Iowa News


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


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

The gubernatorial race in Iowa pits veteran incumbent Terry Branstad (R) against challenger Jack Hatch (D). Branstad, 67, is asking Iowa voters to reelect him to an unprecedented sixth term as governor; if he wins, he will be the longest-serving governor in American history. In addition to his career in political office, Branstad has been an attorney, financial advisor, and president of Des Moines University. Hatch, 64, is a state senator from Des Moines and a former member of the Iowa House of Representatives. He is a real estate developer and businessman who founded Hatch Development Group, a company that builds affordable housing.

With an $850 million revenue surplus, it’s no surprise that both candidates favor tax cuts. However, the two men offer Iowans very different visions when it comes to overall tax policy. Hatch wants to target tax cuts to the middle class. His tax plan would raise Iowa’s per-child tax credit from $40 to $500, give two-earner households a credit of $1,000, and raise the filing threshold for individuals and families by $11,000. Hatch would also collapse Iowa’s eight tax brackets into four, and reduce the top rate from 8.98 percent to 8.8 percent, and eliminate Iowa’s federal deductibility provision. Iowa is one of five states that allow residents to deduct federal tax payments from their taxable income on their state returns. Hatch argues that this provision makes Iowa’s rates appear artificially high, since most Iowans pay a much lower effective rate. As ITEP has reported, the provision is also costly and regressive, and its elimination would be a huge victory for Iowa progressives. Hatch’s tax reform proposal would cost $615.3 million over two years, which he claims will be offset by the state’s existing budget surplus and future revenue growth.

Branstad, meanwhile, has not made tax policy a centerpiece on his reelection campaign. However, Branstad pushed for and signed into law the largest tax cut in Iowa’s history last year, when the legislature approved a compromise that cut property taxes for businesses, limited residential property tax increases, and expanded a number of individual credits, including the Earned Income Tax Credit (EITC). Critics of the bill point out that while low-income workers gained $35 million in tax relief from the EITC expansion, property owners gained ten times as much. They further charge that the property tax changes will strain local government budgets and hamper the ability of state officials to meet citizens’ needs. The total cost of Branstad’s property tax reform alone is $3.1 billion over ten years, to FY 2024.

Branstad has also backed efforts to enact an optional flat tax system, though he declined to endorse House Speaker Kraig Paulsen’s flat tax proposal during this year’s legislative session, bowing to political realities. Under the proposed plan, Iowans would have the option of paying a 4.5 percent flat tax without deductions (including federal deductibility), rather than using the current income tax schedule. It would overwhelmingly benefit wealthy Iowans and impair the state’s ability to fund crucial services. Opponents fear that Branstad will revive the flat tax if he wins reelection, and that his current wishy-washiness is a front.

On the issue of the gas tax and infrastructure, Hatch wants to raise Iowa’s state fuel tax by 2 cents each year for five years. He also wants to capture 20 percent of the state’s budget surplus (and 20 percent of any future surpluses) for road improvements, bridge repairs, school renovation and construction, and broadband internet infrastructure. Branstad has chosen to remain on the sidelines of the gas tax debate, declining to endorse an increase in the tax but saying he would not veto an increase either.

In a June Quinnipiac poll, Branstad led Hatch 38 percent to 14 percent, but 47 percent of voters remain undecided. The number of undecided voters has increased in recent months, after a spate of bad publicity for Branstad’s administration; it remains to be seen if Hatch can capitalize on the incumbent’s woes and reluctance to take firm policy positions, or if Branstad’s cautious campaign will win the day.


State News Quick Hits: Undocumented Immigrants, Tax Deform and More


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This shouldn’t be news to anyone, but undocumented immigrants do pay taxes. This week the Iowa Policy Project (IPP) released a report detailing their contributions to Iowa revenues using ITEP data. IPP found that undocumented immigrants pay an estimated $64 million in state and local taxes. Read IPP’s full findings here.

A News & Observer editorial last week lamented the revenue boom North Carolina might have enjoyed this year but for the package of steep income and corporate tax cuts passed in 2013. While numerous other states, including California, are beginning the fiscal year with healthy reserves, the N.C. Budget and Tax Center, using ITEP data, estimates that the cost of their state’s tax cuts could balloon to over $1 billion this year (almost double the reported amount of the tax cuts).

Rhode Island lawmakers recently enacted a budget for the new fiscal year which received a lot of attention for changes made to the corporate income tax (rate cut and adopting combined reporting) and cutting the state’s estate tax for a few wealthy households.  But, as Kate Brewster of the Economic Progress Institute helps to explain in this op-ed, the budget deal also quietly hiked taxes on many low- and moderate-income families by eliminating a refundable credit used to offset regressive property taxes for non-elderly homeowners and renters.  Brewster opines: “Given the struggles facing middle class Rhode Islanders — enduring unemployment, stagnant wages and a lack of affordable housing — it is hard to believe the state’s new budget includes huge giveaways for a handful of heirs while quietly taking money directly out of the pockets of low- and middle-income Rhode Islanders.

Next month Missouri voters will be asked to decide whether the state’s sales tax rate should be increased to pay for transportation improvements. The debate is raging, though no one seems to dispute Missouri has huge transportation needs. Tax justice groups like the Missouri Association for Social Welfare and even Governor Jay Nixon have argued that hiking the sales tax in the wake of income tax reductions would make the state’s tax system even more unfair. In a statement Nixon said, “This tax hike is neither a fair nor fiscally responsible solution to our transportation infrastructure needs.” It’s worth noting that the state has gone 18 years without an increase in their gas tax.


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


State News Quick Hits: Tax Breaks for NASCAR and House of Cards


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Tax cut one-upmanship continues to be a major theme in the race to be Maryland’s next governor. As of right now, at least two gubernatorial candidates want to completely eliminate the state’s personal income tax–a revenue source that funds about half of the state’s spending on schools, hospitals, and various other services. In terms of how to pay for this massive cut, the best that Harford County Executive David Craig could come up with is a 3 percent across-the-board spending cut (that math seems a little fishy to us), while businessman and candidate Charles Loller seems to have bought into Arthur Laffer’s wild claims that tax cuts pay for themselves. But even if the cost of repeal weren’t an issue, it’s still the case that the personal income tax is an essential element of any fair and sustainable tax system, and should not be on the chopping block in any state.

Lawmakers in Iowa are poised to give NASCAR a $9 million tax rebate. The bill (PDF), which passed a key Senate subcommittee last week, would extend a five percent rebate for all sales tax collected at Iowa Speedway, a racetrack located about 30 miles outside of Des Moines. The sweetheart deal had originally required that the track be owned at least 25 percent by Iowans, but the Florida-based NASCAR company bought the track last year, prompting legislators to scramble to amend the law. (Racetrack owners are already the beneficiary of a notorious federal tax break, which is part of the group of tax “extenders” currently languishing in Congress.) It is unclear why NASCAR, a profitable company in its own right, needs the handout. It already owns the facility and has plans to host four races there in 2014. Some in the state are hoping that the rebate will be used to upgrade the track so that it can host a lucrative Sprint Cup race, but NASCAR has made no such promise.

Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have seen a lot of attention directed toward their analysis of an Oklahoma proposal to cut the state’s top income tax rate–including two opinion pieces, a front-page news story, and a paid advertisement (PDF) taken out by the state’s former Governor. While the top rate cut proposed by current Governor Mary Fallin is extremely lopsided (contrast a $29 tax cut for a middle-income family with a $2,000+ tax cut at the top), it appears that the Senate has some interest in improving upon the bill. Rather than simply cutting the top tax rate and slashing public investments, the Senate’s tax-writing committee recently advanced a bill that pairs the cut with a very sensible expansion of the state’s income tax base: eliminating the nonsensical state income tax deduction for state income taxes paid.

House of Cards–a Netflix show about politicians making bad decisions–is trying to get Maryland’s politicians to make some bad decisions in real life. The Media Rights Capital production company says they’ll shoot the third season of their program elsewhere unless lawmakers direct more taxpayer dollars their way in the form of an expanded film tax credit. Upon learning of the threat, lawmakers on both sides of the aisle had some entirely appropriate reactions: “Is it possible that they would just leave after we gave them $31 million?” “We’re almost being held for ransom.” “When does it stop?”


Gas Tax Remains High on Many States' Agendas for 2014


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

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

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

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

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

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

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

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

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

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

Photo via herzogbr Creative Commons Attribution License 2.0 


A New Wave of Tax Cut Proposals in the States


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Note to Readers: This is the third 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 proposals to cut personal income, business, and property taxes.

Tax cut proposals are by no means a new trend.  But, the sheer scope, scale and variety of tax cutting plans coming out of state houses in recent years and expected in 2014 are unprecedented.  Whether it’s across the board personal income tax rate cuts or carving out new tax breaks for businesses, the vast majority of the dozen plus tax cut proposals under consideration this year would heavily tilt towards profitable corporations and wealthy households with very little or no benefit to low-income working families.  Equally troubling is that most of the proposals would use some or all of their new found revenue surpluses (thanks to a mostly recovering economy) as an excuse to enact permanent tax cuts rather than first undoing the harmful program cuts that were enacted in response to the Great Recession.  Here is a brief overview of some of the tax cut proposals we are following in 2014:

Arizona - Business tax cuts seem likely to be a major focus of Arizona lawmakers this session.  Governor Jan Brewer recently announced that she plans to push for a new tax exemption for energy purchased by manufacturers, and proposals to slash equipment and machinery taxes are getting serious attention as well.  But the proposals aren’t without their opponents.  The Children’s Action Alliance has doubts about whether tax cuts are the most pressing need in Arizona right now, and small business groups are concerned that the cuts will mainly benefit Apple, Intel, and other large companies.

District of Columbia - In addition to considering some real reforms (see article later this week), DC lawmakers are also talking about enacting an expensive property tax cap that will primarily benefit the city’s wealthiest residents.  They’re also looking at creating a poorly designed property tax exemption for senior citizens.  So far, the senior citizen exemption has gained more traction than the property tax cap.

Florida - Governor Rick Scott has made clear that he intends to propose $500 million in tax cuts when his budget is released later this month.  The details of that cut are not yet known, but the slew of tax cuts enacted in recent years have been overwhelmingly directed toward the state’s businesses.  The state legislature’s more recent push to cut automobile registration fees this year, shortly before a statewide election takes place, is the exception.

Idaho - Governor Butch Otter says that his top priority this year is boosting spending on education, but he also wants to enact even more cuts to the business personal property tax (on top of those enacted last year), as well as further reductions in personal and corporate income tax rates (on top of those enacted two years ago). Idaho’s Speaker of the House wants to pay for those cuts by dramatically scaling back the state’s grocery tax credit, but critics note that this would result in middle-income taxpayers having to foot the bill for a tax cut aimed overwhelmingly at the wealthy.

Indiana - Having just slashed taxes for wealthy Hoosiers during last year’s legislative session, Indiana lawmakers are shifting their focus toward big tax breaks for the state’s businesses.  Governor Mike Pence wants to eliminate localities’ ability to tax business equipment and machinery, while the Senate wants to scale back the tax and pair that change with a sizeable reduction in the corporate income tax rate. House leadership, by contrast, has a more modest plan to simply give localities the option of repealing their business equipment taxes.

Iowa - Leaders on both sides of the aisle are reportedly interested in income tax cuts this year. Governor Terry Branstad is taking a more radical approach and is interested in exploring offering an alternative flat income tax option. We’ve written about this complex and costly proposal here.

Maryland - Corporate income tax cuts and estate tax cuts are receiving a significant amount of attention in Maryland—both among current lawmakers and among the candidates to be the state’s next Governor.  Governor Martin O’Malley has doubts about whether either cut could be enacted without harming essential public services, but he has not said that he will necessarily oppose the cuts.  Non-partisan research out of Maryland indicates that a corporate rate cut is unlikely to do any good for the state’s economy, and there’s little reason to think that an estate tax cut would be any different.

Michigan - Michigan lawmakers are debating all kinds of personal income tax cuts now that an election is just a few months away and the state’s revenue picture is slightly better than it has been the last few years.  It’s yet to be seen whether that tax cut will take the form of a blanket reduction in the state’s personal income tax, or whether lawmakers will try to craft a package that includes more targeted enhancements to provisions like the Earned Income Tax Credit (EITC), which they slashed in 2011 to partially fund a large tax cut (PDF) for the state’s businesses. The Michigan League for Public Policy (MLPP) explains why an across-the-board tax cut won’t help the state’s economy.

Missouri - In an attempt to make good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year, House Republicans are committed to passing tax cuts early in the legislative session. Bills are already getting hearings in Jefferson City that would slash both corporate and personal income tax rates, introduce a costly deduction for business income, or both.

Nebraska - Rather than following Nebraska Governor Dave Heineman into a massive, regressive overhaul of the Cornhusker’s state tax code last year, lawmakers instead decided to form a deliberative study committee to examine the state’s tax structure.  In December, rather than offering a set of reform recommendations, the Committee concluded that lawmakers needed more time for the study and did not want to rush into enacting large scale tax cuts.  However, several gubernatorial candidates as well as outgoing governor Heineman are still seeking significant income and property tax cuts this session.

