Other Revenue Sources News

South Carolina's Gas Tax Deal: Could Have Been Worse, Could Have Been Better

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South Carolina lawmakers this week raised the state’s gas tax for the first time in 28 years, a time period that tied for the third-longest in the nation. While the increase was meaningful and hard-fought, the final result remains flawed in ways that could have been easily remedied or avoided.

The biggest positive of the bill is that, once fully phased in, it will raise $600 million per year of needed revenue for the state’s ailing infrastructure through a combination of increased license and registration fees, a higher cap on the vehicle sales tax, and the 12-cent per gallon gas tax increase that is phased in over six years. This will fall short of the estimated $1 billion needed, but is an improvement nonetheless. And lawmakers overcame the opposition and eventual veto of Gov. Henry McMaster, requiring supermajority votes in both houses to enact the measure.

It is also laudable that for the most part, they resisted efforts to tack on costly, regressive, unrelated tax cuts to “offset” the effect of the gas tax increase. Some other states haven’t fared as well on that point: Tennessee’s lawmakers tied this year’s gas tax increase to a cut in the state’s Hall Tax on the investment income of very wealthy families, and last year some New Jersey lawmakers held the gas tax increase   hostage to assure elimination of the completely unrelated estate tax. Moreover, the tax cuts in both of those states were about as large as the tax increases, meaning they raised money to repair crumbling roads and bridges at the expense of schools, public safety programs, and health care, all while shifting the funding responsibility off of wealthy residents and onto low- and middle-income families. South Carolina’s legislators did not cut taxes to such an extent, so the bill brings in meaningful revenue without robbing funding from other priorities.

The Bill’s Flaws

However, some components added to the bill in the last few weeks are so poorly designed to meet their putative goals that it appears they were not intended to achieve those goals at all.

First among these is the creation of a nonrefundable Earned Income Tax Credit (EITC) valued at 125 percent of the federal credit. While this technically adds South Carolina to the list of states with their own EITCs and on the surface looks quite impressive, the nonrefundable nature of the credit and its interaction with the rest of South Carolina’s income tax code render it meaningless to the vast majority of the state’s low- and middle-income families, precisely those who will be hardest hit by the gas tax increase. Low- and middle-income families tend to pay much more in state consumption taxes such as sales and gas taxes than they do in state income taxes, and the main advantage of a state EITC is that if it is refundable it helps offset that fact by reducing a working family’s state income tax liability below zero to help them pay those other taxes that represent a large portion of their budgets.

But a nonrefundable EITC can only reduce income tax liability to zero, and most low-income families in South Carolina already pay little or no state income tax, so the provision is of little to no help to them. In fact, while the gas tax increase will significantly affect nearly all South Carolinians, a nonrefundable EITC will only reach about 2 percent of those in the lowest 20 percent of incomes (those with incomes below $21,000) and only about 11 percent of those in the next 20 percent (incomes between $21,000 and $36,000). For the families unaffected by it, setting the credit at 125 percent of the federal credit, much higher than any other state, is no different from setting it at 250 percent (as was proposed in an earlier version of the bill) or 1 percent. If South Carolina lawmakers wanted to offset the gas tax increase for the working families affected most by it, a refundable EITC even at just 2 percent of the federal credit would have cost a comparable amount from the state budget while reaching many more people – 44 percent of the lowest-income South Carolinians and 30 percent of the next income group. The graph above shows how a refundable EITC would do a better job of offsetting the regressive nature of the gas tax than does the nonrefundable version that was enacted.

A second flaw of the bill is a convoluted new credit for preventative maintenance to vehicles. To claim the credit, South Carolinians must save all their vehicle maintenance and gas tax receipts, and then claim a credit equal to either the total of their maintenance spending or their total increase in gas taxes resulting from the bill, whichever is smaller. And on top of all that, the department of revenue has to adhere to an annual cap on the credit ($114 million once fully phased in), so must estimate how many people will claim the credit and provide an adjustment factor for people to use when calculating their individual credits. This credit is so burdensome to comply with that it is hard to imagine very many people keeping the painstaking records necessary to do so, which may have been the legislators’ intent all along.

The final major flaw in the legislation is legislators’ decision to drop a provision that would have indexed the gas tax rate to inflation. If the goal was truly to update the tax structure and keep it updated to keep funding in line with needs, that provision would have gone a long way to ensuring a sustainable funding stream. Instead, without further action revenues will inevitably fall behind needs once again and this debate will have to be repeated while those needs go unmet.

In the end, lawmakers passed a bill that will do more good than harm. The gas tax update is partial and not sustainable, but is vastly better than another year of stalemate on the issue. The EITC is nonrefundable and will leave out the state’s lowest-income residents, but will provide help to some middle-income South Carolinians and can always be improved in the future. Most of the debates to settle differences on this bill took place behind closed doors with no public input. Had lawmakers been willing to listen to constructive criticism from their constituents and experts in the state, they may have reached a better outcome, but they do deserve credit for a getting the bill over the finish line, and overcoming the hurdle of Gov. McMaster’s veto along the way.

Gas Taxes Increases Continue to Advance in the States

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As expected, 2017 has brought a flurry of action relating to state gasoline taxes. As of this writing, six states (California, Indiana, Montana, South Carolina, Tennessee, and Utah) have enacted gas tax increases this year, bringing the total number of states that have raised or reformed their gas taxes to 24 since 2013.

These increases will play an important role in offsetting the loss of gas tax purchasing power caused by rising construction costs and improvements in vehicle fuel-efficiency. Although it’s worth mentioning that some of these long-overdue updates were paired with cuts in unrelated taxes that will create challenges for funding other areas of the budget, including education and health.

A summary of gas tax changes enacted since 2013 is below. This post will be updated in the weeks ahead as a handful of additional states continue to debate boosting their gas taxes.


2017 Enacted Legislation

  • California: A 12-cent gas tax increase and 20-cent diesel tax increase will take effect on Nov. 1, 2017. The new law also changes the formula that California uses to implement ongoing gas tax rate adjustments. Among those changes are a new provision allowing for gas tax increases based on the rate of inflation within the state’s borders.
  • Indiana: A 10-cent increase will take effect July 1, 2017. Further adjustments will occur between 2018 and 2024 based on a new formula that considers both inflation and the rate of growth in Indiana’s personal income. The new law also shifts the portion of sales tax revenue collected on gasoline purchases out of the general fund and toward transportation instead.
  • Montana: A 6-cent per gallon gas tax increase will be phased-in over 6 years. Most of the increase (4.5 cents) will take effect on July 1, 2017. The remainder will be implemented in 0.5 cent increments between July 1, 2019 and July 1, 2022. The state's diesel tax will eventually rise by 2 cents, with most of that increase (1.5 cents) taking effect July 1, 2017.
  • South Carolina: The legislature overrode Gov. Henry McMaster’s veto to enact a 12-cent per gallon increase in the tax rate on both gasoline and diesel. The increase will be phased-in over 6 years, with the first increase (of 2 cents per gallon) taking effect on July 1, 2017.
  • Tennessee: The gas tax will rise by 6 cents and the diesel tax by 10 cents on July 1, 2017. While Gov. Bill Haslam initially proposed indexing the state’s gas tax rate to inflation, this reform was not included in the final package passed by the legislature.
  • Utah: A new law modifies the variable-rate gas tax formula enacted by Utah lawmakers in 2015 in a way that will allow for somewhat more robust revenue growth. The new formula is expected to result in a roughly 0.6-cent-per-gallon tax increase in 2019 and a 1.2-cent increase in 2020.

2016 Enacted Legislation

  • New Jersey: A 22.6-cent per gallon increase in the gasoline tax took effect on Nov. 1, 2016. The diesel tax will eventually rise by a similar amount, as a 15.9 cent increase went into effect on Jan. 1, 2017 and an additional increase is scheduled for July 1. Moving forward, New Jersey’s gas tax rate will vary based on a formula designed to raise a target amount of revenue.

