oakland and San Francisco – and Boulder, Colo., on Election Day. And just two days after, the Cook County (Illinois) Board of Commissioners also decided to tax sweetened beverages. A one-cent-per-ounce tax will be levied in Bay Area cities and Cook Country, and a two-cent-per-ounce tax will apply in Boulder.

The number of U.S. residents living in localities with a soda tax law increased by almost 350 percent last week, from 1.7 million to 7.5 million (though a number of these taxes have yet to take effect). This striking increase is largely due to Cook County—the county that includes Chicago and surrounding suburbs and has a population of over 5.2 million residents. Cook County is nearly 5 times as populous as the next largest city with a soda tax on the books, Philadelphia. The recent success of the tax has spurred proponents to set their sights on Santa Fe, New Mexico, and the state of Illinois, per reporting by Politico Pro Agriculture.

Cook County Board President Toni Preckwinkle pushed the soda tax proposal primarily as a revenue- raising measure to balance the county budget and avoid further layoffs. But as we noted in our recent report, The Short and Sweet on Taxing Soda, taxing sugar-sweetened beverages is regressive and an unsustainable source of revenue. U.S. soda consumption is reaching record lows. If the tax has its intended effect, it would drive consumption even lower, meaning localities may not be able to rely on it as a consistent source of revenue.

Despite the shortcomings of soda taxes, new research suggests that on balance, taxing sugar-sweetened beverages can improve public health and reduce healthcare spending. Whether those public health benefits outweigh the fiscal shortcomings of these taxes is a matter for the public and their elected officials to decide.

Over the past few weeks we’ve written about a number of tax-related questions that voters will see on their ballots next week.

On income taxes, California voters will decide whether to continue the state’s progressive income tax rates on high earners enacted in 2012, while Maine may create a similar high-income tax bracket to help fund public schools. Colorado could implement the nation’s first universal healthcare plan, funded by a 10 percent payroll tax. Oregonians will cast their votes on a hotly debated corporate tax increase for education, health care, and senior services.

Regarding sales taxes, Oklahoma voters could approve a constitutional amendment to raise the state sales tax by a percentage point to give teachers a raise and fund other education priorities. Meanwhile, Missouri could amend its constitution to prohibit modernizing the sales tax to apply to the growing service sector.

 Other tax questions on ballots this year include soda taxes in multiple cities, cigarette tax increases in four states (California, Colorado, Missouri, and North Dakota), and marijuana legalization and taxation initiatives in five states (Arizona, California, Maine, Massachusetts, and Nevada). And following years of state tax and funding cuts affecting cities, counties, and schools, many of these local jurisdictions are asking voters to approve new or higher local taxes to fill in for lost state funding.

In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately.

Same Tax Shenanigans, Different Day
The annual financial report that Apple released last week indicated two things: One, the company continues funneling money offshore to avoid U.S. taxes on a scale unmatched by any other U.S. company ($216 billion and counting); and two, in spite of the European Commission’s (EC) recent finding that Apple has used its Irish subsidiary for an elaborate profit shifting scheme to illegally avoid taxes, the company has no intention of admitting any wrongdoing. Read more

Federal Gas Tax Remains at 90s-era Rates, But States Are Increasing Theirs
Lawmakers in 19 states and the District of Columbia have enacted gas tax increases or reforms since 2013 and more states will very likely follow suit next year. Check out ITEP Research Director Carl Davis’s recent post on which states have recently increased their gas tax.

Local Governments Put Tax Increases on the Ballot to Make up for Lost State Revenue
The strongest nationwide trend in local ballots is local governments asking voters to create new or raise local taxes to fill in for state funding that has been cut in recent years, often largely due to short-sighted recently enacted state tax cuts. Twenty-seven Ohio cities and villages will seek local income tax increases, and most of them cite state cuts as a primary reason. Atlanta, Ga., Boulder, Colo., Olympia, Wash., and several California cities also are voting on tax increases to fund services. Read more

Speaking of Ballot Measures, How about That Soda Pop Tax?
So-called sin taxes, such as cigarette taxes and alcohol taxes mostly are an accepted reality. But this new trend to consider taxing sugary beverages is more controversial. A new brief from ITEP looks at the advantages and disadvantages of taxing sugary beverages. Also, a recent blog post outlines which localities will vote on sugar taxes on Election Day.

Missouri Commission Eyes Reforms to the State Tax Code
Missouri’s tax code is in some ways stuck in the past, with income tax brackets that have not been adjusted for inflation since they were created in 1931. Even the state’s most recent tax changes enacted in 2014 are largely driven by outdated and debunked notions that slashing taxes on the wealthy is a path to economic growth. But the Missouri Study Commission on State Tax Policy has been taking a good hard look at these issues. Read more

If you have any feedback on the Digest or tax stories you’re watching that we should check out too, please email me rphillips@itep.org 

Sign up to receive the Tax Justice Digest 

For frequent updates find us on Twitter (CTJ/ITEP), Facebook (CTJ/ITEP), and at the Tax Justice blog.


Missouri Commission Eyes Reforms to the State Tax Code


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Missouri’s tax code is in some ways stuck in the past, with income tax brackets that have not been adjusted for inflation since they were created in 1931, a corporate tax code that has not yet adapted to the multi-state structure of many of today’s businesses, and a sales tax base that includes a smaller share of the growing service sector than most other states.

Even the state’s most recent tax changes enacted in 2014 are largely driven by outdated and debunked notions that slashing taxes on wealthy families and joining Kansas’s race to the bottom are paths to economic growth. But the Missouri Study Commission on State Tax Policy has been taking a good hard look at these issues and more this year in an effort to identify ways to reform and modernize Missouri’s tax code.

The commission has been meeting and holding hearings throughout the year to review and study the structure, strengths, and weaknesses of Missouri’s tax laws, and consists of legislators, representatives of certain state agencies, and appointed members of the public with expertise in relevant areas. It will hold its final meeting and receive public testimony on tax policy issues in Kansas City on Nov. 15. I was fortunate to present to the commission on behalf of ITEP at its last meeting on Oct. 19 in St. Louis.

My presentation focused on principles of tax policy and how Missouri’s tax code stacks up in relation to those principles. As is true in all states to varying degrees, some aspects of Missouri’s tax code are upside down, out of date, and/or unnecessarily narrow. Missouri ranks as the 30th most unfair state and local tax system in the country, slightly above average. Reforms to address these issues include:

• Enacting a refundable state Earned Income Tax Credit would be an easily administered and high bang-for-the-buck way of bringing Missouri’s income tax code more in line with modern trends while helping offset the highly regressive nature of state sales and property taxes for low- and middle-income working families.

• Repealing Missouri’s deduction for federal income taxes – a $550 million tax break that mostly goes to the highest-income Missourians – would improve both revenue adequacy and tax fairness.

• Modernizing the state’s income tax brackets, which have been locked in place since the 1930s, could make the tax code more progressive but must be done carefully to ensure progressivity is improved without undermining revenue adequacy.

• Reforming itemized deductions, cancelling or rethinking regressive tax cuts enacted in 2014 that are set to be triggered in future years, enacting corporate combined reporting, and modernizing the sales tax base were also discussed.

• The state could also expand its sales tax base to include more of the growing service sector, though that option could be taken off the table by voters next week.

We look forward to hearing more about Missouri’s tax study commission and hope there is another productive conversation in Kansas City on Nov. 15.


On Revenues and Referenda: Important Tax Questions on Local Ballots, Too


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Our “Revenues and Referenda” has so far focused on key state-level tax-related questions facing voters on Election Day. But many cities, counties, and school districts are posing questions to their residents Tuesday as well. Below we highlight some trends across states and a few of the more interesting local ballot questions.

The strongest nationwide trend in local ballots is that in many cases, local governments are asking voters to create or raise local taxes to fill in for state funding that has been cut in recent years, often largely due to short-sighted tax cuts enacted at the state level. For example, state support for K-12 schools remains below pre-recession levels in at least 23 states and the largest school funding cuts have often correlated with major income tax cuts.

Ohio is a case study in state-level tax slashing forcing costs onto localities that are now having to ask voters to approve local taxes to keep vital services afloat. The state eliminated its estate tax beginning in 2013.Eighty percent of its revenue went to cities and villages. Then the state cut its Local Government Fund in half as part of efforts to fill a budget shortfall caused by tax cuts. These and other measures have cut funding for local services by at least $1 million each in more than 70 Ohio cities. Twenty-seven Ohio cities and villages will seek local income tax increases, and most of them cite the state cuts as a primary reason. The measure in Cleveland, for example, would raise about $80 million to fund reforms in the police department and prevent layoffs.

Voters in Olympia, Washington, will consider enacting a local income tax of 1.5 percent on income over $200,000. This would raise $3 million to help local high school graduates and GED recipients attend community college or public university. The measure would also create the only income tax in Washington State.

State transportation and infrastructure funding has suffered as well, often due to failure to modernize state gas and sales taxes, and again some local entities are taking matters into their own hands. According to the Center for Transportation Excellence, “2016 will be a record-breaking year for transportation ballot measures. There will be 70 ballot measures in the United States” that could raise a combined $175 billion. Several California cities, for example, are voting on sales tax increases to pay for local transportation needs. Voters face similar questions in the Atlanta, Georgia, area.

Other localities are attempting to expand their tax bases rather than increase rates, most notably by taxing sugar-sweetened beverages. Three California cities and Boulder, Colorado, are among localities attempting to tax soda-pop.


On Revenues and Referenda: Will Maine Voters Increase Taxes on the Wealthy to Support Public Education?


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Maine voters will decide the fate of Question 2 next week, a ballot measure that increases taxes on the state’s wealthiest households and provides additional revenue for K-12 education.  If approved, a 3 percent tax surcharge would apply to taxable income above $200,000 generating more than $150 million annually for a new dedicated public instruction fund.  An ITEP analysis found that the measure would only impact Maine’s wealthiest 2 percent of households who currently pay an effective state and local tax rate lower than the other 98 percent of Mainers.

Proponents of the measure, led by Stand up for Students Maine, say that school funding has been falling short and years of tax cuts for wealthy Mainers are partially to blame.  Measure 2 would not only bring in additional revenue for K-12 spending, but it would also help to improve tax fairness by requiring the state’s wealthiest households to pay their fair share. 

Opponents argue that the new revenue generated by the measure will not solve public school inequities.  There is also concern that the three percent surcharge would make Maine’s top marginal personal income tax rate the second highest in the country behind California.

Polling results show Question 2 has strong support from potential voters.  If such support pans out at the ballot, Maine will have a more fair and adequate revenue stream for public education.


Looking Back at Four Years of Gas Tax Reforms


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While New Jersey is getting plenty of attention this week for increasing its gas tax for the first time in decades, it’s worth remembering that the Garden State is not alone in boosting its gas tax to fund infrastructure improvements. Lawmakers in nineteen states and the District of Columbia have enacted gas tax increases or reforms since 2013 and more states will very likely follow suit next year. Here’s a quick rundown of where state gas taxes have been increased or reformed since 2013:

2016 Enacted Legislation

1. New Jersey: A 23 cent per gallon increase in the gasoline tax took effect on November 1, 2016. The diesel tax will rise by a similar amount next year in two stages (on January 1 and July 1).

 

2015 Enacted Legislation

2. Georgia: A 6.7 cent increase took effect July 1, 2015. A new formula for calculating the state’s tax rate will allow for future rate increases alongside inflation and vehicle fuel-efficiency improvements. This will allow the tax to retain its purchasing power in the years ahead.

3. Idaho: A 7 cent increase took effect July 1, 2015.

4. Iowa: A 10 cent increase took effect March 1, 2015.

5. Kentucky: Falling gas prices nearly resulted in a 5.1 cent gas tax cut in 2015, but lawmakers scaled that cut back to just 1.6 cents by setting a minimum “floor” on the state’s gas tax rate. The net result was a 3.5 cent per gallon increase relative to previous law.

6. Michigan: The state’s gasoline and diesel taxes will rise by 7.3 cents and 11.3 cents, respectively,on January 1, 2017. Beginning in 2022, the state’s gas tax will begin rising annually to keep pace with inflation.

7. Nebraska: A 6 cent increase was enacted over Gov. Pete Ricketts’ veto. The gas tax rate will rise in 1.5 cent increments over four years. The first of those increases took effect on January 1, 2016.

8. North Carolina: Falling gas prices were expected to trigger a gas tax cut of 7.9 cents per gallon, but lawmakers scaled that cut down to just 3.5 cents—resulting in a 4.4 cent increase relative to previous law. Additionally, a reformed gas tax formula that takes population and energy prices into account will bring further gas tax increases in the years ahead.

9. South Dakota: A 6 cent increase took effect April 1, 2015.

10. Utah: A 4.9 cent increase took effect on January 1, 2016. Future increases will occur under a new formula that considers both fuel prices and inflation. This reform made Utah the nineteenth state to adopt a variable-rate gas tax.

11. Washington State: An 11.9 cent increase was implemented in two stages: 7 cents on August 1, 2015 and a further 4.9 cents on July 1, 2016.

 

2014 Enacted Legislation

12. New Hampshire: A 4.2 cent increase took effect July 1, 2014.

13. Rhode Island: The gas tax rate was indexed to inflation. This resulted in a 1 cent increase on July 1, 2015 and will lead to further increases in most odd-numbered years thereafter (2017, 2019, etc).

 

2013 Enacted Legislation

14. Maryland: The first stage of a significant gas tax reform, which tied the tax rate to inflation and fuel prices, took effect on July 1, 2013. Since then, the rate has increased by a total of 10 cents above its early-2013 level.

15. Massachusetts: A 3 cent increase took effect July 31, 2013.

16. Pennsylvania: The first stage of a significant gas tax reform, tying the rate to fuel prices, took effect on January 1, 2014. So far the rate has increased by 19.1 cents per gallon.

17. Vermont: A 5.9 cent increase and modest gas tax restructuring took effect May 1, 2013. Since Vermont’s gas tax rate is linked to gas prices, however, the actual rate has varied since then.

18. Virginia: As part of a larger transportation funding package, lawmakers raised statewide diesel taxes effective July 1, 2013, as well as gasoline taxes in the populous Hampton Roads region. Outside of Hampton Roads, gasoline taxes are 1.3 cents lower than they were before the reform, but a new formula included in the law will cause the tax rate to rise alongside gas prices in the years ahead.

19. Wyoming: A 10 cent increase took effect July 1, 2013. Gov. Matt Mead’s signature on this increase made Wyoming the first state to approve a gas tax increase in over three and a half years.

20. District of Columbia: Legislation approved in 2013 has yet to impact DC’s gas tax rate in practice, though by tying its tax rate to fuel prices the District opened the door to potential gas tax rate increases in the future.


On Revenue and Referenda: Soda Taxes


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Voters in Albany, Oakland and San Francisco, Calif., as well as Boulder, Colo., will soon decide whether their cities should tax soda and other sugar-sweetened beverages. Proponents of sugar taxes are touting these ballot measures as public health initiatives that would reduce excess consumption of sugary drinks linked to obesity, type 2 diabetes, and tooth decay. Similar taxes were enacted in Berkeley, Calif., in 2014 and in Philadelphia, Pa., earlier this year.

You can read more about the advantages and disadvantages of taxing sugary drinks in our new report, The Short and Sweet on Taxing Soda.

The ballot measures would levy an excise tax ranging from 1 to 2 cents per ounce on producers and distributors. A 12-pack of 12-ounce sodas that costs $4 now would be $5.44 after the tax in the California cities and $6.88 in Boulder. The tax would be applied to sodas, energy and sports drinks, sweetened iced teas and lemonades, and juices with added sugar. It would not apply to diet sodas, milk products, naturally sweet beverages (such as 100 percent fruit or vegetable juice), meal replacements, baby formula, drinks taken for medical purposes, or alcohol (which is subject to a separate tax).

The battle over soda taxes has drawn big money on both sides of the campaign. California leads the country in campaign contributions for ballot initiatives, and the Bay Area soda tax measures have drawn nearly $14 million to campaign initiatives. Opponents of the taxes, largely funded by the American Beverage Association, have spent $10 million on television ads, while supporters, including former New York Mayor Michael Bloomberg, spent $3.7 million in San Francisco and Oakland.

While proponents of the taxes argue that they are necessary public health measures, opponents counter that the taxes are regressive and will hurt low-income communities. They also stress the taxes will hurt small retailers who, they claim, will have to raise the price of all their products to cover the new tax. Preliminary interviews from a UC Berkeley researcher examining the impact of Berkeley’s tax did not identify any retailers who reported raising prices of non-food items to cover the beverage tax. And Albany’s measure specifies that the tax exempts “small retailers.”

Many campaigns against the taxes have framed them as a “grocery tax” and suggested that lawmakers may levy taxes on other food products later if this is enacted. This is misleading because first, taxing other groceries wouldn’t achieve the public health goals of these measures, and secondly, most states that don’t tax groceries already exclude soda from that exemption. This means soda is already subject to the alleged “grocery tax” by being included in the general sales tax base.

The public health principle behind taxing sugar-sweetened beverages is the same as taxing cigarettes or other so-called vice products. A price increase should decrease consumption, thus decreasing the negative health outcomes associated with consumption.  But the link between sugary drinks and obesity or diabetes isn’t as straightforward as the link between tobacco and cancer. Many other factors, such as family history and physical activity, determine a person’s likelihood for obesity or diabetes. Further, although sugar-sweetened beverages are responsible for most of the calories from sugar consumption and the body digests liquid sugar differently than sugars in solid foods, sugary drinks represent only a small portion of most people’s total daily caloric intake.

Despite their public health goals the ballot measures in California cities are not well targeted to reduce sugar consumption. The taxes are determined by the calorie content of drinks rather than sugar content.  If the public health goal is to reduce sugar consumption, then sugar content should determine the tax.

A similar ballot measure in 2014 failed in San Francisco. Although the measure received a majority of the vote, it fell short of the required two-thirds majority. This year’s measure will only require a simple majority vote to pass. If passed, San Francisco projects the tax will generate $15 million annually and would make it the second largest U.S. city with a tax on sugary drinks.

If all three California cities pass their ballot measures this year, more than 20 percent of Bay Area residents could expect to pay more for sugar-sweetened beverages. The measures in Albany and Oakland are expected to generate $223,000 and $6 million annually for the cities’ respective general funds. The city of Boulder estimates the tax would generate $3.8 million in revenue to be used for a variety of public health campaigns to combat obesity.

As our report outlines, soda taxes like other consumption taxes are inherently regressive. But the excess sugar content in sugary sweetened beverages have public health implications, and new research suggests soda taxes can improve public health and reduce healthcare spending. Voters will have to weigh all of this at the polls in November.

Read the Short and Sweet on Taxing Soda


On Revenues and Referenda: Colorado Voters to Decide on Universal Healthcare


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On Election Day, Colorado voters will decide whether to implement the nation’s first universal healthcare plan.

Amendment 69 would establish ColoradoCare, a healthcare financing system that would provide medical coverage to all Colorado citizens without copays, coinsurance, or deductibles. Upon full implementation, the state would pay for the plan with a 10 percent payroll tax. About 6.67 percent of the tax would be paid by employers and 3.33 percent by employees. The state taxable portion of non-payroll income, such as capital gains, rental, or pension income, would also be subject to the full 10 percent tax paid via the personal income tax. Colorado citizens who receive healthcare from Medicare, the Veteran’s Administration, Federal Employee Health Benefits Plan, TRICARE (for military and dependents), and Indian Health Services, would maintain their current coverage. ColoradoCare would replace Medicaid and the state-run ACA marketplace. Citizens could opt out of ColoradoCare and purchase private insurance, but they would still be subject to the payroll tax.

A grassroots collaborative that ultimately formed Universal Health Care for Colorado initiated the ballot initiative. Proponents argue the plan will provide comprehensive care at a lower cost not only by reducing administrative costs, fraud, and duplication, but also by increasing purchasing power for bulk drugs and medical equipment.

Opponents are more skeptical, particularly of the financing method. Many who oppose the measure argue the payroll tax is insufficient to cover rising healthcare costs and could leave the state with significant unfunded liabilities. The Colorado Health Institute estimated that the proposal would amass an $8 billion deficit after 10 years that would continue to grow. Some groups that support universal healthcare, including the Colorado Fiscal Institute (CFI) oppose Amendment 69)due in part to the unsustainability of the tax.  Opponents have also cited concerns about the lack of gubernatorial or legislative oversight of the 21-member Board of Trustees that would make plan decisions, and lack of coverage for elective abortion care.

A  CFI analysis found that ColoradoCare could result in lower healthcare costs even for those currently without insurance who pay nothing in premiums; however, low-wage earners currently receiving Medicaid could end up paying more if tax credits are not made available. Further, it is unclear if the 10 percent payroll tax would be a sufficient long-term revenue source for financing healthcare, particularly since healthcare costs have grown faster than wages and inflation.


Giving the Gas Tax a New Look in Louisiana


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It may sound strange, but there are very few tax policy issues that generate support among lawmakers quite like a gas tax hike—at least at the state level.  While the federal government may not be interested in raising its gas tax anytime soon, 19 states have enacted gas tax increases and/or reforms since 2013.  And all signs are pointing toward that number growing in the months ahead.

Louisiana is among the states that will seriously consider a gas tax increase in 2017, and for good reason.  At the start of next year, the state’s gas tax rate will officially become 27 years old.  Only five states (Alaska, Oklahoma, Mississippi, South Carolina, and Tennessee) have waited longer since last updating their tax rates.  Unsurprisingly, most of those five states will be considering gas tax increases next year as well.

Last week I had a chance to travel to Baton Rouge to speak with the Louisiana Governor’s Task Force on Transportation Infrastructure Investment.  Part of that conversation (PDF) included a look at how growth in construction costs and improvements in vehicle fuel economy have combined to erode the purchasing power of Louisiana’s gas tax by 47 percent since 1990.  And on top of that, we know with almost complete certainty that both of these developments are going to continue to impact the state’s gas tax in the years ahead.

The only way to shore up gas tax revenues for the long run in the face of inevitable inflation and fuel economy growth is to index the tax rate to inflation or some other economic measure.  This sensible reform is growing in popularity.  Five states (Maryland, Pennsylvania, Rhode Island, Utah, and Virginia) as well as the District of Columbia have adopted indexed gas taxes in just the last three years.  Today most Americans live in states with variable-rate gas taxes of some type.

My presentation (PDF) dives more deeply into some of the details—including a discussion of how volatility can be avoided under an indexed gas tax.  But it’s already clear that the big picture issues are well understood in Louisiana.  Department of Transportation and Development Secretary Shawn Wilson says that in his extensive conversations with stakeholders and citizens thus far, “we hear people say we need to invest more” in infrastructure.  And the means of generating that investment are becoming increasingly clear: “at all of the meetings there was a pretty vocal level of support for addressing the gas tax.”


On Revenues and Referenda: Marijuana Legalization and Taxation Initiatives


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Voters in Arizona, California, Maine, Massachusetts, and Nevada will vote this November on ballot initiatives that, if passed, will legalize and tax marijuana purchased for recreational use.

These states are on the path of Alaska, Colorado, Oregon, and Washington, which already allow the production, taxation, and sale of marijuana to adults for recreational purposes. Should these initiatives pass, the number of Americans living in states with legal marijuana would roughly quadruple, from about 18 million to 75 million, around 23 percent of the U.S. population.

States that already allow recreational marijuana sales have proven that while marijuana taxes are no budgetary panacea, they can raise millions in revenue. For example, as of mid-way through October 2016, Washington has collected $339 million from excise taxes on recreational marijuana since sales began in 2014. Similarly, Colorado collected about $300 million in revenue from marijuana sales between January 2014 and August 2016. For Colorado, this puts marijuana revenue at about 1 percent of the state’s general fund, which is well ahead of the amount collected on alcohol sales, yet still a bit below the revenue collected from cigarette taxes.

Here's a breakdown of each state's ballot initiative, including the potential plan to tax marijuana and what level of revenues these states could expect to collect:

Arizona

Arizona’s marijuana ballot initiative would place a 15 percent excise tax on marijuana and marijuana product sales. The revenues generated by this tax would be earmarked such that 40 percent would go to schools for education-related expenses, 40 percent would go to schools to provide full-day kindergarten services, and 20 percent would go to the Arizona Department of Health services to educate the public on the dangers of alcohol, marijuana, and other substances. The Arizona Joint Legislative Budget Committee estimates that this initiative would raise $135 million in extra revenues in fiscal years 2019 and 2020.

California

The California ballot initiative would levy excise taxes on the cultivation of marijuana flowers and leaves at $9.25 per ounce and $2.75 per ounce, respectively. The measure also places a 15 percent excise tax on the retail price of marijuana. A fiscal analysis of the initiative found that it would raise revenues in the high hundreds of millions of dollars to over $1 billion annually.

Of the revenues raised by the taxes imposed by this measure, $2 million would go to UC San Diego for the study of medical marijuana, $10 million per year for 11 years would go to California universities to research and evaluate the implementation and impact of the ballot initiative, $3 million per year for five years would go to the California Highway Patrol to develop protocols to determine whether a driver is impaired due to marijuana consumption, and $10 million, increasing each year by $10 million until reaching $50 million in 2020, would go to grants to promote employment and health and legal services in communities disproportionately affected by past federal and state drug policies. Of the remaining revenue from the measure, 60 percent would go to youth programs, 20 percent to the prevention and alleviation of environmental damage caused by illegal marijuana producers, and 20 percent to programs that reduce the negative impacts on health and safety resulting from the initiative.

Maine

Maine’s ballot initiative would levy a 10 percent excise tax on recreational marijuana. Additionally, jurisdictions can also impose privilege taxes on marijuana cultivation and manufacturing activities. Revenues raised from this tax would be deposited in the state’s General Fund and cannot be used for new state programs, except to train law enforcement personnel around marijuana retail laws and rules. The Maine Office of Fiscal and Program Review estimates that the initiative would raise $2.8 million in additional revenues in 2017 and 2018, and $10.7 in subsequent years.

Massachusetts

The Massachusetts ballot initiative would subject marijuana to the state’s 6.25 percent sales tax and retail marijuana would also be subject to a 3.75 percent excise tax, bringing the total state tax rate to 10 percent. Local municipalities would have the option of adopting an additional two percent excise tax. Medical marijuana would be exempt from these taxes. The Massachusetts Special Senate Committee on Marijuana estimates that the taxes would produce about $60 million in additional revenues. Of the $60 million, about $25 million would be set aside to fund the implementation of, enforcement of, regulation of, and local assistance for state marijuana policy, with the remainder going to the general fund.

Nevada

The Nevada ballot initiative would levy a 15 percent excise tax on marijuana. The revenues from state taxes would go to the State Distributive School Account, while revenues from local sales and use taxes would be distributed to the state and local governments in the same manner that they are currently distributed.

Aaron Mendelson, an ITEP intern, contributed to this report.


State Rundown 10/26: No More Free (Uber) Rides in Pennsylvania and a Growing Number of States Facing Revenue Challenges


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This week we are bringing you news on taxing Uber in Pennsylvania and yet more states with revenue gaps to fill in 2017. Thanks for reading the Rundown!

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

  • A bill to legalize and tax ride-sharing services in Pennsylvania, such as Uber and Lyft, heads to Gov. Tom Wolf's desk for signature. The legislation would enact a 1.4 percent tax on all rides and put an end to the question of their ability to operate legally in Philadelphia. Speaking of Philadelphia, its school district will benefit from two-thirds of the revenue collected in the city.
  • From one Governor to another... West Virginia Gov. Earl Ray Tomblin says that the next governor of the Mountain State will have to raise taxes to make ends meet. 
  • In Wyoming, despite falling severance tax revenue and a confirmed $156 million shortfall, lawmakers have punted on raising new revenue. This November, voters will head to the ballot box to determine whether the state should invest more money in the stock market while the Governor is considering a withdrawal from the state's rainy day fund. 

  • Count South Dakota among the states expecting to grapple with budget problems in 2017, due to a struggling agriculture sector and high reliance on a sales tax base that is losing revenues to untaxed internet sales.

What We're Reading...

  • New Jersey Policy Perspective released a report today that explores the impact of federal expansion of the earned income tax credit (EITC) on New Jersey adults without children. 

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


State Rundown 10/19: An Attempted Sales Tax Ban, Kansas Revenue Talk, and Ballot Measures


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This week we are bringing you news of Montana's attempt to ban statewide sales taxes, ballot measures to tax e-cigarettes (in California), efforts to enact the nation’s first carbon tax (in Washington state), an initiative to increase income taxes (in Cleveland, Ohio), budget problems in Kansas (along with possible revenue raising momentum), and efforts to address revenue shortfalls in Virginia, Nebraska, and Massachusetts. Thanks for reading the Rundown!

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

  • Montana's Gov. Bullock has proposed banning a statewide sales tax. While there is no state sales tax currently levied, the constitution allows for one up to 4 percent—a possibility the governor wants to do away with. But don't expect to see any action on this in the near future. Passage requires support from two-thirds of the legislature and voter approval in the 2018 general election.
  • If voters approve Proposition 56 in a few weeks, California will become the fifth state to tax e-cigarettes, joining Kansas, Louisiana, Minnesota, and North Carolina.
  • Voters in Washington state have the chance to vote on what could be the first carbon tax in the country, a measure that has divided support even within the environmental community.
  • As a result of numerous tax cuts, Ohio cities continue to struggle. This November, Clevelanders will consider the city's first income tax increase in 35 years. To avoid deep cuts to city services, Issue 32 would increase the tax half a percent to 2.5 percent.
  • In Kansas, researchers warn that population changes will exacerbate state budget problems, Democrats and moderate Republicans are pushing for the legislature to raise revenue needed for public investments, and Gov. Brownback is making efforts to spread "good economic news" while not ruling out the possibility of a future tax increase.
  • Budget balancing measures to address Virginia's $1.5 billion revenue shortfall have commenced. Gov McAuliffe has called for budget cuts, canceling state employee pay raises, tapping reserve funds, and reconsidering the state's choice not to take part in Medicaid expansion. It remains to be seen whether revenue-raising options will be considered during the 2017 legislative session.
  • More on revenue shortfalls: Nebraska is one of many states facing a current and projected revenue shortfall. Unfortunately, it is also one of several states where some leaders think the solution to these problems is to make further cuts. In Massachusetts, a $295 million budget deficit has been identified. As a result, Gov. Baker is pursuing workforce reductions and contemplating cross-agency spending cuts. 

What We're Reading...

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


On Revenues and Referenda: Weighing Cigarette Tax Increases


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Over the past 15 years, nearly every state has enacted a cigarette tax increase to fund health care, discourage smoking, or to help balance state budgets. While attempts to address health concerns have merit, the latter is bad public policy. This November, four states have cigarette and tobacco tax ballot measures up for consideration.  

The cigarette tax is a regressive tax that falls disproportionately on low-income taxpayers. These individuals spend more of their income on the tax than their wealthier neighbors, who also tend to be less likely to smoke. However, research has shown that cigarette taxes can be used to effectively discourage smoking, particularly among children and young adults. Every 10 percent increase in the price of cigarettes may reduce overall cigarette consumption by roughly 3 to 5 percent. This statistic is even more compelling for children and young adults who are two to three times more likely to stop smoking as a result of a price increase.

Taking a step back from the specific merits and drawbacks, the use of cigarette taxes to plug budget gaps is bad policy. Taxes exist primarily to help fund and support public services. Cigarette tax increases are often politically feasible and expedient revenue-raisers, and they can help do just that. However, there is a downside.

Aside from hitting low- and middle-income taxpayers harder than upper-income taxpayers, cigarette tax revenues grow more slowly than do most other taxes. This is partly due to the flat per-pack basis of the tax, which will not fluctuate with inflation and will remain stagnant absent policy change or a reversal of declining smoking rates. As a result, cigarette tax revenue declines over time and is unlikely to be sustainable in the long-run.

During 2016 legislative sessions, Louisiana, Pennsylvania, and West Virginia enacted cigarette tax increases to fill structural gaps and support ongoing expenses. While it was vital for these states to raise revenue amid growing shortfalls, broad-based tax changes could have provided a more stable, ongoing source of revenue.

Of the ballot measures up for consideration in California, Colorado, Missouri, and North Dakota, most are driven by health concerns and the realization of revenue savings that could result from reduced smoking rates rather than tools to raise revenue to address shortfalls or support ongoing expenditures.

Here’s a summary of the cigarette tax initiatives that taxpayers will vote on next month:

  • California Proposition 56 calls for a $2-per-pack tax increase on cigarettes, an increase from the current state tax of $0.87 to $2.87-per-pack. Revenue raised would be redirected to health care for low-income Californians.
  • Colorado Amendment 72 calls for a $1.75-per-pack tax increase on cigarettes, an increase from the current state tax of $0.84 to $2.59-per-pack. Revenue raised would fund a variety of programs, including medical research, cancer and smoking prevention, veteran health, and healthcare in rural and underserved areas.
  • Missouri has two different cigarette tax initiatives on the ballot this year, each with quite different funding objectives:

    • Constitutional Amendment 3 calls for a $0.60-per-pack increase on cigarettes in $0.15 yearly increases by 2020, an increase from the current $0.17 state tax (the lowest in the nation) to $0.77-per-pack, and a $0.67-per-pack initial rate fee on tobacco wholesalers. Revenue raised would largely fund early childhood education programs, with additional funds going toward health care facilities and smoking prevention programs.
    • Proposition A calls for a gradual $0.23-per-pack tax increase on cigarettes by 2021, an increase from $0.17 to $0.40-per-pack, and an additional 5 percent sales tax for other tobacco products. Revenue raised would be placed in the state’s transportation infrastructure fund to repair roads.
  • North Dakota Initiated Statutory Measure 4 calls for a $1.76-per-pack increase on cigarettes, an increase from the current state tax of $0.44 to $2.20-per-pack, and doubling the tax on other tobacco products from 28 percent to 56 percent. Revenue raised would be divvyed between two trust funds, one for community health and the other to support veteran health care services and programs.