New Jersey - By all accounts, Governor Chris Christie will be proposing some sort of tax cut for the Garden State in his budget plan next month.  In November, a close Christie advisor suggested the governor may return to a failed attempt to enact an across the board 10 percent income tax cut.  In his State of the State address earlier this month, Christie suggested he would be pushing a property tax relief initiative.  

New York - Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Governor Cuomo unveiled a tax cutting plan in his budget address that will cost more than $2 billion a year when fully phased-in. His proposal includes huge tax cuts for the wealthy and Wall Street banks through raising the estate tax exemption and cutting bank and corporate taxes.  Cuomo also wants to cut property taxes, first by freezing those taxes for some owners for the first two years then through an an expanded property tax circuit breaker for homeowners with incomes up to $200,000, and a new tax credit for renters (singles under 65 are not included in the plan) with incomes under $100,000.  

North Dakota - North Dakota legislators have the year off from law-making, but many will be meeting alongside Governor Jack Dalrymple this year to discuss recommendations for property tax reform to introduce in early 2015.  

Oklahoma - Governor Mary Fallin says she’ll pursue a tax-cutting agenda once again in the wake of a state Supreme Court ruling throwing out unpopular tax cuts passed by the legislature last year.  Fallin wants to see the state’s income tax reduced despite Oklahoma’s messy budget situation, while House Speaker T.W. Shannon says that he intends to pursue both income tax cuts and tax cuts for oil and gas companies.

South Carolina - Governor Nikki Haley’s recently released budget includes a proposal to eliminate the state’s 6 percent income tax bracket. Most income tax payers would see a $29 tax cut as a result of her proposal. Some lawmakers are also proposing to go much farther and are proposing a tax shift that would eliminate the state’s income tax altogether.


What to Watch for in 2014 State Tax Policy


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

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

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

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

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

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

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

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

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

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

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

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


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


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

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

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

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

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


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


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

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

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

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

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

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


State News Quick Hits: Amazon's Esoteric Tax Dodge, and More


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Iowa Senator Jack Hatch is one of three Democratic candidates running to unseat Governor Terry Branstad. If elected, the Senator intends to pursue a package of tax changes that would cost the state $415 million in Fiscal Year 2015 and $300 million in the following years. Most components of his plan are quite progressive: eliminating the flawed deduction for federal income taxes paid and asking the wealthiest Iowans to pay more overall.  But we wonder if permanently reducing tax revenues is the best approach when (for example) food insecurity in the state is rising.

Interested in how college textbooks are taxed in your state? Check out this New York Times piece which also explains why Amazon is telling its customers not to carry the textbooks they “rent” from Amazon across state lines. It’s one of the many convoluted steps the company takes in efforts to dodge its sales tax collection responsibilities.

The Kansas City Star explains in an editorial why the gas tax is a better tool for funding infrastructure than the sales tax.  As the Star notes, relying on a general sales tax to pay for roads “is a big leap away from the “user pays” world in which motorists help finance road repair and construction … [and] many drivers from outside the state who use the state’s roads would pay little if anything in sales taxes to maintain them.”  Our partner organization, the Institute on Taxation and Economic Policy (ITEP) makes a similar point in its 50-state report on the gas tax.

Nebraska’s Tax Modernization Committee, which we have been following, has moved on from taking public comment and is now back to deliberating potential changes to the Cornhusker state’s tax system.  At the suggestion of the Committee’s Chairman, members are focusing first on how they would pay for any proposed tax cuts – which could include fully exempting social security from the personal income tax and providing state aid to help reduce property taxes. While tapping into the state’s Rainy Day Fund and reserves is one option under consideration, many lawmakers wisely cautioned against using one-time money to pay for permanent tax changes. We are also happy to see that some Committee members are making tax fairness an important part of the debate. To this point, State Senator Jeremy Nordquist said, “There's a number of options for us to address the regressivity of our state and local tax system, and that's certainly what my goal will be."

 

 

 

 

The Philadelphia Inquirer reports on a poll showing that most Pennsylvanians care more about the quality of their schools than about keeping their tax bills low: “The poll found that in order to restore $1 billion in state aid [that was] cut two years ago, more than half the respondents - 55 percent - would be willing to support increasing the state sales tax from 6 percent to 6.25 percent and postponing corporate tax breaks as long as the money went into a dedicated trust for schools... Fifty-four percent said they would favor boosting the state income tax rate from 3.07 percent to 3.30 percent to help the schools.”

In other Pennsylvania news, a proposal by state Senate Majority Leader Dominic Pileggi to uncap that state’s film tax credit failed to garner support during this legislative session. Yesterday, Governor Tom Corbett signed the 2013-14 Executive Budget, maintaining the credit’s $60 million annual cap. Lawmakers must have read our discussion of why film tax credits are a poor economic development tool – hopefully next year the proposal will be to eliminate them entirely.

The Michigan League for Public Policy (MLPP) uses new data to make the case for reversing the 70 percent cut in the state’s Earned Income Tax Credit (EITC) that lawmakers enacted in 2011 to pay for a big cut in businesses’ tax bills.  As the MLPP points out, “One in every four children (25%) in Michigan lived in poverty in 2011, up from one in five (19%) in 2005. Only nine states had bigger jumps in the child poverty rates … The state and federal credits literally lift children in low-income families out of poverty. Studies show a strong correlation between income boosts and good outcomes for kids.”

Goodbye and Congratulations! The Institute on Taxation and Economic Policy (ITEP) often works with the Iowa Policy Project (IPP) on tax and budget issues in the Hawkeye State. The organization’s founding director David Osterberg  announced that he will be stepping away from his director duties to focus on environment and energy policy. Taking over as director will be Mike Owen, IPP’s current assistant director. We wish David all the best and congratulate Mike in his new role.

Our friends at ITEP are busy crunching the numbers for yet another version of tax “reform” in North Carolina. The Senate is expected to approve a revamped bill this week which is more in line with the concepts the House and Governor support.  But, with a more than $1 billion annual price tag and most of the benefits going to wealthy North Carolinians and profitable corporations, the effort still falls far short of being real reform.  Be sure to check out www.ncjustice.org this week for the latest information about the ongoing debate and to see ITEP’s numbers in action.


State News Quick Hits: Iowans Don't Welcome Business Tax Cuts, and More


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In disturbing news that shouldn’t surprise anyone who  looked at the math, Wisconsin’s Legislative Fiscal Bureau is anticipating that the state will experience a $500 million structural shortfall in 2017 if the bill approved by the Joint Finance Committee becomes law in the Badger State.

In Iowa, voters have become increasingly wary of this year’s property tax overhaul- as they see businesses, not individuals, as the plan’s main beneficiaries. A recent poll shows that 64 percent of respondents say businesses that own property would be the winners in reform, and 37 percent of respondents say they would personally lose under the plan. This sentiment seems to be in line with what the Iowa Fiscal Partnership has been saying all along: “property-tax reform will be costly and will challenge cities, counties and schools to deliver what Iowans have come to expect. It offers big breaks to business property owners — while costing significant sums in local services.” Governor Branstad, however, plans to sign the bill this week.

ITEP has long studied state gas taxes and concluded that “state governments are losing out on over $10 billion in transportation revenue every year.” Washington State is on track to curb that trend this year as political leaders of both parties have come to an agreement on a gas tax hike. While it’s promising that legislators are interested in raising the gas tax to fund transportation projects, the kind of increase they’re looking at, a rate increase without any other reforms, is still going to fall far short of restoring the value Washington’s gas tax has lost in recent decades..

Congress hasn’t even granted states the power to collect sales taxes owed on online shopping, but already Tennessee lawmakers are discussing how they might squander the money.  On the heels of inheritance tax, gift tax, sales tax, and interest and dividend tax cuts, Governor Haslam says he’s open to the idea of cutting taxes even further if the state sees a bump in revenue from passage of the Marketplace Fairness Act.  So far the Governor has said he wants to proceed cautiously, but Tennessee lawmakers have guzzled their share of  tax cut snake oil lately.

Uh oh! Watch out for income tax cuts in Iowa in 2014. Already Governor Terry Branstad is looking to next year and potentially reducing income taxes. He recently said, "I think it’s very likely we’ll be looking at reducing the income tax further. When I became governor, the income tax rate in Iowa was 13 percent. We now have it down to 8.98 percent, plus we have full federal deductibility…Remember, the top federal tax is 38.5 percent, so the effective rate in Iowa is only about 5.5 percent. We’d like to see that go lower."

In refreshing news, late last week Missouri Governor Jay Nixon vetoed a radical tax package passed by the legislature that included: a reduction in the corporate income tax rate, a 50 percent exclusion for pass-through business income, an additional $1,000 personal and spouse income exemption for individuals earning less than $20,000 in Missouri adjusted gross income, and a reduction in the top income tax rate from 6 to 5.5 percent. The Governor called the legislation an “ill-conceived, fiscally irresponsible experiment that would inject far-reaching uncertainty into our economy, undermine our state’s fiscal health and jeopardize basic funding for education and vital public services.” Stay tuned. The legislature is expected to come back in September for a veto session during which it’s likely legislators will try to override the Governor’s veto.  

Last week, the Nevada Legislature passed AB 1 (PDF), a bill that changes how the state will handle tax abatements for new or expanding businesses. Under current law, the state grants partial abatement of property taxes, business taxes, and sales and use taxes to a business that locates or expands in the State and has 75 employees, or invests $1 million in capital into the state (businesses in smaller counties can qualify with 15 employees or a $250,000 investment). The new bill would lower the employee requirements to 50 in larger counties and 10 in smaller counties. The Institute on Taxation and Economic Policy (ITEP) reminds us that these kinds of tax incentives are costly and their real impact hard to measure, to say the least.

The Connecticut House of Representatives passed a bill, HB 6566 (PDF), which would require public disclosure of specific details about state economic assistance and tax credits for businesses. The bill would call for the creation of an online database that lists information such as the name and location of the recipient, the number of jobs created or retained, and the amount and detailed nature of the tax subsidy. This bill came only a few weeks after a report was released by Good Jobs First that documented how costly economic development subsidy programs often lack any kind of public transparency. “Despite its widespread practice, this use of taxpayer funds remains controversial,” the report said, “but the absence of good information makes it impossible for citizens to weigh the costs and benefits to their communities.” The bill now heads to the State Senate for consideration.

 


Tax Credit for Working Poor Survives Iowa Tax Compromise


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Governor Terry Branstad has made “reforming” (cutting) the property taxes paid by Iowa businesses a top priority since taking office. We described the latest attempts to reduce commercial property taxes here. But Senator Joe Bolkcom (chair of the Ways and Means Committee) has repeatedly demanded that any change to corporate property taxes must be accompanied by an increase in the state’s Earned Income Tax Credit (EITC).

Now a compromise bill has passed the Iowa Senate and is on its way to Governor Branstad’s desk. And, as tends to happen with compromise, nobody is completely happy with the final product.

If signed into law by the Governor, here is what that legislation would do: assess commercial and Industrial property at 90 percent of its value (down from 100 percent); introduce a new assessment cap of 3 percent for residential and agricultural property; introduce a new nonrefundable income tax credit if the Taxpayers Trust Fund exceeds $30 million; and double the EITC from 7 to 14 percent.

The Governor would have prefered  that commercial and industrial property be assessed lower, at 80 percent of its value, but said this of the compromise: “I’m hopeful maybe we can do more in future years. But I think this is the art of what was possible with this General Assembly. I’m pleased with the compromise bill that we’ve got tentative agreement on.”

Peter Fisher of the Iowa Fiscal Partnership pointed out, however, “It’s Christmas for Walmart and McDonald’s, which will happily receive property-tax breaks that they don’t need, while their low-wage employees receive a better Earned Income Tax Credit. This Christmas tree will grow bigger with each passing year, leaving less room in local budgets to respond to needs.”

Of course we applaud any increase in the EITC, and doubling that credit is a meaningful tax cut for low and middle income workers. But as the Iowa Fiscal Partnership reminds us, “If there is any question as to who benefits, Iowans should note that the EITC boost will be $35 million when fully phased in, compared to about 10 times that for property owners.”  The pricetag for these property tax changes is likely to increase in future years, and will become a constant strain on local government budgets.

 


Iowa Debates Property Tax Cuts


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The debate over how to effectively tax property in Iowa has raged for years. A new report from the Iowa Fiscal Project (IFP) compares and contrasts the property tax reform proposals put forward by the Iowa House and Senate. The report was described in this Des Moines Register editorial with high praise: “No matter which approach prevails, the Iowa Fiscal Partnership deserves credit for an unbiased examination of the impact of the competing property tax proposals on real businesses in Iowa.”

Currently, commercial property taxes are based on 100 percent of their actual values. Residential property is treated very differently. IFP reports that most recently residential property was assessed at just 52.8 percent of actual value. This disparity is something that Governor Branstad, the Iowa House and Senate are working to address. The Senate bill would create a property tax credit which would ultimately mean that some commercial property would be taxed like residential property. The House bill (which has the support of Governor Branstad) would ultimately tax commercial property at 80 percent of its actual value. In its report, IFP raises important questions about how local governments will be reimbursed for the resulting reductions in a significant local government revenue source should either bill become law. The Senate bill provides more targeted tax relief to corporations, whereas the House bill provides a property tax reduction to all businesses.

