Kentucky News



State News Quick Hits: State Lawmakers Not Getting the Message



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Less than a year after enacting a significant (and progressive) revenue raising tax package, Minnesota Governor Mark Dayton signed off last week on more than $400 million of tax cuts. The new legislation repeals several changes put into place last year including removing warehouse storage and 2 other primarily business services from the sales tax base and eliminating a new gift tax. The tax cuts also include reductions in the personal income tax via aligning the state’s tax code more closely to federal rules. Low- and moderate-income working families will also see a small benefit from two changes made to the state’s Working Families Credit (Minnesota’s version of a state Earned Income Tax credit (EITC).

A mother of two in Kentucky has made an impassioned plea to her state legislators to support the creation of a state Earned Income Tax Credit (EITC). More than half of all states have enacted such a credit, which is proven to increase workforce participation and improve health outcomes for children. As Jeanie Smith writes in her op-ed, “I know that we could have put that tax credit to good use. We could have used it toward the textbooks for my husband, or to take the stress out of a month's bills.” There are lots of strong arguments for adding a state EITC to Kentucky’s quite regressive tax code (PDF), and the Governor has proposed establishing a state EITC as part of his tax reform plan. Hopefully, Jeanie’s articulation of what a state EITC would mean for her and other families like hers will persuade those not yet on board.

The Montgomery Advertiser recently ran a very powerful editorial about the problems with low taxes. Lawmakers should give careful thought to one of the questions the editors pose in the piece: “We don’t pay a lot in taxes in Alabama and historically have taken a perverse pride in that. But is this really a bargain, or is it a fine example of false economy, of short-changing public investment to the detriment of our people?”

Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have long been critical of gimmicky sales tax holidays that provide little help to the poor or the economy. But Florida lawmakers don’t appear to have gotten the message, as the state House’s tax-writing committee recently advanced four “super-sized” sales tax holidays for purchases as varied as school supplies and gym memberships. Altogether, the package would drain $141 million from the state’s budget that could otherwise be been spent on education, infrastructure, and other public investments.

Newspapers in Oregon and North Carolina published editorials using data from ITEP and CTJ’s latest report on state corporate income taxes to highlight the need for corporate tax reform in their states. Check out The Oregonian’s editorial, “Extremes of Corporate Tax System Show Need for Reform” and one from the Greensboro News & Record, “Next to Nothing.”



State News Quick Hits: Don't Expect Much from Congress



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Reuters reports that state lawmakers shouldn’t expect Congress to act anytime soon to close the enormous hole in their sales tax bases created by online shopping. Sales tax enforcement on purchases made over the Internet is a messy patchwork right now because states can only require retailers with a store or other “physical presence” within their borders to collect the tax. (Amazon, for example, is only required to collect the tax in 20 states). This uneven treatment of online retailers versus brick-and-mortar stores is nothing new, but the chairman of the House Judiciary Committee insists that more debate is needed before his chamber will act on the bipartisan bill passed by the Senate last spring.

 

Hawaii lawmakers are giving serious consideration to enhancing a number of tax credits for low-income working families, but the state’s worsening revenue outlook is going to make paying for the credits a bit more difficult. Moreover, Honolulu Civil Beat reports that lawmakers are also debating whether to give out more tax credits for things like charter school donations, backup generators, and building renovations. But reducing the very high state and local tax rate being paid by Hawaii’s poor should be a higher priority than these initiatives.

Last year’s trend toward raising state gasoline taxes seems to be continuing this year. In just the last week, the Kentucky House approved a 1.5 cent per gallon increase and the New Hampshire Senate gave preliminary approval to a 4 cent increase. These increases would allow for valuable investments in both states’ infrastructure, and would reduce the likelihood that lawmakers will eventually cut other areas of the budget to fund those investments.

This week the Wisconsin General Assembly approved Governor Scott Walker’s tax cut proposal which includes $404 million in across-the-board property tax cuts and $133 million in income tax cuts that result from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax. The legislation is now sent to Governor Walker’s desk where it is all but guaranteed he will sign the bill into law. For more on the flaws of this bill check out this Wisconsin Budget Project’s blog post.

 



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



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

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

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

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



Gas Tax Remains High on Many States' Agendas for 2014



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

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

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

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

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

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

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

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

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

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

Photo via herzogbr Creative Commons Attribution License 2.0 



What to Watch for in 2014 State Tax Policy



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

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

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

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

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

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

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

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

    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.  



State News Quick Hits: Return of the "Fair Tax", Business Tax Cuts and More



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Some Indiana legislators aren’t too excited about Governor Mike Pence’s plan to take a major revenue source away from local governments.  Instead of prohibiting localities from taxing businesses’ equipment and machinery, House Speaker Brian Bosma has a more modest plan that would give local governments the option of eliminating those taxes on new investments.  But the Indiana Association of Cities and Towns doesn’t think Bosma’s plan is likely to do much good, explaining that “the more we slice the revenue side the less opportunity we have to create those kind of things which are just as big an economic development tool as reducing taxes.”

After cutting taxes for businesses and wealthy individuals these last couple years, Idaho Governor Butch Otter has changed his tune--at least slightly.  While the Governor wants to continue the state’s tax cutting race to the bottom, he says that boosting funding for education is actually his top priority this year.  Otter’s realization that public services matter to Idaho’s economic success is certainly welcome.  But rather than setting aside $30 million for tax cuts in his current budget, he may want to address the fact that “he’s not proposing any raises for teachers … nor is he proposing funding raises for any of Idaho’s state employees, despite a new state report showing state employee pay has fallen to 19 percent below market rates.”

Jason Bailey, Director of the Kentucky Center for Economic Policy gets it right in this op-ed describing how desperately the state needs tax reform and what the goals of tax reform should be. He notes that first and foremost “tax reform should raise significant new revenue now to begin reinvesting in Kentucky's needs.” He goes on to make the case that the tax reform should also improve the state’s tax structure in terms of fairness. He cites an Institute on Taxation and Economic Policy (ITEP) analysis which found that  currently ”low- and middle-income people pay nine to 11 percent of their incomes in state and local taxes in Kentucky while the highest-earning one percent of people pay only six percent.” Thankfully it looks like Governor Steve Beshear is on board with at least some of the principles outlined in this piece. During last week’s State of the Commonwealth (PDF) address he called for “more resources” to help restore cuts to vital services. The Governor’s own tax reform plan is scheduled to be unveiled later this month.

This piece in the Marietta Daily Journal discusses the radical “fair tax” proposal in Georgia. Some lawmakers are interested in eliminating the state’s income tax and replacing the revenue with a higher sales tax. When the Institute on Taxation and Economic Policy (ITEP) analyzed this proposal we found that this tax shift, despite not raising a dime of new revenue for the state, would actually increase taxes on most families.

Economists agreed last week that Michigan is set to see a nearly $1 billion revenue surplus over the next three years.  But, deciding on what to do with the boost in revenue will not be quite so easy.  There is some agreement amongst lawmakers that at least a portion of the surplus should be spent on tax cuts, some even calling tax cuts “inevitable.” Proposals vary greatly from lowering the state’s flat income tax rate (a permanent change) to handing out one-time rebate checks to taxpayers (recognizing that most of the surplus is one-time money) to restoring cuts to the state’s Earned Income Tax Credit (targeting tax cuts to low- and moderate-income taxpayers).   



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



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

 

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

 

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


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

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

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



State News Quick Hits: Revenue Raising Options, New EITC Policy Brief, and More



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MassBudget, in partnership with the Schott Foundation’s Opportunity to Learn Campaign, has launched a new website: “Investing in the Future: Revenue Options to Give Every Child the Opportunity to Learn.”  This website is a resource for education advocacy organizations, grassroots groups, and others who are interested in undertaking a statewide campaign to raise revenue for public education.  It provides information on options for raising adequate revenues for education in progressive ways so that every child can have the opportunity to learn.