For more information, read ITEP’s brief Cigarette Taxes: Issues and Options that looks at the advantages and disadvantages of cigarette taxes, and cigarette tax increases, as a source of state and local revenue.


On Revenues and Referenda: Missouri Voters Could Ban Sales Tax Modernization


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One of the measures facing Missouri voters this fall is Amendment 4, which would modify the state constitution to prohibit future expansions of state or local sales taxes to “any service or transaction” not already included in the tax base.

This amendment would severely restrict Missouri’s ability to adjust its sales tax in the future to adapt to economic changes. As we have written elsewhere, expanding the sales tax base to include consumer services is a reform needed to bring state tax codes into better alignment with the 21st century economy, improve the sustainability of sales tax revenues and the many vital services they fund, reduce upward pressure on sales tax rates and other taxes, and remove arbitrary and unfair distinctions in what’s taxed and what’s not. Banning such expansions would prevent any of these benefits from being realized in Missouri.

Most state sales taxes, including Missouri’s, apply to purchases of physical goods but not to most services. And in most cases this is simply because sales tax codes were created in the 1930s when services were neither a large part of the economy nor feasibly tracked and taxed. But while the economy has shifted substantially over time – services were 67 percent of household consumption in 2015 and technology has made it much easier to apply and enforce taxes on services – most state sales taxes have not kept up with the times. A 2007 Federation of Tax Administrators survey identified 168 services taxed in at least one state. Missouri’s sales tax came in as even more outdated than most, taxing only 26 of those services, fewer than all but 12 states.

And the stakes are not low. Sales and similar taxes are crucial revenue streams for states and local governments, making up nearly half of state tax collections nationwide in Fiscal Year 2014-2015, and 43 percent in Missouri specifically. But as currently constituted, they are an unsustainable revenue source. As the economy shifts and sales taxes like Missouri’s remain stuck in the past, state and local revenues and the services they pay for can suffer. In the words of the Missouri Municipal League, which opposes Amendment 4, its approval “could lead to a significant reduction in vital local services, such as police, fire, street maintenance, parks and more.”

To avoid such service cuts without expanding sales taxes to services, the only options are raising sales tax rates or increasing other taxes or fees. At the state level this generally means upward pressure on personal and corporate income taxes, while at the local level the only significant revenue option other than sales taxes is usually the highly unpopular property tax.

Sales taxes, including those on services, are regressive or weigh more heavily on lower-income families than those higher up the income scale. This is a crucial consideration and a strong reason to avoid relying too heavily on sales taxes, but that can be mitigated with targeted credits like the Earned Income Tax Credit and other means that benefit those lower-income families, or by using revenue gained from expanding the sales tax base to reduce the sales tax rate. It is harder to mitigate the fact that taxing goods while exempting services arbitrarily favors the consumers and providers of services over similarly situated people who just happen to purchase or sell goods. And when shrinking tax bases force sales tax rates higher, the wedge between these two groups is driven wider, exacerbating the unfairness as well as any economic distortion it may cause.

Constitutionally banning sales tax modernization in Missouri would prevent the state from matching its sales tax to the economic realities in 2016, much less keeping up with economic changes and technological advances that are yet to come. If the amendment passes, other states should consider it a cautionary tale rather than an example to follow.


State Rundown 10/12: Lagging Revenues, Taxpayer Boondoggles, and Yet More Kansas Tax News


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This week we are bringing you news confirming that Kansas’ years of tax cutting have been heavily tilted toward the rich, more lagging revenues in states including Arkansas, Texas and Minnesota, new problems for New Jersey’s budget, and a major new taxpayer boondoggle in Nevada. Thanks for reading the Rundown!

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

  • In Kansas, the Brownback tax cuts are under fire on several fronts. Revenue estimates weren't defective before the tax cuts. The tax numbers are in and it's confirmed ITEP’s findings that the bulk of Brownback's cuts helped the wealthy while increasing taxes for those with low-incomes. And new information shows that the governor and majority of lawmakers personally stand to benefit from the tax exemption for business pass-through income.
  • Arkansas revenues are down for the third month in a row, but this isn't stopping Gov. Asa Hutchinson from talking tax cuts. He is expected to release an income tax cut proposal the day after the election. Other lawmakers appear more hesitant in light of unmet revenue expectations.
  • Tax collections are also down in Texas and Minnesota the first quarter of fiscal year 2017. As state budgets struggle, local governments are also feeling the pressure due to decreased revenue sharing.
  • The Joplin Globe takes a close look at Amendment 4, on which Missouri voters will decide this November. The amendment would constitutionally prevent the state from modernizing its sales tax to include the growing service sector.
  • As we wrote last week regarding the tax deal in New Jersey, work can recommence on the state's infrastructure but much remains to be done to repair and improve its tax code. Moody's Investors Service shares our concerns, pointing out that the large and regressive tax-cut package passed along with the gas tax fix “will worsen the state’s existing budget challenge.”
  • Lawmakers in Pennsylvania aim to rework the state's gambling tax after a state Supreme Court decision, ruling that the way casinos are taxed for local impact assessments is unconstitutional, drastically cut local aid.
  • Lawmakers are in special session in Nevada to decide on whether to subsidize a new stadium for the NFL Raiders. The Senate has approved the measure with more than the required supermajority, despite persistent evidence that it's a major rip-off for taxpayers.

What We're Reading...

  • A new study reinforces the need for tax policy and other public policy solutions to the vast and widening inequality we face. The report, using previously unavailable data on inequality and social mobility over multiple generations, reaches a disheartening conclusion: "Whatever you thought, it's worse." The Washington Post Wonkblog summarizes the findings here.

  • Jeffery Sachs also discusses facing up to income inequality in a weekly series.

  • The World Health Organization makes the case for taxing sugar sweetened beverages, urging countries to enact the tax to fight obesity and cut health care costs. Meanwhile, big soda is under scrutiny for using corporate philanthropy as a strategy to stop soda tax measures.

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


On Revenues and Referenda: Will Oregon Require More from Large Businesses?


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Perhaps one of the most debated ballot measures this fall is Oregon’s Measure 97. Multiple economic analyses are circulating, millions of dollars are being spent campaigning, rotary clubs and chambers of commerce are discussing, teachers are canvasing, editorial boards and current and former state governors are weighing in, and polls are fluctuating

Measure 97 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 (ranging from $150 to $100,000) or a tax on profits (6.6 percent on profits up to $1 million and 7.6 percent on profits above $1 million). Measure 97 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, Measure 97 could generate $3 billion in new revenue each year—almost a third of the state’s current budget. The new revenue is earmarked for education, health care, and services for senior citizens, although the legislature would have the authority to appropriate it for other purposes. Gov. Kate Brown, who supports the measure, released a plan earlier this year indicating her priorities for new spending: more vocational and technical education; expanding the state's Earned Income Tax Credit; and reforming business taxes by creating new deductions and closing existing loopholes.

With rising costs currently projected to outpace new revenue, if Measure 97 is defeated, Oregon will face the challenge of cutting $1.35 billion in services from the 2017-2019 budget or raising additional revenue elsewhere.

Proponents argue that the measure would help stabilize the state budget and reduce the risk of budget cuts, thereby allowing for increased investments in education, more accessible health care, and in-home services for seniors. They emphasize that only one quarter of one percent of businesses registered in Oregon would be affected—primarily large and out-of-state corporations not currently paying their fair share (even businesses that don’t turn a profit benefit from infrastructure and state funded services and should contribute accordingly).

Opponents stress the unprecedented size of the tax increase in absolute terms (though the economy of course is bigger today), estimated decreases in private jobs, and the regressive nature of the tax as some portion of the increase is projected to be passed on to consumers and would account for a larger share of incomes among those with low-wages. (Though note that the economic analysis by the Legislative Research Office indicates that the impact of the tax on private job growth is small, as are the changes in incidence.)

If voters can manage to wade through it all, their choice ultimately comes down to questions of values and trust. Do they want to take significant steps towards stabilizing their budget? Do they trust that new revenues would be used to shore up important public investments? Do they believe profitable businesses that benefit from being headquartered in Oregon and having access to markets in the state should be contributing more? Do they believe the prospect of regressive effects or private job dampening are outweighed by the ability to reduce class sizes, access to technical education, and provide greater security for seniors? We look forward to finding out.

For more information on Measure 97, see the Oregon Center for Public Policy’s FAQ blog post.


Private School Tax Subsidies Blur the Line Between Charitable Gift and Money Laundering


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This post from October 2016 was updated on February 23, 2017.

When is a charitable contribution not a “donation” at all? If a taxpayer manages to turn a profit on the deal, has anything altruistic actually occurred? The clear answer is no. But an ITEP report reveals that the federal government does not always agree, at least with regard to certain gifts to private K-12 scholarship funds. Released late last year, the report’s findings may gain renewed public interest because the newly confirmed Education Secretary, Betsy DeVos, is a proponent of using public dollars for private school education and President Trump, according to reports, is considering a policy that would funnel federal dollars to private schools via federal income tax credits.

Tax incentives for charitable giving are common in the United States. More than 30 states, for example, allow a write-off for charitable donations that reduces the cost of giving by roughly 5 to 10 percent, depending on the state. A growing group of states, however, are using their tax codes to supercharge their charitable donation incentive for contributions to private K-12 scholarship funds.

In 17 states, tax credits for donations to private school scholarship funds reduce the cost of a donation by 50 percent or more. Even more remarkable is that in five states, tax credits equal to 100 percent of the donation are actually designed to wipe out the entire cost of donating to these schools. When a 100 percent tax credit is made available, the state is effectively bankrolling the entire donation at no true cost to the taxpayer that allegedly “donated” the funds. In essence, many of these policies have more in common with money-laundering schemes than they do with actual philanthropy.

But this may not even be the most unbelievable part of the arrangement. As explained in our report, certain high-income taxpayers can turn a profit by claiming a federal charitable deduction for so-called “donations” that were already reimbursed by the state. In other words, the IRS allows private school donors to enjoy a charitable deduction even when there was no charitable intent or effect behind their actions.

There are currently ten states (Alabama, Arizona, Georgia, Louisiana, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, and Virginia) where such profit-making schemes are possible. That list could soon grow, however, if states such as Arkansas, Idaho, Kentucky, Minnesota, Missouri, and Nebraska decide to move forward with similar credits currently under discussion.

These and other state tax subsidies collectively funnel more than $1 billion in public funding toward private schools every year. As our report explains, these subsidies function much like school voucher programs and have even been referred to as “neovouchers.” Relative to traditional vouchers, however, the lack of transparency in tax subsidy programs makes them better suited for skirting public opposition or even circumventing constitutional obstacles that sometimes stand in the way of spending public dollars on private schools. 

Read the report for more information on how high-income taxpayers are using neovouchers to turn a profit, and on the dubious educational benefits and general lack of accountability inherent in such programs.


On Revenues and Referenda: Will California Extend Higher Tax Rates on the Wealthy?


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This fall, in addition to casting their votes for elected officials, voters will also determine significant tax policies through ballot initiatives in states and localities across the country. ITEP will be highlighting a number of tax-related measures on the Tax Justice blog in the coming weeks.

Among the measures to be decided by Californians this November is Proposition 55—an extension of increases to the personal income tax rates paid by the wealthy that voters adopted in 2012.

Prior to 2012, high-income taxpayers in California all paid the same marginal rate of 9.3 percent on taxable income over $103,000 (filing jointly)—whether they had $103,000 or $103 million. In the wake of the great recession, voters approved Proposition 30, which made the personal income tax more progressive by temporarily increasing marginal tax rates on the wealthy and also increasing the sales tax by ¼ cent. Absent a change in the law, the sales tax increase will end this year and the higher marginal rates on those earning more than $526,000 (filing jointly) will expire in 2018.

Proposition 55, “Tax Extension to Fund Education and Healthcare,” asks voters whether the income tax rate increases on the wealthy should be extended through 2030. If it passes, the policy is expected to generate between $4 and $9 billion a year, revenue that would go toward meeting constitutional requirements (including public education and the state’s Medicaid program), maintaining existing services, and investing in other budgetary priorities as the funds allow. (See the CA Legislative Analyst’s full analysis of the proposition here.)

ITEP analysis shows that the income tax changes from Proposition 30 and 55 are positive steps toward a more progressive state and local tax system. Without Proposition 55, the top 1 percent of taxpayers would pay an estimated 7.8 percent of their incomes in state and local taxes—a smaller share of their incomes than taxpayers in the bottom 60 percent. With Proposition 55, the wealthy would be required to pay a more proportionate share at 8.7 percent.

Proponents of Proposition 55 emphasize the critical role revenues from the higher rates have played in stabilizing and improving the public school system and saving other services from more devastating cuts in the years following the recession. To them, maintaining these public investments through Proposition 55 by having the wealthy continue to pay their fair share is smart tax and public policy.

Opponents emphasize concerns over relying on unstable sources of income given the volatility in incomes at the top, warn of tax migration, and bemoan the temporary nature of temporary tax increases. (Though surprisingly, there hasn’t been a strong oppositional response to the measure.)

While the incomes of the wealthy do fluctuate more with broader economic conditions, additional revenues available to the state through Proposition 55 would also help shore up contributions to the state’s rainy day fund, a critical tool for smoothing spending over variable economic conditions that can reduce harmful cuts and reliance on temporary tax measures to stabilize budgets and government services.

Counter to claims that taxing the wealthy leads to a depressed economy, California has fared well in the years since the higher tax rates of Proposition 30 were adopted, with an economy that grew faster than the U.S. overall. (Compare to Kansas which infamously cut taxes during the same time period.) And, as has been repeatedly shown but confirmed once again recently by researchers at Stanford University and the Treasury Department, millionaire tax flight is of marginal statistical and socioeconomic significance, making it essentially a negligible issue when determining statewide tax policy.

Six weeks out from the election, field polls suggest strong support for Proposition 55. If such support pans out at the ballot, it will be a positive step for tax fairness and public investments in California.


Trump's Extensive Tax Breaks Highlight Flawed Economic Development Strategies


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A New York Times investigation of the extensive tax breaks that Republican presidential nominee Donald J. Trump’s business enterprises received over the past several decades is helping to bring scrutiny to the practice of local property tax abatements and other local economic incentives. Local officials consistently afforded Trump deals which allowed him to pay very little in taxes on the properties he has built and in some cases totally recoup building costs through tax forgiveness.

The article focuses on the nine construction projects Mr. Trump has overseen in New York City since his solo developer debut in 1980. According to the article, Trump’s real estate development projects have “reaped at least $885 million in tax breaks, grants, and other subsidies” in New York City alone. The largest and most detailed example the article discusses is how Trump’s Grand Hyatt Hotel, which cost an estimated $120 million to build in 1980, has received $359.3 million in forgiven or uncollected taxes to date due to a 40-year deal he struck with the city.

The New York Times’ case study on Trump’s tax treatment is just one example of bad economic development policies that state and local governments adopt all too often. A Good Jobs First study of more than 4,200 economic incentive awards in 14 states (including New York) found that 80 to 96 percent of funds went to large corporate interests. These interests, while promising to bring a plethora of well-paying jobs to communities, often do not deliver on their promises, or do so but only at a very high cost to the community.

This cost comes in the form of decreased tax revenues for the local government. Large firms have little incentive to invest in a community compared to small businesses because the success of the overall corporation depends very little on any single community. Meanwhile, the “business friendly” tax deals afforded to the companies deplete local funds for infrastructure and education, deteriorating the long-term human capital necessary to build a sustainable economy by attracting businesses that require skilled workers for high-paying jobs.

Trump is just one of many developers who use tax incentive programs intended to revitalize economic growth. Sadly, Trump’s business dealings are being reported on only because he is running for President. These developers often fall very short of their economic promises while profiting hugely from taxpayer money. Local and state governments should stop using tax incentives and other subsidies to attract businesses and encourage economic development. Instead, they should expand education opportunities and infrastructure spending to directly invest in their communities and cultivate the skills that top-ranking firms need.


State Rundown 9/28: The Quest for New Taxes


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This week we are bringing you news of proposed new (or increased) taxes in Missouri, Illinois, Louisiana, California and Oregon and the spread of ‘dark store’ tax avoidance practices across the states.  Thanks for reading the Rundown!

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

  • Missouri voters will officially be considering two proposals to increase state tobacco taxes, either by 60 cents per pack over four years or 6 cents over six years. A helpful breakdown of the two proposals and how revenues would be distributed is available here.

  • In Illinois, Cook County Board President is considering adopting a tax on sugary beverages to close a $174 million budget gap.

  • Members of the Governor's Task Force for Transportation Infrastructure Investment are considering a gas tax increase as a viable way to meet Louisiana's infrastructure needs. The last time the state raised its gas tax was in 1984.

  • Cities across California may start taxing online video streaming services, following the lead of Pennsylvania, Minnesota, and Chicago.

  • Among the parties weighing in on Oregon's gross receipts tax on large businesses (Measure 97) are former Oregon governors and the unlikely tax policy adviser Kansas governor Sam Brownback.

  • The "dark store" tactic – by which big-box retailers like Lowe's are challenging their property tax valuations and undermining funding streams for schools and other local services – is spreading across the country and now hitting Alabama in a big way. Meanwhile, new Northern Michigan University-produced documentary "Boxed In" chronicles that state's fight over the issue.

What We're Reading...  

  • A new report from the Rockefeller Institute of Government warns of "slow and highly uncertain" revenue growth for states in FY 2017, which could foreshadow budget cuts ahead.

  • Pew Charitable Trusts reports that record money is being spent on state ballot campaigns across the nation in the leadup to November's election.

  • The Center for American Progress released a tax simplification plan that will "work for everyone."

  • California's Legislative Analyst's Office has released a report examining the impacts of Proposition 13—the landmark property tax limitations enacted back in 1978.
  • A new report from the Council of Economic advisors examining progress made on income inequality under President Obama includes the impact of tax policy changes such as an expansion of the Earned Income Tax Credit and a rollback of the Bush era tax cuts for the wealthiest households.

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


State Rundown 9/21: Many States Moving in Reverse


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This week we are bringing you news about taxpayer disapproval of stadium subsidies in Nevada, more pressure to reverse tax cuts in Kansas, a move in Missouri to narrow its sales tax base, and other state tax policy developments from across the country.  Thanks for reading the Rundown!

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

What We're Reading...  

  • New Jersey Policy Perspective has released a report and short video chronicling the "Notorious Nine" fateful decisions beginning in the 1990s that brought the state down from economic powerhouse to fiscal mess. Step one for states looking to recreate the New Jersey disaster? Pass unaffordable, regressive income tax cuts.
  • A new academic paper examines ownership of pass-through businesses and how much taxes they pay, finding that pass-through income is more heavily concentrated among high-earners and that many of the ownership interests are unclassified or circularly owned.

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

 


Mississippi's Proposed "Consumption Tax" Would Dramatically Lower Taxes for the Wealthy, Increase Taxes for the Poor


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Mississippi’s proposal to move to a user-based tax system is a euphemism for increasing regressive sales and consumption taxes that will ultimately result in higher taxes for the poorest Mississippians and lower taxes on the wealthy.

Currently, Mississippi legislators are reviewing the state's tax code with a goal, according to Lt. Gov. Reeves, to "move toward a user-based system rather than an income-based system."

 And now that the study has begun, one outlet recapped the first day of study proceedings with the blunt headline "Mississippi Would Benefit from Consumption-Based Tax System" (paywall). With the Mississippi legislature's recent history of cutting taxes and seeming desire by many to continue with more of the same, it is important to add data to this conversation showing who would benefit – or not – from the sort of tax shift the Mississippi Tax Policy Panel is considering.

As Hope Policy Institute succinctly pointed out last week, there is no reason to expect cutting taxes and shifting reliance away from income toward sales taxes will bring economic growth and benefit Mississippians. Additionally, a look at whose taxes would rise and fall if the state moves to a “user-based’ system is striking.

ITEP examined the impact of carrying the tax-shift goal to its logical extreme: completely replacing the state's $1.9 billion of personal income tax revenues with higher sales taxes. Our analysis found that the lowest-income Mississippians (bottom 20 percent of taxpayers), who already pay nearly twice the effective tax rate paid by the highest-income 1 percent, would see an additional 3.3 percent of their incomes go toward taxes, while the highest-income 1 percent in the state would see tax cuts averaging 2.9 percent of their incomes – a tax cut of more than $21,000 on average for that group (See graph).  The change would result in a massive shift of the responsibility for paying state taxes away from the highest-income Mississippians and onto low- and middle-income families. Furthermore, to do this without broadening the sales tax base would require a state sales tax rate of about 10.78 percent, which would be easily the highest rate in the nation and an increase of more than 54 percent over the state's current 7 percent rate.

While this type of wholesale elimination of the personal income tax has not been explicitly proposed this year, it was proposed in 2015 and is illustrative of what it means to "move toward a user-based system rather than an income-based system," and it is crucial for the tax policy panel and Mississippians generally to understand that any significant shift from income taxes to sales taxes will take on these same highly regressive contours. When it is claimed that “Mississippi would benefit” from such a shift, it is important to ask which Mississippians.


How State Lawmakers Can Use Their Tax Codes to Fight Poverty


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Poverty, income-inequality, and stagnant wages have been a major part of the political discourse this election cycle. And for good reason. Although new Census data reveal a substantial drop in poverty and a significant increase in income, median household income is still less than it was in real dollars 17 years ago, and 43 million (or nearly one in seven) people in this country live in poverty.

Fortunately, state lawmakers have a range of policy options to mitigate poverty and improve the quality of life of families across the country. ITEP today updated its annual report, State Tax Codes as Poverty Fighting Tools. The report, incorporates the U.S. Census Bureau’s ACS data and makes the case for four key anti-poverty tax policies: state Earned Income Tax Credits (EITCs), property tax circuit breaker programs, targeted low-income credits, and childcare related tax credits. These policies, when well-structured, can provide families with additional income, putting that money back in their pockets to help pay for food, housing, transportation, and other necessities.

Reforming state tax systems should be a priority for state lawmakers across the country. ITEP’s bi-annual report, Who Pays? reveals that when all taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than the richest 1 percent of taxpayers. Across the country the effective tax rate for the poorest 20 percent of taxpayers is 10.9 percent, more than double the 5.4 percent average effective tax rate for the top 1 percent.

For better or worse, our priorities are reflected in our tax codes. Reforming tax systems in a way that ensures the lowest-income families are not paying a greater share of their income to fund services on which we all rely should be a top priority for state lawmakers.

We recommend that states enact, or strengthen, one or more of four proven and effective tax strategies to reduce the share of taxes paid by low- and middle-income families and increase their ability to make ends meet.

Misha Hill contributed to this report


How Inflation Results in Higher State Taxes for Low-Income People


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New national data on poverty and income released this week by the U.S. Census Bureau reveals that from 2014 to 2015, median household income increased by 5.2 percent and poverty declined by 1.2 percent — good news by any measure. But these statistics don’t tell the full story.

Despite positive growth in incomes from 2014-2015, low-income earners were worse off in 2015 than they were 15 years ago because income growth has not been sufficient to keep up with inflation. Once the impact of rising prices is taken into account, incomes among the bottom 20 percent of earners in 2015 were actually 8 percent lower than they were in 2001, and incomes among the next 20 percent of earners were 4 percent lower than they were in 2001.

While low- and moderate-income taxpayers have less buying power today than they did 15 years ago, many are paying more in state taxes because too many state tax codes do not take the nuances of inflation into consideration. This phenomenon, dubbed ‘bracket creep,’ is the subject of a recent ITEP policy brief, “Indexing Income Taxes for Inflation: Why It Matters.”

State tax systems have many features that are defined as fixed dollar amounts, including the income levels at which various tax rates start to apply. If these fixed income levels aren’t adjusted periodically, taxes can go up substantially simply because of inflation. For example, in 1969 Illinois enacted a personal exemption of $1,000. If this amount had been adjusted for inflation since its enactment, taxpayers could exempt $6,550 per filer and dependent instead of the current $2,175.

Consider a hypothetical state that taxes the first $20,000 of income at 2 percent and all income above $20,000 at 4 percent. A person who earns $19,500 will only pay tax at the 2 percent tax rate (Figure 1). But over time, if this person’s salary grows at the rate of inflation, she will find herself paying at a higher rate—even though, in terms of the cost of living and ability to pay, her income hasn’t gone up at all. In this example, suppose the rate of inflation is 5 percent per year and the person gets salary raises that are exactly enough to keep up with inflation. After four years, that means a raise to $23,702. Whereas before all of this person’s income was taxed at the 2 percent rate, part of this person’s income ($3,702) will now be taxed at the higher 4 percent rate because the tax brackets haven’t also increased with inflation.  

In this way, as the ITEP report Who Pays? notes, unfair state tax systems exacerbate widening income inequality. To learn more about “bracket creep” and the importance of indexing tax policy provisions, check out the brief!


State Rundown 9/14: Sales Tax Reform and Other Developments


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This week we are bringing you news about potential sales tax changes (and vetoes) in California, New Jersey, and Iowa, voter disapproval of income tax elimination in Arizona, and other state tax policy developments from across the country. Thanks for reading the Rundown!

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

  • A recent poll shows that a majority of Arizona voters oppose (40%) or are uncertain (24%) about the idea of eliminating the state income tax in exchange for a higher sales tax. 
  • Alabama legislators last week sent a plan to Gov. Bentley (which he has promised to sign) to spend the state's $1 billion BP oil spill settlement. Most of the money will be used to pay down state debt, fund road projects, and free up money to plug the state's $85 million Medicaid shortfall. The state also recently rejected a regressive lottery proposal and established a budget reform task force that will begin looking at some of Alabama's revenue and spending processes later this month.
  • Sales taxes and water quality will be in the news in Iowa again next year, as a coalition has announced a new initiative to increase the sales tax by 3/8 of a cent and devote the $180 million raised to cleaning up waterways, increasing soil conservation efforts, and improving programs for wildlife and outdoor recreation.
  • Sales tax cuts are being discussed in New Jersey again as part of a package including a much-needed gas tax increase to bring the state's roads department – currently operating on an emergency shoe-string budget – back to life.
  • California Gov. Brown vetoed legislation this week that would have exempted feminine hygiene products and diapers from the state sales tax, citing these tax breaks as new spending that must be considered during the upcoming budget session.

What We're Reading...  

  • New Census data from the Current Population Survey shows the first increase in real terms of median income since 2007 and a decrease in Americans living in poverty (though the poverty rate still exceeds 2007 levels).
  • CNBC reports on the federal and possibly state tax treatment of federal loans forgiven through the Income Based Repayment Plan.
  • A new paper by the Federal Reserve Bank of Boston studying income mobility in the US from 1977-2012 shows lower family income mobility in more recent decades, especially for those in the bottom 20% of earners.

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


How State Tax Policies Can Help Mitigate Poverty, Alleviate Growing Income Inequality


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The U.S. Census Bureau is slated to release its annual national data on poverty this Tuesday and on Thursday will release state-specific data on poverty. While Census doesn’t leak data ahead of time, many economists are predicting that median income increased between 2014 and 2015 and the poverty rate will see a slight decline. While a downward trend in poverty and upward trend in real income would undoubtedly be good news, it is important to note that the poverty rate will more than likely remain substantially higher than its 2000 level and income gains likely will not be substantial enough to recoup the erosion that happened throughout the early aughts.  

The analysts at the Institute on Taxation and Economic Policy (ITEP) have produced multiple recent briefs and reports that provide important context and offer tax policy suggestions that would both make state tax codes more progressive but also help mitigate poverty and widening income inequality.

ITEP’s signature report, Who Pays?, is a distributional analysis of average effective tax rates in each of the 50 states. This in-depth analysis explains how state and local tax systems exacerbate poverty by overly relying on regressive taxes to raise revenue. In fact, when all the taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than the richest 1 percent of taxpayers. Across the country, the effective tax rate for the poorest 20 percent of taxpayers is 10.9 percent, more than double the 5.4 percent average effective tax rate for the top 1 percent.

State Tax Codes as Poverty Fighting Tools is a 2015 report that examines four specific tax policies in each of the 50 states and Washington, DC. ITEP will release an update to this report by 11 a.m. on Thursday, Sept. 15 and will also include 2016 legislative updates. The new ITEP report suggests states should enact or improve refundable Earned Income Tax Credits (EITC), offer refundable property tax credits for low-income homeowners and renters, create refundable, targeted low-income credits to help offset regressive sales and excise taxes, and increase the value of existing child-related tax credits. In addition to the report, ITEP will release four updated briefs on each of these key anti-poverty tax policies: Rewarding Work Through State Earned Income Tax Credits, Reducing the Cost of Child Care Through State Tax Codes, Property Tax Circuit Breakers, and Options for A Less Regressive Sales Tax.

In Indexing Income Taxes for Inflation, Why It Matters, ITEP analysts note that low- and moderate-income families may be subject to higher state taxes over time due to “bracket creep.” This simply means since state tax brackets aren’t adjusted for inflation, a hypothetical family whose household income was at the poverty level in 2007 but whose income increased only at the rate of inflation (meaning they are still living in poverty) may be subject to a higher tax rate in states whose tax codes don’t adjust for inflation.

The bottom line is that no matter what the 2015 Census data on poverty and income find, the nation can do more to address and alleviate poverty. Ensuring state tax policies are progressive is one effective, proven tool in a very diverse arsenal.

 


State Rundown 9/7: A Growing Number of States Face Revenue Challenges


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This week we are bringing you news from a growing number of states with current and projected revenue shortfalls including Mississippi, Virginia, New Mexico, Oklahoma, Wyoming and Tennessee.  Thanks for reading the Rundown!

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

New Jersey Gov. Christie, one of the nation's most hard-line anti-tax governors, has ended a four-decades-old tax reciprocity agreement with Pennsylvania and in the process has shown he is in fact willing to raise taxes – just so long as high-income New Jerseyans are protected. Nixing the deal will raise taxes on upper-income Pennsylvanians and lower- and middle-income New Jerseyans who cross the border to go to work.

Mississippi
revenues are already running behind for the new fiscal year, a particularly disconcerting sign considering lawmakers budgeted $130 million more than they expected to receive in tax revenues under normal circumstances. Meanwhile, state transportation commissioners estimate they need nearly $1 billion per year in additional funds to keep the state's infrastructure in good shape.

It appears fiscal issues will be front and center in Virginia in 2017, with Gov. McAuliffe announcing a projected $1.2 to $1.5 billion revenue shortfall this week that could be the largest in state history. The good people at The Commonwealth Institute have offered thoughtful solutions to the shortfall.

New Mexico
Gov. Martinez will call a special session to deal with the state's $485 million current-year revenue shortfall sometime in September. Tensions may be high in that session, with some legislators insisting on further funding cuts and refusing to consider revenue solutions, and others arguing "We're not cutting anymore; we're amputating." 

Oklahoma's Governor, Mary Fallin, decided against calling a special session to discuss teacher pay increases. Instead, the state's budget surplus will be divvied out amongst state agencies who felt the brunt of recent state spending cuts.

Wyoming lawmakers look to the sales tax as revenue from energy reliance continues to take a hit. Specifically, lawmakers are looking to end certain exemptions. The Equality State relies heavily on the sales tax, a tax that disproportionately falls on low- and middle-income families.

Tennessee's
decision this year to cut taxes for its wealthiest residents by beginning a phase-out of the state's "Hall Tax" on certain dividend and interest income is already leading directly to calls for 2 percent budget cuts throughout state departments that all Tennesseans rely on.

What We're Reading...  

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

 


Workforce Development Programs Provide Greater ROI Than Corporate Subsidies


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By Greg Leroy

States and localities spend tens of billions of dollars annually in the name of creating jobs, but not all economic development deals are created equal.  Some are clearly cost-effective and others are obviously taxpayer gifts to large companies.

A new report, Smart Skills and Mindless Megadeals, from Good Jobs First finds that workforce training programs provide taxpayers a solid return on their investments. But 20 or 30 times a year, states and localities award huge tax-break “megadeals” costing an average of more than $658,000 per job—compared with a few thousand dollars per job for most training programs.

The study draws heavily from Good Jobs First’s unique Subsidy Tracker database, which names 14 megadeals that each cost more than $2 million per job. By contrast, 25 of 33 workforce development programs cost less than $2,000 per job.

This is an important issue to highlight because most of these megadeals’ costs are in foregone taxes, and at that astronomical price, taxpayers can never break even. That is, the workers getting those jobs will never pay $658,000 more in taxes than public services they and their dependents will consume. Who makes up the difference? You guessed it: this is one cause of the long-term tax burden shift onto working families.

It’s the Corporate One Percent taking it to the bank, with companies like Boeing, Tesla and General Electric pitting states against each other for nine- and 10-figure subsidy packages. Highly automated facilities like data centers, oil and gas refineries, micro-chip fabrication plants and steel mills have the highest costs per job.

By contrast, studies find that most job-training programs pay off well. And even if the job for which the worker originally trained doesn’t pan out, chances are she will stay put and take her skills to another employer, so taxpayers’ investment still pays off.