It could be that this issue gets put on hold for yet another year because Senator Joe Bolkcom (chair of the Ways and Means Committee) is vowing, as he has before, that no compromise on a tax bill will be reached until an increase in Earned Income tax Credit (EITC) is signed into law.


State News Quick Hits: Pushback on Tax Cuts as Job Creators, and More


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Michigan’s former Treasurer, Robert Kleine, explains in a Detroit Free Press op-ed that “there is no evidence that … [a 2011 tax change] reducing business taxes by $1.7 billion has created new jobs in Michigan.”  Among other things, Kleine observes that “state business taxes are such a small part of a business’ costs that even large changes have a minor impact.”

Gas taxes remain a major topic of debate in the states.  Since publishing our mid-session update on state gas tax debates two weeks ago, Vermont Governor Peter Shumlin signed a gas tax increase into law, Iowa Governor Terry Branstad reiterated that a gas tax hike is still on the table in his state, and The Olympian reports that raising Washington State’s gas tax is “now widely seen as a topic for special session.”

New Jersey Governor Chris Christie has been traveling the state seeking support for his more than $2 billion tax cut proposal (once fully phased-in) ever since using Tax Day 2013 to announce his renewed push for the plan he first championed last year. An op-ed from the Better Choices for New Jersey Campaign says the proposal was “a bad idea then, and it remains one today.”  Why?  Simply put, the state cannot afford even the scaled-back tax cut the governor is proposing for 2013 without reducing spending.

A new report from the North Carolina Budget and Tax Center takes on two common myths about the state’s economy that policymakers often use to justify cutting or eliminating taxes: North Carolina’s economy is uncompetitive compared to neighboring states and high tax rates drive North Carolina’s high unemployment. The report found that North Carolina is actually either leading or in the middle of the pack in every major indicator of economic health except for unemployment.  And, the explanation for high unemployment? A decline in specific industries the state has long relied on – like textiles and furniture – that are highly vulnerable to offshoring, outsourcing and other global pressures, not high tax rates.

Anti-Taxer-in-Chief Grover Norquist recently travelled to Minnesota where he met up with Congresswoman Michele Bachmann to rally against taxes. Minnesota is actually one of the bright lights this year for tax justice advocates who are supporting House and Senate plans there that would raise taxes on the wealthiest Minnesotans.


Mid-Session Update on State Gas Tax Debates


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

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

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

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

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

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

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

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

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

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


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


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

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

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

Positive Developments

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

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

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

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

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

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

Negative Developments

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

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

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

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

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


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

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

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

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


Gas Tax Gains Favor in the States


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

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

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

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

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

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

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

The Pennsylvania legislature just sent a bill to Governor Corbett that would allow most companies to keep the income tax payments they withhold from their employees as a kind of reward for having hired them. Normally, of course, those tax dollars would go to pay for the public services all Pennsylvanians, including the workers, rely on.  As Sen. Jim Ferlo argues, “All of sudden we're waylaying those employees' wages, almost akin to Jesse James robbing a bank, and we're going to put it back in the pockets of one company, in one locale, in one county, in one jobsite.”  This type of tax break is not uncommon, and it’s explained in Good Jobs First’s “Paying Taxes to the Boss.

The Olympian editorializes against Washington State’s Initiative 1185, the newest attempt by anti-tax activist Tim Eyman to empower a small minority of legislators to block the closing of any tax loophole.  The proposal is known as a “supermajority requirement,” since it would require approval by two-thirds of each legislative chamber to enact any revenue-raising tax change.  But as the editorial explains, “A supermajority gives unprecedented and undemocratic powers to the minority in just one area: tax increases. Lawmakers who oppose a tax proposal get twice the voting power of those who support it.”

Iowa tax revenues appear to be on the rise, but instead of using that money to fill in gaps after years of “starv[ing] state government” or, say, restoring anti-poverty tax credits like the state’s Earned Income Tax Credit (EITC),  Governor Terry Branstad is pushing for proposals that will “dramatically” reduce both personal and corporate income tax rates. This is par for the course with Governor Branstad. He has a history of prioritizing the wrong tax cuts while vetoing those for working families, like an expanded state EITC.

Looking for evidence that states shouldn’t heavily depend on cigarette tax (PDF) revenues as a stable source of revenue? Check out this Clarion Ledger article which reports that “per capita consumption of cigarettes — 67.9 packs a person in 2011 — is the lowest it’s ever been in Mississippi.” Thanks to federal and state tax increases, tax revenues have actually increased, but as fewer and fewer Mississippians smoke, those cigarette tax revenues are bound to decline as well.

In a recent survey, conducted by the Docking Institute of Public Affairs at Fort Hays State University, Kansans said they would rather see property tax cuts than income tax cuts. This finding isn’t surprising given the unpopularity (PDF) of regressive property taxes. Earlier this year, however, Kansas lawmakers did the opposite and passed sweeping reductions to the income tax.  The Institute’s Director said it was clear that, “the tax structure [Kansans] want seems to be completely the opposite of the tax policies coming from the Legislature.”


Quick Hits in State News: Wynonna Judd's Tax Break, Undocumented Workers' Taxes


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The Iowa Policy Project’s Research Director Peter Fisher is quoted in a Des Moines Register piece where he recommends that Iowa increase it Earned Income Tax Credit (EITC) as one way to help low- and middle-income children. ITEP has long championed EITCs as a vital anti-poverty tax policy.  

With Halloween just around the corner, Renee Fry of Nebraska’s Open Sky Policy Institute shares the scary news that Nebraska ranks 27th among states for its regressive tax structure. Taxes are expected to be a contentious issue this year and “fiscal guru” Fry says the state’s “tax system is taking its toll in how much Nebraskans invest in schools, roads and communities. Outdated tax codes also complicate state leaders’ ability to plan strategically.”

Here’s a familiar problem, this time from Tennessee.  Big property tax breaks for farmers are reducing local tax bases by up to 20 percent. Worse, a state report says that the break is “being used by some people who clearly aren't farmers.”  Among the so-called “farmers” benefiting from this giveaway are some of the state’s wealthiest residents, like country music stars Billy Ray Cyrus and Wynonna Judd, as well as the founder of Autozone.

With a Maryland version of the DREAM Act on the November ballot, columnist Dan Rodricks at the Baltimore Sun wants readers to be aware of  the taxes that are often paid by undocumented workers, including state income taxes, federal income taxes, Social Security taxes, sales taxes, and fees.


Politicians Choosing Roads Over Schools


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Let’s start with the good news.  There's a growing recognition among even the most virulently anti-tax lawmakers that one core area of government is actually underfunded and needs revenues: transportation maintenance and construction.

Unfortunately, there’s some bad news, too. Rather than fixing the gas tax shortcomings that have led to transportation coffers (quite predictably) running dry, many of those same lawmakers want to divert money away from education, health care, and other services, and spend it on roads and bridges instead.

One lawmaker touting this approach is Iowa Governor Terry Branstad.  While Branstad should be praised for realizing that the gas tax should be raised next year, his broader plan to couple that increase with big cuts in income taxes and local property taxes completely misses the mark.  If enacted, everything from schools to police departments will have to be scaled back just so that Branstad can avoid the “tax raiser” label some political operatives might pin on him for favoring a long-overdue and much-needed gas tax hike.

Governor Branstad's approach echoes one outlined earlier this year by his counterpart in Virginia, Governor Bob McDonnell.  During a conversation with the Associated Press (AP), McDonnell hinted that he might reverse his opposition to raising the gas tax if it’s done as part of a broader, revenue-neutral tax “reform” package.  As we explained then, however:

“Even if McDonnell believed the state’s gas tax needs to be raised and indexed, his opposition to raising any new revenue overall is almost guaranteed make his reform agenda bad for the state.  That’s because every dollar in new revenue McDonnell might generate for transportation would have to be offset with a dollar in tax cuts elsewhere in the budget—presumably from a tax that funds education, human services, public safety, and other core government functions.”

These proposals to actually increase the gas tax might seem remarkable at first, coming from governors who are as opposed to taxes as Branstad and McDonnell.  But when you peel away the layers, the logic behind the proposals is nothing new.  In the face of lagging gas tax revenues, politicians have frequently raided other revenue streams in order to avoid raising taxes but still keep their transportation systems afloat. Nebraska, Utah, and Wisconsin did it in 2011, and Michigan, Oklahoma and the federal government did it in 2012.  At their core, Branstad and McDonnell’s approaches are just accomplishing the same outcome but in a more roundabout way: shifting money around in a way that benefits roads at the expense of everything else.

For a smarter approach, see the recommendations made in Building a Better Gas Tax, from the Institute on Taxation and Economic Policy (ITEP).

 

Slow but steady progress toward enforcing state sales taxes on online purchases continues.  Amazon.com has agreed to begin collecting sales taxes in Pennsylvania, and the state’s Revenue Department plans to start auditing and penalizing other online retailers with a physical presence in the state that fail to collect the tax.

Promises from Iowa lawmakers to flatten and lower income tax rates and roll back business property taxes are worrisome. But when House Republicans and the governor recently sketched out their ideas for pursuing this agenda, they actually (and deliberately) “offered no specifics on any of their tax relief and reform commitments.”  The state requires a balanced budget, so these tax cuts will need to be paid for and the choices available are limited: cut services or increase other taxes

While state lawmakers love to offer tax breaks in the name of job creation, Missouri might be learning to resist the urge. Governor Jay Nixon has asked his Tax Credit Review Commission, which he created in 2010 to provide an independent review of the state’s many tax credits, to update its 2010 report, which was harshly critical of many Missouri tax credits. While the original report’s advice was never followed because the state legislature was unable to agree on paring back these tax breaks, House lawmakers are now signaling their interest in critically reviewing the tax breaks the state currently provides in the name of job creation – welcome news since there is remarkably little evidence (PDF) that state tax breaks are an effective job-creation strategy.

Last weekend, Louisiana shoppers took advantage of the Second Amendment sales tax holiday, which allows the purchase of guns and ammunition tax free.  Read why sales tax holidays are silly (PDF) and a political racket.

 

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


Quick Hits in State News: Iowa Film Tax Credit Drama Continues, and More


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Former Texas deputy comptroller, Billy Hamilton, explains why extreme proposals to repeal the property tax are a bad idea.  Among the reasons he cites: out-of-state property owners would get a massive tax cut, localities would lose control of their own finances, and the sales tax increase needed to fund repeal would be so large as to be both bad policy and bad politics.

Iowa filmmakers that benefited handsomely from the state’s now-suspended film tax incentive program have been rebuffed by the state’s Supreme Court, which rejected their claim that if their company financials were publicly released, it would cause them hardship. The Des Moines Register editorialized in favor of the decision, saying that: “Businesses that ask for the government to subsidize their ventures are in effect asking the taxpayers to share in the risk.  Those taxpayers have an interest in knowing if their investment is being spent properly.  Businesses should accept that as part of the deal, or they should look elsewhere for business partners.”

This weekend back-to-school shoppers in twelve states are gearing up for a political gimmick – a break from paying sales taxes known as sales tax holidays. This South Carolina editorial reminds policymakers and voters that these holidays aren’t a real solution to regressive taxes, “Lawmakers should get the state's sales tax house in order, not throw us a couple of short-term holidays.”


Will Conservative Governors Reject the Deal of a Lifetime?


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According to one of the latest counts, officials in 30 state governments have indicated that their state plans to opt out of the Medicaid expansion that was enacted as part of health care reform, or are at least leaning in that direction. The reason many conservative state officials, like Florida Governor Rick Scott, cite for opting out (putting aside general criticism of the evils of “Obamacare”) is that participating would “strain state budgets.”

In reality, the Medicaid expansion is the deal of a lifetime for state governments. The nonpartisan Congressional Budget Office (CBO) estimates that the federal government will take on nearly 93 percent of the costs of the Medicaid expansion over its first nine years. On average, that means that states will receive over 9 additional Medicaid dollars for every 1 they spend themselves.

While this may already sound like a great deal, many states may end up actually saving money by embracing the Medicaid expansion. An in-depth study by state officials in Arkansas found that it would actually cost the state $3.4 million more to not participate in the Medicaid expansion. Similarly, a study by the Urban Institute found that health care reform overall will save state budgets between $92-129 billion dollars from 2014-2019.

In some cases, the failure of the state government to accept the Medicaid expansion may also have the side effect of putting even more strain on local budgets. Last year in Texas, for example, the decision by the Republican Governor Rick Perry and state legislators to cut Medicaid forced the El Paso County Hospital District to raise property taxes to make up for the increasing costs from nearly uninsured patients. This dynamic explains why many local officials in Texas support the Medicaid expansion, even as Governor Perry is one of its most outspoken critics.  

While many conservative governors are claiming that the Medicaid expansion would cost too much, they are at the same time continuing budget-busting tax breaks for the wealthy. Iowa Republican Governor Terry Branstad for instance has said that the Medicaid expansion would be “unaffordable” and “unsustainable”, even though its estimated cost would be less than 4 percent of the revenue that could be raised by ending the Iowa’s bizarre and regressive deduction for federal income tax payments.

