Arkansas News


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.


State Rundown 9/24: Tax Cuts, Tax Cuts and More Tax Cuts


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monopoly.jpgThe Kansas dogpile continues, with the Washington Post editorial board launching the latest broadside against Gov. Sam Brownback’s tax cut fiasco. “Few if any governors, “it writes, “have undertaken such an extreme trial-by-revenue-deprivation in a state so clearly lacking the economic means to withstand it.” The board also notes that both Moody’s and Standard and Poor’s have downgraded the state’s credit rating, since they feel that budget is not “structurally aligned.” That’s fancy credit agency talk for Kansas is broke.

In Ohio, where state officials have apparently never heard of Kansas, enthusiasm for needless tax cuts continues unabated. Incumbent Gov. John Kasich, running for a second term, promises that if reelected he will make further income tax cuts a top priority. To make his case, he employed the canard that high income tax burdens have forced people to leave the state. Kasich has already cut income taxes by 10 percent -- though, the “relief” hasn’t been evenly distributed. An analysis by ITEP and Policy Matters Ohio found that 70 percent of Ohio taxpayers will get an average tax cut of less than $100, while the top 1 percent of earners will pay $8,262 less, on average. Even worse, those making under $19,000 will actually pay more in taxes, after taking into account a sales tax hike meant to offset cuts elsewhere.

The tax debate started by Gov. Mike Pence in Indiana continues, as the governor gears up for the upcoming biennial legislative session. Tax reform is high on his agenda. Pence held a tax conference to bat around ideas to make Indiana’s tax system more competitive in June; some observers were dismayed that Art Laffer and Grover Norquist had speaking slots, while the general public (you know, the people affected by tax changes) were barred from attending. Meanwhile, the state superintendent is asking for more money so she doesn’t have to charge families for school textbooks.

Both candidates for governor in Arkansas are trying to one-up each other with voters by touting their plans for big tax cuts. Republican candidate Asa Hutchinson has pledged to cut the income tax by $100 million in his first year as governor, with the end goal of eliminating the tax entirely. Democratic candidate Mike Ross wants to cut the income tax by $575 million -- but gradually, and only if the state can afford it. According to Ross, Hutchinson’s plan is fiscally irresponsible and would put Arkansas on a glide path to Kansas’ budget woes. Hutchinson claims that Ross is making big promises to voters without being specific. Neither plan would make Arkansas’ tax system less regressive; as it stands, the bottom 20 percent currently pay an effective tax rate nearly twice that of the top 1 percent. For more coverage of the race in Arkansas, check out our recent blog post

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


Tax Policy and the Race for the Governor's Mansion: Arkansas 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 race for Governor in Arkansas.

No matter who wins the governor’s race in November, income tax cuts are coming to Arkansas. The state finds itself in a unique position this year – because of a law imposing term limits on the governorship, neither of the 2014 gubernatorial candidates is an incumbent, yet both are attempting to fashion themselves in the image of current Democratic Governor Mike Beebe as they push long-term income tax overhauls.

Back in 2006, then-candidate Beebe made slashing the state’s historically unpopular sales tax on groceries the cornerstone of his campaign, a promise he kept as governor as he gradually reduced the rate over the course of his 8-year term from 6% to 1.5%. Beebe was commended both at home and in national policy circles for successfully implementing a common-sense tax cut which lessened the regressivity of the sales tax for low-income Arkansans while also minding the health of the state’s revenue stream – not cutting too deeply too quickly.

In the current gubernatorial race, Republican candidate Asa Hutchinson and Democratic candidate Mike Ross have both invoked Beebe’s duly cautious sales tax reduction strategy as a model for their own income tax cut proposals. But the thing is, the income tax is fundamentally different – state sales taxes are known to be highly regressive, but the income tax is a progressive tax that has the potential to increase the overall fairness of state taxes. As always, the cost of reform to the state should be no small consideration in any evaluation of the candidates’ proposals, but just as important is the extent to which broad income tax cuts would be a loss for progressivity in state taxation.

Arkansas’ current income tax brackets were designed back in 1971 and were left unchanged for 26 years until 1997, when the state legislature first began indexing the brackets to inflation, with a 3% cap. But the legislature declined to apply the indexing retroactively, meaning that bracket boundaries have only risen alongside inflation for 17 of their 43 years of existence (a problem exacerbated by recent low levels of inflation). In real terms, then, the dollar value of the state’s current bracket boundaries are stuck in the 1980s, with the top bracket starting at $34,000. This would be fine if prices and incomes were still at 1980 levels, but inflation inevitably does what it does best – inflates – and has pushed many middle-income Arkansans into unjustifiably high tax brackets.

Mike Ross has proposed a relatively simple, measured hike in the bracket thresholds that retains the tax’s original structure. Ross would lower rates across the board by 0.1% (except the top rate, which is already being lowered by the same amount as part of last year’s tax cut package) and retroactively index the tax brackets to inflation for the 26 years prior to 1997. Applying this type of broad reform, with the adjusted top bracket starting at a more reasonable $75,100, would certainly target relief toward the low- and middle-income taxpayers most affected by inflationary tax hikes under the current structure, but it would also afford unnecessary benefits to the higher end of the income ladder.

Critics have taken issue with the fact that Ross’s timetable for implementation is indeterminate, with the candidate saying only that he will “implement [the proposal] in a gradual, fiscally responsible way -- as the state can afford it.” The plan also comes with a $575 million price tag, as projected by the Arkansas Department of Finance and Administration (DFA), once it is fully phased in.

Hutchinson is pushing a more rapid timetable for his own income tax cut plan, which has some worried about unmanageable revenue impacts. The candidate is proposing immediate first-year rate cuts – namely, lowering the rate for those in the $20,400-$33,999 bracket from 6% to 5%, and from 7% to 6% for those earning $34,000 to $75,000. The phased-in portion comes via the implementation of an ill-advised rate cut for those earning more than $75,000 “as surpluses and growth allow.” Extrapolating from Hutchinson’s pledge that no one earning over $75,000 will receive a tax cut under his initial plan, the benefit of the lower rates would likely be phased out over some income range just under $75,000. The plan would target around 500,000 middle-income taxpayers, but would do nothing to lower the taxes paid by the poorest Arkansans – those earning under $20,400.

The campaign estimates the first-year cost at $100 million (the major caveat here is that the cost for the Hutchinson plan cannot be compared to the cost of the Ross plan and should not be taken as an official estimate because the Hutchinson campaign has refused to release plan details to the DFA to model). Hutchinson intends to use surplus funds to cover the cost of the cuts in 2015 and is counting on state revenue growth in future years – a tenuous strategy given the eventual $140 million per year cost of last year’s tax cut package that will be competing for new revenues.

With the price of both plans likely to be a major factor, Hutchinson’s plan at least appears to be preferable in terms of fairness, with high-income taxpayers seeing no cut. But unfortunately, the plan is a red herring. The candidate has made no bones about his end goal – the total elimination of the income tax in Arkansas. Such a move would wipe out a major piece of the state’s tax base and take away the only meaningful mechanism for reducing regressivity, and that outcome has far greater implications for both fiscal health and fairness than Ross’s across-the-board cuts.


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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

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

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

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

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

Read the full report


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. 


State News Quick Hits: Criticism of "Business Climate" Rankings Grows, and More


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Nebraska’s Tax Modernization Committee, which we promised to keep tabs on in July, is scheduled to hold its final public hearings this week. But rather than wait to hear what the panel has to say, Governor Dave Heineman decided to renew his calls for lower property and income taxes. While some have argued that Nebraska’s property taxes are too high, slashing property taxes without increasing state aid to local governments would put significant strain on vital local services. Today, Nebraska ranks 43rd nationally in the amount of state aid it provides to local governments, and 49th in the aid it gives to schools. If Governor Heineman succeeds in his quest to cut state taxes, increasing local aid will become even more difficult. The Open Sky Policy Institute has issued thoughtful recommendations on this and other issues facing the Committee.

If you’re wondering whether you should put any stock in the Tax Foundation’s newest “Business Tax Climate Index,” the answer is No.  For starters, Good Jobs First has shown that, contrary to popular belief, the Tax Foundation’s rankings aren’t a very good predictor of how much a business would actually pay in taxes if it were located in any given state.  And now Governing magazine has taken a critical look at the rankings in a new article, and concludes that states earning high marks from the Tax Foundation don’t actually have stronger job markets or higher medium wages.

U.S. News & World Report is running an opinion piece by Carl Davis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), highlighting the fact that the federal gas tax has not been raised in exactly 20 years – and has been losing value ever since. The essay draws heavily from research that ITEP published late last month, and concludes that “it's time for our elected officials to accept that keeping the gas tax cryogenically frozen at 18.4 cents per gallon is costing Americans a lot more than it's helping them.”