Given these sharp differences in taxpayer costs and risks, Good Jobs First recommends that public officials should quit “buffalo hunting” for those big, risky megadeals and instead invest in skills, infrastructure, emerging business “clusters” and in local entrepreneurs.

It doesn’t have to be this way: at least 19 state programs and two long standing federal programs cap the amount of subsidy per job. And in the European Union, “aid intensity” rules reduce costs far below the levels of some U.S. deals.

The bottom line: states and localities should put their buffalo muskets in a museum where they belong. We can spend less and get more.

Greg LeRoy is the executive director of Good Jobs First.


Surveying State Tax Policy Changes Thus Far in 2016


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

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

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

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

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

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

Tax Increases

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

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

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

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

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

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

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

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

Tax Cuts

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

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

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

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

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

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

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

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

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

Stalled Tax Debates Likely to Resume in 2017

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

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

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

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

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

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

What Lies Ahead?

Key Tax-Related Measures on the Ballot in November

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

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

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

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

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

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

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

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


State Rundown 8/10: Avoiding a Race to the Bottom


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This week’s Rundown features a troubling multi-state trend that would help shield the country’s wealthiest taxpayers from paying state income taxes, a message from voters about the Kansas tax cut experiment, and potential special sessions in Minnesota and Alabama. Also, be sure to check out the What We’re Reading section.  Thanks for reading the Rundown! 

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

  • A New York Times report shows the troubling race to the bottom between a number of states including Alaska, Delaware, Nevada, New Hampshire, Ohio, South Dakota, Tennessee, and Wyoming – to attract trust funds controlled by the wealthiest Americans. States are doing so not only by slashing  taxes on such funds, but also by putting up barriers to protect the elite from child-support claims, divorce settlements, and the attempts of other states and the federal government to collect taxes owed.
  • Tennessee officials are attempting to create marketplace fairness between online retailers and brick-and-mortar stores via a rule change that would require out-of-state sellers to collect state and local sales taxes. But opponents to the rule worry that other states will follow suit and level the playing field in their states as well – let's hope they're right! 
  • Alabama Gov. Bentley has released his proposal for a constitutional amendment creating the state’s first lottery. The amendment would create a lottery commission but would not authorize casino gaming or affect "traditional bingo." The legislature convenes Monday for a special session focused primarily on the lottery proposal, and lawmakers may also discuss the state's outdated gas tax. 
  • Recent primary elections point to a changing landscape for fiscal policy in Kansas in January 2017, as 14 supporters of Gov. Brownback's failed tax policy lost their races. Whether those seats ultimately are filled by more moderate Republicans or Democrats, the new lawmakers are not likely to be advocates of the governor's tax cuts, which presents an opportunity for the state to reverse course.
  • Minnesota may have another chance to pass critical tax and public works funding bills during a special session  if the governor and legislative leaders can reach a deal regarding metro transit. State leaders resume talks this Friday.  
  • Missouri voters will decide on two different cigarette tax increases in November after both measures were approved for the ballot this week. One is a 60-cent-per-pack increase that would raise more than $300 million, primarily for early childhood education. The other is a 23-cent increase that would raise $95-$103 million for transportation infrastructure funding.
  • After reiterating her commitment to her no-tax pledge in the face of looming revenue shortfalls last weekNew Mexico Gov. Martinez has now ordered state executive branch agencies to cut 5 percent out of their budgets and implement the cuts immediately.

What We're Reading...    

  • A Center for American Progress study found that an EITC expansion for workers without children would save billions each year by reducing crime and improving public safety.  

  • Governing magazine summarizes state efforts to tax online streaming services such ase Netflix and Hulu and looks at Kalamazoo, Michigan's turn to private donations for needed revenue. 
  • Jared Bernstein in the Washington Post debunks the faulty correlation between the size of government and economic growth. 

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

 


Fiscal Policy Shake-up Comes to Energy States


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The sharp decline in oil prices since summer 2014 has allowed consumers to save hundreds of dollars annually at the pump, but it also has left some energy producing states clamoring to come up with policy ideas to make up for lost revenue.

Before the recent precipitous decline in oil and other fuel prices, states that rely on the energy sector for revenue enjoyed years of fiscal bliss thanks to the high price of natural resources. Rarely fretting about ways to pay for public services, many of these states found themselves so flush with funds that they began cutting taxes and offering corporate giveaways. With energy revenues flowing, lawmakers failed to make the tough, long-term decisions needed to ensure their states had a diverse portfolio of broad-based taxes.

Now that oil prices have remained comparatively low for the last two years, and the price and demand for coal, natural gas, and other energy commodities also have taken a hit, there is no way to know for sure when the fortunes of the energy industry may rebound. This reality imposes a revenue challenge for states with budgets that are heavily dependent on energy markets.

Many of the most consequential tax debates taking place right now are in states with a significant energy sector presence. States such as Alaska, Louisiana, New Mexico, North Dakota, Oklahoma, Texas, West Virginia, and Wyoming have been forced to find ways to fill budget holes in the past year, which in some cases has necessitated rethinking the very structure of their state tax systems.

How Did We Get Here?

To be sure, these states are reeling in part because of low-energy prices. But that is not the whole story. Most energy-reliant states celebrated “boom” times with ill-advised tax cuts and corporate giveaways. The most egregious example is Alaska’s elimination of its personal income tax some 35 years ago (Alaska is the only state to ever repeal a personal income tax). With near complete reliance on the energy sector, Alaska has no personal income tax or state sales tax to turn to in times of crisis.

Other states did not go as far as to repeal personal income taxes, but many made ill-advised tax cuts when they were awash in energy revenue. Louisiana’s decision to eliminate the “Stelly Plan” in 2008, for example, significantly reduced tax rates for the wealthy. This politically charged policy change cost the state an estimated $800 million a year. Over that same period, Gov. Bobby Jindal handed out lavish credits and rebates for corporations. As a result, this year alone the state has paid $200 million more in tax breaks than it has collected in corporate income and franchise taxes.

New Mexico lawmakers’ phased in cuts to the state’s top personal income tax rate, costing  an estimated $500 million in revenue per year. The damage done in the early 2000s continues to play out as the state struggles with year after year of budget challenges. Oklahoma’s shortfall was driven in large part by generous tax breaks and unaffordable, repeated cuts to the state’s income tax over the past decade. The most recent income tax rate reduction had the poorest timing of all, triggered this January despite an official “revenue failure.” Today this series of cuts comes with an annual price tag in excess of $1 billion in lost revenue.

North Dakota lawmakers slashed income tax rates for years, pushing to lower or even eliminate them as energy prices slumped. 2015 legislation alone reduced both individual and corporate income taxes across the board by 10 percent and 5 percent, respectively. While near the peak of its oil boom in 2011, voters concerned about service cuts overwhelmingly rejected a referendum to eliminate the state’s property tax.

Business tax cuts are a major contributing factor to West Virginia’s fiscal problems. The state’s elimination of its business franchise tax took full effect last year, and over the last several years the corporate income tax has been reduced as well.

State Actions This Year

Booms are followed by inevitable busts. Cutting taxes while flush with revenue is not advisable for energy-dependent states. Particularly for states with narrow tax portfolios that are highly reliant on the success of the energy sector.

To date, the tax policy changes enacted in energy states have been limited largely to regressive tax hikes, though there are indications that more meaningful tax reforms could be on the horizon. 

Tax Increases

Lawmakers in traditionally conservative states such as Louisiana, Oklahoma, and West Virginia all approved tax increases in 2016 to help address significant revenue shortfalls. Legislators in Louisiana raised $1.3 billion in new revenue through a 1-cent sales tax increase, the elimination of certain exemptions from the state sales tax base, and tax increases on beer, alcohol, wine, and tobacco. Lawmakers tried, but failed, to enact long-term personal income tax changes. A task force is now exploring comprehensive reform options for 2017. 

Tobacco tax debates were a common theme in energy states this year—West Virginia lawmakers also opted to raise tobacco taxes and Oklahoma lawmakers came close to doing the same.

While a cigarette tax increase was not ultimately enacted in Oklahoma, lawmakers did raise revenue by repealing the state’s “double deduction,” a nonsensical law that allowed Oklahomans to deduct their state income taxes from their state income taxes. In addition, they voted to change the state portion of the Earned Income Tax Credit (EITC) from refundable to non-refundable, a move that disproportionately affects low-income taxpayers by denying the credit to families that earn too little to owe state income taxes.

In New Mexico, Gov. Susana Martinez has reiterated her “no tax increase” pledge despite the state’s projected $600 million shortfall. Given the breadth of the revenue gap, state legislators have urged her to reconsider her position.

While major tax increases have yet to come to The Last Frontier, the significant fiscal debates that took place in Alaska this year are also worth mentioning. There, lawmakers discussed a range of options to remedy the state’s multi-billion-dollar deficit during the state’s regular legislative session and two special sessions called by Gov. Bill Walker.

Spending Cuts

In 2016, virtually every energy-reliant state cut vital public services. North Dakota saw cuts exceeding 4 percent earlier this year. That was followed by a May announcement for a total of 10 percent across-the-board cuts for the coming biennium. And the problem persists—Gov. Jack Dalrymple called a special session to address yet another shortfall.

Similarly, New Mexico lawmakers passed budget amendments early this year to cut spending across state agencies. New revenue gaps have since appeared, leading lawmakers to request that Gov. Susana Martinez call a special session. In Wyoming, Gov. Matt Mead recently announced another round of cuts, this time nearing $250 million. Those cuts and the associated loss of federal funds are expected to result in massive layoffs across the state.

Alaska, Louisiana, Oklahoma, and West Virginia accompanied their tax increases (or in Alaska’s case, proposals for tax increases) with cuts to state spending. And many additional cuts are anticipated for the coming years. For example, Texas lawmakers have asked most state agencies to lower funding requests for the coming biennium, with a call for 4 percent nearly-across-the-board cuts to many programs that are already underfunded.

Short-Term Fixes

While all of these states have made progress in closing their current budget gaps, there remains a need for revenue and structural reforms in the long run. One-time revenues were used heavily in both Oklahoma and West Virginia. In Oklahoma, 60 to 80 percent of the budget hole was filled with non-recurring revenue such as one-time bond issues and cash transfers. West Virginia filled its gap with a range of one-time funds, including a $70 million withdrawal from the state’s Rainy Day Fund.

Similarly, Louisiana’s solution was primarily dependent upon temporary tax measures. Changes to the state’s inventory tax credit and corporate franchise tax come with expiration dates attached.

And in Alaska, legislative inaction forced Gov. Bill Walker to veto large swaths of the state’s spending plan. In doing so, the governor capped next year’s Permanent Fund dividend, a flat dollar payment that most Alaskans receive each year, at $1,000. This is down more than 50 percent from the state’s 2015 dividend payout of $2,072. A restructuring of the state’s dividend program will likely be revisited next year.

Some Progress, But More Reforms Are Needed

While lawmakers in energy-sector states have taken steps to close their revenue shortfalls, not nearly enough is being done to address the structural inadequacies driving the problem. Inaction or short-term fixes were too often a theme for energy-reliant states in 2016. While partly driven by hope that energy prices will rebound, this tendency for delay is not a long-term solution. Rather than watching desperately for signs of improvement in energy markets, lawmakers should take matters into their own hands by reconsidering past tax cuts that have drained state coffers and by fundamentally rethinking the makeup of tax structures that have become over-reliant on energy revenues.


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


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

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

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

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

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

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


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


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

— Meg Wiehe, ITEP State Policy Director, @megwiehe  

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

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

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

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

 What We're Reading...   

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

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

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

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

Weird New Jersey Tax Debates Continue


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Since 1989, a magazine published in New Jersey called Weird N.J. has chronicled all things quirky, strange, unusual, and absurd in the Garden State. Weird N.J. could do an entire issue about the bizarre mix of tax policies floated in New Jersey this year.

The New Jersey Legislature is considering a proposal to increase the state’s gas tax but at the same time some lawmakers are insisting that that tax increase be paired with tax cuts for the wealthiest New Jerseyans. Perhaps most bizarre is that the state is considering providing a tax cut for retirement and pension income (a move that would benefit the best-off state residents) while also weighing cuts to the revenue that funds state pensions.

Gas Tax Increase?

New Jersey's antiquated gas tax has been frozen since 1990 and at 14.5 cents per gallon is the second lowest state gas tax rate in the nation. Meanwhile, cars have gotten more fuel efficient and inflation has increased the cost of building and maintaining roads and bridges. As a result, the state’s Transportation Trust Fund (TTF) is facing a serious funding shortage and lawmakers are scrambling to replenish it by finally updating the gas tax.

A proposed gas tax update would raise $1.4 billion annually to replenish the TFF and boost transportation funding. The update would add about 23 cents per gallon to the rate paid at the pump, and include a mechanism to adjust that rate in future years to always hit the $1.4 billion target by increasing the rate when fuel prices and consumption are down, or decreasing it when they are up.

Tax Cut Ideas Galore

Yes, it's absurd that the Garden State's gas tax has been locked for almost 30 years, but the even bigger absurdity is the insistence by some lawmakers that the need for additional gas tax revenue to shore up the TTF is an occasion for massively cutting other taxes and revenues. At least one lawmaker said he would only consider proposals that are “revenue neutral or better,” meaning he will only support revenue-raising proposals that do not raise revenue.

Most policymakers have not gone that far, but in all, lawmakers are weighing about $850 million worth of tax cuts, more than half the size of the revenue raised through the gas tax increase in the first place. This would be a major blow to the state's General Fund, which does not receive any gas tax revenues and has to fund important state investments such as education and health care. The current package of tax cuts being discussed includes eliminating the estate tax, increasing tax benefits for retirees, creating a new deduction for charitable contributions, and increasing the state's Earned Income Tax Credit (EITC). More on some of these individual items below:

Tax Cuts for the Wealthy

Many in New Jersey have continued to adhere to the nonsensical notion that any increase in the gas tax – which lands most heavily on low- and middle-income families – must be paired with tax cuts for the wealthiest New Jerseyans in the name of “tax fairness.” Gov. Christie has focused particularly on eliminating the state’s estate tax, which would cost the state $540 million per year and benefit only a very small number of very wealthy estates.

Give to Pensioners with One Hand, Take Away from Them with the Other

Yet another oddity in the mix is a major increase in the state’s tax benefits for retirement and pension income. This tax cut would cost about $130 million per year and does essentially nothing for the low- and middle-income New Jerseyans who will be most affected by the gas tax increase. But what’s particularly strange about this is that it targets retirees and pensioners for tax breaks while simultaneously cutting the very revenues that go toward the state’s notoriously underfunded pension fund for its retirees.

EITC

In this bizarre landscape of outlandish tax ideas, one component stands out for being so normal it’s weird: lawmakers are also discussing increasing the state’s Earned Income Tax Credit. Increasing the state EITC is a perfectly sensible way of offsetting the gas tax increase for those low-income working families who will be most affected, and it comes at a reasonable cost that does not undo a significant share of the revenue gain achieved. In fact, an ITEP analysis shows that increasing the EITC to 40 percent of the federal credit, as proposed, would on average fully offset the gas tax increase for the lowest-income fifth of New Jerseyans, while reducing the overall revenue gain by only about $130 million of the $1.4 billion total.

New Jersey legislators should embrace their sensible side this time: raise the gas tax to shore up the TTF, expand the EITC to keep their tax structure from falling even harder on low-income families than it already does, and leave the absurdities to the experts at Weird N.J.


Is Pay-Per-Mile Driven Better Than a Gas Tax? Experiment Gets Underway in California


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Next week California will launch an experiment to determine whether the state could repeal the gas tax and instead charge motorists for each mile they drive—essentially turning every public road into a toll road. 

But while a per-mile charge does have merit, California’s decision to expend so much effort studying this option while ignoring the preventable decline of its gas tax is problematic.

The Golden State’s per-mile experiment comes on the heels of a similar pilot program launched in Oregon last summer.  In both cases, officials’ main objective is to establish whether available technology—in the form of a smartphone app or standalone plug-in device—is reliable and secure enough to track distance traveled, and sometimes location, for a large number of vehicles.  California’s experiment is expected to include 5,000 volunteer drivers while Oregon’s currently has 1,018 vehicles enrolled.  Although smaller, Oregon’s experiment may be more ambitious: California’s experiment will last just nine months, but Oregon’s is slated to continue indefinitely.  And while California drivers will only make “simulated” payments, Oregon drivers can opt out of the state’s gasoline tax and choose to pay the per-mile charge in its place.

Putting aside concerns over technology and privacy, the basic idea behind this plan is sound.  Frequent drivers generate more wear-and-tear on the roads and should therefore generally pay more for roadway upkeep and expansion (low-income families unable to afford the charge are an exception but can be offered offsetting relief via a rebate or tax credit).

As things currently stand, this “user pays” objective is accomplished relatively well by existing taxes on gasoline, diesel, and other motor fuels.  Every state, as well as the federal government, currently levies an excise tax on these fuels and frequent drivers tend to pay more as a result.

In the long-term, however, it is likely that a sizeable share of drivers will own electric-powered vehicles that will be unaffected by the gas tax.  If and when this happens, a gas tax replacement will be necessary and a per-mile charge could become the cornerstone of transportation finance.  But with fully electric vehicles currently making up less than 1 percent of new vehicle sales, we’re not there yet.  While fuel economy is improving, the transportation funding shortfalls facing many states are not evidence that the current gas tax structure is on the verge of becoming obsolete.

Gas Tax Revenue Collections Are Falling Short, But There Is a Fix

Changes in vehicle fuel economy are only part of the reason gas tax revenues are falling short.  In fact, when we studied the causes of the gas tax’s decline in 2013, we found that more than three-fourths of the decline since the mid-1990s was unrelated to fuel economy improvements.  Instead, the main problem thus far has been stagnant tax rates failing to keep pace with predictable growth in construction and maintenance costs.  Typically, this has been because state and federal gas taxes are levied as fixed amounts per gallon and are adjusted only infrequently by lawmakers reluctant to vote for gas tax increases.

In California’s case, however, the problem is even worse.  Only July 1, the state will see its third gas tax rate cut in as many years, dropping the rate by almost 12 cents per gallon relative to where it stood in the summer of 2013.  This decline has come about because California’s gas tax is linked to the volatile price of fuel.  It has nothing to do with changes in vehicle fuel economy and could have been easily avoided with a restructuring of the formula used to calculate the state’s gas tax rate.

If lawmakers in California and elsewhere want to pursue a meaningful, sustainable strategy for funding transportation right now, a per-mile charge is not the answer.  For starters, as we’ve explored in earlier reports, per-mile charges are no better prepared for inflation than existing gas taxes.  Regardless of whether drivers are taxed per-mile or per-gallon, revenues will fall short in the long-term unless the tax rate is indexed to inflation.  Florida, Georgia, Maryland, Rhode Island, and Utah already index their gas tax rates, and unlike per-mile charges whose widespread implementation is still years away, inflation indexing can be implemented almost immediately.

Moreover, if lawmakers are concerned about the impact that fuel economy improvements are having on the gas tax, Georgia’s 2015 gas tax reforms offer a practical, implementable model that other states can follow.  Going forward, Georgia’s gas tax rate will be allowed to rise alongside improvements in average fuel economy.  For instance, if average fuel economy were to double from 20 to 40 miles per gallon, Georgia’s gas tax rate would double as well, leaving the average driver paying the same amount of tax per mile driven.

Of course, even these reforms will not be sufficient if many or most Americans eventually begin driving electric cars rather than gasoline-powered ones.  The experiments underway in California and Oregon are important steps toward preparing us for that future.  But we don’t have the luxury of planning for the future while ignoring the needs of the present.  To deal with the shortcomings that exist in our infrastructure right now, gas tax reform—not a per-mile charge—is the answer.


The Case for Eliminating Itemized Deductions


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In our newly updated policy brief on State Treatment of Itemized Deductions, we review a menu of options available to states interested in reforming these regressive income tax breaks. We also show that while several states have recently taken action on this issue, most states still have room to improve their itemized deduction policies. Every state has an upside down tax system that leans more heavily on low- and middle-income families than high-income residents. And many states have serious revenue needs created by underperforming economies or tax cuts passed in prior years. The itemized deduction reforms outlined in our brief can help address both the issues of tax fairness and revenue adequacy at the same time.

Itemized deductions are tax breaks intended to help defray a wide variety of personal expenditures that affect a taxpayer's ability to pay taxes, including charitable contributions, extraordinary medical expenses, mortgage interest payments, and state and local taxes. But the breaks reduce state funding for public services by billions of dollars each year while primarily benefiting high-income households that generally don't need such generous tax benefits. Most states with income taxes can therefore find something in the menu of itemized deduction reforms to add a healthy boost of progressivity to their revenue structures, cut unneeded fat from their tax codes, and/or generate new revenue for vital public services. Our brief catalogs 10 states that do not allow itemized deductions and 11 others (and DC) that have implemented reforms paring back itemized deductions for at least some taxpayers.

The most popular item currently on the menu is to build upon existing federal rules that phase down the value of itemized deductions for people with very high incomes ($311,300 and above for married couples in 2016). States can add their own flavor to these rules by beginning the phase-down at a somewhat lower income level, phasing down the deductions at a faster rate, and/or completely phasing them out once income reaches a certain point.

States with big appetites for reform can opt for even larger overhauls of itemized deductions, such as eliminating them entirely. Others may opt to selectively eliminate some deductions while retaining a few staple deductions like those for medical expenses or charitable contributions. Portion control can also be effective, in the form of a simple cap on the total amount each filer can deduct. Still other options remain, and ordering off the menu is encouraged as well.

Because low- and middle-income families benefit very little, if at all, from itemized deductions, most of these reform options have little effect on those groups. But they do pair well with measures like increasing the standard deduction available to all families, enhancing state Earned Income Tax Credits (EITC), or taking other more targeted measures to promote tax fairness beyond itemized deduction policy.

And itemized deduction reform is growing in popularity, as many states have taken this information to heart and taken steps to moderate their exposure to the more harmful aspects of these deductions.  Rhode Island took a comprehensive approach in 2010, eliminating all itemized deductions while increasing the standard deduction that is available to taxpayers of all income levels, along with multiple other changes to its tax code. Another similar example is Maine, which in 2015 became the first state to fully phase out itemized deductions for the very wealthy. That same year, Vermont enacted a cap on total deductions set at 2.5 times the standard deduction. Just last week, Oklahoma eliminated its nonsensical state income tax deduction for state income taxes. And Louisiana Gov. Bel Edwards has asked lawmakers to consider itemized deduction reforms in the special session that convenes there next week.

All states considering such reforms should do so carefully and avoid the temptation to fall into other bad tax habits that could leave their tax codes even more unbalanced and starve them of needed revenue. North Carolina and Kansas, for example, enacted packages that included some positive itemized deduction reforms but proved destructive on net, leaving behind a revenue structure that was less progressive and less capable of bringing in revenue than the system that preceded it, necessitating major cuts to public services in those states. If not handled carefully, reform packages like these can be a bit like cutting Ho Hos out of your diet and replacing them with Twinkies -- the net effect is a wash at best and might be much worse.

State policymakers looking to the menu of itemized deductions reforms we compile in our brief should resist the temptation to combine them with fiscal fad diets like flat income taxes and large unaffordable rate cuts. But if implemented with care, these options have promising potential to improve the balance, adequacy, and long-term health of their state tax structures.

Read the policy brief here.


New Research Shows Millionaires Less Mobile than the Rest of Us


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A new study (PDF) released today provides the best evidence yet that progressive state income taxes are not leading to any meaningful amount of “tax flight” among top earners.

Stanford University researchers teamed with officials at the Treasury Department to examine every tax return reporting more than $1 million in earnings in at least one year between 1999 and 2011.  They found that while 2.9 percent of the general population moves to a different state in a given year, just 2.4 percent of millionaires do so.  Even more striking is that for the most “persistent millionaires” (those earning over $1 million in at least 8 years of the researchers’ sample), the migration rate is just 1.9 percent per year.  As the researchers explain: “millionaires are not searching for economic opportunity—they have found it.”

The researchers examined the specifics of where those few migrating millionaires decided to relocate.  They found that “outside of Florida, differences in tax rates between states have no effect on elite migration. Other low-tax states, such as Texas, Tennessee, and New Hampshire, do not draw millionaires from high-tax states.”

In other words, Florida is only one of the nine states without broad-based income taxes that seems to possess any kind of special allure for high-income taxpayers.  Given that reality, the study notes that “It is difficult to know whether the Florida effect is driven by tax avoidance, unique geography, or some especially appealing combination of the two.”  In any case, this study refutes the notion that repealing state income taxes can transform a state into a magnet for high-income taxpayers: it’s simply not playing out that way in eight of the nine states without such a tax.

None of this should be terribly surprising.  By definition, high-income taxpayers are already living comfortably.  A very small minority of them may be willing to uproot their lives in search of an even better bang for their buck, but they are the exception rather than the norm.  In fact, even when the researchers narrowed their focus to less disruptive migration options—moving just across a state border in regions where notable differences in tax rates exist—they were unable to find a meaningful tax effect in either the short- or long-term.  Despite the mythology, high-income earners do not simply pack their bags and leave in search of locales that will allow them to chip in less for public investments. 


Tax Migration Myth Refuses To Die


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Let’s establish a few facts for the last time. Santa Claus isn’t real, and neither is the Easter Bunny. There is no pot of gold at the end of the rainbow. Mutant alligators don’t roam the sewers of New York City. And the fabulously wealthy do not migrate from state to state in search of low tax rates.

We’ve dispelled the “millionaire migration” myth a number of times (see here, here, and here). But it seems thinly-sourced anecdotes beat empirical evidence.

The brouhaha over hedge fund honcho David Tepper’s move from New Jersey to Florida is the latest case in point. A few weeks back, The New York Times published a hand-wringing article that claimed Tepper’s relocation could cost the Garden State hundreds of millions of dollars. Frank Haines, New Jersey’s legislative budget and financial officer, noted that the state “may be facing an unusual degree of income tax forecast risk.” Tepper was one of the wealthiest men in New Jersey, earning more than $6 billion over the past three years; sources claim New Jersey could lose out on $300 million in income tax revenue annually to Tepper’s preference for South Beach over the Jersey Shore.

A number of other publications jumped on the story as well. In Forbes, Laffer lackey Travis Brown crowed, “When the departure of just one resident sends your state’s legislative budget office into a panic – it might be time to take a closer look at your tax policies.” Bloomberg blamed the state’s high marginal tax rates, noting that “1 percent of taxpayers contribute about a third of [income tax] collections.” (To the credit of the New York Times, they identify growing income inequality as one factor in lopsided income tax contributions).

It’s a familiar tale. Before David Tepper, it was Gerard Depardieu and thousands of French citizens fleeing high taxes. And before Depardieu, it was Phil Mickelson suggesting he would take his golf winnings and leave high-tax California for a more millionaire-friendly state. Art Laffer and Travis Brown have built a cottage industry peddling these “tax rate arbitrage” stories to amenable legislators and chambers of commerce around the country. But the claims don’t stand up to the barest scrutiny.

Take the case of New Jersey, at the center of the latest drama. Tepper is one man in a state of 8.9 million. He certainly wasn’t the only person to move out or into the state this year. Many observers have highlighted the increasing numbers of people leaving New Jersey, but the out-migration rate for 2014-15 was just 0.9 people per 1,000 residents; overall population increased by 19,169 over the same period. Moreover, the state increased its number of millionaire residents from 207,200 to 237,000 between 2006 and 2015. In 2014 the state ranked second overall in the percentage of households worth at least $1 million – a fact hard to square with the dire predictions of wealth flight.

Additionally there is a mountain of evidence disproving claims that the wealthy move just to pay a lower marginal tax rate on their higher earnings. If Us Magazine has taught us anything, it’s that stars – financial or otherwise – are just like us: they move for job opportunities, a change in scenery, or for personal reasons. In fact, sources close to David Tepper say he moved to Florida to be closer to his mother and sister.

And yet these tax tall tales persist, because they allow anti-tax advocates to push for low marginal tax rates and regressive policies that are more “friendly” to the wealthy. By focusing on the sad story of one fantastically rich person, they conveniently obscure the forest for one money tree.

For example, these low-tax boosters point to Florida, which has a reputation as a “low-tax” state. But by touting the Sunshine State’s nonexistent income tax, they ignore the rest of the state’s hugely regressive tax structure. As an ITEP report notes, “failing to levy an income tax comes at a cost. In order to pay for state and local government services, Florida’s sales and excise taxes are 18 percent above the national average. Measured relative to personal income, Florida has the 13th highest sales and excise tax collections in the entire country.” The bottom 20 percent in Florida – who earn an annual salary of $10,700 on average – pay almost seven times as much of their income in state taxes as the top 1 percent. These low-income working families face the fourth highest state and local tax bill in the country. Few can afford to move elsewhere, and they certainly don’t get coverage in the New York Times when they do.

This has been the aim of pushers of the tax migration myth all along – to skew state tax policies to the few at the expense of the many. In Connecticut, state officials regularly track and forecast the incomes of their richest 100 residents. When one plutocrat makes noises about moving, state officials meet with them and try to persuade them otherwise. Is this the kind of government we want: a rapid response team hyper-focused on a few dozen billionaires instead of the pressing needs of millions of ordinary citizens? Public policies designed to lure the wealthy instead of promoting broad-based economic growth? A friendly handshake for rich hedge fund owners, and a shakedown for the working poor?

Supply-siders would rather we focus on their anecdotes rather than the questions above. 


Donald Trump the Farmer?


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People may disagree about what exactly Donald Trump is, but almost no one would call him a farmer. Well, no one except the property tax department of New Jersey. According to a recent report from the Wall Street Journal, Donald Trump has saved tens of thousands of dollars in property taxes on two golf courses in New Jersey through the use of a farmland tax break.

To qualify for the tax break, Trump maintains a small goat herd, hay farming and woodcutting operation on his New Jersey golf courses. The properties include just enough of these activities to qualify for a rather generous farmland tax break, which by one calculation has allowed Trump to pay less than $1,000 annually in property taxes on a property on which he would otherwise have owed around $80,000.

Trump is the latest of many high profile examples of wealthy individuals taking advantage of tax breaks meant for farmers. In 2011, reporting found that Tom Cruise managed to pay a measly $400 in property tax on an $18 million Colorado property by allowing sheep to occasionally graze on his land. Similarly, Senator Bill Nelson was able to reduce his property taxes from over $45,000 to just $3,700 by allowing cows to graze on his land in Florida.

What the cases of Trump, Nelson and Cruise reveal is that it is often difficult to craft tax breaks so that they can only be obtained by those individuals they are meant for. In the case of the farmland tax break, presumably the goal is to provide support to and help conserve small family farms, yet loose definitions of what constitutes an eligible farm allow it to be gamed by wealthy individuals.

To ensure that the Trumps of the world are not getting tax breaks for farmers, states can take a number of approaches. To start, states could tighten the rules around what constitutes an eligible farm, which is exactly what Colorado did after the revelations around Tom Cruise and other celebrities taking advantage of the system. Alternatively, states could trade-in their farmland tax breaks for an agricultural circuit breaker, which would only allow for a tax break in the case of real low- and middle-income farmers.

In any case, everyone should be able to agree that Trump is no farmer, even if he played a singing one at the Emmy’s. 


Undocumented Immigrants Pay Up on Tax Day


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At the state and local level alone, undocumented immigrants nationwide collectively pay an estimated $11.64 billion each year in taxes, according to a recent report by the Institute on Taxation and Economic Policy. Our calculations, based on academic, congressional, and think-tank research, show that total includes more than $6.9 billion in sales and excise taxes, $3.6 billion in property taxes, and over $1 billion in personal income taxes.
Undocumented immigrants pay sales and excise taxes when they pay their electric bills, buy toiletries, or fill up at the gas station. One third of them are homeowners who pay property taxes directly on their homes. Those who rent pay property taxes indirectly through higher rent to their landlords. Many undocumented immigrants also pay state income taxes. The best evidence suggests that at least 50% of undocumented immigrant households currently file income tax returns, and among those who don’t file, many still have taxes withheld from their paychecks.
While the state and local tax contributions of undocumented immigrants vary by region, we found that undocumented immigrants nationwide pay on average 8% of their incomes in taxes to state and local governments. In contrast, the top 1% of taxpayers nationwide pay on average just 5.4%.
Undocumented immigrants already are helping to fund our federal, state and local governments and services like public schools, road repairs, and police and fire protection. If more of them were granted legal status, our research shows that their state and local tax contributions would increase.
For example, the Institute on Taxation and Economic Policy analyzed the impact of full implementation of President Obama’s 2012 and 2014 executive actions on the state and local tax contributions of undocumented immigrants. Those potentially affected by these executive actions (an estimated 5 million or 46% of undocumented immigrants) would pay an additional $805 million a year in state and local taxes. Personal income tax collections would increase by $442 million a year, sales and excise taxes by $239 million, and property taxes by $124 million. As a result, the overall state and local taxes paid by this subset of the undocumented immigrant population as a share of their income would increase from 8.1% to 8.6%.
If all undocumented immigrants in the country today were granted legal status through comprehensive immigration reform, their state and local tax contributions would increase by an estimated $2.1 billion a year. Personal income tax collections would increase by more than $1 billion a year, sales and excise taxes by $695 million, and property taxes by $360 million. As a result, the overall state and local taxes paid by all undocumented immigrants as a share of their income would increase from 8% to 8.6%.
The ability to work legally in the United States leads to higher earnings as a result of better job opportunities and access to better training. Legal status also leads to more income tax returns being filed, due to strong incentives and requirements for legal residents to fully comply with the tax laws. That means more revenue for state and local governments to meet demands for important public services.
No matter where you stand personally on the issue of immigration or what you think the U.S. should do about the 11 million undocumented immigrants currently living here, the fact is that undocumented immigrants pay billions of dollars in state and local taxes each year and would contribute more under immigration reform. These contributions are significant to local governments and economies and should be part of the broader discussions on immigration policy moving forward.
Lisa Christensen Gee, a senior policy analyst with the nonpartisan, left-leaning Institute on Taxation and Economic Policy, is co-author of the group’s report on state and local tax revenue paid by undocumented immigrants. Read the full report here.