If you’re looking for a short explanation of the Earned Income Tax Credit (EITC) and a summary of how states differ in their EITC policies, look no further than the Institute on Taxation and Economic Policy’s (ITEP) recently updated policy brief.  Short primers on more than 40 tax policy topics are available in ITEP’s full library of policy briefs.

Here’s a great piece by the Associated Press about the perils of not modernizing state tax structures.  Missouri’s income tax brackets haven’t been changed since the Great Depression, and now updating those brackets would cost the state billions in revenue.  For more on the importance of indexing to maintaining a modern tax structure, check out ITEP’s policy brief.

Say it ain’t so… An Ohio Senator is proposing a sales tax holiday to help “lure Kentucky shoppers” to the Buckeye State.  Read why this is a horrible idea in ITEP’s brief, Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform.



State News Quick Hits: Expert Advice Versus Politics in DC, NE, NY and KY



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The District of Columbia’s Tax Revision Commission heard from the Institute on Taxation and Economic Policy (ITEP, CTJ’s partner organization), last week about options for lessening the regressivity of DC’s tax system. In testimony before the Commission, ITEP’s Matt Gardner explained how enhancements to DC’s standard deduction, personal exemption, and Earned Income Tax Credit (EITC) could be enacted without breaking the bank, as long as they’re paired with reforms like phasing-out exemptions and deductions for high-income taxpayers, or eliminating the District’s unusual tax break for out-of-state bond interest.

We got our first glimpse this week of what tax reform could mean for Nebraskans next year.  Members of Nebraska’s Tax Modernization Committee sketched out details of a potential tax reform proposal, but will wait until next month to finalize the plan.  And so far, it looks like the Committee will be sticking to modest, sensible ideas like expanding the sales tax to some household services, indexing tax brackets for inflation, and cutting property taxes (slightly). Considering that Governor Dave Heineman’s commitment to doing away with the personal income tax (or at least significantly cutting it) is the reason for the Committee’s existence, it is a positive sign that its members are steering clear of more radical changes to the income tax.

New York Governor Andrew Cuomo’s first appointed tax commission, the one charged with finding revenue-neutral options to reform the state’s tax system, released its recommendations last week for making the state’s tax code “simpler and fairer”.  Our friends at the Fiscal Policy Institute and New Yorkers for Fiscal Fairness called the recommendations “a smorgasbord of reforms with a little something for everyone."  The ideas include: expanding the sales tax base to services and currently exempted goods and using the new revenue to cut taxes for low- and middle-income families; reforming the corporate and bank franchise tax; and exempting middle-income families from New York’s estate tax. The question now is whether the Governor, (who can hardly find a tax he doesn’t hate), will consider these recommendations. Or, whether he will only focus on ideas coming from a second tax committee he appointed, with former Governor George Pataki at its helm, which is tasked with finding ways to simply cut $2 to $3 billion in taxes next year.

Last September, recommendations from Kentucky’s Blue Ribbon Commission on Tax Reform were released. ITEP deemed the Commission’s 453 page final report filled with tax reform recommendations “worth legislative consideration.” Yet, the Lexington Herald-Leader is reporting that, like the eight other previous tax studies, this report is simply “gathering dust.” Some lawmakers say that 2014 isn’t the year for tax reform, citing a difficult “political climate.” Let’s hope the tide changes and all the Commission’s work doesn’t go unutilized given the fiscal stress the state is already under.



State News Quick Hits: Ohio's Kasich Wants More Tax Cuts, Missouri's Nixon Wants Fewer - and More



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Not even a month after cutting personal income taxes and raising the state’s sales tax, Ohio Governor John Kasich is pledging to further lower the state’s top income tax rate to below 5 percent (the top rate was 5.925% before being dropped to 5.3% this year).  Speaking at a plastics plant last week, the Governor said, “we have momentum” with tax cuts, and expressed his belief that low taxes will draw more business to the Buckeye State.

Proponents of the $800 million regressive income tax cut package that was vetoed by Governor Jay Nixon last month are spending millions of dollars to convince lawmakers to override the veto. Missouri’s Chamber of Commerce is airing TV ads in support of the cuts and conservative political activist Rex Sinquefield (who has been a long-time funder of the anti-tax agenda in Missouri) has given more than $2 million to efforts to overturn the veto.  For his part, Governor Nixon is spending the summer trying to convince lawmakers and others that the veto should be sustained, particularly if they care about quality education.  At a St. Louis Chamber event Governor Nixon said, “members of the General Assembly can either support (the tax cut) or they can support education. They cannot do both.”

The Salt Lake Tribune reports on the growing chorus of support for raising taxes in Utah in order to pay for improvements to the state’s transportation infrastructure.  According to the Tribune, everybody from the state Chamber of Commerce to local governments and non-partisan think tanks has been “working to build a case that transportation tax hikes are overdue.”

A story in Kentucky’s Courier-Journal highlights some of the problems with paying for roads and bridges with tolls.  Drivers who happen to live or work close to a tolled bridge end up paying far more for infrastructure than those drivers who are lucky enough to have un-tolled routes available to them.  Moreover, low-income drivers are always affected most by tolls -- a fact that’s led some local lawmakers to begin discussing ideas like exempting drivers from tolls if their incomes are low enough to qualify for the Earned Income Tax Credit (EITC).

 



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



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

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

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

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

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

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

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

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



State News Quick Hits: Neo-Vouchers in Alabama, and More



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Kentucky’s Blue Ribbon Commission on Tax Reform released its very useful findings in December, but regrettably little action has resulted from the comprehensive document. Many of the Commission’s recommendations were bold and forward-looking, like the proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). But Commissioners themselves aren’t confident that anything will come from their hard work developing those recommendations. Commissioner Sheila Schuster recently said, “I haven’t heard anything since the end of the (legislative) session that would suggest that it’s got legs... So it’s pretty discouraging.”

Legislators in many states are putting the cart before the horse when it comes to budgeting for the next fiscal year. This article (subscription required) from the Wall Street Journal tells of states like Maryland and Virginia who have already passed spending bills that assume new revenues from online Internet sales tax collections when Congress passes the Main Street Fairness Act. Of course, the Act has actually only passed the Senate, and by all accounts the bill faces an unclear future in the House.

This November, Colorado voters will vote on raising their state’s income tax to better fund education. The details of that increase have yet to be worked out, but former state representative Don Marostica has taken to the pages of the Denver Post to argue in favor of his preferred alternative: ditching the state’s flat income tax in favor of a more progressive, graduated income tax used by most states. Marostica explains that “businesses and middle-class Coloradans alike would be better off with a two-step income tax to provide the resources for top teachers and great facilities. The No. 1 priority for businesses seeking a new location is a well-educated, fully prepared workforce. … Yet we're under-investing in education, in part because we've prioritized low taxes ahead of everything else.”

Bad tax ideas are in the news in the District of Columbia.  Mayor Vincent Gray recently reiterated that he wants to cut taxes for DC investors who do their investing outside of the District.  But it’s Councilwoman Anita Bonds’ idea that recently made headlines. Bonds wants to give a super-sized tax break to most people over 80 years old: a full exemption from property taxes, provided their income is below $150,000 per year and they’ve lived in the District for 25 years or more.  But property tax relief should be distributed based on income, not age. Rather than cutting taxes for the well-off elderly, DC lawmakers would be wise to follow the advice of the DC Fiscal Policy Institute and expand the city’s low-income property tax credit for DC residents of all ages.

