Personal Income Taxes News


State Tax Breaks for the Elderly Primarily Benefit Wealthier Citizens and Drain State Coffers


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Poverty among the elderly rapidly declined during the last century in part because of the Social Security program, which is credited today with keeping up to 22 million people out of poverty. No one wants to work a lifetime only to face poverty in their golden years, so it is no wonder that states offer varied tax breaks for their elderly citizens, including not taxing pensions and other retirement benefits.

But an updated brief from ITEP finds that, in spite of their popularity, tax breaks for the elderly are often a poorly targeted, costly commitment for states that may not be accomplishing their desired effect.  In many cases, wealthy elderly taxpayers reap the majority of the benefits from state income tax breaks designed for older adults. Further, with the nation’s aging population, these tax breaks threaten to become unaffordable in the long-run.

Many older Americans continue to work into their golden years. Others retire, yet they continue to bring in income by collecting Social Security and pension benefits. In most states, retirement income is frequently not taxed or sheltered through generous tax breaks. This shifts the cost of funding public services to members of society who remain in the labor market and non-elderly taxpayers. Of states with a broad-based income tax, three fully exempt all retirement income from taxation; 36 allow some exemption for private or public pension benefits; 20 allow senior citizens an additional personal exemption or exemption credit; and seven allow senior citizens to claim the higher federal standard deduction. In addition, 22 of the 30 states that provide a property tax credit limit availability to seniors or offer them a more generous version of the credit.

Ill-targeted elderly tax breaks raise concerns of both fairness and sustainability.

The percentage of the U.S. population over the age of 65 continues to grow, expected to exceed one-fifth of the nation’s population in the next 25 years. With a rapidly aging population come state budget challenges, in the form of both growing expenses and revenue loss. As older Americans age, they tend to earn less–bringing in a reduced amount of income tax revenue for states. They also spend less–providing states with a reduced amount of sales tax revenue. The Federal Reserve Bank of Kansas City produced a study on The Impact of an Aging U.S. Population on State Tax Revenues, finding that on a per-capita-basis demographic shifts alone will reduce individual income taxes and sales taxes, although to a lesser extent, in nearly every state in the country. Increasingly generous and often poorly targeted tax breaks for older adults only contribute to state budget woes.

There’s something to be said for being kind to your elders. But states should weigh whether these costly tax breaks are money well-spent, or if they are largely benefiting well-off retirees. The details are in the design of the break. Rather than providing broad, expensive breaks, states should retool their elderly tax breaks to better target low-income seniors. This will allow states to aid those most in need while committing to a more fair and sustainable tax system.

For more read “State Tax Breaks for Elderly Taxpayers,” ITEP’s updated report on the topic.


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


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

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

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

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

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

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


The Case for Eliminating Itemized Deductions


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

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

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

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

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

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

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

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

Read the policy brief here.


Tax Migration Myth Refuses To Die


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

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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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

Enacting state EITCs:   

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

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

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

Enhancing state EITCs:   

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

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

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

Protecting state EITCs:  

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

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

 


Celebrating EITC Awareness Day


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

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

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

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

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


Back to Reality: Alaska Governor Proposes Progressive Income Tax


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For years, lawmakers interested in cutting or eliminating personal income taxes have held up Alaska as aAlaska Progressive Income Tax model for what they would like to achieve.  Alaska is the only state to ever repeal a personal income tax and has been without one for 35 years.  But Alaska’s status as an anti-tax role model may not last.  Yesterday, Gov. Bill Walker proposed a plan to remedy the state’s massive revenue shortfall by, among other things, instituting an income tax equal to 6 percent of the amount that Alaskans pay in federal income taxes.

As background, Alaska’s decision to repeal its income tax always came with something of an asterisk attached.  The state’s 1980 repeal only occurred after drillers discovered North America’s largest oil field on land that happened to be owned by the state government.  During times of high oil prices, the billions of dollars in tax revenue collected from the energy sector were enough to fund 90 percent of the state’s general operations and to pay an annual dividend to Alaska residents (totaling $2,072 per person this year).

But as anybody who has driven by a gas station this year knows, these are not times of high oil prices.  Crude oil prices recently fell to just $37 per barrel and Alaska’s oil-dependent revenue streams are now raising enough to fund just 40 percent of the state’s budget, even with significant spending cuts enacted last year.  As Gov. Walker explains, “we cannot continue with business as usual and live solely off of our natural resource revenues.”

The Governor proposed revenue changes that include raising the state’s comically outdated motor fuel tax rate, boosting taxes on alcohol and tobacco, reforming the tax treatment of oil and gas producers, and paring back residents’ annual dividend.  Of course, many of these changes would impact lower- and moderate-income Alaskans more heavily, which is part of the reason why (PDF) the package also includes an income tax piggybacked on the progressive federal income tax system.  Notably, Gov. Walker’s income tax design is similar to one proposed by lawmakers from both parties during this year’s legislative session, and also resembles the structures previously in place in states such as North Dakota, Rhode Island, and Vermont.

Ultimately, the plan put forth by Gov. Walker appears to be a serious attempt to address the state’s yawning, $3.5 billion deficit.  And as Alaska Public Media explains, it would also “shift the state away from a direct reliance on oil revenue and the boom-and-bust cycle of oil prices.”

Now that the Governor has spoken out about an income tax, wild, erroneous claims about the economy-destroying nature of personal income taxes are surely on the way.  But the reality is that if Alaska can’t count on oil revenues to fund its schools and infrastructure, an income tax is the most equitable and sustainable option available. 


Maine Republicans Double Down on Tax Cut Fervor


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lepage-1.jpgThere have been lots of fireworks since the beginning of the year in Maine over tax policy, and they are unlikely to stop anytime soon. This week, the Maine Republican Party announced its intention to seek a ballot measure that would implement a flat 4 percent income tax, replacing the current graduated income tax structure. Their goal is to eventually eliminate the state income tax entirely.

If voters were to approve this ballot measure, the result would be a massive tax cut for the wealthiest Mainers and a steep reduction in the quality of critical public services that would undermine the state’s economy. The Institute on Taxation and Economic Policy (ITEP), estimates that shifting to a 4 percent flat income tax by 2021 would cost $600 million in state revenues – about half of all the state money spent on K-12 education according to the Maine Center of Economic Policy. ITEP also found that half of the tax cut would go to Mainers making more than $175,000 annually, with the top 1 percent of taxpayers receiving an average cut of over $21,000.

Meanwhile, the 20 percent of Maine taxpayers that make do with just an average of $23,000 a year would get a tax cut of only $14 (the vast majority of low-income Mainers would see no cut at all). The ballot measure doesn’t specify which budget cuts or tax increases will happen to make up the lost revenue, but one can be sure that any of the paltry tax cuts given to middle and working-class Maine families will be outweighed by higher sales and property taxes or cuts in public services. ITEP crunched the numbers- if all of the lost revenue was replaced with a higher sales tax, the average taxpayers the in bottom 80 percent would see a significant tax hike while the majority of the state’s wealthy taxpayers would still make out with sizeable tax cuts.

The most egregious part of the Maine Republicans’ push to lower income taxes that benefit the wealthy is that the plan would undo most of the good that came about from tax reform enacted in Maine this year. In a bipartisan compromise, Republican and Democratic legislators rebuked the governor’s initial proposed giveaway to the wealthy and instead cut income tax rates across the board while broadening the tax base. They also implemented or enhanced refundable tax credits for working families, doubled the homestead property tax exemption, cut estate taxes and increased the sales tax. The package had its flaws- mostly in that it is a small tax cut on net and shifted some responsibility for paying for state services away from the personal income tax and onto regressive sales taxes. However, it also made great strides in improving tax fairness and sustainability in the state. Now Republicans want to undo the hard work of the previous legislative session and put Maine on a worse path.

One can confirm that this recent push for a flat income tax is all about politics and not about the welfare of the state by looking at the other proposals included in this ballot initiative, which include draconian reforms to social services meant to punish the low-income residents who rely on them. Undocumented immigrants, felons convicted of drug crimes and the unemployed would be kept from getting any TANF or SNAP benefits, the amount of time citizens could collect benefits would be reduced, and all adult TANF beneficiaries would be subject to drug testing, a policy that has failed in many states. As Jesse Graham of the Maine People’s Alliance laments, Maine Republicans want "tax cuts that primarily benefit the wealthy and new attacks on poor people and immigrants." Apparently what they don’t want is responsible tax policies that would work for everyone, not just the privileged few. 


New Poverty Data Shows 1 in 7 Americans Are Still Living in Poverty: ITEP Report Identifies State Tax Policies Needed to Help Reduce Poverty


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In conjunction with the U.S. Census Bureau’s release of new poverty data this week, ITEP has an updated report out today, State Tax Codes as Poverty Fighting Tools, that provides an overview of anti-poverty tax policies, surveys state developments in these policies in 2015, and offers recommendations that every state should consider to help families rise out of poverty.

Based on the Census data, here’s what we know. Poverty remained persistently high as the new data showed no significant change from last year or the previous three years.  In 2014, 46.7 million (or 1 in 7) Americans were living in poverty.  At 14.8 percent, the federal poverty rate remains 2.3 percentage points higher than it was 2007, just before the throes of the Great Recession indicating that recent economic gains have not yet reached all households and that there is much room for improvement. Most state poverty rates also held steady between 2013 and 2014 though twelve states experienced a decline.

In good news, the Supplemental Poverty Measure (SPM) released alongside the official measure, demonstrates that the tax code can be used as an effective poverty-fighting tool. The federal EITC and refundable portion of the Child Tax Credit alone, for example, decreased the supplemental poverty rate from 18.4 to 15.3 percent for everyone.  And, thanks in large part to those credits, the supplemental poverty rate for children is actually lower than their official poverty rate (16.7 compare to 21.5 percent). The SPM was developed in recent years to address concerns that the official measure does not produce an adequate nor accurate picture of those living in poverty.  It does a much better job of measuring the true cost of making ends meet as it includes expenses such as child care, out of pocket medical costs, and payroll and income taxes as well as policies like the Earned Income Tax Credit (EITC), the Supplemental Nutritional Assistance Program (SNAP; formerly food stamps), housing assistance and other key anti-poverty policies.

But here’s something that will be ignored this week in virtually all the chatter about poverty and policy: As much as federal tax policy plays a vital role in mitigating poverty, state tax systems actually exacerbate poverty.

While the federal tax system is overall (barely) progressive thanks to progressive income tax rates and tax credits such as the EITC and Child Tax Credit (CTC), virtually every state tax system is regressive, meaning the less you earn, the higher your effective tax rate. In fact, when all the taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than on the richest 1 percent of taxpayers. ITEP’s 2015 comprehensive report, Who Pays?, examined the tax systems of all 50 states and the District of Columbia and found the effective state and local tax rate for the poorest 20 percent is 10.9 percent, which is more than double the 5.4 percent average effective rate for the top 1 percent.

Despite the unlevel playing field states create for their poorest residents through existing policies, many state policymakers have gone backward and proposed (and in some cases enacted) tax increases on the poor under the guise of “tax reform.” During the 2015 legislative session, for example, 17 states considered or passed tax cut or tax shift packages that would lower taxes for the very rich and increase them for low- and moderate-income families.

State policymakers should take note. Right now, states are failing those who struggle with poverty and, instead, are using the tax code to favor those who don’t need any more help. Lawmakers who are serious about improving their constituent’s lives should closely examine the Census data on poverty in their states and communities and consider enacting progressive tax policies that will reduce poverty and improve families’ quality of life.

State Tax Codes As Poverty Fighting Tools recommends that states jump-start their anti-poverty efforts by enacting one or more of four proven and effective tax strategies to reduce the share of taxes paid by low- and moderate-income families: state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits.

A full copy of the report can be found here


Dueling Tax Reform Proposals Take Shape in Maine


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MaineStateHouse.JPGDespite its setting among rugged coastlines and quaint lighthouses, there will be nothing picturesque about the coming tax battle between Gov. Paul LePage and legislative leaders in Maine. The current debate is the latest in a string of Maine tax reform efforts; in 2013 the “Gang of 11” proposed an ambitious bipartisan plan that was dashed like a fishing boat along a rocky shore, and in 2009 lawmakers passed a tax package that was soundly rejected by voters at the polls.

LePage unveiled his budget proposal back in January, and it included a package of changes that would fundamentally change the way Maine taxes its residents. The governor wants to cut income taxes through across-the-board rate reductions. The threshold for the zero income tax bracket would increase from $5,200 to $9,700. Any income between $9,700 and $50,000 would be taxed at a reduced rate of 5.75 percent, and income between $50,000 and $175,000 would be taxed at 6.5 percent. Income beyond $175,000 would be taxed at just 5.75 percent – an outrageous concession to the already well-off.. His plan also increases the exclusion for pension income from $10,000 to $30,000, introduces a refundable sales tax credit (though the state’s nonrefundable Earned Income Tax Credit is axed under the plan), and boosts the state’s targeted property tax fairness credit.

LePage has gone on record as wanting to eliminate Maine’s income tax – most recently at a Tax Day press conference – calling it “an obsolete form of taxation.” If the state income tax were eliminated, half of Maine’s annual $3 billion in revenue would go with it.

LePage wants other provisions that would inordinately benefit wealthy Mainers as well. His plan would eliminate Maine’s estate tax at a cost of $85 million over four years, and the top corporate income tax rate would fall from 8.93 percent to 6.75 percent.

To pay for his proposed cuts, Gov. LePage wants to increase the sales tax rate to 6.5 percent and expand the sales tax base to include personal and professional services. He makes further changes to the personal income tax as well, including eliminating itemized deductions. He would also end the state’s practice of sharing revenue with municipalities, while allowing cities and towns to implement a new tax on large nonprofit organizations in their jurisdictions. Lawmakers and local officials fear this will upend municipal budgets and force property tax increases at the local level.