West Virginia is thinking about how best to use the tax revenues it expects to collect from sales of its natural gas resources. The Associated Press reports that “[f]or decades, coal from West Virginia's vast deposits was mined, loaded on rail cars and hauled off without leaving behind a lasting trust fund financed by the state's best-known commodity. Big coal's days are waning, but now a new bonanza in the natural gas fields has state leaders working to ensure history doesn't repeat itself.” According to the AP, the state’s Senate president, Jeff Kessler, is looking to use some of the severance tax revenues on oil and natural gas to create an enduring trust fund, as other states with significant natural resources have done. “His goal: a cushion of funds long after the gas is depleted to buoy an Appalachian mountain state chronically vexed by poverty, high joblessness, and cycles of boom and bust.”

Arkansas Advocates for Children and Families Executive Director, Rich Huddleston, was one of four Arkansas leaders invited to contribute to Talk Business Arkansas magazine with ideas for how to “construct a fairer state tax code.” His proposal (citing ITEP data) is here, and begins: “The goal of any good tax system is to raise enough revenue to fund critical public investments that improve well-being of children and families while also promoting economic growth and prosperity.”


State News Quick Hits: Starving Government With TABOR, and More


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TABOR stands for Taxpayer Bill of Rights, but it’s really a destructive law that restricts tax and spending growth with the goal of starving government. Colorado has the most restrictive version of this kind of law and serves as a cautionary tale. The Colorado TABOR and its implications are described in a new policy brief from the Institute on Taxation and Economic Policy (ITEP).  In a nutshell, TABOR’s arbitrary limit on the size of government prevents states from meeting their evolving responsibilities as populations change, services become more expensive, and voters demand new public investments.

Texas Governor Rick Perry is headed to Missouri to stump for a regressive income tax cut that some legislators are trying to enact over Governor Nixon’s recent veto.  If Show Me State residents ignore Perry’s advice, who could blame them? The former presidential candidate’s own state’s tax system is one of the least fair in the country.  Only five states require their poorest residents to pay more in taxes than Texas.

Indiana’s property tax caps, which we’ve long criticized, are causing headaches for local lawmakers in Indianapolis who are facing pleas from law enforcement and other agencies for more funds. Coupled with the revenue slump brought on by the recent recession, officials are grappling with three choices: close their current budget gap by raising the city’s income tax; risk the city’s AAA credit rating by tapping its reserves; or enact even deeper cuts in public services on top of those already in effect.

It looks like taxes will be a hot issue in the 2014 Arkansas gubernatorial election.  Arkansas’ leading republican candidate, Asa Hutchinson, recently said he supported phasing out the state’s personal income tax, but offered no specifics for how he would replace the lost revenue.  Mike Ross, the leading Democratic candidate, took Hutchinson to task, reminding Arkansans that tax cuts come with a price: “So when you start talking about cutting taxes, unless you’re talking about shifting the burden to other taxes, you’re talking about laying off teachers, you’re talking about kicking seniors out of the nursing home.... It’s pretty simple math.”

 

If you’re looking for some summer reading, the Institute on Taxation and Economic Policy (ITEP) is in the process of updating its collection of policy briefs.  In the last couple weeks, ITEP has released updated briefs on sales tax holidays, state gasoline taxes, and efforts to collect sales taxes owed on purchases made over the Internet.

Bad tax ideas have already entered Arkansas’ 2014 race for governor.  After claiming that the personal income tax cuts signed this year by Governor Beebe aren’t “significant enough … to make us competitive with our surrounding states,” Republican candidate Asa Hutchinson announced that he would like to phase-down the personal income tax even further.  But ITEP has shown that the personal income tax is vital to both tax fairness and sustainability, and that the states with the highest top personal income tax rates are experiencing economic conditions at least as good, if not better, than those states without income taxes.

The Commonwealth Institute in Virginia writes that the state’s gubernatorial candidates shouldn’t assume it will be easy to pay for their tax cut promises by simply eliminating “wasteful” tax breaks.  According to the Institute, “When you exclude tax breaks that would disproportionately hit low-income and middle class families or those that are clearly not politically feasible, [eliminating] the rest would raise only about $850 million.”  Compare that with the $1.4 billion per year candidate Ken Cuccinelli proposes in personal and corporate income tax rate cuts alone.

Mississippi’s struggling infrastructure budget is in the news now that a new task force is beginning to study how the state can better fund its transportation system.  The Mississippi Department of Transportation (MDOT) says that asphalt costs have tripled in recent years while fuel taxes--which haven’t been raised since the 1980’s--have predictably failed to keep pace.  So far MDOT is responding by forgoing new construction in favor of simply maintaining the current system, but if taxes aren’t raised soon, Mississippi may run the risk of becoming yet another state that opts to siphon money away from education, human services, and other priorities to fill its growing infrastructure funding gap.

 

Here’s some happy news: a recent poll finds that just 27 percent of Louisianans support Governor Bobby Jindal’s tax swap, and that’s before the Institute on Taxation and Economic Policy (ITEP) released its latest analysis showing that the poorest 60 percent of taxpayers in Louisiana would see a tax hike as a result of the Governor’s plan.

A robotics company based in Nevada recently decided to abandon the state’s allegedly “business friendly” environment in favor of Silicon Valley in California, where there are better trained employees and plenty of deep pocketed investors. Nevada does not levy a personal or corporate income tax, but as Romotive founder Keller Rinaudo explains: "It was not a short-term economic decision ... We have to find experienced roboticists, and that really only exists in a few places in the world, and California is one of them."

Maryland’s gas tax will be increased and reformed starting July 1 under a bill just sent to Governor Martin O’Malley by the state’s legislature.  This year’s increase will be something less than 4 cents per gallon, but the tax will now rise each year alongside inflation and gas prices, as recommended by ITEP. ITEP showed that even with the increase, Maryland’s gas tax rate will still remain below its historical average and be less than the state probably needs.

Here’s an interesting story in the Minnesota Star Tribune about how Governor Dayton’s tax plan would impact the wealthiest Minnesotans. While opponents resort to the usual tax-hikes-kill-jobs refrain, Wayne Cox of Minnesotans for Tax Justice notes, “Economists believe keeping teachers and firefighters on the payroll is at least three times more helpful to the economy than keeping income tax rates at the top the same.”

Tax cuts for opposite ends of the income spectrum are getting opposite treatment in Maine and Arkansas. This week, Maine lawmakers rejected a bill that would cut taxes on capital gains (which heavily benefits wealthy taxpayers) and approved an increase in the state’s Earned Income Tax Credit (EITC) (PDF), which amounts to a tax cut to low- and moderate-income families. But last week in Arkansas, a House panel approved a cut in taxes on capital gains while passing up an opportunity to enact a state EITC.

A story in the Arkansas News show why all citizens should be concerned about the bad design (PDF) of state gasoline taxes. Arkansas’ gas tax hasn’t been raised in over a decade, during which time it has lost about a quarter of its value due to rising construction costs alone. In order to offset those losses, lawmakers are debating a bill that would transfer $2.3 billion away from other areas of the state budget in order to pay for roads and bridges over the next 10 years.  At a rally protesting the idea, Rich Huddleston of Arkansas Advocates for Children and Families ticked off just some of the state services that would have to be cut: “education, higher education, Medicaid and health services for vulnerable populations, services for abused and neglected children, juvenile justice services for kids … public safety and corrections and pre-K and child care for our youngest populations.”

Girl Scouts in Idaho are seeking out a special sales tax loophole for selling their cookies so that they can keep an extra 22 cents on every box sold. There is no tax policy reason to exempt Girl Scout cookies from the sales tax. If enacted, this break would be a true “tax expenditure” -- a state spending program grafted onto the tax code (PDF) in a way that exempts it from the normal processes used to manage state spending year in and year out.

Minnesota Governor Mark Dayton is traveling the state on a “Meetings with Mark” tour to discuss his budget and tax plans with voters. Last week the Governor unveiled a revised tax plan, but minus the sales tax base expansion from his original proposal.  Wayne Cox of Minnesota Citizens for Tax Justice supports the new proposal as it retains two crucial pieces of the original – an income tax hikes for wealthy Minnesotans and a cigarette tax hike. “Gov. Mark Dayton’s new budget is a blueprint for fairer taxes and a brighter future for Minnesota families.  His reforms pave the way for new jobs, healthier lives and a better-educated workforce. Education and health experts around the state have praised Gov. Dayton’s reforms. Future economic growth depends on these changes.”

In response to Ohio Governor John Kasich’s regressive proposal to expand the state sales tax base and lower income taxes, Policy Matters Ohio (using ITEP data) released a paper reminding Ohioans how beneficial an Earned Income Tax Credit (PDF) could be to low-income families hit hardest by an increased sales tax.

