North Carolina’s two major newspapers, the Raleigh News and Observer and Charlotte Observer, published editorials in support of the state’s estate tax in the wake of a hearing last week called to eliminate it.  From the News and Observer: “The estate tax is hardly a burden on those few inheritors who have to pay it. It is a modest but valuable asset to government revenue, and there is nothing unfair about [it]."  And, from the Charlotte Observer: “Some Republicans support abolishing the federal estate tax. They should explain why the extremely wealthy should be able to avoid paying any taxes on unrealized capital gains.”

Washington State’s special legislative session started yesterday. The media is reporting that the session will be a contentious battle over how the state should close its $1 billion budget gap. (Hint: the answer’s in the Washington State Budget and Policy Center’s proposal to tax capital gains income. )

An article from The Miami Herald reveals some ugly details surrounding the $2.5 billion in business tax cuts just passed by the Florida legislature.  As the Herald points out, “those benefiting had plenty of lobbyists … AT&T, which has 74 Florida lobbyists, spent $1.68 million on lobbying last year, more than any other company.”  Not coincidentally, AT&T and Verizon – both champion tax dodgers – were among the biggest winners.  A last-minute amendment to the legislation could give the telecommunications industry a tax break as large as $300 million.

A great op-ed in the Kansas City Star asks why Governor Brownback wants taxes in Kansas to be like Texas, reminding Kansans that Texas ranks low in everything that really matters, from high school graduation rates to household income to crime.

Dolly Parton’s Dollywood Co. and Gaylord Entertainment Co. have struck a deal with Nashville, Tennessee Mayor Karl Dean that, if approved, would result in an estimated $5.4 million in property tax breaks for their planned water and snow park.  Ben Cunningham of the Nashville Tea Party was right to point out that the plan amounts to a “giveaway” to companies that plan to move to the city anyway and that it’s time to stop “giving in to this kind of corporate extortion.”

Photo of Dolly Parton via Eva Rinaldi Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, the Institute on Taxation and Economic Policy 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 increase state revenues to pay for important public investments. 

Given the number of Governors calling for major tax cuts in their states, you’d think that states are suddenly awash in cash and well on the road to economic recovery.  But the reality is that very few states are back to where they were before the recession hit in terms of tax collections and public spending.  Many were limping along with federal stimulus funds, but now that’s dried up, too. Recognizing the need to begin restoring investments in education, transportation, and health care or prevent even more devastating cuts to these services, a handful of Governors have put tax increases on the table.  The proposals range from across-the-board rate increases to tax hikes only on the wealthiest, permanent to temporary changes, and plans that require only legislative approval to ballot initiatives for the public to decide.

California Governor Jerry Brown is taking his proposed tax increase to the voters in November.  In an effort to prevent damaging cuts to public education, Brown is asking wealthy Californians to pay more income taxes and everyone to chip in with a higher sales tax for the next five years.  A recent poll shows Californians are overwhelmingly on his side- more than 2/3rds of those surveyed support the Governor especially when the tax increases are linked to investments in education.

Maryland Governor Martin O’Malley included several r evenue raising measures in his recent budget proposal to help close a $940 million gap.  Most notable is a plan to raise taxes on upper-income Marylanders through limiting the amount of itemized deductions and personal exemptions they are able to claim - a recommendation ITEP made last year.

O’Malley also proposed taxing internet transactions, digital downloads and increasing taxes on tobacco products and the state’s “flush tax.”  He recently announced a plan to apply the sales tax to gasoline rather than an increase in the designated gas tax to address transportation needs in the state.

Washington lawmakers are facing off on how best to address a $1 billion budget gap this year.  Governor Christine Gregoire is pushing for a temporary half-cent sales tax increase that would raise roughly $500 million, and to close the remaining gap with spending cuts.  At least two competing proposals, however, have emerged that would raise needed revenue and improve the fairness of the state’s tax structure.  The first is a one percent tax on corporate and personal income that would raise $500 million and allow for a reduction in the state’s sales and business-occupations taxes. Another plan would tax realized capital gains at five percent, raising between $215 million and $650 million a year. 