Considering the generous deal that governors are being offered, many commentators believe that most if not all the states will ultimately take the deal, despite the recent election year grandstanding. The CBO is not so sure. On Tuesday, CBO released its latest cost projections of health care reform, which predicts that many states will choose to opt out of the Medicaid expansion resulting in 3 million fewer people insured.

Photo of Gov. Terry Branstad via Iowa Politics Creative Commons Attribution License 2.0

  • When the richest woman in Wisconsin (and the governor’s biggest donor) pays no income tax to the state in 2010, it gets people asking about loopholes in the tax code.
  • We aren’t the only think tank taking issue with the Kansas tax bill recently signed into law.  The fiscally conservative Tax Foundation recently issued a report which says that provisions in the bill to exempt “pass through” business income are “problematic” and an invitation to tax avoidance.  
  • With summer road tripping underway, it’s bad news for Iowans that the state’s Department of Transportation appears to be more than $200 million short. Governor Branstad was right to say the state gas tax should be increased next year (as should almost every state’s).

Photo of Governor Christie via Bob Jagendorf Creative Commons Attribution License 2.0


Iowa Governor Fails Again to Win Property Tax Cuts for Business; Tax Credit for Working Poor Is Casualty


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Governor Terry Branstad has made “reforming” (cutting) the property taxes paid by Iowa businesses a top priority since taking office. The good news is that his latest proposal to accomplish that goal seems to have fallen short; unfortunately, this one was coupled with an increase in the state’s earned income tax credit (EITC), so it also fell by the wayside.

Last year we explained that Branstad’s first proposal would have allowed businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). The plan was estimated to cost as much as $500 million annually, but it ultimately failed.

On Tuesday, a Senate bill which offered a targeted property tax credit aimed at small businesses (and in some cases offering more relief to businesses than the Governor’s original proposal) was also narrowly voted down, 24-23. The Senate refused to even vote on a more costly tax cut proposal that passed the House, which would have assessed commercial property taxes at 90 percent of their actual value for tax purposes, taking effect over five years. Reports point to effective lobbying by cities and towns whose leaders came out against drastic cuts to business property taxes. One county, for example, stood to lose $7.3 million in just one year.

Governor Branstad is not giving up, though, and called on Iowans to vote out any legislator who voted against these business tax cuts. For now, it appears that counties and cities can breathe a sigh of relief. The same is not true, however, for the working poor who rely on the EITC to fill gaps in their household budgets; any increase in their tax credit won’t come around again until next year, either.

  • The Maryland Budget and Tax Policy Institute just unveiled a “Doomsday Clock” on their website.  The countdown shows how many days are left until massive budget cuts take effect on July 1.  The Institute explains that these cuts can be avoided if Governor O’Malley calls a special session and lawmakers pass the progressive income tax package agreed to in conference committee.
  • Former Mississippi Governor Haley Barbour continues to lobby for taxing internet sales even after leaving the Governor’s mansion. In fact, in his farewell address to Mississippians the Governor said, “It is time for the federal government to allow Mississippi and every other state to choose to enforce our laws and to collect these taxes. They are owed us today, and there is no longer any public policy reason to keep us from collecting. Indeed, good public policy says it is past time that our brick-and-mortar merchants on Main Street and in our shopping centers get a level playing field with Amazon and the Internet. That they get fair treatment for paying our taxes.”
  • Thanks to an obscure tax loophole which offers Iowans the ability to write off all of their federal income taxes paid, Governor Terry Branstad had a 2011 tax bill of just $52. One state senator is pondering whether or not the state needs a “Branstad rule” to ensure that upper income Iowans pay more in state taxes. The Governor’s lack of a tax bill illustrates just how preposterous the loophole is – and why there are only six states that allow it.
  • Now that the rush to make sure our taxes are filed on time is over, here’s a downright beautiful essay from a priest in Kansas reminding us the good that comes from all the frenzy.
  • Here’s a thoughtful editorial from the St. Cloud Times describing Minnesota’s need to fund important transportation projects. Lawmakers there are looking into toll roads because the political will to raise gas taxes doesn’t exist – yet the editors rightly conclude, “It’s not that we oppose building this bridge or expanding roads. It’s just that the fairest revenue stream to do so is the gas tax. Legislators just need the courage to adjust it as needed.” To see how Minnesota’s gas tax has effectively shrunk over time, check out this chart from the Institute on Taxation and Economic Policy (ITEP).

Transportation Funding Debacles Around the Country


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Our nation’s gas tax policy is horribly designed, and the consequences have never been more obvious at either the federal or state levels.  Construction costs are growing while the gas tax is flat-lining, and the resulting tension has made even routine transportation funding debates too much for our elected officials to handle.  Just last week, President Obama signed into law the ninth temporary, stop-gap extension of our nation’s transportation policy since 2009, and numerous states are similarly opting to kick the proverbial can down the crumbling road.

Much of our collective transportation headache arises from our “fixed-rate” gas taxes that just don’t hold up in the face of rising construction costs.  The federal gas tax hasn’t been raised in over 18 years, and most states have gone a decade or more without raising their tax.  There’s no doubt that we’re long-overdue for a gas tax increase, but political concerns have kept that option largely off the table.  In addition to the embarrassing federal Band-Aid fix just signed into law by the President, here’s what we’re seeing in the states:

The Michigan Senate has voted to permanently take millions in sales tax revenue away from health care, public safety, and other services in order to complete basic road repairs.  But as the Michigan League for Human Services explains, the state would be much better off modernizing its stagnant gas tax.

Both the Oklahoma House and Senate have voted to raid the general fund as a result of lagging gas tax revenues.  These proposals are very similar to the one under consideration in Michigan, and when fully phased-in they would divert $115 million away from education and other services in order to improve some of the state’s wildly deficient bridges.

Luckily, Virginia lawmakers didn’t agree to Governor McDonnell’s proposal to raid the general fund in a manner similar to what’s being considered in Michigan and Oklahoma.  But they also failed to enact a much smarter proposal passed by the Senate that would have indexed the state’s gas tax to inflation.  It looks like rampant traffic congestion will remain the norm in Virginia for the foreseeable future.

Iowa and Maryland appear likely to follow Virginia’s lead and do nothing substantial on transportation finance this year.  Iowa House Speaker Kraig Paulsen says that after much talk, a gas tax increase is not happening.  And while Maryland Governor Martin O’Malley is trying hard to end almost two decades of gas tax procrastination in the Old Line State, it doesn’t look like the odds are on his side.

Connecticut lawmakers aren’t just continuing the status quo, they’re actually making it worse.  Connecticut is among the minority of states where the gas tax actually tends to grow over time, since it’s linked to gas prices.  But the Governor recently signed a hard “cap” on the gas tax that prevents it from rising whenever wholesale prices exceed $3.00 per gallon.  Lawmakers in North Carolina briefly considered a similar cap last year, but as the Institute on Taxation and Economic Policy (ITEP) explains, blunt caps are very bad policy and there are much better options available.

For more on adequate and sustainable gas tax policy, read ITEP’s recent report, Building a Better Gas Tax.

Photo of Governor Martin O'Malley and Sunoco Gas Station via  Third Way and MV Jantzen Creative Commons Attribution License 2.0

 


Quick Hits in State News: Tax Victory in Iowa, and More


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Here’s a huge tax fairness victory in Iowa. The state Senate voted unanimously to increase the Earned Income Tax Credit from 7 to 13 percent of the federal credit to help working families make ends meet.

Matt Gardner, Executive Director of the Institute on Taxation and Economic Policy (ITEP), blogs about lessons for Georgia from a new ITEP report on the economies of states with and without income taxes.  Gardner writes that Georgia lawmakers “wanting to join the non-income tax club are simply idolizing the wrong states.  Most states without income taxes are doing worse than average … and the states with the highest top tax rates are actually outperforming them.”

Also in Georgia, anti-tax guru Grover Norquist is weighing in on collecting taxes on internet sales, warning that it is a violation of his group’s “no new tax” pledge to vote for legislation requiring online retailers to collect sales taxes on purchases.  But the fact is, Georgians who shop online do, by law, have to pay the sales tax on those purchases if the e-retailer does not collect the tax, but the requirement is basically unenforceable.  Collecting taxes legally due is not a tax increase.

Missouri lawmakers are falling all over themselves to come up with revenues without “raising taxes” because the trust fund that pays for veterans’ services in the state is insolvent.  Silly “non tax” ideas being floated by legislators include casino entrance fees and a special lottery, which have already proven to be unsustainable revenue sources for veterans’ and other programs.  Missouri is notorious for its failure to tackle serious tax reform; will a backlog of military veterans in need of care give lawmakers incentive to do the right thing?

Bills in both the Iowa House and Senate are advancing that would finally raise the state’s long stagnant gas tax rate.  ITEP recently found that Iowa hasn’t raised its gas tax rate in 22 years, and that since that time the tax has lost $337 million in yearly value relative to rising transportation construction costs.


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:


The Verdict Is In: Business Tax Breaks Do Not Create Jobs


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A slew of tax credit programs in Iowa that have failed to live up to their job-creation promises is further evidence that while companies will happily take taxpayer money when it’s offered, no amount of corporate pork can make a company hire people when there’s no demand for its products.

An excellent piece of journalism from The Des Moines Register reveals that 15 companies enjoying tax credit dollars given to them by the state have defaulted on the job-creation requirements tied to those credits.  All together, those companies created one-third fewer jobs than they promised when they took the money.  (This story echoes a recent report from Texas showing that just 26 percent of projects receiving funding from the Texas Enterprise Fund (TEF) fully complied with their 2010 job creation requirements.)

The reasons for these failures should be obvious.  When the economy is weak, businesses generally can’t sell as much of their product as they used to.  You can throw money at them and ask them to hire more people, but ultimately it doesn’t make sense for a company to bring on more employees unless there’s some new, unmet demand that needs to be filled.  In good economic times, companies simply rake in tax credit dollars and create jobs they would have created anyway. But in bad economic times, companies rake in tax credit dollars, the façade collapses, and you end up with exactly the situation we see in Iowa.

Iowa State University economist David Swenson provided some valuable insight to The Des Moines Register on this issue: “Tax credits in Iowa are used very injudiciously.  Everybody qualifies for something. It makes no sense from a business or government point of view. … But government officials can’t take credit for job creation if they don’t hand out some sort of subsidy.”

He goes on to provide an important recommendation to legislators currently reviewing 35 of Iowa’s tax credits: “Everybody is living with a lot less,” due to the down economy. “That really does mean businesses should be living with a lot less public subsidy.”

Photo of Iowa State Capito via  Jimmy Wayne Creative Commons Attribution License 2.0


Way to Go, Governor Branstad! Kick 'Em While They're Down


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Being a member of the working poor has never been easy, but these past few years have been particularly tough on working families who must contend with increasing health care costs, high unemployment, food inflation and high gas prices, among other things.  This makes now an ideal time for policymakers to work together to make it a little easier for families to make ends meet.

But Iowa Governor Branstad appears to be moving in the opposite direction. Exhibit A is his veto last week of a minor increase in the state’s Earned Income Tax Credit (EITC). This credit has received bi-partisan support for decades because of its unique ability to lift working families out of poverty. It is smart, targeted policy that everyone can get behind.

But the Governor couldn’t find his way clear to increase Iowa’s EITC credit from seven to ten percent of the federal credit; and with 15 percent being the national average, ten is not even particularly generous.  For now, Branstad says he is most interested in “reducing those taxes that are impeding our state’s ability to compete for new business and jobs.” Yet another governor who’s been drinking the Chris Christie kool aid.

This may be one of the worst cases we’ve seen of kicking them while they’re down.  We share the sentiments of the Iowa Fiscal Partnership when they write the veto “hurts working people and the economy.”

Photo via Gage Skidmore Creative Commons Attribution License 2.0


Iowa Business Leaders Prefer Higher Fuel Tax to Crumbling Infrastructure


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A group of Iowa business leaders recently voiced their support for an increase in the state fuel tax to pay for much needed road repairs. Speaking in front of Governor Terry Branstad’s Transportation 2020 Citizen Advisory Commission, a wide array of business (subscription required to view link) interest groups called for the fuel tax hike, including the Associated General Contractors of Iowa, Iowa Farm Bureau, Iowa Bankers Association, Iowa Motor Truck Association, and the Iowa Good Roads Association.

The Commission is tasked with assessing the condition of Iowa’s roads and the revenue sources used to pay for those roads.  More specifically, the Commission is seeking to address what the state’s Department of Transportation estimates is a $215 million shortfall in transportation spending, relative to the amount of money needed to complete certain high-priority projects. 

Most of those who spoke at the July 7th hearing agreed that the best way to address this shortfall would be through an increase in the fuel tax.  One virtue of the tax is that it functions like a “user fee” in that those who drive more (and wear down state roads more) pay more to have them maintained and repaired.  Advocates for progressive taxes, on the other hand, point out that the gas tax impacts low-income taxpayers most heavily.  If the regressivity of the gas tax is mitigated through an expansion of the state’s EITC, however, an increased gas tax could be a very responsible and equitable way of fixing Iowa’s – or any state’s – deteriorating roadways.