The governor’s plan would shift revenues from progressive income taxes to regressive sales and property taxes, and the state will net a revenue loss of $300 million if all changes take effect. The shift would also make state finances more volatile over the long run; as this ITEP brief explains, the income tax displays more robust growth over time than do sales and property taxes.

Last week, legislative leaders in the Maine House and Senate unveiled an alternative to Gov. LePage’s plan entitled “A Better Deal for Maine.” The alternative proposal would also cut income taxes and increase sales taxes, but the benefits would be targeted to middle-income Mainers rather than the wealthy. The average taxpayer with income under $167,000 would get an income tax cut, but the top personal income tax rate would remain untouched and many of the state’s richest residents would see a modest tax increase under the plan. Rather than increasing the 0 percent bracket, the alternative plan boosts the state’s standard deduction and phases out the benefit for upper-income taxpayers. 

The sales tax rate would remain at 5.5 percent, but the base would be expanded to include services, as it would under LePage’s plan. Like the governor’s plan, the alternative introduces a new refundable sales tax credit and increases the property tax fairness credit, but it retains the current pension exclusion amount.

The Better Deal alternative proposed by legislators does not eliminate revenue sharing with municipalities, as the governor would. Under the alternative plan, the Homestead Exemption property tax benefit would be doubled to $20,000 for all homeowners; under the plan proposed by LePage, the homestead exemption was doubled only for homeowners over 65 years of age. Unlike the governor’s plan, the alternative plan is revenue neutral.

An ITEP distributional analysis found that the “Better Deal for Maine” plan would provide bigger tax cuts for more Mainers while protecting investments in critical services like education. Under Gov. LePage’s plan, the average taxpayer in the top 5 percent of Mainers would see significant cuts, while the alternative plan would see taxes increase modestly for most in the same group. Overall, the alternative plan would make Maine’s tax system more fair.

The “Better Deal for Maine” plan has already won an opening salvo, garnering the support of many of the state’s major newspapers. The Bangor Daily News praised the alternative for its focus on reducing property taxes, which fall more heavily on the bottom of the income scale, than income taxes that are felt more heavily at the top. The Morning Sentinel and Kennebec Journal said in a joint editorial that the alternative plan would “boost demand and lead to economic growth” because it targets middle-class consumers rather than wealthy businesses.

 


North Carolina Lawmakers Push Unreasonable Income Tax Cuts, Prompt Outcry


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NCSenate.jpgNorth Carolina legislators are moving ahead with plans to double down on fiscally-ruinous income tax cuts less than two years after enacting a significant tax cut package that was heavily tilted to the Tarheel state's richest residents. Senate Bill 526 would reduce the personal income tax rate from 5.75 to 5.5 percent, replace the standard deduction with a zero percent tax bracket for the first $20,000 of income, and reduce the corporate income tax from 5 to 4 percent. Worse, the bill would eliminate revenue benchmarks passed in 2013 that would have prevented corporate income tax cuts if revenue collections didn’t reach a certain level. All told, the tax cuts would cost at least $1.4 billion in revenue over the biennium. Currently, North Carolina faces a $271 million shortfall.

Luckily, opponents of the tax cut plan continue to sound the alarm. Alexandra Sirota of the Budget and Tax Center (BTC) blasted the proposed income tax cuts, saying previously-enacted cuts “have undermined the state’s ability to invest in infrastructure, in research and development at public universities and in many other public services that underpin a strong economy.” Sirota pointed out that some lawmakers who back further income tax cuts have sought to hedge their bets by securing more sales tax revenue for their districts – an implicit admission that revenue growth is unlikely to occur.

A recent BTC report found that the evidence gleaned from tax cuts passed in North Carolina in 2013 disprove the arguments that tax cuts create growth and attract businesses. While the state’s job growth since December 2013 has been slightly stronger than the national average, personal income and hourly wage growth in North Carolina have both trailed the nation. The report also cites an ITEP analysis which found that the 2013 tax cuts overwhelmingly benefited the wealthy and profitable corporations, and that the 2015 plan would send another $2,000 back to the top one percent of earners. 

Advocates aren’t the only ones condemning the plan. An editorial in The Charlotte Observer chides state lawmakers for their attempts “to fund the fiction that giving ‘job creators’ more money is good for North Carolina. Doing so ignores history, which shows there’s no link between lowering state taxes and economic growth. That’s because businesses spend money when they can make money, not simply because the government gave them more of it.”

 


State Tax Policy Trends in 2015: Not All That "Trickles Down" Is Rain


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The theory that tax cuts for the affluent will eventually trickle down to everyone else is shopworn, yet supply-side adherents keep promising the public that the rich can have their tax cuts and the rest of us will eat cake too.

Despite 35 years of data showing this to be false, the notion has seduced enough policymakers to keep the lights on at Art Laffer’s house.

At least 10 states have tax cut proposals in motion that, unlike the tax shifts we reviewed previously, will not offset cuts by raising other taxes but by raiding surpluses or reducing spending. The overwhelming majority of these proposals will reduce taxes for the best off while doing nothing or little for everyone else, making a regressive tax landscape worse.  Gov. Asa Hutchinson’s overhaul of his state’s income tax and Mississippi Gov. Phil Bryant’s proposal to introduce a state Earned Income Tax Credit (EITC) would actually benefit low- and moderate-income families, but most of the other proposals would lead mainly to benefits for the wealthy.

Over time such tax cuts exacerbate income inequality and stymie opportunity for the masses. Taxes and spending are on a balance scale. Top-heavy tax cuts and their purported economic benefits do not trickle down a rolling hill; they tip the scale in favor of the rich while depriving states of necessary revenue to adequately fund basic services, including education, public safety, infrastructure health and other priorities. Below are some pending proposals:

Arkansas: Gov. Asa Hutchinson fulfilled his campaign promise of passing a middle class tax cut. The governor’s plan introduces a new income tax rate structure for middle income Arkansans. To help pay for the measure the capital gains exemption was reduced from 40 to 50 percent. Using data from ITEP, Arkansas Advocates for Children and Families explains that the taxpayers who benefit from capital gains exemptions are wealthier families.

Florida: Once again, Florida Gov. Rick Scott is pushing lawmakers to enact an unusual hodgepodge of tax cuts.  Under his proposal, taxes on cable TV and cell phone usage would drop by 3.6 percentage points, manufacturing machinery and textbooks would both be exempted from the sales tax, the corporate income tax exemption would be raised from $50,000 to $75,000, and yet another back-to-school sales tax holiday would be held this summer.  The overall cost of this package would be roughly $700 million, and while it’s too early in the session to gauge the chances of passage, there is apparently some skepticism toward the plan in the state legislature.

Idaho: The big tax shift sought by some Idaho lawmakers is off the table for now, but Gov. Butch Otter made clear all along that he prefers a straight-up cut to the state’s corporate income tax rate, and its top personal income tax rate, from 7.4 to 6.9 percent.  Our analysts recently found that such a tax cut would make Idaho’s decidedly regressive tax system even more unfair.  More than three out of every four dollars in personal income tax cuts would flow to the wealthiest 20 percent of households, and members of the top 1 percent would see an average tax cut of over $3,500 each year.  These cuts would come on top of a very similar package of regressive income tax reductions enacted in 2012.

Mississippi: Lawmakers in the Magnolia State can’t seem to get enough of tax cut proposals. In addition to the tax shift proposal passed by the House recently (and written about here), lawmakers are debating a variety of tax cutting measures, which include decreasing personal and corporate income tax rates, introducing a nonrefundable EITC, and eliminating the corporate franchise tax.

Montana: The Montana legislature has approved a bill that would cut personal income tax rates across the board and reduce state revenues by roughly $42 million per year.  ITEP analyzed similar, earlier versions of the cut and found that high-income households would be the largest beneficiaries and that low-income and middle-income taxpayers, who currently face the highest overall state and local tax rates, would receive little or no benefit.  Governor Steve Bullock is likely to veto the plan because of its impact on the state’s ability to fund vital public services.

Nebraska: With the sheer number and diversity of tax cut bills circulating in Nebraska this winter, it seems certain some cut will be enacted.  Much of the focus so far has been on reducing property taxes, a stated priority of newly elected Gov. Pete Ricketts.  Property tax proposals include creating a new refundable, targeted property tax circuit breaker credit for homeowners and renters, introducing a local income tax to reduce reliance on property taxes for school funding, hiking the sales tax rate to pay for a bump in a statewide property tax credit, and increasing personal and corporate income tax rates to pay for property tax cuts. State business leaders, however, have made it clear that income tax cuts are their main concern, and Governor Ricketts has not ruled out the possibility.  One plan being floated would reduce personal and corporate income tax rates over eight years, giving the biggest benefits by far to the richest Nebraskans.

North Carolina (updated 4/6/2015): Two years after North Carolina enacted a sweeping tax cut package, state lawmakers have returned this year with more tax cutting plans that will bust the budget to benefit wealthy residents and profitable corporations.  Senate Republicans have unveiled another round of personal income tax cuts that cost more than  $1 billion when fully enacted and would slash millions of dollars in corporate income taxes. There has also been talk of reducing taxes on capital gains income, restoring items eliminated in 2013 including a deduction for medical expenses and historic preservation tax credit.  What makes these proposals even more egregious is the state’s anticipated revenue shortfall of almost $300 million this year. Lawmakers were forced to close a $500 million revenue gap last year with deep spending cuts after underestimating the steep cost of the tax cuts passed in 2013.  

North Dakota: Just a few short months ago, North Dakota lawmakers were giddy about the idea of using booming oil and gas tax revenue to pay for an elimination or significant reduction of the state’s personal income tax.  But as gas prices plummeted, reality set in and the House approved a scaled back proposal – a 10 percent across-the-board reduction in personal and corporate income tax rates (Gov. Dalrymple also proposed a 10 percent personal income tax cut).  North Dakota lawmakers enacted similar plans in 2011 and 2013, slowly chipping away at the two taxes.

Tennessee: In what’s becoming an annual tradition, multiple Tennessee lawmakers have proposed (subscription required) repealing the state’s “Hall Tax”—a modest 6 percent income tax on interest, dividends, and capital gains income.  As we showed in our recent Who Pays? report, the Hall Tax is a rare progressive bright spot in a tax system that tilts overwhelmingly in favor of affluent households.  Fortunately, leaders in the state’s House and Senate are reportedly unenthused by the idea since Tennessee’s wealthiest households recently benefited from cuts in estate, inheritance, and gift taxes.  And while it’s discouraging that the governor isn’t making principled tax fairness arguments against these proposals, he is very skeptical that the state can afford to get rid of the Hall Tax right now.

Texas: Lawmakers in the Lone Star State hope to enact a tax cut package that would cost about $4 billion over a two year period.  Governor Greg Abbott’s top priority is cutting the business franchise tax, and he has said that he will veto any budget that does not include such a cut.  So far, the main options for reducing business franchise taxes include cutting the rate from 1 to 0.85 percent or raising the exemption from $1 million to $4 million.  The governor would also like to see school property taxes cut, and the Senate seems happy to go along with that idea.  Options currently under discussion include raising the $15,000 homestead exemption to $33,625, or converting it to equal 25 percent of home value.  As we explain in this policy brief, the percentage-based option is less fair than a flat-dollar exemption.  But it’s also important to keep in mind the context provided by Dick Lavine of the Center for Public Policy Priorities: “There’s better uses of this money … than tax cuts.”


Mississippi House Passes Bill that Could Tank the Already Poor State's Economy


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mississippicapitol.jpgMississippi lawmakers are playing a game of one-upmanship when it comes to tax proposals, but the biggest losers could be taxpayers if lawmakers enact one of the more ill-advised plans.

Last week, after just two hours of debate, the Mississippi House passed a bill that would phase out the state’s personal income tax. If passed, the bill could gradually eliminate nearly a third of state revenues. Despite the hollow promises of tax-cut advocates, eliminating the income tax would do nothing to improve employment or economic opportunity in the state.

The new bill, championed by House Speaker Philip Gunn, is the latest example of state lawmakers’ zeal to change the state tax code. Gov. Phil Bryant and Lt. Gov. Tate Reeves have also offered tax cut plans, though their measures are more moderate than the House proposal. Bryant wants to create a non-refundable Earned Income Tax Credit for low- and moderate-income Mississippi families, while Reeves wants to implement a package of income and business tax cuts and eliminate the state’s corporate franchise tax.

Opponents of Gunn’s income tax elimination have derided the plan as “lunacy,” and it is a hard accusation to dispute. Losing its second-largest source of revenue would be a devastating blow for the state, particularly because the effect of any spending cuts would be concentrated on the most vulnerable Mississippians. While the bill does not include any program cuts or new taxes to offset lost revenue, they would surely be necessary.

Supporters of eliminating the income tax are using the widely disproven claim that cutting taxes will boost economic growth, and therefore state revenue. A look at Kansas provides a cautionary tale: lawmakers passed deep income tax cuts using the same rubric only to slash spending later, and now the state’s conservative governor is proposing regressive consumption tax hikes.

Eliminating Mississippi’s state income tax would do little to support working and low-income families since most of the benefits would accrue to the wealthy. ITEP data shows that 65 percent of the tax cut would go to the top fifth of earners, and that the top one percent of earners would get an annual average tax cut of $20,000 if the policy were fully implemented.

Supporters believe they have answered the complaints of critics by including growth triggers in their proposal. Each phase in the income tax elimination could only proceed in years when state revenue grows by at least 3 percent. In reality, the triggers only expose their cynicism. Revenue growth in the state has slowed over the past 15 years, from 7.22 percent annually in 2000 to about 3.5 percent recently. The culprits for declining revenue growth are rising income inequality and a dampened economy, which cut into the sales tax revenues that Mississippi relies upon heavily. In fact, revenue growth from 2010 to 2013 was driven by income and corporate tax collections – the same sources that some state leaders want to cut. Supporters of eliminating the income tax either know this information and are pushing triggers to look “responsible,” or they don’t know this information and are dangerously ignorant of state finances.