Given Washington’s restrictive rules on revenue-raising (a two thirds legislative supermajority is required to enact increases), any proposed tax increase will likely end up on a ballot (which a legislative simple majority can implement) for the voters to decide this Spring or Fall.

North Carolina Governor Beverly Perdue recently proposed reinstating most of a temporary sales tax increase that expired last year.  She wants to invest the $800 million the tax would raise in the state’s public schools, community colleges and universities, all of which suffered massive cuts over the past four years.

Massachusetts Governor Deval Patrick is promoting some r evenue raising ideas he says are supported by the public.  His $230 million revenue package includes a 50 cent per pack increase in the cigarette tax (bringing the total to $3.01), increases on other tobacco products, expanding the bottle bill so that a wider range of beverages require a redeemable nickel deposit, and taxing candy and soda at the state’s 6.25 percent rate (both are currently exempt from taxation).

Rhode Island After failing to gain legislative support last year for his reform-minded and sensible tax plan, Governor Lincoln Chafee has offered up a hodgepodge of tax changes this year he thinks lawmakers can stomach.  Chafee’s $88 million tax package includes some modest expansion of the sales tax to items such as taxi and limousine rides and pet services.

Photo of Christine Gregoire via Studio 8, photo of Deval Patrick via Green Massachusetts, and photo Jerry Brown via Steve Rhodes Creative Commons Attribution License 2.0

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 reduce or eliminate state inheritance and estate taxes.  If you haven’t already, be sure to read our inaugural article in the series on proposals in some states to roll back or eliminate income taxes, which are the uniquely progressive feature of our tax system.

Whether state or federal, inheritance and estate taxes play an important role in limiting concentrated wealth in America. Warren Buffett views the estate tax as key to preserving our meritocracy, and the great Justice Louis Brandeis famously warned that we could have concentrated wealth or we could have democracy, but not both.  While the federal estate tax is often the source of passionate debate, these taxes are particularly important at the state level because they help offset some of the stark regressivity built into most state tax systems.  Unfortunately, lawmakers in some states have bought into the bogus claims of the American Family Business Institute (a.k.a. nodeathtax.org), Arthur Laffer, and others in the anti-tax, anti-government movement that repealing estate and inheritance taxes will usher in an economic boom.

Nebraska – Governor Dave Heineman has proposed repealing Nebraska’s inheritance tax entirely, determined, it seems, to pile on to the tax cuts already enacted earlier in his term.  (Inheritance taxes are very similar to estate taxes, except that inheritance taxes are technically paid by the heir to the estate, rather than by the estate itself.)  Unfortunately, in addition to worsening the unfairness of the state’s tax system, the Governor’s proposal would also kick struggling localities while they’re down, since revenue from Nebraska’s inheritance tax flows to county governments.

Indiana – Senate Appropriations Chairman Luke Kenley recently made the same proposal as Nebraska’s governor: outright repeal of the inheritance tax.  Kenley has floated the idea of using sales taxes on online shopping to pay for the repeal, but while Internet sales taxes are good policy on their own, this change would amount to an extremely regressive tax swap overall.  Indiana’s inheritance tax is already limited, however, and exempts spouses of the deceased entirely, as well as the first $100,000 given to each child, stepchild, grandchild, parent, or grandparent.

Tennessee – Governor Bill Haslam’s inheritance tax proposal may be less radical than those receiving attention in Nebraska and Indiana, but not by much.  Rather than repealing the tax entirely, Haslam would like to increase the state’s already generous $1 million exemption to a whopping $5 million.  It’s surprising, to say the least, that one of Haslam’s top tax policy priorities should be slashing taxes for lucky heirs inheriting over $1 million.

North Carolina – Efforts to gut the estate tax in North Carolina haven’t gained backers as visible as those in Nebraska, Indiana, and Tennessee.  But there are rumblings that repeal could be on the agenda of some legislators, as evidenced by the vehemently anti-estate tax testimony that a joint House-Senate committee heard from the American Family Business Institute this month.