Ultimately, it’s refreshing to see these business leaders – a group that too often exhibits a knee-jerk opposition to all tax increases – recognize that new tax revenues will be absolutely essential in bettering the state of Iowa and its roadways.  Iowa business leaders are well aware that working roads are the kind of infrastructure that allows them to succeed economically and transport their goods and services around the state. It’s also worth noting that the path being urged by Iowa business leaders is preferable to the one taken just next door in Nebraska, where chronic transportation funding shortfalls have been “addressed” by simply taking money away from education and other public services.

Photo via Will Merydith Creative Commons Attribution License 2.0


Stalemate on Corporate Taxes Is Good News for Hawkeye State


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In the final hours before the state’s new fiscal year was to begin, Iowa lawmakers agreed on a two year, nearly $6 billion, budget plan. The new budget was heavily debated during the state’s third longest legislative session. The state’s budget is now balanced for the next two fiscal years, and compromise on some key issues was reached.

For example, the Press-Citizen reports that Democrats agreed to freeze school spending for the current fiscal year and then to increase funding by two percent in 2013. Republicans agreed to provide $59 million for the state's preschool program, more than they originally proposed.

In the case of costly cuts to corporate property taxes, however, no final agreement was reached; and that is a victory for tax justice advocates.

Governor Terry Branstad wanted to drastically reduce corporate property taxes. His proposal would have allowed businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). When fully implemented, the price tag for this measure was about $500 million. 

House Republicans weren’t willing to go that far, offering to shelter 25 percent of a property’s value. Senate Democrats were only interested in allowing targeted tax credits instead of across the board cuts. Ultimately, Iowa policy makers weren’t able to come to any sort of agreement.

But then, when it comes to handouts for corporations, that's not such a bad thing.

Photo via Gage Skidmore Creative Commons Attribution License 2.0


Iowa Governor Chooses Corporations Over Iowans


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Iowa Governor Terry Branstad has made it very clear that he prioritizes corporations over working families. Earlier this week, the Governor vetoed a slight increase in the state’s earned income tax credit (EITC) from 7 to 10 percent of the federal credit. The EITC is one of the most effective and popular anti-poverty programs states can offer, but Branstad has insisted that Iowa’s “limited budget” requires a single-minded focus on slashing business taxes instead.

The Governor’s veto letter makes his reasoning crystal clear, saying "Iowa should instead focus its energies on improving our state's long-term competitive tax position for new job creation.”  The letter goes on to explain that in Branstad’s mind, this means that corporate income taxes and commercial property taxes must be slashed.

In an effort to fulfill Branstad’s vision, legislation was introduced Wednesday that, when fully phased in, would allow businesses to shelter a full 40 percent of their property’s value from the property tax (by assessing commercial property at only 60 percent of its actual value for tax purposes). When fully implemented, the price tag for this measure is about $500 million.  

Many local officials are wary of the proposed change since local governments are heavily dependent on the property tax to fund their day-to-day operations.  The state has promised to replace the revenue localities are sure to lose as a result of this legislation, but most would prefer to have control over their own revenue streams. Making matters worse, House Ways and Means Committee Chair Thomas Sands has acknowledged that “the state doesn’t always honor its commitments.”  

The Governor has chosen to favor corporations over middle class Iowans. What remains to be seen is how far the state’s legislature is willing to go to give handouts to corporations while working families struggle.


New ITEP Report on States With Deductions for Federal Income Taxes Paid


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Earlier this week, the Institute on Taxation and Economic Policy released a new report, Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head.  The report highlights an unusual tax break that currently exists in only six states (Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon): a state income tax deduction for federal income tax payments.  Collectively these states stand to lose over $2.5 billion in tax revenues in 2011 due to these tax breaks, with losses ranging from $45 million to $643 million per state.

Unfortunately, the high price tag of this tax giveaway yields remarkably little benefit to low-and middle-income families.  In states where the deduction is uncapped, the best off 1 percent of taxpayers enjoy up to one-third of the benefits from this provision, while the top 20 percent enjoy up to 80 percent of the benefits.  Wisely, several states have eliminated or scaled back this expensive and poorly targeted deduction in the last few years.  North Dakota, Oklahoma, and Utah have all eliminated the deduction, and Oregon lawmakers voted recently to further limit their deduction.

Deductions for federal income taxes seriously undermine the adequacy and fairness of state income taxes. These deductions also leave state budgets vulnerable to changes in federal tax law.  As the recession lingers and states look to enhance their long term fiscal solvency, elected officials in states with a deduction for federal income taxes paid have a real opportunity to close fiscal shortfalls in a way that has minimal impact on low-and middle-income families.

Read the Report


Tax Cutting Mania: Iowa and Kansas


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The Iowa Fiscal Partnership has issued a policy brief about the destructive tax cuts that are being proposed in the state legislature. The cuts being debated carry a hefty price tag, $1.6 billion, most of which is from a proposal to cut income tax rates by 20 percent across the board.

As we’ve previously noted, these income tax cuts are very regressive. ITEP found that the wealthiest 1 percent of Iowans would receive an average of $6,822, while those in the bottom quintile would enjoy a break of just $18 on average.

According to IFP, the revenue picture in Iowa is improving and the budget can be balanced without drastic cuts to spending and without raising taxes. But it’s mind boggling that legislators would want to cut taxes as they're just barely crawling out of a fiscal crisis.

Charles Bruner, Executive Director of the Child and Family Policy Center, recently said, "Nobody is saying we're flush with revenues, but the picture has improved and we can get through without major cuts. But that assumes we don't dig a bigger hole with unnecessary and unwise cuts in revenues." For more on the tax cut proposals and why they are shortsighted, read IFP’s report.

In more disturbing tax cut news, the Kansas House has passed legislation that would link the state’s personal and corporate income tax rates to changes in revenue. If revenues increase, the rates for the state’s two major progressive taxes will decrease. Eventually the income tax could even be phased out altogether. 

Supporters of the legislation say that this proposal will increase the likelihood that businesses will locate in the state. But a more thoughtful critique was offered by two state Representatives in explaining their vote against the proposal. "When it (the income tax) is gone, our three-legged stool is cut to two — and the worst two we can choose. [The] sales tax is a regressive tax that impacts low-wage earners most.” The legislation now goes to the state Senate.


Iowa: Facts Ignored By State House


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The Iowa House of Representatives has approved a bill to cut income taxes by 20 percent, despite an analysis from ITEP showing that the richest 1 percent of Iowans would receive an average of $6,822 while those in the bottom quintile would enjoy a break of just $18 on average.

The bill, H.F. 194, which reduces income tax rates by 20 percent across the board, will now go to the Senate. For more information, see the Iowa Policy Project’s brief on this enormous tax cut.


States Take a Knife to One of Their Major Arteries: Corporate Income Taxes


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It’s pretty evident that state corporate income taxes are especially flawed and riddled with loopholes. But, of course, that doesn’t have to be the case. In fact, there are lots of things that legislators can do (given the political will) to strengthen their corporate income taxes, including enacting combined reporting, increasing corporate tax disclosure, and closing selected loopholes.

Despite all these options to strengthen the corporate tax, lawmakers from coast to coast are doing their best to undermine this inherently progressive tax. This seems especially sort-sighted given the revenue needs of many states.

Here are some recent bad ideas regarding state corporate income taxes:

Arizona Governor Jan Brewer’s budget outline includes a proposal that would phase out the state's corporate income tax over four years.  

Florida Governor Rick Scott has proposed reducing the corporate income tax rate from 5.5 to 3 percent.

Indiana’s Senate is considering a bill to reduce the state’s corporate income tax by 20 percent. This bill recently passed the Senate Committee on Tax and Fiscal Policy.

Iowa Governor Terry Branstad has said that he would like to cut Iowa’s corporate income tax in half, despite evidence that this tax change would only benefit large corporations.

Recently, bills have been dropped in the both the Kansas House of Representatives and the Senate which would phase out the state's corporate income tax altogether.

North Carolina Governor Beverly Perdue is proposing that the corporate income tax rate be reduced to 4.9 percent from 6.9 percent.

Instead of slashing or completely eliminating the state corporate income tax, lawmakers should be working to strengthen this revenue source.


Tax Giveaways for Big Business Continue to be Sold as Economic Panacea


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Lawmakers in a handful of states are pushing tax cuts for corporations and other businesses under the guise of spurring economic growth.  Florida, Kansas, Iowa, Missouri, and Arizona all made headlines this week for proposed tax cuts of this sort.

In Florida, Governor Scott’s proposed budget plan was released on Monday, and as expected, it included enormous cuts to both corporate income taxes and property taxes.  Under Scott’s plan, which he unveiled before a crowd of tea party activists, the state’s already low corporate tax rate would fall from 5 percent to 3.5 percent.  At the same time, state spending would plummet by $4.6 billion, with pre-K through university education making up $3.1 billion of that total.  Fortunately, even the state’s conservative legislators don’t seem the least bit interested in Scott’s ultra-conservative (and exceedingly vague) ideas.

Kansas lawmakers generated similar headlines this week as bills were introduced in both the House and Senate to phase out the state’s corporate income tax.  According to the Wichita Eagle, proponents of the measure are actually claiming that phasing out this major tax would somehow increase tax revenue.  We seriously doubt it.

In Iowa, Governor Branstad’s proposal to slash the corporate income tax in half and cut business property taxes by 40 percent received renewed attention this week as the Des Moines Register attempted to summarize the absolutely massive number of tax cuts being proposed by Iowa lawmakers. 

Fortunately, Senate Majority Leader Michael Gronstal isn’t impressed, saying, “Taken as a whole, the Republican budget basically says we're going to squander the opportunities for the next generation of kids in this state — in terms of education, in terms of access to community college and training programs — we're going to push that aside and say the most important thing is to make sure corporations have tax cuts.”

Missouri lawmakers also garnered some attention this week when the state Senate endorsed legislation to repeal the state’s franchise tax on businesses over the course of the next five years.  Currently, a business must have more than $10 million in assets to be subject to the franchise tax.  The St. Louis Post-Dispatch ran an excellent editorial this week in response to the plan, noting: “Businesses were given tax breaks, tax credits, tax incentives, low corporate taxes and tort reform. So where are the jobs? Or did they just pocket the savings? … Business-friendly is one thing. Business-promiscuous is quite another.”

It probably wouldn’t change anything, but it sure would be nice if Arizona lawmakers gave the Post-Dispatch’s editorial a read before beginning debate on the business tax cut package that Governor Brewer plans to release on Monday.


Tax Reform: Good Ideas in Colorado and Kentucky, Bad Ideas in Iowa


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Progressive tax reform ideas are getting attention in Colorado, where voters may get the opportunity to enact it by ballot, and Kentucky, where lawmakers have the opportunity to support a far-reaching reform bill. Meanwhile, Iowa may move in the opposite direction by choosing the most draconian tax proposal being debated in the state.

Supporters of progressive taxation in Colorado, led by the Colorado Center on Law and Policy, filed a mix of ballot proposals last week that would greatly enhance the adequacy and fairness of Colorado’s tax system.  (Multiple proposals were filed for technical reasons, and supporters intend to bring only one plan before the voters.) 

Each proposal would transition away from Colorado’s flat rate income tax in favor of a graduated rate system.  The tax rate on taxable incomes below $50,000 would fall from 4.63% to 4.2%, while progressively higher rates would apply to higher levels of income.  Incomes above $1 million would be taxed at 9.5%. 

The majority of Colorado residents would see tax cuts, or no change in their income tax liability, under this plan.  Some of the proposals would also raise the state’s corporate income tax rate, while others would institute a new corporate minimum tax.  The state’s EITC would also be made permanent under some of the proposals.  By reforming Colorado’s tax system in this manner, approximately $1.5 billion in sorely needed revenue could be raised each year in order to improve the state’s struggling school system and other public services.

In Kentucky, Representative Jim Wayne held a press conference last week to discuss his bill, HB 318, which would modernize and increase the progressivity of Kentucky’s tax structure. The bill would expand the sales tax base to include a variety of services, introduce an Earned Income Tax Credit, and change the personal income tax rates and brackets.

ITEP estimates were used to show that, overall, the state would have a more progressive tax structure if the Wayne bill became law. Representative Wayne should be applauded for continuing to beat the progressive drum and arguing year after year that a tax system “should be equitable, it should be buoyant, it should be flexible, and it should grow with the economy.”

In less cheerful news, the Iowa House will have the opportunity to vote on a bill that passed through committee that, if approved, would reduce the state’s income tax rates across the board by 20 percent. This bill is one of the most expensive tax cut proposals currently on the table and threatens Iowa’s ability to provide public services over the long term.

In fact, the leader of the Democratic minority in the House recently said, "I'm not sure where the House ship is sailing. On one hand, we have all kinds of tax-cut bills moving through the process. ... It's about $2 billion over the next few years that would be eliminated from the state of Iowa's budget. How is that even remotely fiscally responsible?"

Of course, it's the opposite of fiscally responsible, as noted in a recent Iowa Policy Project brief finding that “[t]o develop long-term sustainability in the budget, it is important to examine what has given rise to current budget imbalances. Iowa’s long-term structural budget deficit has occurred in significant measure because lawmakers have adopted various tax breaks and reductions, not because they have expanded programs and services.”