2015 Enacted Legislation

  • 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. The first such increase (0.3 cents) under this formula took effect on Jan. 1, 2017.
  • Idaho: A 7-cent increase took effect July 1, 2015.
  • Iowa: A 10-cent increase took effect March 1, 2015.
  • 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.
  • Michigan: The state’s gasoline and diesel taxes rose by 7.3 cents and 11.3 cents, respectively, on Jan. 1, 2017. Beginning in 2022, the state’s gas tax will begin rising annually to keep pace with inflation.
  • Nebraska: A 6-cent increase was enacted over Gov. Pete Ricketts’ veto. Nebraska’s gas tax rate is rising in 1.5 cent increments over four years. The first two of those increases took effect on January 1 of 2016 and 2017.
  • 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. The first of those increases (0.3 cents) took effect on Jan. 1, 2017.
  • South Dakota: A 6-cent increase took effect April 1, 2015.
  • Utah: A 4.9-cent increase took effect on Jan. 1, 2016. Future increases will occur under a new formula that considers both fuel prices and inflation. This formula was modified under legislation enacted in 2017 to allow for faster gas tax revenue growth.
  • Washington State: An 11.9-cent increase was implemented in two stages: 7 cents on Aug.1, 2015, and a further 4.9 cents on July 1, 2016.

2014 Enacted Legislation

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

  • 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 state’s tax rate has increased by 10 cents above its early-2013 level.
  • Massachusetts: A 3-cent increase took effect July 31, 2013.
  • Pennsylvania: The first stage of a significant gas tax reform, tying the rate to fuel prices, took effect on Jan. 1, 2014. So far the gasoline tax rate has increased by 27 cents per gallon while the diesel tax has increased by 35.5 cents.
  • 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.
  • 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.
  • 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 (no state enacted a gas tax increase in 2010, 2011, or 2012).
  • District of Columbia: Legislation approved in 2013 has yet to impact Washington D.C.’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.

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: 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)

47 Years Later, Alaska Considers Playing Catch-Up with its Motor Fuel Tax

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Alaska Gov. Bill Walker recently proposed tripling the gasoline and diesel tax rates paid by Alaska motorists to generate funding for the state’s infrastructure. In a different state, tripling the motor fuel tax might be a radical policy change. But Alaska’s tax has not been updated since 1970 and because of those 47 years of procrastination, it now lags far behind the taxes levied in most other states. In fact, as ITEP explains in a new brief, Alaska’s motor fuel tax would remain below average even if Gov. Walker’s proposal to raise the base rate from 8 to 24 cents per gallon were enacted.

ITEP’s brief discusses four ways in which Alaska’s fuel tax is an outlier both compared to the taxes levied in other states, and compared to Alaska’s own history. Specifically, it finds that:

  • Alaska’s tax rate on highway fuel (gasoline and diesel) is the lowest in the nation.
  • Alaska has waited longer than any state since last updating its highway fuel tax rate.
  • Adjusted for inflation, Alaska’s tax rate on gasoline and diesel fuel has reached its lowest level in history.
  • Alaska households are spending a smaller share of their earnings on state highway fuel taxes than at almost any time since Alaska became a state.

Read the brief


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

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.

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.

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: 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’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.


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’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.


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.


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.

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.

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.

Five States Change their Gas Tax Rates on Friday; Will New Jersey Join Them?

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UPDATE: New Jersey did not increase its gas tax on July 1 because of disagreement over tax cuts that many legislators wanted to tie to the gas tax increase.  Lawmakers continue to search for a solution to the state’s infrastructure funding shortfall.

Independence Day weekend isn’t the only thing arriving this Friday.  Most states will be starting new fiscal years on July 1, and a handful of them will be adjusting their gas tax rates to mark the occasion.  And depending on the actions of New Jersey lawmakers over the coming days, it’s possible that the Garden State could overshadow the rest by implementing the largest gas tax increase in recent memory—and the state’s first in 26 years.

Aside from New Jersey, the rest of the 21 states that have waited a decade or more since last raising their gas tax rates will continue to hobble along as their transportation revenues stagnate.  In total, nineteen states will witness gas tax “anniversaries” on Friday when their gas tax rates will officially become a full year older.  Of that group, Tennessee’s 27 years of inaction leads the pack.  The Volunteer State has been collecting the same 20 cents in tax per gallon of gas since July 1, 1989—a few months prior to the fall of the Berlin Wall.

Gas Tax Increases

For the moment, Washington State has the largest gas tax change scheduled for this Friday.  There, the tax rate on gasoline and diesel fuel will rise by 4.9 cents per gallon, bringing the state’s overall rate to 49.4 cents.  This is the second and final stage of an 11.9 cent increase enacted last year to fund improvements to the state’s transportation network.

Meanwhile, Maryland’s gas tax rate will rise by just under a penny per gallon (0.9 cents).  This represents the final stage of a reform signed by then-Gov. Martin O’Malley in 2013, though the state’s tax rate will continue to vary in the years ahead alongside both inflation and fuel prices.

Given the enormous economic importance of our transportation network, both of these increases are steps forward for these states.  But both would also pale in comparison to the 23 cent increase under consideration in New Jersey.  For years, lawmakers in the Garden State have struggled to fund their state’s infrastructure with a meager 14.5 cent per gallon gas tax, ranked second lowest in the nation behind only Alaska.  Boosting that rate to 37.5 cents per gallon would allow for enormous improvements to the state’s infrastructure while still leaving its rate below that of its two largest neighbors—New York and Pennsylvania.  But the cuts to general fund taxes (including income, sales, and estate taxes) that key lawmakers are insisting must accompany a gas tax hike would result in a major erosion of funding for education, health care, and the state’s notoriously underfunded pension system.

Gas Tax Cuts

Three states will see their transportation funding situations deteriorate later this week when gas tax rate cuts take effect.

In California, the 2.2 cent per gallon cut taking effect on Friday represents the third cut in as many years.  Altogether, this series of reductions has pushed the Golden State’s gas tax rate 11.7 cents lower than where it stood in the summer of 2013.

In Nebraska, the situation is somewhat better as the state’s more modest 1 cent per gallon cut is bookended by an increase that took effect in January and another increase expected to take effect next January.  But even so, the state’s gas tax rate is still lower than it was a decade ago.

And finally, the 1 cent per gallon gas tax cut taking place in North Carolina actually represents a smaller decline than was originally scheduled.  Last year, lawmakers intervened to curb reductions in the gas tax rate triggered by low gas prices.  At the same time, they also implemented a new formula that will allow the state’s tax rate to grow alongside its population starting this January.

Given how gas prices have declined as of late, it is remarkable that more states aren’t cutting gas tax rates on Friday.  Kentucky, Vermont, and Virginia all have gas tax rates linked to fuel prices that often undergo automatic adjustments on July 1, but the tax rates in each of these states have already fallen so low that they’ve reached the minimum, or “floor,” level specified in law.  Similarly, had Georgia not reformed its gas tax last year, it’s possible that a gas tax cut would have taken effect there as well.

Decades of Procrastination

Sometimes, inaction can be just as significant as actual changes in policy.  In total, nineteen states will see gas tax “anniversaries” arrive on Friday.  Unless New Jersey lawmakers act, for example, the state’s 14.5 cent per gallon fuel tax rate will have been frozen in time for exactly 26 years come Friday.  The last time the state’s tax rate on fuel went up was on July 1, 1990 when the four cent Petroleum Products Gross Receipts Tax took effect.

Other states where gas tax rates officially become one year older on Friday include Tennessee (27 years), New Mexico (23 years), Montana (22 years), Arkansas (15 years), Kansas (13 years), North Dakota (11 years), and Ohio (11 years).  At the other end of the spectrum, states such as Idaho and Rhode Island saw their gas tax rates increase exactly one year ago under reforms recently enacted by those states’ lawmakers.

As we explain in a newly updated brief identifying the number of years that have elapsed since each state last raised its gas tax rate:

If the gas tax is going to provide an adequate amount of revenue to fund transportation in the medium- and long-term, the tax rate needs to be periodically adjusted to at least keep pace with the rate of growth in the cost of infrastructure maintenance and construction. State gas tax rates that have gone ten to twenty years, or more, without an increase clearly do not live up to this bare minimum test of sustainability.

Read the brief 

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.

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.

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

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.



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




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.

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. 

Oregon's Per-Mile Tax Contains Glaring Flaws

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On July 1, up to 5,000 Oregon residents can sign up for a program that indefinitely exempts them from the state’s gasoline tax.  Instead, these drivers will pay a flat 1.5-cent tax on each mile that they drive.

On one level, the logic behind this experiment is sound.  As electric cars and highly efficient cars become more popular, consumers need to buy less gasoline to go the same distances.  The result is less collected in per-gallon gasoline taxes, and less resources to fund maintenance and enhancements to the transportation network.  Oregon’s per-mile-tax experiment is designed to address this emerging issue.