With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate tomorrow (July 1). This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.Read the ITEP Press Release.

Photo via herzogbr Creative Commons Attribution License 2.0

Expert to North Carolina: Don’t Cap the Gas Tax

Statement from the Institute on Taxation and Economic Policy (ITEP)

June 23, 2011

Washington, DC – With the state’s gas tax pegged to the price of gasoline, North Carolina is scheduled to raise its gas tax rate on July 1. This increase was entirely predictable, but is understandably controversial. Unfortunately, the debate surrounding what to do in the wake of this increase has been far too narrow, focusing on just two options: capping the maximum tax rate, or doing nothing at all.

Carl Davis, Senior Analyst at the Institute on Taxation and Economic Policy (ITEP) and author of a major 50-state gas tax report due out late this summer, issued the following statement in response to the controversy:

“North Carolina’s gas tax is clearly in need of reform, but a simple gas tax cap is a blunt instrument that can do more harm than good. The neighboring states of Kentucky and West Virginia have gas taxes similar to North Carolina’s, and both have wisely chosen to address the problem of price-related volatility by limiting changes in their tax rates to no more than 10%. They don’t cap the tax, but they do cap the volatility.

“A cap on the variable portion of North Carolina’s gas tax, similar to the type used in Kentucky and West Virginia, would have resulted in the state’s gas tax rate rising just 1.5 cents this July 1, rather than the full 2.5 cents currently scheduled to occur. A cap above or below 10% could have resulted in a slightly larger, or smaller, increase.

“A limit of this type would produce a more stable and predictable gas tax, and one that results in fewer surprises for taxpayers, transportation officials, and state lawmakers.

“Such a limit would also allow the state’s gas tax to retain its character as a tax on the actual price of gas, while smoothing some of the jarring ups and downs seen in recent years. Gas tax caps, by contrast, run the risk of transforming North Carolina’s extremely sensible price-based tax into a stagnant, flat levy that can never keep up with the state’s transportation needs. In Pennsylvania, for example, a gas tax cap has left state’s tax rate unchanged since 2006, resulting in flatlining revenues while transportation funding needs continue to climb. Pennsylvania is the poster child for bad gas tax policy.

“The problem facing North Carolina lawmakers is not new, and not unique to North Carolina. The Tar Heel State’s neighbors to the north have already dealt with this issue, and North Carolina should learn from their experiences by implementing a similar reform.”

###

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. ITEP’s full body of research is available at www.itepnet.org.

If a multistate corporation doing business in North Carolina shows signs of shifting income around to avoid paying state taxes, the state’s Department of Revenue has authority to require additional information to be sure the company’s not simply offshoring its profits. But that may be about to change.

In the last hours of North Carolina’s legislative session this year, the House and Senate passed a two-pronged bill that will legally allow multistate corporations doing business in North Carolina to avoid paying corporate income taxes rightfully owed to the state.

First, the bill limits the Department of Revenue’s power to demand companies “combined reporting,”  i.e., fully disclose income for all of a company’s subsidiaries, regardless of their location.

Under the new law, the Secretary of Revenue could only force a combined report if transactions between subsidiaries have no "reasonable business purposes" other than reducing the corporation’s tax liability. As the NC Budget and Tax Center noted, “corporate accountants could easily restructure tax shelters and give them the appearance of "business purposes," even if the primary purpose was to, in fact, reduce corporate taxes.”

Second, the bill reopens the egregious “royalties and trademark loophole” closed by legislators ten years ago.  Multistate corporations operating in North Carolina with headquarters out of state will now be allowed to charge their North Carolina entities for the right to use the corporations’ trademarks.  There is no limit to the ‘charge’ for this privilege and as such, it can (and will) be used to offset profits made in North Carolina for any given tax year resulting in zero state tax liability. 

Speaking out against the amendment, House member Jennifer Weiss said, "We are telling multistate corporations, 'Come on over, rip us off, we won't charge you any taxes, but we're going to tax the little guy…Go ahead, cheat us, it's legal."