State-Based Coalitions Fight for Budget Fairness


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Faced with huge budget deficits, many state lawmakers are eyeing dangerous short-sighted budget cuts that threaten to gut essential services and state infrastructure.  In response, dedicated advocacy organizations, service providers, religious communities, concerned citizens, and professional associations have formed coalitions in more than 35 states to battle for smart fiscal policies that will protect core services and ensure that states have the resources to meet current and future needs. 

Here’s a brief overview of the newest of these coalitions:

In Georgia, the coalition 2020 Georgia officially launched on January 18th to promote a balanced approach to their budget that adequately addresses the long-term needs of the state instead of pursuing damaging cuts to services that can hurt the state’s economy.  The coalition consists of a wide variety of partners, including AARP, the League of Women Voters of Georgia, and the Georgia Public Health Association.  2020 Georgia hopes to maintain smart investments in education, public safety, health, and the environment.

In Texas, a wide coalition of organizations have created Texas Forward, a group that hopes to spur continued investment in vital public services instead of devastating budget cuts.  Texas Forward believes that smart investment now can prevent future generations from shouldering the burden of the lasting damage caused by disinvesting in services during this time of financial need.  Recently, Texas Forward urged state lawmakers to seek new revenue sources and federal funding to minimize the impact of the projected $24 billion deficit.

In Iowa, the Coalition for a Better Iowa was formed with the express mission “to maintain and strengthen high quality public services and structures that promote thriving communities and prosperity for all Iowans.”  The Coalition for a Better Iowa includes organizations representing children, seniors, human service providers, environmental organizations, and politically engaged citizens.  The coalition is committed to creating a balanced solution to the budget shortfalls while protecting vital services and investing sustainably in the state’s future.

In Montana, a group called the Partnership for Montana’s Future offers an extensive list of revenue-raising mechanisms to solve the state’s budge crisis.  The list has many specific proposals, generally categorized as collecting new revenue through improved tax compliance, closing tax loopholes, targeted tax increases, and other miscellaneous options.  The coalition consists of a wide variety of health, education, environmental, labor, and policy organizations.

In Pennsylvania, Better Choices for Pennsylvania is a coalition of health, education, labor, and religious organizations that recognize that all Pennsylvanians benefit from the services and infrastructure provided by state government.  Like the other coalitions featured, Better Choices for Pennsylvania refutes the proposition that deep tax cuts can solve the state’s budget problems.  Instead, BCP is pushing for closing special tax breaks and loopholes.  The coalition believes that helping working families through hard times will put the state in a better position towards long-term financial stability.

In Michigan, the revenue coalition, A Better Michigan Future recently issued a press release reviewing Governor Snyder’s budget proposal.  The group supports smart revenue-raising tactics like eliminating redundant and wasteful loopholes and modernizing the state sales tax to reflect the changing marketplace.

While not a new coalition, North Carolina’s revenue coalition, Together NC, recently launched a web ad.  The ad is meant to remind North Carolinians about the smart budget choices the state has made in the past that allowed it to prosper and spur citizens to take action to protect their state from falling behind (or, as the ad says, to keep North Carolina from becoming its neighbor to the south).


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.

For a review of the most significant state tax actions across the country this year and a preview for what’s to come in 2011, check out ITEP’s new report, The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes.

"Good" actions include progressive or reform-minded changes taken to close large state budget gaps. Eliminating personal income tax giveaways, expanding low-income credits, reinstating the estate tax, broadening the sales tax base, and reforming tax credits are all discussed.  

Among the “bad” actions state lawmakers took this year, which either worsened states’ already bleak fiscal outlook or increased taxes on middle-income households, are the repeal of needed tax increases, expanded capital gains tax breaks, and the suspension of property tax relief programs.  

“Ugly” changes raised taxes on the low-income families most affected by the economic downturn, drastically reduced state revenues in a poorly targeted manner, or stifled the ability of states and localities to raise needed revenues in the future. Reductions to low-income credits, permanently narrowing the personal income tax base, and new restrictions on the property tax fall into this category.

The report also includes a look at the state tax policy changes — good, bad, and ugly — that did not happen in 2010.  Some of the actions not taken would have significantly improved the fairness and adequacy of state tax systems, while others would have decimated state budgets and/or made state tax systems more regressive.

2011 promises to be as difficult a year as 2010 for state tax policy as lawmakers continue to grapple with historic budget shortfalls due to lagging revenues and a high demand for public services.  The report ends with a highlight of the state tax policy debates that are likely to play out across the country in the coming year.


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.


Combating Tax Cuts with Slightly Better Tax Cuts in Iowa


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Iowa Governor Chet Culver has rightly been very vocal in criticizing GOP challenger Terry Branstad’s proposal to slash corporate income taxes and commercial property taxes.  Branstad’s plan ignores the fact that Iowa’s corporate taxes are already quite low, as well as the reality that these tax cuts will have to be paid for – through reduced services (which Branstad has refused to identify), or through higher taxes on individuals. 

Nonetheless, despite the obvious problems with Branstad’s plan, Governor Culver’s campaign this week found it necessary to respond with a tax cut plan of its own.  In a press release heavily emphasizing his anti-tax credentials, Governor Culver proposed on Tuesday a $90 non-refundable tax credit to taxpayers earning less than $200,000 per year (or $100,000 for single filers).

According to the Governor’s calculations, roughly 65% of Iowans would benefit from the credit.  Families earning above $200,000 would receive no benefit.  Similarly, families earning too little to owe income taxes (but who still pay substantial sales, property, and excise taxes) will also see no benefit from Culver’s plan. 

Why a family earning $195,000 is more in need of a $90 tax break than a family below the poverty line is unclear. But if forced to choose between the major candidates’ plans, we can only conclude that Culver’s is clearly the more sensible of the two.

One of the more confusing developments to occur in the wake of Culver’s plan being released was the flurry of complaints from conservatives alleging that the $90 non-refundable tax credit is a form of “class warfare.”  It’s a very odd type of “class warfare” indeed when Iowa’s middle-class are on one side, and the poor and rich are lumped together on the other. 

In the end, though, it’s probably not worth spending too much time worrying about what this particular group of critics has to say.  This is the same bunch that had the audacity to argue that Iowa’s sharply regressive tax system is actually a form of “socialism.”

But putting aside all the rhetoric, one point recently made by Rep. Erik Helland is hard to ignore: “Two weeks before the election? This is a campaign rebate… It's nothing more than campaign politics.”  The sad truth is that Culver’s plan is good politics – probably even better than the platform of the “Rent is Too Damn High Party” in New York. 

No matter which candidate wins, the anti-tax direction that both campaigns have taken does not bode well for tax reform.  Keep in mind that Iowa still offers an enormously costly and regressive deduction for federal income taxes paid, as well as a sizeable break for many types of capital gains income.  Let's just hope the current tax cut arms race we’re witnessing doesn’t set the tone for the next four years.


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.


What You Should Know Candidates are Saying About Taxes


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Candidates across the country are gearing up for the November elections. Over the coming months we'll highlight just some of the candidates running in local, state, and national races with an eye toward evaluating their positions in terms of tax fairness.

Current Iowa Governor Chet Culver - Iowa's film tax credit program has been costly and controversial. This week current Governor Chet Culver came out against keeping the program. He said in a recent news conference, "We’re not going to be taken for suckers. People, unfortunately, exploited that program.”

Current Illinois Governor Pat Quinn - During the Democratic primary we wrote about Governor Quinn's proposal to raise income taxes in a progressive way. Now Candidate Quinn is proposing that, in combination with an income tax hike, he would urge local school districts to reduce regressive property taxes. He recently said, "If you get additional new money from Springfield, from the state government, then I think part of the bargain has to be that the local school districts at least roll back a portion of their property taxes. It's a fair bargain."

Current Massachusetts Governor Deval Patrick - Massachusetts voters will be asked to decide Question 3, which would slash the state sales tax from 6.25 to 3 percent. Despite the regressive nature of the sales tax, taking a hammer to this revenue stream would have a disastrous impact on the state budget. Current Governor and gubernatorial candidate Deval Patrick has come out against Question 3, saying that if the sales tax is reduced it would be "a calamity."

X South Carolina gubernatorial candidate Nikki Haley - South Carolina collected $147 million in corporate income tax revenue in the last fiscal year. Nikki Haley has said that she would eliminate the tax altogether in hopes of attracting more businesses. She said at a recent fundraiser, "If we become a no-corporate-income-tax state, we will become a magnet for companies." Instead of proposing to throw out an entire revenue source, she should take a minute to read ITEP's latest policy brief on economic development.

X Vermont gubernatorial candidate Brian Dubie - Candidate Dubie is campaigning on a promise to cut $240 million in income and property taxes paid by Vermonters. Specifically, he would drastically reduce personal income tax rates, cut corporate income tax rates, and support a property tax cap.  But when he was asked how the tax cuts would be paid for in terms of fewer services, Dubie couldn't offer any details.


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.

Film tax credits have received a lot of attention in recent days.  Just as Virginia Governor Bob McDonnell was signing the state’s first film tax credit into law, stories out of Iowa and New Jersey, as well as a New York Times article about film credits in Michigan, Texas, Pennsylvania and Utah, provided quite a few good reasons to be skeptical of these credits.

On Monday, Virginia Gov. Bob McDonnell excitedly signed into law the state’s new film tax credit, with sitcom star Tim Reid (from “WKRP in Cincinnati,” “Sister Sister,” and “That 70’s Show”) there to celebrate.  In order to justify enacting this giveaway for the film industry while Virginians are having to make due with reduced state services, Gov. McDonnell made the asinine claim the credit would produce a 1400% return on investment.  Economists everywhere have no doubt been laughing ever since.

Meanwhile, in New Jersey, fellow 2009 gubernatorial election winner Chris Christie took exactly the opposite approach in vowing to eliminate the state’s film credit in order to help balance the state’s budget.  While Christie clearly had his priorities dead wrong in choosing not to extend the state’s income tax surcharge on millionaires (61% of voters favor the surcharge), he has certainly hit the nail on the head when it comes to this wasteful giveaway.  Not even the cast of “Law and Order: Special Victims Unit” appears to have been able to sway him.

Stories this week from the Des Moines Register and New York Times provide some very timely evidence regarding the wisdom of Christie’s approach, as well as the folly of McDonnell’s.  In Iowa, the Register reports that new criminal charges have been filed in the state’s ongoing film tax credit scandal.  Specifically, three moviemakers have been charged with inflating the value of their expenses in order to increase their take from the state’s film credit program.  A $225 broom, $900 stepladder, and 16,000% markup on lighting equipment are among the bogus expenses claimed by the filmmakers. 

The steady drumbeat of discouraging news surrounding Iowa’s film tax credit makes clear that Virginia is facing an uphill battle when it comes to policing this program.

The New York Times this week explored a more specific attribute of state film tax credits: the steps states are taking to prevent movies they dislike from receiving taxpayer dollars.  In Michigan, a sequel to a cannibalism-themed horror movie that was supported by state film tax credits was rejected for subsidy this time around because the state’s film commissioner determined that “this film is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light.”  Michigan is by no means alone in enforcing this standard.  Films made in Pennsylvania can be denied tax credits if the movie in question does not “tend to foster a positive image” of the state. 

Texas possesses a similar requirement, which apparently was used to prevent the makers of a film about the Waco raid from even applying for film tax credits. 

And in Utah, the state’s Film Commission director admitted to withholding credits from films that he wouldn’t feel comfortable taking the governor to see. Whether or not this rule of thumb varies with the theatrical tastes of the governor in office at the time remains to be seen.  Upon reading the Times story, one blogger with the Baltimore Sun went so far as to argue that these provisions show that “states want propaganda from filmmakers.”  They certainly beg the question: If state taxpayers subsidize the film industry, is it inevitable that state governments will censor movies before they're made?


Iowa Governor Declares Tax Credit Reform a Top Priority Following Release of New Recommendations


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In his recent “Condition of the State Address,” Iowa Governor Chet Culver identified tax credit reform as one of his “top legislative and budget priorities for the 2010 session.”  Specifically, the Governor urged the legislature to act on the recommendations just released by a panel charged with evaluating both the state’s tax credits, and the mechanisms in place for monitoring those credits.  In addition to recommending the outright elimination of eight tax credits, and the addition of a means-test to another credit, the panel produced a number of good-government recommendations that set the stage for the upcoming legislative session.

The panel recommended, among other things:

- Subjecting all business-related tax credits to an annual $185 million cap and scheduling them to sunset in five years;
- Eliminating the “transferability” for all tax credits (i.e. preventing firms from selling their tax credits);
- Ending the refundability of the state’s research activities credit;
- Requiring the state’s revenue estimates to include analyses of the types and amounts of tax credits claimed, in order to produce a more complete picture of the state’s budgetary situation.

Implementing the panel’s recommendations would save the state $55 million in FY2011, and $106 million in FY2012.  This fact alone should be enough to spur lawmakers in cash-strapped Iowa to give the recommendations some serious consideration.  

Be sure to visit the Iowa Fiscal Partnership’s website to stay up-to-date on the upcoming debates on this issue.