Mississippi has been the poorest state in the nation across a variety of measures since at least 1931. Today, the median net worth of a Mississippi household is half the median net worth of the average American household, and the state fares poorly on indicators related to poverty – life expectancy at birth, educational attainment, employment, and obesity, among others. The people of Mississippi sorely need economic growth, but because their leaders rely on tax cuts as an economic development strategy no growth is forthcoming.

The true drivers of growth – workforce quality and new markets for goods and services – have seen systematic under-investment, leaving Mississippi underdeveloped. A strong workforce and economic climate aren’t cheap, and more tax cuts will just move the state further backward. It’s a shame that today’s leaders will repeat past mistakes, but it was Faulkner who wrote, “The past is never dead. It’s not even past.”

 


Gov. Kasich's Tax Proposal Promises to Make Ohio's Tax System Less Fair


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kasich.pngThe tax plan recently proposed by Ohio Gov. John Kasich would be a massive tax shift away from well-off taxpayers to the middle-class and working poor, according to a new report released by Policy Matters Ohio that incorporates ITEP data. His plan follows similar tax shift proposals from Maine and South Carolina and shows that plenty of governors around the country are doubling down on regressive tax “reform,” despite arguments to the contrary.

Taking into account the governor’s proposed changes to income and consumption taxes, the top one percent of Ohio taxpayers will receive an average tax break of $12,010, while the bottom 40 percent of taxpayers will actually see their taxes go up by about $50. Gov. Kasich has touted his plan as a measure to boost small businesses, but in reality his policy will benefit the wealthy and leave working families in Ohio further behind.

Gov. Kasich has proposed slashing income taxes for the second time in his administration. His new plan would cut rates by 23 percent over two years, with an immediate 15 percent cut in 2015. These cuts would cost an estimated $4.6 billion in revenue over the biennium. Kasich also wants to eliminate the income tax for business owners with $2 million or less in annual receipts at a two-year cost of $700 million dollars, and increase the personal exemption allowed for those with $80,000 or less in annual income. The benefits of the governor’s income tax proposals would put, on average, $13,000 back into the pockets of the top one percent of Ohio taxpayers annually, while those at the bottom would see an average $16 tax cut. Those in the middle would see a $219 tax cut on average.

Worse than the lopsided benefits that would accrue to the rich are the regressive tax increases Gov. Kasich proposes to pay for his cuts. The governor wants to increase the sales tax rate from 5.75 to 6.25 percent and broaden the sales tax base to include a number of additional services. He also wants to increase excise taxes on cigarettes and other tobacco products. These measures hit low-income households the hardest and explain why overall tax rates will increase for the bottom 40 percent. While wealthier households will pay a higher dollar amount under the sales tax increase, low-income households will have to pay a larger percentage of their income. Similarly, the cigarette and tobacco tax increase will have a larger impact on low-income households. ITEP’s recent Who Pays report shows that states that rely disproportionately on consumption taxes rather than income taxes are less fair and more unequal in the distribution of tax obligations. 

Kasich’s proposal also includes other measures meant to help pay for his tax cuts or reduce taxes for businesses. He would means test three tax provisions geared toward income earned by senior citizens, raise the rate of the Commercial Activity Tax while reducing the minimum paid by some companies, and increase the severance tax on oil and gas.

A number of legislators have balked at the governor’s plan. Rep. Kevin Boyce argued that the increase in the income tax personal exemption for lower-income taxpayers would be negated by the increase in sales taxes, while Rep. Denise Driehaus questioned whether the measures for business owners would be enough to spur job growth.

The governor could actually help working Ohioans by expanding the state’s Earned Income Tax Credit (EITC). While Gov. Kasich often highlights his expansion of the EITC from 5 to 10 percent, this is not nearly enough to truly make a difference for low-income families – as Policy Matters Ohio and ITEP have previously argued. The bottom 20 percent of tax filers receive an average of just $5 in savings from the EITC, while the next 20 percent receive an average $60 in savings. These meager savings would be wiped out by the governor’s proposed sales tax increases. A truly progressive tax proposal would increase the EITC further and make the credit refundable so that working families would receive the full benefit.

What Ohio needs is a tax policy that will help low-income and working families get a leg up, not reward the well-off with lower taxes. We hope the governor will make fairness a part of his economic agenda. 

 


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. 

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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.” 


Michael Mazerov, Tax Myth Monster Slayer


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Like the mythic Hydra of centuries old, the idea that people “vote with their feet” by intentionally leaving high-tax states for low-tax states is a monster that will not die. Each time the tax flight myth is shot down, two additional claims arise that espouse tax migration as gospel. Even though ITEP’s own Carl Davis demolished Art Laffer’s claim that states without income taxes outperform states with progressive income taxes way back in 2011, Laffer continues to peddle the same snake-oil. And despite the abundance of data refuting the migration claims posited by anti-tax activists like Travis Brown, Maryland Republicans made the same deeply-flawed claims a centerpiece of their strategy in the recent gubernatorial election.

Luckily, Michael Mazerov at the Center on Budget and Policy Priorities (CBPP) is on the case. I saw Mazerov’s presentation on interstate migration and state income tax levels at this week’s State Fiscal Policy Conference, and walked away impressed with his thorough debunking of the myths.

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The bards will sing tales of his greatness.

Proponents of the tax flight myth argue that people intentionally flee states like New York and California for states like Texas and Florida due to a conscious desire to pay lower state and local taxes. They draw the conclusion that states can promote in-migration and economic growth by cutting income taxes for the wealthy or at the very least stopping tax increases. Mazerov’s research shows that these arguments are dead wrong. In a paper he wrote in May, Mazerov found that taxes have a negligible effect on interstate moves; most people (75 percent) cited new jobs or family obligations as the main reason for leaving their state in a 2013 Census Bureau Survey. Furthermore, the rate of interstate relocation has declined over the past few decades; only 1.5 percent of the US population moved between states in 2013. 69 percent of US citizens still live in the state where they were born, and there is no relationship between a state’s income tax rate and the proportion of native born residents.

A key way that tax flight proponents distort the data is by focusing on out-migration and totally ignoring in-migration. Of the nine states with the highest top income tax rates in 2011, all nine replaced more than two-thirds of their departing households with new arrivals, according to IRS interstate migration data. In fact, the replacement rate was about 91 percent on average.

Another key argument that tax flight proponents make is that when residents or businesses depart, they take their income with them – a canard that Mazerov swatted down in a paper released last month. To state the obvious, most people don’t take their income with them when they leave since they work for other people. In most cases, their job will just be filled by another resident of the state, new or old. Research also shows that entrepreneurs – the “job creators” that proponents claim will flee to low-tax states – are relatively immobile. A February 2014 survey of 150 entrepreneurs found that the most common reason for launching a business in a particular location was that the entrepreneur lived there; the second most common reason was access to talent. Only five percent of those surveyed cited low tax rates as a factor. When business owners leave a state, the business is sold or other businesses pick up its market share – it would be a strange economy indeed where jobs and firms disappeared even though the demand for those jobs and firms remained.

Finally, proponents of the tax flight myth ignore the convincing body of research around the impact of climate on interstate migration decisions. Mazerov’s research shows that Florida (no income tax) was the top destination for interstate movers from Illinois, Michigan, New Jersey, New York, Ohio and Pennsylvania despite vastly different income tax rates in those states. The second-most popular destination states were Arizona and North Carolina, despite the presence of Nevada, Tennessee and Texas – all states with no income tax – close by.

The empirical evidence confirms what most know intuitively: people don’t pack up their lives and move to another state because of percentage changes in personal income tax rates. They move for a spouse, for a job, to be closer to family, to get a better education – in short, for the myriad human reasons that make our lives meaningful. It would be better for states to invest in areas that would actually attract new residents and economic activity (affordable housing, education, and workforce development for starters) than to conjure up justifications for unfair tax cuts. We owe Michael Mazerov a debt of gratitude for his Herculean effort to bring the facts to this crucial public policy debate. 


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.


Putting a Face to the Numbers


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For years we’ve been telling you about the various tax cuts that have been signed into law by Ohio governors. Governor Bob Taft (who was elected in 1999) pushed through (among other tax changes) a 21 percent across the board income tax reduction. Those tax cuts were allowed to continue under Governor Ted Strickland. Current Governor John Kasich has pushed through his own series of tax cuts.  We’ve written about and crunched numbers on these flawed plans often. Look here,hereherehere and here.

The numbers are certainly compelling. For example, ITEP found that since 2004 the various tax changes signed into law cost the state $3 billion and are currently reducing tax bills for the state’s most affluent 1 percent of taxpayers by more than $20,000 on average, while the bottom three-fifths of state taxpayers as a group are actually paying more taxes now, on average, than they would if these tax changes had not been enacted.

But the purpose of this post isn’t to rehash these dreadful numbers but to urge readers to check out the recent Rolling Stone piece: Where the Tea Party Rules. Here you’ll read about real families living in Lima, Ohio who are just trying to get by. These families put a real face to ITEP’s numbers. (Added bonus: an ITEP analysis is referred to in the piece!)


State News Quick Hits: Kansas Budget Woes, Absurd Ohio Tax Cuts


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In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, "It's like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low-income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap - a proposal that Christie already has vetoed several times but is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax. But, Gov. Brewer has made it clear she does not support such extreme ideas. From the Arizona Daily Star: “I think that you need a balance,” she said in an interview with Capitol Media Services. Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”

 


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


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

During his first term in office,  Wisconsin Gov. Scott Walker passed three rounds of property and personal income tax cuts, and now he is on the campaign trail touting the so-called benefits.

But the truth is that Gov. Walker’s tax cuts disproportionately benefited the wealthiest Wisconsinites while lower-income people received little to no benefit. The Wisconsin Budget Project (WBP), using ITEP data, concluded that Gov. Walker’s tax cuts will give the bottom 20 percent – those earning an average of $14,000 a year – an average tax break of just $48 in 2014. In contrast, the top 1 percent of earners, or those whose average income is $1.1 million, will receive an average tax cut of $2,518.

If Gov. Walker is re-elected, tax cuts will likely remain a priority. He’s already pledged that property taxes won’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, will 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.

Challenger Mary Burke, a Trek Bicycle Corporation executive and former state Commerce Department secretary, has yet to put out her own tax plan, but she recently told the Milwaukee Journal Sentinel that she would not take a pledge to not increase taxes, saying, “I'd want to look at the totality. We collect revenue in a lot of different ways. I certainly wouldn't look at raising (taxes), but I'd also want to look at it in the context of our finances, our budgets ….”

When asked specifically about her tax plan she remained vague, “My focus would be tax cuts targeted to the middle class and working families instead of breaks to businesses and those at the top that don’t create jobs….I’m particularly concerned about the very high property taxes across the state.”

As with every election, there’s a lot at stake in the upcoming Wisconsin governor’s race. Tax revenue funds every level of government not to mention vital programs and services. Low- and middle-income Wisconsinites pay a disproportionately higher percentage of their income in state taxes than the rich. Voters deserve to know details about each candidate’s plan for the state. In the coming months, let’s hope Burke provides more details about her tax plan, especially since the direction Gov. Walker wants to take the state seems particularly clear.  

 


ITEP Powers Wisconsin Tax Calculator


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Recently the Wisconsin State Journal ran an important piece describing the current tax debate in the Badger State. Gov. Walker has said he is interested in income tax repeal and already pushed through three major tax cuts during his term in office.  

Governor Walker’s major challenger, Mary Burke  has said, “My pledge is not to raise taxes overall and to make sure that Wisconsin taxes and fees are in line with other states.”

Clearly tax issues will be a hotly debated issue over the course of the gubernatorial campaign. At the request of the Wisconsin State Journal the Institute on Taxation and Economic Policy provided data that powers a new interactive tax calculator that allows readers to answer the question “What’s the right tax  mix for Wisconsin?”


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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On the heels of state Earned Income Tax Credit (EITC) expansions in Iowa, Maryland, and Minnesota and heated debates in Illinois and Ohio about their own credit expansions,  the Institute on Taxation and Economic Policy released a new report today, Improving Tax Fairness with a State Earned Income Tax Credit, which shows that expanding or enacting a refundable state EITC is one of the most effective and targeted ways for states to improve tax fairness.

It comes as no surprise to working families that most state’s tax systems are fundamentally unfair.  In fact, most low- and middle-income workers pay more of their income in state and local taxes than the highest income earners. Across the country, the lowest 20 percent of taxpayers pay an average effective state and local tax rate of 11.1 percent, nearly double the 5.6 percent tax rate paid by the top 1 percent of taxpayers.  But taxpayers don’t have to accept this fundamental unfairness and should look to the EITC.

Twenty-five states and the District of Columbia already have some version of a state EITC. Most state EITCs are based on some percentage of the federal EITC. The federal EITC was introduced in 1975 and provides targeted tax reductions to low-income workers to reward work and boost income. By all accounts, the federal EITC has been wildly successful, increasing workforce participation and helping 6.5 million Americans escape poverty in 2012, including 3.3 million children.

As discussed in the ITEP report, state lawmakers can take immediate steps to address the inherent unfairness of their tax code by introducing or expanding a refundable state EITC. For states without an EITC the first step should be to enact this important credit. The report recommends that if states currently have a non-refundable EITC, they should work to pass legislation to make the EITC refundable so that the EITC can work to offset all taxes paid by low income families. Advocates and lawmakers in states with EITCs should look to this report to understand how increasing the current percentage of their credit could help more families.

While it does cost revenue to expand or create a state EITC, such revenue could be raised by repealing tax breaks that benefit the wealthy which in turn would also improve the fairness of state tax systems.