House Majority Leader Paul Stam argued that affording corporations the confidence that they can, in fact, avoid taxes if they move to the state was “extremely important to the economy of North Carolina.”  He added that “of all the bills we've had this session, this is the jobs bill."

The bill now awaits the signature of Governor Bev Perdue.

Earlier last week, the Republican led legislature overrode the governor’s veto of the damaging state budget they crafted.  News of this last minute move to support corporate interests over the public interest is even more disturbing in light of the fact the state already has a budget in place that severely underfunds all levels of education, eliminates thousands of state workers  and limits access to health care.

Photo via  Jimmy Wayne Creative Commons Attribution License 2.0

Last weekend, North Carolina’s General Assembly gave final approval to a state spending plan for next year that significantly cuts spending, allows temporary taxes to expire, and offers small businesses a new tax break.  The budget now sits on Governor Bev Perdue’s desk and observers are watching closely to see if she will keep her promise to veto a budget that moves the state backwards in education spending.

New North Carolina Speaker of the House Thom Tillis penned an op-ed describing his party’s approach to the Tarheel state’s $2 billion shortfall as a “new choice for North Carolina.”  This choice includes sticking to a campaign pledge not to raise taxes. It slashes funding to the state’s early childhood education programs, K-12 schools, community colleges, universities, Medicaid, court and prison systems, and substance abuse and mental health services resulting in the loss of thousands of government jobs. 

But, there are alternatives to rolling back North Carolina spending to unprecedented levels, laying off government workers, and securing the economic recovery the state’s new leaders seek.  

As the North Carolina Budget and Tax Center points out, the most damaging cuts in the final legislative budget agreement could be altogether avoided if lawmakers would extend two temporary taxes and close other major tax loopholes in the state. 

First, Governor Perdue included an extension of ¾ of the 1 cent sales tax increase in her budget plan.  Second, advocates have also called on state leaders to extend a temporary personal income tax surcharge for the state’s wealthiest taxpayers as well as a surcharge for profitable corporations. Finally, tax loopholes abound and for years lawmakers have talked about, but failed to act on, comprehensive tax reform that would ensure more fair and adequate revenues in the short- and long-term.

Unfortunately, unless a minimum of 2 of the 5 democratic House members who voted in support of the budget are convinced to change their minds, it appears a veto from the governor could be overturned and the ‘new choice’ for North Carolina will be in effect for at least a year in the state.

The ongoing recession, the expiration of two temporary taxes, and the end of federal recovery aid have left North Carolina with a $2.4 billion gap for next fiscal year.  The state’s Democratic governor, Bev Perdue, and the Republican-led legislature have taken very different approaches to plugging the gap. 

Governor Perdue’s budget plan, released earlier in the spring, balanced spending reductions (around $1.4 billion) with about $1 billion of additional revenue.  The primary means for raising revenue in her budget included extending three fourths of a temporary sales tax increase enacted in 2009 and set to expire this summer.  She also proposed reducing the state’s corporate income tax rate from 6.9 percent to 4.9 percent, a move Republican leaders have, surprisingly, not yet embraced.
 
Republican House and Senate leaders have adamantly opposed extending either the temporary sales tax or personal income tax surcharge, taking a cuts-only approach to the state’s fiscal problems.  In fact, they have proposed new tax cuts that would force them to reduce state spending beyond the $2.4 billion budget gap and far beyond the governor’s proposal.
 
The North Carolina Senate released its budget plan this week.  It includes around $550 million in tax cuts, once it's fully phased-in, resulting in deeper cuts to education, public safety, and health care. 

Billed as a ‘Jobs Package’, it would cut personal income tax rates by 0.25 percentage points in each bracket and exempt the first $50,000 of small business income from the personal income tax for businesses with gross receipts under $850,000, at a cost of around $485 million.  The Senate would also eliminate the state’s estate tax for an additional loss of $72 million. 