"State and local governments alone take in $11.6 billion from taxpayers without papers. They'd net more if more immigrants had legal status.

It may come as a surprise to some that just like almost everyone else, undocumented immigrants pay taxes. They pay property taxes and sales taxes, and many also pay taxes on their incomes. In fact, on average, they pay a higher share of their incomes in state and local taxes than taxpayers in the top 1%."

Read the Full Article in USA Today

 

 


Equitable Solution to Alaska Fiscal Gap Must Include Personal Income Tax


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Alaska is grappling with one of the most serious budget shortfalls in the nation. The state currently faces a budget gap exceeding $4 billion and current revenues are expected to cover just 25 percent of the state’s costs, despite major spending cuts enacted in recent years.

With a revenue system highly dependent on oil tax and royalty revenue, Alaska has been forced to reevaluate its revenue structure in the face of plummeting oil production and prices. For years Alaska was able to use oil revenue proceeds to fund state government, and even repeal their income tax and cut sizable annual checks to Alaskans. Faced now with a new fiscal reality, the state is considering ways in which to diversify its revenue stream.

In a new report, “Distributional Analyses of Revenue Options for Alaska,” ITEP analyzes Gov. Walker’s New Sustainable Alaska Plan and other revenue strategies to fill the gap. The report presents information on how a range of policy options would impact Alaskans at different income levels.

The New Sustainable Alaska Plan, the most ambitious proposal on the table, would institute a personal income tax in the state for the first time in 35 years, reduce the Permanent Fund dividend (a cash payment that most Alaskans receive each year) and increase taxes on a variety of industries and on purchases of alcohol, tobacco and motor fuel.

The personal income tax in the plan was specifically proposed to offset the disproportionate impact that many of these changes would have on moderate-income families. Alaska is one of just nine states that lack a broad-based personal income tax – the most equitable revenue option available to states.

According to ITEP’s research director, Carl Davis:

“The governor’s decision to include an income tax in his fiscal plan was a step forward for Alaska’s budget debate. It is simply not possible to craft an equitable solution to Alaska’s budget shortfall that does not include some level of income tax.”

While a step in the right direction, the report finds that the modest income tax structure proposed in the New Sustainable Alaska Plan is not enough to fully offset the regressive nature of other components included in the package. Low-income families could expect to see their incomes reduced by between 5.5 and 9.6 percent, while higher-income families would face declines equal to just 1.2 to 2.0 percent of their incomes. Middle income families would see declines in the range of 2.4 to 3.9 percent.

The distributional impact of the New Sustainable Alaska Plan and other proposals currently being discussed by the legislature could be improved if they were rebalanced to derive more revenue from the personal income tax and less from reductions in the dividend. ITEP’s findings show that it is not possible to close Alaska’s budget gap in an equitable way unless a robust personal income tax is enacted as part of the package.

Read the report


The Shifting Landscape of Sales Tax Bases


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Springtime has traditionally been a fertile period for state tax proposals. This year, some important debates have flourished regarding the scope of state sales tax bases.

In their purest form, sales taxes apply to nearly all of the goods and services purchased by final consumers. Maintaining a broad base and low rate helps these taxes bring in relatively steady revenues and minimizes any interference they may have with the economy. The real world, however, is much more complicated as most state sales tax bases are riddled with special exemptions.

Some of those exemptions have been crafted to advance important policy goals such as limiting the disproportionate impact that sales taxes typically have on low-income families. Others have more to do with the political influence of a given constituency than with principled tax policy. And still others are essentially historical accidents—as the economy and consumption patterns have changed, sales tax laws haven't always kept up and initially inconsequential tax exemptions have sometimes ballooned in size. 

Shifting Ground 

It's well-known that the nation's service sector has grown significantly in recently decades. Today as much as two-thirds of consumer spending is on services rather than goods, and spending on services is the fastest growing area of consumption. But when lawmakers initially designed most state sales taxes in the 1930s, services were a relatively small part of the economy and were typically left out of tax bases. States have been slow to adapt to this change, though there have been some modest steps toward sales tax modernization in places such as North Carolina, as well as ongoing discussions of similar reforms in Arizona, California, Oklahoma, and West Virginia.

While few developments in sales tax policy are as important as the service sector's growing prominence, the recent growth of online shopping has created another high-profile challenge to state sales tax systems. Under current federal law, states can only force e-retailers to collect the sales taxes their customers owe if those retailers have some kind of "physical presence" in the state. To take just one example, this means that Amazon.com (the nation's largest e-retailer) is only collecting sales tax from customers in about half the states. For the other half, customers are supposed to be paying the sales taxes they owe directly to the state, but this requirement is unenforceable and very few do so in practice. Ultimately, the sales tax only functions if sellers are collecting and remitting the tax. For years, states have searched for ways to bring a larger number of e-retailers within their sales tax collection systems, and 2016 has been no exception in this regard. Bills taking steps to rein in the untaxed nature of online purchases have moved in Utah and in Oklahoma this year, and a recent federal court case has given states new hope of collecting these taxes as well.

Compared to the growth of the service sector and of online shopping, the rise of websites like Airbnb and apps like Uber and Lyft are extremely new developments with sometimes unclear implications for state and local tax policy. For example, it is not always clear whether Airbnb room rentals are subject to state and local hotel and lodging taxes, or whether Uber and Lyft rides are subject to sales taxes and airport pickup taxes, nor who is responsible for collecting and remitting those taxes if they are due. To their credit, some states and cities are attempting to be pro-active in updating their tax laws and regulations to account for these changes. Gov. Ducey of Arizona took executive action to help ensure that the state's regulations adapt to the rise of the "sharing sector," and other jurisdictions such as ClevelandPhiladelphiaSan Francisco, Pennsylvania's Allegheny County, and the state of Alabama have begun grappling with this issue as well.  

Exemptions old and new 

In contrast to the above attempts to ensure that sales tax bases can grow in line with the economy, states are also considering creating new exemptions from their sales taxes. Most state sales taxes already exempt some items deemed to be necessities, such as groceries and prescription drugs. This year has seen many calls to create similar exemptions for other necessities, particularly tampons. Tampon exemptions have already been enacted in a few states and have been the subject of vigorous debate around the country, including a lawsuit in New York, legislative proposals in CaliforniaConnecticutTennessee, and Wisconsin, and stories in The New York TimesWashington Post, and National Public Radio

But determining which items are truly necessities deserving of a tax exemption is not an easy task. As some lawmakers seek to broaden these exemptions, others are arguing that the exemptions already on the books for items such as groceries are too broad because they exempt not just bread and milk, but candy bars and soda pop as well. Last year Vermont removed soda from its broad exemption for groceries and California is considering removing its exemptions for candy and snack food. At the same time, lawmakers in Louisiana and Philadelphia have discussed implementing special excise taxes on soda.          

Healthy debates 

Ensuring that sales tax bases are not eroded as the economy changes is vital to securing adequate revenues for public services such as schools and public safety. But sales taxes are far from perfect, particularly in the way that they tend to hit lower- and moderate-income families the hardest. One tool for lessening sales tax regressivity is to exempt more necessities from the tax, but doing so can also force rates up and increase revenue volatility if the tax collects a larger share of its revenue from "unnecessary" items that people are less likely to buy during economic downturns. With that in mind, lawmakers should keep in mind that there are many tax policy solutions aside from sales tax exemptions that can benefit low-income families in more targeted ways.  


Tax Breaks for Higher Education Could Do More for Working Families


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Perhaps T.S. Eliot was on to something when he deemed April the cruelest month. Spring is a mix of heady excitement and apprehension as they await word from universities across the county. For their parents, the season brings a hyper-awareness of their own finances since tax season and tuition bills loom concurrently. ITEP’s new brief, “Higher Education Income Tax Deductions and Credits in the States,” provides an overview of the ways state governments have sought to encourage more residents to pursue and pay for higher education through their income tax codes.

The soaring cost of college and the ensuing sticker shock has spurred government at all levels to action. Over the past few decades, many states have created tax incentives to encourage families to save for college via 529 plans. Others have focused on higher education costs, providing tax breaks for student loan and tuition payments, or room and board fees. The federal government offers two deductions for college costs, the student loan interest deduction and the tuition and fees deduction. Most states allow residents to use these deductions in determining taxable income for state filing purposes.

While the goal of bringing higher education to more citizens is laudable, many of the tax incentives that states have created don’t help the working class families who need the most help accessing college. As the report notes,

The benefits of [many] higher education tax breaks are modest. Since they tend to be structured as deductions and nonrefundable credits, many of these tax provisions fail to benefit to lower- and moderate-income families. These poorly targeted tax breaks also decrease the amount of revenue available to support higher education. And worse yet, they may actually provide lawmakers with a rationale for supporting cuts in state aid to university and community colleges.

For instance, of the many tax breaks documented in the brief only seven are credits. Of those seven credits, only three are refundable, which means they are capable of benefiting low-income families who earn too little to owe state income tax. For low-income families, far too many of the tax breaks offer no assistance at all.

States could provide more support to these families by transforming current deductions into refundable credits. They could also improve the targeting of existing tax breaks through the introduction of additional means-testing.  The two deductions offered at the federal level can only be claimed by taxpayers who earn less than $80,000 in Modified Adjusted Gross Income ($160,000 for married couples). Similar limits could be applied to the deductions offered for contributions to 529 savings plans, which vary in size and scope according to the state.

Read the full brief here.

Downloadable Maps:

State Tax Treatment of Federal Deductions for Student Loan Interest and Tuition and Fees

State Tax Deductions and Credits Related to Higher Education Costs

State Tax Deductions and Credits Related to Higher Education Savings


Tax Cut Fever in Georgia


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A push to cut taxes for the wealthy that would pinch funding for Georgia schools, roads, and other services may have just become an even more dangerous effort to eliminate Georgia's personal income tax and devastate the state's ability to fund public investments.

Georgia lawmakers, spurred on by the fact that all 236 of them are facing re-election this year, are considering drastic changes to their state's personal income tax. One proposal could entirely repeal the income tax.

One of the bills under consideration (HB 238) contains some positive provisions, such as limiting deductions that are primarily used by high-income households. But the bill would also flatten and reduce the state's income tax to a single rate of 5.4 percent (the top rate is currently 6 percent). Lawmakers are selling this proposal as a tax cut for most Georgia families. But an Institute on Taxation and Economic Policy analysis of the plan reveals that most working families would receive minimal benefit. More than half of the resulting tax cuts would flow to just the top 20 percent (PDF) of Georgia residents, and even then the benefits are weighted most heavily for the very richest. Families earning less than $100,000 would receive an average tax cut of $100 while the top 1 percent of families would get an average cut of $2,850. Meanwhile, the overwhelming majority of Georgia families would lose because the state's ability to fund crucial services would be seriously harmed. Nonetheless, the bill has passed the House and advanced to the Senate Rules Committee and appears to be on a fast track to passage.

Meanwhile, the state Senate has approved a measure (SR 756) that would amend Georgia's constitution to force further income tax cuts when certain 'triggers' are met. The original version of this proposal would have brought the rate down in 0.2 percent increments until it reached 5 percent. But in a hastily conceived attempt to compromise before the state's 'crossover' deadline on Monday, lawmakers changed the bill (PDF) in such a way that, due to its ambiguous wording, could result in the complete elimination of the state's income tax in the long-term. While some observers argue that the bill lacks a minimum, or "floor" tax rate, others say that this is not the case and that rate cuts would stop once the state's tax rate reached 5.8 percent. Even under that generous reading, however, revenues would fall by some $350 million and roughly 70 percent of the benefit would go to the top 20 percent of Georgia households.
 
Georgia’s pending tax cuts are part of a broader, disturbing trend at the state level that seeks to tilt already unfair state tax codes even more heavily in favor of the wealthy. In the case of Georgia, that effort would also come with a large price tag: the tax cut proposals under consideration would result in an annual revenue loss of $281 to $442 million (or nearly $10 billion if LR 756 ultimately eliminates the income tax). A revenue loss of that magnitude would undoubtedly jeopardize the state’s ability to adequately fund public priorities.


Undocumented Immigrants Pay Billions in State and Local Taxes and Would Pay Substantially More Under Comprehensive Immigration Reform


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Immigration policy—it’s a politically contentious issue but one of key importance in current state and national debates. To dispel inaccuracies and provide sufficient information to inform these debates, ITEP released today an updated report on the state and local tax contributions of undocumented immigrants. 

The report, Undocumented Immigrants’ State and Local Tax Contributions, finds that undocumented immigrants living in the United States collectively pay an estimated $11.64 billion dollars each year in state and local taxes. Contributions vary by state, ranging from less than $2.2 million in Montana with an estimated undocumented population of 4,000 to more than $3.1 billion in California, home to more than 3 million undocumented immigrants. Nationwide, the average tax contributions of undocumented immigrants equal 8 percent of their income. In contrast, the top 1 percent of taxpayers in the United States pay an average nationwide effective tax rate of just 5.4 percent.

See the report for state-by-state estimates on undocumented immigrants’ current state and local tax contributions, including breakdowns of sales and excise, personal income, and property taxes.

Further, the report shows how the tax contributions of undocumented immigrants would increase if more were granted a pathway to legal status due to increased earnings and higher compliance with the tax code. If all undocumented immigrants in the United States were granted legal status and allowed to work legally, their state and local tax contributions would increase by an estimated $2.13 billion a year, with their nationwide effective state and local tax rate increasing to 8.6 percent.

The report also examines the potential state and local tax impact if President Obama’s 2012 and 2014 executive actions are upheld and fully implemented.  We estimate that the tax contributions of the more than 5 million undocumented immigrants who would be eligible for temporary reprieve under the actions would increase by an estimated $805 million. (Smaller gains in this scenario reflect the fact that the executive actions would only affect around 46 percent of the undocumented population and do not grant a full pathway to legal status.)

See the report for state-by-state estimates of the post-reform state and local tax contributions of the total undocumented immigrant population and of the 5 million undocumented immigrants directly affected by President Obama’s executive actions.

While our estimates look only at the tax consequences of immigration reform on state and local taxes, it’s important to note that our findings mirror those at the federal level. Full immigration reform at the federal level would decrease the deficit and generate more than $450 billion in additional federal revenue over the next decade, according to a 2010 report from the non-partisan Congressional Budget Office. And the president’s executive actions are estimated to have positive effects on labor market growth and productivity, as well as wages and economic growth according to both the Council of Economic Advisers and the Center for American Progress.

To view the full report, find state-specific data, or review our methodology go to www.itep.org/immigration/.


Internet Tax Ban is a Defeat for Good Tax Policy


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Yesterday Congress passed a bill, which President Obama is expected to sign, that will ban states from imposing taxes on Internet access.  The so-called “Internet Tax Freedom Act” (ITFA) was originally enacted in 1998 as a temporary measure meant to assist an “infant industry.”  Now, however, it is being made permanent for exactly the opposite reason: because the Internet is “a resource used daily by Americans of all ages, across our country,” according to Sen. Majority Leader Mitch McConnell.  The bill effectively forces a tax cut onto the states, without any direct cost to the federal government.  It’s Congress’ favorite kind of tax cut: one that it does not need to pay for.

The most tangible effect of ITFA will come in 2020 when the seven states that began applying taxes to Internet access prior to 1998—Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin—will lose their “grandfathered” status and be forced to enact special Internet tax exemptions costing a total of $563 million per year.  But Michael Mazerov at the Center on Budget and Policy Priorities (CBPP) explains that the impact on existing state taxes may not stop there.  According to Mazerov, this sweeping new ban could provide Internet access providers with a legal basis for arguing that all of their purchases, from computer servers to fiber-optic cable and even gasoline, must be exempted from tax in order to avoid any “indirect tax” on Internet access.

For years, permanent enactment of the ITFA had been stopped short by members of Congress who insisted that it be packaged with a measure that could actually improve state sales tax systems: the Marketplace Fairness Act (or similar legislation) that would allow states to require online retailers to collect the sales taxes owed by their customers.  Today, enforcement of sales taxes on purchases made over the Internet remains a messy patchwork, with many e-retailers enjoying an inequitable and distortionary price advantage over brick and mortar stores.  In order to secure passage of ITFA, Sen. McConnell pledged to hold a vote on the Marketplace Fairness Act later this year—though if history is any guide, that may not mean much.  The Senate already passed the Act once, in 2013, before watching it languish in the House.

Regardless of what happens to the Marketplace Fairness Act, the permanent extension of ITFA marks a step backward for state tax policy.  ITFA narrows state sales tax bases, makes them less economically neutral, and damages the long-run adequacy and sustainability of state revenues.  Limiting states’ ability to apply their consumption taxes in a broad-based way is antithetical to sound tax policy.


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: Shifty Tax Proposals


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This is the fourth 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 

Tax shifts lower or eliminate one tax in exchange for increasing a different tax. While tax shifts can come in different forms, recent tax shift proposals have typically called for the reduction or elimination of personal and corporate income taxes and expanded consumption taxes to make up some or all of the lost revenue. Despite the detrimental effect these tax shifts have on working families and state budgets down the road, they’ve been quite popular among states. Unfortunately, this trend continues in 2016, with several states considering tax shift proposals right out of the gate.

This year we are keeping our eye on an emerging sub-trend in tax shifts—leveraging the need for states to make long-overdue improvements to transportation infrastructure in order to get tax cuts that disproportionately benefit the highest-income households. We saw this in Michigan this past November, where lawmakers approved increases to gas taxes and vehicle registration fees but also offset new revenue with future cuts to the state’s top income tax rate. While an increase in transportation funding has been long-overdue in many states, these tax shift proposals have the effect of doing so at the expense of other critical state investments including higher education, public health, and safe communities. 

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

Arizona. Eliminating the income tax and replacing lost revenues with a higher sales tax is still a priority for Gov. Doug Ducey and lawmakers like chairman of the Ways and Means Committee Representative Darin Mitchell. Details are still forthcoming, but the governor has stood by his campaign pledge to drive the income tax rate as close to zero as possible. In Arizona, the bottom 20 percent of taxpayers already pay three times as much in taxes as a share of their income as do the top one percent. Further tax shifts from the income tax to the sales tax would be a disastrous move for tax fairness, increasing taxes on low- and middle-income families while providing substantial tax cuts to those with high-incomes.   

Mississippi. There was no shortage of significant tax proposals last year, including the Senate’s proposal to reduce income tax rates and franchise taxes, the governor’s tax cut for working families, and the House’s proposal to eliminate the income tax. However, the session ended last year without a compromise plan that could garner enough votes to win approval.  Given a new supermajority among republican lawmakers thanks to November elections, the state is almost certain to see some sort of major tax shift this year. 

Mississippi’s transportation infrastructure needs may very well provide the ticket lawmakers need to enact their desired cuts. It’s been 27 years since Mississippi last raised its gas taxes, making proposals to reform fuel taxes this year most welcome and long-overdue. Plans to raise at least $300 million for road and bridge maintenance however, are unlikely to move forward without offsetting tax cuts. Even Governor Bryant is calling for “an equal and sufficient tax reduction” to offset any proposed tax increases.  His preferred plan is a “blue collar” tax cut in the form of a nonrefundable EITC (the same plan he advocated for last year), but he is also amenable to a reduction or elimination of the state’s corporate franchise tax. While a tax cut for working families would be an appropriate and targeted policy to pair with a regressive tax increase, House and Senate lawmakers are likely to propose less targeted and more broad-based tax cuts that could result in tilting the state’s already upside down tax system more in favor of the wealthy.

Tax Shifts for Transportation a Bridge to Nowhere

Indiana. To make it more palatable for lawmakers to fund repairs for roads and bridges, House Republicans slipped a phased-in 5 percent income tax cut into a transportation package that passed the House this past Tuesday. Intending to increase funds available for infrastructure improvements, HB 1001 raises the state’s gasoline excise tax by 4 cents per gallon and the tax on diesel fuel by 7 cents. It also increases the cigarette tax by $1 per pack. The revenue potential of this bill, however, is undermined by the reduction of the personal income tax rate down to 3.06 percent over eight years. The proposal also exacerbates the unfairness of Indiana taxes: an ITEP analysis of the proposal found that the average taxpayer among the bottom 80 percent of earners would see a tax hike while the wealthiest 20 percent would benefit from a tax cut.

Georgia. What we’re seeing in Georgia is an attempt to enact a tax shift over two legislative sessions. Last year, the state enacted significant gas tax reform amongst other measures, raising $1 billion in transportation revenue. Part of the transportation package created a Special Joint Committee on Revenue Structure, which was tasked with identifying tax cuts. Due to a failure of the House to appoint their members, the committee did not convene and no tax reform plan was created. As a result of this inaction and in direct response to the prior year’s tax increase, Senator Judson Hill has introduced his own tax-cutting measures. Senate Bill 280’s primary effect is to flatten Georgia’s personal income tax to a single rate of 5.4 percent. Senate Resolution 756 requires a constitutional amendment that would bring down this rate even further. Both measures would deprive the state of needed revenue and require it to inevitably to make up these losses through more regressive sources. 

New Jersey. Facing a drying up Transportation Trust Fund, lawmakers continue to talk this year about increasing the gas tax. However, Governor Christie has said that he won’t consider raising the gas tax unless lawmakers agree to other tax cuts, specifically raising the exemption level of the estate tax or eliminating the tax altogether. In contrast to the governor’s claim that the estate tax is a burden on the middle class, a new report from the New Jersey Policy Perspectives shows that just four percent of estates are subject to the tax and that cutting the tax could seriously threaten resources needed to fund important building blocks of a strong economy such as higher education, health care, and safe communities.

South Carolina. South Carolina is preparing to debate and vote on a road repair plan in the coming weeks. The proposed law would raise an estimated $700 million each year in new revenue once fully phased in through an increase to the gas tax and other transportation related-fees, but this amount would be offset by $400 million from a combination of income tax and business property tax cuts. While there are some targeted income tax breaks that would benefit working families, including the creation of a 3.5% refundable Earned Income Tax Credit, the overall effect of the plan is somewhat regressive. There may be talk of offsetting the gas tax increase with cuts to the sales tax instead of the income tax, which, all things being equal, would be a preferable shift since it would favor cuts for middle-income earners over the wealthiest. But, most importantly, like in every other state considering this brand of tax shift, increasing one set of fees and taxes to support new funding for transportation while cutting taxes that support public education and health care is not a sensible or sustainable policy idea.

Up Next

Not all tax cuts and shifts are bad policy. Building on the momentum from 2015 reforms, many states are headed into their legislative sessions looking to address poverty and inequality through targeted tax measures. Stay tuned for the next blog post in our series for a more in-depth look at what states are addressing poverty and inequality through enacting or strengthening tax credits for working families.

 


How Are Marijuana Taxes Faring?


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In four states (Alaska, Colorado, Oregon, and Washington State), retail sales of marijuana are both legal and taxable.  Of these states, Colorado was the first to implement sales and excise taxes on legal marijuana and now has over two years’ experience collecting those taxes.  The state is collecting roughly $90 million in marijuana excise taxes alone each year—an amount short of the $162 million it collects from cigarette taxes, but that far exceeds the $42 million it receives from taxes on alcohol.  When state-level sales taxes, license fees, and application fees are added to the picture, Colorado’s haul from marijuana taxes rises to roughly $130 million per year, with millions more flowing directly to local governments via their own sales taxes on marijuana.

As the chart below shows, marijuana tax revenues have risen rapidly in Colorado throughout most of the last two years.  The same is true in Washington State—the only other jurisdiction where legal, taxable sales of retail marijuana have been taking place for a sustained period of time (Oregon implemented its retail marijuana taxes in January 2016, and Alaska will do the same later this year).  As I recently noted in testimony before Vermont’s Senate Finance Committee, monthly marijuana tax revenues are up 64 percent in Colorado compared to a year earlier, and are up by a staggering 246 percent in Washington State.

Nobody knows for certain how marijuana tax revenues in these two states, and elsewhere, will perform in the years ahead.  But it is clear that this kind of rapid growth cannot continue forever.

Much of the growth seen so far is related to the fact that new retail marijuana outlets were opened gradually in each of these states, and that many marijuana consumers did not immediately shift their purchases from the black market to the legal market following the start of legal sales.  Once the legal marijuana market becomes more established, the rapid growth in tax collections observed thus far should begin to slow.

More interesting, however, is speculation surrounding what may happen to the legal marijuana market in the long-term.  As I discussed in Vermont, one place to look for clues about the long-run trajectory of legal marijuana is the gambling industry.  Today, legal marijuana is relatively rare—much like legal casino gambling was decades ago.  With gambling, early adopters such as Atlantic City reaped an enormous economic and tax revenue windfall as gamblers flocked to the city’s casinos.  But eventually that windfall faded when casino gambling became more commonplace.  While it is unlikely that any state would ever become as economically reliant on marijuana as Atlantic City has been on gambling, early adopters of legal marijuana are likely to be more effective at luring out-of-state customers, and tax dollars, in the short-term than they will be in a future where other states are likely to have legalized marijuana as well.

Changes in the price of marijuana will also have enormous effects on the long-run yield of marijuana taxes.  Three of the four states that collect taxes on retail marijuana sales (Colorado, Oregon, and Washington State) tax the product based on its price with just one state (Alaska) taxing marijuana at a flat rate per ounce.

The RAND Corporation, among others, expect that the price of marijuana will fall significantly in the years ahead as growers become more experienced at cutting costs and as federal and state laws related to marijuana are loosened.  If prices fall, those states with price-based taxes could see a dramatic decline in marijuana tax revenues—much like the decline in many states’ gasoline taxes that has resulted from the falling price of fuel.

To help avoid this outcome, states with legal marijuana could establish a “tax floor” that would prevent the tax charged per ounce from dropping below some predetermined level even if marijuana prices plummet.  In the context of gasoline taxes, “floors” are an increasingly popular policy option used in states such as Kentucky, North Carolina, Pennsylvania, Utah, Vermont, Virginia, and West Virginia.

Ultimately, however, tax floors are no panacea for potential long-run challenges to the yield of marijuana taxes.  Lawmakers in states where marijuana is legal—or where legalization is being considered—should be aware that marijuana taxes may not be a particularly sustainable source of revenue in the long-run.  More generally, lawmakers should accept that the future of marijuana taxes is highly uncertain.  While they should strive to tax marijuana in the most sensible fashion possible, any marijuana tax established today will almost certainly need to be revisited in the future as changes occur in the price of marijuana, the structure of the industry, and the product’s legal status at the federal level and in other states.

 

For more information, see:

Testimony Regarding Tax Policy Issues Associated with Legalized Retail Marijuana

Issues with Taxing Marijuana at the State Level


Surveying Gas Taxes: Two Updated Resources


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In the coming days, President Obama will officially unveil a plan to fund major enhancements to transit, rail, and other infrastructure projects with a $10 tax per barrel of crude oil.  While the tax would initially fall on oil companies, its ultimate impact would be similar to the nation’s existing gas tax—albeit somewhat broader since it would affect not just gasoline and diesel fuel, but also heating oil and other petroleum products.

According to our updated policy brief, the federal government has now gone over 22 years without raising the gas tax.  At the state level, by contrast, gas tax increases or reforms have been enacted in 18 states since 2013 and are once again major topics of discussion.

With the average price of gas now well below $2 per gallon, state lawmakers have been more willing to accept the fact that refusing to update their gas tax rates for years, or even decades, has seriously harmed their ability to maintain and expand their transportation networks.  Despite the progress being made, we count a total of fifteen states that have waited twenty years or more since last raising their gasoline tax rates.  Though in some of those states—such as Alaska (45.8 years), Mississippi (27.1 years), South Carolina (27.1 years), New Jersey (25.6 years), and Alabama (23.7 years)—proposals to raise gas taxes have recently received the backing of governors or other key lawmakers.

Fortunately, gas tax procrastinators in search of a better model have plenty of examples from which to choose.  Our second updated brief spotlights states with smarter, variable-rate gas taxes that can rise automatically alongside inflation, vehicle fuel-efficiency, or other relevant measures.

In the long-run, we know that construction costs and vehicle fuel-efficiency are almost guaranteed to continue increasing.  Given this reality, we also know that levying a flat gas tax rate for years, or even decades, without any kind of adjustment is a recipe for fiscal imbalance as fuel-efficient vehicles consume less gas and each gas tax dollar collected is stretched thinner.

Ultimately, those states with variable-rate gas taxes are much better positioned for the long-run than the states—and the federal government—that levy fixed-rate gas taxes whose rates have been outdated for far too long.

Read the briefs:

How Long Has it Been Since Your State Raised Its Gas Tax?

Most Americans Live in States with Variable-Rate Gas Taxes


State Rundown OK, KS, and IN: Tax Cut Groundhog Day


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

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

 


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

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

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

 


State of the State Addresses This Week:

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

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

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

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

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

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

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


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

 


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.


Tax Justice Digest: EITC Awareness -- Corporate Tax Watch -- Flint


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Read the Tax Justice Digest for recent reports, posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

Our office survived the blizzard and got busy analyzing tax policies far and wide – take a look at what we’ve been commenting on this week:

EITC Awareness Day!
Today is EITC Awareness Day and we couldn’t be happier to join with the IRS and other groups to spread the word about this important credit that lifts millions of families out of poverty each year. For more on the EITC, how the recent expansions benefit your state, and how states are implementing the credit check out this post from ITEP senior analyst Aidan Davis.

Federal News

Corporate Tax Watch: Adobe, Johnson Controls and NASCAR
The last few weeks we’ve been busy monitoring companies getting increasingly creative when it comes to avoiding their taxes. ITEP’s Director, Matt Gardner, crunched the numbers and it appears that Adobe shifted hundreds of millions offshore. Apparently executives at Adobe think, like PDFs, its profits are portable too.

Johnson Controls is a Milwaukee-based company that makes batteries and HVAC systems. They’d also like to become Irish. Read more about its outrageous tax-dodging scheme here.

Did you know that a tax break for NASCAR was included in the $680 billion extenders package Congress passed late last year?

Flint Fail: Lessons
The Flint water crisis should not be happening.  Here we take a closer look at this “customer” service failure and the role that tax policy played.

State News

Looking Forward: 2016 State Tax Policy Trends
This week ITEP’s state tax policy team identified many of the trends they will be following this year in state tax policy - from tax shifts to tax cuts and working family tax credits. Read the first post in ITEP’s important series.

Chances Are You Live in a State Where Amazon Collects Taxes
Starting Monday, Amazon.com will begin collecting sales tax from its customers in Colorado.  Once this happens, the company will be collecting sales tax in a total of 28 states – including 19 of the 20 most populous states in the country. Here’s what ITEP’s Research Director, Carl Davis, has to say about this development.

Sign up for ITEP’s State Tax Rundown to Get Expert Info On Tax Debates In:
Alaska, Kentucky, Georgia, Indiana, Kansas, Massachusetts, North Carolina, South Carolina, and West Virginia

Now that many state legislatures are in session tax debates are heating up. During this busy time ITEP sends out two State Rundown emails a week detailing a myriad of state tax issues. To get these emails sign up for our Rundown here.  

State Spotlight: Louisiana
ITEP’s State Tax Policy Director, Meg Wiehe, weighs in on the tax and budget situation the new Governor of Louisiana faces. Stay tuned, the situation in Louisiana is quickly evolving.

Shareable Tax Analysis:

EITC Awareness

ICYMI: As part of EITC Awareness Day we wanted to remind you about CTJ’s interactive map which details the average benefit for working families of permanently extending the recent expansions in the EITC and Child Tax Credit. In good news for working families, these extensions were made permanent late last year.

As the compiler of this email, I’d love to hear from you anytime at kelly@itep.org

For frequent updates find us on the Tax Justice blog.


Celebrating EITC Awareness Day


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EITC awareness DayCTJ and ITEP are joining in the effort to promote the EITC Awareness Day outreach campaign as it celebrates its 10th anniversary. Over the past decade, the IRS has joined partners nationwide to ensure that low- and moderate-income workers are given the credit they deserve. The federal EITC and state EITCs are well worth celebrating as anti-poverty measures that lift millions of working Americans out of poverty.

Since its introduction in 1975, the federal Earned Income Tax Credit (EITC) has rewarded work and boosted the economic security of low-wage workers. Over the past several decades, the effectiveness of the EITC has been magnified as the federal credit has been expanded and 26 states have enacted, and later expanded, their own credits.

The most recent expansion of the federal credit occurred in 2009 as part of the American Recovery and Reinvestment Act (ARRA). Under ARRA the EITC was temporarily enhanced for families with three or more children and for married couples. These vital enhancements were extended through 2017 in subsequent legislation and – in a big win for low-wage workers across the country – were made permanent late last year. For more on the impact by state of expanding the EITC click here for an interactive map.  This permanent improvement to the credit will prevent 16.4 million Americans from being pushed into or deeper into poverty.