Here’s a powerful column from the Atlanta Journal Constitution citing ITEP data. Advocating against a state Senator’s proposal to raise the Georgia sales tax and freeze revenues into the future, Jay Bookman writes: [h]e has proposed two amendments to the state constitution that, if approved by voters, would lead to significantly higher taxes on the vast majority of Georgia households, while sharply reducing taxes on the wealthiest. That ought to be controversial under any circumstances. As it is, lower- and middle-income Georgia households already pay a significantly higher percentage of their income in state and local taxes than do the wealthy. The Shafer amendments would make that disparity considerably worse.”


Five States Eyeing Regressive Income Tax Cuts: AR, IN, MT, OK, WI


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Note to Readers: This is the third 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. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” proposals.  This post focuses on personal income tax cuts under consideration in the states.

While not as dramatic as wholesale repeal of the income tax, five states this year are likely to consider regressive income tax cuts that will compromise their ability to adequately fund public services now and in the future.

In Indiana, Governor Pence campaigned last fall on cutting the state’s already low, flat personal income tax rate from 3.4 to 3.06 percent, and has shoehorned that idea into a budget proposal that also fails to help schools that are “still reeling from the cuts” enacted during the recent recession. The Institute on Taxation and Economic Policy (ITEP) found that Pence’s tax plan would primarily benefit the state’s most affluent residents: 56 percent of the benefits would go to the best-off 20 percent of Indiana residents, while one in three of the state’s poorest residents would see no tax cut at all.  The South Bend Tribune, among others, has urged lawmakers to “pass on this tax cut” because of its high revenue cost and the way in which it would add to the unfairness (PDF) already present in Indiana’s tax code.

In Oklahoma, Governor Fallin has significantly scaled back her tax cut ambitions from last year.  Rather than aiming for a fundamental restructuring of the income tax, the Governor has proposed simply repealing the state’s top personal income tax bracket, thereby cutting the state’s top rate from 5.25 to 5.0 percent.  The Oklahoma Policy Institute explains that this proposal “would take $106 million from Oklahoma schools, public safety, and other core state services without offering any way to pay for it.”  And ITEP’s new Who Pays? report shows that last time Oklahoma cut its top income tax rate, in 2012, the vast majority of the benefits (PDF) went to the highest-income taxpayers in the state.  Meanwhile, State Senator Anderson has once again proposed a dramatic flattening of the income tax that would actually raise taxes on most of the state’s lower- and moderate income residents.

In Montana, two different proposals for cutting personal income tax rates have been floated in recent weeks.  A House proposal to cut the bottom income tax bracket has already been defeated, with Democrats opposing it because of its revenue cost and some Republicans opposing the idea of tax relief for the poor, despite the disproportionate impact (PDF) the state’s tax system currently has on low-income families.  Meanwhile, a Senate bill to repeal the top personal income tax bracket and cut the next tax rate is still alive.  A small portion of the bill would be paid for through scaling back the state’s regressive preference for capital gains income and hiking the state’s corporate income tax rate.  Overall, however, the bill would reduce both the fairness of Montana’s tax system and the revenue it generates.

In Arkansas, the debate over the income tax has yet to heat up, but the House Revenue and Taxation Committee Chairman says he’s “very bullish” about the possibility of enacting a large tax cut, and other Republicans in the legislature are reportedly discussing options for cutting the income tax. 

Finally, in Wisconsin, rumors briefly swirled that there may be a push to eliminate the state’s income tax and replace it with a much larger sales tax, akin to what’s been proposed in Louisiana, Nebraska, and North Carolina.  Governor Walker, however, responded by saying that he will wait and see how those debates play out in other states before deciding whether to advocate for such a change in 2015.  In the meantime, the Governor says he will propose what he claims will be a “middle-class” tax cut of about $340 million.  Assembly Speaker Robin Vos is hoping for a proposal of at least that size.  The Governor’s budget proposal is due out on February 20, and by then we should have a better idea of whether the plan will actually be aimed at middle-income Wisconsinites, as well as its true price tag.


Ballot Measures in Eleven States Put Taxes in Voters' Hands


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California is not the only state this election season taking taxing decisions directly to the people on November 6.  The stakes will be high for state tax policy on Election Day in nine other states with tax-related issues on the ballot. With a couple of exceptions, these ballot measures would make state taxes less fair or less adequate (or both).

Arizona

  • Proposition 204 would make permanent the one percentage point sales tax increase originally approved by voters in 2010.  The increase would provide much-needed revenue for education, particularly in light of the worsened budget outlook created by a flurry of recent tax cuts.  But it’s hard not to be disappointed that the only revenue-raising option on the table is the regressive sales tax (PDF), at a time when the state’s wealthiest investors and businesses are being showered with tax cuts.
  • Proposition 117 would stop a home’s taxable assessed value from rising by more than five percent in any given year.  As our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains (PDF), “Assessed value caps are most valuable for taxpayers whose homes are appreciating most rapidly, but will provide no tax relief at all for homeowners whose home values are stagnant or declining. As a result, assessed value caps can shift the distribution of property taxes away from rapidly appreciating properties and towards properties experiencing slow or negative growth in value - many of which are likely owned by low-income families.”

Arkansas

  • Issue #1 is a constitutional amendment that would allow for a temporary increase in the state’s sales tax to pay for large-scale transportation needs like highways, bridges, and county roads. If approved, the state’s sales tax rate would increase from 6 to 6.5 percent for approximately ten years, or as long as it takes to repay the $1.3 billion in bonds issued for the relevant transportation projects. Issue #1 would also permanently dedicate one cent of the state’s 21.5 percent gas tax (or about $20 million annually) to the State Aid Street Fund for city street construction and improvements. It’s no wonder the state is looking to increase funding for transportation projects. ITEP reports that Arkansas hasn’t increased its gas tax is ten years, and that the tax has lost 24 percent of its value during that time due to normal increases in construction costs. Governor Beebe is supporting the proposal, and his Lieutenant Governor Mark Darr recently said, “No one hates taxes more than me; however, one of the primary functions of government is to build roads and infrastructure and this act does just that. My two primary reasons for supporting Ballot Issue #1 are the 40,000 non-government jobs that will be created and/or protected and the relief of heavy traffic congestion.”

California

  • Thus far overshadowed by the competing Prop 30 and 38 revenue raising proposals, Proposition 39 would close a $1 billion corporate tax loophole that Governor Brown and other lawmakers have tried, but failed to end via the legislative process.  Currently, multi-national corporations doing business in California are allowed to choose the method for apportioning their profits to the state that results in the lowest tax bill.  If Prop 39 passes, all corporations would have to follow the single-sales factor apportionment (PDF) method.  Half of the revenue raised from the change would go towards clean energy efforts while the other half would go into the general fund.

Florida

  • Amendment 3 would create a Colorado-style TABOR (or “Taxpayer Bill of Rights”) limit on revenue growth, based on an arbitrary formula that does not accurately reflect the growing cost of public services over time.  As the Center on Budget and Policy Priorities (CBPP) explains, Amendment 3 is ““wolf in sheep’s clothing” because it would phase in over several years, which obscures the severe long-term damage it would cause.  Once its revenue losses started, however, they would grow quickly. To illustrate its potential harm, we calculate that if the measure took full effect today rather than several years from now, it would cost the state more than $11 billion in just ten years.” The Orlando Sentinel's editorial board urged a No vote this week writing that voters “shouldn't risk starving schools and other core government responsibilities that are essential to competing for jobs and building a better future in Florida.”
  • Amendment 4 would put a variety of costly property tax changes into Florida’s constitution, including most notably an assessment cap (PDF) for businesses and non-residents that would give both groups large tax cuts whenever their properties increase rapidly in value.  Moreover, as the Center on Budget and Policy Priorities (CBPP) explains, “Amendment 4’s biggest likely beneficiaries would be large corporations headquartered in other states, with out-of-state owners and shareholders,” including companies like Disney and Hilton hotels.

Michigan

  • Proposal 5 would enshrine a “supermajority rule” in Michigan’s constitution, requiring two-thirds approval of each legislative chamber before any tax break or giveaway could be eliminated, or before any tax rate could be raised.  As we explained recently, the many flaws associated with handcuffing Michigan’s elected representatives in this way have led to a large amount of opposition from some surprising corners, including the state’s largest business groups and its anti-tax governor. Republican Governor Rick Snyder wrote an op-ed in the Lansing State Journal opposing the measure saying it was a recipe for gridlock and the triumph of special interests. Proposal 5 is also bankrolled by one man to protect his own business interests.

Missouri

  • Proposition B would increase the state’s cigarette tax by 73 cents to 90 cents a pack. The state’s current 17 cent tax is the lowest in the country.  Increasing the state’s tobacco taxes would generate between $283 million to $423 million annually. The Kansas City Star has come out in favor of Proposition B saying, “It’s not often a single vote can make a state smarter, healthier and more prosperous. But Missourians have the chance to achieve all of those things on Nov. 6 by voting yes on Proposition B.”