Earlier this spring, Alabama lawmakers approved a bill establishing a state income tax credit (up to $3,500) to reimburse parents for the cost of sending children to private school or transferring them to a better performing public school.  The legislation also created a tax credit for corporations and individuals who contribute to scholarship funds. These kinds of credits are often referred to as back-door or neo-vouchers as they divert taxpayer money away from public schools, indirectly via the tax code.  Due in part to concern over the unknown cost of the credits and seemingly in part due to public displeasure with the new program, Alabama Governor Robert Bentley (who had been a supporter of the bill) attempted to delay the implementation of the school tax credits last week.  He told lawmakers they “had better be listening to the people” who he says are not supportive of using public tax dollars to fund private school education.  However, the House decided this week to ignore the Governor’s request; they rejected his suggested amendment and took a vote to show they could override any veto attempts.



State News Quick Hits: Tax Politics in Virginia, Tax Reform in Kentucky, and More



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In an excellent op-ed, Jason Bailey of the Kentucky Center for Economic Policy makes the case for real tax reform in Kentucky, and that means a tax code that can raise revenues to keep Kentucky thriving. He explains that after years of budget cuts and a sluggish economy, the Bluegrass State cannot make public investments needed to recover economically and get on a sustainable fiscal footing. Bailey lists the various stop-gap measures lawmakers have already deployed and concludes they are all out of tricks. With a good roadmap to reform available, Bailey writes, it’s time to begin that hard work.

This otherwise fine article in the St. Louis Post-Dispatch, about competing tax proposals in Missouri, provided online readers with a calculator – that utterly failed in calculating how those proposals would affect taxpayers. The state policy team at ITEP quickly responded with a Letter to the Editor pointing out that “the tax calculator omits some key information about who wins and who loses under these plans.”

Tax policy is taking center stage in Virginia’s gubernatorial race. Republican candidate Ken Cuccinelli is reportedly in the process of designing a major tax cut on which to campaign.  While precise details have yet to be announced, a 20 percent cut in the personal income tax and elimination of the corporate income tax altogether are under consideration. Watch this space for a full analysis of the plan’s impact on Virginians at different income levels once more details are announced.

The Center on Budget and Policy Priorities (CBPP) has a new report that clarifies a lot of misconceptions about the existence of fraud in the Earned Income Tax Credit (EITC). For starters, CBPP explains that most EITC overpayments “reflect unintentional errors, not fraud.”  On top of that, it turns out that IRS studies of EITC overpayments suffer from “significant methodological problems that likely cause them to overstate the actual EITC overpayments.”



Quick Hits in State News: Hoosiers Choose Revenues, Kentuckers Tackle Reform and More



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Late last week, Kentucky’s Blue Ribbon Commission on Tax Reform released their tax reform recommendations. Many of the Commission’s recommendations are bold and forward-looking, like their proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). Not only does the Commission deserve kudos for trying to shore up tax revenues over the long term while keeping an eye on tax fairness, the Commission also clearly understood the need to raise more revenue. As one Herald-Leader columnist said,  “task force members had the courage to recommend a plan that would add $690 million in revenue during the first year.”  But the Commission’s recommendations aren’t without their flaws, such as $100 million in cuts to the corporate income tax. Jason Bailey from the Kentucky Center for Economic Policy reminds us, "Business tax cuts are really a race to the bottom between states.”

Nebraska think tank Open-Sky Policy Institute released, “Feeling the Squeeze- The Negative Effects of Eliminating Nebraska’s Inheritance Tax” detailing the impact of eliminating the state’s inheritance tax. The tax generates about $43 million annually for counties. These revenues are an important part of county budgets, and its counties assist with natural disasters, keeping roads safe and administering elections, among other things. Tax cuts don’t happen in a vacuum and that revenue will need to be made up with new revenue or reductions in services. Open Sky found that if “counties replaced all of the lost inheritance tax revenue with an increase in property taxes, the average overall county tax rate would have to increase by 7 percent.”

The majority of Hoosiers are telling Indiana Governor-elect Mike Pence “not so fast” on his tax cutting plan.  A new poll shows that taxpayers would rather see their tax dollars spent on investment priorities rather than tax cuts. Just 31 percent of those surveyed supported Pence’s proposal of slashing taxes by 10 percent across the board versus 64 percent of voters who would rather see tax revenue spent on education and workforce development.

Read this fantastic op-ed from Remy Trupin, executive director of the Washington State Budget & Policy Center, which makes the case for fundamental tax reform. “Washington needs a revenue mix built for the 21st century. That means eliminating wasteful tax breaks, modernizing our state sales tax to include more consumer services and taxing gains on the sale of stocks, bonds and other high-end financial assets held by the wealthiest two percent of Washingtonians.”



Blue Ribbon Experts School Blue Grass Lawmakers in Tax Reform



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Kentucky’s tax structure is broken - so broken that policymakers have convened 12 commissions since 1982 to study the state’s revenue stream.  And yet the Institute on Taxation and Economic Policy (ITEP) found that still the state continues to tax low and middle-income people at a higher rate than the wealthy. This year the Governor Beshear formed the Blue Ribbon Commission on Tax Reform, and the consulting economists assisting the Commission have released their report (PDF) which offers a variety of recommendations that are worth legislative consideration. The full commission, consisting of stakeholders and leaders from organizations across the state, will release its recommendations in November.

The Commission was tasked with analyzing the tax structure with these five goals in mind: fairness, competitiveness, simplicity and compliance, elasticity, and adequacy. The economic consultants found (and most analysts agree) that “a broader tax base is needed so that revenue can keep pace with future economic growth.” The report predicts a dire future for the state’s finances unless the tax structure is improved, “Without fundamental reforms Kentucky could face a $1 billion shortfall by 2020, and could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment.”

The experts’ comprehensive report included some common sense, positive proposals like eliminating itemized deductions, instituting an Earned Income Tax Credit, and broadening the sales tax base to more personal services. The Louisville Courier Journal, in the culmination of three months of quality, in-depth reporting on the issue notes that, “many lawmakers and others expect the governor’s effort will fall far short of any significant reform — just as reform attempts by most of Beshear’s immediate predecessors failed.” The reason? Getting legislators to agree to any tax increase (even if other taxes are lowered) may be a political bridge too far.

The Governor, however, has said that he is not abandoning the idea of a special session focused solely on tax reform. He admits, “It’s always difficult to address the issue of taxes. But I think it is do-able if we all will work together.” The full tax commission is expected to come out with its recommendations by November 15. The question remains whether Kentucky can not only study its tax system, but also reform it.



Quick Hits in State News: Massachusetts Movie Subsidies, Oklahoma Short on Transit Funds, and More



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Massachusetts taxpayers now have a better idea of where $171 million of their tax dollars are going.  Thanks to legislation enacted in 2010, the state’s Department of Revenue just issued its first-ever report identifying recipients of so-called economic development tax credits.  The biggest winner in 2011 was Columbia Pictures, which received $11.6 million Bay State tax dollars for a movie that, ironically, depicts a teacher trying to raise money for his under-funded public school.

Then there’s the fraudulent use of film tax credits, which is a whole other thing!

Revenue to fund bridge repairs is falling short in Oklahoma, so Governor Mary Fallin signed a bill this week that takes money away from education and other general fund services to cover the costs.  The move follows similar actions taken last year in Nebraska, Utah and Wisconsin (and almost in Virginia).  Oklahoma has gone 25 years without raising its gas tax—the state’s traditional source of transportation revenue.  That’s longer than any state except Alaska.

Calling all Kentuckians! Here’s a chance to make your pitch for tax fairness to the Blue Ribbon Tax Commission, which holds public hearings through the summer.