Read the full report


Norquist-Backed Tax Cut for the Rich Fails in Tennessee


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Grover Norquist’s Americans for Tax Reform, along with the Tax Foundation and Koch brothers-backed Americans for Prosperity all tried to convince Tennessee lawmakers that the state’s wealthiest investors need a tax cut.  Fortunately for Tennesseans, their elected officials rejected that idea this week.

 At issue was the state’s “Hall Tax,” a 6 percent levy on stock dividends, certain capital gains, and interest.  Tennessee does not tax wages, business income, pensions, Social Security, or virtually any other type of income imaginable.  But for anti-tax groups, even the state’s narrow income tax on investors was too much to stomach.

The Tax Foundation put out an alert claiming Tennessee could improve in its (highly questionable) tax climate ranking by repealing the tax, while Grover Norquist traveled to Tennessee to urge repeal and Americans for Prosperity ran a series of radio ads doing the same.

The state’s comptroller got in on the action as well, bizarrely suggesting that the Hall Tax is bad policy because it is not primarily paid by large families or low-income people lacking health insurance.

But ultimately, sensible concerns that repeal would require damaging cuts in state and local public services eventually won out, and the bill’s sponsor dropped his plan.

This is good news for people concerned with the fairness and adequacy of state tax systems.  As our colleagues at the Institute on Taxation and Economic Policy (ITEP) explained in a report picked up by The Tennessean, these cuts in public investments would have come with no corresponding tax benefit for the vast majority of households:

“Nearly two-thirds (63 percent) of the tax cuts would flow to the wealthiest 5 percent of Tennessee taxpayers, while another quarter (23 percent) would actually end up in the federal government’s coffers. Moreover, if localities respond to Hall Tax repeal by raising property taxes, some Tennesseans could actually face higher tax bills under this proposal.”

Tennesseans can breathe a sigh of relief that this top-heavy tax repeal plan didn’t make it into law this year.  But you can bet that Grover et al. will try again soon as they attempt to set in motion a national trend away from progressive income taxes.


Either Way - Reducing Ohio's Top Income Tax Rate to 4 or 5 Percent is a Bad Idea


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Ohio Governor John Kasich is expected to unveil his latest tax cut proposal soon and it doesn’t take a deep understanding of Ohio politics to know that the Governor’s plan will likely include large across the board income tax rate reductions. Last week he mentioned wanting to lower the top income tax rate to below 4 percent after persistently advocating in recent months for reducing the top rate to less than 5 percent (the current top income tax rate is 5.333 percent).

In anticipation of the governor’s latest proposal, Policy Matters Ohio (PMO) released a new report, using ITEP data,“Income-tax cut would favor well-to-do”, which shows the impact of an across the board income tax rate reduction that lowers the top income tax rate to just under 5 percent. The biggest beneficiaries of this proposal are by far the wealthiest Ohioans. In fact, 69 percent of the benefits go to Ohioans in the top 20 percent of the income distribution.

We often don’t get to talk about tax policy as it relates to pizza, but PMO finds “that the across-the-board cut in rates needed to [get the top rate to below 5 percent] may allow low-income Ohioans to buy a slice of pizza a year, on average. Middle-income Ohioans could purchase a cheap pizza maker. For the state’s most affluent taxpayers, on average it would cover round-trip airfare for two to Italy, with some money left over to pay the hotel bill and buy some real Italian pizza.”

If the Governor aggressively pushes getting the top rate below 4 percent the benefits to the wealthy will be even greater and could mean a second trip to Italy with a stop over in France to pick up a bottle of wine. Either way, reducing the top income tax rate below 4 or 5 percent would enhance the unfairness already apparent in Ohio’s tax structure and makes it more difficult for the state to fund necessary services.


Say it Ain't So: Kentucky's Missed Opportunity


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Kentucky Governor Steve Beshear has unveiled a 22-point tax reform plan that includes a new refundable state earned income tax credit (EITC), limits on the generous $41,110 pension exclusion and expanding the sales tax base to include a wider range of services. The plan is based in part on the recommendations of the Governor’s Blue Ribbon Commission on Tax Reform, which were released in 2012. Beshear’s plan also includes a cut in the personal and corporate income tax rates and an increase in the cigarette tax. In total the proposal increases state revenues by $210 million a year.

The proposal is a mixed bag.  While it raises much needed revenue and includes several reform-minded options, it falls short of improving the fairness of the state’s tax structure. The introduction of an EITC and limiting the current pension exclusion are a good start, but changing the corporate income tax apportionment formula to single sales factor and lowering personal and corporate income tax rates are costly ideas that benefit wealthier Kentuckians.

The Kentucky Center for Economic Policy (KCEP) issued a brief containing an Institute on Taxation and Economic Policy (ITEP) analysis showing that Governor Beshear’s proposal doesn’t improve tax fairness in any meaningful way. KCEP concludes that “the combined impact of the tax increases and tax cuts in Governor Beshear's reform proposal would not help improve the regressive nature of Kentucky’s tax system.”  This is because the new revenue raised from the Governor’s plan comes almost entirely from regressive changes to the sales tax base and hiking cigarette taxes.

Governor Beshear deserves some credit for proposing tax reform despite this being an election year, but he missed an opportunity to truly reform the state’s tax structure by making it more fair and adequate. Let’s hope that Kentucky legislators follow KYCEP’s advice and “build on the good parts of the plan while making improvements.”


State News Quick Hits: Transformers and Tax Breaks for the Rich in Disguise


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Editorial boards at the Milwaukee Journal Sentinel and the Wisconsin State Journal have both (rightly) responded to Governor Walker’s property and income tax cut proposals by encouraging lawmakers to instead curb the state’s growing structural deficit, or put any surplus revenue toward serious problems like poverty reduction and enhancing K-12 education. Perhaps the editorial boards were persuaded by Institute on Taxation and Economic Policy (ITEP) findings that wealthier folks benefit more from the tax cuts than low-and middle-income families. For more on ITEP’s analysis read this Milwaukee Journal Sentinel piece.

Idaho’s House Speaker has proposed dramatically scaling back the state’s grocery tax credit in exchange for a regressive $70-80 million cut to the individual and corporate income tax rates. But economist Mike Ferguson of the Idaho Center for Fiscal Policy points out that the Speaker’s plan would amount to a giveaway to the rich, while further squeezing the middle class.  An Idahoan making $50,000 per year, for example, could expect to see about $305 tacked on to their state tax bill under this change. Governor Butch Otter has been saying the right things about taking a break from tax cuts (kind of) and instead making education spending a priority this year. But the Governor recently said he was open to the Speaker’s idea, and the Idaho Statesman provided a partial endorsement. Idaho legislators should tread carefully: raising taxes on the middle class to pass another trickle-down tax cut is bad public policy and even worse politics.

A Wichita Eagle editorial, “Pressure on sales tax”, shares our concerns about one of the major consequences of the tax cuts and “reforms” enacted in Kansas over the past two years.  With the gradual elimination of the state’s personal income tax and pressure on local governments to raise revenue, it is inevitable that the state’s sales tax rate will continue to rise at the detriment of low- and moderate-income working families who are stuck footing the bill. And, in order to have sufficient revenue to fund services over the long-run, Kansas lawmakers will need to make the politically difficult decision to broaden the sales tax base, something they’ve shown little stomach for so far. The editorial states, “as Kansas strains to deal with declining tax collections and reserves according to Brownback’s plan to become a state without an income tax, the sales tax will be one of the only places to go for more revenue.”

Indiana lawmakers want to get a better handle on whether their tax incentives for economic development are actually doing any good.  Last week, the House unanimously passed legislation that will require every economic development tax break to be reviewed ov

er the course of the next five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recommends that all states implement these kinds of ongoing evaluations.

Illinois Governor Pat Quinn is pushing back against a string of bad publicity regarding film tax credits. Quinn says that an entertainment boom is occurring in Illinois in part because of the Illinois Film Services Tax Credit, an uncapped, transferable credit that was extended in 2011. What Governor Quinn fails to mention, however, is how much taxpayers lost in the process. The credit costs roughly $20 million a year, requiring higher taxes or fewer public services than would otherwise be the case. Research from other states indicates that only a small fraction of that amount would be recouped via higher tax receipts. Moreover, film subsidies often waste money on productions that would have located in the state anyway and are unlikely to do much good in the long-term since the industry is so geographically mobile. Indeed, one of the producers of Transformers 3 admitted that he would have filmed in Chicago even without the credit, which cost taxpayers $6 million. Instead, the decision was based on “the skyline, the architecture and the skilled crews here, among other factors.”


Beware of the Tax Shift (Again)


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Note to Readers: This is the second of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on tax shift proposals.

The most radical and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate state income taxes and replace some or all of the lost revenue by expanding or increasing consumption taxes. These “tax swap” proposals appeared to gain momentum in a number of states last year, but ultimately proposals by the governors of Louisiana and Nebraska fell flat in 2013. Despite this, legislators in several states have reiterated their commitment to this flawed idea and may attempt to inflict it on taxpayers in 2014. Here’s a round-up of where we see tax shifts gaining momentum:

Arkansas - The Republican Party in Arkansas is so committed to a tax shift that they have included language in their platform vowing to “[r]eplace the state income tax with a more equitable method of taxation.” While the rules of Arkansas’ legislative process will prevent any movement on a tax shift this year, leading Republican gubernatorial candidate Asa Hutchinson has made income tax elimination a major theme of his campaign.  

Georgia - The threat of a radical tax shift proposal was so great in the Peach State that late last year the Georgia Budget and Policy Institute published this report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated their income tax and replaced the revenue with sales taxes. This report seems to have slowed the momentum for the tax shift, but many lawmakers remain enthusiastic about this idea.

Kansas – In each of the last two years, Governor Sam Brownback has proposed and signed into law tax-cutting legislation designed to put the state on a “glide path” toward income tax elimination.  Whether or not the Governor will be able to continue to steer the state down this path in 2014 may largely depend on the state Supreme Court’s upcoming decision about increasing education funding.

New Mexico - During the 2013 legislative session a tax shift bill was introduced in Santa Fe that would have eliminated the state’s income tax, and reduced the state’s gross receipts tax rate to 2 percent (from 5.125 percent) while broadening the tax base to include salaries and wages. New Mexico Voices for Children released an analysis (PDF) of the legislation (citing ITEP figures on the already-regressive New Mexico tax structure) that rightly concludes, “[o]n the whole, HB-369/SB-368 would be a step in the direction of a more unfair tax system and should not be passed by the Legislature.” We expect the tax shift debate has only just started there.

North Carolina - North Carolina lawmakers spent a good part of their 2013 legislative session debating numerous tax “reform” packages including a tax shift that would have eliminated the state’s personal and corporate income taxes and replaced some of the revenue with a higher sales tax. Ultimately, they enacted a smaller-scale yet still disastrous package which cut taxes for the rich,hiked them for most everyone else, and drained state resources by more than $700 million a year. There is reason to believe that some North Carolina lawmakers will use any surplus revenue this year to push for more income tax cuts.  And, one of the chief architects of the income tax elimination plan from last year has made it known that he would like to use the 2015 session to continue pursuing this goal.

Ohio - Governor John Kasich has made no secret of his desire to eliminate the state’s income tax. When he ran for office in 2010 he promised to “[p]hase out the income tax. It's punishing on individuals. It's punishing on small business. To phase that out, it cannot be done in a day, but it's absolutely essential that we improve the tax environment in this state so that we no longer are an obstacle for people to locate here and that we can create a reason for people to stay here." He hasn't changed his tune: during a recent talk to chamber of commerce groups he urged them “to always be for tax cuts.”  

Wisconsin - Governor Scott Walker says he wants 2014 to be a year of discussion about the pros and cons of eliminating Wisconsin’s most progressive revenue sources—the corporate and personal income taxes. But the discussion is likely to be a short one when the public learns (as an ITEP analysis found) that a 13.5 percent sales tax rate would be necessary for the state to make up for the revenue lost from income tax elimination. 


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.  

    Missouri
    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.  


How to Understand New York Governor Andrew Cuomo's Proposed Tax Cuts


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Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Taking his tax cut efforts one step further this election year, Cuomo is now proposing to expend the entirety of his state’s hard-won budget surplus on more than $2 billion in annual tax cuts.

While the term "budget surplus" may make it sound like that there is extra money lying around in Albany, the reality is that the surplus is the product of five consecutive years of austerity budgets and a budget plan that would continue this austerity for years to come. In other words, rather than using the surplus to restore funding to state and local services that have taken a hit over the past years, Cuomo is insisting that the money be used for tax cuts (many permanent) instead.

Unfortunately, tax cutting has become a pattern during Cuomo's time as governor. In June 2011, Cuomo pushed through a property tax cap, which severely limited the ability of cash-strapped local governments to raise enough revenue to fund basic services. In December of the same year, Cuomo further starved the state of much needed revenue by killing efforts to fully extend a millionaire's surtax, and instead pushing through a scaled back surcharge that raised half as much revenue as the original. Just last year, Cuomo pushed through a program of unproven and expensive corporate tax breaks, which a CTJ investigation found could actually harm many existing New York companies.

Even worse, to defend his past and newest tax cut proposals, Cuomo has embraced the cringe-worthy rhetoric of anti-tax governors like Kansas Governor Sam Brownback in arguing that ending "high taxes" and enacting corporate tax breaks will make the state more "business-friendly" and help improve New York's economy. The problem, of course, is that taxes are crucial to funding what really drives economic development: a highly educated workforce, good infrastructure and quality healthcare.

Cuomo's anti-tax approach is in direct contrast to the newly-elected New York City Mayor, Bill de Blasio, who ran and won a landslide victory on a campaign platform of addressing growing income inequality primarily through hiking taxes on the rich to provide universal citywide pre-kindergarten classes. De Blasio's call for higher taxes has proven not only popular in New York City, but also garnered the support of 63% of New York voters statewide. What de Blasio's election proves is that a significant majority of New Yorkers, unlike Cuomo, are not only willing to forgo tax cuts, but are actually willing to support higher taxes in order to help fund critical public services.