Corporate Taxes in the News


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In at least three states, lawmakers are ignoring fiscal reality and advocating for cuts in one of the most progressive taxes levied by states -- the corporate income tax. The general consensus among experts is that most states aren't out of the woods yet when it comes to economic recovery. That means their budget gaps are going to be a problem for some time. Yet, legislators in Florida, Idaho, and Iowa are pushing the same old proposals to reduce state revenue in order to benefit corporations.

For example, Florida Governor and U.S. Senate hopeful Charlie Crist is crafting a plan that would cut the state's corporate income tax. Details remain sketchy, but he is quoted as saying that he'd "love" to reduce the tax "because I think it would help job stimulation."

Actually, any business person will tell you that he or she wants to hire workers whenever there is demand for their products. If no one is ready to buy orange juice, Tropicana is not going to create jobs regardless how many tax cuts Governor Crist throws at them. Further, there is ample evidence that corporate taxes aren't a major factor in business location decisions because those decisions are affected by numerous other factors. (For instance, Tropicana will not try growing oranges in Alaska just because Alaska offers a tax break.)

The corporate tax cut madness has popped up in other parts of the country. Idaho Representative Marv Hagedorn is proposing cutting both the personal and corporate income tax rates by a third. However, it appears that more sensible minds will prevail. The House Revenue and Tax Commmittee chairman calls the proposal "more political statements than they are reality. I just think it's a tough sell to say we're going to reduce somebody's taxes -- I don't care who it is -- when we're cutting programs left and right."

Cutting taxes is also a hot topic in the Republican primary for Iowa Governor, as the candidates attempt to outdo each other with little thought to the impact that their proposals will actually have on the services Iowans depend on. Two of the Republican candidates are reportedly open to the idea of completely eliminating the state's corporate income tax.


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 more shocking details continue to surface regarding Iowa’s rampantly abused film tax credit, lawmakers have begun giving increasingly serious attention to the issue of how to better oversee all the special subsidies contained within the state’s tax code.

A recent review of the credit by a team of accountants revealed a plethora of abuses, including incomplete records, altered contracts, unqualified expenditures, illegitimate labor expenses, deferred payments, advertising irregularities, nonproduction expenses, nepotism, inaccurate credit calculation, erroneous awards, broker fees, and pass-through business abuses.

This list of abuses has caused Governor Chet Culver to wisely call for a comprehensive review of all Iowa tax credits.  While such a review is unlikely to turn up any abuses of the magnitude that took place under the film tax credit, it could potentially highlight credits that aren’t living up to the promises that were made when they were enacted.

By reviewing the effectiveness of these subsidy programs buried within the state’s tax code, Iowa could shine a bright light on an area of policy that typically receives much less scrutiny than direct spending programs, which must battle their way through the authorization and appropriations processes.  In fact, Iowa would benefit greatly from conducting reviews of its tax subsidies on a regular basis, rather than waiting for another political scandal to erupt.  Moreover, the state should consider expanding those reviews to include special deductions, exemptions, exclusions, deferrals, and preferential tax rates as well.  Tax credits aren’t the only means by which the state provides subsidies through its tax code.

In addition to Culver’s call for tax credit reviews, other lawmakers have begun asking for greater tax credit disclosure.  Rep. Clel Baudler, for instance, recently insisted that Iowa’s Department of Economic Development should “absolutely not” be able to “hide the specifics on the awards or grants they’re giving out.”  We certainly agree.

The issue of subsidy disclosure is one that Good Jobs First has been leading the charge on for years.  In addition, they’ve also recently posted an excellent piece on the history and effectiveness of film tax credits that’s worth a close look.


State Film Tax Credits: Next on the Cutting Room Floor?


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If you’re a state legislator, chances are good that you’ve spent the better part of the last twelve to eighteen months struggling to find options for bringing your state’s budget into balance.  Chances are equally good that, while you’d like to stop thinking about the subject, circumstances won’t allow it.  After all, some thirty-six states are expected to face budget deficits in fiscal year 2011, even after forty-eight states closed budget gaps totaling $168 billion for the current fiscal year.

In this context, then, state legislators will be forced to evaluate even more stringently each program funded by the public, whether through the regular appropriations process or via foregone tax collections.  One good place to start would be to reconsider the wisdom of offering subsidies through the tax code for the purposes of film, television, and other media productions.  As the Los Angeles Times reports this week, more than 40 states now provide tax credits or other tax reductions for such purposes, often at a very high cost to the state’s budget and just as frequently with little to no understanding of whether they are producing any real benefits for the state’s economy. 

For instance, Michigan is home to one of the most generous such subsidies in the nation: a credit equal to 42 percent of filmmakers’ production expenses, which could cost the state as much as $150 million next year.  Yet, as one Michigan Senator admitted to the Times, “We are still not sure what exactly our tax dollars are being spent on with these films…If we don’t know that, how can we justify it?”

Those states that do examine the uses to which scarce tax dollars are being put may not like what they find.  In Iowa this past week, three state officials – the Director and Deputy Director of the Department of Economic Development, as well as the manager of the Iowa Film Office – either resigned or were fired in the wake of reports that the state’s tax credit program was subject to serious abuses, including the purchase of two luxury automobiles that were not actually used in making in a movie but instead went to film executives.  Governor Chet Culver has temporarily suspended the program, which, by some estimates, could pay out more than $300 million in tax subsidies if it resumes.  For more on Iowa’s film tax credit and the need for greater transparency, visit the Iowa Fiscal Partnership.

When a state government hands out cash to businesses, you'd think that the state's taxpayers would at least have a right to know who exactly they're subsidizing. This is especially true in Iowa, a state that offers businesses a research tax credit that is refundable -- meaning businesses actually get checks from the state when their credits exceed their tax liability. In 2006 alone, those checks cost the state nearly $44 million, with about 85% of that going to just 10 companies.

Last week, Iowa policymakers decided that their constituents might at least want to know where those millions are going. Governor Chet Culver signed a bill requiring that any business receiving a research credit check from the state of more than a half million dollars have its name made public.

Iowa is unusual in its generosity to businesses conducting (or claiming to conduct) research. Of the 38 states offering a research credit, only five actually pay businesses for conducting research even if their tax credit exceeds the amount of taxes they paid.

Despite the unusual generosity of the Iowa credit, one business industry representative had the gall to suggest that businesses may decide to conduct their research elsewhere as a result of the measure. The phrase "crying wolf" comes to mind.

But ultimately, the new Iowa law is little more than a baby step. It's hard to believe that Iowans are not also interested in knowing which businesses receive $100,000 or $200,000, for example, from the state for conducting research. Furthermore, even businesses not receiving refunds, but nonetheless benefiting from the research credit, are effectively being subsidized by the state and should be identified as well. And limiting the disclosure provision to only the research credit is also disappointing.

If Iowa really wants to improve government transparency, it should consider reporting on the jobs and other benefits created as a result of this and other subsidies -- as opposed to just offering the company's name. See this report from Good Jobs First for more on appropriate state subsidy disclosure practices.


Try, Try, Try Again. Next Year.


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As we've discussed in recent digest articles, this year saw a flurry of activity in the debate over state deductions for federal income taxes paid. Presently, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they have the greater ability to pay. Proposals to reform the deduction for federal income taxes paid in Alabama and Iowa came up short this year, but state lawmakers are vowing to bring up the issue again next year.

Removing the sales tax on food and offsetting the revenue loss by phasing out the deduction for federal income taxes paid for wealthier Alabamians was the number one priority for Democratic lawmakers, but this week the House came up just one vote shy of the three-fifths needed to debate a bill before the state's budget passes. The bill's sponsor, Representative John Knight, has vowed to bring up the bill again next year and says, "I consider this an economic incentive package for working families of this state."

Lawmakers in Iowa proposed to completely eliminate the deduction and use the revenue generated to fund a reduction in state tax rates. The debate over the proposal was quite heated. According the Des Moines Register, "The debate included a rowdy public hearing where hundreds of Iowans -- most of whom opposed the plan -- were escorted from the House chambers by Iowa State Patrol troopers after they persisted in booing, hissing and applauding speakers." Despite support from the House Speaker Pat Murphy and Senate Majority Leader Michael Gronstal, the legislation didn't have enough support and ultimately wasn't debated in either the House or the Senate. Senator Gronstal is predicting that the legislation will be introduced again next year, saying, "There are times when issues are right but they're not ripe."


State Deductions for Federal Income Taxes: A Step Forward in Iowa, a Standstill in Alabama


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At present, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of an income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they still have the greater ability to pay.

Efforts to limit or to repeal these deductions -- and to use the additional revenue to provide tax reductions for low- and moderate-income taxpayers -- have been underway in two such states. In Alabama, Representative John Knight has proposed legislation to pare back his state's federal income tax deduction in order to finance a sales tax exemption for groceries. Unfortunately, House Republicans may have successfully prevented further consideration of the bill this session, voting en bloc to keep it from coming before the House for debate.

Meanwhile, in Iowa, momentum is building for a plan that would repeal the deduction outright while also lowering tax rates across the board and increasing a pair of tax credits. House Speaker Pat Murphy recently voiced his support for the changes and the Senate seems poised to act as well.

For more on efforts in Alabama and Iowa to improve tax fairness, see the web sites for Alabama Arise and the Iowa Policy Project.


The Economic Development Tax Credit Addiction


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It's hard to believe, but there may actually be a trend in state tax policy more prominent than increasing cigarette taxes. Business tax credits aimed at spurring economic development have been among the most popular ideas in statehouses scrambling for ways to reduce unemployment. Just last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.

In Iowa, Republican lawmakers have suggested paying (via tax credit) half the salary of each new job created by private businesses. Oddly, because this payment would be administered through the tax code rather than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".

An excellent op-ed out of Kentucky helps clear things up a bit, noting that Gov. Beshear's proposed expansion of business tax incentives would be a costly, nontransparent, and likely ineffective way of encouraging job growth. The op-ed goes on to argue that a "broader" approach, including better targeted and more closely scrutinized spending programs, could do far more good than creating more tax credits.

Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission of at least one legislator that he is a "recovering tax credit addict" helped to shine some light on the unfortunate politics behind these types of tax credits. These programs can cost a state enormously, and are rarely defensible on principled tax policy grounds. Instead, they constitute a type of spending done through the tax code -- commonly referred to as "tax expenditures" -- which add complexity, shrink the tax base, require higher marginal rates, and offer little if anything in terms of making the system more responsive to individuals' and businesses' ability to pay.


Three States Focus on Eliminating Regressive Deduction to Raise Much Needed Revenue


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We've recently highlighted a variety of progressive revenue raising options gaining serious attention in New York and Wisconsin. This week we bring you yet another idea that's recently been the subject of debate, though this one applies to fewer states. Those seven states still offering income tax deductions for federal taxes paid (i.e. Alabama, Iowa, Missouri, Montana, North Dakota, Louisiana, and Oregon), should immediately repeal, or at the very least dramatically scale back, that deduction.

The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level. Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.

Iowa Governor Chet Culver most recently drew attention to this problem while urging lawmakers this week to end the deduction. The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction. Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.

With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.


Budget Fixes Worth Embracing


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This week, the Iowa Fiscal Partnership (IFP) released a study examining Iowa's budget woes with an eye toward understanding how the state's fiscal situation will be impacted by Iowa's growing senior population. Not only are Iowa lawmakers currently grappling with a budget shortfall, this report predicts that more tough decisions are coming. One of the reasons that even harder times may be on the horizon is that Iowa, like many states, offers elderly preferences that are going to become more costly as America grays.

In fact, IFP found, "The aging of the population will probably produce a decline in state income tax revenue of 2 to 3 percent in Iowa, due largely to the adoption of tax preferences for seniors. If there were no elderly preferences in Iowa's income-tax code, the very small projected increases in total population combined with the aging of the population would increase income-tax revenues for a period of time, reaching a peak in 2015 at $2.27 billion."

The report offers helpful insight into why revenues aren't able to keep up with growing needs (beyond elderly preferences). Most notable is the sales tax base erosion taking place both because the state's tax base is made up of mostly goods and not services, and because of the continuing need to close the sales tax loophole which ensures that online purchases aren't subject to the sales tax. Resolving the problem of sales tax base erosion and poorly targeted elderly preferences is something many states could tackle now in their attempt to deal with their own budget mess. ITEP has written a variety of policy briefs on topics discussed here: elderly preferences in the tax code, sales tax base expansion, and taxing internet sales.

The Virginia based Commonwealth Institute recently issued their own set of recommendations offering suggestions on ways that the Old Dominion state could dig itself out of its budget crisis. These recommendations are good ideas any time, but will likely receive more attention now because of the state's budget crisis. Their recommendations include further means-testing of elderly tax preferences, and closing corporate loopholes through steps such as enacting combined reporting. The Institute takes a balanced approach and acknowledges that some cuts may need to be made and the state's rainy day fund may need to be tapped to deal with the state's shortfall. This balanced and comprehensive approach including both revenue enhancers and tax cuts may be the best solution for many states in crisis.


Sales Tax Holidays: Free Swirlies for Everyone


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As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.


State Transportation Woes Have Common Thread


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North Carolina is suffering from an increase in the cost of asphalt. Asphalt is made of petroleum derivatives, and its cost has increased 25% since the end of 2006. This is causing the state to cut back on road repaving projects which are likely to cost more money to accomplish the longer they go unrepaired.