Senator Rand Paul: Champion of Secret Swiss Bank Accounts



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Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0



Quick Hits in State News: Supermajorities Aren't All That Super, Valentine's Dinner With Tax Dodgers, & More



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  • In this upside down world where closing a corrupt tax loophole is called a tax hike (like that’s a bad thing), some states are moving towards amending their constitutions to require a two thirds supermajority to raise taxes or borrow money. This is a shame. New Hampshire Senators, for example, are expected to vote on a supermajority proposal later this week. Here’s an excellent editorial from the Idaho Statesman and a new report from the Center on Budget and Policy Priorities about the perils of supermajorities.
  • It’s been just over a month since Kansas Governor Brownback unveiled his tax plan and the criticism continues. His plan, which would raises taxes on the bottom 80 percent of the income distribution, was recently called “radical and troubling.” Attention is shifting to the House, where leaders are now introducing their own tax proposal which includes the most costly and regressive elements of the Governor’s proposal.
  • Kudos to Kentucky Governor Steve Beshear for appointing his 23 member blue ribbon commission to study the  state’s tax system and propose ways to reform it.  Let’s hope they heed the governor’s call for "a tax system that produces adequate revenue that meets the needs of our people," and his admonition that there comes a time "when slashing programs and services starts a downward spiral from which recovery is too difficult and too steep."
  • Good news from Nebraska, where it looks like support is weak for the Governor’s proposal to eliminate the inheritance tax.  Legislators know that revenue from this tax goes directly to counties, which would have to cut services or make up the revenues with regressive tax increases.
  • Finally, in planning your Valentine’s dinner, you might think twice about eating at a Yum Brands restaurant (KFC, Taco Bell, and Pizza Hut) or serving Campbell Soup, H.J. Heinz or ConAgra Foods products.  Our Corporate Tax Dodging in the Fifty States, 2008-2010 found that, despite being profitable, these companies didn’t pay any federal corporate income taxes in at least one year between 2008-2010.

 



Trending in the States: Cutting Corporate Taxes Because Lobbyists Say You Should



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Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This article takes a look at efforts to roll back business taxes in states based on the shopworn, erroneous argument that tax cuts are good for the economy.

Robust corporate income taxes ensure that large and profitable corporations that benefit from publicly subsidized services (transit that delivers customers, education that trains workers, electricity that powers industry, etc.) pay their fair share towards the maintenance of those services. But, as ITEP’s recent report, Corporate Tax Dodging in the Fifty States, 2008-2010, found, twenty profitable Fortune 500 companies paid no state corporate income taxes over the last three years, and 68 paid none in at least one of those three years, even as state budgets are stretched to the point of breaking.  

As a new legislative season gets underway, too many political leaders are bashing taxes in general and business taxes in Governor Nikki Haleyparticular.  Here are some states to watch for more bad business tax policy (followed by a few glimmers of hope).

South CarolinaSouth Carolina Governor Nikki Haley is following through on her misguided campaign promise and recently proposed eliminating the state’s corporate income tax over four years. This despite the fact that South Carolina’s corporate income taxes as a share of tax revenue are among the lowest in the country, at a mere 2.4 percent.

KentuckyState Representative Bill Farmer has filed legislation that, instead of strengthening the tax, would repeal the state’s corporate income tax entirely. Farmer worked as a “tax consultant” and has been an anti-tax crusader in the Kentucky legislature since 2003.

Nebraska – Governor Dave Heineman recently unveiled his plan to reduce the top corporate income tax rate from 7.81 to 6.7 percent (and eliminate other key state revenue sources, too).

Florida Governor Rick ScottFloridaIn his recent State of the State address, Governor Rick Scott said that taxes and regulations were “the great destroyers of capital and time for small businesses.”  And – no surprise here – he also called for lowering business taxes.

IdahoGovernor Butch Otter has called for $45 million in tax cuts but is leaving the details to the legislature.  Of course, when a lobbyist from the Idaho Chamber Alliance of businesses calls the governor’s position “manna from heaven,” there’s a good chance some of those cuts will be given to business.

A few signs of sanity. In Connecticut , the governor is looking to improve the return on tax-break investment for the Nutmeg state. Perhaps he’s learned from states like Ohio, where a recent report issued by the attorney general showed that fewer than half of all companies receiving tax subsidies actually fulfilled their commitments in terms of job creation or economic growth.   We also see combined reporting getting attention in a couple of states.  It’s smart policy that discourages companies from creating multi-state subsidiaries to shelter their profits from taxes. We will report on other positive developments as warranted – so watch this space.

Photo of Rick Scott via Gage Skidmore and Photo of Nikki Haley via Mary Austin Creative Commons Attribution License 2.0



Trending in 2012: Destroying the Personal Income Tax



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Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country. This week, we’re taking a closer look at proposals which would lessen a state’s reliance on progressive income taxes, often by shifting to a heavier reliance on regressive sales taxes. 

Georgia – A legislative proposal gaining traction in Atlanta would undercut the state’s reliance on the personal income tax – its only major progressive revenue source.  It would make up those revenues by raising the sales tax – every state’s most regressive source of revenue.  The plan also includes two other components that hit the poorest Georgians the hardest: taxing groceries and adding a dollar to the cigarette tax.  A sensible, comprehensive proposal from the Georgia Budget and Policy Institute is the template lawmakers should be following. It starts with fairness, ends with increased revenues and is all about modernization and reform. 

Kansas – If the expectations about Governor Sam Brownback’s proposed income tax changes are right, Kansas could have a hard time balancing its books. Tonight, the Governor, (who has received technical assistance from supply side guru Arthur Laffer), is expected to propose drastic reductions to state income tax rates.  Details on how the governor plans to make up the lost revenue haven’t been revealed, but his sidekick Laffer was recently quoted as saying, “It’s a revolution in a cornfield. Brownback and his whole group there, it’s an amazing thing they’re doing. Truly revolutionary.”

Kentucky –  Fresh off his reelection to the Governor’s office, Steve Beshear is expected to propose his own tax reform plan, but Representative Bill Farmer, who’s been itching to change Kentucky’s tax code for years, has already pre-filed his own tax overhaul bill, which would slash the state income tax, expand the sales tax base to include more services and lower the sales tax rate.  ITEP conducted an in depth analysis of an earlier Farmer proposal and found that his proposal would cost the state hundreds of millions of dollars and raise taxes on the poorest 20 percent of Kentuckians by an average of $138. We expect that his current proposal won’t do much to fix the state’s regressive tax structure either.

Missouri – Perhaps the most destructive proposal of this type gaining traction is Missouri’s mega-tax proposal, so called because it amounts to a massive consumption tax hike for ordinary Missourians. Proponents of the related ballot initiative that would eliminate the state’s personal income tax and replace that revenue by adding goods and services to the sales tax base are currently collecting signatures in an attempt to place the initiative on the ballot this November. Show-Me-Staters would be unwise to provide their signatures for this kind of campaign, however, because its passage would result in higher overall taxes for working families. Click here to see ITEP testimony on a similar proposal.

Oklahoma – Two seriously bad proposals that would increase the unfairness of Oklahoma’s tax system are currently under consideration. Working with (the aforementioned supply side guru) Arthur Laffer, the free-market Oklahoma Council of Public Affairs is proposing to eliminate the state income tax altogether. An ITEP analysis found that the bottom one-fifth of Oklahoma taxpayers -- those earning less than $16,600 per year -- would be paying on average $250 a year more in taxes, or about 2.5 percent more of their income. Similarly, the Tax Force on Comprehensive Tax Reform (dominated by business interests) suggests lowering the state’s top income tax rate and eliminating a variety of tax credits, many of which are designed to help low and middle income families. David Blatt, director of the non partisan Oklahoma Policy Institute recently said of the proposal, "This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy.”

Photo of Governor Steve Beshear via Gage Skidmore and photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0



Conservative ALEC "Legislator of the Year" Defeated in Kentucky



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Kentucky GOP gubernatorial candidate, longtime Senate President and American Legislative Exchange Council (ALEC) “Legislator of the Year” awardee, David Williams, was rebuked by Blue Grass State voters last week.

Williams staunchly advocated for eliminating the state’s personal and corporate income taxes during his campaign, that is, eliminating the most progressive and fair taxes levied in Kentucky and creating a colossal hole in the state’s budget at the same time.