Cuomo's Tax Proposal a Mixed Bag in Terms of Tax Fairness

While many of Cuomo’s past tax proposals have offered little or nothing to those in need, Cuomo's new plan does includes a few potentially good ideas as well as few a very bad ones. On the good side of things, Cuomo proposes to substantially expand the state's property tax circuit breaker and create a renters credit, which could potentially provide a well-targeted income boost to low-income families. While the proposals sound good, their effectiveness will really depend on their details, which are yet to be released.

Regrettably, Cuomo is also proposing a significant cut in the state's corporate income and estate taxes, which will almost exclusively go to only a very small portion of the richest New Yorkers. Considering the recent series of tax cuts already passed by Cuomo and the years of budget cuts, piling on these additional tax breaks for the rich is simply unconscionable and would make an already unfair tax system (PDF) even worse.

 


Will Basic Constitutional Rights Be the Next Casualty of Kansas' Supply-Side Experiment?


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Almost every American would agree that education is a fundamental right. Any serious commitment to the notion of “equal opportunity” means ensuring that kids have an opportunity for a quality education—and that this opportunity should be as available to the very poor as it always has been to the very rich. As it happens, every state’s constitution includes a provision guaranteeing a basic education to its residents. But as an excellent op-ed in today’s New York Times notes, if some Kansas policymakers have their way, that state’s constitutional guarantees may be the latest victim of Governor Sam Brownback’s income tax cuts.

It’s worth reviewing how Kansas lawmakers found themselves talking about jettisoning fundamental constitutional rights. In 2012, Governor Brownback pushed through huge tax cuts for the affluent based, in part, on the argument that these tax cuts would be largely self-financing. (Brownback was apparently influenced heavily by the half-baked supply-side claims of Arthur Laffer that cutting income taxes will automatically spur economic growth.) Rather than requiring harmful cuts in state and local public investments, Brownback argued, his tax cuts would be “a shot of adrenaline into the heart of the Kansas economy,” generating new economic activity that would actually boost tax collections.  But as the Center on Budget and Policy Priorities notes, it hasn’t worked out that way. State lawmakers were forced to enact substantial spending cuts across the board, and per-pupil funding plummeted from nearly $4,500 less than a decade ago to $3,838 last year. After a group of Kansas parents brought suit against the state, a lower state court ruled (PDF) that these cuts were an unconstitutional violation of the state’s basic education guarantees—and prescribed a remedy that returns per-pupil funding to the levels achieved in the last decade.

In response to the court’s finding (which is now being reviewed by the state Supreme Court), policymakers in the Brownback administration have argued that the court’s mandate for more school spending prevents them from adjusting spending levels to reflect economic downturns. As the state’s solicitor general argued last year, “The Legislature has to deal with the real world…the constitution shouldn't be a suicide pact." But this argument is ludicrous: as the court sensibly pointed out in its ruling, state lawmakers gutted education spending at the same time that they were pushing through huge tax cuts, making it “completely illogical” to argue that the unconstitutional education cuts are anything other than “self-inflicted.” Notwithstanding this, some policymakers have called for amending the state constitution to modify or even eliminate the guarantee of a basic education in response to this ruling. In other words, when the state constitution conflicts with supply-side tax cuts, it must be the constitution’s fault.  

The good news is that most other states have, so far, resisted the siren call of Laffer’s calls for huge income tax cuts. But in Kansas, some policymakers are so enamored with the Brownback tax cuts that they appear to be willing to write off their most basic constitutional guarantees. 


State News Quick Hits in Wisconsin, Illinois, Kentucky and Oklahoma


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The LaCrosse Tribune gets it right in this editorial titled, “Don’t Conduct Tax Talks in Private.” As we told you last week , Wisconsin  Governor Scott Walker asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Unfortunately, the first invitation-only discussion happened behind closed doors. We couldn’t agree more with the Tribune that, “true tax reform deserves feedback and input from all Wisconsin citizens because while we may not all contribute to political candidates or align ourselves with political parties, we all pay taxes.” Now we hear that the Governor is interested in  income tax repeal. Let’s hope this debate doesn’t happen behind closed doors.

 

Illinois Governor Pat Quinn has come out in favor of reviewing tax breaks given to businesses over the last several years in order to see if they really had a positive impact on the state’s economy.  We’ve been critical of the Governor for offering such tax incentives to specific companies.  Reviewing those giveaways for effectiveness is long overdue.

 

In more good news for those of us concerned with the “race to the bottom” in which states are doling out massive tax incentives to businesses with little oversight, Archer Daniels Midland is set to announce that they will move their headquarters to Chicago without receiving any state or city incentives in return.


Kentucky Governor Steve Beshear is (again) committing himself to tax reform. He recently said in 

an interview, “Tax reform remains a top priority of mine, and I am hopeful that we can address it in some way in the upcoming session.”

The Oklahoma Supreme Court recently struck down a regressive and unpopular cut to the state’s top income tax rate that Governor Mary Fallin signed into law earlier this year.  According to the court, the bill containing the tax cut violated a provision in the Oklahoma constitution requiring each bill to be focused on a “single subject.”  In addition to cutting the state’s income tax, the bill would have also provided funding to repair the state’s Capitol building. 


Hey, Hey, Ho, Ho, Tax Simplicity Has Got to Go, says Iowa Governor


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Iowa Governor Terry Branstad is reportedly interested in implementing an alternative income tax structure for the Hawkeye State’s wealthiest taxpayers.

The state’s income tax rate structure is a bit deceptive because Iowa is one of just six states offering a deduction for federal income taxes paid. ITEP has written a whole report on this costly and regressive loophole available here (PDF). The ability of Iowans to write off all of their federal income taxes on their state income tax forms means that the state needs higher income tax rates in order to raise necessary revenue. The state’s top personal income tax rate is 8.98 percent—and some elected officials believe this makes it difficult to attract businesses to the state. But, Iowans pay an effective tax rate far lower than 8.98 percent because of the generous deduction for federal income taxes paid.

In order to combat this public relations problem, Governor Branstad is considering proposing an alternative income tax that has lower rates and no deduction for federal income taxes paid. Iowans would be allowed to file their taxes either way, but of course, most taxpayers would compute their income tax bills twice to determine which results in lower tax liability. In other words, the proposal completely disregards the tax policy principle of simplicity. It’s also likely that offering this “optional” income tax would cost the state in terms of revenue, since most people will choose it only if it saves them money.

The Governor’s proposal has come under scrutiny from some in the legislature and from various advocacy groups. Iowa Citizens for Community Improvement released a statement saying, “Iowa’s wealthiest citizens need to pay their fair share in taxes. They don’t need more options for how to pay less.”

The track record for proposals of this type isn’t very good. One need only look to the 2008 presidential campaign and Senator John McCain’s tax proposal. During the campaign Citizens for Tax Justice analyzed the Senator’s alternative “simplified” tax and found that in 2012 alone, the alternate tax “would cost $98 billion, and 58 percent of this would go to the richest five percent of taxpayers.” Let’s hope Governor Branstad’s proposal falls the way of McCain’s.

Governor Scott Walker says that one of his goals is to lower taxes for all Wisconsinites. He’s asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Regrettably, transparency clearly isn’t another one of the Governor’s goals as the first roundtable discussion was closed to the public (and press) and only business leaders were invited.

In “race to the bottom” news, Missouri lawmakers approved a 23-year, $1.7 billion package of tax cuts for Boeing in an attempt to lure the manufacturer to the state. Missouri is one of twelve states vying for the opportunity to make the new 777X passenger jets. As we have explained, Missouri seems eager to repeat the mistakes of of Washington State, which recently provided Boeing with the largest state tax cut in history, at $8.7 billion.

It turns out that Kansas’ recent tax cuts aren’t just 
bad policy.  They’re also unpopular.  The income tax cuts, sales tax hikes, education cuts, and social service cuts that resulted from Governor Brownback’s tax plan are all opposed by a majority of Kansans, according to polling highlighted in The Wichita Eagle.

Due to the extensive changes to North Carolina’s personal income tax starting in 2014, the state’s Department of Revenue has 
asked all employers to distribute new state income tax withholding forms to their employees.  The need for a new form has unfortunately led to a lot of confusion and some really inaccurate press coverage on the regressive and costly tax “reform” package enacted this year.  Some articles mistakenly reported that everyone will get an income tax cut (and thus a little more money in their paychecks next year), but we know this is not the case.  The loss of the state’s Earned Income Tax Credit, personal exemptions (despite a higher standard deduction), and numerous other deductions and credits will negatively impact many working North Carolina families and seniors living on fixed incomes.  And, these stories all failed to point out that while income taxes may be going down for some, sales tax on items including movie tickets, service contracts and electricity will be going up in 2014.


Scott Walker's Tax Record Will Be on the Wisconsin Ballot Next Year


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Voters in 36 states will be choosing governors next year.  Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where we expect taxes to be a key issue. Today’s post is about the race for the Governor’s mansion in Wisconsin.

To many Wisconsinites, it may seem like yesterday that Governor Scott Walker survived a recall election against Milwaukee Mayor Tom Barrett. But in less than a year, he’ll be up for reelection. This time Mary Burke, a Trek Bicycle Corp. executive and state Commerce Department secretary, is the Democrat hoping to unseat him.  During the campaign, Walker will most certainly tout his record of cutting taxes, but anyone who’s paid attention knows his record is nothing to be proud of.

This year alone he signed legislation that both cut property taxes and reduced income tax rates in a way that does little for Wisconsin’s neediest residents – the opposite, actually. In fact, the budget he introduced in 2011 was called a betrayal of Wisconsin values by the Center on Wisconsin Strategy and other public interest groups because he ultimately approved legislation that reduced the Earned Income Tax Credit (EITC), thus increasing taxes on the state’s poorest working families. That budget also included $2.3 billion in tax breaks over a decade, in the form of a domestic production activities credit, two different capital gains tax breaks for the rich, and a variety of new sales tax exemptions, including for snowmaking and snow grooming equipment.

Challenger Mary Burke is being cautious and has yet to put out her own tax plan. She recently told the Milwaukee Journal Sentinel, however, that she would not take a pledge to not increase taxes, saying, “I'd want to look at the totality. We collect revenue in a lot of different ways. I certainly wouldn't look at raising (taxes), but I'd also want to look at it in the context of our finances, our budgets …” When we learn more about her plan, we’ll review it for you here.

 


New Analysis: Replacing Flat Tax Would Improve Colorado's Tax System


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In less than a month, Colorado voters will decide whether to abandon the state’s flat-rate income tax in favor of a more progressive, graduated rate tax.  The main purpose of this reform is to raise nearly $1 billion in new revenue each year to offset the disastrous effects that strict constitutional limits on tax collections (i.e. TABOR) have had on the state’s K-12 education system.  But a new analysis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), shows that the proposal would have another benefit: improving the fairness of Colorado’s regressive tax system (PDF).

According to ITEP’s Who Pays? report, the poorest 20 percent of Coloradans currently spend 8.9 percent of their income paying state and local taxes, while the wealthiest 1 percent pay just 4.6 percent of their income in tax.  One reason for this gap is that unlike most states, Colorado’s income tax uses a single flat rate, and therefore doesn’t live up to its potential for offsetting the steep regressivity of sales and excise taxes.

The proposal being voted on in November (Amendment 66) would change this by giving Colorado a fairer, two-tiered income tax.  Specifically, the Amendment would raise the state’s income tax rate from 4.63 percent to 5 percent on incomes below $75,000, and from 4.63 percent to 5.9 percent on incomes over that amount.  If approved by voters, the gap in overall tax rates paid by Coloradans at different income levels would be reduced.  The wealthiest 1 percent would see taxes rise by 0.8 percent relative to their incomes, while lower-income taxpayers would see just a 0.1 percent increase.

Amendment 66 asks the most of those taxpayers currently paying the lowest effective tax rates.  While most families would see a modest increase in their income tax bills under the amendment, just 16 percent of the revenue raised by Amendment 66 would come from the bottom 80 percent of earners.  The bulk of the revenue (63 percent) would come from the wealthiest 20 percent of Coloradans.  And the remainder (21 percent) would not come from Coloradans, but rather from the federal government as Coloradans reap the benefits of being able to write-off larger amounts of state income tax when filling out their federal tax forms.

As the Colorado Fiscal Institute points out, that 21 percent federal contribution is a big deal.  If Coloradans reject Amendment 66 this November, they’ll essentially be turning down $200 million in federal dollars that their K-12 education system could put to very good use.

Read the report

 


States Praised as Low-Tax That Are High-Tax for Poorest Families


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Annual state and local finance data from the Census Bureau are often used to rank states as “low” or “high” tax states based on state taxes collected as a share of personal income. But focusing on a state’s overall tax revenues overlooks the fact that taxpayers experience tax systems very differently.  In particular, the poorest 20 percent of taxpayers pay a greater share of their income in state and local taxes than any other income group in all but nine states.  And, in every state, low-income taxpayers pay more as a share of income than the wealthiest one percent of taxpayers.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) took a closer look at the Census data and matched it up with data from their signature Who Pays report which shows the effective state and local tax rates taxpayers pay across the income distribution in all 50 states.  ITEP found that in six states— Arizona, Florida, South Dakota, Tennessee, Texas, and Washington —  there is an especially pronounced mismatch between the Census data and how these supposedly low tax states treat people living at or below the poverty line. 

See ITEP's companion report, State Tax Codes As Poverty Fighting Tools.

The major reason for the mismatch is that these six states have largely unbalanced tax structures.  Florida, South Dakota, Tennessee, Texas and Washington rely heavily on regressive sales and excise taxes because they do not levy a broad-based personal income tax.  Since lower-income families must spend more of what they earn just to get by, sales and excise taxes affect this group far more than higher-income taxpayers.  Arizona has a personal income tax, but like the no-income tax states, the Grand Canyon state relies most heavily on sales and excise taxes.