But the plan has fundamental problems. In the short-term, this program will be a boon to the 1,500 gas guzzler owners lucky enough to score a spot in the experiment. Thirty-percent of the slots in the program can go to vehicles that get less than 17 miles per gallon, a provision intended to avoid significant revenue losses.  Toyota Prius owners, by contrast, are likely to be more hesitant to volunteer since the Oregon Department of Transportation estimates that doing so would cost them $117 in additional taxes per year.  This imbalance is a big part of the reason that just 24 percent (PDF) of people support an Oregon-style per-mile tax that does not take vehicle emissions into account.  After rewarding SUV owners and penalizing Prius owners, the net result will be a system that collects roughly the same amount of revenue overall as the current gasoline tax.

But this is not the only problematic aspect of Oregon’s pay-per-mile experiment.  Incredibly, this new tax includes the same design flaw that has plagued the state’s gasoline tax for almost a century: a stagnant, fixed tax rate that is incapable of keeping pace with inflation.

Oregon, like many other states, has recently been having trouble raising enough revenues to maintain and expand its transportation network.  Much of this trouble can be traced back to the design of the state’s gasoline tax, which cannot keep pace with the growing cost of asphalt, machinery, and other construction inputs because it is levied at a flat per-gallon rate of 30 cents per gallon.  Increasingly, states have been moving away from this “fixed-rate” model in favor of smarter, variable-rate taxes tied to inflation or other factors.

But rather than adopt this reform, Oregon lawmakers have overlooked inflation entirely and have opted to launch an experiment aimed at dealing with increasing fuel-efficiency.  The problem with this approach is that fuel-efficiency’s impact on the budget is a longer-term issue that has yet to rival inflation in terms of its practical effect.  When ITEP last examined this topic, we concluded that “construction cost growth has been 3.5 times more important than fuel-efficiency gains in eroding the purchasing power of the gas tax.”

In this light, Oregon lawmakers’ decision to launch a major pay-per-mile experiment is nothing short of bizarre.  If transportation revenue sustainability is their chief concern, indexing the gas tax rate to inflation would go much farther toward addressing this problem, and would do so much more quickly and at much less expense to taxpayers.

Once that reform is enacted, there would be a stronger case to be made that a pay-per-mile tax experiment should be conducted to prepare for the coming popularity of electric cars and highly efficient vehicles.  But even then, lawmakers will still need to be mindful of inflation.  As we explained in our 2014 report on this subject : “Lawmakers interested in adequately funding transportation on an ongoing basis should immediately index their gas tax rates to inflation, and should be aware that such indexing will also be needed under any [pay-per-mile] tax they might enact.”

As things currently stand, Oregon’s 1.5-cent-per-mile tax is exactly as vulnerable to inflation as its 30-cent-per-gallon gas tax.  Despite the hype, this experiment isn’t the leap forward in transportation funding sustainability that Oregon needs right now.

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.

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.

Gas Tax Procrastination: 22 States Have Gone a Decade or More Since Last Hike

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gas.jpgWith at least twelve states looking seriously at gas tax increases this year, now is a good time to survey the landscape of state gas tax policies.  Two new briefs from ITEP do exactly that.

While the cost of asphalt, concrete, and machinery has been rising, too many state gas tax rates haven’t budged.  Twenty-two states have gone a decade or more without a gas tax increase, and sixteen of those states have not acted in two decades or more.  Alaska (44.8 years) and Oklahoma (27.8 years) are the top two gas tax procrastinators and it’s unlikely that will change this year.  But Iowa and South Carolina (tied for #3 at 26.1 years each) are seriously considering gas tax increases, as are #6 Tennessee (25.6 years) and #8 New Jersey (24.6 years).

All of these states have one thing in common: a fixed, cents-per-gallon gas tax that is guaranteed to fall short over time as inflation chips away at its “real” value.  Fortunately, our other brief shows that a large, and growing, group of states now levy smarter, variable-rate gas taxes that trend upwards over time.  Eighteen states, home to over half of the county’s population, have this type of gas tax—either with a price-based (sales tax) on gas, or a gas tax rate that’s simply indexed to inflation.  And as we noted recently, more states such as Minnesota, South Dakota, and Utah could join that list soon.

Stagnant gas tax rates that have not been updated in years, or even decades, are not generating enough revenue to cover the growing cost of maintaining and expanding our infrastructure.  To accomplish that goal, outdated gas tax rates need to be increased, and gas taxes need to be set on a more sustainable course by adopting variable-rate structures better geared for long-run growth.

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

The Round-Robin of State Lottery Exploitation

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lottery.jpgLotteries have been with us since the early years of the Republic. They were corrupt and a poor way to raise revenue then, and today they’re not much better.

Cohens v. Virgina, an 1821 Supreme Court case, concerns the sordid tale of the National Lottery, passed by Congress to raise funds for the beautification of DC and conducted by the city’s municipal government. The court was forced to intervene when unscrupulous agents sold tickets in Virginia contrary to state law. Even worse, the lottery never paid out after one of the agents absconded with the winnings.

In a depressing reminder that nothing ever changes, a recent article in Stateline reports that a statistically impossible number of convenience store owners and clerks have hit lottery jackpots. In New Jersey, half of the 20 most frequent lottery winners since 2009 are either retailers or their family members. Store clerks commonly cash winning tickets for a commission for those who owe back taxes or other debts, and some defraud customers (often elderly or unsophisticated) by shortchanging them on their winnings. As Richard Lustig explains in Stateline, “(The clerk) sees a $500 winning ticket, but says you won $20…He gives you $20 and then goes and cashes the ticket.”

It isn’t just retailers getting in on the fraud. In states that have turned to private contractors to administer their lotteries, the companies have failed to deliver on wildly exaggerated claims of revenue growth. Last year, former Illinois Gov. Pat Quinn was forced to fire Northstar, the firm operating the state lottery after it failed to deliver $400 million in promised profit over three years. Despite that abysmal track record, New Jersey Gov. Chris Christie hired the same firm to take over New Jersey’s lottery; unsurprisingly, Northstar New Jersey missed it’s income target by $55 million, and revenues were 7.9 percent lower compared to the same period the previous fiscal year (under state management).

Lotteries hang on because state officials claim that the proceeds go to worthy causes, such as schoolchildren, the elderly, or other feel-good state spending categories, never mind that it’s a bad bet for states to depend on the meager dollars of their most vulnerable citizens to fund crucial services like schools. And often, the money never goes to its intended purpose; one study found that states with lotteries increase education budgets initially but then decrease them later on by shifting general fund dollars previously earmarked to education to other purposes. Meanwhile, “states without lotteries increase their spending over time and end up spending 10 percent more of their budgets, on average, on education compared to lottery states.”

The combination of unscrupulous vendors and firms, waning public interest in lotteries, competition from casinos and other forms of gambling, and declining revenues have made many states desperate. State lotteries have boosted advertising budgets in the hopes of squeezing more dollars out of the 20 percent of customers who constitute 80 percent of lottery sales. They’ve tried publicity stunts like bacon-scented scratch-off tickets and mobile apps to reel in younger players. Apparently, it has occurred to no one that needed revenues can be raised in traditional ways, such as through progressive taxation that asks the well-off to pay their fair share, rather than relying on the destitute to shore up state coffers.

Unscrupulous agents may not be running away to an undisclosed location with state lottery proceeds as some did in one of the earliest state lotteries, but they are still an ill-advised way to raise reliable revenue.

As ITEP state policy director Meg Wiehe said in a recent MSNBC interview, “lotteries are highly unstable; they’re unsustainable, unpredictable, and frankly an unfair way to pay for public services.” It’s time our legislators found the courage to raise revenues in a responsible way, rather than resorting to gimmicks. 

Sam Brownback's White Whale

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Little did Kansas voters know that in reelecting Sam Brownback they were actually voting for a vengeful old sea captain obsessed with one issue above all others – eliminating the state’s personal income tax.

How else to explain the governor’s insistence on continuing his ruinous path, despite the dictates of reality and reason? His zeal for cutting the personal income tax will cost Kansas $5 billion in lost revenue over the next seven years. The governor’s recent budget proposes cutting K-12 operational spending by $127.4 million this year alone, to say nothing of the draconian cuts he implemented over his first term. Per-pupil spending in the state is $861 less than it was in 2008, according to a recent study from the Center on Budget and Policy Priorities. The governor has already been forced to reduce spending by  4 percent across the board for state agencies this year (on top of other cuts), and he has raided the highway fund to the tune of $421 million. The reserve fund is almost empty. The state’s credit is in tatters.