Governor Steve Beshear, who defeated Williams and won a second term on November 8, estimated the budget hole from eliminating these two vital sources of revenue would equal 43 percent of the state’s general fund.  Beshear also suggested it would have to be made up with a sales tax hike – which is always hardest on the poorest families.

Kentucky voters had their say and voted down Williams’ radical agenda 36  to 56 percent (an independent candidate garnered 9 percent of the vote).

This isn’t the last we’ll hear of ALEC and its state-by-state plan to advance its corporate-authored agenda . But it’s encouraging that the good people of Kentucky didn’t fall for it.

Photo of Governor Steve Beshear via Gage Skidmore Creative Commons Attribution License 2.0



The Preposterous Plans of a Kentucky Gubernatorial Candidate



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Kentucky Republican gubernatorial candidate David Williams released the outline of his economic plan earlier this week. Williams proposes to repeal the state’s personal and corporate income taxes as part of a “revenue-neutral” tax swap, which of course means that the remaining taxes levied by Kentucky would have to be increased by close to $4 billion a year to make up for the loss of the income tax.

Williams would replace the state’s personal and corporate income taxes with a broader consumption tax of some sort. He says of this proposal, “If you tax consumption, people will make discerning choices about consumption and you will encourage productivity.”

Consumption taxes as a substitute for income taxes is backwards tax policy at its worst and is catastrophic for middle- and low- income families. In fact, the Institute on Taxation and Economic Policy (ITEP)  found that the impact of a similar proposal in 2009 was disastrous:  the poorest 20 percent of Kentuckians would have seen their taxes rise by $136 on average, while the richest one percent would have received an average tax cut of $40,910.

Explaining his plan to abolish the income tax, Williams says it will be somehow economically stimulative: “If you look at states that have done away with income taxes, states like Texas, Tennessee and Florida, many jobs there were created after they adopted that."  

What Williams doesn’t seem to know is that none of these states had income taxes in the first place, so none have actually “done away” with them.  And whether it’s Texas’s oil or Florida’s tourism industry, these states have unique natural resources to fall back on that Kentucky can’t match.

What’s more, living in Texas, Tennessee, or Florida is hard for working families. ITEP found that all three of these states are in the top ten for the states with the most regressive tax structures, meaning they make it cheap for rich people live there, but expensive for everyone else because of reliance on consumption taxes.  Florida taxes its poor families at a rate of 13.5 percent, the second highest rate in the nation.

Williams, the GOP’s candidate for governor in Kentucky, proposes that an unelected tax reform commission of “economic and tax experts” should be appointed to create a plan based on his broad outlines.  It’s not clear, however, where he’ll manage to dig up a panel of actual tax experts who believe that income tax repeal is a smart move. The only support for that kind of policy is in conservative think tanks funded by corporations who, it is well known, hate paying taxes.

Should Williams unveil more details about his economic plans as the election approaches, we’ll be right here, ready to flag his more outrageous proposals and assumptions.

Photo via Am Heart Advocacy Creative Commons Attribution License 2.0



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.”



The Specter of the So-Called "Fair Tax" Rises Again in Missouri



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According to the St. Louis Post-Dispatch, the push to pass so-called “Fair Tax” proposals in Missouri is "gaining steam" as billionaire Rex Sinquefield and his organization, Let Voters Decide, work to get these proposals on the ballot next year.  The goal is to use the threat of ballot initiatives to press lawmakers to pass “Fair Tax” legislation.

The move is the latest by Sinquefield and his organization (who backed the disastrous Proposition A which passed last year) to force a highly regressive measure on Missourians. It should come as no surprise that Republicans in the state are seriously considering the proposal. As CTJ has noted before, you can "follow the money" and find that Rex Sinquefield donated significantly to statewide Republican candidates, including contributing $200,000 to Speaker Steve Tilley who ran unopposed for his seat.

The specific legislative proposals, HJR-56 and SJR-29, would essentially replace all of Missouri’s income taxes by both increasing the rate of the sales tax as well broadening the base of the sales tax so that it applies to services.

As the Institute on Taxation and Economic Policy (ITEP) demonstrated in its testimony to a Missouri Senate committee in January, the legislation would cut taxes only for the Top 5% of income earners in Missouri, while significantly hiking taxes on the other 95% of Missourians. This translates into a $154 average increase for the lowest 20% of taxpayers, with the average tax cut for the top 1% reaching over $25,000.

On top of all this, the Missouri Budget Project notes in a recent statement that if the proposed sales tax rate is capped at 7% as reported, then the plan would result in billions of dollars of lost revenue.

If the initiative passes, “critical programs that represent the state’s investment in its workforce, such as education, transportation, and health services would face further cuts, endangering the state’s economic recovery, ” according to the Missouri Budget Project's Executive Director, Amy Blouin.

Unfortunately, Missouri is not the only state to consider “Fair Tax” legislation. Kentucky State Representative Bill Farmer recently proposed to repeal the state's income taxes and increase the sales tax. Once again, ITEP has demonstrated how this proposal would also be highly regressive and fail to produce adequate revenue.

As many states consider dramatic overhauls to their tax systems, it is important to stay vigilant as various disastrous “Fair Tax” proposals, like those in Kentucky and Missouri, pop up throughout the country.



New Project to Focus on Fiscal Issues in Kentucky



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The Kentucky Center for Economic Policy (KCEP), a new project of the Mountain Association for Community Economic Development, also launched its website this week.   The site features KCEP’s publications on fiscal policy issues in Kentucky focusing on the areas of budget and tax, workforce and economic development, and economic security.



New Report from ITEP: The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes



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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.



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.



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.



Kentucky Special Session: Missed Opportunity



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Late last year we described Kentucky Governor Steve Beshear's misguided resistance to reforming the state's tax system. Instead of offering real leadership and addressing the serious flaws of the state's tax structure, Governor Beshear took a dramatic and short-sighted stance against any tax increases to assist in balancing the state's budget. It's unfortunate, but unsurprising that he continues to hold this position leading up to the Special Session starting May 24. (The legislature adjourned its regular session on April 15 without a budget).

Kentucky isn't a state where the tax system just needs a little tweaking. In a recent report, ITEP found that the state's revenue system "is simultaneously insufficient, as it fails to produce enough revenue to fund the public services on which Kentuckians rely, and inequitable, requiring low- and moderate-income residents to pay more in taxes relative to their incomes than wealthier individuals and families."

The two-year budget that is expected to pass in the special session contains no fundamental tax reform. Instead, it relies heavily on across-the-board spending cuts of 3.5 percent for the first year and 4.5 percent in the second year. Many are quick to add that the spending cuts aren't as deep for select areas of spending, including K-12 education, higher education, Medicaid and some areas of public safety, as if this makes a cuts-only budget more acceptable.

No doubt the choices facing Kentucky lawmakers are difficult and complex. But they have made their own jobs enormously more complicated and difficult by taking taxes completely off the table for the special session. The cutting has only begun.



KENTUCKY: Out in the Open, But on the Wrong Side of the Fence



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Well, no one could accuse Governor Steve Beshear of failing to take a position on tax reform in Kentucky.  Unfortunately for the citizens and businesses of the Bluegrass State, it’s the wrong position.  In recent weeks, the Governor has made plain his opposition to changing the state’s tax structure, arguing in an opinion piece in the Lexington Herald-Leader that “for many, …‘tax reform’ means raising broad-based taxes on some while lowering them on others….an approach [that] at this time could do immediate damage to the economy, to employment levels and to individual workers.”

To be sure, state policymakers face a very limited set of options in addressing budget shortfalls. They can either cut spending or raise taxes. (Governor Beshear touts gambling expansions in Kentucky as one additional approach, though that option, as other states have found in recent months, has its own shortcomings.)  Still, between spending cuts or tax increases, it’s the latter that are likely to have a less deleterious effect on economic growth, since they will not reduce consumer demand as extensively as spending cuts.