New Hampshire

  • Question 1 would amend New Hampshire’s constitution to permanently ban a personal income tax.  The Granite State is already among the nine states without a broad based personal income tax and proponents want to ensure that will remain the case forever. As Jeff McLynch with the New Hampshire Fiscal Policy Institute explains, a Yes vote would mean that “you’d limit the choices available to future policymakers for dealing with any circumstances, and by extension, you’re limiting choices for future voters.”

Oklahoma

  • State Question 758 would tighten an ill-advised property tax cap (PDF) even further, preventing taxable home values from rising more than three percent per year regardless of what’s happening in the housing market.  As the Oklahoma Policy Institute explains, “Oklahomans living in poor communities, rural areas, and small towns would get little to no benefit, since their home values will not increase nearly as much as homes in wealthy, suburban communities.”  And since many localities are likely to turn to property tax rate hikes to pick up the slack caused by this erosion of their tax base, those Oklahomans in poorer areas could actually end up paying more.  
  • State Question 766 would provide a costly exemption for certain corporations’ intangible property, like mineral interests, trademarks, and software.  If enacted, the biggest beneficiaries would include utility companies like AT&T, as well as a handful of airlines and railroads.  The Oklahoma Policy Institute explains that the exemption, which would mostly impact local governments, would have to be paid for with some combinations of cuts to school spending and property tax hikes on homeowners and small businesses.  And the impact could be big.  As one OK Policy guest blogger explains: “In 1975, intangible assets comprised around 2 percent of the net asset book value of S&P 500 companies; by 2005, it was over 40 percent, and the trend is likely to continue. If SQ 766 passes, Oklahoma will find itself increasingly limited in its ability to tax properties.”

Oregon

  • Measure 84 would gradually repeal Oregon’s estate and inheritance tax (PDF) and allow tax-free property transfers between family members.  If the measure passes, Oregon would lose $120 million from the estate tax, its most progressive source of revenue.   According to many legal interpretations of the measure, the second component - referring to inter-family transfers of property - would likely open a new egregious loophole allowing individuals to avoid capital gains taxes (PDF) on the sale of land and stock by simply selling property to family members.  Oregon’s Legislative Revenue Office released a report last week that showed 5 to 25 percent of capital gains revenue could be lost as a result of the measuring passing. The same report also found no evidence for the claim that estate tax repeal is some kind of millionaire magnet that increases the number of wealthy taxpayers in a state.
  • Measure 79, backed by the real estate industry, constitutionally bans real estate transfer taxes and fees.  However, taxes and fees on the transfer of real estate in Oregon are essentially nonexistent, prompting opponents to refer to the measure as a “solution in search of a problem.”
  • Measure 85 would eliminate Oregon’s “corporate kicker” refund program which provides a rebate to corporate income taxpayers when total state corporate income tax revenue collections exceed the forecast by two or more percent. Instead of kicking back that revenue to corporations, the excess above collections would go to the state’s General Fund to support K-12 education. Supporters of this measure acknowledge that a Yes vote will not send buckets of money to schools right away since the kicker has rarely been activated.  But, it is a much needed tax reform that will help stabilize education funding and peak interest in getting rid of the Beaver State’s more problematic personal income tax kicker.

South Dakota

  • Initiative Measure #15 would raise the state’s sales tax by one cent, from 4 to 5 percent. The additional revenue raised would be split between two funding priorities: Medicaid and K-12 public schools. As a former South Dakota teacher writes, “[w]hile education and Medicaid are important, higher sales tax would raise the cost of living permanently for everyone, hitting struggling households the hardest, to the detriment of both education and health.”  This tax increase is the only revenue-raising measure on the horizon right now; South Dakotans deserve better choices.

Washington

  • Initiative 1185 would require a supermajority of the legislature or a vote of the people to raise revenue. A similar ballot initiative, I-1053, was already determined to be unconstitutional. As the Washington Budget and Policy Center notes about this so called “son of 1053” initiative:  “Limiting our state lawmakers with the supermajority requirement is irresponsible, and serves only  to limit future opportunity for all Washington residents.”

 

Here’s a follow up to our previous post describing the effort to get a much needed severance tax increase on the ballot in Arkansas.  The former natural gas executive, Sheffield Nelson, who was behind the effort has said that he won’t have enough signatures to qualify this proposal for the November ballot.

Last month, a Louisiana Revenue Study Commission began looking into the state’s tax exemptions to see if these government handouts are effective. Now that Governor Bobby Jindal has been passed over as the Republican Vice Presidential nominee, it appears he’s going full speed ahead with revenue neutral tax “reform” efforts.  As part of the efforts to reform the tax structure and examine tax expenditures the Governor, other policymakers and taxpayers should review these new materials from the Louisiana Budget Project.

This week, Illinois Governor Pat Quinn signed into law legislation that imposes a new tax on strip clubs. Revenue generated from this new tax will fund programs for victims of sexual assault. By choosing to enact an entirely new tax that seems destined to raise little revenue, rather than enacting needed reforms in the taxes the state already levies, Illinois lawmakers have missed a chance to make the tax system fairer. The worthy goal of funding anti-abuse efforts would be better served by eliminating income, sales and corporate tax loopholes.

Iowa’s gas tax is at an all-time low and shrinking- and transportation infrastructure is suffering because of it.  Earlier in the year, we thought Governor Terry Branstad would champion an increase in the tax to address the state’s transportation funding needs.  Now we have learned the governor will only support a “modest” change in the gas tax if lawmakers first reduce property, personal income and corporate income taxes.  Which begs the question- how will Iowa pay for much needed road and bridge repairs if the state is left with even less revenue than it had before this so-called “reform” plan?

Photo of Bobby Jindal via Gage Skidmore Creative Commons Attribution License 2.0

As the back- to-school sales tax holidays season winds down, this Institute on Taxation and Economic Policy (ITEP) op-ed is a reminder that consumers and citizens “should not accept tax-free weekends as a replacement for the types of real reforms that clean out unnecessary breaks at the top and solve the problems that will still be there, long after this year's sales tax holidays have passed.”  

Arkansas Governor Mike Beebe has a message for Republican lawmakers bent on eliminating the state’s personal income tax: “If you’re going to eliminate the income tax, you better figure out where you’re going to get a couple billion just to stay where we are.”  The Arkansas Republican Party platform includes replacing the state’s personal income tax with what they call a “more equitable method of taxation.”  In Beebe’s words, “I don’t think there is more equitable… the income tax was designed to be more equitable than a flat, for example, sales tax.”

Now that Governor Jack Dalrymple has unveiled his tax cut plan, North Dakota voters (who rejected a ballot measure eliminating property taxes altogether in June) will hear from two gubernatorial candidates who want to cut property taxes, but in very different ways. While the incumbent, Dalrymple, would give across-the-board property tax cuts to every property owner (including profitable businesses and the wealthiest North Dakotans) and a token cut to older low-income adults, the Democratic challenger, Ryan Taylor, targets his tax cuts to homeowners and renters, with the largest cuts as a share of income going to low- and moderate-income taxpayers.  The Institute on Taxation and Economic Policy is working up a full analysis of the candidates’ competing tax plans, which have roughly the same revenue cost.


Quick Hits in State News: Florida's Tax Mess, Chris Christie's Hubris


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The Orlando Sentinel’s editorial board explains the “slow-motion disaster” that is Florida’s tax system, cataloging the lack of sales taxes on services (PDF) and online shopping taxes (PDF), and gasoline tax shortfalls (PDF), among others.

Special tax breaks for businesses frequently reward behavior that would have occurred anyway.  The most recent examples come from Florida, where Publix, CSX, TECO Energy, NextEra Energy, and Mosaic Co. are seeking millions in tax breaks for capital spending they were already planning to undertake.

Online shopping in the DC-Metro area is about to become more expensive, according to this Washington Post article.  Here’s why that’s a good thing for tax fairness, the Marketplace Fairness Act and state coffers.

Advocates for increasing the Arkansas severance tax rate on natural gas from 5 to 7 percent and eliminating exemptions turned in nearly 70,000 signatures on Friday. If the Secretary of State verifies enough signatures, the long overdue rate increase worth $250 million in annual revenues will be put on the November ballot. 

Check out New Jersey Governor’s Chris Christie talk at the Brookings Institution today on “Restoring Fiscal Integrity and Accountability”.  Christie used the first several minutes to give his view on the current tax cut standoff in the Garden State, claiming Democrats were playing politics by holding up his tax cut proposal (when in fact what they’re doing is the right thing).