Brownback has been forced to delay further income tax cuts planned for this year. He has also 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. As former Kansas Gov. Kathleen Sebelius said recently, “I’m not sure there’s enough smokers and drinkers in Kansas to balance these enormous cuts.” Furthermore, the governor’s regressive tax hikes would increase the burden on the same Kansans hurt the most by his economic stewardship.

The governor’s plan has succeeded in uniting state lawmakers in opposition. “These changes to tax policy proposed by Governor Brownback do nothing to address the systematic problem created by his irresponsible tax polices and fiscal mismanagement,” House Minority Leader Tom Borroughs complained. Sen. Laura Kelly groused that “People are being asked to take politically difficult votes on proposals that don’t solve the problem.”

Faced with this reality, Brownback and his first mate, supply-side Svengali and economist-for-hire Art Laffer, have resorted to the time-honored strategy of obfuscation. When a reporter pointed out that the governor’s plan to delay income taxes was a copy of his opponent’s plan from the gubernatorial election – a proposal that Brownback’s campaign derided as “appalling” – Brownback’s revenue secretary testily responded that, while Davis’s plan would have halted tax cuts forever, the governor’s proposal would still allow for tax cuts to go forward if growth in state tax receipts exceeded 103 percent of tax receipts in the previous fiscal year. Since the state is forecasting budget deficits through 2019, this is disingenuous at best.     

The governor’s budget director has tried to claim that the governor has not cut spending at all. “I know many people have different words for efficiencies. I do not believe these to be cuts,” he said, referring to the $1.38 billion in spending reductions in the governor’s proposed budget. Somehow I don’t think the kids in overcrowed classrooms and pensioners uncertain about their retirement plans would agree.

Laffer, in a recent interview, said that while he was not surprised by the state’s yawning deficits, he was at a loss as to why they occurred – this, despite a PhD in economics from Stanford University. He does feel bad, however – not for the Kansans hurt by budget cuts, but for Brownback. “I feel sorry for the governor,” he lamented, “but he did the right thing.”

Brownback, confronted with terrible revenue projections soon after his reelection, denied having any advanced knowledge that things were so bad. “I knew what the public knew,” he claimed, which is quite a troubling admission.

And let’s not forget Orwellian attempts to distort reality with misleading information. For example, the graph below looks great for Kansas job growth, until you look at the y-axis and see the state has added about 60,000 jobs in the last four years, trailing job growth in neighboring Missouri, Iowa, Oklahoma and Colorado. 


In his state of the state speech, Gov. Brownback vowed to continue the “march toward zero,” referring to his quest to eliminate state income taxes. But maybe the march is toward zero money for crucial state services, zero new jobs created through his austerity economy, and zero prospects for Kansas schoolchildren.

A wise public servant would acknowledge his error and reverse the policies that have led to so much economic harm. But Sam Brownback has become a 19th century salty dog chasing the white whale of eliminating his state’s income tax. No matter that he has lost his leg and thousands of kids have lost their shot at a decent future. He and Art Laffer, say “Damn the torpedoes, full speed ahead.” 

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.

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

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

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

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

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

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

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

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

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

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

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

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

Taxing Toking: The Tax Implications of Marijuana Ballot Initiatives

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In addition to a number of tax proposals on the ballot this election, voters in Alaska, Oregon, and the District of Columbia will vote on ballot initiatives that would legalize marijuana for recreational use. These measures could also have future revenue implications. If these initiatives pass, they would set these jurisdictions on the path of Colorado and Washington, which already allow production and sale of marijuana to adults for recreational as well as medical purposes.

While Colorado and Washington marijuana markets are still a work in progress, both states have proven that taxes on marijuana can generate revenue. For example, since recreational marijuana sales began in January, Colorado has collected over $45 million in revenue from marijuana taxes and fees. Washington has collected $5.5 million in excise tax revenue from July 8 (the first day of sales) through October 7.

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


Oregon's marijuana ballot initiative would place a $35 per ounce excise tax on all marijuana flowers, a $10 per ounce excise tax on all marijuana leaves, and a $5 excise tax per immature marijuana plant. The revenue generated from these taxes would be earmarked such that 40 percent would go to the Common School Fund, 20 percent for mental health/alcohol/drug services, 15 percent for state police, 20 percent for local law enforcement, and 5 percent for the Oregon Health Authority. The Oregon Legislative Revenue Office estimates that this measure would raise $41 million from 2017 to 2019 , while the economic consulting firm ECONorthwest estimated that revenue would hit a much higher  $79 million over the same time period.


Alaska's marijuana ballot initiative would place a $50 per ounce excise tax on the sale of marijuana with the option of allowing the Department of Revenue to exempt or apply lower tax rates to certain parts of the marijuana plant. While the Alaska Department of Revenue has chosen not to issue a formal revenue estimate, a Colorado-based organization, the Marijuana Policy Group, has estimated that the measure would raise $73 million  from 2016 to 2020.

District of Columbia

Unlike the initiatives in Alaska and Oregon, Washington, D.C.'s ballot initiative does not explicitly lay out a taxation regime in the initiative text. The assumption, however, is that the D.C. Council will follow-up with legislation that puts in place a regulatory and taxation system for recreational marijuana. To this end, D.C. Councilmember David Grosso has proposed the Marijuana Legalization and Regulation Act, which would place a 6 percent excise tax on medical marijuana and a 15 percent excise tax on recreational marijuana.

Although there has been no official score of the bill, an estimate of a similar hypothetical marijuana tax in D.C. predicted it could raise $8.8 million. Whatever the amount raised, the proposed D.C. legislation would direct all of it into a dedicated marijuana fund, which would fund anti-drug abuse programs across D.C. agencies. 

How to Combat the Rapid Rise of Tobacco Smuggling

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According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), an estimated $7 and $10 billion is lost in federal and state tax revenue annually due to cigarette smuggling, which is astounding considering that total federal and state tobacco tax collections were about $32 billion in 2013. This means that as much as a quarter of all tobacco tax revenue is being lost each year.

One of the biggest drivers of the extensive cigarette smuggling is the substantial differences in state excise taxes. For example, Virginia's state tax is only 30 cents on a pack of 20 cigarettes, whereas New York’s combined state and city excise tax is 19.5 times higher at $5.85 per pack. From a practical perspective, this means that an individual could evade $166,500 in tobacco taxes by simply buying up 50 cases of cigarettes in Virginia, driving them to New York City and then illegally reselling them to retailers in the city.

While some level of smuggling may be inevitable due to the high profitability of this enterprise, the good news is that there are a host of simple measures that state governments can take to combat the flow of cigarette smuggling, including simply increasing the quality of tobacco tax stamps and better record keeping by retailers. Lawmakers in Virginia and Maryland, for instance, have already started to crack down on cigarette smuggling by stepping up enforcement and increasing criminal penalties on smugglers.

On the federal level, Rep. Lloyd Doggett has proposed the Smuggled Tobacco Prevention (STOP) Act, which would require unique markings on tobacco products for tracking purposes, ban the use of tobacco manufacturing equipment to unlicensed persons, require better disclosure by export warehouses and increase the penalty on tobacco smuggling offenses. Taken together, these measures provide the critical framework needed for federal and state authorities to significantly stem the flow of cigarette smuggling.

Taking a step back, it's important for state and federal lawmakers to remember that tobacco taxes are most useful as a mechanism to discourage smoking, rather than a particularly desirable revenue source given that they are regressive and the amount of revenue they generate declines over time. Still, allowing tax evasion to erode this revenue source at the state and federal level is simply unacceptable.

Tobacco Industry Games Rules to Dodge Billions in Taxes

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What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.

The Dilution of State Estate Taxes Spells Trouble for Tax Fairness

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The Institute on Taxation and Economic Policy published a report on Monday highlighting a disturbing trend that’s made inroads even in solidly progressive states over the past year: the weakening or complete dismantling of state estate taxes. Three states – Indiana, North Carolina, and Ohio – repealed their estate or inheritance tax in 2013, bringing the total number of states still maintaining their own estate or inheritance tax down to only 19, plus the District of Columbia. Seven other traditionally Democratic states plus D.C. sapped the potency of their tax, either seeing their exemption levels increase in 2013-2014 or passing legislation calling for future increases.

In an era when a dense economic treatise on inequality tops the New York Times bestseller list, developments like these threaten efforts to mitigate a troubling degree of wealth concentration in the United States (the wealthiest 1 percent of American households owned 35.4 percent of the nation’s wealth in 2010) – efforts made all the more important in the realm of regressive state taxation. The estate tax helps to prevent intergenerational transfers from clustering large amounts of wealth in the hands of a few – a phenomenon which has negative implications for equality in the democratic process. States’ recent changes to the tax undermine that purpose and further shift the cost of government onto lower-income taxpayers.