Fortunately, other voices within the state are speaking up in favor of modernizing Kentucky’s tax system.  As the Owensboro Messenger-Inquirer noted recently, “it makes no sense to close off options when the state is facing one of its largest budget shortfalls in history.” This is a common-sense view given that, as the paper further observes, “Kentucky's outdated tax system has left the state's revenue sources dried up, which makes this the right time to act on tax reform.”

For more on the challenges – and the choices – before Kentucky policymakers, see ITEP’s June 2009 report on the subject as well as resources from Kentucky Youth Advocates and Kentuckians for the Commonwealth.



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.



State Revenue Matters In the News



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With legislative sessions starting in just a few months, advocates and the press are weighing in on the options available to cash-strapped states. Kentucky lawmakers are urged to find a real solution to the state's fiscal woes. Idaho's Governor is suddenly open to delaying an improvement in an important tax justice tool. Maryland advocates urge a balanced approach to this year's budget, Arizona researchers offer insight into the cost of previous tax cuts, and Ohio lawmakers rethink their own previously enacted tax cuts.

Kentucky

Late last week, Kentucky's Lexington-Herald Leader published an editorial urging lawmakers to reform that state's tax code, saying "Our representatives and senators turned to a 'smoke and mirrors' approach to budgeting because they simply lacked the backbone to do the right thing: Pass the kind of real tax reform that could provide state government with a stable, sustainable revenue base." They fear that during this session lawmakers will continue to cut important programs instead of fixing the state's revenue stream. The paper warns the lawmakers appear to be on track to continue "robbing Peter to pay Paul...Only this time, Peter is a schoolchild."

Idaho

Tax fairness advocates in Idaho may be facing a similar uphill battle. Governor Butch Otter, once a strong proponent of the state's grocery tax credit (which helps to offset the state's sales tax on food), has now left the door open for delaying an increase in the credit amount in order to save the state $15.5 million. Of course, now is precisely the wrong time to delay such an important credit specifically targeted to help offset the state's regressive sales tax on food. While it's important to keep all options on the table, during this time of fiscal upheaval delaying the increase in this credit is an option that should be quickly dismissed.

Maryland

Recently the Maryland Budget and Tax Policy Institute released a paper urging lawmakers to approach the state's budget woes in a balanced way. The report makes a strong case against a cuts-only budget. "An all-cuts budget solution would sacrifice too many of the things that make Maryland such a great state." The report goes on to offer a list of concrete revenue-raising options available to lawmakers interested in preserving the state's education, health, and transportation programs.

Arizona

Arizona's budget woes are dire. A new report from the Arizona Children's Action Alliance describes the state's budget crater, which is projected to be $1.5 billion for FY10 and $2.5 billion in FY11. The report is useful for any Arizona advocate interested in understanding the impact that previous rounds of tax cuts have had on the resources available to fund public services. It explains "why any [budget] package that results in further net loss to the state general fund endangers the common benefits that Arizona counts on." The report goes on to offer ten reasons why the state should freeze and reverse the harmful tax cuts from recent years.

Ohio

Last week, the Ohio House of Representatives voted to suspend the state's scheduled income tax rate reductions for two years to help plug a budget hole. Governor Ted Strickland congratulated members of the House, saying they "acted quickly, courageously and responsibly to protect Ohio schools from devastating cuts while reducing their own pay in solidarity with struggling Ohio families and businesses." Now the legislation moves to the state's Republican controlled Senate. Let's hope lawmakers there follow in the House's footsteps and put the needs of Ohio first.



The Exaggerated Promise of Legalized Gambling



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There’s a lot that can go wrong when a state turns to legalized gambling as a source of revenue.  This is a fact that Kentucky, Pennsylvania, and others should keep in mind during their continuing efforts to push for expanded gambling as a solution to their budget woes

For starters, a poor economy, opposition by local residents, legal challenges, and a number of other factors can delay the opening of newly legal gambling establishments.  And without functioning gambling venues, there’s no money for the state.  Recent stories out of Maryland and Pennsylvania demonstrate the very real nature of this threat.  Additionally, recent polling done in Illinois suggests that opposition to gambling at the local level – fueled in part, no doubt, by the Not-In-My-Back-Yard (NIMBY) syndrome – could cause similar delays there.  And legal challenges in Ohio indicate that the Buckeye state could be in for delays in gambling implementation as well.

But even after a state manages to get its gambling operations up and running, the revenue stream produced by gambling may not be as lucrative as advertised.  A recent New York Times story details the degree to which gambling revenues (from casinos, racetracks, lotteries, etc) are disappointing states this year.  The most obvious culprit in this case is the slumping economy, though some experts believe that increasing competition for gamblers both between states, and within states – known as “market saturation” – may be at least partially to blame.  Worries about market saturation have been on full display in Ohio, where racetrack owners are on edge about the effect that casino legalization (to be voted on by Ohioans this November) could have in cutting into their profits.

In other cases, it may simply be the case that gambling just isn’t as popular as first expected.  The perceived need among many states to legalize slot machine gambling as a means of drawing gamblers back to struggling racetracks is evidence of this problem.  Unfortunately, the failure of this method in Indiana has drawn into question the wisdom of this revenue-raising strategy as well.

Other methods, such as loosening the restrictions on betting limits or alcohol sales (which were originally imposed to secure support for gambling from reluctant lawmakers) are being tried as well.

Ultimately, the fact is that gambling is far from a fiscal panacea for the states, and given the tendency for implementation delays, is exceedingly unlikely to result in much revenue to fix the current round of state budget shortfalls.  Take a look at this ITEP policy brief for more on the gambling issue.



Tax-Free Gun Days Starting to Catch On



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A little over a year ago, we told you about a ridiculous law in South Carolina that provided for a sales tax "holiday" on purchases of handguns, rifles, and shotguns (later ruled unconstitutional for technical reasons, though only after the holiday had already taken place).  Little did we know then that the idea would actually catch on.  Louisiana enacted a similar "holiday" last month, upping the ante by exempting not only handguns, rifles, and shotguns, but also bows, crossbows, hunting knives, arrows, ammunition, rifle scopes, holsters, and much more.  Unbelievably, the idea is reportedly receiving attention in Texas and Kentucky as well.

The Louisiana holiday is scheduled to occur each year on the first consecutive Friday through Sunday in September.  During that weekend, neither state nor local sales taxes will be collected on a variety of items the legislature has declared worthy of being included in its "Second Amendment Holiday." 

But it's not hard to imagine how many of those exemptions will pose serious administrative problems.  With some exempt items, such as tree stands, there seems to be little room for confusion.  In other cases however, the state has decided to exempt a variety of multi-purpose items based on whether they were designed, marketed, or even simply purchased for use while hunting (e.g. some items must be designed with hunting in mind, while others need only be purchased by somebody with the intent to hunt).  Items falling into this category include off-road vehicles, animal feed, boots, bags, binoculars, chairs, belts, and various types of camouflage clothing. 

Apparently, according to this list of tax-exempt items, you can look at a bird through tax-free binoculars, but only if you intend to kill it.  Ensuring that these items are really purchased by individuals with "Second Amendment" intentions will no doubt prove impossible.

The bill's official fiscal note hints at a further complication involved with this holiday.  Specifically, it explains that the state will pay retailers $25 for each cash register they re-program to calculate "Second Amendment" items as being tax-free.  On top of that, the state will pay $25 more when the register is re-programmed, back to normal, at the end of the holiday.  Official estimates are that it could cost Louisiana taxpayers up to $100,000 to help retailers make the necessary modifications.  Since the holiday is only expected to result in $263,000 per year in tax savings, this $100,000 cost is not a trivial concern.  And keep in mind, Louisiana taxpayers not purchasing weapons will be helping to pay this $100,000 tab to benefit their soon-to-be well-armed neighbors.