The plan raises small amounts of revenue by eliminating a handful of random state tax expenditures such as the credit for oyster recycling and the sales tax holiday for Energy Star appliances. 

The House GOP’s budget plan, released earlier in the month, was short on tax package details other than sticking to the promise to allow the temporary taxes to expire.  However, rumors are swirling that their plan will be released soon and will likely closely mirror the Senate’s proposal. 

If these rumors are true, their plan would not only cut taxes for wealthy taxpayer and businesses, but would also increase taxes on working families by eliminating the state’s Earned Income Tax, Child Tax, and Child and Dependent Care credits.

House and Senate GOP leaders had made veiled promises to reform the state’s outdated and inadequate tax code this year.  Both hinted they would start by broadening the personal income tax base, moving from federal taxable income to federal adjusted gross income (AGI).  This move would eliminate costly tax breaks for the best-off taxpayers. 

The Senate’s plan does indeed move the starting point for calculating North Carolina income taxes to federal AGI, but the move is completely revenue-neutral and only meant as a way to simplify tax forms. This would do nothing to truly reform its narrow tax base.  Rather than walking through a series of calculations to add back the difference between the state and federal amounts for the standard deduction and personal exemption, under the plan, taxpayers would simply subtract the state amounts from federal AGI and still be allowed to take all of their federal itemized deductions (with the exception being the deduction for state income taxes).  Social Security income would also continue to be exempt from state taxation.

The North Carolina Budget and Tax Center said in a statement about the Senate budget plan that “these measures will do nothing to improve the upside-down nature of the state’s revenue system. North Carolina’s revenue system must provide adequate revenue for critical investments and must be fair and equitable.”

North Carolina advocates seeking to protect the state’s Earned Income Tax Credit and supporting a balanced approach to the state’s budget crisis have stepped up their efforts to build public support with new multimedia campaigns.  

The SaveEITC.org website, launched last week, features a clever ad titled "If You Work Hard, You Deserve a Chance to Get Ahead." The website also features fact sheets, and an action center where individuals can send virtual postcards to lawmakers explaining the many ways the EITC supports North Carolina’s low-wage workers and families. 

TogetherNC, a coalition of more than 120 advocacy groups, service providers and professional associations, started running ads this week in 15 North Carolina newspapers calling on lawmakers to support teachers, firefighters, public health workers, and other vital services with new revenue. 

Each of the four unique ads ends with the following message, “When our economy is out of balance, so are our classrooms.  Schools and parks. Libraries and fire stations. The things that make our communities great places to work and live are in jeopardy. Lawmakers, North Carolinians want a practical approach to our economy and our state budget–one that includes not only careful spending cuts but also new revenues that work for our changing economy. Balance is a beautiful thing.”

The Together NC coalition also launched a new website, SpeakNC, which will introduce a new video each week featuring North Carolinians who rely on the hundreds of services in jeopardy of being gutted in this year’s budget. 

Finally, the North Carolina Budget and Tax Center released their revenue raising and modernization plan this week.  The report describes the current failings of the state’s tax system and offers a comprehensive revenue modernization plan that would update the state’s personal income tax, sales tax, business taxes, and “tax-code spending” practices.  ITEP contributed substantial analysis and technical expertise to the report.

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

Read the ITEP brief.

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

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

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

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

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

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

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

Add North Carolina to the list of states considering increasing taxes on the low-income working families hit hardest by the economic downturn.  Republican lawmakers in North Carolina recently filed a bill to convert the state’s refundable 5 percent Earned Income Tax Credit (EITC) to a nonrefundable credit, essentially eliminating the benefit of the program for the lowest income households. 

An op-ed this week by Lucy Gorham, director of the EITC Carolinas Initiative, put it this way: “The Republican leaders won their seats, in part, by pledging not to raise taxes and to represent those North Carolinians who work hard to provide for their families in the face of one of the worst economic downturns most of us have ever lived through. Strange, then, that in one of their first moves in the current legislative session, the leadership proposes to increase taxes on low- and moderate-income working families by eliminating the refundable portion of the state's Earned Income Tax Credit (EITC).”