Two of the states (plus D.C.) taking steps to increase their exemption thresholds plan to match the federal per-spouse exemption by 2019 or later, which will top $6 million. Calling this exemption level high by historical standards is a bit of an understatement, and states adopting it effectively exempt many very wealthy households from estate taxation. The five other states raising their exemption thresholds in the past year are moving in the same direction, seeing exemption levels as high as $2 million-$4 million. This means that the overall state tax levy shifts even more toward the low- and middle-income households who already pay a higher share of their income in state taxes. And the fact that predominantly progressive states are making these changes is a step back particularly for places like D.C., which passed smart tax reform this year when it expanded its Earned Income Tax Credit.

Outright repeal in Indiana, North Carolina, and Ohio came on the heels of other ill-advised tax “reforms.” Indiana Governor Mike Pence authorized a sudden repeal of that state’s inheritance tax last year, which had been scheduled to phase out by 2022. ITEP ranked Indiana among the 10 most regressive tax states in last year’s “Who Pays?” report. The elimination of the inheritance tax will compound the fairness issue in a state which recently passed income and corporate tax cuts whose benefits will overwhelmingly accrue to wealthy taxpayers. North Carolina and Ohio similarly passed large income tax cuts last year in addition to their estate tax repeals, with North Carolina also eliminating its Earned Income Tax Credit.

All of these states would do well to heed this simple truth: failing to address large inequities in wealth isn’t good for the democratic process, nor is it good tax policy.

Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer

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Transportation funding in the United States is in trouble. With the Highway Trust Fund set to go broke by late August, Congress has forgone any increase in the grossly inadequate federal gas tax (unchanged at 18.4 cents per gallon since 1993) in favor of plugging recurring funding gaps with general revenues. Currently, Senators Chris Murphy (D-Connecticut) and Bob Corker (R-Tennessee) are floating a proposal to hike the federal tax by 12 cents, but the new revenues would be offset by new tax cuts and its chances of passage are at any rate tenuous before a full legislature that habitually shies away from increasing taxes.

Fortunately, states need not wait for Congress to take action. With an eye toward long-term sustainability, several states will increase their own fuel taxes on Tuesday, July 1.

According to an analysis by the Institute on Taxation and Economic Policy (ITEP), four states will hike their gasoline or diesel taxes next week. The changes generally take two forms – automatic inflationary increases designed to keep pace with the rising cost of building and maintaining transportation infrastructure and hikes resulting from recent legislation.


Four states will see gasoline tax increases on Tuesday. Increases in Maryland and Kentucky are the result of 2013 legislation requiring an annual adjustment to reflect growth in the Consumer Price Index and a quarterly adjustment reflecting an increase in wholesale gas prices, respectively. New Hampshire deserves special kudos after the state legislature passed its first gas tax increase – and the largest of any state this year – since 1991. An additional levy of 4.2 cents per gallon – a decade’s worth of inflationary value – will be added at the pump on Tuesday to support needed transportation projects. Unfortunately, the tax is essentially a fixed rate increase rather than a variable-rate design which could have kept pace with annual increases in infrastructure costs, and it will be repealed in roughly 20 years when bonds for the I-93 project are paid off. Vermont will see a second structural tweak in its tax formula as a result of 2013 legislation overhauling the state’s gasoline and diesel taxes. The imposition of a higher motor fuel percent assessment combined with a decrease in the per gallon tax will result in an overall net increase next Tuesday of 0.6 cents per gallon.


On the diesel tax front, four states will see hikes next week ranging from 0.4 to 4.2 cents per gallon. Changes in Maryland and Kentucky again reflect annual or quarterly price growth. New Hampshire’s diesel tax increase matches that for gasoline (4.2 cents per gallon). Vermont will raise its diesel tax by an additional 1 cent on top of last year’s 2 cent hike as the state’s 2013 tax structure overhaul is fully phased in.

Two more states should have made the list this year, but officials there have actually blocked scheduled fuel tax increases. Georgia Governor Nathan Deal suspended an automatic 15% increase in his state’s variable-rate gas tax by way of executive order earlier this month, citing concerns over the cost burden for families and businesses. North Carolina lawmakers passed legislation during the 2013 session freezing the state’s variable-rate gas tax at 37.5 cents per gallon, effective through June 30, 2015. Officials in these states will likely take credit for enacting “tax cuts” this year as infrastructure projects go underfunded.

Two other states will see their fuel taxes decrease on Tuesday. California will cut its gasoline excise tax from 39.5 to 36 cents per gallon, reflecting a decrease in gas prices. Connecticut’s diesel tax rate is revised each July 1 to reflect changes in the average wholesale price over the past year, and will see a decrease this year of 0.4 cents per gallon.

Fortunately, gasoline tax reform is already on the horizon in Rhode Island, where lawmakers agreed as part of this year’s budget plan to index the tax to inflation, which will mean a roughly 1 cent increase effective July 1, 2015. Michigan’s legislature was expected to come to an agreement this session on a fuel tax increase after voters there expressed a willingness to pay for repairs on badly deteriorating roads and bridges, but proposals to increase the tax by 25 cents per gallon over four years or to index it to keep pace with construction costs stalled. With lawmakers promising to take up the issue again in the fall, another summer construction season is now lost in the state.

Including the budget agreement passed by Rhode Island earlier this month, the total number of states with variable-rate fuel taxes designed to rise alongside the price of gas, overall inflation, or both increases to 19 (plus DC). In the past year, Massachusetts, Pennsylvania, and DC have all switched from fixed-rate fuel tax structures to variable-rate structures.

Given the level of debate and the major changes in states’ fuel tax structures that have taken place in 2013 and 2014, it seems that more states are recognizing the need for a sustainable fuel tax capable of keeping pace with the inevitable increases in transportation infrastructure costs.

NOTE: Differences among states in the direction and magnitude of gas price changes evident in rate revisions reflect states' use of state-specific price data as the basis for rate changes. In particular, California experienced the largest gasoline price drop of any state over the past year and will, therefore, see a large negative change in their rate.

Just in Time for Memorial Day: Primers on Federal and State Gasoline Taxes

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The summer driving season is kicking off this weekend, so our colleagues at the Institute on Taxation and Economic Policy (ITEP) have released a pair of updated policy briefs explaining everything you need to know about the federal and state gasoline taxes that pay for our roads and transit systems.

The federal brief explains that the nation’s 18.4 cent gas tax has been stuck in neutral for over 20 years, and that construction cost inflation and fuel efficiency gains have steadily chipped away at the value of the tax.  Since 1997 (the year in which the gas tax was rededicated exclusively to transportation spending), the federal gas tax has lost 28 percent of its value as a result of these two factors.

The state brief is slightly more optimistic, noting that while most states still levy stagnant fixed-rate gas taxes similar to the federal tax, the clear trend is toward a more sustainable, variable-rate design where the tax rate can grow over time alongside inflation or gas prices.

Read the briefs

The Federal Gas Tax: Long Overdue for Reform

State Gasoline Taxes: Built to Fail, But Fixable

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

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State gas tax policies have changed a lot in recent months, which makes two new fact sheets from the Institute on Taxation and Economic Policy (ITEP) especially useful in understanding where states stand on this issue.

The first fact sheet shows that 24 states have gone a decade or more without increasing their gas tax rate, and that 16 states have gone two decades or more.  This lack of action has allowed for a significant drop in the purchasing power of these states’ gas tax dollars as the cost of construction and maintenance has increased.  The worst gas tax procrastinators are Alaska (43.9 years), Virginia (27.3 years), Oklahoma (26.9 years), Iowa (25.3 years), Mississippi (25.3 years), and South Carolina (25.3 years). 

The fact sheet also shows that four states are “celebrating” gas tax anniversaries this week.  As of April 1st, it has been exactly 18 years since Idaho and Missouri raised their gas tax rates, while South Dakota and Wisconsin have gone 15 and 8 years, respectively.  The only state raising its gas tax this April 1st is Vermont, where the rate is rising by less than a tenth of a penny per gallon.

The second fact sheet from ITEP puts a spotlight on those 18 states, plus the District of Columbia, that actually levy a smarter gas tax.  Rather than going years on end without a change in their gas tax rates, these states allow for modest increases in their tax rates each year through the use of a “variable-rate” tax that rises with inflation or gas prices. 