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


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

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

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

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

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

Example:


Arkansas Results Prove Sales Tax Holiday is All Cost, No Benefit for States


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The Institute on Taxation and Economic Policy (ITEP) made a lot of noise (and news, newsnews) about sales tax holidays during the recent back to school season. Seventeen states offer sales tax holidays. The rules vary widely, but in most cases they mean consumers don’t have to pay sales taxes on back to school supplies, clothes, etc. for a few days. This past August for the first time, Arkansas offered a sales tax holiday of its own.  While the sales tax revenue figures are still coming in, it’s now clear that holiday cost the state about $2.1 million in lost revenues and an additional $710,000 loss in revenues for cities and counties that collect their own local sales taxes.

Naïve state officials hoped to see an increase in sales tax revenue based on the assumption that consumers would go out and purchase more taxable items. Indeed, sales tax holiday proponents often argue that sales tax holidays actually generate new sales tax revenue, as in this report from the Florida Retail Association.

But so far the Arkansas revenue figures aren’t showing much offsetting revenue generated. The Deputy Director of the Department of Finance and Administration, Tim Leathers has admitted they “couldn't detect any increase in consumers spending more money while they were in there buying school supplies." Revenue officials have yet to tally September’s sales tax revenues to see if there were shifts in consumption by month, but either way it seems that the sales tax holiday didn’t provide a real and needed boost for state coffers.

John Shelnutt, an economist with the Department of Finance and Administration said, “If it did shift consumption from month to month, we'll have to see…. Even then, it's not a clear story. We were below forecast for the first two months of the fiscal year, which begins July 1."

Another reason that Arkansas jumped on the sales tax bandwagon was lawmakers’ belief it would lure shoppers from neighboring states to take advantage of the holiday, but again, the numbers don’t show any evidence for this. The economist, Shelnutt, sees no “growth rate to suggest there was a cross-border rush to take advantage of the holiday.”

Myths about the utility of sales tax holidays abound.  Lawmakers too often believe these events are helpful to cash-strapped consumers, result in increased revenues and add out of state dollars to the economy.  But too often, like in Arkansas, the costs to the state as a whole far outweigh the modest benefit a handful of consumers enjoy.

We also know that not collecting sales tax on specific items for just a couple of days does nothing to help make a state’s overall tax structure more fair.  Lawmakers interested in really helping the most hard-pressed families and boosting their states’ economies have other tax reform options that offer long term and widespread benefits. Sales tax holidays, however, are more boondoggle than good policy. For  more on what they do and don’t accomplish, read ITEP’s brief.


Cutting Food Sales Taxes: Right Intention, Wrong Policy


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Earlier this year, governors in West Virginia and Arkansas signed legislation to lower their states’ sales tax on food, a policy both had championed.  West Virginia lowered the state’s sales tax on food from 3 to 2 percent and Arkansas’ was reduced from 2 to 1.5 percent.

Unlike most states, West Virginia and Arkansas were doing just fine budget-wise, so the tax cut was “affordable” and did not come at the expense of critical and core public services, which are often sacrificed for tax cuts.  Pursuing cuts to food sales taxes also set Mike Beebe (AK) and Earl Ray Tomblin (W.VA) apart from other governors who pushed for regressive tax cuts that primarily benefited upper-income households and businesses.

West Virginia’s Tomblin recently upped the ante, too, asking lawmakers during a special August 2011 session to end the state’s sales tax on food altogether, given the state’s finances were continuing to perform well.  The House and Senate heeded the governor’s request and agreed to phase out the remaining two percent sales tax on food by July 1, 2013. 

The phase-out is contingent on the health of the state’s Rainy Day Fund, which must be equal to or greater than 12.5 percent of the General Revenue Fund at the end of 2012. If that goal is met, the sales tax on food will be reduced to one percent on July 1, 2012 and totally eradicated on July 1, 2013.

While West Virginia’s decision to eliminate the sales tax on food is certainly more beneficial to more families than other states’ efforts to eliminate corporate and personal income taxes, there are smarter, more targeted strategies available to lawmakers seeking to improve the fairness of the sales tax and support working families.

As an updated ITEP brief explains, targeted tax credits are a preferred alternative to exempting products, such as food, from the sales tax base. 

Sales tax exemptions have two main disadvantages as policy. First, they make the sales tax base (that is, the total dollar amount collected from taxable items) much narrower, and reduce the yield of the tax.  Second, they make the exemptions available to all taxpayers, regardless of need or income.  For example, the poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries while the rest goes to wealthier taxpayers who can more easily afford to pay the grocery tax.

Targeted credits, on the other hand: are designed to apply to specific income groups deemed to be most in need of tax relief; are available only to in-state residents; can be less expensive than exemptions, and; do not affect the stability of the sales tax as a revenue source.

Rather than wholly eliminate the sales tax on food, West Virginia lawmakers could have followed the model of 24 states which have wisely enacted a state Earned Income Tax Credit to ensure the tax cut will primarily benefit low- and moderate-income families, those who need help the most and spend a larger proportion of their incomes on food.  Alternatively, a refundable food tax credit, implemented in Kansas, Oklahoma and Idaho, which helps offset sales taxes paid on food, would be a more preferable policy as it is also 1) targeted to taxpayers who need it most and 2) less disruptive to the state’s revenue – two characteristics of the smartest tax policies.

Photo via Judy Baxter Creative Commons Attribution License 2.0


Arkansas & Oklahoma: "No New Taxes" Pledge Trumps Democracy for Grover Norquist


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You may have heard of the "no new taxes" pledge, which is promoted by the extreme anti-government organization, Americans for Tax Reform (ATR), and its leader, Grover Norquist. What you may not know is that the pledge bars lawmakers from allowing voters to choose for themselves whether or not to raise taxes. At least that's the latest word from Norquist, who is apparently the sole adjudicator of the meaning of the pledge.

In Arkansas, four legislators who signed the pledge are defending their vote to allow Arkansans to decide whether to increase the state’s diesel fuel tax by five cents per gallon. There's an argument to be made that legislators really ought to make these types of decisions on their own. After all, isn't that what they're paid to do? But this is not the sort of criticism that Arkansas lawmakers are hearing these days.

Instead, the criticism is coming from Grover Norquist and ATR. Business Week reports that several legislators actually voted against HB 1902 because they feared the wrath of Norquist.

What many lawmakers probably thought was a political gimmick when they signed onto it has clearly become a ridiculous obstacle to rational, representative government, as lawmakers become fixated with the opinions of Norquist rather than the opinions of their constituents.

And it hardly helps policymaking when lawmakers are tied to simple, black-or-white dogmas that they feel forced to carry to any and all extremes. Elected officials are put in office so they can, in the words of one of the legislators taking heat, “consider all bills based upon their individual merits.”

Oklahomans are asking questions about the “no new taxes pledge” as well. Recently Grover Norquist said that Oklahoma policymakers supporting a hospital provider fee would violate the “no new taxes” pledge.

A recent blog post from the Oklahoma Policy Institute (OPI) asks simple, yet important questions. “When lawmakers sign a pledge, who are they working for?... Should they adhere to the dictates of outside groups that always take the most simplistic and extreme stance on their particular issue, regardless of the context for Oklahomans?”

OPI also discusses members of Congress and their controversies concerning ATR's pledge. When Senator Tom Coburn said that he was in favor of eliminating ethanol tax subsidies and using the revenue to pay down the national deficit, Norquist said that this position was in violation of the tax pledge.

Coburn responded, “The pledge to uphold your oath to the Constitution of the United States? Or a pledge from a special interest group who claims to speak for all of American conservatives, when in fact they really don’t?”

As OPI puts it, “Leaders now have a choice: do they represent Grover Norquist, or do they represent Oklahoma?”

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

Read the ITEP brief.


Grocery Tax Cuts Enacted in Arkansas and West Virginia


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Lawmakers in almost every state (44 according to the Center on Budget and Policy Priorities) must close significant budget gaps again this year.  Despite these continuing fiscal woes, a variety of costly tax cuts -- from reductions in corporate tax rates to new capital gains breaks -- have been proposed alongside massive spending cuts in many of these states.

But West Virginia and Arkansas are among the six states not reporting budget gaps this year -- a fact which has provided them with somewhat more flexibility to consider reducing taxes. In this context, both Arkansas and West Virginia lawmakers recently enacted reductions in their states' sales taxes on groceries.  As of July 1, 2011, Arkansas’ sales tax rate on groceries will be lowered from 2 percent to 1.5 percent.  West Virginia’s rate will drop from 3 percent to 2 percent starting January 1, 2012.  These cuts were championed by Governors Beebe and Tomblin as a means to provide immediate assistance to taxpayers (in particular low-income households), and as a way to stimulate their states' economies. 