To learn more about how low tax states overall can be high tax states for families living in poverty, read the state briefs described below:

Arizona has the 35th highest taxes overall (9.8% of income), but the 5th highest taxes on the poorest 20 percent of residents (12.9% of income).  The top 1 percent richest Arizona residents pay only 4.7% of their incomes in state and local taxes.

Florida has the 45th highest taxes overall (8.8% of income), but the 3rd highest taxes on the poorest 20 percent of residents (13.2% of income).  The top 1 percent richest Florida residents pay only 2.3% of their incomes in state and local taxes.

South Dakota has the 50th highest taxes overall (7.9% of income- making it the “lowest” tax state), but the 11th highest taxes on the poorest 20 percent of residents (11.6% of income).  The top 1 percent richest South Dakota residents pay only 2.1% of their incomes in state and local taxes.

Tennessee has the 49th highest taxes overall (8.3% of income), but the 14th highest taxes on the poorest 20 percent of residents (11.2% of income).  The top 1 percent richest Tennessee residents pay only 2.8% of their incomes in state and local taxes.

Texas has the 40th highest taxes overall (9.1% of income), but the 6th highest taxes on the poorest 20 percent of residents (12.6% of income).  The top 1 percent richest Texas residents pay only 3.2% of their incomes in state and local taxes.

Washington has the 36th highest taxes overall (9.7% of income), but the 1st highest taxes on the poorest 20 percent of residents (16.9% of income).  The top 1 percent richest Washington residents pay only 2.8% of their incomes in state and local taxes.


Census Says Poverty Persists, Here's What States Can Do About It


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This week, the Census Bureau released new data showing that the share of Americans living in poverty in 2012 remained high, despite other signs of economic recovery.  While the national poverty rate (15%) and the rates in most states are holding steady, the number of people living in poverty today is much greater than in 2007, prior to the start of the recession.

The good news is that policy makers have at their disposal several affordable, targeted and effective tax policy tools to alleviate economic hardship and help families escape poverty.  An updated report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), “State Tax Codes as Poverty Fighting Tools,” provides a comprehensive view of anti-poverty tax policies state-by-state, surveys tax policy decisions made in the states in 2013, and offers recommendations tailored to policymakers in each state as they work to combat poverty. As ITEP lays out in its signature Who Pays report, virtually every state and local tax system is regressive, contributing to the challenges of America’s low-income families; State Tax Codes as Poverty Fighting Tools details some options for reversing that.

See ITEP's companion report, Low Tax for Who?

In most states, truly remedying tax unfairness would require comprehensive tax reform. Short of this, lawmakers should consider enacting or enhancing four key anti-poverty tax polices explained in the report: the Earned Income Tax Credit, property tax circuit breakers, targeted low-income tax credits, and child-related tax credits. (Each of these provisions is also described in an ITEP stand-alone policy brief.) Unfortunately lawmakers in a number of states have moved in the wrong direction this year (North Carolina, Ohio and Kansas are top of the list), pursuing massive tax shifts that would hike taxes on their poorest residents while unjustifiably reducing them for the wealthiest individuals and profitable corporations. 

Given the persistence of poverty in the states as documented by the new Census data, policy makers should be focused on finding ways to boost the incomes of low- and moderate-income families rather than taxing them deeper into poverty in order to provide tax breaks to the well- heeled.

 


Tax Plans for Wisconsin Go From Bad to Worse


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Wednesday, June 5, 2013 Update: The Wisconsin legislature’s Joint Finance Committee approved a budget early this morning that included an income tax cut that reduced income tax rates from 4.6%, 6.15%, 6.5%, 6.75%, and 7.75% to 4.4%, 5.84%, 6.27%, and 7.65%. The legislation also reduced the number of tax brackets from five to four. This plan stops short of Rep. Kooyenga’s plan plan described below, but is more costly than Governor Walker’s $340 million initial proposal. According to the Legislative Fiscal Bureau (PDF) these permanent tax cuts cost $632.5 million over two years and the distribution is again skewed to benefit the wealthiest Wisconsinites. Current reporting suggests this plan will pass the full legislature.

This week Wisconsin Representative Dale Kooyenga, an accountant who’s taking a lead roleon tax policy, released his plan to reform the state’s tax code. In a proposal that would more than double the tax cuts proposed by Gov. Scott Walker, Kooyenga seeks to reduce personal income tax rates and cut the number of income tax brackets from five to three. The latter would, as one report put it, put middle income earners like a secretary at a law firm in the same tax bracket as the high-earning lawyers.  Kooyenga touts simplifying the forms taxpayers file and eliminating nearly 20 tax credits.

Earlier this year, Governor Scott Walker proposed his own income tax cut ,which was slammed for mostly benefiting the wealthy (in large part because an Institute on Taxation and Economic Policy (ITEP) analysis showed that it was tilted that way). The Governor’s proposed income tax rate cuts were expected to cost the state $343 million over two years; Representative Kooyenga’s would cost $760 million in the upcoming budget and $914 million in the 2015 budget.

And it’s not just costly, it’s regressive. As the lawmaker himself concedes, “[i]t is nearly impossible to create a tax reform or tax cut that is not going to disproportionately lower taxes for upper-middle-class and rich taxpayers,” and a new ITEP analysis of Kooyenga’s plan shows his is no different. ITEP ran the numbers for the Wisconsin Budget Project (WBP) the impact of the Kooyenga income tax plan was shown to be even more skewed to the wealthy that Governor Walker’s, as WBP writes:

Here is how the tax cut would be distributed among income groups:

- The top 5% of earners alone, a group with an average income of $392,000, would receive more than 1/3 of the benefit of the income tax cuts.

- The top 20% of earners, a group with an average income of $183,000, would receive more than 2/3 of the benefit.

- The bottom 60% of earners – those making $60,000 a year or less – would only receive 11% of the benefit of the income tax cuts.

- The 20% of the Wisconsinites with the lowest incomes would receive just two cents out of every $100 in individual income tax cuts under this proposal.

WBP says that the Kooyenga tax plan’s expansion of Governor Walker’s proposal is a “bad idea made worse,” and they are right.  
 

Good Jobs First (GJF) has a new in-depth report revealing how the most aggressively promoted and publicized measures of states’ “business climates” are nothing more than messaging tools “designed to promote a particular political agenda.”  According to the study’s co-author, PhD economist Peter Fisher, “When we scrutinized the business climate methodologies, we found profound and elementary errors. We found effects presented as causes. We found factors that have no empirically proven relationship to economic growth. And we found scores that ignore major differences among state tax systems.” Yet too often, such rankings are reported uncritically in the media and – worse – cited by lawmakers seeking to change policy. Of course, this is precisely the goal of the corporate-backed, ideologically driven organizations generating these simplistic reports.

Looking at indexes from the Tax Foundation, ALEC and other anti-tax groups, GJF finds that “the one consistent theme that the indexes harp on is regressive taxation, especially lower corporate income taxes, lower or flat or nonexistent personal income taxes, and no estate or inheritance taxes.”  While the biggest problem is that none of the indexes show any actual economic benefits from their policy prescriptions, GJF also spotlights a slew of methodological problems that in some cases border on comical:

The Tax Foundation’s State Business Tax Climate Index is compiled by “stirring together no less than 118 features of the tax law and producing out of that stew a single, arbitrary index number.” Since the Tax Foundation index gets sidetracked into trivial issues like the number of income tax brackets and the tax rate on beer, it should come as little surprise that their ranking bears no resemblance to more careful measures of the actual level of taxes paid by businesses in each state. GJF concludes that “it is hard to imagine how the [Tax Foundation] could do much worse in terms of measuring the actual amount of taxes businesses pay in one state versus another.”

The index contained in the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report fails an even more fundamental test. After running a series of statistical models to examine how states that have enacted ALEC’s preferred policies have fared, GJF concludes that the index “fails to predict job creation, GDP growth, state and local revenue growth, or rising personal incomes.”

The Beacon Hill Institute’s State Competitiveness Report misses the purpose of these indexes entirely by assuming that things like the creation of new businesses and the existence of state government budget surpluses somehow cause economic growth—rather than being direct result of it. 

Finally, the Small Business and Entrepreneurship Council’s (SBEC) U.S. Business Policy Index has a somewhat more narrow focus: grading states based on policies that the SBEC thinks are important to entrepreneurship and small business development.  But GJF explains that “the authors apparently believe that there are in fact no government programs or policies that are supportable … State spending on infrastructure, the quality of the education system, small business development centers or entrepreneurship programs at public universities, technology transfer or business extension programs, business-university partnerships, small business incubators, state venture capital funding—none of these public activities is included in the [index].”  Unsurprisingly, then, GJF also finds that a state’s ranking on the SBEC index has no relation with how well it actually does in terms of variables like the prevalence of business startups and existence of fast-growing firms.

But while each index has its own problems, GJF also points out that when it comes to tax policy, there’s a much more fundamental flaw with what these organizations have tried to do:

State and local taxes are a very small share of business costs—less than two percent … State and local governments have a great deal of power to affect the other 98+ percent of companies’ cost structures, particularly in the education and skill levels of the workforce, the efficiency of infrastructure, and the quality of public services generally. … The business tax rankings examined here … are worse than meaningless – they distract policy makers from the most important responsibilities of the public sector and help to undermine the long run foundations of state economic growth and prosperity.

Read the report


Missouri's Kansas-Envy is Self-Destructive


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The Missouri House and Senate have each passed their own versions of a “race to the bottom” tax plan in a misguided effort to keep up with neighboring Kansas, where a radical tax plan that is eviscerating the state’s budget might actually be followed up by another round of tax cuts (currently being debated by the legislature).

Both the Missouri Senate and House plans would reduce income tax rates, introduce a 50 percent exclusion for “pass-through” business income, reduce corporate income tax rates, and increase the sales tax. The Senate plan is summed up in this St. Louis Post-Dispatch editorial, Missouri Senate Declares Class War Against Citizens.

The poorest 20 percent of Missourians, those earning $18,000 a year or less, will pay $63 a year more in taxes. Those earning between $18,000 and $33,000 a year will pay $129 more. The middle quintile — those earning between $33,000 and $53,000 a year — will pay $150 a year more. The fourth quintile ($53,000 to $85,000 a year) will pay $149 a year more. That’s a grand total of 80 percent of Missourians who will pay more and get less: crummier schools, higher college tuitions (because state aid will continue to fall) and less access to worse state services. The poor are used to this. It remains to be seen whether the middle class will put up with it.”


Despite the fact that similarly reckless tax proposals in other states have failed (Louisiana and Nebraska) or been scaled back (Ohio), it seems the proposals are moving forward in Missouri, thanks in large part to Americans for Prosperity. This national group uses state chapters to throw money at anti-tax, anti-government agendas its corporate funders like, and it has launched a “Bold Ideas Tour” to travel Missouri advocating for deep tax cuts as the state’s legislature approaches its closing date of May 17.

Governor Jay Nixon has vowed he will veto a tax cut bill of this magnitude, rightly saying, "Making a veteran with aches and pains pay more for an aspirin so that an S Corporation can get a tax cut does not reflect our values or our priorities. I have long opposed schemes like this one that would shift costs onto families because they reflect the wrong priorities and do not work.”

The Governor’s position is supported by multiple experts, including the Institute on Taxation and Economic Policy (ITEP), and it looks like Missouri could be a state where good information comes between the national anti-tax movement and their legislative agenda.


Earned Income Tax Credits in the States: Recent Developments, Good and Bad


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Note to Readers: This is the last in a six part series on tax reform in the states. Over the past several weeks CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) has highlighted tax reform proposals and looked at the policy trends that are gaining momentum in states across the country.

Lawmakers in at least six states have proposed effectively cutting taxes for moderate- and low-income working families through expanding, restoring or enacting new state Earned Income Tax Credits (EITC) (PDF). Unfortunately, state EITCs are also under attack in a handful of states where lawmakers are looking to reduce their benefit or even eliminate the credit altogether.

The federal EITC is widely recognized by experts and lawmakers across the political spectrum as an effective anti-poverty strategy. It was introduced in 1975 to provide targeted tax reductions to low-income workers and supplement low wages. Twenty-four states plus the District of Columbia provide EITCs modeled on the federal credit. At the state level, EITCs play an important role in offsetting the regressive effects of state and local tax systems.

Positive Developments

  • Last week, the Iowa Senate Ways and Means Committee approved legislation to increase the state’s EITC from 7 to 20 percent. Committee Chairman Joe Bolkcom said, “This bill is what tax relief looks like. The tax relief is going to people who pay more than their fair share.”

  • The Honolulu Star-Advertiser recently reported on the push to create an EITC and a poverty tax credit (PDF) in Hawaii. The story cites data from ITEP showing that Hawaii has the fourth highest taxes on the poor in the country and describes the work being done in support of low-income tax relief by the Hawaii Appleseed Center.  The poverty tax credit would help end Hawaii’s distinction as one of just 15 states that taxes its working poor deeper into poverty through the income tax.

  • In Michigan, lawmakers are looking to reverse a recent 70 percent cut in the state’s EITC.  That change raised taxes on some 800,000 low-income families in order to pay for a package of business tax cuts.  Lawmakers have introduced legislation to restore the EITC to its previous value of 20 percent of the federal credit, and advocates are supporting the idea through the “Save Michigan’s Earned Income Tax Credit” campaign

  • Pushing back against New Jersey Governor Christie’s reduction of the EITC from 25 to 20 percent, last month the Senate Budget and Appropriations Committee approved a bill to restore the credit to 25 percent. Senator Shirley Turner, the bill’s sponsor, said there was no reason to delay its passage as some have suggested because low-income New Jersey families need the credit now.  "People would put this money into their pockets immediately. I think they would be able to buy food, clothing and pay their rent and their utility bills. Those are the things people are struggling to do."