As a result of reforms enacted in four states last year, a majority of the country’s population now lives in a state where the gas tax rate is “indexed” in this way.  This isn’t a radical idea.  More states, and the federal government, should take a serious look at switching to a variable-rate gas tax.

Read the fact sheets:

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

Most Americans Live in States with Variable-Rate Gas Taxes


Grover Norquist cares a lot about Tennessee taxes. You should too.

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(Blog Post Originally Appeared in The Hill)

It’s not breaking news that partisanship has gridlocked Congress these last few years, and most policy change has occurred at the state level. State legislatures have debated and enacted laws affecting issues as varied as minimum wage, infrastructure investment, education, environmental protection, and voting rights.

National groups seeking to cut taxes for the wealthy are well aware that policy change in states may be their best bet right now, and they’ve set their sights high. Grover Norquist’s Americans for Tax Reform, as well as Koch brothers-backed Americans for Prosperity and other conservative groups, continue to advocate for full repeal of state income taxes, with an eye toward setting a national trend in motion.

So far, most proposals to do away with state income taxes have run into a brick wall called reality after legislators learned that repeal would mean damaging cuts in public investments and significant tax hikes on the poor and middle-class. Proposals for income tax repeal recently failed in Louisiana, Missouri, Nebraska, North Carolina, and Oklahoma. The only state in U.S. history to repeal its personal income tax is Alaska, which threw out the tax in the 1980s when it was awash in newfound oil tax revenues.

Now it seems anti-tax proponents have found a test case in Tennessee. The Volunteer State has a regressive tax code built mainly around the sales tax. Unlike most states, it doesn’t have a general income tax on salaries and wages. But it does levy the Hall Tax, a modest 6 percent assessment on investment income that largely falls on wealthy Tennesseans with large stock portfolios. In recent months, a number of right-wing groups have spent significant resources backing a bill that would repeal this tax.

These groups are toeing their typical line, saying repeal will make Tennessee “economically competitive.” But the mediocre experiences of states that have recently cut income taxes don’t support that assertion.

Moreover, the vast majority of Tennesseans don’t pay the Hall Tax. The law exempts business income, wages, pensions, Social Security, and most other types of income Tennesseans earn. Only people with more than $2,500 in dividends, interest, and certain capital gains pay anything at all. Low- and moderate-income residents over age 65 are entirely exempt.

Given the Hall Tax’s limited scope, it generates only about 1 percent of the state’s revenue, making it low-hanging fruit for tax repeal advocates who have met with failure in states where personal income taxes generate significantly more revenue. 

While repealing the Hall Tax could yield fruit for the no-tax agenda, it’s not in Tennesseans’ best interest. My colleagues and I at the Institute on Taxation and Economic Policy produced an analysis that found the top 5 percent of earners would receive a whopping 63 percent of the benefits of the tax cut. Another 23 would go to the federal government because residents who pay the tax would no longer be able to write-off those payments on their federal tax returns. The remaining 14 percent of revenue lost by the cut would be spread thinly among the bottom 95 percent of households.

Although most ordinary working Tennesseans would see no benefit to their pocketbooks, they certainly would see the effect on state and local budgets. The $260 million revenue loss resulting from Hall Tax repeal would require Tennessee to scale back investments in education, infrastructure, and other services vitally important to the state’s success. Local communities would be hit particularly hard since more than one out of every three dollars generated by the tax goes to local government budgets. And if communities respond to this revenue loss by increasing property taxes, many Tennesseans could see their overall tax bills rise under this so-called “tax cut.”

The vagaries of Tennessee legislation may seem inconsequential for people outside the Volunteer State. But anyone concerned about how states and local governments fund basic services should be worried that national anti-tax groups have set their sights on repealing the Hall Tax. Tennessee isn’t this train’s first stop, and it won’t be the last.

Gas Tax Remains High on Many States' Agendas for 2014

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Note to Readers: This is the fourth installment of a five-part series on tax policy prospects in the states in 2014.  This series, written by the staff of the Institute on Taxation and Economic Policy (ITEP), highlights state proposals for “tax swaps,” tax cuts, and tax reforms.  This post focuses specifically on proposals to increase or reform state gasoline taxes.

Six states and the District of Columbia enacted long-overdue gas tax increases or reforms last year, despite the tough politics involved in raising the price drivers pay at the pump.  Will 2014 bring the same level of legislative activity on the gas tax?  Maybe not; but there are a number of states where the issue is receiving serious attention.

Delaware: Governor Jack Markell of Delaware is pushing for a 10 cent increase in his state’s gas tax, which hasn’t been raised in over 19 years.  The idea faces an uphill battle in the legislature, but without the increase the Delaware Department of Transportation’s capital budget will have to be slashed by about 33 percent next year.  Delaware’s House Minority leader would rather raid the state’s general fund budget (most of which goes toward education and health care) as opposed to addressing the state’s transportation revenue problems directly through reforming the gas tax.

Iowa: Governor Terry Branstad isn’t going to lead the fight for a gas tax increase, but he won’t veto one, either, if it makes it to his desk. Last week, an Iowa House subcommittee unanimously passed a 10 cent gas tax hike just a few hours before Branstad made clear his intention to remain on the sidelines during this important election-year tax debate.

Kentucky: Governor Steve Beshear wants to reverse a 1.5 cent gas tax cut that went into effect last month as a result of falling gas prices (Kentucky is one of eighteen states where the tax rate changes alongside either gas prices or inflation).  Doing so would raise about $45 million in additional funds to invest in the state’s transportation infrastructure.  And putting a “floor” on the gas tax to prevent further declines in the tax rate could avoid up to $100 million in funding cuts in the next two years.

New Hampshire: The chair of New Hampshire’s Senate Transportation Committee wants to raise the gas tax and index it to inflation.  The tax has been stuck at 18 cents per gallon for over twenty-two years, and the commissioner of the state’s Department of Transportation is optimistic that could finally change this year.  Governor Maggie Hassan hasn’t been a major player in the push for a higher gas tax, but it seems likely she would sign an increase if it made it to her desk.

Utah: Utah Senate President Wayne Niederhauser is rightly concerned about the fact that “more and more money is coming out of the state's general fund for transportation,” and would like to reform the state’s gas tax to provide transportation with a sustainable revenue stream of its own.  Familiar concerns about not wanting to hike the gas tax in an election year have been raised, but Governor Gary Herbert seems to realize that some kind of change to the gas tax is needed.  To provide some context to this debate, we recently found that Utah’s gas tax is currently at an all-time low, after adjusting for inflation.

Washington: Last year’s unsuccessful push to raise the gas tax in Washington State has spilled over into the current legislative session.  Governor Jay Inslee still supports raising the tax, and House and Senate leaders have spent a significant amount of time trying to cobble together an acceptable compromise.

But while these six states are the most likely to act this year, they’re hardly the only places where the gas tax is generating a lot of interest.  In Oklahoma, both of the state’s largest newspapers have urged lawmakers to consider gas tax reform, as has the Oklahoma Policy Institute and the Oklahoma Academy.  In Minnesota, the commissioner of the Department of Transportation wants to see the gas tax rise on a yearly basis, and a coalition has been formed seeking more revenue for transportation.  The chairman of the South Carolina Senate Finance Committee supports a gas tax hike, as does the chair of New Mexico’s Transportation and Public Works Committee, some members of New Jersey’s legislature, and the editorial boards of both New Mexico’s and New Jersey’s largest newspapers.  And in Michigan, Governor Snyder’s laudable attempt to raise the gas tax last year has stalled, though it remains a topic of discussion in the Wolverine State.

Altogether, thirty-two states levy unsustainable flat-rate gas taxes, twenty-four states have gone a decade or more without raising their gas tax, and sixteen of those states have gone two decades or more without an increase.  With so many states reliant on outdated gas tax structures, there’s little doubt that reforming the tax will remain a major topic of discussion for the foreseeable future.

Photo via herzogbr Creative Commons Attribution License 2.0 

What to Watch for in 2014 State Tax Policy

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Note to Readers: This is the first of a five-part series on tax policy prospects in the states in 2014.  This post provides an overview of key trends and top states to watch in the coming year.  Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals and take a deeper look at the four key policy trends likely to dominate 2014 legislative sessions and feature prominently on the campaign trail. Part two discusses the trend of tax shift proposals. Part three discusses the trend of tax cut proposals. Part four discusses the trend of gas tax increase proposals. Part five discusses the trend of real tax reform proposals.