But reducing the sales tax on groceries is not the most targeted approach available to state lawmakers looking to support working families.  The poorest 40 percent of taxpayers only receive about 25 percent of the benefit from exempting groceries in most cases. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries.  Increasing Arkansas’s refundable state Earned Income Tax Credit (EITC) or enacting a state EITC in West Virginia would have been a better targeted alternative for ensuring that the tax cuts would reach low- and middle-income working families.  However, when viewed alongside the sharply regressive and completely unaffordable tax cuts being considered in so many other states, Arkansas and West Virginia lawmakers should receive some credit for at least enacting progressive tax cuts that benefit low- and moderate-income households the most as a share of their incomes.


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


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

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

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

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

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

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

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


Bad and Less Bad: Business Tax Cuts vs. Grocery Tax Cuts


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Some politicians in state capitals across the U.S. seem convinced that tax cuts for businesses and the wealthy are the best way to accelerate economic recovery. In two states, governors are proposing instead to cut taxes on groceries, which is a more effective, though not exactly flawless, way to help ordinary families. The tradeoff to any tax cut, of course, is unaffordable cuts to essential services including education, public safety, and health care.

In Wisconsin, state lawmakers agreed on a business tax cut that would add about $50 million to the budget deficit.  The Republican controlled legislature and newly elected Governor Scott Walker believe that the tax cuts will leave everybody with more money and leave the state with an improved economy.  Incredibly, Walker’s proposal rests on the assumption that the tax cuts will lure businesses away from Illinois, which recently saw an increase in its income tax, rather than fostering young, developing businesses. 

In Iowa, where a similar $300 million business tax cut is being discussed, critics of Governor Terry Branstad point out that essential social services are being axed in favor of pro-business policies.

In Arizona, Governor Jan Brewer is proposing to cut taxes on high-wage industries while further reducing funding for Medicaid, universities, community colleges, and K-12 education.  

Similar tax cuts are being proposed in New York, Washington, Michigan, Minnesota, and South Carolina. All of these plans prioritize tax breaks for business over providing essential services to those most affected by the economic downturn.  

The Governors of West Virginia and Arkansas have arrived at an entirely different tax-cutting proposal: reducing the sales tax on groceries.  Like lawmakers who support business tax cuts, Governors Tomblin and Beebe believe their brand of tax cuts will circulate quickly throughout the economy, providing necessary relief to the taxpaying public while stimulating the economy. 

Governor Mike Beebe of Arkansas wants to cut the sales tax on groceries by a half-cent and has said it is the only tax cut he will consider this year.  In West Virginia, Governor Earl Ray Tomblin wants to reduce the grocery sales tax from 3 to 2 cents and would ultimately like to see it eliminated entirely.

While the proposals to cut the sales tax on groceries are a welcome development compared to proposed tax cuts for businesses and the wealthy, there are still two problems with them. 

First and foremost, states are in dire need of revenue this year as they face the most significant budget challenge yet since the start of the recession.  Every dollar lost to a tax cut will have to be made up by an even deeper cut in spending. 

Second, reducing the sales tax on groceries is not the most targeted approach available to state leaders looking to support working families.  The poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. 

Enacting or increasing a refundable state Earned Income Tax Credit (EITC) or other low-income refundable credit would be a more affordable and better targeted alternative to ensure that tax cuts reach low- and middle-income working families.  Tax cuts that directly benefit low-wage workers are especially beneficial to the general economy because low-wage workers immediately spend their refunds out of necessity.  By pumping the money back into the economy, the tax cut goes further in stimulating the economy than tax cuts for the wealthy or businesses.

Instead of pursuing tax cuts for businesses and wealthy individuals, state lawmakers should be working to alleviate hardship on the most vulnerable.  Indeed, the governors in West Virginia and Arkansas may end up being much more efficient at helping their state economies rebound than the “business friendly" governors in Wisconsin and Iowa.


ITEP Releases New Report on Capital Gains Tax Breaks in the States


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Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

 


Debate Over Capital Gains Taxation in Arkansas


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Trouble is brewing in Arkansas. Tax fairness advocates are anticipating that legislation to further reduce the amount of taxes paid on capital gains income will be a hot issue in the upcoming legislative session. Arkansas Advocates for Children and Families (AACF) released a brief this week explaining that Arkansas already offers a 30 percent exclusion for capital gains income and is one of only eight states that offers a substantial tax break for capital gains.

CTJ and ITEP have long argued that all types of income, including capital gains, should be taxed in the same way. Providing special breaks for capital gains is regressive, in addition to making tax rules needlessly complicated. Most low- and middle-income families don't have any capital gains income and therefore don't benefit from this tax break.

The AACF brief cites ITEP data and explains, “For 2010, the poorest 80 percent of Arkansas taxpayers (those with incomes less than $71,000) are projected to earn only 2 percent of the capital gains income earned by the state’s taxpayers. In contrast, the top 1 percent of Arkansas taxpayers, those with incomes of $352,000 or more, will likely earn 75 percent of all capital gains income in Arkansas.”

Further enhancing the already generous exclusion would benefit well off Arkansans, cost the state valuable revenues, and certainly do nothing to improve tax fairness. For more on capital gains taxation in the states, see ITEP’s report on this issue.


State Transparency Report Card and Other Resources Released


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

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

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

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

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

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


Arkansas: Task Force Unveils Anti-Poverty Recommendations


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This week the Arkansas Legislative Task Force on Reducing Poverty and Promoting Economic Opportunity released thirty-one recommendations for reducing poverty in the state. Rich Huddleston, co-chair of the task force and Executive Director of Arkansas Advocates for Children and Families said, "Poverty hurts individual Arkansans, but it also has a long-term impact on our economy. Our businesses need a healthy, educated work force. To get there, we need to ensure that our children are in good shape and get a quality education." 

Not surprisingly, the panel found that tax policy has a role to play in poverty reduction. The panel recommended a variety of policy changes including: creating a state Earned Income Tax Credit, fixing the Arkansas low-income tax threshold, and continuing efforts to cut the state sales tax on food. See the panel’s full recommendations here.

Arkansas, of course, is not alone in having sensible options for using the tax code to reduce poverty. To read about more effective anti-poverty strategies in your state, read ITEP’s report: Credit Where Credit is (Over) Due.


Gubernatorial Candidates with Progressive Positions on Taxes Who Won


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On Tuesday, voters in 37 states went to the polls to vote for Governor. The results of nine gubernatorial races provide a small glimmer of hope for sensible, balanced, and progressive approaches to addressing the next round of state budget shortfalls.  Two candidates campaigned on raising taxes, four incumbents were re-elected after implementing new taxes to close previous budget gaps, and three governors-elect won races against opponents who sought to dismantle progressive tax structures.

As for those governors-elect who have rejected revenue increases, the next four years will be quite a challenge. In Texas, Governor Rick Perry will face a projected two-year $21 billion budget shortfall.  Likewise in Pennsylvania, Governor-elect Tom Corbett is staring at a $5 billion budget deficit next year.  Faced with these problems, this new crop of state executives can take either a dogmatic cuts-only approach or they can opt for a more flexible approach that allows for raising new revenue by closing tax loopholes or implementing other reforms.

Candidates Who Campaigned on Raising Taxes

In Minnesota, Mark Dayton ran for governor on a progressive tax platform, calling taxes “the lubricant for the machinery of our democracy." He has proposed increasing taxes on the wealthiest 5 percent of Minnesotans to raise revenue to address the state’s continuing budget woes and to improve tax fairness.  Although the Minnesota gubernatorial race remains undecided and Dayton may face a recount, Dayton’s small lead demonstrates the support he has received for purposing such a beneficial progressive tax plan.

In Rhode Island, Lincoln Chafee won a three-way race against Republican John Robitaille and Democrat Frank Caprio.  Like Dayton, Chafee championed tax increases aimed at refilling the state’s depleted coffers.  During the campaign Chafee, whose father lost a Rhode Island gubernatorial race 42 years ago after supporting a state income tax, proposed a one percent sales tax on previously exempted items.  Though more likely to adversely affect low-income families than Dayton’s plan, Chafee deserves credit for supporting a moderate tax plan in this cycle of anti-government sentiment.

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

Besides Dayton and Chafee, three other winners on Tuesday night defeated opponents who sought to drastically cut taxes and reduce spending and government services.  In California, Jerry Brown defeated Meg Whitman, who supported a regressive tax cut that would only benefit taxpayers who claim capital gains income

In New York, Andrew Cuomo defeated Carl Paladino, who promised to cut taxes by 10 percent and spending by 20 percent in his first year.  Unfortunately, however, Andrew Cuomo has not fully distanced himself from Paladino’s vilification of taxes.  Instead, Cuomo, along with eleven newly elected Republican Governors, has pledged to freeze taxes, vetoing any hike that comes his way.  This absolutist approach does nothing to alleviate the enormous deficit problems faced by each of these states.