  • Oregon’s EITC is set to expire at the end of this year, but Governor Kitzhaber views it as a way to help “working families keep more of what they earn and move up the income ladder” so his budget extends and increases the EITC by $22 million. Chuck Sheketoff with the Oregon Center for Public Policy argues in this op-ed, “[t]he Oregon Earned Income Tax credit is a small investment that can make a large difference in the lives of working families. These families have earned the credit through work. Lawmakers should renew and strengthen the credit now, not later.”

  • In Utah, a legislator sponsored a bill to introduce a five percent EITC in the state. The bipartisan legislation is unlikely to pass because of funding concerns, but the fact that the EITC is on the radar there is a good development. Rep. Eric Hutchings said that offering a refundable credit to working families “sends the message that if you work and are trying to climb out of that hole, we will drop a ladder in."

Negative Developments

  • Last week, North Carolina Governor McCrory signed legislation that reduces the state’s EITC to 4.5 percent. The future looks grim for even this scaled down credit, though, since it is allowed to sunset after 2013 and it’s unlikely the credit will be reintroduced. It’s worth noting that the state just reduced taxes on the wealthiest .2 percent of North Carolinians by eliminating the state’s estate tax, at a cost of more than $60 million a year. Additionally, by cutting the EITC the legislature recently increased taxes on low-income working families, saving a mere $11 million in revenues.

  • Just two years after signing legislation introducing an EITC, Connecticut Governor Dannel Malloy is recommending it be temporarily reduced “from the current 30 percent of the federal EITC to 25 percent next year, 27.5 percent the year after that, and then restoring it to 30 percent in 2015.” In an op-ed published in the Hartford Courant, Jim Horan with the Connecticut Association for Human Services asks, “But do we really want to raise taxes on hard-working parents earning only $18,000 a year?”

  • Last week in the Kansas Senate, a bill (PDF) was introduced to cut the state’s EITC from 17 to 9 percent of its federal counterpart. This would be on top of the radical changes signed into law last year by Governor Sam Brownback which eliminated two credits targeted to low-income families including the Food Sales Tax Rebate.

  • Vermont Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs, a move described as taking from the poor to give to the poor. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute cites ITEP Who Pays data to make the case for maintaining the EITC.  Calling the Governor’s idea a “nonstarter,” House and Senate legislators are exploring their own ideas for funding mechanisms to pay for the EITC at its current level.

National Anti-Tax Group vs. Indiana


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The nation is watching Indiana’s tax debate, according to Tim Phillips, national president of the anti-tax group Americans for Prosperity.  But the outcome that Phillips is looking for —a regressive cut in the state’s personal income tax—is facing an uphill battle. The Indiana House, under supermajority Republican control, chose not to include Governor Pence’s proposed tax cut in its budget. Senate leadership has yet to embrace the tax cut either, and the state’s largest newspaper recently editorialized against the plan, explaining: “What holds back faster economic growth now is less about taxes than the lack of a well-educated workforce and higher than average business costs associated with Hoosiers’ poor health.”

But despite all this resistance, Americans for Prosperity is determined to gin up some interest in cutting Indiana’s income tax rate. The Indiana chapter of the group announced that it will spearhead a major TV, radio, online advertising, and door-to-door campaign.  As Phillips explained, “In Washington, it’s gridlock and really that’s not where the action is.” 

There's reason to hope this campaign doesn’t pressure lawmakers into enacting a tax cut against their better judgment, though. In a letter to state GOP officials, House Speaker Brian Bosma recently made a compelling case against the cut and offered a warning about the dire consequences that could arise from following Kansas as it staggers and stumbles down its own tax-cutting path (excerpt below):

“With respect to the Income Tax cut proposal, legislative leaders have expressed caution on this issue for a variety of reasons, which I want you to understand.  First, in 1998, the last time the state had a $2 billion surplus, a series of Income Tax and Property Tax cuts coupled with an unexpected downturn in the economy turned that surplus into a $1.3 billion deficit in a short six year period.  When Republicans regained the majority in 2004, our first order of business was to fill that hole through cuts (and not tax increases), and we did it.  It was painful and difficult, but we knew that the most important job of state government is to be lean, efficient, and most importantly, sustainable in the long run, avoiding wild shifts in one direction or another.  That uncertainty of big shifts leads to uncertainty for business investment and family security.  With pending sequestration, looming federal mandates and an uncertain national economy on the horizon, caution is certainly advisable.

“Finally, the Governor cites the recent experience of Kansas in cutting income taxes last year under the leadership of Governor Sam Brownback.  I would encourage you to get online and see what is going on in Kansas right now, as news reports abound of projected deficits, delays in proposed tax cuts, and lawsuits for underfunding public education.  This is just the type of economic unpredictability and unsustainability that we hope to avoid here in Indiana.”

 


States with "High Rate" Income Taxes Are Still Outperforming No-Tax States


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Lawmakers looking for an excuse to cut their personal income taxes regularly claim that doing so will trigger an economic boom.  To support this claim, many cite an analysis by supply-side economist Arthur Laffer that our partner organization, the Institute on Taxation and Economic Policy (ITEP), exposes as deeply flawed.

In States with “High Rate” Income Taxes are Still Outperforming No-Tax States, ITEP explains that Laffer uses cherry-picked data and simplistic comparisons to claim that the nine states without income taxes are outperforming states with “high rate” income taxes.  He goes on to suggest that the alleged success of those no-tax states can be easily replicated in any state that simply repeals its own personal income tax.

But ITEP shows that residents living in states with income taxes—including those in states with the highest top tax rates—are experiencing economic conditions as good, if not better, than in the no-tax states.  In fact, the states with the highest top income tax rates have seen more economic growth per capita and less decline in their median income level than the nine states that do not tax income.  Unemployment rates have been nearly identical across states with and without income taxes. 

As ITEP explains, Laffer’s supply-side claims rely on blunt, aggregate measures of economic growth that are closely linked to population changes, and the unsupported assertion that tax policy is a leading force behind those changes. Laffer chooses to omit measures like median income growth and state unemployment rates in his comparisons of states with and without income taxes, even as he cites these very same measures in his other studies, when the story they tell fits his preferred narrative.

Even more fundamentally, Laffer’s work falls far short of academic standards in that it completely excludes non-tax factors that impact state growth, including variables like natural resources and federal military spending (variables that Laffer himself has admitted to be important).  In the text of his reports, Laffer concedes that “the drivers of economic growth are many faceted.”  And yet when he constructs analyses designed to show the harm of state income taxes, somehow every non-tax “facet” happens to get left out.  Of course, more careful academic studies often conclude that income tax cuts have little, if any, impact on state economic growth.

Read ITEP’s report.



Front Page Photo of Arthur Laffer and Rick Perry via Texas Governor Creative Commons Attribution License 2.0


New from ITEP: Laffer's Latest Job Growth Factoid is All Rhetoric


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A new talking point from tax cut snake oil salesman Arthur Laffer is making the rounds. It’s been seen in the pages of The Wall Street Journal and cited by Indiana Governor Mike Pence, Iowa House Majority Whip Chris Hagenow, and Tim Barfield, Governor Jindal’s point man for income tax elimination in Louisiana.   

As the Journal put it: A new analysis by economist Art Laffer for the American Legislative Exchange Council finds that, from 2002 to 2012, 62% of the three million net new jobs in America were created in the nine states without an income tax, though these states account for only about 20% of the national population.

But as they’ve done with many of Laffer’s previous analyses, the Institute on Taxation and Economic Policy (ITEP) explains why this talking point is all rhetoric and no substance. Laffer’s research is like a house of cards, depending on data selected and placed precisely to help reach the conclusion he wanted, as ITEP details:

1) Most of the states without income taxes contributed just one percent or less to the nation’s job growth over the period Laffer examines.  Laffer’s claim has nothing to do with the “nine states without an income tax,” and everything to do with one of those states: Texas.

2) Texas’ economy differs from that of other states in many significant ways, and comparing its job growth to the rest of the country provides no insight into the economic impact of its tax policies.  This is particularly true of the time period Laffer examines, since it includes the housing crisis that Texas largely avoided for reasons unrelated to tax policy.

3) Looking beyond the specific Recession-dominated time period chosen by Laffer, Texas’ job growth has otherwise generally been in line with its rate of population growth.

The four-page report with graphs and footnotes is here.

 

 


State News Quick Hits: Myth of the Tax-Fleeing Millionaire, and More


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In 2011, Michigan lawmakers enacted a huge “tax swap” that cut taxes dramatically for businesses and raised them on individuals – especially lower-income and elderly families. Given that many of these changes went into effect at the beginning of 2012, and that many Michiganders are just now beginning to file their 2012 tax forms, the Associated Press provides a rundown of the ways in which the tax bills of typical Michiganders will look different from previous years. Our partner organization, the Institute on Taxation and Economic Policy (ITEP), estimated (PDF) that changes in the personal income tax would result in tax increases of $100 for a poor family, $300 for a middle income family and $7 from a rich one.

South Carolina is considering jumping onto a bandwagon heading the wrong way: supplementing the state’s transportation revenues by taking money away from schools and other state services. If enacted, the plan under consideration would raid $80 million from the state’s general fund every year and use it for roads instead. ITEP estimated, however, that South Carolina could raise more than $400 million for transportation every year just by updating its stagnant gasoline and diesel taxes to catch up to over two decades of inflation.

There’s some good news on the gas tax issue in Iowa. This week, an ad hoc transportation lobby will rally to support the “It’s Time for a Dime” campaign. These builders, farmers and contractors are urging lawmakers to raise the state’s gas tax to pay for needed infrastructure repairs. The Institute on Taxation and Economic Policy’s (ITEP) Building a Better Gas Tax concludes that Iowa hasn’t raised its gas tax in over two decades and has lost 43 percent of its value since the last increase.

In case you missed it, here’s a great read from the New York Times about how we shouldn’t be so quick to assume that millionaires are ready to pack up their bags and move at the slightest increase in their tax bills. In “The Myth of the Rich Who Flee From Taxes,” the Times cites ITEP’s work on the Maryland millionaire tax: “a study by the Institute on Taxation and Economic Policy, a nonprofit research group in Washington, found that nearly all the decline in millionaires was the result of a drop in incomes largely attributable to the stock market plunge and recession, and not to migration — “down and not out,” as the study put it.”


"Middle Class Tax Cut" Could Send Wisconsin Down Slippery Slope


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Wisconsin Governor Scott Walker’s Secretary of Administration, Mike Huebsch, caused a kerfuffle recently when he said that the Governor “is considering” eliminating the state’s income tax and replacing the revenue with a larger sales tax. This is not a new concept, but to say it’s a flawed approach to tax reform is an understatement.  “For the first time in, I would say the last 20 years,” said Huebsch, “this is getting much more discussion across the nation. And I think it’s being led by governors like Bobby Jindal in Louisiana who are trying to figure out ways that they can eliminate their income tax. That’s really the motivation here. They want to eliminate the income tax.”  

Emulating Governor Jindal would be misguided. An Institute on Taxation and Economic Policy (ITEP) analysis found that Jindal’s proposal to eliminate income taxes and replace the revenue with higher sales taxes would actually increase taxes on the bottom 80 percent of Louisianans. Specifically, the poorest 20 percent of taxpayers, those with an average income of $12,000, would see an average tax increase of $395, or 3.4 percent of their income. The largest beneficiaries of his tax proposal would be the top one percent, with an average income of well over $1 million, who'd see an average tax cut of $25,423.

Since Secretary Huebsch’s comments, the Governor’s office has responded saying that Walker will propose a “middle class tax cut,” but not the complete elimination of the state’s income tax. For now, anyway.

The Governor’s spokesman did open the door to future, potentially more radical tax proposals when he said, “Governor Walker will propose a middle class income tax cut in the 2013-15 state budget. He considers this to be a down payment on continuing to drop the overall tax burden in Wisconsin in future years. He will review the impact of tax policy on job growth in other states as he considers future reforms."

Wisconsinites should know that a middle class tax cut is, like a Unicorn, commonly mentioned but rarely seen. While there are tax credits (like the making work pay credit and property tax circuit breakers(PDF)) that are genuinely targeted towards middle income families, a tax rate cut for middle income groups is almost always also a tax cut – and a bigger one, at that – for high income groups. That’s just how marginal tax rates work (and the reason across-the-board income tax cuts are such budget busters).

Income tax cuts and even elimination are practically epidemic this year. We’ll be watching to see if Governor Walker catches the bug, too. Meantime, he can already “review the impact of tax policy on job growth in other states” right here, and see that cuts do not, in fact, lead to growth.


Anti-Tax Credo Keeps Texas Kids In Underfunded Schools


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Earlier this week, a district court in Texas ruled for a second time that the state’s system of paying for schools is unconstitutional, both because it fails to provide enough revenue to deliver an adequate education for Texas children and because it creates huge inequities in the quality of education enjoyed by richer versus poorer districts. The lawsuit prompting this decision was brought by hundreds of school districts in the wake of a 2011 decision by the state legislature to dramatically cut state aid to local schools. The state of Texas is expected to appeal, in which case it goes to the Texas Supreme Court.

As the Texas Center for Public Policy Priorities (CPPP) notes (PDF), the 2011 spending cuts came after a misguided decision by the 2006 legislature to replace local property tax revenue with revenues from cigarette taxes (of all things) and a new, untested approach to taxing business income. CPPP finds that the tax hikes in that 2006 “tax swap” have paid for only about a third of the lost property tax revenue, leaving a gaping $10 billion hole in the state’s 2011 budget. This probably also helps account for what the 600 school districts in the lawsuit say is a $43,000 gap between rich and poor classrooms, too.