2013 was a year like none we have seen before when it comes to the scope and sheer number of tax policy plans proposed and enacted in the states.  And given what we’ve seen so far, 2014 has the potential to be just as busy.

In a number of statehouses across the country last year, lawmakers proposed misguided schemes (often inspired by supply-side ideology) designed to sharply reduce the role of progressive personal and corporate income taxes, and in some cases replace them entirely with higher sales taxes.  There were also a few good faith efforts at addressing long-standing structural flaws in state tax codes through base broadening, providing tax breaks to working families, or increasing taxes paid by the wealthiest households.

The good news is that the most extreme and destructive proposals were halted.  However, several states still enacted costly and regressive tax cuts, and we expect lawmakers in many of those states to continue their quest to eliminate income taxes in the coming years.  

The historic elections of 2012, which left most states under solid one-party control (many of those states with super majorities), are a big reason why so many aggressive tax proposals got off the ground in 2013.  We expect elections to be a driving force shaping tax policy proposals again in 2014 as voters in 36 states will be electing governors this November, and most state lawmakers are up for re-election as well.

We also expect to see a continuation of the four big tax policy trends that dominated 2013:

  • Tax shifts or tax swaps:  These proposals seek to scale back or repeal personal and corporate income taxes, and generally seek to offset some, or all, of the revenue loss with a higher sales tax.

    At the end of last year, Wisconsin Governor Scott Walker made it known that he wants to give serious consideration to eliminating his state’s income tax and to hiking the sales tax to make up the lost revenue.  Even if elimination is out of reach this year, Walker and other Wisconsin lawmakers are still expected to push for income tax cuts.  Look for lawmakers in Georgia and South Carolina to debate similar proposals.  And, count on North Carolina and Ohio lawmakers to attempt to build on tax shift plans partially enacted in 2013.  
  • Tax cuts:  These proposals range from cutting personal income taxes to reducing property taxes to expanding tax breaks for businesses.  Lawmakers in more than a dozen states are considering using the revenue rebounds we’ve seen in the wake of the Great Recession as an excuse to enact permanent tax cuts.  

    lawmakers, for example, wasted no time in filing a new slate of tax-cutting bills at the start of the year with the hope of making good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year.  Despite the recommendations from a Nebraska tax committee to continue studying the state’s tax system for the next year, rather than rushing to enact large scale cuts, several gubernatorial candidates as well as outgoing governor Dave Heineman are still seeking significant income and property tax cuts this session.  And, lawmakers in Michigan are debating various ways of piling new personal income tax cuts on top of the large business tax cuts (PDF) enacted these last few years.  We also expect to see major tax cut initiatives this year in Arizona, Florida, Idaho, Indiana, Iowa, New Jersey, North Dakota, and Oklahoma.

    Conservative lawmakers are not alone in pushing a tax-cutting agenda.  New York Governor Andrew Cuomo and Maryland’s gubernatorial candidates are making tax cuts a part of their campaign strategies.  
  • Real Reform:  Most tax shift and tax cut proposals will be sold under the guise of tax reform, but only those plans that truly address state tax codes’ structural flaws, rather than simply eliminating taxes, truly deserve the banner of “reform”.

    Illinois and Kentucky are the states with the best chances of enacting long-overdue reforms this year.  Voters in Illinois will likely be given the chance to convert their state's flat income tax rate to a more progressive, graduated system.  Kentucky Governor Steve Beshear has renewed his commitment to enacting sweeping tax reform that will address inequities and inadequacies in his state’s tax system while raising additional revenue for education.  Look for lawmakers in the District of Columbia, Hawaii, and Utah to consider enacting or enhancing tax policies that reduce the tax load currently shouldered by low- and middle-income households.
  • Gas Taxes and Transportation Funding:  Roughly half the states have gone a decade or more without raising their gas tax, so there’s little doubt that the lack of growth in state transportation revenues will remain a big issue in the year ahead. While we’re unlikely to see the same level of activity as last year (when half a dozen states, plus the District of Columbia, enacted major changes to their gasoline taxes), there are a number of states where transportation funding issues are being debated. We’ll be keeping close tabs on developments in Iowa, Michigan, Missouri, New Hampshire, Utah, and Washington State, among other places.

Check back over the next month for more detailed posts about these four trends and proposals unfolding in a number of states.  

In New Mexico, "Hold Harmless" Does Not Mean What You Think It Means

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When state governments force cuts in local tax collections, as New Mexico did almost a decade ago under Governor Bill Richardson, these cuts are often accompanied by a “hold harmless” promise, under which locals will (in theory) be reimbursed for the taxes they are no longer allowed to collect. But the hold harmless pledge often works out to be what Mary Poppins called a “pie crust promise”—easily made and easily broken. Just nine years after Governor Richardson burnished his tax-cutting credentials by exempting groceries from local (and state) gross receipts taxes—while simultaneously implementing a “hold harmless” provision so that locals wouldn’t feel the pain of losing such a large chunk of their tax base—a law is now in place that will completely phase out the hold-harmless aid to locals between 2015 and 2030.  A recent Santa Fe New Mexican editorial correctly rakes the legislature over the coals for its “fickle” attitude toward fiscally-strapped local governments.

The lesson for local policymakers facing the threat of state-mandated tax cuts? Hold-harmless provisions should be a basic component of any such cuts—but the state aid resulting from these provisions will be a all-too-tempting target for state lawmakers whenever the economy slows.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mid-Session Update on State Gas Tax Debates

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

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

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

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

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

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

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

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

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

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

Chart: New Gas Tax Plan in Maryland House of Delegates

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UPDATE: As of March 29, 2013 this plan has passed both the House and Senate and is expected to be signed into law by the Governor.

This week, the Maryland House will vote on a plan to raise and reform the state’s gasoline tax. The plan is very similar to one proposed by Governor Martin O’Malley that our partner organization, the Institute on Taxation and Economic Policy (ITEP), analyzed when it was released two weeks ago.

An updated chart from ITEP shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not raise the gas tax, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years. Only in 1922 and 1923 did Maryland levy a lower gas tax.

Moreover, the gas tax increase under consideration in the House, like the one proposed by the Governor, is actually very modest. The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 12 cent increase by 2015. That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised. Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the House plan is enacted, the inflation-adjusted rate over the next decade would average just 32.8 cents.

Chart: Maryland Governor O'Malley's New Gas Tax Plan

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Maryland Governor Martin O’Malley recently unveiled his plan to raise and reform his state’s gasoline tax.  Local TV stations predictably responded by interviewing drivers unhappy with the high price of gas, while (also predictably) failing to explain that Maryland’s gas taxes are not to blame for those high prices.

A new chart from our partner organization, the Institute on Taxation and Economic Policy (ITEP) shows that Maryland’s flat gas tax has long been declining as inflation has chipped away at its value.  If the legislature does not act on the Governor’s recommendation, ITEP projects that by 2014 Maryland’s gas tax rate will reach its lowest (inflation adjusted) level in 91 years.  Only in 1922 and 1923 did Maryland levy a lower gas tax.

Moreover, the gas tax increase proposed by the Governor is actually very modest.  The plan (which would tie the gas tax to both inflation and gas prices) would result in roughly a 9 cent increase by 2014.  That’s significantly less than the nearly 16 cent increase that ITEP found would be needed to return Maryland’s gas tax to its purchasing power as of 1992, when it was last raised.  Taking an even longer-term perspective, ITEP finds that Maryland’s inflation-adjusted gas tax rate has historically averaged 41.1 cents per gallon.  If the Governor’s plan is enacted, the inflation-adjusted rate over the next decade would average just 31 cents.

Gas Tax Gains Favor in the States

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

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

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

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

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

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

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

Governor McDonnell's Bad Idea: Eliminating Virginia's Gas Tax

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Perhaps he was just floating a trial balloon when Governor Bob McDonnell said he was open to increasing Virginia’s gas tax in some way.  If so, it seems to have been a lead balloon because this week he announced his intention to eliminate the gas tax altogether.

But, experts at the Institute on Taxation and Economic Policy have concluded that the Commonwealth’s gas tax actually needs to be raised by 14.5 cents per gallon, right now, just to make up the revenue ground it’s lost having been stagnant for a quarter century.

Calling the gas tax an unviable revenue source (which is true only when lawmakers like McDonnell fail to modernize it!), the Governor proposed replacing it by raising the sales tax (from 5 percent to 5.8 percent) and increasing vehicle registration fees by $15 for most vehicles and $100 for alternative fuel vehicles.