The inevitably complicated nature of sales tax holidays is just one of their many flaws -- as explained in this ITEP Policy Brief.  But despite all their problems, at least typical "back-to-school" sales tax holidays can be interpreted as a misguided attempt to make life easier for families with school-age children.  When it comes to these "Second Amendment Holidays," however, it's hard to see what exactly lawmakers are trying to gain, other than a pat on the back from the NRA.



Kentucky Lawmakers Should Look Beyond Gambling



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Lawmakers in Kentucky met this week in a special legislative session that started Monday. During Governor Beshear's opening address, he proposed solving the state's nearly $1 billion shortfall for the new fiscal year (which starts in less than two weeks) through spending cuts, federal stimulus dollars, and gambling. He

called on lawmakers to approve a proposal that would expand gambling at horse tracks to include casino-style gambling. He argued, "If we don't act now, our racetracks face declining status and even the certainty of closure."

The latter proposal isn't without it critics (after all, gambling is a notoriously regressive way to raise revenue). But proponents of the legislation are highly-organized. Wednesday hundreds of proponents of the legislation (including a two-time Kentucky Derby winning jockey) rallied in Frankfort in favor of increased gambling.

Yet, Governor Beshear's proposals miss an important opportunity. Instead of partially balancing the state's budget with gambling revenues, legislators would be better off to follow the advice outlined by Representative Jim Wayne in a recent op-ed. Rep. Wayne details the structural problems with the state's tax system and offers real reforms that could ensure Kentucky's tax structure is sustainable over the long term including sales tax base broadening, new top rates and brackets and the introduction of an Earned Income Tax Credit.



New ITEP Report Focuses on the Need for Tax Reform in Kentucky



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Who should pay to fix the billion dollar hole in Kentucky's budget? One group of lawmakers thinks low- and middle-income families, the same families hit hardest by the economic crisis, should foot the bill. Another group of lawmakers thinks that well-off families, the same families who have benefited the most from the tax-cutting sprees and the economic changes of the last several years, can afford to give something back. A new report from ITEP shows how different the two approaches are.

Both views were on display yesterday during a meeting of the Interim Joint Committee on Appropriations, where lawmakers discussed these two very different alternatives for solving the state's anticipated shortfall for the next fiscal year, now estimated to total $996 million.

HB 51 PHS would repeal Kentucky's personal and corporate income taxes as well as its limited liability entity tax, reduce the sales tax rate from 6.0 to 5.5 percent, and broaden the sales tax base to include a variety of services. Estimates show that in future years this legislation would actually cost the state money and make Kentucky's tax structure more regressive.

The other bill heard on Thursday, HB 223, would raise tax rates for well-to-do Kentuckians, create a new income tax credit based on the federal Earned Income Tax Credit (EITC), reinstate a version of Kentucky's estate tax, and also subject a variety of services to the sales tax. HB 223 would both increase state revenues and make the state's tax structure more progressive.

For more on these proposals, read ITEP's report, Tax Reform in Kentucky: Serious Problems, Stark Choices.

Like many state tax systems, Kentucky's currently faces two serious problems. The first -- and most immediate -- is that Kentucky's tax system is insufficient. It fails to produce enough revenue to fund the public services on which Kentuckians rely. The second problem, while less pressing, is arguably more persistent. Kentucky's tax system has long been inequitable, requiring low- and moderate-income residents to pay more in taxes relative to their incomes than wealthier individuals and families. In fact, in 2007, state and local taxes as a share of income were nearly twice as high for middle-class Kentucky taxpayers as they were for the most affluent.

Ideally, lawmakers would see this situation as an opportunity. Hearings like those conducted yesterday are steps in the right direction. However, it appears that Governor Beshear is turning his head away from discussions of comprehensive tax reform. When the special session scheduled to start June 15 begins, comprehensive tax reform isn't likely to be on the table. Instead, gambling, budget cuts, and federal stimulus dollars are likely to be on the legislative agenda. Precisely because Kentucky is facing such challenges, now is the time to reform the state's tax structure. HB 223 would certainly be a leap in the right direction.



Kentucky Advocates Call on Governor



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Today a panel of economic experts is expected to unveil their estimate of Kentucky's budget shortfall for the next fiscal year. Governor Steve Beshear and administration officials seem to agree that the shortfall for the fiscal year starting July 1 could be about $1 billion. For context, the state's budget in the coming fiscal year is $9.3 billion, so it's clear that, unless revenue is raised, a significant portion of the state's programs and services will be on the chopping block.

Instead of accepting spending cuts as the only option for dealing with the coming shortfall, this week "Kentucky Forward" was launched. This coalition of labor, social service, community, and religious organizations, united behind a set of progressive tax policy principles, called upon the Governor to call a special session and put progressive tax reform on the legislative agenda. ITEP's comments during the coalition's launch about the need for tax reform can be found here.

Stay tuned. Next week a special joint meeting of the House and Senate budget committees will hear two tax reform bills. One is largely modeled after the so called "fair tax" and would eliminate the state's income tax and replace the revenue with new sales taxes. The other is a comprehensive tax reform bill that would make the Commonwealth's income tax more progressive as well as broaden the sales tax base to include more services.



"Fair Tax" Dead in Missouri But May Rear Its Head in Kentucky or South Carolina



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It's safe to assume that there will be a special legislative session in Kentucky this summer. After all, the Blue Grass state is expected to face a billion dollar shortfall for the fiscal year starting July 1. Governor Beshear claims

he hasn't committed to calling back the legislature or decided what topic he would even select for a special session, but everyone knows a shortfall this large isn't going away without further action. So a flurry of proposals are being discussed from progressive income tax reform to increased gambling and even the so-called "fair tax."

The infamous "fair tax" legislation, which proponents are pushing all over the country, would eliminate corporate and individual income taxes, replace the lost revenue with increased sales taxes on a wide range of services, and eliminate most current sales tax exemptions. Before going too far down this path,

Kentucky legislators should take a moment to look at how that same proposal has faired in other states just this year.

Missouri, "fair tax" legislation passed the House of Representatives but went nowhere in the Senate. An ITEP analysis found that this proposal would raise taxes on middle-income Missourians and require a much higher sales tax rate than advertised.

A similar fate is expected in South Carolina where similar legislation has been introduced in the House. Advocates in South Carolina are hopeful that the legislation won't get very far.

Kentucky lawmakers should quickly jump off the failed "fair tax" bandwagon and instead look for ways to improve their state's tax structure while also increasing state revenue.



Tax Overhaul in Kentucky Could Be Progressive... Or Not



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This week, Kentucky's legislative session ended without much in the way of progressive tax reform actually becoming law. Instead, policymakers voted during the 30-day session to approve a cigarette tax hike and remove the sales tax exemption on beer and liquor. But there is some hope that the session laid productive ground work for tax reform efforts next year. According to the Lexington Herald-Leader, tax overhaul discussions are on the horizon. At the moment, the choice seems to be between a bill that would eliminate the state's corporate and personal income taxes or a different bill that would introduce a state earned income tax credit (EITC), broaden the sales tax base to include services, and add new top income tax brackets. Legislators and policymakers interested in tax fairness should stay focused on passing a bill that includes an EITC and sales tax base expansion.



Two States Consider Offering Unproven Tax Breaks for Home Buyers



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Following the creation of a federal tax credit for new home buyers, two states are considering also wandering down this unproven and expensive path. North Dakota and Kentucky are each debating sacrificing taxpayer dollars to fund special tax breaks for newly built homes. In Kentucky, the break would come in the form of a $5,000 tax credit for purchasers of newly constructed homes, while in North Dakota, those fortunate enough to afford a newly built home during this downturn would enjoy a temporary doubling of their property tax homestead exemption (from $75,000 to $150,000).

In each case, the break would not be available for purchasers of older residences, suggesting that these breaks are more of a bailout for developers than they are aid for those in the market to buy a home. And in either case, the proposals still suffer from many of the flaws with the federal break -- such as their potential to re-inflate home prices, and the fact that these breaks won't provide homebuyers with any cash at the time of purchase.