The case for an EITC is even stronger at the state level, as we explain in our report Rewarding Work Through State Earned Income Tax Credits. State and local taxes are regressive, requiring low- and moderate-income families to pay more of their income in taxes than wealthy taxpayers. To date, twenty-six states and the District of Columbia have EITCs in place to supplement the federal credit. This past year lawmakers from both sides of the aisle came together in five states to champion state EITCs. California became the 26th state to enact an EITC; theirs is loosely based on the federal credit, but targeted only to those living in deep poverty. Building from the bipartisan momentum of 2015 state EITC reforms, a number of states are heading into their legislative sessions with EITC enactment and reform on the agenda. ITEP’s State Tax Policy Director, Meg Wiehe, flags this as a trend to watch in 2016.

Stay tuned for an upcoming blog post that will provide a more in-depth look at how states are likely to address poverty and inequality through tax breaks for working families in 2016. 


Amazon.com to Collect Sales Tax from Roughly 84 Percent of its US Customers


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amazon taxStarting Monday February 1st, Amazon.com will begin collecting sales tax from its customers in Colorado. Once this happens, the company will be collecting sales tax in a total of 28 states—including 19 of the 20 most populous states in the country.  All told, 84 percent of the country’s population will live in a state where Amazon.com collects sales tax.

Putting aside the four states that levy neither a state nor local sales tax, that leaves just 18 states, and the District of Columbia, where Amazon is refusing to collect and remit the sales taxes owed by its customers: Alabama, Alaska, Arkansas, Hawaii, Idaho, Iowa, Louisiana, Maine, Mississippi, Missouri, Nebraska, New Mexico, Oklahoma, Rhode Island, South Dakota, Utah, Vermont, and Wyoming.

For more on this issue, see the detailed discussion (and animated map) that we released at the start of last year’s holiday shopping season.


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.


GE's Move to Boston Fueled by Hospitable Business Environment Not Tax Rates


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Ending months of media speculation, General Electric announced this week that the company will relocate its headquarters from Fairfield, Conn., to Boston, Mass.The company’s press release announcing the move explained that its choice is driven by amenities Boston and the state of Massachusetts offer, including its “diverse, technologically fluent workforce” and its emphasis on research and development.

Conspicuously absent from the announcement is any reference to tax-related reasons for the relocation. Earlier this year after the Connecticut legislature marginally increased business taxes, GE threatened to move and anti-tax advocates wrongly held up the state’s tax increases as a cautionary tale. GE’s choice of Massachusetts (New York was the company’s other consideration), hardly a tax haven for footloose corporations, demonstrates that a wide variety of factors, not simply the lowest tax rate, determine where businesses will locate. Boston and runner-up New York are recognized as centers of commerce and innovation. As GE said in its own press release, it chose Boston as its new corporate headquarters because of the broader “ecosystem” it offers.

It should be noted, however, that the biggest winner in this move is GE, not other taxpayers. The company has long been spectacularly successful in avoiding state income tax obligations as a Connecticut resident. In 2014, the company enjoyed $5.8 billion in pretax profits and didn’t pay a dime in state income tax on these profits. Over five years, the company paid just a 1.6 percent state income tax rate on $34 billion in U.S. profits, and it paid less than 1 percent in federal income taxes. The company is one of the nation’s most notorious tax dodgers.  

These hard facts haven’t stopped idle speculation over the role of recent Connecticut tax changes in prompting the move. GE CEO Jeffrey Immelt fanned the flames when he wrote a memo earlier in 2015 complaining about tax changes enacted by the state legislature last year. But it’s unlikely that these changes really factored into the company’s decision. After all, the “combined reporting” changes corporate lobbyists in Connecticut complained most vocally about have been in place in Massachusetts since 2008. Moreover, the Connecticut Legislature quietly enacted special new tax breaks for GE in November, and the company itself has been very clear that “GE's move is not being driven by tax policy. It's being driven by a major change in GE's strategy.” Further, the company’s press release admits that corporate leaders had “been considering the composition and location of its headquarters for more than three years,” long before Connecticut’s recent corporate tax changes saw the light of day.  

Long-time business leader Michael Bloomberg said that “any company that makes a decision as to where they are going to be based on the tax rate is a company that won’t be around very long.” General Electric’s latest announcement strongly suggests that tax rates weren’t even a blip on the radar in the company’s relocation move. 


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


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

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

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

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

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

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

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

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

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

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

 


Connecticut Lawmakers Cave to Threats from General Electric Yet Again


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Connecticut lawmakers earlier this year passed a budget with more than $1 billion in new revenue, including increased corporate taxes, to plug a budget gap and ensure the state has resources to make needed investments in education, transportation and health care.  In late June, Gov. Dannel Mallow called lawmakers back to the capital for a special session, essentially caving to notorious tax dodger General Electric (GE) and other corporations' demand that the state pare back just enacted tax chages. The most significant change enacted in the special session was a delay in the start date for combined reporting. Combined reporting requires a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report for tax purposes. Connecticut Voices for Children puts it this way:

 “Combined reporting is an essential policy aimed at preventing corporations from using accounting gimmicks to shift profits actually earned within their borders to states and foreign countries where they will be taxed at lower rates or not at all.”

This week, the governor and legislature once again put GE’s interests over the health and well-being of the state’s residents.  Due to underperforming personal income tax collections, the state faces a projected $350 million budget shortfall for the current fiscal year and another $552 million in the next fiscal year.  To close the current year gap, the legislature voted this week to cut early-childhood programs, conservation efforts, and medical services for inmates. But, it also agreed to spend money to cut corporate taxes including modifying combined reporting requirements and changing how some corporate deductions can be claimed.

The new corporate tax changes are largely seen as an effort to keep GE headquartered in the state.  But not surprisingly GE hasn’t committed to staying put and news leaked this week they may be considering a move to Boston. Since Massachusetts also requires multinational corporations to file combined returns, this latest news would suggest that Connecticut is being played by GE executives.  


Hope in Louisiana?


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Louisiana Governor-elect John Bel Edwards may be a breath of fresh air for tax justice advocatesin Louisiana this upcoming legislative session.

Gov. Bobby Jindal prioritized policies aligned with his no new taxes pledge rather than meeting the needs of Louisianans. The outgoing governor even introduced a losing proposal that would have eliminated the state’s income tax and replaced the revenue with a broader sales tax.

But hope springs eternal for fundamental and thoughtful tax reform as way to help close the state’s projected budget gap of $370 million for the current fiscal year and a more than $1 billion budget gap for next year. The optimism for revenue raising tax reform is possible thanks to the Gov. Elect’s appointment of former Republican Lt. Gov. Jay Dardenne as the state’s commissioner of administration  (a position that is equivalent to chief budget officer). Dardenne was the architect of revenue-raising tax reform enacted but later repealed) in the early 2000s. That package lowered sales taxes and increased the state’s reliance on income taxes.  

Another bright spot--last week the governor-elect called for doubling the state EITC as part of his commitment to reduce poverty in the Pelican State. We’ll be closely following the tax debate in Louisiana in the new year.


Back to Reality: Alaska Governor Proposes Progressive Income Tax


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For years, lawmakers interested in cutting or eliminating personal income taxes have held up Alaska as aAlaska Progressive Income Tax model for what they would like to achieve.  Alaska is the only state to ever repeal a personal income tax and has been without one for 35 years.  But Alaska’s status as an anti-tax role model may not last.  Yesterday, Gov. Bill Walker proposed a plan to remedy the state’s massive revenue shortfall by, among other things, instituting an income tax equal to 6 percent of the amount that Alaskans pay in federal income taxes.

As background, Alaska’s decision to repeal its income tax always came with something of an asterisk attached.  The state’s 1980 repeal only occurred after drillers discovered North America’s largest oil field on land that happened to be owned by the state government.  During times of high oil prices, the billions of dollars in tax revenue collected from the energy sector were enough to fund 90 percent of the state’s general operations and to pay an annual dividend to Alaska residents (totaling $2,072 per person this year).

But as anybody who has driven by a gas station this year knows, these are not times of high oil prices.  Crude oil prices recently fell to just $37 per barrel and Alaska’s oil-dependent revenue streams are now raising enough to fund just 40 percent of the state’s budget, even with significant spending cuts enacted last year.  As Gov. Walker explains, “we cannot continue with business as usual and live solely off of our natural resource revenues.”

The Governor proposed revenue changes that include raising the state’s comically outdated motor fuel tax rate, boosting taxes on alcohol and tobacco, reforming the tax treatment of oil and gas producers, and paring back residents’ annual dividend.  Of course, many of these changes would impact lower- and moderate-income Alaskans more heavily, which is part of the reason why (PDF) the package also includes an income tax piggybacked on the progressive federal income tax system.  Notably, Gov. Walker’s income tax design is similar to one proposed by lawmakers from both parties during this year’s legislative session, and also resembles the structures previously in place in states such as North Dakota, Rhode Island, and Vermont.

Ultimately, the plan put forth by Gov. Walker appears to be a serious attempt to address the state’s yawning, $3.5 billion deficit.  And as Alaska Public Media explains, it would also “shift the state away from a direct reliance on oil revenue and the boom-and-bust cycle of oil prices.”

Now that the Governor has spoken out about an income tax, wild, erroneous claims about the economy-destroying nature of personal income taxes are surely on the way.  But the reality is that if Alaska can’t count on oil revenues to fund its schools and infrastructure, an income tax is the most equitable and sustainable option available. 


What Makes Delaware an Onshore Tax Haven


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When you think of a tax haven, you probably imagine the far off tropical islands of Bermuda or Grand Cayman, but the reality is that there is a major tax haven even closer to home in the state of Delaware. A new report from the Institute on Taxation and Economic Policy (ITEP) explains how one of our nation’s smallest states is one of the world’s biggest havens for tax avoidance and evasion.

What makes Delaware a tax haven? First, Delaware is one of the easiest places in the world to set up an anonymous shell corporation. In fact, setting up a company in Delaware requires less information than signing up for some library cards. This means that it is difficult for law enforcement to trace the activities of the anonymous shell corporations to the people who actually own and control them. This is what makes Delaware corporations an ideal vehicle not only tax evasion, but also for illicit activities like drug trafficking, terrorism finance and defrauding the government.

In addition, the state does not require companies to pay any tax on income relating to intangible assets held by companies based in the state. Companies take advantage of accounting gimmicks to shift their intangible income from other states into Delaware in order to take advantage of the zero tax rate on income earned from intangible assets. For example, Toys R Us has avoided millions in taxes by transferring its trademarks and trade names (including “Geoffrey the Giraffe”) into Delaware and charging its subsidiaries in other states for use of its trademarks.

Taken together, these two features help explain why there are 1.1 million companies registered in a state that has a population of only 935,000 people. While many in the media have highlighted the 19,000 companies listing the Ugland House in the Cayman Islands as their address, this pales in comparison to the 285,000 companies that are listed at the modest CT Corporation building in Wilmington, Delaware.

Barring action from the Delaware legislature , the good news is that individual states and the federal government can easily close down this onshore tax haven. To stop anonymous shell corporations, Congress could pass legislation, such as the Incorporation Transparency and Law Enforcement Act, mandating that states require the name and address of each owner of a company at the time of incorporation and after any change in ownership. This would lift the veil on individuals seeking to hide behind their anonymous shell corporations. And states can adopt “combined reporting,” which requires companies to report the income and expenses of all out-of-state subsidiaries for the purpose of determining corporate income tax.

Ending Delaware’s tax haven status would send a clear signal to other nations that the U.S. is a credible actor and thus bolster our efforts to combat offshore tax avoidance and evasion internationally. In addition, by putting an end to anonymous shell corporations, the United States could play a leadership role in promoting this critical policy throughout the rest of the world.

Read ITEP’s full report “Delaware: An Onshore Tax Haven” 


Grover and the Gas Tax


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Congress is on the verge of passing a five year transportation funding package built around a strange mix of revenue sources.  As many observers have pointed out, a more coherent and long-term solution would have been to increase and reform the nation’s largest source of transportation revenue: the federal gasoline tax.  Unfortunately, this option has been kept off the table for over 22 years.

Why is that?

An article in The Washington Post linked the lack of Congressional interest in the gas tax to “a pledge inspired by the conservative activist Grover Norquist, promising never to raise taxes.”

Similarly, the former head of the National Association of Manufacturers recently said that “the Norquist anti-tax pledge” is the primary reason that Congress has not taken the “obvious” step of raising the gas tax.

And Sen. Sherrod Brown (D-Ohio) indicated that a gas tax increase was not seriously considered this year because the “majority party … signed a pledge to a Washington lobbyist.”

Without a doubt, anti-tax attitudes in Congress have been a major factor in keeping gas tax increases off the table since 1993.  And Grover Norquist of Americans for Tax Reform (ATR) has done quite a bit to shape and maintain those attitudes.

But when it comes to his “Taxpayer Protection Pledge,” it appears that Norquist’s reach is being exaggerated.

The full text of the 57 word pledge (PDF) signed by members of Congress is as follows:

I, ___________, pledge to the taxpayers of the state of __________, and to the American people that I will:

ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and

TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Clearly, there is no language in this pledge that is designed to prevent signers from voting for a gasoline tax increase.  Only income tax rates, deductions, and credits are mentioned in the federal pledge (the state-level pledge is another matter).

Of course, the folks at Americans for Tax Reform should know this better than anyone.  But when asked about the significance of the pledge during debates over the gas tax, the group is inevitably coy.  Politico, for example, reported earlier this year that ATR “did not say whether it would consider a gas tax hike this year a violation of its anti-tax pledge.”

In reality, Politico did not need to bother asking.  Anti-tax attitudes have certainly played a role in keeping overdue gas tax reforms off the table.  But Grover Norquist’s pledge is very clearly not a factor.


Mapping the Benefit of Making Permanent the Expansions of the EITC and CTC


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Critical expansions to the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) will expire without action from Congress, making life harder for working families already struggling to make ends meet. More than 13 million families (nearly 25 million children) would see their taxes go up by an average of $1,073 annually.

As Congress and the president negotiate an end of year tax deal, they should say yes to the working families’ tax credits and no to the tax extenders. At a time of record corporate profits and record income inequality, making permanent the expansions to the EITC and CTC, rather than more tax breaks for big corporations, is just plain commonsense.

Scroll over your state below to see the impact of the EITC and CTC expansions.

 



Impact of Expansions in EITC and CTC:

 

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Why Online Holiday Shopping Will Cost More This Year


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If recent history is any guide, U.S. consumers will do more online shopping during next week’s “Cyber Monday” sales event than on any other day in history.  E-commerce is now a $300 billion business that has been growing by roughly 15 percent each year.  While most of its popularity comes from its convenience, the tax evasion opportunities made possible by the Internet (and a gridlocked U.S. Congress) have also helped tilt the playing field in favor of e-retailers.

For years, making purchases online was an easy way to avoid paying sales tax since most e-retailers refuse to collect the taxes owed by out-of-state customers.  When that happens, shoppers are supposed to pay sales taxes directly to the states in which they live, but such requirements are unenforceable and few shoppers actually pay the tax.  The result is a massive hole in state sales tax bases that has made raising state revenue for education, infrastructure, and countless other public services more difficult.

Recently, however, tax-free online shopping has become slightly less universal as the nation’s largest online seller—Amazon.com—has expanded its physical distribution network in a way that has brought it within reach of a growing number of state tax authorities.

This holiday season will be the first in which Amazon will be collecting sales tax in a majority of states.

In fact, this holiday season will be the first in which Amazon will be collecting sales tax in a majority of states.  As recently as 2011, Amazon collected sales tax from its customers in just five states: Kansas, Kentucky, New York, North Dakota, and its home state of Washington.  With the Oct.1 addition of Michigan to its tax collection list, that number now stands at twenty six states—home to 81 percent of the country’s population.

Our new, 20-second animated map provides an overview of how Amazon’s sales tax collection practices have evolved since the company’s first online sale in 1995:

Amazon’s (often grudging) expansion in the scope of its sales tax collection represents a modest step toward a more rational sales tax.  Taxing items that are purchased at traditional retail outlets while effectively exempting those bought over the Internet is unfair and unsustainable, especially as more and more consumers shift their purchases from brick and mortar retailers to online.

But despite the progress being made, there are still many cases in which e-retailers and traditional retailers are not competing on a level playing field.  Countless online retailers continue to skirt sales tax collection requirements in most states.  And even Amazon, despite its demonstrated ability to collect sales tax from most of its customers, is not collecting tax in 20 states and the District of Columbia (this count excludes the four states that levy neither state nor local sales taxes).  The result is that while most shoppers see sales tax tacked onto their Amazon purchases, about 17 percent of shoppers can still use Amazon.com as a means of evading (knowingly or not) their state’s sales taxes, and thereby reducing funding for education and other services in the process.

While most shoppers see sales tax tacked onto their Amazon purchases, about 17 percent of shoppers can still use Amazon.com as a means of evading (knowingly or not) their state’s sales tax.

While Amazon has arguably softened its opposition to sales tax collection in some instances, in others it has continued to pursue an aggressive avoidance strategy.  Specifically, the company has severed ties with businesses located in half a dozen states (Arkansas, Colorado, Maine, Missouri, Rhode Island, and Vermont) as a means of sidestepping laws that would have otherwise required sales tax collection, or additional reporting, on Amazon’s part.  As our animated map shows, the company also previously used this tactic in California, Connecticut, Illinois, Minnesota, and North Carolina before eventually reversing course and collecting sales tax, as well as in Hawaii where business relationships were terminated for a few weeks in a successful effort to pressure former Gov. Linda Lingle to veto an Internet sales tax enforcement measure.

Ultimately, a comprehensive solution will have to come from the U.S. Congress.  The federal government has the authority to require e-retailers to collect sales taxes in all of the states and localities where their customers are located.  In 2013, the Senate passed and President Obama supported legislation that would have done exactly that, but the House failed to act.  As of now it is unclear when Congress will take up the issue again, but until that happens, sales tax collection in the rapidly growing e-commerce sector will remain an indefensible patchwork.

 

 


New Law Endangers Michigan's Fiscal Future


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Earlier today, Michigan Gov. Rick Snyder signed a package of tax changes that will eventually fund improvements to the state’s transportation infrastructure, but it comes with cuts to other services and a weakened long-term fiscal position.  When most of the law’s provisions are phased in five years from now, they will collectively drain (PDF) more than $800 million from local governments, universities, health care, and corrections every year.  Making matters worse, a modified income tax trigger could push the general fund loss to $1 billion per year within a decade and could turn this so-called “funding” package into a net revenue loser.

Below is a list of the package’s most significant components (revenue estimates are for Fiscal Year 2021):

New Revenue

  • $404 million from increasing the gasoline tax by 7.3 cents and the diesel tax by 11.3 cents on Jan. 1, 2017.  These tax rates will also be tied to inflation starting in 2022.
  • $221 million from increasing most vehicle registration fees by 20 percent and from levying higher fees on electric vehicles.

Funding Shifts

  • $600 million annually will be moved out of the general fund to be spent on transportation.  The Detroit Free Press identifies local governments as the group most likely to face funding cuts under this shift, followed by higher education, public health, and corrections.

Tax Cuts

  • $206 million in tax cuts will be distributed to Michiganders by expanding the state’s property tax credit for low- and moderate-income families.  Some features of the credit will also be indexed to inflation starting in 2021.
  • A sizeable, but uncertain revenue loss will come from cutting the state’s top income tax rate via an ill-conceived “trigger” mechanism.  Starting in 2023, the state’s income tax rate will be reduced if general revenue growth exceeds the inflation rate multiplied by 1.425.  The non-partisan House Fiscal Agency estimates (PDF) that if this law were in effect today, $593 million in revenue would be lost next year as a result of dropping the tax rate from 4.25 to 3.96 percent.  If this type of cut is combined with the property tax credit expansion, fuel tax increases, and vehicle registration fees just described, the net result of this “funding” package will be to reduce state revenues—not raise them.

Ultimately, these reforms to Michigan’s fuel taxes are long-overdue and the property tax credit expansion is a reasonably effective way of offsetting some of these taxes for lower-income families.  But the components of this package that will have the largest impact on Michigan’s budget in the years ahead are the $600 million general fund earmark for transportation, and the automatic income tax cuts scheduled to take effect long after most of today’s lawmakers have left office.


Louisiana Voters Protect State Rainy Day Fund


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Good news out of Louisiana this week. Voters defeated Amendment 1, one of four constitutional amendments on the Oct. 24 statewide primary ballot. The proposal would have put a $500 million dollar cap on the state’s Rainy Day Fund, the savings account the state relies on in the event of an unexpected drop in revenues. The amendment would have also created a transportation fund to capture any mineral revenue coming in above the new cap.

Steve Spires of the Louisiana Budget Project sums up the situation in his recent post:

“The goal of this amendment is laudable: to address Louisiana’s chronic backlog of transportation needs. Unfortunately, it would do so by weakening the state’s rainy-day savings account, which would hurt the state’s ability to react to future financial downturns and put vital state services at risk for damaging cuts.”

Even without the amendment, the fund is already subject to strict rules such as the condition that the legislature can only use one-third of its contents in any given year. A $500 million dollar cap would have limited rainy day fund infusions to just $167 million per year. In the context of Louisiana’s roughly $8 billion budget, Amendment 1 would have rendered the fund unable to cover anything beyond a 2.1 percent decline in revenues. This would have been an inadequate cushion to protect Louisiana residents from cuts to critical public services during the next economic downturn.

Size restrictions on rainy day funds limit states’ ability to grow reserves in line with their budgets. In our Primer on State Rainy Day Funds, ITEP warns against such overly restrictive caps. Louisiana voters made the right call this week by forcing lawmakers to have a real discussion about road funding, rather than weakening the state’s rainy day fund as part of a deficient package that wouldn’t have solved the problem.


Tax Ballot Measures Ask Voters to Decide


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The fall harvest season has brought a bumper crop of tax ballot measures in states across the nation(though sadly, no tax-themed seasonal lattes.) We’ve already covered a ballot proposal in Washington, a potential ballot proposal in North Carolina, and a 2016 proposal in Maine – check out the links to get the scoop. Today, we’re looking at measures in Texas and Utah, and providing an update on Washington.

Texas: Texas voters will consider two proposals with significant ramifications for roads and schools. Proposition 1 would increase the homestead exemption for public school property taxes from $15,000 to $25,000. The average savings for Texan households would be about $126, but schools systems across the state would lost $1.2 billion per biennium – money that the state would have to replace from the general fund. A state judge has already ruled that the state’s low level of school funding is unconstitutional, and Proposition 1 will make it harder to even maintain the status quo – all at a time when the needs of Texas’s schoolchildren are growing. Compounding the budgetary pressure is Proposition 7, which would divert sales tax revenue from the general fund to the Texas Department of Transportation for highway maintenance and construction, but would not raise any new revenue. This could have the unintended effect of weakening spending in other important areas that are paid for out of the general fund (including schools), particularly since low oil and gas prices are hurting the state’s bottom line. A better approach would be raising the state’s gasoline tax, which has remained unchanged for 24 years and has failed to keep pace with inflation.

Utah: Utah voters in 17 counties will decide whether or not to raise their sales taxes by 0.25 percentage points in order to fund the Utah Transit Authority. Legislative analysts say the plan will cost affected Utahans $50 a year on average. The legislature voted to allow counties to decide if they wanted to include the measure, Proposition 1, on the ballot and 17 of Utah’s 29 counties followed through. If passed by a county’s residents, the sales tax increase will only apply to that county. If approved, 40 percent of the revenue raised will support the transit authority. Another 40 percent would go to cities for local roads and other transportation projects. The final 20 percent will go regional transportation projects.

Washington: Tim Eyman, the author of Initiative 1366 and previous supermajority requirements, is a lightning rod in Washington state politics. I-1366 would force the legislature to amend the state constitution to require a supermajority vote for tax increases. If legislators refuse to amend the constitution, the ballot initiative would automatically cut the sales tax rate by a penny, leaving the state $8 billion poorer at a time when the Washington Supreme Court says the state is not meeting its constitutional obligation to K-12 students. Already, a mix of uncertainty over funding and questions swirling around Eyeman have caused many supporters of previous anti-tax measures to withhold their support from I-366. The Association of Washington Business and the state’s grocery store association are both keeping out of the debate over the proposal over concerns about how their donations were used in past efforts. If the initiative passes anyway, opponents hope that the courts will eventually rule I-1366 an unconstitutional abrogation of legislative authority. 


New ITEP Brief: A Primer on State Rainy Day Funds


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With the Great Recession behind us and economic conditions slowly improving across the country, now is the time for states to assess their preparedness for future downturns. Rather than waiting for another crisis to occur, ITEP’s new policy brief explains why states should make structural improvements to their rainy day funds right now.

If the economy falters and states are caught without enough reserves to cover the resulting budget shortfalls, policymakers will be faced with having to enact temporary tax increases or potentially painful budget cuts. An adequate, accessible rainy day fund can help lessen the need for these types of difficult budget decisions.

But as the brief explains, deposits into state rainy day funds should not come at the cost of inadequate funding and support of critical public services today. State rainy day funds are at their best when the need to save is carefully balanced against spending priorities. When this happens, rainy day funds are an indispensable part of a responsible state budget.

Read the brief to learn more about rainy day issues such as size limits and rules for the deposit, withdrawal, and replenishment of funds.


Pennsylvania Budget Stalemate and the Hard Work Ahead


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

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

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

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


Progressive Era Reform Can Be Anything But Progressive


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referendum.jpg

Way back in 1902, when the Oregon legislature passed the first law allowing ballot initiatives, the measure was seen as a progressive reform that would put power back into the hands of the many, rather than the few. Today, 24 states allow ballot initiatives, where proposals that gain a certain number of signatures on a public petition can be put before the voters. But while the process was initially promoted to make government more democratic and responsive to the will of the people, today the ballot initiative is often used the tie the hands of lawmakers and thwart the prerogatives of future generations with onerous requirements. These ballot proposals can be anything but progressive, serving the economic interests of the wealthiest citizens and businesses rather than addressing the needs of citizens as a whole.

Supermajority requirements and tax and spending limits, two frequently proposed ballot measures, are not designed to promote the well-being of states. They do the exact opposite by making it nearly impossible for lawmakers to properly fund public investments that benefit a state and its people. Supermajority initiatives increase the threshold needed for tax legislation to pass. Tax and spending limits, like Colorado’s Taxpayer Bill of Rights (TABOR), couple state spending to arbitrary factors instead of allowing lawmakers to actually debate and decide what the state needs. These measures tie the hands of lawmakers by limiting their ability to govern and undercut democracy.

Two ballot measures, one currently before voters in Washington and the other still in the planning stage in North Carolina, highlight the danger of adopting anti- tax measures at the ballot box.

The Supermajority Requirement and Washington

A Washington ballot initiative masterminded by anti-tax activist Tim Eyman would essentially force lawmakers to add a supermajority requirement for tax legislation to the state constitution. If the initiative is approved by voters, lawmakers have the choice of voting to amend the constitution to adopt the requirement or losing over $1 billion in needed state revenue.

The Washington State Supreme Court ruled supermajority initiatives (led by Eyman) unconstitutional in 2010 and 2013, arguing that such a measure “unconstitutionally amends the constitution by imposing a two-thirds vote requirement for tax legislation. More importantly, the Supermajority Requirement substantially alters our system of government, thus enabling a tyranny of the minority.”

Mr. Eyman, undeterred, crafted his latest initiative with an eye toward getting around the court’s ruling. Since only lawmakers can approve an amendment to the constitution, the initiative (I-1366) is designed to force lawmakers to approve the amendment or otherwise lose more than $1.4 billion in revenue annually via an automatic one-cent decrease in the state sales tax.  If voters approve this initiative in November, lawmakers’ ability to govern would be restricted either via the requirement or through a major revenue loss.

The result would be disastrous to state investments that help build a strong economy. Many vital public services could face cuts or be eliminated due to the revenue hole of $1.4 billion per year that would come as a result of a sales tax reduction. Those potentially lost revenues support public safety, schools and other investments that secure a strong economy and protect working families. In essence, this is a ‘lose-lose’ situation for lawmakers. They are either stuck with a damaging supermajority requirement or a massive loss in revenue.

Such restrictions can also force lawmakers to raise tuition and fees or utilize other devices to make up for lost revenue, placing an undue burden on everyone. Further, if lawmakers are looking to improve their tax structure (like adding a tax on capital gains to a tax code that currently does not tax personal income), they can forget about it. Any kind of real tax reform that might close wasteful loopholes for profitable corporations becomes nearly impossible with supermajority requirements.

Lastly, for anyone who believes our country has become too beholden to special interests, supermajority requirements worsen the situation. With a supermajority law in place, there are fewer legislators required to derail tax bills. Therefore, lobbyists and other special interests can essentially hold important legislation ‘hostage’.

The So-Called “Taxpayer Bill of Rights” and North Carolina

The North Carolina Senate approved a version of the “Taxpayer Bill of Rights” (TABOR) constitutional amendment for the ballot in November 2016 that would make things worse in the Tarheel State, where lawmakers have been on a spree of tax and spending cuts.  The House has yet to give their stamp of approval, but there is still time for the House to discuss the measure and hopefully reject it over the coming months.

If approved by voters, the initiative would change the state constitution in three detrimental ways. First, spending on public services would be limited and a two-thirds majority vote would be required to raise additional revenue. Second, TABOR would cap the income tax at 5% (currently the flat rate is 5.75%), resulting in more than $2 billion less each year in funding for education and other priorities that benefit North Carolina.  Finally, it would impose a limitation on the amount of revenue the state can collect and retain each year, requiring a deposit into the Rainy Day Fund but also a two-thirds vote to access that fund.

TABOR has some similarities to the supermajority requirement currently under consideration in Washington State, but its primary parallel is that it too limits lawmakers’ ability to adequately fund investments. The measure would be damaging to the quality of life for all North Carolinians.

A majority of families in the state rely heavily on the investments TABOR’s limits would undercut. Living proof of this struggle can be found in Colorado, where TABOR resulted in cuts to health care and education. It also allowed the economy, business environment, and overall quality of life to stagnate, if not worsen. That’s why Colorado voters ultimately decided to suspend the measure for five years, starting in 2005, in response to a sharp decline in public services.

Furthermore, the initiative’s revenue-limiting income tax cap would make it exceedingly difficult to create new economic growth. The decreased revenue would result in less investment in innovation, new industries, and building a strong workforce. Ensuring that a state’s tax structure is fair is also vital to a strong economy. The income tax is one of the best tools to ensure low-income people are protected from paying more in taxes than the wealthy. A cap on the income tax would only worsen the already upside-down North Carolina tax structure, as lawmakers will be forced to rely on other sources for revenue like regressive sales and property taxes.

Since TABOR limits the amount of revenue states can retain, it can fail to take unanticipated spending needs into consideration. The formula used to limit any unused revenue does not account for the growing costs of goods and services over time. TABOR would prevent the state from meeting the changing needs of its growing population while making it impossible to keep up with even basic growth in the costs of delivering public services. Requiring a two-thirds majority vote just to access the Rainy Day Fund in the event of an emergency could result in disaster.

Restrictive fiscal policies like North Carolina’s proposed TABOR initiative and Washington’s supermajority requirement do not help lawmakers govern, nor do they make governments more responsive to the will and needs of the people. Budgeting becomes nearly impossible when legislators are forced to comply with flawed limitations instead of serving the people in their states. What the people want becomes, in many ways, irrelevant and, ultimately, our democracy suffers. These supposedly progressive ballot initiatives are anything but. 

 


New Poverty Data Shows 1 in 7 Americans Are Still Living in Poverty: ITEP Report Identifies State Tax Policies Needed to Help Reduce Poverty


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In conjunction with the U.S. Census Bureau’s release of new poverty data this week, ITEP has an updated report out today, State Tax Codes as Poverty Fighting Tools, that provides an overview of anti-poverty tax policies, surveys state developments in these policies in 2015, and offers recommendations that every state should consider to help families rise out of poverty.

Based on the Census data, here’s what we know. Poverty remained persistently high as the new data showed no significant change from last year or the previous three years.  In 2014, 46.7 million (or 1 in 7) Americans were living in poverty.  At 14.8 percent, the federal poverty rate remains 2.3 percentage points higher than it was 2007, just before the throes of the Great Recession indicating that recent economic gains have not yet reached all households and that there is much room for improvement. Most state poverty rates also held steady between 2013 and 2014 though twelve states experienced a decline.

In good news, the Supplemental Poverty Measure (SPM) released alongside the official measure, demonstrates that the tax code can be used as an effective poverty-fighting tool. The federal EITC and refundable portion of the Child Tax Credit alone, for example, decreased the supplemental poverty rate from 18.4 to 15.3 percent for everyone.  And, thanks in large part to those credits, the supplemental poverty rate for children is actually lower than their official poverty rate (16.7 compare to 21.5 percent). The SPM was developed in recent years to address concerns that the official measure does not produce an adequate nor accurate picture of those living in poverty.  It does a much better job of measuring the true cost of making ends meet as it includes expenses such as child care, out of pocket medical costs, and payroll and income taxes as well as policies like the Earned Income Tax Credit (EITC), the Supplemental Nutritional Assistance Program (SNAP; formerly food stamps), housing assistance and other key anti-poverty policies.

But here’s something that will be ignored this week in virtually all the chatter about poverty and policy: As much as federal tax policy plays a vital role in mitigating poverty, state tax systems actually exacerbate poverty.