In Colorado, Democrat John Hickenlooper defeated Republican Dan Maes and Independent Tom Tancredo.  Maes, who lost voter support after the Republican primary, promised to lower income taxes and cut spending.  As Maes’ popularity decreased, Tom Tancredo began to gain steam, eventually garnering around 37% of the vote.  In their final debate Tancredo proposed removal of “any tax rebates or incentives.”  For his own part, Hickenlooper never committed to raising or lowering taxes, but did call for a "voluntary" tax on the oil and gas industry to fund higher education.

Incumbents Re-elected After Raising Taxes

The Governors of Maryland, Illinois, Arkansas, and Massachusetts pulled off victories after enacting or supporting new taxes during their previous terms. 

In Maryland, Martin O’Malley, who defeated former Governor Robert Ehrlich, oversaw tax increases in his first term to fix a $1.7 billion deficit.  O’Malley’s plan relied in part on progressive tax increases, including a temporary increase in the income tax rate paid by millionaires. While Republicans criticized the tax increases, the citizens of Maryland approved enough to re-elect O’Malley with over 55% of the vote.

In Illinois, Governor Pat Quinn is the likely winner of a tight race against Republican challenger Bill Brady.  Since becoming Governor in the wake of former Governor Blagojevich’s scandal, Pat Quinn has repeatedly proposed to raise income tax rates to fill budget holes.  Quinn would use the revenue raised to fund education.  Meanwhile Brady, Quinn’s opponent, championed tax cuts that included repealing the sales tax on gasoline and eliminating the inheritance tax.

In Arkansas, Republican Jim Keet was soundly defeated by Governor Mike Beebe in his re-election bid.  During his first term, Beebe implemented a significant hike in tobacco sales taxes, raising the tax on a pack of cigarettes by 56 cents.  The increase was designed to increase revenues by $86 million to fund statewide trauma systems and expanded health care coverage for children.

In Massachusetts, Deval Patrick was re-elected Governor after signing last year’s budget that included an increase in the sales tax rate. Patrick also showed interest in improving fairness in Massachusetts’ tax code. Bay State voters rewarded Patrick for his tough decisions by handily re-electing him.


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


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

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

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

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

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

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

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


ITEP Identifies Fundamental Mismatch in 6 State Tax Structures


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Earlier this summer the Census Bureau released data that revealed which states can be considered "low tax" states. We took a closer look at the data and found that while a handful of states could be considered low tax states overall, their taxes are not low for poor and middle-income families.

In fact, in six states — Arkansas, Arizona, Florida, Tennessee, Texas, and Washington — there is a fundamental mismatch between the Census data and how these supposed low tax states treat people living at or near the poverty line. One of the major reasons for this is that these states have largely unbalanced tax structures. Florida, Tennessee, Texas, and Washington rely heavily on property and sales taxes because they don't have a broad-based personal income tax. (For more on a Washington ballot initiative to introduce an income tax, see our Digest article below.) Despite having income taxes, Arkansas and Arizona rely heavily on sales taxes, thus making their tax structures balanced on the backs of low- and middle-income taxpayers.


New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.


States Get Serious About Transportation Funding


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Many states across the country have stood idly by while inflation and improving vehicle fuel efficiency have cut into their gas tax revenues, reducing their ability to build and maintain an adequate transportation network.  Fortunately, new developments in at least four states demonstrate an increasing level of interest in addressing the transportation problem head-on.

In Arkansas this week, a state panel created by the legislature endorsed increasing taxes on motor fuels, and taking steps to ensure that such taxes can provide a sustainable source of revenue over time.  Specifically, the panel expressed an interest in linking the tax rate to the annual “Construction Cost Index,” a measure of the inflation in construction commodity prices.  As the committee chairman explained, this method would provide a revenue stream better suited to helping the state maintain a consistent level of purchasing power over time. 

Wisely, the proposal would also ensure that fuel tax rates would not increase by more than 2 cents per gallon in any given year.  Such a limitation should help to prevent the types of political outcries that have surfaced in other states when indexed gas taxes have increased by large amounts in a single year.

In Texas, attention has begun to turn toward a vehicle-miles-traveled (VMT) tax which, as its name suggests, would tax drivers based on the number of miles they travel.  Such a tax is similar to a gas tax in that it makes the users of roadways pay for their continued maintenance.  VMT’s, however, are able to avoid some of the most serious long-run revenue problems associated with gas taxes, since their yield is not eroded as individuals switch to more fuel efficient vehicles.  But Texas Senator John Carona hit the nail on the head in his description of the VMT as an idea “far into the future and way ahead of its time.”  While states like Texas should begin studying this option now, they should also follow Carona’s lead in the meantime by embracing an increase in motor fuel tax rates to address the funding problem already at their doorsteps.

Nebraska legislators have also begun discussing the need for additional transportation dollars.  In a report outlining the testimony given at eight hearings conducted last fall by the Legislature’s Transportation and Telecommunications Committee, 31 separate options for raising transportation revenues are examined.  Among those options are an increase in the gas tax and indexing the tax either to inflation or directly to the costs associated with the continued maintenance and construction of the state’s transportation network.  As the report explains, “there was nearly unanimous support from all testifiers for some type of tax or fee increase to support the highway system.”  Committee Chairwoman and State Senator Deb Fischer expects to have a major highway-funding bill ready for the 2011 legislative session.

Finally, legislators in Kansas this week also pushed forward with proposals to enhance the sustainability and adequacy of their transportation revenue streams.  A joint House-Senate transportation committee advanced two options for raising motor fuel tax collections: (1) applying the state sales tax to fuel purchases and slightly lowering the ordinary fuel tax rate, and (2) raising the fuel tax rate and indexing it to inflation.  While either proposal would be a great improvement to Kansas' stagnant, flat cents-per-gallon gas tax, the inflation-indexed approach would provide a somewhat more predictable revenue stream since its yield would not be contingent upon the (often volatile) price of gasoline.

In addition to these four states, we have also highlighted stories out of South Dakota and Mississippi during the latter half of 2009 that indicated a similar interest in doing something constructive to enhance current transportation funding streams.  And more beneficial debate has occurred in a number of states where progressives have insisted on offsetting the regressive effects of transportation-related tax hikes by enhancing low-income refundable credits.

Virginia is one of the major exceptions to the trend toward a more rational transportation funding debate.  As the Washington Post explained in an editorial this week, “[Governor-elect Robert McDonnell’s] transportation plan, which ruled out new taxes, relied on made-up numbers and wishful thinking to arrive at its promise of new funding.”  Rather than acknowledging the futility of attempting to fund a 21st century transportation infrastructure with a gasoline tax that hasn’t been altered since 1987, McDonnell worked to repeatedly block attempts to raise the gas tax during his time in the state’s legislature. 

Following the leads of policymakers in Arkansas, Texas, Nebraska, Kansas, South Dakota, and Mississippi and keeping higher taxes on the table is absolutely essential to the construction and maintenance of an adequate transportation system.  As the Washington Post cynically suggests, new revenue is so desperately needed that McDonnell should even be forgiven if he has to rebrand new taxes as “user fees” in order to get around his irresponsible campaign promise not to raise taxes.


ITEP's "Who Pays?" Report Renews Focus on Tax Fairness Across the Nation


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This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

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

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

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

Read the report.


Numerous Other States Decide on Tax/Revenue Proposals


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Arizona voters wisely rejected Proposition 105, a proposal that would have placed a nearly insurmountable obstacle in the way of Arizona residents seeking to raise their own taxes through the referendum process.

Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.

Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it's certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.

Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.

Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.

Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.

Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.


Cigarette Taxes: Another State Seeking the Path of Least Resistance


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Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans. This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.

The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority. But it's the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.

Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system. South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.

In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time. South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.

Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas. This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.

With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown. A recent study by Howard Chernick entitled "Cigarette Tax Rates and Revenue" found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%. Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling. The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).


Arkansas to Consider Cigarette Tax Hike in 2009


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Arkansas legislators have put off until next year a proposed 50 cent hike in the cigarette tax from 59 cents per pack to $1.09 per pack. The increase is expected to generate about $71.1 million in state tax revenues. This money would be used to fund a badly-needed state trauma system to respond to emergencies in which victims must be sent quickly to nearby specialists. Arkansas is one of the only states lacking such a vital infrastructure. The trauma system is estimated to cost $25 million a year and the extra revenue would be used to fund community health centers and charitable clinics serving the poor.

Arkansas currently ranks in the middle of its neighboring states in terms of its cigarette tax. If the tax is raised, Arkansas will have the second highest tax in its region, behind only Texas' $1.41 per pack tax. The situation in Maryland last year almost exactly parallels the one that Arkansas is facing this year. When Maryland's cigarette tax was $1.00 per pack, the tax ranked exactly in the middle of those of neighboring states. After the tax doubled to $2.00 per pack, it became the most expensive among Maryland's neighbors.