McDonnells’ plan is riddled with flaws. For starters, this “tax swap” shifts the responsibility for paying for roads away from frequent and long-distance drivers (and the owners of heavier passenger vehicles), onto everybody else.  He very literally gives drivers a “free ride” by eliminating the gas tax, likely leading to more congestion, more wear-and-tear on roads, more air pollution and probably even excessive sprawl in the long run.

Oddly, by repealing only the gasoline tax and leaving the diesel tax untouched, his plan also discriminates sharply between motorists depending on the type of fuel they use to fill up.  The aim here is clearly to continue requiring the trucking industry to pay for their use of the roads (since heavy, diesel-powered trucks produce a disproportionate amount of wear-and-tear, as the Governor understands).  But many light trucks, vans and even some passenger vehicles run on diesel as well, and owners of these vehicles will see their sales taxes rise but won’t see any benefit from the gas tax cut.

McDonnell’s plan also does nothing to improve the fairness of Virginia’s taxes from a progressivity perspective, since both gas and sales taxes are regressive.  If the Governor were instead using a progressive income tax increase to fund transportation, at least he could argue that his plan improves Virginia taxes from an ability-to-pay perspective, even if it makes tax fairness much worse from a “benefits principle” (PDF) perspective—that is, a taxing in accordance with the benefits a given taxpayer receives.

Aside from the changes in tax policy, the Governor’s plan includes an expensive bailout of the transportation fund, when that fund could easily be fixed through gas tax reform.  The legislature has rejected such bailouts in the past for the very good reason that the state can’t afford to spend less on education and the other services which will necessarily have to be cut to fund McDonnells’ bailout.

Tax Fairness Prevails at the State Ballot Box

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Last night Americans in states from coast to coast cast their ballots on a wide range of tax and budget issues.  On the whole, they should feel proud of their choices.

Generally, just as voters nationally favored a presidential candidate who supports higher taxes on the best-off Americans and made tax fairness a centerpiece of his candidacy, when given the opportunity at the state level to raise taxes on, or reject tax cuts for, the wealthy, voters overwhelmingly were on the side of fairness. In California Governor Jerry Brown’s revenue raising plan, which increases income taxes on the richest Californians and raises the sales tax by a quarter cent, passed handily. Californians also voted to repeal a special billion-dollar tax break for multi-state corporations. In Oregon, voters shot down a measure that would have repealed the state’s estate tax and allowed family members to transfer property tax-free. Oregonians also voted to eliminate the state’s “corporate kicker” refund program. Instead of providing a tax rebate to corporate income taxpayers when total corporate tax revenues exceed expectations, now that excess revenue will be used to support K-12 education.

The vote on the Oregon “kicker” refund was part of a broader rejection of measures designed to strangle future revenue growth in the states.  Voters in Florida rejected both a “TABOR” style state tax limitation and a cap on local property tax increases. Michigan voters decisively rejected a measure that would have required a two-thirds vote of each legislative chamber to eliminate any tax break or raise any tax rate.  And New Hampshire voters opted not to ratify a constitutional amendment that would have handcuffed future lawmakers by banning them from ever enacting a tax on earned income (which the state does not currently levy).

Unfortunately, some lower-profile efforts to curb state revenue growth met with success.  Oklahoma slightly tightened an existing cap on its property tax, and Arizona created a new property tax cap. Washington voters also approved a statutory change requiring a supermajority vote of the legislature to raise taxes, though since the requirement is not enshrined in the state’s constitution it’s possible for lawmakers to work around it as they have similar limitations in the past.

Proposals to increase taxes that fall most heavily on middle- and low-income Americans, like the sales tax and cigarette tax, generally didn’t fare as well as the more progressive tax plan put before California voters. In Arizona and South Dakota, measures that would have increased the sales tax rate were rejected handily, and Missouri voters rejected a measure that would have hiked the cigarette tax. Arkansas voters, however, gave their approval to a half cent sales tax increase that state lawmakers had already passed.

Below is a complete listing of the results for the state tax ballot initiatives we’ve been following:

Arizona Proposition 204 FAILED
Proposition 204 would have made permanent a temporary 1 percent sales tax increase that voters approved in 2010, and that is scheduled to expire in mid-2013.

Arizona Proposition 117 PASSED
Proposition 117 limits property taxes by preventing the taxable assessed value of properties from rising by more than 5 percent per year.

Arkansas Issue #1  PASSED
Issue #1 amends the Arkansas constitution to allow for a temporary increase in the state’s sales tax to pay for large-scale transportation needs like highways, bridges, and county roads.

California Proposition 30 PASSED and Proposition 38 FAILED
Governor Jerry Brown’s revenue raising measure, Proposition 30, won handily while the rival revenue raising proposal was defeated.  Proposition 30 will raise significant revenue to stave off cuts to education through a tax hike on wealthy Californians and sales tax increase.

California Proposition 39  PASSED
California voters supported Proposition 39 which repeals a billion dollar tax break for multi-national corporations.

Florida Amendment 3 FAILED
Amendment 3 would have created a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on state revenue growth, based on a formula tied to population and cost-of-living growth.

Florida Amendment 4 FAILED
Amendment 4 would have cut property taxes for businesses, non-residents, and Floridians with multiple homes by capping growth in the taxable value of their properties at no more than 5 percent per year.

Michigan Proposal 5 FAILED
Proposal 5 would have amended the state constitution to require a two-thirds vote in both the House and Senate to raise revenue either by increasing tax rates or eliminating special tax breaks.

Missouri Proposition B FAILED
Proposition B would have increased the state’s cigarette tax by 73 cents to 90 cents a pack.

New Hampshire Question 1 FAILED
Voters rejected Question 1 which would have enshrined a permanent ban on taxing earned income into the Granite State’s constitution.  New Hampshire is already one of nine states without a broad-based personal income tax.

Oklahoma State Question 758 PASSED
State Question 758 tightens the state’s property tax cap by limiting increases in home’s taxable assessed value to 3 percent per year, rather than the previous limit of 5 percent.

Oklahoma State Question 766 PASSED
State Question 766 creates a new exemption for certain corporations’ intangible property, such as mineral interests, trademarks, and software.

Oregon Measure 84 FAILED
Voters rejected Measure 84 which would have eliminated the state’s inheritance and estate tax and allowed for tax-free property transfers between family members.

Oregon Measure 85 PASSED
Voters approved Measure 85 choosing to eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Now, the excess revenue above collections will go to the state’s General Fund to support K-12 education.

Oregon Measure 79 PASSED
Measure 79 constitutionally bans the state from levying real estate transfer taxes and fees even though such taxes are currently nonexistent in Oregon.

South Dakota Initiated Measure #15 FAILED
Initiated Measure #15 would have raised the state’s sales tax by one cent, from 4 to 5 percent. The additional revenue raised would have been split between two funding priorities: Medicaid and K-12 public schools.

Washington Initiative 1185  PASSED
Initiative 1185 requires a supermajority of the legislature or a vote of the people to raise revenue.

To Know the Gas Tax Is To Love the Gas Tax

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Over 30 million Americans will take to the roads this Memorial Day weekend, and it’s all but guaranteed that many of them will be unhappy about the price of gas.  But while it’s easy to get frustrated by high prices at the pump, it’s also important that motorists realize gas taxes are not to blame for those high prices, and that gas taxes are absolutely essential to the safety and efficiency of the infrastructure we use everyday.

As the Institute on Taxation and Economic Policy (ITEP) explains in a pair of new policy briefs, federal and state gas taxes are the main sources of funding for the roads, bridges, and transit systems that keep our economy moving (and that make our summer vacations possible).  Roughly 90 percent of federal transportation revenues come from the federal gas tax, while state gas taxes are the single most important source of transportation revenue under the control of state lawmakers.

Moreover, the amount of money we’re spending on gas taxes is much lower than what we used to pay. Families today are spending a smaller share of their household budgets on gas taxes than they have in about three decades—and that share is continuing to decline.

Of course, a low gas tax has a cost.  The federal government is increasingly using borrowed money to pay for our roads and bridges, while states that lack the luxury of borrowing are taking money away from education and other priorities in order to fund basic road repairs.  Meanwhile, even with these infusions of cash, the condition of our transportation infrastructure is continuing to decline.

ITEP’s new policy briefs put this issue into perspective by explaining how gas taxes work, their importance as a transportation revenue source, the specific problems confronting gas taxes, and the types of gas tax reforms that are needed to overcome these problems.

Read More:

Photo of man pumping gas via Teresia Creative Commons Attribution License 2.0

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

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