While the federal tax system is overall (barely) progressive thanks to progressive income tax rates and tax credits such as the EITC and Child Tax Credit (CTC), virtually every state tax system is regressive, meaning the less you earn, the higher your effective tax rate. In fact, when all the taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than on the richest 1 percent of taxpayers. ITEP’s 2015 comprehensive report, Who Pays?, examined the tax systems of all 50 states and the District of Columbia and found the effective state and local tax rate for the poorest 20 percent is 10.9 percent, which is more than double the 5.4 percent average effective rate for the top 1 percent.

Despite the unlevel playing field states create for their poorest residents through existing policies, many state policymakers have gone backward and proposed (and in some cases enacted) tax increases on the poor under the guise of “tax reform.” During the 2015 legislative session, for example, 17 states considered or passed tax cut or tax shift packages that would lower taxes for the very rich and increase them for low- and moderate-income families.

State policymakers should take note. Right now, states are failing those who struggle with poverty and, instead, are using the tax code to favor those who don’t need any more help. Lawmakers who are serious about improving their constituent’s lives should closely examine the Census data on poverty in their states and communities and consider enacting progressive tax policies that will reduce poverty and improve families’ quality of life.

State Tax Codes As Poverty Fighting Tools recommends that states jump-start their anti-poverty efforts by enacting one or more of four proven and effective tax strategies to reduce the share of taxes paid by low- and moderate-income families: state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits.

A full copy of the report can be found here


Guest Post: Five Findings: Tax-cut plan will harm North Carolina's Competitive Position


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Thanks to Alexandra Sirota from the North Carolina Tax and Budget Center for guest posting for us about the budget debate in North Carolina. For more information we urge you to visit the North Carolina Tax and Budget Center's website

The Budget & Tax Center will release a more detailed analysis of the tax plan in the next day, so stay tuned.
The bottom line: yet again policymakers chose to cut taxes — a strategy that doesn’t address North Carolina’s real economic challenges. By doing so they undercut the foundations of what has proven to be economy-boosting public investments. Rather than debate what is needed so every child in North Carolina receives a high quality education, for example, policymakers narrowed their choices by cutting taxes to say it’s either teachers or textbooks; smart technology in the classroom or a teacher assistant; a one-time bonus or bringing teachers closer to the national average in pay.
North Carolina can’t afford to debate what a successful state looks like at the margins. The bar should be higher. We need to build on the investments that have made our state great and follow the time-tested better pathway to a strong economy that works for everyone.
Here is why the tax plan fails to meet North Carolina’s high standards of fiscal responsibility and will fail to put the state in a competitive position against our neighbors and the nation:
It’s a big revenue loser. No surprise here — but the impacts of that revenue loss aren’t fully accounted for in this two-year budget. That is because policymakers designed the tax changes to kick in down the road when future policymakers will need to contend with an even greater gap between resources and public needs, like a growing number of students and the inability to move teachers to the national average in pay.

By: Alexandra Sirota, Director North Carolina Tax and Budget Center

Due to the speed at which passage of the budget bill is moving, we’re highlighting here five important findings from our analysis of the proposed tax-cut plan.

The Budget & Tax Center will release a more detailed analysis of the tax plan in the next day, so stay tuned. 

The bottom line: yet again policymakers chose to cut taxes — a strategy that doesn’t address North Carolina’s real economic challenges. By doing so they undercut the foundations of what has proven to be economy-boosting public investments. Rather than debate what is needed so every child in North Carolina receives a high quality education, for example, policymakers narrowed their choices by cutting taxes to say it’s either teachers or textbooks; smart technology in the classroom or a teacher assistant; a one-time bonus or bringing teachers closer to the national average in pay.

North Carolina can’t afford to debate what a successful state looks like at the margins. The bar should be higher. We need to build on the investments that have made our state great and follow the time-tested better pathway to a strong economy that works for everyone.

Here is why the tax plan fails to meet North Carolina’s high standards of fiscal responsibility and will fail to put the state in a competitive position against our neighbors and the nation:

  • It’s a big revenue loser. No surprise here — but the impacts of that revenue loss aren’t fully accounted for in this two-year budget. That is because policymakers designed the tax changes to kick in down the road when future policymakers will need to contend with an even greater gap between resources and public needs, like a growing number of students and the inability to move teachers to the national average in pay.

                            

  • The wealthiest keep getting the biggest breaks. The move to cut the top state income tax rate to 5.499 percent from 5.7 percent appears to only serve the ideological commitment to income tax cuts. By design, it doesn’t address the fact that low- and middle-income taxpayers already pay more as a share of their income in state and local taxes than the wealthiest taxpayers do. That gap will even widen a bit under this plan. Just slightly more than one-third of taxpayers with income below $20,000 get a tax cut at the same time that 99 percent of those with income greater than $423,000 do.

 

  • The sales tax base expansion should not be used to pay for income tax and should include a state Earned Income Tax Credit. Increasing the goods and services subject to sales tax is important to keep up with today’s economy and provide much-needed revenue.  But relying more on the sales tax while reducing the income tax is a step in the wrong direction. It threatens the balance provided by two taxes that perform differently in different economic circumstances. In the long term North Carolina’s revenue system will be more subject to erosion in economic downturns – just when public needs tend to be the greatest. Equally important is that using an expanded sales tax to pay for costly income tax cuts fails to account for the reality that the lower one’s income the higher percentage of it they pay in sales taxes. A $500 increase in the standard deduction is insufficient to address the greater tax load that low- and middle-income taxpayers will pay. Again, the wealthiest get the biggest benefit.
  • The corporate income tax rate will definitely drop to 3 percent at some point next year. Changes to the language driving the reduction mean that revenue collections don’t have to meet the low revenue threshold set, a bar that they will likely surpass given the national economic recovery, by the end of Fiscal Year 2016. Whenever they reach that threshold, the rate will be reduced resulting in an additional $350 million in lost revenue for public schools and targeted economic development efforts beginning in the second year.  Moreover, changes to the way in which corporations profits are subject to tax will also change such that multistate corporations will only pay tax based on the share of their national profits generated from sales to North Carolina consumers and no longer need to account for their property or payroll.
  • Allocating sales tax revenue to local communities under the proposed complex formula won’t make them whole. Many questions remain about how the complicated formula for sending sales tax revenue to localities will be implemented — and how much money will be involved. Is it just the revenue anticipated from expanding the sales tax? Or could revenue generated from sales tax also be in the mix if anticipated revenue collections from broadening the sales tax fall short?  Importantly too, the roughly $84.8 million identified is unlikely to sufficiently change the dynamics in rural communities where water & sewer infrastructure needs persist, main street revitalization and support to existing businesses to expand are needed and job training and pathways require regional connections. A vision and policy agenda for rural economic development cannot be achieved with a state tax code that falls short.

The proposed tax plan proposed is not reform. It won’t help the state’s economic position. It has been proven over time that tax cuts don’t drive significant job creation or improve wages. They can’t ensure that economic activity happens in communities that are being left behind by current economic growth.

What tax cuts do is reduce the ability of the state to build a foundation for a strong economy. That is crystal clear. The harm to public schools, health, the justice system and economic development from adoption of a strategy that doesn’t work will be felt by us all.

 


Revenue Raising in Alabama: Another Opportunity


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Alabama Gov. Robert Bentley has publicly said his state has a revenue problem, not a spending problem.

Perhaps this isn’t the most profound statement, but it is remarkable coming from a Republican governor who 1.) governs a state that would require a constitutional amendment to increase its low personal income tax rate, and 2.) has signed Grover Norquist’s infamous no-tax pledge.

The governor’s resolve will once again be tested this week as Alabama lawmakers reconvene for a second special session to address the state’s projected $200 million budget gap before the start of the state’s fiscal year on Oct.1. Gov. Bentley has twice proposed revenue raising packages to help set the state on a path toward fiscal sustainability and ensure vital services that improve the quality of life for all Alabamians are protected. Yet conservative lawmakers have thus far refused to compromise or put forward a plan free of damaging spending cuts.

This week’s revenue raising discussions are being greeted with anticipation and hope by many, including the 200 groups who signed on to the Stand Tall Coalition’s letter. The letter cautions lawmakers that, “Further cuts will set our state’s health system and economy on a dangerous course.” The stakes are as high as they were during the state’s regular session, if the state fails to raise new revenue,-- rural hospitals could close, funding for quality childcare could be slashed,  and state troopers could close their jobs.

That, of course, is the crux of the problem with refusal to increase taxes, not just in Alabama but in other states. In theory, no-tax pledges often disconnect taxes from vital public services that our taxes fund. In practice, refusal to raise revenue often comes at a steep cost to the general public. So it’s refreshing that Gov. Bentley is pushing lawmakers to send him a bill that will raise enough revenue to plug the state’s budget gap without having to slash funding for vital programs and services.  

The governor vetoed a cut-filled budget in June and called lawmakers back for a special session in early August to seek a revenue solution to the state’s revenue problem.  However, the first special session fell apart when the House and Senate couldn’t agree on a way forward, thus lawmakers are back in Montgomery this week for a second special session.

The governor is once again proposing $260 million in revenue-raising measures that are similar to those he put forward during the first special session - eliminating the deduction for the Social Security portion of payroll taxes (taxpayers who itemize can currently deduct the full value of their payroll taxes an uncommon state tax policy practice), a 25-cent cigarette tax increase, and a few small business tax changes. The changes to the state deduction for payroll taxes is a long sought reform that will broaden the state’s income tax base and shore up revenues for the long term.  An ITEP analysis found that 65 percent of the revenue raised from the payroll deduction reform will be paid by the top 20 percent of taxpayers.

On Wednesday, the House Ways and Means General Fund Committee approved bills that raised $130 million in taxes on car rentals, car titles, cigarettes, and businesses. Should this package become law, the state’s car rental tax would increase from 1.5 to 2 percent, the car title fee would increase to $28 up from $15, and the tax on cigarettes would go up to 25 cents.   The full House is expected to vote on the bills Thursday.  Gov. Bentley isn’t satisfied with the House committee’s tax package, but he calls the bill a “step in the right direction” and says that more must be done. He cautions, “If the gap is not closed then they (lawmakers) will be closing down some facilities in the state.”

It remains to be seen if compromise will win the day in Montgomery and if enough revenues will be raised, but the fact that House members supported revenue raising measures for the first time this week is a positive sign.


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

 

 

 


And That's a Wrap....the Failed Experiment in Kansas Continues


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The drama that ensued over the last few weeks in Topeka is the stuff of telenovelas. Kansas Gov. Sam Brownback got emotional when urging lawmakers to vote for a sales tax hike, even calling legislators from the hospital where his granddaughter was just born. Staunch anti-tax legislators broke their no new taxes pledge. Lawmakers accused the governor of blackmail, and the legislative session went on for an extra 23 days.

In the end, many Kansans will pay more in taxes due to an increase in sales and cigarette taxes, a freeze in income tax rates and limits for itemized deductions.

But every good soap opera deserves a twist. It’s well known that these tax increases were precipitated by irresponsible, top-heavy tax cuts championed by Gov. Brownback and passed in 2012 and 2013. An ITEP analysis of all Kansas tax changes over the last four years (including this year’s) found that the poorest 20 percent of Kansans, those with an average income of just $13,000, will pay an average of $197 more in taxes in 2015 as a result of the Gov. Brownback tax changes, and, even with the increases Gov. Brownback is expected to sign into law today, the richest 1 percent are still paying about $24,000 less.

Early on in his tax-cutting frenzy, the Governor offered that Kansas was a “real live experiment” for other states in terms of showing the positive impact of supply side economics. Those words have come back to haunt him and other supporters of trickle-down economic theories. If Kansas is an experiment, Friday’s vote makes it clear that the experiment failed.

One of the biggest and most regressive tax cuts included in the Governor’s 2012 tax cuts is its full exemption of non-wage business income. It’s the only state in the nation to fully exempt all pass-through business income. Lawmakers missed a real opportunity to fix this costly loophole.  Instead, they approved a new tax on guaranteed payments to ensure that some tax on small business income is levied, but accountants can easily manipulate the books so their clients don’t pay this new tax.

Most importantly, Kansas’s tax changes, even the provision that allegedly exempts 380,000 low-income people from income taxes, will do nothing to alter the fact that the Sunflower State earlier this year earned a spot on ITEP’s “Terrible Ten” list because it has 9th most regressive tax structure in the country.

The tax bills that barely passed the Senate (and passed the House at 4 am that same morning) included the following:

  • Income Tax Rate Freeze: Income tax rates were scheduled to fall to 2.3 and 3.9 percent, but the budget instead froze the rates at 2.6 and 4.6 percent
  • Itemized Deduction Reform: The bill limits itemized deductions  for mortgage interest and property taxes paid.  This change is expected to generate $97 million in FY2016.
  • Sales Tax Rate Hike: The sales tax rate (including groceries) increases from 6.15 to 6.55 percent. This rate increase is expected to bring in $164 million in FY2016.
  • Cigarette Tax Rate Hike: The cigarette tax increases by $0.50 per pack to $1.29 beginning July 1.  The tax hike is expected to generate $40 million in FY2016 and will almost certainly generate less in years to come.
  • Low Income Exemption: Taxpayers with taxable income less than $5,000 ($12,500 for married couples) are exempt from paying the personal income tax.
  • Guaranteed Payments: These payments, received from some types of pass-through business income, will now be taxed. This change is expected to bring in $23.7 million in FY2016.

The Kansas tax drama is over for the time being, but stay tuned. Chances are this soap opera will continue as lawmakers grapple with the impact of tax hikes in the context of unaffordable tax cuts.


Michigan House Wants Poor to Pay for Road Repairs


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There’s no doubt that Michigan needs to find additional funds to repair its rapidly deteriorating transportation network.  But the package of bills just approved by the Michigan House of Representatives represent some of the worst ideas for doing so.

The most problematic change would repeal the state’s Earned Income Tax Credit (EITC).  The EITC is a vital pro-work and anti-poverty tax credit that benefits roughly 800,000 Michigan families every year.  Just four years ago, Michigan lawmakers voted to scale back the state’s EITC by 70 percent to help fund large business tax cuts.  Rather than revisiting whether such dramatic tax cuts were prudent, the House wants to double down and repeal the modest EITC that remains.

Judging by the statements being made by some lawmakers, this decision seems to be based in part on a fundamental misunderstanding of how Michigan’s tax system works.  State Rep. Aric Nesbitt, for example, justified his vote by saying that EITC repeal “helps ensure a flat and fair system.”  In reality, repealing the EITC would only exacerbate the unfairness of a tax system already tilted against low- and moderate-income taxpayers. 

Under current law, Michigan’s wealthiest residents pay 5.1 percent of their income in state and local taxes while the state’s poorest residents pay a significantly higher 9.2 percent rate.  Repealing the EITC would have no impact on the taxes paid by the state’s more affluent taxpayers, but an ITEP analysis showed that it would raise the rate paid by the state’s low-income residents to 9.7 percent.  The result would be an even more steeply regressive tax system, and one even further from the “flat” ideal that Rep. Nesbitt says he supports.

While EITC repeal is the most troubling aspect of the House package, the lion’s share (more than $900 million out of a $1.1 billion package) of the road funding would come from simply diverting money away from other vital services such as health care, education, corrections, and economic development.  This reshuffling of funds toward roads and bridges is nothing more than a Band-Aid tactic—and one that we’ve seen create real budgetary problems in states such as Oklahoma and Utah.

The one bright spot in this plan would raise the diesel tax by four cents and would index both gasoline and diesel tax rates to inflation.  If these changes are enacted into law, Michigan would become the 17th state to raise or reform its fuel taxes since 2013.  Such reforms are vital to ensuring the long-run sustainability of gas taxes—the single most important source of transportation funding available to Michigan lawmakers. 

But despite their merits, these incremental gas tax reforms will hardly be worth celebrating if they’re accompanied by an elimination of the EITC and cuts to non-transportation areas of public investment.  Hopefully the Michigan Senate will be able to come up with some better ideas as it crafts its own transportation funding package.


Flaw in Connecticut's Budget Is Its Increase in Taxes on Working Poor- Not Corporate Tax Changes


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Connecticut’s legislature approved a two-year $40 billion budget last week with wide-ranging tax increases to help close a $1 billion budget gap. 

The changes include fully applying the sales tax to all clothes purchases and reducing a targeted property tax credit. But the two provisions that have received widespread attention are corporate tax reforms and increasing the personal income tax rate on the richest 5 percent of taxpayers.

Lawmakers included corporate tax reforms in the final budget despite objections from some of the largest corporations in the state, such as GE and Aetna.  In addition to higher taxes on computer and data processing services, the plan limits tax credits and specifies how business income can be reported.  Most significantly, Connecticut will join the majority of states in requiring corporations to file a combined report that treats subsidiaries of multistate corporations as one entity so they are taxed in aggregate.

General Electric (GE) threatened to relocate its headquarters and established an exploratory committee the day after lawmakers passed the final budget, and other major business interests have issued press releases conveying their discontent for the corporate- and personal income tax changes in the budget.  Gov. Dan Malloy has yet to sign the budget and has agreed to a sit-down meeting this week with the president of the Connecticut Business and Industry Association to discuss the corporate tax changes

GE and other corporations’ complaints have misrepresented the budget as a plan that only raises needed revenue by solely increasing taxes for the wealthy and profitable businesses. This is far from reality.  An ITEP analysis found that all income groups will pay more under this plan, and the lowest-income taxpayers in the state will experience the largest tax increase as a share of income.  Connecticut’s tax system is already upside down, and the tax changes included in the contentious budget deal would further exacerbate the gap between low-income and wealthy Connecticut taxpayers. 

Complaints about ‘combined reporting’ are also suspect considering that GE and other major corporations in Connecticut comply with the measure in almost every other state in which they currently operates.

GE is not exactly the best poster child for so-called high taxes. The company is notorious for paying low to zero corporate income taxes.  In 2014, an ITEP analysis found that GE paid an average state corporate income tax rate of negative 1.2 percent on its $5.75 billion in profits in the United States. Looking over the past five years, GE only paid a state corporate income tax rate of 1.6 percent, just about a quarter of the average weighted state corporate income tax rate of 6.25 percent.

Big business will undoubtedly continue to pressure Gov. Malloy into forgoing the good corporate tax changes included in the budget deal awaiting his signature.  The state is certainly in need of new revenue to protect critical public investments, yet if any part of the plan should give him pause it should be the tax increases on low- and moderate-income families rather than the small ask for wealthy taxpayers and profitable corporations to pay a little more.  


Sales-Tax-Free Purchases on Amazon Are a Thing of the Past for Most


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One of the main arguments used against efforts to crack down on online sales tax evasion just got a little bit weaker.  For years, e-retailers have been claiming that state and local sales tax laws are too complicated for them to bother complying with.  But Amazon.com’s decision to begin collecting sales taxes in Ohio last week belies that claim.

Effective June 1, Amazon is now collecting sales taxes in fully half the states that are collectively home to over 247 million people, or 77 percent of the country’s population.  In other words, more than three out of every four Americans now live in a state where Amazon willingly collects the sales taxes its customers owe.

 

In the shrinking number of states where Amazon is still refusing to collect the tax, the problem is clearly not that Amazon is incapable of participating in the sales tax system.  Instead, the company thinks it can retain a competitive advantage over mom and pop shops, and other brick-and-mortar stores, by continuing to offer its customers an avenue to evade state and local sales taxes.  And in at least half a dozen states (Arkansas, Colorado, Maine, Missouri, Rhode Island, and Vermont), Amazon has gone out of its way to preserve this advantage by cutting ties with local advertisers in order to dodge state-specific requirements that it collect sales tax.

As we’ve noted before, Congress could address this inequity quite simply if it were able to overcome its current gridlock and pass the Marketplace Fairness Act or similar legislation.  But until that happens, state sales tax enforcement as it applies to purchases made over the Internet will remain an inefficient and unfair patchwork. 


Kansas Considers Tax Hikes on the Poor to Address Budget Mess


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It’s been clear for more than a year that Kansas must make significant policy changes to address its severe budget shortfall. Now, legislative developments are moving quickly as Gov. Sam Brownback and lawmakers try to hammer out a plan to plug the budget gap, but so far proposals on the table would make Kansas’s already regressive tax code even more so.

On Saturday, Gov. Brownback unveiled (a second) tax proposal to fix the state’s fiscal mess, AKA a $400 million shortfall. The governor’s latest plan cuts income tax rates, changes how itemized deductions are taxed, includes a vague low-income exemption and raises both the sales tax and the cigarette tax.

“The latest proposal is asking the Kansas Legislature to repeat 2012 mistakes, proposing dramatic changes to the Kansas tax code without identifying specific statutory changes or data to show the impact those changes will have,” Annie McKay, executive director of the Kansas Center for Economic Growth said in a statement.

By now, it’s no secret that that much of this fiscal mess has its roots in the governor’s own top-heavy, unaffordable tax cuts passed in 2012 and 2013. Perhaps the copious and damaging press over the last several years around the governor’s tax cuts for the wealthy are the impetus behind Brownback’s claim that 388,000 people will not have to pay income taxes under his new plan. While ITEP hasn’t yet evaluated whether this claim is true,  an initial ITEP analysis of Brownback’s plan found that his proposal results in an average net tax hike for Kansans in the bottom 40 percent of the income distribution due in part to higher  sales and other regressive excise taxes.

As our analyses have repeatedly shown, Gov. Brownback’s 2012 and 2013 tax cuts disproportionately benefited the wealthy, collectively cost the state more than $1 billion and actually raised taxes overall on average for the bottom 20 percent of Kansans.

 


Martin O'Malley's Record on Taxes is Progressive


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At a time when many governors stubbornly rejected new revenues despite their states’ weak fiscal positions, former Maryland Gov. Martin O’Malley’s was one of only a few governors who championed tax increases to preserve his state’s public investments even during the Great Recession.

Early in his term, O'Malley made a substantial revenue increase the centerpiece of his economic agenda. The most notable piece of this package was a progressive measure, the "millionaires tax," which temporarily created a slightly higher new tax bracket applicable solely to taxpayers with taxable income in excess of $1 million. This change raised millions in much-needed revenue from the very wealthiest Marylanders—a group that could clearly afford to pay more since, at that time (PDF), the top 1 percent of taxpayers in Maryland paid just 6.2 percent of their income in state and local taxes compared to an effective tax rate of almost 10 percent for the bottom 20 percent of earners.

Unfortunately, the millionaire's tax faced substantial opposition from anti-tax conservatives who claimed that the tax was driving wealthy individuals to leave the state. In reality, these claims turned out to be entirely fallacious and were driven in large part by the Wall Street Journal’s reckless misreading of data.

Additionally, the package contained other regressive revenue raisers, which were more of a mixed bag. For example, O'Malley approved increases to the regressive sales tax and cigarette tax. He also attempted to substantially expand the sale tax base through taxing services, a smart move in terms of policy, but one that turned out to be to politically toxic.

Each of these tax increases disproportionately affected low- and middle-income taxpayers. However, these increases were part of a broadly progressive package and were critical in maintaining public services that benefit all families in the state.

Five years later, O'Malley moved to increase the sustainability and progressivity of the tax code by raising income tax rates and limiting tax exemptions for Marylanders earning more than $100,000. According to an analysis by the Institute on Taxation and Economic Policy (ITEP), these changes only affected 11 percent of Maryland taxpayers and a majority of it was borne by the wealthiest 1 percent of taxpayers in the state.

In terms of enhancing the sustainability of Maryland’s tax system, one of the best moves made by O'Malley was his push to reform Maryland's gasoline tax, which is the state's main funding source for transportation projects. Like most states throughout the country, Maryland had allowed inflation to gradually chip away at the value of the gas tax. If lawmakers failed to act, the tax was on its way to its lowest level (adjusted for inflation) in 91 years. Fortunately, O'Malley was able to usher through a reform that both raised the gas tax rate in the short term, and allows for further adjustments in the future to keep the rate in line with inflation and gas prices.

One of the more noteworthy ways that O'Malley improved his state’s tax system was with expansions of the state's Earned Income Tax Credit (EITC) in both 2007 and 2014. According to an ITEP analysis, the state's expanded EITC made the state's tax system significantly less regressive for low- and middle-income families.

O'Malley has yet to articulate a detailed vision on federal tax policy, but he recently laid out some broader progressive principles. In a recent speech at Harvard, O'Malley lambasted the failure of "supply-side economics" and called for an end to "tax policies that not only underinvest in our nation, but grossly and disproportionately benefit corporations and the ultra-wealthy."

In addition, he has recently argued in favor of raising the capital gains tax rate, which would make the tax system significantly more fair considering that capital gains receive a preferential rate compared to wages and primarily are received by wealthier Americans. This move could potentially position him to the left of Hillary Clinton, who has been mum on raising the capital gains tax rate so far this election and has expressed skepticism of increasing the rate in the past. 


Inflation Drives Federal Gas Tax Down Almost 40%


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Congress seems to be nearing agreement on a plan to extend transportation infrastructure spending for another two months, but it also appears to be at a loss for ideas on how to continue these critical investments after the fund becomes insolvent toward the end of July. 

The root cause of this recurring crisis is an obvious, easily fixable flaw in the gas tax’s design—the tax remains the same, with no adjustments for inflation unless lawmakers agree to change it.  States that recognize the economic importance of their transportation networks are increasingly taking steps to address this flaw, but federal lawmakers lack the political will to increase the gas tax and have repeatedly sidestepped the issue with 33 short-term fixes.

As with most things in our economy, the cost of building and maintaining our transportation network grows more expensive over time.  Asphalt, concrete, and machinery prices are subject to inflation in much the same way as food, furniture, and all the other products that shoppers have seen grow in cost over the years.

This is not an unusual or surprising problem.  But it does require that we pay for our transportation network with a sustainable revenue source.  Unfortunately, the federal gasoline tax (the single largest source of transportation funding in the county) does not fit this description because of a glaring flaw in its design.  Rather than growing with inflation each year, the federal gas tax has been fixed at 18.4 cents for more than 21 years.  Because of this, drivers have been paying roughly $3 in federal tax on each tank of gas for two decades, despite the fact that $3 buys significantly less maintenance and construction than it did in the 1990’s.

The nearby chart shows that if the federal gas tax rate is measured relative to growth in road construction costs, the tax has lost 38 percent of its value since Congress last increased it in 1993.  To be clear, this does not suggest that construction costs have grown in an unprecedented or unexpected way.  The problem has been a long, slow, inevitable decline in purchasing power for which lawmakers failed to plan.  If we measure the gas tax rate relative to a broader, more familiar measure of general inflation in the economy (the Consumer Price Index), the result is almost identical: a 39 percent decline.

Offsetting these decades worth of inflation would require an immediate increase in the tax rate of 11 or 12 cents per gallon.  But a one-time boost in the gas tax rate will not address the unavoidable, ongoing impact that inflation will have in the future.  For that, lawmakers should look to other parts of the tax code for inspiration.  Numerous tax brackets, exemptions, deductions, credits, and even the Alternative Minimum Tax are now tied to inflation so that they can grow modestly every year and retain their “real” value.  A very similar fix—which is growing in popularity at the state level—would put an end to these recurring funding crises for years to come, and would allow for infrastructure maintenance and expansions that are vitally important to the economy.


Sweet Sixteen: States Continue to Take On Gas Tax Reform


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UPDATE: A total of eighteen states have now taken action on the gas tax since 2013.  On July 15, Washington Gov. Jay Inslee signed legislation raising the state’s gas and diesel taxes by 11.9 cents.  The increase takes effect in two stages: 7 cents on August 1, 2015 and 4.9 cents on July 1, 2016.  Similarly, on November 10, Michigan Gov. Rick Snyder signed legislation raising the state’s gasoline tax by 7.3 cents and its diesel tax by 11.3 cents, effective January 1, 2017.  These tax rates will also grow alongside inflation in the years ahead.

In just the last three months, eight states have approved increases in their gasoline taxes to fund additional spending on infrastructure maintenance and expansion.  When taken in combination with gas tax increases or reforms enacted in 2013 and 2014, a total of sixteen states have acted to improve their gas taxes in just over two years.

These increases, many of which took place in states under Republican control and with the backing of the business community, stand in stark contrast to most state tax debates that have been decidedly anti-tax in recent years.  They also differ sharply from the approach being taken in Congress, where over twenty-one years of inaction has resulted in the federal gas tax losing almost 40 percent of its purchasing power.

2015 Actions

1. Georgia: A 6.7 cent increase will take effect July 1, 2015, and future increases will occur alongside growth in inflation and vehicle fuel-efficiency.

2. Idaho: A 7 cent increase will take effect July 1, 2015.

3. Iowa: A 10 cent increase took effect March 1, 2015.

4. Kentucky: Falling gas prices nearly resulted in a 5.1 cent gas tax cut this year, but lawmakers scaled that cut down to just 1.6 cents.  The net result was a 3.5 cent increase relative to previous law.

5. Nebraska: A 6 cent increase was enacted over Gov. Pete Ricketts’ veto.  The gas tax rate will rise in 1.5 cent increments over four years, starting on January 1, 2016.

6. North Carolina: Falling gas prices were scheduled to result in a 7.9 cent gas tax cut in the years ahead, but lawmakers scaled that cut down to just 3.5 cents.  The eventual net result will be a 4.4 cent increase relative to previous law (though now there is talk of allowing further cuts to take place and hiking drivers’ license fees to make up some of the lost gas tax revenue).  Additionally, a reformed gas tax formula that takes population and energy prices into account will result in further gas tax increases in the years ahead.

7. South Dakota: A 6 cent increase took effect April 1, 2015.

8. Utah: A 4.9 cent increase will take effect January 1, 2016, and future increases will occur as a result of a new formula that considers both fuel prices and inflation.  This reform makes Utah the nineteenth state to adopt a variable-rate gas tax.

2013 and 2014 Actions

 9. Maryland (2013): The first stage of a significant gas tax reform, tying the rate to inflation and fuel prices, took effect on July 1, 2013.  So far the gas tax rate has increased by 6.8 cents.

10. Massachusetts (2013): A 3 cent increase took effect July 31, 2013.

11.  New Hampshire (2014): A 4.2 cent increase took effect July 1, 2014.

12.  Pennsylvania (2013): The first stage of a significant gas tax reform, tying the rate to fuel prices, took effect on January 1, 2014.  So far the rate has increased by 19.3 cents per gallon.

13.  Rhode Island (2014): The gas tax rate was indexed to inflation.  This will result in a 1 cent increase on July 1, 2015 and likely further increases every other year thereafter (in 2017, 2019, etc).

14.  Vermont (2013): A 5.9 cent increase and modest gas tax restructuring took effect May 1, 2013.  Since Vermont’s gas tax rate is linked to gas prices, however, the actual rate has varied since then.

15.  Virginia (2013): As part of a larger transportation funding package, lawmakers raised statewide diesel taxes effective July 1, 2013, as well as gasoline taxes in the populous Hampton Roads region.  Outside of Hampton Roads, gasoline taxes are 1.3 cents lower than they were before the reform, but a new formula included in the law will cause the tax rate to rise alongside gas prices in the years ahead.

16.  Wyoming (2013): As the first state to approve a gas tax rate increase in over 3.5 years, Wyoming’s 10 cent increase took effect July 1, 2013.

Gas Tax Debates Continue

There is little doubt that more states will join this list in the months and years ahead.  Michigan lawmakers, for example, are considering a plan that would raise the diesel tax and then index both gasoline and diesel taxes to inflation.  Unfortunately, that plan would also scrap the state’s Earned Income Tax Credit (EITC) – a vital tool for lifting families out of poverty and offsetting regressive taxes such as the gas tax.

In South Carolina, the debate is playing out in a similarly troubling way as lawmakers discuss pairing a gas tax increase with income tax cuts that, depending on the specifics, could ultimately flow overwhelmingly to high-income taxpayers.

Following years of income tax cutting, Kansas lawmakers are reportedly considering a gas tax increase to help improve the state’s financial standing.

And in Washington State, the Senate passed an 11.7 cent gas tax increase earlier this year that may still be alive as part of the state’s ongoing special sessions.

Even if these states do not act this year, it’s clear that more gas tax increases and reforms are on the way.  Twenty states have gone a decade or more without a gas tax increase, and in many of those states (Missouri and Tennessee, for example) there is a growing recognition that outdated gas tax rates will have to be addressed sooner rather than later.


Back to the Drawing Board in Michigan


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Although Michigan voters rejected a ballot proposal Tuesday that would have raised sales taxes, gasoline taxes, and vehicle registration fees, the debate over how to boost funding for the state’s deteriorating infrastructure is far from over. 

Leading up to the election, 87 percent of likely voters said that if defeated, lawmakers should immediately begin work on a new plan to fix the state’s transportation system.  It appears voters were turned off by what The Detroit Free Press described as “one of the most complicated and confusing questions ever placed on a Michigan ballot.”  Had the measure passed, it would have triggered ten other laws that dealt with issues such as offsetting the tax increases paid by some low-income families via a boost in the state’s EITC, and reimbursing local governments for the revenue loss they would otherwise have faced under the plan.

Some voters said that lawmakers showed “cowardice” by bringing a plan to voters rather than raising revenue through the normal legislative process.  These voters are likely to get their wish in the months ahead.  Polling indicates that a straight up sales tax increase could be popular.  There is also talk about asking businesses to pay more, particularly since they saw their taxes slashed dramatically under the tax package signed by Gov. Rick Snyder in 2011.