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.



Progressive Tax Reform Gaining Steam in Missouri and Kentucky



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Last week Missouri lawmakers joined Tax Justice for a Healthy Missouri and the newly formed Long Spoons Coalition to hold a press conference promoting HB 567, a bill that would modernize Missouri's outdated income tax structure (the top $9,000 bracket hasn't changed since 1931) and produce needed revenue while cutting taxes on average for the bottom 60% of Missourians. It's fine time that this sweeping legislation receives attention from policymakers and the press.

A progressive tax reform proposal is also in the news in Kentucky, where some lawmakers want to balance their state budget in a progressive way, combining revenue-raising options with tax cuts for low- and middle-income folks. The Kentucky reform plan includes an Earned Income Tax Credit, new top rates and brackets, and broadening the sales tax base. The bill's sponsor will be meeting with Kentucky Governor Steve Beshear about the bill's merits -- a meeting we hope goes well.



How to Fix a State Budget Shortfall: Kentucky Youth Advocates Weighs In



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By now you're familiar with the basic outline of the story. Our broader economic troubles have translated directly into state budgetary nightmares, and in most cases, the natural inclination of policymakers has been toward slashing services. As a recent op-ed from the Kentucky Youth Advocates points out, however, "making up the shortfall with nothing more than cuts in spending will cause serious, and in some cases permanent, harm to [any state's] residents and infrastructure".

In addition to the Kentucky governor's proposals to tap the rainy day fund and increase the state's abnormally low cigarette tax rate, the op-ed goes on to suggest:

  • "Adding a 1 percent surtax on incomes of $500,000 or more... [or, alternatively], adding a 1 percent surtax on the richest 1 percent of taxpayers in Kentucky."
  • "Kentucky also can follow the example of some 20 other states and close corporate tax loopholes so that multi-state corporations operating in Kentucky can no longer avoid paying state taxes by setting up subsidiaries in other states."
  • "If the Commonwealth makes its own tax law, instead of blindly following federal law, we can "decouple" some of our tax policies from the federal tax code, especially in taxing domestic production. That alone would produce an additional $30 million dollars in 2010."
  • "Finally we can broaden the tax base by enacting an equitable way of taxing services to provide sustainable revenue, particularly during economic slowdowns when the manufacturing sector slows."

Echoing a concern that should be on the minds of many states, the op-ed points out that absent changes in the way the state raises revenue, "the state will still face cuts in 2009, shortfalls in fiscal year 2010 and continuing problems in the years to follow. Even before the recession, Kentucky's annual revenues were not adequate to meet its annual expenses, and Frankfort balanced the budget by using gimmicks". Click here to read the full op-ed, or here to visit the Kentucky Youth Advocates' website.



Kentucky Leaders Open to Tax Hikes and Pay Cuts (for Themselves Too)



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The Blue Grass state is facing its own budget crisis. The latest estimates put the state's shortfall at $456 million. In an admittedly symbolic gesture, Kentucky Governor Steve Beshear and six other high ranking state officials have agreed to a 10 percent pay reduction. Latest reports are that all options, including resurrecting a failed attempt to raise cigarette taxes and cutting services drastically, are on the table. Raising cigarette taxes certainly isn't an ideal revenue raiser because of its regressive nature and declining yield, but it's good to see that the Governor is not focusing only on cutting public services.



Progress on State Tax Breaks for Low-Income Families



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Advocates in Kentucky have long been pushing for the implementation of a state Earned Income Tax Credit (EITC). The EITC is a popular, targeted tax credit that offers assistance to working families. Similar credits have been enacted in 22 states and the District of Columbia. The House Budget Committee passed a bill that would introduce a credit equal to 7.5 percent of the federal EITC, coupled with a broader state estate tax. The bill will now go before the full House.

Policymakers in Connecticut have revived their efforts - stymied by a veto by Governor Jodi Rell - to enact a refundable EITC equal to 20 percent of the federal credit. A bill creating such a credit was approved by the General Assembly's Human Services Committee in late February; see this recent testimony from Connecticut Voices for Children on the measure's potential impact.

The state of Washington, despite lacking a personal income tax, could also be moving towards adopting a version of the EITC. Called the Working Families Credit, it would provide as many as 350,000 Washington residents with a credit amounting to 10 percent of their federal EITC, thus offsetting some of the impact of Washington's highly regressive tax system.

In more low income tax relief news, the Idaho House Revenue and Taxation Committee voted this week to increase the state rebates offered to offset the state's sales tax on groceries. Currently Idaho residents receive a $20 credit as an offset to the sales tax on groceries (more for seniors). The proposal being debated in the House would provide increased and targeted tax relief. For example, the new expanded credit would offer $50 per family member if the family's income is less than $25,000. The value of the rebates would increase each year until the maximum credit of $100 is reached. By 2015 the proposal is expected to cost about $122 million. Read more about options states have to provide targeted tax relief in ITEP's policy brief.



State of the States Roundup



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Kentucky

Kentucky residents are bracing themselves for a fiscal crisis but newly elected Governor Steve Beshear's State of the Commonwealth speech offered little more than spending cuts and grim predictions for how to handle the quandary. One of the reasons cited for the budget shortfall was "weaker-than-expected corporate income tax returns." Oddly, in his speech the Governor chose to ignore revenue raising options that would help to ensure Kentucky's fiscal solvency into the future.



Who Benefits from Tax Breaks for Business?



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Advocates of tax breaks for business typically argue that such tax breaks will benefit workers as companies are more able to expand and invest. The latest study to call this into question comes from the University of Kentucky, which finds that tax breaks don't create as many jobs as previously hoped. The report concludes, "Based on our evidence showing that training incentives are positively related to economic activity in an area, and given that relatively little is spent on this program, the Legislature may want to consider increasing the amount spent on training incentives" rather than more tax breaks.

It's also doubtful that tax breaks are very important to the success of businesses themselves. Despite the fact that Kansas business owners named excessive taxation as their biggest concern for the fourth year in a row, nearly half of the businesses surveyed by the Kansas Chamber of Commerce weren't even aware that the Legislature had enacted a six-year, $632 million business tax cut last year. The bill eliminated the state's property tax on new capital investment in business equipment and machinery and went into effect last July. It's difficult to believe that tax breaks could be vital to economic expansion if they're not even noticed by the corporations that benefit most from them.



Kentucky - More Change to the State's AMC



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If some Kentucky legislators have their way, the Alternative Minimum Calculation (AMC), which is the state's alternative minimum tax paid by businesses, may be on its way out. According to the Louisville Courier Journal, the state has numerous unmet needs and faces a structural deficit, yet some legislators would rather spend the temporary budget surplus on permanent tax cuts for businesses. Earlier this year, the state held a special session where aspects of the AMC were amended to help small businesses. As a result, those with less than $3 million in gross profits are now exempt from the tax and those with gross profits of less than $6 million enjoy a reduced tax rate. But apparently that's not enough for some legislators and business people. Concerning the repeal, Tom Underwood, state director of the National Federation of Independent Business says, "It's not going to hurt anybody's feelings if it is repealed altogether." Maybe he meant anybody except the Kentuckians who will have a harder time paying for schools and and healthcare if the tax is eliminated.



It Depends on What "Tax" Is....



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As we reported in last week's digest, elected officials are doing all they can to wiggle around and out of their "no new tax" pledges. This week we have a similar story from Kentucky, where Governor Ernie Fletcher explains his support for a 25 cent tax on cigarette papers by calling it "closing a loophole" rather than an actual tax hike. Even the House Speaker seems confused, claiming that this proposal is "not a tax increase, it's tax equity." For a heavy hitting editorial from the Courier-Journal about this attempt to raise taxes, but stay away from the "T" word, click here.

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