The choice to pay for the growing cost of education using a flat-lining tax such as the cigarette tax (whose returns are famously diminishing, PDF) reflects the limited options available in a state that refuses to levy a tax on personal income.

Texas is one of only a handful of states with no income tax, and its current Governor has made a big show of his intention to keep it that way. At a time when a number of states’ elected officials are expressing a desire to restructure their tax systems to more closely resemble the Texas tax system (usually by simply repealing their personal income tax), this week’s court decision is a harsh reminder that the short term politics of tax cuts has long term consequences for citizens. Texas, for example, has abysmal numbers on education and its poverty rate continues to rise.

So when someone like Kansas Governor Sam Brownback crows “Look out Texas. Here comes Kansas!” it might be he didn’t read the brochure before planning this particular trip. It’s not the first time he – like other political leaders – has talked up the Texas tax structure.  But given the Lone Star State’s track record, and the budget havoc tax cuts are causing in Kansas, all lawmakers should think twice before embarking on the no-income-tax path.

Photo courtesy Texas Tribune.


Beware The Tax Swap


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Note to Readers: This is the second of a six part series on tax reform in the states.  Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends  that are gaining momentum in states across the country. This post focuses on “tax swap” proposals.

The most extreme and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate one or more taxes and replace some or all of the lost revenue by expanding or increasing another tax.  We call such proposals “tax swaps.”  Lawmakers in Kansas, Louisiana, Nebraska and North Carolina have already put forth such proposals and it is likely that Arkansas, Missouri, Ohio and Virginia will join the list.

Most commonly, tax swaps shift a state’s reliance away from a progressive personal income tax to a regressive sales tax. The proposals in Kansas, Louisiana, Nebraska and North Carolina, for example, would entirely eliminate the personal and corporate income taxes and replace the lost revenue with a higher sales tax rate and an expanded sales tax base that would include services and other previously exempted items such as food.   

In the end, tax swap proposals hike taxes on the majority of taxpayers, especially low- and moderate-income families and give significant tax cuts to wealthy families and profitable corporations. For instance, according to an ITEP analysis of Louisiana Governor Bobby Jindal’s tax swap plan (eliminating the personal income tax and replacing the lost revenue through increased sales taxes) found that the bottom 80 percent of Louisianans would see their taxes increase. In fact, the poorest 20 percent of Louisianans, those with an average annual income of just $12,000, would see an average tax increase of $395, or 3.4 percent of their income. At the same time, the elimination of the income tax would mean a tax cut for Louisiana’s wealthiest, especially in the top 5 percent.  ITEP concluded that any low income tax credit designed to offset the hit Louisiana’s low income families would take would be so expensive that the whole plan could not come out “revenue neutral.” The income tax is that important a revenue source.


These proposals also threaten a state’s ability to provide essential services, now and over time. They start out with a goal of being revenue neutral, meaning that the state would raise close to the same amount under the new tax structure as it did from the old.  But, even if the intent is to make up lost revenue from cutting or eliminating one tax, these plans are at risk of losing substantial amounts of revenue due in large part to the political difficulty of raising any other taxes to pay for the cuts. Frankly, it’s taxpayers with the weakest voice in state capitals who end up shouldering the brunt of these tax hikes: low and middle income families.

Proponents of tax swap proposals claim that replacing income taxes with a broader and higher sales tax will make their state tax codes fairer, simpler and better positioned for economic growth, but the evidence is simply not on their side. ITEP has done a series of reports debunking these economic growth, supply-side myths. In fact, ITEP found (PDF) that residents of so-called “high tax” states are actually experiencing economic conditions as good and better than those living in states lacking a personal income tax. There is no reason for states to expect that reducing or repealing their income taxes will improve the performance of their economies; there is every reason to expect it will ultimately hobble consumer spending and economic activity.

Here’s a brief review of some of the tax swap proposals under consideration:

Last week Nebraska Governor Dave Heineman revealed two plans to eliminate or greatly reduce the state’s income taxes and replace the lost revenue by ending a wide variety of sales tax exemptions. ITEP will conduct a full analysis of both of his plans, though it’s likely that increasing dependence on regressive sales taxes while reducing or eliminating progressive income taxes will result in a tax structure that is more unfair overall.

If Kansas Governor Sam Brownback has his way he’ll pay for cutting personal income tax rates by eliminating the mortgage interest deduction and raising sales taxes. An ITEP analysis will be released soon showing the impact of these changes – made even more destructive because of the radical tax reductions Governor Brownback signed into law last year.

Details recently emerged about Louisiana Governor Bobby Jindal’s plan to eliminate nearly $3 billion in personal and corporate income taxes and replace the lost revenue with higher sales taxes. ITEP ran an analysis to determine just how that tax change would affect all Louisianans. ITEP found that the bottom 80 percent of Louisianans in the income distribution would see a tax increase. The middle 20 percent, those with an average income of $43,000, would see an average tax increase of $534, or 1.2 percent of their income. The largest beneficiaries of the tax proposal would be the top one percent, with an average income of well over $1 million, who'd see an average tax cut of $25,423. You can read the two-page analysis here.

North Carolina lawmakers are considering a proposal that would eliminate the state’s personal and corporate income taxes and replace the lost revenues with a broader and higher sales tax, a new business license fee, and a real estate transfer tax. The North Carolina Budget and Tax Center just released this report (using ITEP data) showing that the bottom 60 percent of taxpayers would experience a tax hike under the proposal. In fact, “[a] family earning $24,000 a year would see its taxes rise by $500, while one earning $1 million would get a $41,000 break.” The News and Observer gets it right when they opine that the “proposed changes in North Carolina and elsewhere are based in part on recommendations from the Laffer Center for Supply Side Economics.  Supply-side economics (or “voodoo economics,” as former President George H.W. Bush once called it) didn’t work for the United States…. We wonder why such misguided notions endure and fear where they might take North Carolina.”


Rush Limbaugh Pilfers Our Research, Deception Ensues


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While we’re not regular listeners to Rush Limbaugh’s radio program, we caught the fact that Limbaugh cited data from our partner organization, the Institute on Taxation and Economic Policy (ITEP), during his monologue the other day. Not surprisingly, Limbaugh both misconstrues ITEP’s analysis and ignores basic economic realities.

Echoing a talking point circulating in conservative media that the tax code has no role in mitigating income inequality (and that somehow immigrants cause it), Limbaugh argued that, therefore, higher taxes on the rich cannot reduce income equality.  He said this is proven by simply making “a quick comparison of state inequality data and their corresponding tax codes.” He went on to assert that because California and New York have two of the most progressive tax systems but also some of the highest levels of income inequality, this means progressive taxes do nothing to reduce income inequality.

Honestly, it’s hard to know where to even start with breaking down this nonsense.

For one, Limbaugh must have overlooked the central conclusion of ITEP’s Who Pays report, which is that ALL state tax systems are regressive, meaning that even the most “progressive” state tax systems in the US still exacerbate income equality. Even in California, which Limbaugh claims has one of the most progressive tax systems (it doesn’t), 10.2 percent of family income for those in the bottom 20 percent is spent on state taxes, whereas only 9.8 percent of the top 1 percent’s income goes toward state taxes.

Another critical problem with Limbaugh’s monologue is that he did not actually do much analyzing, but instead opted to cherry-pick New York and California off the list of states with high levels of income inequality. By doing this, Limbaugh ignores the fact that Arizona and Texas have two of the most regressive tax systems and – what? – also happen to top of the income inequality list. To actually support his point, Limbaugh would have had to compare the relative progressivity of different tax systems with their level of income inequality, an impossible task considering that ITEP does not actually rank the states according to progressivity. In addition, Limbaugh does not even consider the myriad of factors (besides immigration) that contribute to income inequality, such as  government safety net and income supports, the types of jobs available and their wage levels, or the presence of industries, like finance, that generate unusually high wealth.

One last fatal flaw is that Limbaugh utterly ignores the reality that progressive taxes straightforwardly take more money from the wealthy and redistribute that money more evenly to the population through government services, which, for obvious reasons, affects income inequality. The fact is that basic economic logic and decades of economic analysis have shown that lower taxes on the rich directly increase income inequality. As a definitive study by the non-partisan and widely respected Congressional Research Service (CRS) puts it, “lowering top marginal tax rates has the effect of further increasing the disproportionate amount of income earned by the wealthiest of the wealthy.” Similarly, the OECD’s economic analysis of the US earlier this year found that our failure to implement a more progressive federal tax code was a critical factor in making the US the fourth most unequal country in the developed world and that this must be reversed in order to stave off even high income inequality.

Next time Rush Limbaugh wants to use ITEP numbers, he should check with us first – we’d be happy to enlighten him!


Evidence Continues to Mount: State Taxes Don't Cause Rich to Flee


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There’s been a lot of good research these past few years debunking claims that state taxes – particularly income taxes on the rich – send wealthy taxpayers fleeing from “unfriendly” states.  CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP), took a lead role in disproving those claims in Maryland (PDF), New York, and Oregon (PDF), for example. CTJ has also been covering the controversy in several states and in the media.

Some particularly thorough research on this topic has come out of New Jersey, where researchers at Princeton and Stanford Universities were granted access to actual tax return data, which is not available to the public, in order to investigate the issue in more detail. The resulting paper (PDF) found a “negligible” impact of higher taxes on the migration patterns of the wealthy.

And now, for the further benefit of lawmakers seeking to become better informed about tax policy, those same Princeton and Stanford researchers were recently granted access to similar confidential taxpayer data in California. Unsurprisingly, the findings of their newest paper (PDF) were similar to those out of New Jersey: “the highest-income Californians were less likely to leave the state after the [2005] millionaire tax was passed… [and] the 1996 tax cuts on high incomes … had no consistent effect on migration.”

That’s right.  California millionaires actually became less interested in leaving the state after the tax rate on incomes over $1 million rose by one percentage point starting in 2005.

Another important finding: migration is only a very small piece of what determines the size of a state’s millionaire population.  “At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population,” they explain.  The other 98.8 percent is due to yearly fluctuations in rich taxpayers’ income that moves them above or below the $1 million mark.  

This finding (which is not entirely new) defeats the very logic that anti-tax activists use to argue their “millionaire migration” case. Here’s more from the researchers:

“Most people who earn $1 million or more are having an unusually good year. Income for these individuals was notably lower in years past, and will decline in future years as well. A representative “millionaire” will only have a handful of years in the $1 million + tax bracket. The somewhat temporary nature of very-high earnings is one reason why the tax changes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income.”

But for every new piece of serious research on this issue, there are just as many bogus studies purporting to show the opposite.  Of particular note is a September “study” from the Manhattan Institute, recently torn apart by Sacramento Bee columnist Dan Walters.

Somewhat surprisingly for a right-wing organization’s study of this topic, the Manhattan Institute report actually concedes that other variables, things like population density, economic cycles, housing prices and even inadequate government spending on transportation, can motivate people to leave one state for another.  But while the Institute doesn’t claim that every ex-Californian left because of taxes, regulations, and unions, it does, predictably, assign these factors an outsized role. But their “analysis” of the impact of taxes spans just six paragraphs and is, in essence, nothing more than an evidence-free assertion that low taxes are the reason some former Californians favor states like Texas, Nevada, Arizona – even, oddly, Oregon, where income tax rates are similar to California’s.

Obviously, the guys looking at the actual tax returns have a better idea of what’s actually going on, and state lawmakers need to listen.


New From ITEP: Maryland Tax Bill Would Improve Tax Fairness and Revenue


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May 16, 2 PM UPDATE: The House has passed SB1302 and it now heads to Gov. O’Malley’s desk, where he is expected to sign it.

Maryland lawmakers are on the verge of bucking a national trend.  While most of the biggest state tax debates in 2012 have focused on proposals that would cut taxes and tilt state tax systems even more heavily in favor of the wealthy, Maryland appears poised to do exactly the opposite.  On Tuesday, the state Senate voted to raise tax rates and limit tax exemptions for single Marylanders earning over $100,000 and for married couples earning over $150,000 per year.  The House is expected to follow suit by passing the same bill (SB1302) as early as Wednesday.

If enacted into law, these changes will allow the state to avoid a variety of cuts to vital public services, as detailed by the Maryland Budget and Tax Policy Institute.  But in addition to improving the adequacy of Maryland’s tax system, a new analysis from our sister-organization, the Institute on Taxation and Economic Policy (ITEP), shows that the income tax changes contained in SB1302 would also lessen the unfairness of a regressive tax system that allows Maryland’s wealthiest residents to pay less of their income in tax than any other group.  Among ITEP’s findings:

  • Because the income tax changes are limited to taxpayers earning over $100,000 or $150,000 per year, only 11 percent of Maryland taxpayers would face an income tax increase in 2012 as a result of SB1302.  (It’s worth noting, however, that increases in tobacco taxes, fees, and other provisions would affect additional taxpayers—though these increases make up just 3 percent of the bill’s total revenue.)
  • 54 percent of the income tax revenue raised by SB1302 would come from the wealthiest 1 percent of state taxpayers—a group with an average income of nearly $1.6 million per year.  87 percent of the revenue would come from the top 5 percent of taxpayers.
  • The changes in families’ income tax bills—even at the top of the income distribution—would be very modest.  After considering the "federal offset" effect, the tax increase faced by the top 1 percent of taxpayers would equal just 0.16 percent of their total household income, and taxpayers outside of the top 1 percent would face an even smaller increase.  Given the small size of these tax changes, Maryland’s tax system would undoubtedly remain regressive overall.
  • The progressive nature of SB1302 means that it’s well suited to take advantage of the “federal offset” effect mentioned above, whereby wealthier taxpayers write-off their state tax payments and receive a federal tax cut in return.  17 percent of the revenue raised by SB1032—or $28 million in tax year 2012—would come not from Marylanders, but from the federal government in the form of new federal tax cuts for Maryland taxpayers.

See ITEP’s full analysis here.

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