The ballot measure was a complicated mix of tax increases and tax cuts that anti-tax advocates trumpeted as a tax increase on working people.  An ITEP analysis found that while most Michiganders would indeed pay more, the bottom fifth of Michigan taxpayers would actually receive an average tax cut of $24, and it would be the state’s highest earners that would face the largest increases.  For the vast majority of drivers, the increase would be a relative bargain given that the poor condition of the state’s roads costs most drivers over $500 per year in vehicle repairs.

Now that voters have defeated the measure, anti-tax advocates have begun spinning this election as evidence that voters are unwilling to pay higher taxes.  But the reality is that just 37 percent of Michigan residents think spending cuts alone could free up enough money to bring the state’s infrastructure up to 21st century standards.  When asked about cuts in specific programs, the results were similar.  Majorities ranging from 63 to 88 percent of voters oppose major cuts in K-12 education, universities, public safety, and health care for the poor, elderly, disabled, and children.

The hard truth is that Michigan’s roads are not going to fix themselves, and the state has to raise money some way to bring roads up to par. Gov. Snyder has conceded as much. 


ITEP Releases a Best Practices Guide on Taxing Marijuana at the State Level


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While the focus of marijuana legalization debates is rightly on the potential health and criminal justice impacts, the decision to legalize marijuana also has real implications for state and local revenue.

Over the past two decades, 23 states and the District of Columbia have enacted laws allowing the production and use of marijuana for medical purposes. Taking this one step further, Colorado, Washington, Alaska and Oregon are moving forward with systems that will permit the general production and purchase of retail marijuana. California, Maine, Nevada and others may soon follow in the coming years.

Given the increasing prominence of these issues, the Institute on Taxation and Economic Policy (ITEP) has written a new report providing a comprehensive overview of best practices for taxing marijuana and the potential impact these taxes could have on state and local revenue.

One of the central findings of the ITEP report is that predicting how much money state and local governments could raise from marijuana taxes is extremely difficult. To start, no jurisdiction in the world has legalized marijuana in modern times for a sustained period of time so there is not much historic data to go on.

Colorado and Washington have raised tens of millions in revenue from marijuana taxes, but these experiments in taxing marijuana are only a year old and the markets in both states are still evolving immensely, making it difficult to draw too many definitive lessons from either state.

The critical problem with estimating the revenue yield of marijuana taxes is that there are unpredictable factors that could work to substantially increase or decrease the revenue these taxes could yield. On the negative side for example, it's unclear whether there will be a dramatic decrease in the cost of marijuana production if legislation allows for cheaper cultivation methods, which could limit the ability of state governments to impose really dramatic excise taxes. Another significant factor that could drive marijuana tax revenue downward would be a step up in enforcement of federal laws against the production and consumption of marijuana.

One factor that could increase revenue is that legalization would likely significantly increase marijuana consumption across the United States, which would mean a bigger marijuana market to tax. In addition, bringing marijuana into the legal market would mean that individuals involved in the cultivation and sale of marijuana would be more likely to report their income from and pay taxes on these activities. Finally, states that adopt legalization early may experience a significant uptick in revenues from tourists, though this revenue could be fleeting as more states legalize marijuana.

Taking these factors all together, a recent study by the Congressional Research Service found that a $50-an-ounce tax at the state level could potentially raise about $6.8 billion annually if it were implemented across the country. Another report found that applying existing sales taxes and a 15 percent excise tax on marijuana in each state would generate just under $3.1 billion in state tax revenue. To give some context, raising somewhere between $3.1 to $6.8 billion would put marijuana taxes in the ballpark of the $6.5 billion that state and local alcohol taxes raise each year, yet put them well below the $17.6 billion raised by state and local cigarette taxes.

Read the Full Report:

Issues with Taxing Marijuana at the State Level


Who Pays for South Carolina Road Plans?


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Guest Post by John Ruoff of the Ruoff Group, Click here for orignal post

Who will pay to fix our roads? The burden, as a percentage of income, will fall hardest on those making less than $19,000 a year. Facing massive shortfalls in repairs and maintenance on our state roads and highways, the General Assembly is looking at ways to fund those needs. Everyone understands that, in the end, new revenues to fund the roads are needed. The Governor, seeing an opportunity to pull off a massive income tax cut, proposed that massive cut tied to a much more modest increase in the gas tax. Three proposals have been placed on the table: the Governor’s, a House-passed Plan that combines some tax increases with a much more modest income tax cut and a Senate Finance plan which increases revenues without an income tax cut.

In order to figure out who will pay for these changes, we asked the Institute on Taxation and Economic Policy (ITEP), a Washington, DC, based think tank that produces widely-respected tax incidence studies to model these changes. Their Who Pays? provides detailed analyses of which income groups pay what shares of their income towards various taxes. You can see the most recent analysis of South Carolina here. The ITEP modeling allows us to look at gross income, unlike the estimates from the Office of Revenue and Fiscal Affairs which are based on taxable income.

They modeled three plans:

  • Governor Haley proposes trading a 10 cent per gallon gas tax increase for an eventual reduction in marginal tax rates of 2 %. That translated, according to the SC Office of Revenue and Fiscal Affairs, to $1.7 billion reduction in General Fund Revenue by 2025.
  • The House version combines an effective 10 cent per gallon increase in the gas tax and raises the cap on sales tax for cars from $300 to $500 with a broadening of income tax brackets that produces a maximum $48 per year tax cut. Other provisions were not modeled.
  • The Senate Finance Plan contains no tax cut but increases the gas tax by 12 cents per gallon and the sales tax cap on cars to $600. Other provisions were not modeled.

The Governor’s plan creates a very large tax cut for those with higher incomes. In the Top 1 % of incomes, the tax cut,on average, is $6,893. Meanwhile, those in the lowest 20 % of incomes would face, on average, a tax increase of $34.

The House and Senate Finance plans raise taxes and revenues across the board. The House Plan, netted for a modest income tax cut, raises on average the  annual taxes for the lowest income group, which averages $12,000 a year, by $39. The Top 1 %, which averages $987,000 in income, would pay on average an additional $414.

As a share of income, the various plans hit harder on the most vulnerable. The Senate Finance Plan would cost our lowest income quintile, on average, .4 % of their income, compared to .1 %, on average, of the income of the Top 1 %. The House Plan calls on the poorest in our state to pay, on average, an additional .3 % of income while costing our wealthiest 1 % only, on average, .04 %. As percent of income, the Governor would raise taxes on taxpayers in the Lowest 20 % by .3 %, on average, while cutting them for the Top 1 % by, on average, .7 %.

Legislative debates frequently resound with arguments that the rich pay the most taxes and lower income people “don’t pay taxes”. They, of course, mean that most lower income taxpayers don’t pay income taxes. We all pay taxes and we have increasingly in South Carolina relied on regressive sales taxes that take a larger cut of poor people’s income than rich people’s. ITEP’s most recent statewide analysis of actual tax burden (Who Pays?, 5th Ed., Jan. 14, 2015) shows that in South Carolina the lowest income group pays, on average, about 7.5 % of income for all state and local taxes. The Top 1 % pay only, on average, 4.5 % of their income in state and local taxes.

Advocates of cutting taxes repeatedly argue, often to the accompaniment of anecdotes, that cutting income taxes drives in-migration of rich people who bring or start companies. The actual evidence suggests, at best, a very modest relationship between income taxes and economic development. That relationship is far outweighed by the effects of spending on things like infrastructure and education.

Recognizing both that road funding is a critical need for all of us and that gas and sales taxes hit harder on lower than upper income South Carolinians, there are additional approaches which could meliorate these effects on our most vulnerable taxpayers.

A refundable State Earned Income Tax Credit (EITC) has many desirable policy effects. Ronald Reagan and many conservative policy leaders recognize the EITC as the most effective anti-poverty measure we have. The EITC encourages personal responsibility by rewarding work, since only working people get the EITC.  In addition, a state EITC keeps money in the hands of folks who will spend it in local communities with local businesses. It’s good for the economy. An EITC pegged at 10 % of the federal EITC, would cut taxes for the Lowest 20 % receiving the credit by, on average, $262 and $331 and $190 to the next two quintiles according to another analysis by ITEP.

Rather than raising the cap on sales taxes on cars (not to mention yachts and airplanes), flipping the cap so that it was a floor would provide relief to folks who can only buy cheap cars while shifting more tax burden to those better able to afford it. That way, instead of stopping the tax when a car’s price reaches $6,000, $10,000 or $12,000, it would start at one of those points. Either of these approaches would reduce revenues for roads overall, but would make the tax system fairer.

The Governor’s Plan appears to be a nonstarter in the General Assembly. The House and Senate Finance plans are not that far apart. A critical flaw in our gas tax has been its failure to adjust for inflation and both legislative plans make provisions for indexing the gas tax (within limits) to inflation. That is a good thing.

What is absolutely clear is that something needs to be done to raise funds to ensure future economic development and safer roads. Clearly, income tax cuts are not the answer, although the House’s approach is far preferable to the Governor’s massive tax cut masquerading as a road funding plan. Equity for our poorest taxpayers needs more legislative attention, since all of these plans ask them to contribute a larger share of income to fixing the roads than their better-off fellow taxpayers.


Dueling Tax Reform Proposals Take Shape in Maine


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MaineStateHouse.JPGDespite its setting among rugged coastlines and quaint lighthouses, there will be nothing picturesque about the coming tax battle between Gov. Paul LePage and legislative leaders in Maine. The current debate is the latest in a string of Maine tax reform efforts; in 2013 the “Gang of 11” proposed an ambitious bipartisan plan that was dashed like a fishing boat along a rocky shore, and in 2009 lawmakers passed a tax package that was soundly rejected by voters at the polls.

LePage unveiled his budget proposal back in January, and it included a package of changes that would fundamentally change the way Maine taxes its residents. The governor wants to cut income taxes through across-the-board rate reductions. The threshold for the zero income tax bracket would increase from $5,200 to $9,700. Any income between $9,700 and $50,000 would be taxed at a reduced rate of 5.75 percent, and income between $50,000 and $175,000 would be taxed at 6.5 percent. Income beyond $175,000 would be taxed at just 5.75 percent – an outrageous concession to the already well-off.. His plan also increases the exclusion for pension income from $10,000 to $30,000, introduces a refundable sales tax credit (though the state’s nonrefundable Earned Income Tax Credit is axed under the plan), and boosts the state’s targeted property tax fairness credit.

LePage has gone on record as wanting to eliminate Maine’s income tax – most recently at a Tax Day press conference – calling it “an obsolete form of taxation.” If the state income tax were eliminated, half of Maine’s annual $3 billion in revenue would go with it.

LePage wants other provisions that would inordinately benefit wealthy Mainers as well. His plan would eliminate Maine’s estate tax at a cost of $85 million over four years, and the top corporate income tax rate would fall from 8.93 percent to 6.75 percent.

To pay for his proposed cuts, Gov. LePage wants to increase the sales tax rate to 6.5 percent and expand the sales tax base to include personal and professional services. He makes further changes to the personal income tax as well, including eliminating itemized deductions. He would also end the state’s practice of sharing revenue with municipalities, while allowing cities and towns to implement a new tax on large nonprofit organizations in their jurisdictions. Lawmakers and local officials fear this will upend municipal budgets and force property tax increases at the local level.

The governor’s plan would shift revenues from progressive income taxes to regressive sales and property taxes, and the state will net a revenue loss of $300 million if all changes take effect. The shift would also make state finances more volatile over the long run; as this ITEP brief explains, the income tax displays more robust growth over time than do sales and property taxes.

Last week, legislative leaders in the Maine House and Senate unveiled an alternative to Gov. LePage’s plan entitled “A Better Deal for Maine.” The alternative proposal would also cut income taxes and increase sales taxes, but the benefits would be targeted to middle-income Mainers rather than the wealthy. The average taxpayer with income under $167,000 would get an income tax cut, but the top personal income tax rate would remain untouched and many of the state’s richest residents would see a modest tax increase under the plan. Rather than increasing the 0 percent bracket, the alternative plan boosts the state’s standard deduction and phases out the benefit for upper-income taxpayers. 

The sales tax rate would remain at 5.5 percent, but the base would be expanded to include services, as it would under LePage’s plan. Like the governor’s plan, the alternative introduces a new refundable sales tax credit and increases the property tax fairness credit, but it retains the current pension exclusion amount.

The Better Deal alternative proposed by legislators does not eliminate revenue sharing with municipalities, as the governor would. Under the alternative plan, the Homestead Exemption property tax benefit would be doubled to $20,000 for all homeowners; under the plan proposed by LePage, the homestead exemption was doubled only for homeowners over 65 years of age. Unlike the governor’s plan, the alternative plan is revenue neutral.

An ITEP distributional analysis found that the “Better Deal for Maine” plan would provide bigger tax cuts for more Mainers while protecting investments in critical services like education. Under Gov. LePage’s plan, the average taxpayer in the top 5 percent of Mainers would see significant cuts, while the alternative plan would see taxes increase modestly for most in the same group. Overall, the alternative plan would make Maine’s tax system more fair.

The “Better Deal for Maine” plan has already won an opening salvo, garnering the support of many of the state’s major newspapers. The Bangor Daily News praised the alternative for its focus on reducing property taxes, which fall more heavily on the bottom of the income scale, than income taxes that are felt more heavily at the top. The Morning Sentinel and Kennebec Journal said in a joint editorial that the alternative plan would “boost demand and lead to economic growth” because it targets middle-class consumers rather than wealthy businesses.

 


Immigration Reform Would Net States More Tax Revenue


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An ITEP report released today found that the 11.4 million undocumented immigrants living in the US  contribute significantly to state and local taxes – to the tune of $11.84 billion in 2012, our analysis shows. Under the terms of President Obama’s executive actions on immigration that figure could increase by $845 million a year; if legal status were granted to all undocumented immigrants their state and local tax contributions would increase by $2.2 billion a year.  

Immigration reform efforts have languished in Congress since 2005, and more recently the House of Representatives failed to consider a comprehensive immigration bill passed by the Senate in 2013. A frustrated President Obama announced last November that he would offer temporary legal status to close to 4 million undocumented immigrants who are parents of US citizens or lawful permanent residents and who pass a background check. He also expanded his 2012 order to defer deportation for undocumented immigrants who arrived in the country as children. Roughly 5.2 million undocumented immigrants could benefit from the president’s 2012 and 2014 proposals.

In February a federal judge in Texas temporarily blocked the president’s executive actions in response to a lawsuit against the federal government by 26 states. Judge Andrew Hanen granted the injunction on the grounds that the suing states “would suffer irreparable harm in this case” were the executive actions enforced before the lawsuit wound its way through the federal judiciary, since a revocation of legal status would be extraordinarily unlikely and since the states would be forced to increase “investment in law enforcement, health care and education. 

Our recent report shows that granting legal status to undocumented immigrants would be a net benefit to states since these workers already contribute to paying for state and local services and would pay even more taxes were they allowed to work legally. In Texas, where the injunction was granted, undocumented immigrants already pay an estimated $1.5 billion a year in taxes, and under the terms of Obama’s executive actions they would pay an additional $57 million.

Despite contrary claims – similar to the falsehood that 47 percent of Americans do not pay taxes – the reality is that undocumented immigrants contribute to paying for local and state services. Those who make these arguments focus narrowly on federal income taxes, ignoring the sales, excise and property taxes to which all Americans contribute and which make up a significant share of taxes collected. Extending lawful permanent residence to those who are currently undocumented would be a positive benefit for the economy and the communities where undocumented immigrants live, allowing them to fully contribute and support the important work we do together.


Tax Day State Round Up


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Tax day is the perfect opportunity for legislators, the media, and taxpayers to be reminded who pays (and who doesn’t pay) taxes, how tax dollars are spent and about current tax policy debates raging in the states. The following is a compilation of tax day resources from the states:

Arizona: Through their blog, the Children’s Action Alliance wished everyone a “Happy Tax Day” and shed light on the important issue that “many corporations and higher income families owe little or no state income taxes.”

Calfornia: Right in time for Tax Day the California Budget and Policy Center released a new report Who Pays Taxes in California? The report highlighted ITEP data as well as the need to create a state Earned Income Tax Credit and better target existing credits to low income families.

Iowa: The Iowa Policy Project shared ITEP’s Who Pays? findings to shed light on the regressivity of the state’s tax structure

Georgia: The Georgia Budget and Policy Institute reminded Twitter followers to be thankful for the services that taxes pay for through #ThanksTaxes, they were interviewed by an NRP affiliate, and had their income tax materials prominently displayed on their website.

Michigan: The Michigan League for Public Policy put together this creative map showing what taxes pay for.

New Jersey: New Jersey Policy Perspective took the day to remind folks of three “takeaways” regarding taxes in the state. First, that all New Jerseyans pay taxes (with a link to ITEP’s Who Pays data), that corporations are often getting big tax breaks, and that taxes are an investment that provide opportunities.

North Carolina: The North Carolina Budget and Tax Center hosted a tax tweet on Tax Day so folks could share how their tax dollars are working in North Carolina. Followers were urged to share their thoughts using #thanktaxesnc

Texas: The Center for Public Policy Priorities (CPPP) shared this recent blog post to remind Texas taxpayers who pays state and local taxes. Also CPPP used Tax Day to shed light on a the tax debate there reminding lawmakers that Texas can’t afford tax cuts.

Washington: The Washington State Budget and Policy Center released a post It’s Tax Day! Let’s Talk About Washington’s Tax System. Since the state has the most regressive tax structure of them all, there is certainly a lot to say!

Wisconsin: The Wisconsin Budget Project creatively travelled and tweeted around the state with Casey Badger to show how tax dollars go to fund investments that Wisconsinites enjoy. They also published This Tax Day, Remember that Taxes Make Investments in a Strong Economy Possible.

We are still collecting tax day information and media. Already we know that ITEP’s Who Pays data have been cited in the Washington Post, a Dallas Morning News op-ed, an LA Times column, articles in the Topeka-Capital Journal and Mother Jones and in an editorial in the Wilmington Star (NC).


More Than 20 States Considering Detrimental Tax Proposals


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It’s not hard to sell tax cuts. Who among us would turn down extra money in our pockets by way of fewer taxes?

But state lawmakers do us all a gross disservice when they tout tax cuts to serve their political goals but fail to address the consequences or talk about who will really benefit. The adverse after-effects are often many and disproportionately fall on low- and middle-income taxpayers. This is why the trend to push for tax cuts, in some cases on top of cuts recently enacted, is worrisome. States cannot continually cut taxes and adequately pay for services that the public overwhelming wants. And it is not fair to pay for cuts to more progressive personal and corporate income taxes by heaping more taxes on those least able to pay.

Currently, lawmakers in more than 20 states are considering major tax proposals (See an ITEP summary of most proposals here and here). Much has been made about the fact that many conservative state lawmakers are considering hiking taxes this year, but with very few exceptions, these lawmakers plan to use the revenue gained from increasing one tax to cut or eliminate another.  While a handful of these tax shift proposals have provisions that would benefit working people, the vast majority would deliver the greatest benefit to wealthy taxpayers and profitable corporations, thus making state tax systems more regressive than they already are.

In Ohio, for example, Gov. Kasich has proposed further slashing personal income taxes across the board, which on the surface may sound like it will benefit all taxpayers. However, the governor’s plan recoups most of the lost revenue by raising the sales tax a full half a percent and expanding the tax to more services. The problem with this, of course, is that sales taxes are inherently regressive, which means the plan actually increases taxes on those least able to pay. An ITEP analysis of the Governor’s plan found that the top one percent of Ohio taxpayers would receive an average tax break of close to $12,000 while the average taxpayers in the bottom 60 percent would actually see their taxes go up by more than $100.

Other proposals out right cut taxes without any plans to replace the lost revenue. In North Carolina, Senate members have recently put forward a plan to slash personal and corporate income taxes which would cost the state well more than $1 billion a year, despite the fact that the state faces a $300 million budget deficit. The proposal would be the second billion-dollar tax cut in as many years. Texas lawmakers are getting closer to finalizing a more than $4 billion tax cut package that would reduce property and business taxes. 

The Cost of Tax Cuts

The problem with state politicians' dogged pursuit of tax cuts is that they don’t come without a cost. Public services such as education, public health and safety, infrastructure, etc. either must be pared back or paid for using some other source of revenue. 

ITEP along with many academics and news outlets have written extensively about the Kansas experiment. Gov. Sam Brownback promised Kansans that his top-heavy tax cuts would pay for themselves by stimulating economic growth. Widely derided three years ago, that claim has proven to be untrue and now the state is scrambling to make up lost revenue. Gov. Brownback has proposed increasing (regressive) alcohol and tobacco taxes to help partially plug a growing budget gap and House and Senate members have floated other largely regressive tax hikes. Further, the state has had to reduce funding to schools, higher education and social services. The proposed tax increases will undoubtedly hit low- and middle-income more as will the cuts in vital services that promote broader access to opportunity.

Tax cuts simply don’t work as an engine of economic growth, and it is time for governors and state legislators to stop peddling their plans as such. The truth about state tax systems is that each of them takes a greater share of income from their very poorest residents than their richest residents. The majority of pending tax cut and tax shift plans on the table would exacerbate this nationwide problem.

There is a right, progressive way for policymakers to approach tax policy. Last year, the District of Columbia broadened its sales tax base to include more services and made permanent a higher tax rate for the wealthiest residents. At the same time, it lowered taxes for middle-income earners and strengthened the Earned Income Tax Credit to put more money in the pockets of working people. Given that every state tax system requires more of its lowest-income residents than the rich, the right approach to tax reform is to focus on measures that would make corporations and the wealthy, those most able, pay their fair share.


Six States Have Raised or Reformed Their Gas Taxes This Year


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As we’ve noted previously, eight states enacted gas tax increases or reforms in 2013 and 2014 to better fund their transportation infrastructure.  So far this year, six more states have joined this list, meaning that a total of 14 states have taken action on the gas tax in just over two years’ time (Wyoming kicked off this trend in February 2013).  Here’s a quick rundown of what has been enacted this year: 

1. After years of debate, Iowa’s gasoline and diesel taxes finally rose by 10 cents per gallon on March 1 as a result of legislation enacted in February.  The increase was Iowa’s first in more than a quarter century.

2. Next door in South Dakota, lawmakers quickly followed Iowa’s lead with a law that raised gasoline and diesel taxes by 6 cents starting April 1.

3. Utah took a more long-term approach to its gas tax with a law that will hugely improve the tax’s sustainability.  In addition to raising the rate by 5 cents on January 1, 2016, the state also converted its fixed-rate gas tax into a smarter variable-rate gas tax that will initially grow alongside gas prices, and then eventually alongside the greater of gas prices or inflation.  Utah is now the 19th state to adopt a variable-rate gas tax.

4. Georgia Gov. Deal has promised to sign a transportation funding bill recently approved by the state legislature.  Under the bill, the state portion of the gas tax will rise by 6.7 cents on July 1.  Until 2018, the rate will rise each subsequent July based on growth in both vehicle fuel-efficiency and inflation, after which point the inflation factor will be dropped and the rate will be determined based on fuel-efficiency changes alone.  Georgia is the first state in the nation to tie its gas tax rate to fuel-efficiency gains: a recommendation we have made in the past.

5. Kentucky drivers received a 1.6 cent gas tax cut on April 1, far less than the 5.1 cent cut that would have taken effect if lawmakers had not acted.  This was accomplished by raising the state’s minimum gas tax level from 22.5 to 26.0 cents per gallon.  In addition to this boost in the state’s gas tax “floor,” lawmakers also reformed (PDF) the tax with an eye toward predictability by mandating that gas tax cuts brought on by falling gas prices cannot exceed 10 percent per year.

6. North Carolina drivers are also seeing their gas taxes fall, but only temporarily and not by as much as would have otherwise been the case.  Under a bill signed by Gov. Pat McCrory, gas tax rates fell by 1.5 cents on April 1 and will drop by an additional penny on both January 1 and July 1 of next year.  This gradual 3.5 cent cut is less than half the full 7.9 cent cut that otherwise would have taken effect this summer.  Additionally, lawmakers also agreed to swap out their price-based gas tax formula in favor of allowing the tax rate to grow alongside population and the general inflation rate—a change they think will generate a more substantial, predictable stream of revenue in the years ahead.

It is likely that more states will follow the lead of these half dozen states before 2015 legislative sessions come to a close.  Our earlier surveys identified eight states in particular that are also giving the idea careful consideration: Idaho, Michigan, Missouri, Nebraska, New Jersey, South Carolina, Vermont, and Washington State.


Nine States and Counting Have Raised the Gas Tax Since 2013


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This is the third post in our series outlining state tax trends being debated during 2015 legislative sessions.  Our previous two posts focused on tax shifts and tax cuts.

MARCH 19 UPDATE: The list of states has grown to ten now that a 6 cent increase was signed into law in South Dakota (taking effect April 1).  Utah is poised to become the eleventh state once Governor Herbert signs a bill raising the tax by 5 cents and tying it to gas prices (effective January 1)..

A little over a month ago, we identified a dozen states seriously considering raising their gas taxes in 2015 to better fund their deteriorating transportation infrastructure.  Since then, Iowa lawmakers enacted and implemented a 10-cent increase in gas and diesel tax rates, effective March 1.  Iowa’s step forward makes it the ninth state to either raise or reform its gas tax in just over two years.  Starting with Wyoming’s approval of a 10-cent gas tax hike in February 2013, we’ve seen gas tax increases or reforms enacted in jurisdictions as varied as Maryland, Massachusetts, New Hampshire, Pennsylvania, Rhode Island, Vermont, Virginia, the District of Columbia, and now Iowa.  We expect that this list will grow by the time states’ 2015 legislative sessions come to a close.

The Leaders: Aside from Iowa, these six states have made the most progress toward gas tax reforms or increases this year by passing a bill through at least one legislative chamber.

  • The Georgia House overwhelmingly approved a bill that reforms the gas tax by indexing it to rise alongside both inflation and fuel efficiency, as we’ve recommended in the past.  Now attention shifts to the Senate.
  • Michigan lawmakers have approved gasoline and sales tax increases, but we’ll have to wait until May 5 to see if voters sign off on those changes.
  • In North Carolina, the Senate passed a bill that would raise the state’s tax on wholesale gas prices from 7 to 9.9 percent.  The bill would also pare back a gas tax cut scheduled to take effect this July due to falling gas prices and would prevent further declines in the future.  The House, on the other hand, approved a less sustainable bill that would not raise the wholesale gas tax rate and would only put a temporary stop to scheduled gas tax rate cuts.  For his part, Gov. Pat McCrory is assuming the Senate’s permanent gas tax “floor” will take effect to help balance his proposed budget.
  • The South Dakota Senate approved the first bill filed this year (SB1), which raises the state’s gas tax by 2 cents per year.  The bill that the House is poised to vote on would put a stop to those increases after 3 years—effectively capping the increase at 6 cents per gallon.
  • In Utah, both the House and Senate passed gas tax legislation this week.  The Senate bill would raise the current fixed-rate gas tax by 9 cents per gallon, while the House prefers a more sustainable reform that would allow the tax to rise alongside gas prices in the future.
  • And in Washington State, the Senate approved an 11.7 cent gas tax hike, phased in over three years.

Other Developments: While the gas tax debate hasn’t advanced quite as far in these seven states as of yet, each still has a real shot at reform in 2015.

  • Discussions of a gas tax increase in Idaho are ongoing.
  • Kentucky lawmakers may not be talking about boosting the tax that drivers currently pay at the pump, but there is a lot of interest in stopping a 5.1 cent tax cut scheduled to take effect on April 1 as a result of falling gas prices.
  • Following Governor Jay Nixon’s urging that Missouri legislators consider raising the state’s 18 year old gas tax rate, at least two bills have been filed doing exactly that.
  • Nebraska’s unicameral legislature is giving serious thought to a 6-cent gas tax hike that’s being pushed by a lawmaker with a reputation for being a tax-cutting conservative.
  • Influential lawmakers in New Jersey are continuing to talk about raising the gas tax, but Gov. Chris Christie and some legislators are indicating that tax increases are off the table.  Not much has changed since our last post on the subject, but there is still talk that anti-tax politicians may change their tune if a gas tax hike on New Jersey drivers is paired with tax relief for heirs to large fortunes, in the form of repeal of the state’s estate tax.
  • South Carolina lawmakers are having ongoing discussions over plans to enact a flat gas tax hike, or to reform the tax to rise alongside inflation or gas prices.  Unfortunately, Gov. Nikki Haley is continuing to insist that any reform to the state’s severely outdated gas tax rate should be paired with an even larger cut in the state’s personal income tax—a rare progressive feature of a tax system that already tilts in favor of high-income taxpayers.  South Carolinians, however, appear to be less hung up on the idea of tying a personal income tax rate cut to gas tax reform.  As long as South Carolina’s gas prices stay lower than in neighboring states, most South Carolinians support raising the gas tax to fund infrastructure repairs.
  • Vermont is considering to a 2-cent gas tax increase that would help offset the costs associated with cleaning up roadway run-off into the state’s waterways.

The Procrastinators: The chances of gas tax reform this year have dimmed somewhat in at least two states that we initially saw as likely reformers.

  • A sizeable budget surplus in Minnesota has reduced the some lawmakers interest in raising the gas tax.  Minnesota House leadership now says that transportation needs can be met with existing revenues, at least this year.
  • Tennessee Gov. Bill Haslam thinks that gas tax reform is needed, but says that he won’t be ready to put in the effort needed to pursue that reform until next year. 

For more information on state gas taxes, take a look at the new gas tax section of ITEP’s website.


Netflix is a Real-Life Frank Underwood When it Comes to Tax Breaks


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Political nerds and TV binge watchers of all stripes will gather around the TV (or laptop) this weekend to watch the much anticipated release of Season 3 of the Netflix original series House of Cards. While the show follows the shadowy manipulations of Frank Underwood, the company and producers behind the show have done some manipulating of their own to get millions in generous tax breaks from the state of Maryland for the production of its third season.

Last year, the producers of House of Cards played hardball with Maryland lawmakers by threatening to “break down our stage, sets and offices and set up in another state" if they did not receive millions more in tax credits. Pairing this stick with a carrot, the House of Cards producers brought in Kevin Spacey to meet with "star-struck" lawmakers and push for the passage of more tax breaks for the TV series.

The trouble for Maryland lawmakers is and continues to be that the film tax credit program lavishing House of Cards with millions in tax breaks provides very little economic benefit to Maryland taxpayers—in fact, the entire program has cost the state $62.5 million since 2012. A recent study by the Maryland Department of Legislative Services found that the film tax credit in Maryland only brings in 10 cents for every dollar that it provides in economic benefits.

Unfortunately, the lawmakers in Maryland are reflective of lawmakers across the nation, who keep falling for the siren call of film producers and ponying up ever larger tax credits to companies in hopes of creating a lasting film industry in their state. Leading the pack, Louisiana spent over $1 billion on its film tax credit program from 2002-2012, yet the state still has very little to show in terms of permanent jobs and economic development benefits from the program.

In spite of all of the evidence against film tax credits, Maryland lawmakers, fearful of "losing" the Netflix series, decided to give in and increased the size of the credits for House of Cards, bringing the total amount of tax breaks that the show has received to a whopping $37.6 million. What makes these tax breaks particularly galling is that Netflix is already exploiting the stock option loophole to such an extent that it paid nothing in federal or state corporate income taxes on its $159 million in profits, even before it received the new cache of tax breaks.

The tax swindle that Netflix is running with the production of House of Cards would be enough to make Frank Underwood proud. 

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Shell games have been with us since ancient times, and the tax shift proposals of today indicate that the basic concept has a long shelf life. A “conjurer” who makes fantastic claims that are later found too good to be true? Kansas Gov. Sam Brownback and many other governors fit the bill. A “shill” who enthusiastically vouches for the legitimacy of the game and who stands to make a hidden profit? Any number of supply-siders who claim that tax cuts will promote prosperity or that tax increases will lead to a mass exodus. A “mark” who plays the game in hopes of winning, never realizing that it’s been rigged from the start? Unless you sit in the uppermost tax bracket, the mark is likely you.

Tax shifts lower one tax and increase another in a way that is purportedly revenue neutral. All too often, such proposals reduce taxes for top earners and stick low- and middle-income people with the bill by increasing regressive, consumption taxes. As ITEP’s Who Pays report shows, every state tax system asks more of the poorest residents than they do of the rich. Tax shifts allow elected officials to serve political goals, posing as fiscal stewards acting in the public interest even though their tax policies are detrimental to state budgets and critical programs such as education, infrastructure and public safety.  

There is a right way to do a tax shift. Last year, the District of Columbia broadened its sales tax base to include more services used by businesses and well-off residents. At the same time, it lowered taxes for middle-income earners and strengthened the Earned Income Tax Credit to put more money in the pockets of working people. Unfortunately, states currently considering tax shifts are focused on cutting taxes for the highest-income households.

Below are the top tax shift trends that ITEP is following in legislatures across the country:

1) Hiking Taxes on Low Income Families to Pay for Tax Cuts for Wealthy Families
Ohio: Gov. John Kasich’s budget includes yet another massive tax shift away from well-off taxpayers to the middle-class and working poor. He wants to slash income taxes for the second time since he’s been in office, cutting rates by 23 percent over two years, with an immediate 15 percent cut in 2015. The cuts would cost an estimated $4.6 billion in revenue over the biennium. Kasich also wants to eliminate the income tax for business owners with $2 million or less in annual receipts at a two-year cost of $700 million dollars, and increase the personal exemption allowed for those with $80,000 or less in annual income. He would pay for these massive income tax cuts through regressive tax hikes. The governor wants to increase the sales tax rate from 5.75 to 6.25 percent and broaden the sales tax base to include a number of additional services. He also wants to increase excise taxes on cigarettes and other tobacco products, two measures that hit low-income households the hardest. ITEP ran an analysis of the tax shift plan and found that the top one percent of Ohio taxpayers would receive an average tax break of $12,010, while the bottom 40 percent of taxpayers would actually see their taxes go up by about $50. For more on the ITEP analysis read this report from Policy Matters Ohio.