North Carolina’s House Finance Committee heard the bill on Wednesday.  Only two lawmakers spoke out in favor of the proposed change to the credit.  Representative Edgar Starnes, the bill's sponsor, delivered an endorsement of the credit even while he moved to destroy its value.  He said he recognizes the EITC is an extremely good program, but given North Carolina's large budget shortfall, he claims the state can no longer afford the cost and lawmakers must look to every program for savings, including the EITC. 

Naturally, the opponents of the proposal turned the committee debate into a question of why the majority party was starting with the EITC — an attack on the state’s most vulnerable residents — and suggested they should look elsewhere for the $50 million saved by the regressive change.  

House and Senate Democrats also held a press conference this week to show support for the EITC.  They argued that the refundability is a means to reimburse low-income families for other taxes they pay and pointed out that low-income workers pay a much larger share of their incomes in state and local taxes than wealthier households.  North Carolina’s governor, Bev Perdue, also weighed into the debate via Twitter: “Concerned that EITC bill hurts working families: waitresses, construction wrkrs, store clerks -- the backbone of our communities. #NCGA”

The North Carolina Budget and Tax Center has argued that “working class, tax-paying families could no longer benefit from the credit’s ability to help them cover the substantial share of their income they pay in sales and property taxes” if refundability was eliminated.  An ITEP analysis found that eliminating the refundability of North Carolina’s EITC would result in a tax increase for 1 in 10 households.  The Budget and Tax Center also released an interactive map this week that demonstrates the wide-ranging and deep benefits of the North Carolina’s Earned Income Tax Credit.

North Carolina lawmakers will continue to grapple with significant budget dilemmas in 2011 and beyond.  But balancing their budget on the backs of those families hit hardest by the recession should be a non-starter.

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

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

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

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

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

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

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

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

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

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

Governors are in the midst of crafting their budget proposals for next year, and many state leaders continue to grapple with historic budget shortfalls due to lagging revenue recovery and a high demand for public services.  In 2009 and 2010, most states balanced their budgets with a mix of temporary and permanent tax increases, significant federal assistance, and spending cuts.  This year, state revenues continue to lag, many of the temporary tax increases are set to expire, and federal stimulus assistance will dry up, yet the need for quality education, safe communities, affordable health care, public transit and well-maintained roads has not diminished.

As the Tax Justice Digest has previously noted, so far this year we have seen mostly a slew of bad proposals from state leaders. Many states are offering tax breaks to corporations and wealthy households and refusing to consider new taxes, while choosing to cut state spending to historically low and damaging levels. A few governors, however, have recently bucked the cuts-only trend and have made it clear that taxes must be a part of the solution.
 
In Connecticut, newly elected Governor Dannel Malloy plans to address the state’s $3.7 billion budget shortfall with an almost equal share of spending cuts ($2 billion) and tax increases ($1.7 billion).   While the details of his tax plan will not be unveiled until February, he is likely to support eliminating a majority of the state’s sales tax exemptions as one part of his revenue raising plan.

Hawaii’s new governor, Neil Abercrombie, has also embraced the need to raise new revenues as part of a budget-fixing compromise.  Governor Abercrombie proposed raising $279 million, including taxes on soda, alcohol, and time-shares. Most significantly, Abercrombie would tax pension income (which is generally exempt from taxation currently) for taxpayers with incomes over $50,000, raising around $114 million a year.  He also supports eliminating the state deduction for state taxes, a smart reform measure that would raise $70 million a year.  

North Carolina lawmakers addressed their budget crisis in the previous two years in part with $1.3 billion in temporary taxes which are set to expire this year.  For months, Governor Bev Perdue opposed extending the taxes for another year despite a shortfall of nearly $4 billion.  She recently changed her tune, and is now considering including an extension of these temporary tax increases (a 1 cent sales tax increase and income tax surcharge on high-income households and corporations) in her budget proposal in order to stave off massive cuts to K-12 education.

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

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

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

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

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

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

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

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

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