In Missouri, the state has a projected $1 billion transportation fund deficit. It is only expected to be able to meet 40% of obligations starting July 2009. In spite of this, all three major candidates for Missouri Governor pledge not to raise the state motor fuels tax. The two Republican gubernatorial contenders, Sarah Steelman and Kenny Hulshof suggest dedicating general funds revenue to transportation and privatizing some state roadways respectively.

Virginia is currently confronting a "growing bridge and road maintenance shortfall" which is depriving money from road construction. Governor Tim Kaine has recently released a proposal to raise vehicle registration fees and sales taxes on vehicles, while keeping the state fuel tax unchanged.

These states have in common a tendency to tinker around the edges of transportation funding policy while failing to address the taboo topic of gas taxes. The root cause of these transportation troubles is that the gas tax has been kept too low to finance the transportation needs in all these states.

Most states have a "per gallon" gas tax that leaves them unable to cope with rising costs of transportation as inflation erodes the value of the tax collected on each gallon. North Carolina's gas tax has been capped at 29.9 cents since 2006 due to pressure from anti-tax activist Bill Graham, although it was formerly readjusted to reflect price changes twice a year. Missouri has not raised its gasoline tax since 1996 and Virginia's gasoline tax has stayed constant since 1992. None of these states index their gasoline tax either to transportation costs or the general inflation rate.

Sometimes even a major crisis is not enough to get politicians to consider gas tax adjustments. Due to Iowa's recent flooding, Iowa's legislature is likely to convene an emergency session to confront their newly pressing infrastructure needs and find sources of funds for disaster recovery. Legislators rejected efforts to raise the gasoline tax earlier in the year to fill the $200 million highway maintenance deficit, opting instead to tinker around the edges and simply raise vehicle registration fees. But even now, the Iowa House Majority Leader considers a hike in the gasoline tax "an absolute, absolute last resort," with gas selling for $4/gallon.

Even a spectacular tragedy is sometimes not enough to get politicians to wake up. Before the August 2007 Minnesota I-35W bridge collapse, Governor Tim Pawlenty vetoed a bill raising the gasoline tax 7.5 cents per gallon, calling it "an unnecessary and onerous burden" as consumers were paying $3 per gallon for gasoline in May 2007. This was in a state that hadn't adjusted its gasoline tax in 19 years. Not even a bridge collapse and transportation funding shortfall of nearly $2 billion were enough to change the governor's position that gas taxes are anathema. Needed road and bridge repairs were being neglected, with obviously dire consequences. Fortunately, Minnesota lawmakers were finally able to override Governor Pawlenty's veto in February, raising the gas tax by 8.5 cents.

For many, there will never be a "right time" to raise the gas tax. It wasn't the right time at $2 per gallon in 2005 when Gov. Pawlenty first vetoed a gas tax increase, nor at $3 per gallon in 2007, nor now at $4 per gallon. In fact, it's never the "right time" to raise any kind of tax... no one wants to pay more than they have to. But sometimes in order fund vital services policymakers need to come together and bite the bullet as they did in Minnesota, even if it is politically difficult.

Opponents have sometimes successfully argued that raising the gasoline tax would be regressive and particularly damaging to the economy in such a car-dependent nation. But gas tax increases can be done in conjunction with progressive measures, such as raising the Earned Income Tax Credit and creating a refundable gas tax credit as was done in Minnesota and proposed in Virginia.


Corporate Giveaways in Iowa


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Iowa Governor Chet Culver is usually committed to closing corporate tax loopholes. As in 2007, he is championing combined reporting legislation, which would reduce corporate tax avoidance by requiring a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report. This is better from a tax enforcement perspective than separate accounting, which allows companies to report the profit of each of its subsidiaries independently. Separate accounting is often cited by critics as an "open highway for tax avoidance." Despite studies from the Iowa Policy Project and the Center on Budget and Policy Priorities which show that combined reporting is an essential tool for policymakers looking to close tax loopholes and level the playing field for all types of businesses, the Iowa Legislature has reacted lukewarmly to the idea.

The state's legislature shows no such hesitation, however, when it comes to providing tax giveaways to large corporations like Microsoft. This week the Legislature passed HF 2233, which will expand certain property and sales tax exemptions for "web search portal business and property," apparently in a bid to lure the software giant to the state. The governor, despite his stance on other corporate tax issues, signed the bill on Thursday.


States React to Economic Turmoil


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Many states are in a fiscal crunch and the number of states facing budget shortfalls may be growing. This week the Center on Budget and Policy Priorities released a state fiscal update saying that, "At least twenty-five states, including several of the nation's largest, face budget shortfalls in fiscal year 2009." A sluggish economy, bursting housing bubble, and the decline of tax revenues have all had a significant impact on states and their ability to keep budgets balanced.

It's not always clear that states can act as effectively as the federal government to kick start a sluggish economy, but that doesn't stop them from trying. For any legislation to be effective as a stimulus to counteract a recession, it must be "temporary, timely and targeted," as argued by the Center on Budget and Policy Priorities. Some of the stimulus initiatives being proposed on the state level meet these goals better than others. Tax cuts that are not temporary can do more harm to states in the long-run, and provisions that will not have any benefit until after a recession has passed are useless as a stimulus. Most importantly, those tax cuts not targeted towards low- and middle-income people are not likely to result in new spending that immediately spurs the economy, but will go largely towards savings, which takes much longer to have a positive effect.

Stimulus Plans in the States: Connecticut, Iowa, Georgia, and Ohio

In Connecticut, Governor Jodi Rell has asked legislators to reconsider their economic stimulus proposals, arguing that there is no money available to pay for tax cuts. Senate Democrats there proposed increasing the state's property tax credit by $250 and House Republicans proposed offering tax credits to offset medical and energy costs. It's certainly not obvious that an increased property tax credit is well-targeted, since property-owners tend to have higher incomes than everyone else. Depending on how it's implemented, it may not be timely either.

Policymakers in Georgia have proposed legislation to expand the state's personal exemptions temporarily. The legislation is targeted to the degree that it benefits middle-income people, but it doesn't reach those too poor to pay state income taxes. It's also flawed because it's not entirely timely. A lot of people won't benefit until next year.

Some Iowa lawmakers have adopted a completely different approach to providing economic stimulus by proposing a five-year property tax break for Iowans who improve their homes. According to one state senator, the tax break "really rewards all homeowners that have pursued the American dream of owning their own home." But a five-year tax break does not qualify as temporary, at least for the purpose of responding to a recession. It's also hard to believe that it would be targeted to those who need help and will spend the extra money right away, and it's not clear that any home improvements that result will happen quickly enough to qualify this as timely. Another idea being tossed around is a proposal that would expand the state's sales tax holiday to include all items subject to the sales tax. ITEP has long argued that sales tax holidays are not good policy. In this context it's worth noting that they are usually not targeted well at all, since the benefits go to everyone who shops during the sales tax holiday and because people who need help the most are less capable of shifting the timing of their consumption to take advantage of it.

Ohio Governor Ted Strickland isn't proposing increased tax credits. Instead, his plan includes borrowing $1.7 billion in an attempt to stimulate the state's economy and create 80,000 jobs. If approved by voters, more money would be available for transportation, renewable energy technologies, and local infrastructure projects. Borrowing to fund important investments makes sense in some contexts, but as a stimulus it's unclear whether these investments will give a timely boost to the economy to counteract a recession that is occurring now.


State of the States Roundup


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Iowa

Governor Chet Culver's Condition of the State address was a shot in the arm to advocates for fair business taxation. In his speech the Governor unveiled his plan for combined reporting of corporate income for tax purposes. He said, "It's just not fair that big, out of state, multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes because of an outdated tax loophole." Read the Iowa Fiscal Partnership's release on the importance of closing this costly loophole. Another proposal included in Culver's speech was a 2-cent tax on the purchase of bottles and cans. Part of this increased revenue would go towards enhancing environmental programs.


Myth Busters in Iowa


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This week the Iowa Policy Project (IPP) issued a report called Undocumented Immigrants in Iowa: Estimated Tax Contributions and Fiscal Impact. The study's release received much attention in the press by rightly debunking the myth that undocumented immigrants in Iowa don't pay taxes. The study includes estimates of the average property, sales/excise, and income taxes paid by undocumented immigrants in Iowa. The results of the study may surprise many as IPP estimates that undocumented families contribute more than $40 million dollars to state revenues. Similar studies have been conducted in other states and similar myth-busting findings were revealed.


Can the Tax Code Keep Educated Residents from Leaving the State?


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This November Maine voters will have the opportunity (unless the Legislature acts first) to vote on a proposal that would provide tax cuts to assist college graduates as they pay back their student loans. If the initiative is approved, college students in Maine who stay and work in the state after graduation may claim a tax credit of about $2,100. Advocates of the proposal say that offering the tax credit will make education more affordable for students and also "raise the wage and skill levels of Maine's workforce." However, some important questions remain regarding how much the tax credits will cost, where the money to pay for the credits would come from, and whether or not offering a tax credit will really ensure that students stay in Maine.

In Iowa a similar proposal is focused on keeping college graduates in the state and slowing the state's "brain drain." The proposal allows businesses who repay new employees' student loan debt (up to $25,000) to receive tax credits of up to $7,500. In order to qualify for the credit, employers have to pay a minimum salary of $25,000 and start repaying the employee's loan within six months. The Des Moines Register's editorial board sharply critiques this proposal and raises good points about whether or not providing tax credits to businesses really is the best strategy for ensuring that college graduates stay or move into the state. Instead, the Register rightly suggests, "To reduce student loan debt, public money would be better used to hold down tuition costs at state universities, so students don't graduate with huge debt in the first place."


Cigarette Tax Update


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Wednesday, Iowa Governor Chet Culver signed into law a bill that raises cigarette taxes by $1 a pack and also increases taxes on various other tobacco products. The Governor predicts that the new $1.36 tax will cause 20,000 Iowans to quit smoking and prevent twice as many from ever picking up the habit. The tax increase goes into effect immediately and revenues generated are expected to be used for healthcare. Unfortunately, evidence from other states shows that revenues generated from this regressive tax will decline over time.

In Mississippi, a proposal to swap a cigarette tax hike for a sales tax cut appears to be dead for the second time. While promising to propose a "serious tax cut" in the future, Governor Haley Barbour refused to support a bill that would increase the state's cigarette tax from 18 cents to $1 and cut the tax on groceries by half. The problems with Mississippi's tax code go beyond sales and excise taxes, so perhaps now is the time for discussing a complete overhaul of Mississippi's tax structure.


States Growing Tired of Large National Businesses Avoiding State Taxes


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As expected, Massachusetts Governor Deval Patrick this week joined the ranks of chief executives calling for the use of combined reporting of state corporate income taxes to combat tax avoidance by large and profitable companies. Like the Governors of New York, Pennsylvania, and Iowa, Governor Patrick, in his FY2008 budget plan, recommended adopting this approach to corporate taxation, which would require corporations operating in multiple states to report all of their income... including that attributable to subsidiaries. This would negate any tax benefit derived from accounting schemes designed to shift profits out-of-state. A fact sheet from the Massachusetts Budget and Policy Center explains how combined reporting works and why it's needed in the Bay State. While Martin O'Malley has not yet added his name to this growing gubernatorial roster, Maryland legislators this week considered a bill to institute combined reporting in their state. ITEP Executive Director Matt Gardner was among those who testified on the measure.


EITC Expansion: A Good Idea in Every State


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In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits ... or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.


How to Stop Corporations from Avoiding State Taxes


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State corporate income tax reform is gathering momentum in 2007, as more and more states are considering adopting an important corporate tax reform: combined reporting. Governors in New York, Iowa and Pennsylvania have already proposed this important loophole-closing reform, and newly elected Massachusetts Governor Deval Patrick is sending signals that he may follow in their footsteps. Meanwhile, a new paper by the Center on Budget and Policy Priorities' Michael Mazerov gives the lowdown on an equally important corporate tax reform that could productively be adopted by every state with a corporate tax: company-specific disclosure of taxes paid (or not paid). Mazerov's paper includes model legislation for use in any state seeking to shed more light on corporate tax avoidance.


Two More States Pursue The Most Effective Weapon Against Corporate Tax Avoidance


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Over the past few years, a number of states have taken incremental steps to reform their corporate income taxes to curtail tax avoidance by large and profitable companies. One such reform, combined reporting, prevents corporations from using a range of accounting schemes to shift profits from one state to another in order to artificially reduce the taxes they owe. The seventeen states that now use combined reporting may eventually get some company, as two Governors - Eliot Spitzer (D-NY) and Chet Culver (D-IA) - have included provisions in their budget proposals for the coming fiscal year to institute combined reporting. To learn more about combined reporting and how it works, see the Institute on Taxation and Economic Policy's updated policy brief.

Several tax avoidance techniques are available to corporations operating in states that don't have combined reporting. For example, a recent Wall Street Journal article (subscription required) notes that Wal-Mart may have been able to avoid as much as $350 million in state corporate income taxes between 1998 and 2001 due to a loophole that could be countered with combined reporting.

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