Maine: Gov. Paul LePage has proposed a sweeping tax shift package that would hike sales taxes to help pay for significant personal and corporate income tax cuts and would also eliminate the estate tax. All together, the governor’s tax changes would cost $260 million when fully phased in. LePage wants to increase the sales tax rate and broaden the tax base to include some services. His plan would also eliminate cost-sharing with local governments, which could force them to hike property taxes. The governor described his plan as a way to move the state from an income-based tax system to a “pay-as-you-go” consumption-based tax system – a dangerous and ill-advised shift in the way Maine funds its crucial public investments.  But, wait; there’s more!  In his State of the State address, LePage announced his intention to fully eliminate Maine’s income tax in three steps (we saw how that worked out for Kansas). Eliminating the state income tax would result in the loss of half of the state’s $3 billion in annual revenue, necessitating deep cuts and major tax shifts to more recessive revenue sources. 

Idaho (updated 4/6/2015): Idaho lawmakers have given serious thought to a number of tax shifting ideas, almost all of which would make the state’s regressive tax system even more unfair.  The House recently decided to move forward with some of these ideas, passing a bill that would have flattened the income tax for many taxpayers, raised the gasoline tax, eliminated the Grocery Credit Refund, and exempted groceries from the sales tax.  ITEP found that the overall impact (PDF) of these changes would be higher taxes for low- and middle-income taxpayers, and dramatically lower taxes for the affluent (the top 1 percent of earners would receive an average benefit of $5,000 per year).  Fortunately, the Senate killed the bill and seems to be interested in refocusing on the original objective that inspired it: raising money for transportation.

Michigan: This May, Michigan voters will be asked to approve a major tax package that would boost funding for transportation and education by some $1.7 billion per year.  The package relies entirely on regressive tax changes to raise revenue, notably through a 1 percent sales tax increase and a gasoline tax restructuring that would raise the tax rate by roughly 12 cents per gallon.  However, the package also includes a valuable progressive offset for low-income families in the form of a significant expansion to the state’s Earned Income Tax Credit (EITC), from 6 to 20 percent of the federal credit.  Unfortunately, lawmakers are now sending signals that if voters approve this package, they may squander some of the revenues on a personal income tax cut that would be no good for the state’s economy and would make the state’s regressive tax system even more unfair.  According to an ITEP analysis provided to the Michigan League for Public Policy, the income tax rate cut under consideration would give low-income taxpayers an average reduction of $12 per year, while handing over $2,600 per year to each of Michigan’s top 1 percent of earners.

2) Using Tax Shifts as Political Cover to Raise Revenue to for Infrastructure
South Carolina: Gov. Nikki Haley has said that she won’t support a gas tax increase without an across the board income tax cut. Raising gas taxes while cutting income tax rates would result in a tax shift from well-off South Carolinians to middle income and working families. Her proposal would phase in income tax rate reductions over 10 years, resulting in a top income tax rate cut from 7 to 5 percent, and increase the gas tax from 16 to 26 cents. This shift away from progressive income taxes coupled with a regressive gas tax hike would be problematic for state coffers over the long term, and low-income folks would undoubtedly feel the brunt of this tax shift.

New Jersey: Lawmakers in New Jersey seem to agree that the state is facing a transportation funding crisis and that an increase in the gas tax is needed.  However, it appears more and more likely that a gas tax increase will not be enacted without a tax cut elsewhere. The taxes lawmakers are considering reducing or even eliminating to get the much needed gas tax boost?  The estate and inheritance taxes, which only impact roughly 4 percent of New Jersey families each year and have zero connection to the need to boost transportation funding in the state.  As our friends at New Jersey Policy Perspectives have argued, the other problem with this proposal is that it does nothing to help low- and moderate- families who will actually be hit hardest by a gas tax increase.  Restoring the state’s Earned Income Tax Credit to 25 percent of the federal (cut to 20 percent in 2010) makes much more sense as the tax cut to propose alongside a gas tax hike, rather than eliminating taxes which benefit only the wealthiest families in the state.

3) Other States to Watch
Arizona: Online shoppers In Arizona (and every other state) often fail to pay sales taxes because e-retailers shirk their tax collection responsibilities.  In 2013 the U.S. Senate passed legislation that would have closed this gap in sales tax enforcement, but the House failed to act on it.  Now, some Arizona lawmakers say that if the federal government ever does act on this important issue that any additional revenue collected through improved enforcement should be immediately sent back out the door in the form of a regressive income tax cut.  Fortunately, legislation aimed at accomplishing this end was recently voted down by a narrow margin in the Arizona House, though the sponsor is still trying to find a way to resurrect the proposal.

Mississippi (updated 4/6/2015): Mississippi lawmakers showed zeal this session for changing the state’s tax code.  Gov. Phil Bryant recommended a nonrefundable Earned Income Tax Credit and Lt. Governor Tate Reeve’s proposal would have cut personal and corporate income tax rates and eliminated the state’s franchise tax.  But, the most extreme plan emerged from the House where members passed a bill that would have phased out the state’s personal income tax over several years with more than two-thirds of the cut flowing to the richest 20 percent of taxpayers in the state at a cost of nearly $2 billion. Thanks in part to ITEP’s number crunching on all of the plans, which advocates in Mississippi shared with the media and lawmakers and put to use in publications, the House and Lt. Governor’s tax cutting proposals failed to muster enough support to move forward this session.

New Mexico: We are closely following a bill in the New Mexico legislature that would eliminate most of the taxes currently levied in the Land of Enchantment and replace the revenues with a 1 percent tax on gross receipts.  Similar tax-shifting legislation was introduced in 2013 and gained little traction.

4) The Cautionary Tale: Kansas
Kansas: The most notorious case of tax shifting continues to unfold in Kansas. In 2012 and 2013 Gov. Brownback pushed through two rounds of very regressive income tax cuts that lowered taxes on wealthy Kansans while hiking taxes on low-income Kansans, and he’s now proposing more regressive tax hikes to help balance the state’s budget. The income tax cuts already passed will cost Kansas $5 billion in lost revenue over the next seven years. Given the state’s budget situation, Brownback has been forced to delay further income tax cuts planned for this year. He also has been forced to raise taxes, though not the ones you would think: his budget proposal would increase the excise tax on cigarettes by nearly 300 percent, from $0.79 to $2.29 per pack, and taxes on liquor would rise from 8 percent to 12 percent. The governor’s regressive tax hikes would fall  on the same Kansans hurt the most by his failed economic stewardship. They also drive home some of the consequences that could arise from other officials’ rosy tax shift plans. Aggressive tax shifts that favor businesses and the wealthy at the expense of low- and middle-income families can result in states having difficulty adequately funding basic public obligations over the short and long-term.

 


New Analysis: Don't Scrap Idaho's Grocery Tax Credit


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Some lawmakers and advocates in Idaho have been pushing a tax swap under which Idaho’s $100 per person Grocery Credit Refund would be eliminated in favor of exempting all grocery purchases from the sales tax. But a new ITEP report shows that the biggest winners under such a plan would be high-income households.

Members of Idaho’s top 1 percent would receive an average tax cut of $234 per year under such a swap.  Low-income families, by contrast, would typically see a cut of $15 or less, and some would actually see their taxes increase.

The impact of this change is so lopsided in part because the state’s existing Grocery Credit Refund can cover most, or sometimes all, of the grocery taxes paid by a low- or moderate-income household.  For a high-income household purchasing premium brands and other high-end foods, however, a blanket exemption for all grocery purchases can be much more lucrative than the current flat credit of $100 per person.

If cutting grocery taxes is on lawmakers’ minds, ITEP’s report suggests expanding the existing Grocery Credit Refund—a move that could provide larger benefits to most households than the alternative plan to create a grocery tax exemption.

For more on sales tax exemptions and credits, check out ITEP’s policy brief on the subject.


12 States Could Raise Gas Taxes This Year


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When it comes to paying for infrastructure, the gasoline tax is the single most important source of revenue collected at both the state and federal levels.  As a result, funding large scale improvements, or maintenance, to transportation networks usually means that the gas tax rate has to go up.  In 2013, six states enacted gas tax increases or reforms (Maryland, Massachusetts, Pennsylvania, Vermont, Virginia, and Wyoming).  In 2014, two more states followed suit (New Hampshire and Rhode Island).  Now, with lower gas prices freeing up some room in drivers’ budgets, there are 12 states seriously considering  gas tax increases in 2015: Georgia, Idaho, Iowa, Michigan, Minnesota, Missouri, New Jersey, South Carolina, South Dakota, Tennessee, Utah, and Washington State.

Georgia: Georgia House Speaker David Ralston says that a gas tax increase is possible this year and lawmakers in his chamber recently introduced a bill that would do exactly that by allowing the tax rate to growth alongside improvements in vehicle fuel-efficiency.  Gov. Nathan Deal has been dropping hints that he’s open to the idea and even went so far as to call the bill a “positive step forward.”  Business leaders in the state are strong supporters of boosting funding for infrastructure and the governor has been adamant that he intends to find a way to secure that funding.

Idaho: Gov. Butch Otter has yet to propose a gas tax increase this year, but he has supported increases in the past, and there is rampant speculation that a gas tax hike could be floated soon.  Encouragingly, the governor made very clear in his State of the State address that he is not interested in taking money away from education to fund the state’s infrastructure, so it appears that additional revenues will have to be raised to satisfy the governor’s call for larger investments in transportation.

Iowa: Gov. Terry Branstad has been open to a gas tax increase for the last few years, but he has shown increased urgency this year on the need for additional infrastructure funding.  Now, even early in the legislative session, the governor is already in serious talks with legislative leaders aimed at hammering out the specifics of how a gas tax hike could be structured—including possibly allowing local governments to raise the tax.  Legislation raising the tax could be introduced within days.  Such an increase is clearly needed since, after adjusting for inflation, Iowa’s current gas tax rate is at its lowest level in the state’s history.

Michigan: This May, Michiganders will vote on a package of tax changes that would raise roughly $1.3 billion in new revenue for transportation and $300 million for education each year.  Most of the revenue would come through a 1 percentage point increase in the sales tax, though gasoline and diesel taxes would also be reformed in a way that would initially raise their rates by approximately 12 cents per gallon.  Under the reforms, vehicle registration fees would also rise.  But the package also includes an important tax cut as low-income families would see some of the gas, sales, and registration tax hikes offset by an expansion in the state’s Earned Income Tax Credit (EITC) from 6 to 20 percent of the federal credit.  Michigan legislators approved this package of changes in December and Gov. Rick Snyder signed them earlier this month, saying, “Most of you know, I’m a fairly frugal CPA. This is a smart investment to make by the citizens of the state of Michigan to invest more in the roads, schools and local government.”

Minnesota: Gov. Mark Dayton and state Senate leaders have proposed applying a 6.5 percent tax to the wholesale price of gasoline.  That reform would initially raise the gas tax rate by about 16 cents per gallon, and would put revenues on a more sustainable path by allowing for further increases in the future once gas prices begin to rise.  Opponents of the plan criticized the fact that it will “disproportionately impact poor and middle class families.”  But lawmakers don’t need to look very far for a solution to this problem.  Following the deadly I-35W bridge collapse, Minnesota lawmakers enacted a gas tax increase in 2008 that included a “low-income motor fuels tax credit” dealing with this exact issue.  Unfortunately, that credit was repealed after being in effect for only one year in order to help close a budget gap arising from the Great Recession.  But if concerns about regressivity have returned to lawmakers’ minds, a similar credit could be implemented again—ideally on a permanent basis this time.

Missouri: Gov. Jay Nixon used part of his State of the State speech to argue that a gas tax hike “is worth a very close look.”  Nixon said that “Missourians believe it’s only fair that folks who use the roads also pay for them” but explained that the state has unwisely moved away from this model as “Missouri’s gas tax hasn’t gone up a penny in nearly 20 years. It’s the fifth-lowest in the nation.”   

New Jersey: State Transportation Commissioner Jamie Fox announced that he is ramping up inspections of the state’s aging bridges as they continue to deteriorate in the face of inadequate funding.  New Jersey’s gas tax rate is the second lowest in the country and hasn’t been raised in almost a quarter century.  Legislators in both chambers have proposed raising the tax, and Gov. Chris Christie is less hostile to the idea than might be expected, saying that “I’ve made it very clear that everything is on the table.”  If a gas tax hike passes in the Garden State, there’s talk of offsetting it (in full or in part) with cuts in a different tax.  One sensible option comes from New Jersey Policy Perspective, which proposed that the state’s Earned Income Tax Credit (EITC) be expanded to offset the impact of gas taxes on low-income families.  A much less sensible alternative would involve eliminating the state’s estate tax, presumably to make it a little easier for heirs to large fortunes to afford the gas tax.

South Carolina: Gov. Nikki Haley surprised many people when she recently proposed a 10 cent increase in the gas tax after having repeatedly threatened to veto any such increase.  Unfortunately, her proposal comes with a major condition: cutting the state’s top income tax rate from 7 to 5 percent.  That change would make South Carolina’s already lopsided tax system significantly more unfair, and has been called unaffordable by The State’s editorial board.  Nonetheless, talk of raising South Carolina’s historically low gas tax rate seems to be reaching a critical mass as House lawmakers debate a plan to tax gasoline based on its price, and even the South Carolina Chamber of Commerce is backing a higher gas tax.

South Dakota: Gov. Dennis Daugaard recently proposed raising the state’s gas tax by 2 cents per gallon, per year, in order to put revenues on a more sustainable path that could keep pace with the growing cost of infrastructure maintenance and construction.  Gas taxes are on legislators’ minds as well, as the first bill filed in the South Dakota Senate this year would hike the tax by roughly 6 cents per gallon.

Tennessee: Gov. Bill Haslam is giving serious thought to proposing what would be Tennessee’s first gas tax hike in over a quarter century.  While the governor hasn’t come out with a plan yet, he seems to understand that twenty five years of gas tax procrastination have put the state on an unsustainable course, noting that “There’s no way the state can continue on the path we’re on now. The math just doesn’t work.”  State legislative leaders and local governments are reportedly interested in the idea of a gas tax hike and the Farm Bureau has softened its long-running opposition to an increase.  Add to that a new report from the comptroller outlining the benefits of the gas tax, and it appears a gas tax hike is a real possibility in the Volunteer State.

Utah: Gov. Gary Herbert says that “now is the time” to raise Utah’s gas tax, and leaders in the state House and Senate are reportedly in agreement.  Now the debate has shifted to whether the state should simply increase its fixed-rate gas tax (stuck at 24.5 cents since 1997 and currently at its lowest level ever, adjusted for inflation), or whether a long-term reform should be enacted with a more sustainable, variable-rate gas tax.  The latter option is better policy, but either could generate significant revenues for infrastructure and allow for the roll-back of raids on education money enacted in recent years.  Encouragingly, Governor Herbert supports both of these goals.

Washington State: The legislature has been debating a gas tax increase in Washington State for at least two years.  The House passed a 10.5 cent increase in 2013 and the Senate seriously considered an 11.5 cent increase in 2014, but neither of those plans ever made it to the governor’s desk.  This year, Senate transportation leaders say that a gas tax hike is still on the table, and House leaders say that bills debated over the last two years are a good starting point for further negotiations.  Gov. Jay Inslee, for his part, is well aware that more revenues are needed.

Other States: The twelve states listed above are hardly the only ones with gas taxes in need of reform.  We’re also hearing gas tax talk from legislators in Montana and Nebraska, task forces in Louisiana, research groups in Oklahoma, and media in states such as Colorado and Wisconsin.  Of course, there’s plenty of bipartisan chatter about raising the federal gas tax as well.  We’ll be following all of these stories closely as they develop, but for the moment, the twelve states listed above seem the most likely to act.


Who Pays? Report Brings out the Red Herring Brigade


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Last week, the Institute on Taxation and Economic Policy released Who Pays?, a report that examines the state and local tax system in all 50 states. The analysis concludes that every state’s tax system is regressive, meaning the lower one’s income, the higher one’s tax rate.

Not surprisingly, the report ruffled a few feathers. It’s about taxes, after all. A few critics cried foul because the study, which made clear it’s an analysis of state and local tax systems, only discussed state and local tax systems. Such a focus doesn’t paint a complete picture of all taxes people pay, they argue. Well, no kidding. Proponents of progressive taxes made a similar argument in 2012 when Mitt Romney made his widely disproven, notoriously wrong remark that 47 percent of the population doesn’t pay any taxes, based on a narrow analysis of federal income taxes.

State governors and lawmakers have a clear set of policies they can control. Federal tax laws are not among them. State and local tax systems fund all manner of public services that benefit all state residents, including public education, public health and safety, and infrastructure. How states fund these vital services and who the responsibility falls on to pay for them are precisely the questions state policymakers should be debating.  

It is indisputable that states are raising revenue in a regressive way that demands a greater share of income from those who have the least. When state lawmakers are forced to deal with difficult fiscal circumstances that may require tax hikes, what they need to know is who’s getting hit hardest to begin with. And that’s exactly what the Who Pays? report shows.

If it is easy to conclude from Who Pays? that states seeking to increase taxes should not look first to low- and middle-income families, including federal taxes makes this conclusion even more obvious. An April 2014 report from Citizens for Tax Justice shows that the lion's share of taxes paid by low- and middle-income people are state and local. Yes, our collective federal and state tax system is somewhat progressive overall, but that doesn’t mean states should be absolved from imposing an unconscionably high tax rate on Americans living at or below the poverty line. If our tax system is indirectly contributing to income inequality, state and local taxes are the main reason why.

For those who would argue that regressive state taxes are just fine because the federal system makes taxes more progressive, well, please make that argument to the low-income families in Washington state who pay an effective state tax rate of 16.8 percent while the richest 1 percent pay only 2.4 percent. And while you’re at it, make your case to the residents of Kansas who are dealing with the fallout from Gov. Sam Brownback’s failed supply-side experiment that cut state taxes for businesses and the very rich – and raised taxes on lower-income residents. It’s well documented that Kansas’s irresponsible tax cuts have left the state struggling to raise enough revenue to adequately fund basic public services.

These kinds of facts should be the starting point for tax reform debate in the states—not nuanced ideological arguments that seek to justify regressive state and local taxes because the federal system is comparatively progressive.

Those of us who advocate for just, progressive tax policies are accustomed to anti-tax advocates dangling shiny objects and trying to detract from big picture questions about how to raise revenue in a fair way. But criticizing a 50-state analysis for analyzing 50 states, not the federal system, is an obvious red herring.


New Year, New Gas Tax Rates


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

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

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

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

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

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

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

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


Why Now May Be the Time to Implement Higher Gas Taxes


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Earlier this year, copious potholes on highways and roads due to severe winter weather conditions exposed the harsh truth about our nation’s transportation funding: there’s not enough of it, and potholes and other crumbling infrastructure could become the norm if the states and the federal government don’t address the issue.

Twenty-four states have gone a decade or more without increasing their gas tax, and 16 states have gone two decades or more without an increase. The last time Congress increased the federal gas tax was in 1993.

A blog in Wednesday’s Washington Post pondered whether now is the time for the federal government to raise the tax since gas prices have dropped to levels last seen four years ago. While there will not be any movement on the federal level in the short term, a couple of states are weighing increases. 

South Carolina Gov.  Nikki Haley and a majority of House members have historically refused to increase the state’s gas tax, but The State newspaper reported that lawmakers are increasingly recognizing that the South Carolina’s transportation infrastructure needs are woefully underfunded. Perhaps a hike in the gas tax isn’t that unrealistic.  A state Department of Transportation report released earlier this year found that the state needs to generate an additional $43 billion over the next 25 years to meet those needs.

South Carolina’s gas tax is one of the lowest in the country (PDF) and hasn’t been raised in more than 25 years. After adjusting for inflation, ITEP found that the state’s current gas tax is lower today than at any point in history – going all the way back to the tax’s creation in 1922. For example, while the 2 cent gas tax that South Carolina levied in 1922 may sound very low to today’s drivers, in the context of the 1922 economy it was actually higher than the 16 cent gas tax South Carolina levies today. In fact a 2-cent tax in 1922 is roughly equivalent to a 28.3-cent tax in today’s dollars. Simply restoring the South Carolina gas tax to the same inflation-adjusted levels would represent a big step toward fully funding the state’s transportation needs. More and more states are realizing that undoing inflationary tax cuts is the most straightforward way to keep their infrastructure from crumbling beneath their feet.

In Michigan, Governor Rick Snyder is putting pressure on the House of Representatives to follow in the footsteps of the Senate and pass legislation that would replace both the state’s current 19-cent gas tax and 15-cent tax on diesel with a tax on the average wholesale price of gas. Based on current gas prices the tax rate would increase to 44 cents in 2018 and raise an additional $1.2 billion for transportation by 2019.   The Governor admits this is asking representatives to take a “tough vote”, but it’s one that the Senate already took by a nine-vote margin (23-14). Gov. Snyder said of the state’s infrastructure crisis, “Every day that passes it's only going to get worse. Pothole season isn't going to be any better next year.”

Because this legislation links the gas tax to the wholesale price of gas the state is putting itself in a better position to ensure that transportation funding keeps up with inflation overtime. 

Policymakers in South Carolina and Michigan aren’t alone in their quest for dealing with infrastructure woes. ITEP’s report State Gasoline Taxes: Built to Fail, But Fixable concludes that the poor design of gas taxes “has resulted in sluggish revenue growth that fails to keep pace with state infrastructure needs.” ITEP recommends raising gas taxes especially in states that haven’t increased their taxes in several years, restructuring gas taxes to take into account increased fuel efficiency and construction costs, and offsetting regressive gas tax hikes with targeted low-income tax relief.

In this political environment, tax increases may be a tough sell. But roads aren’t going to fix themselves, and the D-grade results of inadequate transportation funding will only get worse. States and the federal government should present and consider serious policy proposal for raising gas taxes to repair our nation’s roads and bridges.

 

By Kelly Davis and Meg Wiehe

Mississippi lawmakers have been talking for months about spending some of the Magnolia State’s revenue surplus next year on a tax cut, but that talk has been short on details until this week.  On Monday, Gov. Phil Bryant released his budget plan for next year which includes a $79 million tax break for working families via enacting a 15 percent nonrefundable Earned Income Tax Credit (EITC).  The EITC would be available for taxpayers if revenues increase by 3 percent annually and the state’s emergency fund is fully funded.  

More tax cut proposals are likely to surface in the coming weeks as House and Senate members put together their spending plan for next year. While it is likely we will see much more expensive tax cuts directed to the wealthiest taxpayers in the state, let’s hope lawmakers work to improve upon Gov.  Bryant’s plan.  Nonrefundable EITCs only benefit low income workers who owe income taxes, but do nothing to offset the high sales and property taxes that hit these families the hardest. Making the credit refundable would help offset those regressive taxes for the poorest Mississippians. In fact, an ITEP analysis found that the governor’s nonrefundable EITC proposal would give a tax break to only 9 percent of the poorest MS. But a refundable credit would reach 45 percent of low-income people.

Making the credit refundable would also be an excellent way to put even more money in the hands of working Mississippians who are very likely to spend that money. When speaking about who would benefit from his tax cut plan Bryant rightly said, "They don't bury it in the yard," Bryant said. "They spend it."

While it’s worth celebrating that the Mississippi Governor’s tax cut plan is directed to low-income working families most in need of a break, our friends at the Mississippi Economic Policy Center remind us than any tax cut comes at a cost to public education which is grossly underfunded in the state.  The state has cut funding for K-12 schools by 12.3% since 2008.  More than $300 million is needed to bring public education spending up to an adequate level, yet Bryant's proposed budget only increased K-12 spending by $53 million.


Michael Mazerov, Tax Myth Monster Slayer


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Like the mythic Hydra of centuries old, the idea that people “vote with their feet” by intentionally leaving high-tax states for low-tax states is a monster that will not die. Each time the tax flight myth is shot down, two additional claims arise that espouse tax migration as gospel. Even though ITEP’s own Carl Davis demolished Art Laffer’s claim that states without income taxes outperform states with progressive income taxes way back in 2011, Laffer continues to peddle the same snake-oil. And despite the abundance of data refuting the migration claims posited by anti-tax activists like Travis Brown, Maryland Republicans made the same deeply-flawed claims a centerpiece of their strategy in the recent gubernatorial election.

Luckily, Michael Mazerov at the Center on Budget and Policy Priorities (CBPP) is on the case. I saw Mazerov’s presentation on interstate migration and state income tax levels at this week’s State Fiscal Policy Conference, and walked away impressed with his thorough debunking of the myths.

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The bards will sing tales of his greatness.

Proponents of the tax flight myth argue that people intentionally flee states like New York and California for states like Texas and Florida due to a conscious desire to pay lower state and local taxes. They draw the conclusion that states can promote in-migration and economic growth by cutting income taxes for the wealthy or at the very least stopping tax increases. Mazerov’s research shows that these arguments are dead wrong. In a paper he wrote in May, Mazerov found that taxes have a negligible effect on interstate moves; most people (75 percent) cited new jobs or family obligations as the main reason for leaving their state in a 2013 Census Bureau Survey. Furthermore, the rate of interstate relocation has declined over the past few decades; only 1.5 percent of the US population moved between states in 2013. 69 percent of US citizens still live in the state where they were born, and there is no relationship between a state’s income tax rate and the proportion of native born residents.

A key way that tax flight proponents distort the data is by focusing on out-migration and totally ignoring in-migration. Of the nine states with the highest top income tax rates in 2011, all nine replaced more than two-thirds of their departing households with new arrivals, according to IRS interstate migration data. In fact, the replacement rate was about 91 percent on average.

Another key argument that tax flight proponents make is that when residents or businesses depart, they take their income with them – a canard that Mazerov swatted down in a paper released last month. To state the obvious, most people don’t take their income with them when they leave since they work for other people. In most cases, their job will just be filled by another resident of the state, new or old. Research also shows that entrepreneurs – the “job creators” that proponents claim will flee to low-tax states – are relatively immobile. A February 2014 survey of 150 entrepreneurs found that the most common reason for launching a business in a particular location was that the entrepreneur lived there; the second most common reason was access to talent. Only five percent of those surveyed cited low tax rates as a factor. When business owners leave a state, the business is sold or other businesses pick up its market share – it would be a strange economy indeed where jobs and firms disappeared even though the demand for those jobs and firms remained.

Finally, proponents of the tax flight myth ignore the convincing body of research around the impact of climate on interstate migration decisions. Mazerov’s research shows that Florida (no income tax) was the top destination for interstate movers from Illinois, Michigan, New Jersey, New York, Ohio and Pennsylvania despite vastly different income tax rates in those states. The second-most popular destination states were Arizona and North Carolina, despite the presence of Nevada, Tennessee and Texas – all states with no income tax – close by.

The empirical evidence confirms what most know intuitively: people don’t pack up their lives and move to another state because of percentage changes in personal income tax rates. They move for a spouse, for a job, to be closer to family, to get a better education – in short, for the myriad human reasons that make our lives meaningful. It would be better for states to invest in areas that would actually attract new residents and economic activity (affordable housing, education, and workforce development for starters) than to conjure up justifications for unfair tax cuts. We owe Michael Mazerov a debt of gratitude for his Herculean effort to bring the facts to this crucial public policy debate. 


Immigration Reform and Tax Revenues: What the Numbers Tell Us


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The already overheated battle over immigration reform is becoming more intense after President Obama yesterday announced executive action to give legal status to many undocumented residents.  

But will the impending debate shed any light on the important question of how immigration reform would affect our tax revenues? The good news is that for policymakers who choose to notice them, there are sensible estimates showing that at both the federal and state level, tax revenues are likely to go up as a result of legalizing our undocumented population. A 2013 Congressional Budget Office (CBO) report found that while immigration reform involves both costs (in the form of health, education and other services provided to legalized immigrants) and benefits (in the form of federal taxes paid by newly legal immigrants), in the long run, the benefits to the U.S. Treasury from immigration reform are likely to exceed the costs.

The news is good at the state level too: a 2013 report from the Institute on Taxation and Economic Policy (ITEP) shows that state and local budgets also will receive a new jolt of needed tax revenues as a result of immigration reform—and that undocumented taxpayers are already paying a substantial amount of state and local taxes across the nation. The report estimates that these families pay $10.6 billion a year in state and local sales, excise, income and property taxes, and would pay an additional $2 billion if they were, as part of immigration reform, allowed to fully participate in state tax systems.

While it is not yet clear what percentage of the undocumented workforce would be affected by this plan, it likely would bring in a substantial part of the potential $2 billion in state and local tax.

The $2 billion in new tax revenues ITEP estimates as a result of legalization is the product of two factors. Most importantly, legalization would bring all undocumented workers into the income tax system. The best estimates are that about half of undocumented workers are currently “off the books.” But legalization would also likely bring a substantial wage boost for these currently undocumented workers, further boosting state and local income tax collections as well.

To be sure, undocumented workers are already paying billions of dollars a year to support state and local services from which they benefit: far from simply consuming basic public services, these workers also are making an important contribution to funding their cost. But legalization could, if fully implemented, bring in billions of new revenues to help states dig out of their recent fiscal woes. The president’s plan is an important first step.


The Internet and Taxes: Good and Bad Ideas Might Be Combined in Compromise Tax Bill


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Congress is considering two proposals related to taxes and the internet, one that would facilitate state and local governments in exercising their tax authority, and another that would restrict it. The first, a very good idea, would allow state and local governments to require internet retailers (and other remote retailers) to collect sales taxes from customers, just as any bricks-and-mortar store is required to do. The second, a bad idea, would continue and possibly expand a federally imposed ban on state and local governments taxing internet access the same way they tax other services.

A bill in the Senate combines these two proposals as a compromise, but the future of that legislation is cloudy given the vortex of political maneuvering and obstruction in that chamber.

The Good Idea: The Marketplace Fairness Act

The Marketplace Fairness Act would allow state and local governments to require internet retailers and other remote sellers to collect sales taxes from customers, just as bricks-and-mortar stores are required to do.

If a sales tax applies to something you’re buying, you’re supposed to pay it regardless of whether you make the purchase at a store, over the internet, or through a mail order catalogue. But the Supreme Court decided in 1992 that state and local governments cannot require a remote seller (which could include an internet retailer like Amazon if it has no physical presence in a given state) to collect that tax.

So if you buy something online and you’re not charged whatever sales tax applies, you are supposed to send that sales tax payment to the state or local government on your own. Few people comply with that requirement or even know it exists so, in effect, the Supreme Court decision turned us into a nation of sales tax evaders.  

The Court did leave Congress the option of addressing this problem by allowing state and local governments to require remote sellers to collect sales taxes, which the Marketplace Fairness Act would do. The Senate approved the bill last year with 69 votes — including 21 Republicans, 46 Democrats, and 2 independents that caucus with the Democrats.

It’s obvious why the bill has bipartisan appeal. Unlike other bills that mention the word “tax,” this bill does not raise taxes but only makes it possible to collect taxes that are already due (but rarely paid) under existing state and local law. It also addresses a major source of unfairness. Internet retailers are given an unfair advantage over bricks-and-mortar stores because the former allow customers to evade sales tax.

Opposition to the Marketplace Fairness Act sometimes focuses on the complexity a multistate company faces if it must collect the different sales taxes levied by many different jurisdictions. But retailers like Wal-Mart and Home Depot, which sell goods online and also have a physical presence in most states, have been collecting sales taxes on online purchases for years.

The Bad Idea: The Internet Tax Freedom Act

The Internet Tax Freedom Act, first enacted in 1998, banned state and local governments from taxing internet access. This seemed like a bad idea from the very beginning. Some of the same lawmakers who insist that the federal government not interfere with the economy and not intrude upon states’ rights rushed to restrict states’ taxing authority in a way that favored the internet relative to other services. The law was extended several times and is now scheduled to expire on December 11.

If anyone thought in 1998 that the internet was an “infant industry” that needed to be nurtured and subsidized, that argument is surely even weaker today than it was then.

In July, the House approved the Permanent Internet Tax Freedom Act. In addition to making the ban permanent, this bill would also repeal the grandfather provision that allowed seven states that had enacted Internet taxes prior to 1998 to keep those laws in place. This move would cost those states half a billion dollars in revenue each year. And the remaining states would collectively forgo billions in revenue that they could otherwise raise each year.

The Possible Compromise: The Marketplace and Internet Tax Fairness Act

The Marketplace Fairness Act has not advanced in the House and the Permanent Internet Tax Freedom Act has not advanced in the Senate. A group of Democratic and Republican Senators introduced the Marketplace and Internet Tax Fairness Act (MITFA) as a compromise. The bill essentially attaches the Marketplace Fairness Act to a 10-year extension of the ban on taxing internet access, leaving in place the grandfathering provisions for the seven states that levied such a tax before 1998.

As Senate Majority Leader Harry Reid began to advance MITFA in the Senate, House Speaker John Boehner signaled that he will not bring such a compromise to the House floor. It is unclear how this will be resolved. The worst possible outcome would be an extension or expansion of the ban on taxing internet access without action on the Marketplace Fairness Act. Given that Senate supporters of the latter are more than numerous enough to block passage of the former, they should ensure this does not happen.