So what does all this mean? In a recent Wall Street Journal editorial, Maryland's cigarette tax hike was slammed as a failure because, the author speculated, it did not deter smoking and the state lost sales to nearby Virginia, where a carton is almost $15 cheaper. And as usual, the WSJ misleads its readers with anti-tax rhetoric, implying that higher tax rates decrease tax revenues. But if Arkansas lawmakers take a closer look at the numbers cited in the Wall Street Journal piece, the outlook for their proposed increase appears feasible, at least in the short term.

The editorial states that Maryland's cigarette sales fell 25% after a 100% tax increase. But what is craftily omitted is that this does not mean that tax revenues will fall. In fact, quite the opposite should happen. The tax increase is large enough to offset the fall in sales so much that the state should actually gain 50% more in cigarette tax revenue thanks to the hike. And just as Marylanders descended upon their neighbors to take advantage of cheaper cigarettes, it is highly likely that Arkansans will do the same. But the purpose of the Arkansas tax is to generate at least $25 million each year to fund an essential trauma system, not to deter smoking. Indeed the tax may help to curb the habit, especially among youths but even if smokers in Arkansas leave the state to shop for smokes in Missouri or Mississippi, where the taxes are the lowest in the US, sales within the state are still likely generate a sizeable and sufficient amount of tax revenue because the increase in the tax is so high.

So what is the drawback to this plan? The percentage of smokers in the US, along with the number of cigarettes sold, declines steadily each year. While Arkansas and Maryland risk losing business to neighbors, they also risk losing a sizeable amount of business to quitters and the declining number of new smokers, regardless of the size of their cigarette taxes. This means that an essential program that requires yearly funding cannot be viably sustained by a tax on a product for which demand is shrinking. The policy may be a responsible budgetary decision in the short term, when money is tight and the tax is likely to generate a sufficient amount of revenue. But as time goes on and smoking becomes increasingly unpopular (regardless of price), Arkansas will have to find another way to fund its trauma system.


Severance Taxes in The News


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Arkansas Governor Mike Beebe has called a special session starting Monday to consider a higher severance tax on natural gas. The Governor says that the tax hike will eventually raise as much as $100 million to help pay for state highways. The current level of tax was established in 1957 and is based on the volume of gas extracted. Beebe's proposal would change the tax base to market value, bringing Arkansas in line with what most states have been doing since the 1970s. Basing the tax on market value would ensure that inflation will no longer erode the value of revenues generated by the tax, which is currently providing natural gas companies with an effective tax cut each year. A 2003 ITEP study of the Arkansas natural gas tax found that if the state had imposed a 5 percent tax on the market value of natural gas in 1975 (rather than basing the tax on volume) the state would have raised $610 million between 1975 and 2001, instead of the $13 million it actually collected. For more on the state's severance tax and potential reforms read this report from Arkansas Advocates for Children and Families.

Higher severance taxes may soon be on the agenda as well in Colorado, where environmental groups and higher education advocates have banded together in support of a ballot initiative to generate $200 million in additional revenue from the oil and gas industries. The proposal would eliminate several severance tax deductions and exemptions, the most notable of which allows companies to write off 87.5 percent of their property tax bills. The revenue generated would go to fund college scholarships and renewable-energy programs, among other things.


Reducing Grocery Taxes: "Yes, but how?"


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Four states - Mississipi, Tennessee, Arkansas, and Idaho - are currently debating ways to reduce the sales taxes paid on food. But how (or whether) to pay for the cuts and who should benefit remain key sticking points.

On Thursday, the Mississippi House of Representatives passed (91-27) a "tax swap" bill that would cut the state's sales tax on groceries in half and raise the tax on cigarettes to $1 per pack. The bill still faces significant challenges before becoming law, however, since key members of the Senate oppose it and Governor Haley Barbour vetoed a similar bill last year. Although the plan's reliance on revenue from cigarette taxes is not a long-term solution, it does offer a temporary mechanism to make up the revenue that would be lost from a cut on the sales tax on food.

In Tennessee, a similar "tax swap" is under consideration. However Gov. Phil Bresden has expressed reluctance to link a cigarrette tax increase with a grocery tax reduction, and has instead proposed using revenue from a cigarette tax increase for education funding.

Arkansas Gov. Mike Beebe signed a grocery tax reduction into law on Thursday that will reduce the state's sales tax on groceries from 6% to 3% effective July 1st. However, no funding mechanism was enacted to make up for the decreased revenue, as lawmakers instead decided to rely on a projected surplus to pay for the proposal.

In Idaho, Gov. Butch Otter continues to struggle with the state legislature over how best to enact a grocery tax credit. Otter's proposal would target low-income Idahoans with a credit of up to $90, while the House's newly passed version would give a smaller grocery tax credit (up to $50) to a broader range of residents.


Race-to-the-Bottom: Economic Development "Incentives"


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Last week there were three states offering competing tax incentives for a new ThyssenKrupp steel mill. Now there are two; ThyssenKrupp has taken Arkansas out of the running, leaving Alabama and Louisiana as its final two candidates. In a press release announcing the move, the company explained its rationale for dumping Arkansas: "geological conditions, energy costs and logistical disadvantages." Notably absent from its explanation: tax breaks.

And elected officials in the two remaining states seem to agree that non-tax factors set one state apart. Louisiana Governor Kathleen Blanco boasts and, Alabama Governor Bob Riley openly admits, that Louisiana has geographic advantages that Alabama can't match.

But Riley and some state lawmakers are pushing for a special legislative session later this month that would be devoted entirely to creating a new fund for tax incentives for ThyssenKrupp and other companies the state is currently courting. If this sounds like a devious subversion of market forces, it is ... but Louisiana already did the same thing back in December, creating a $300 million fund to court the steelmaker.

How can states short-circuit this self-destructive competition of tax giveaways? Lessons might be learned from efforts by European Union members to prevent tax competition that distorts market forces, which culminated this week in an EU statement that Switzerland must curb its corporate tax giveaways.


Arkansas's Tax Cut: Could Be Worse, Could Be Better


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Arkansas Governor Mike Beebe and the state senate worked together this week to pass a series of measures aimed at helping low-income Arkansans.The keystone of the tax package was a cut in the state sales tax on groceries from six percent to three percent, one of Governor Beebe's leading campaign proposals.A study by the Arkansas Advocates for Children and Families (AACF) projected annual savings for a family of four ranging from $98 to $298, depending on income level.The Governor's Office estimated that the sales tax change would cut state revenues by $252 million this year.Everyone involved in the effort to pass this bill deserves high praise for bringing attention to this important issue.However, research by the AACF using ITEP data indicates that a refundable Earned Income Tax Credit might be an even more effective way to help low-income Arkansans.According to the data, a 24% refundable EITC would cost almost exactly the same as the grocery sales tax exemption, but would provide more assistance to families in need.Arkansas lawmakers should consider a refundable EITC to get the most bang for their tax bucks.


Removing the Sales Tax on Food: Two Approaches


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On Wednesday newly elected Arkansas Governor Mike Beebe kept a campaign promise and proposed a cut in the state's sales tax on food. The proposal would cut the state's 6 percent sales tax, as it applies to groceries, by half. The Governor hopes to eventually repeal the tax on food altogether. However, the price tag for this cut is over $200 million and the benefits from this tax cut aren't targeted towards those who need it. Also, despite the state's recent higher-than-expected revenues, many advocates are worried the funding for the tax cut could come from education or other programs.

A similar discussion is taking place in Idaho, where Governor Butch Otter is proposing a more progressive approach to this issue. His proposal would keep the grocery tax and would instead offer a low-income tax credit designed to offset it. For more on the relative merits of exemptions and credits as strategies for making sales taxes less unfair, check out this ITEP Policy Brief.


Hot Topic: Severance Taxes


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States that enjoy a large endowment of mineral resources usually levy a severance tax on the extraction of these resources and these taxes are receiving a lot of attention these days. In Colorado the Auditor's office found that many oil and gas companies may not be filing tax returns. Officials in West Virginia worry that coal severance taxes are on the decline there, while advocates in Arkansas say that now is the time for severance tax reform. For more on this, read the report "Digging Deeper," from Arkansas Advocates for Children and Families.


Good Ideas and Bad Ideas for State Budget Surpluses


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Several states are debating ways to spend budget surpluses.

Arkansas Governor Mike Huckabee has "tax reformation" plans which include putting more money in a rainy day fund and rebating money to taxpayers in the form of a tax credit.

In response to the surplus in Idaho, legislators are debating ways to shift the tax burden from property taxes to regressive sales taxes.

North Carolina legislators are taking notice of the financial hit that mental health services took during the previous recession and both houses have passed budgets that would provide more funds for these services. Of course, if any of these states had a Colorado-style TABOR policy there wouldn't even be a question about how to spend state surpluses because TABOR takes these important budget decisions out of the hands of elected officials.

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