Indiana’s inheritance tax will soon be no more.  Under a bill signed by Governor Mitch Daniels this week, the state inheritance tax will be gradually eliminated over the next decade.  Of course, this will further benefit the state’s wealthiest taxpayers even as the state’s poorest residents already pay an effective state and local tax rate more than twice that paid by the rich.  

Connecticut lawmakers are seriously considering capping the state’s gasoline tax rate, due to the political pressures created by high gas prices.  A permanent cap, as some lawmakers prefer, would be extremely poor policy because it would flat line the gas tax as a revenue source for years to come.  A temporary cap would be preferable, but the best solution would be one that ITEP recommended for North Carolina last summer: design a cap that limits volatility. This protects consumers from price spikes and stabilizes state budgets without undermining a key source of revenue.

A new ITEP analysis finds that under a South Carolina House Republican plan, poor South Carolinians would see their income tax increase while wealthy taxpayers would pay less. The effect on individual taxpayers in any bracket are not substantial, but the revenue implications for the state are enormous and depend on the working poor to pick up the tab. The Ruoff Group policy shop does a nice job here of explaining why the plan is neither flat nor fair, as its advocates claim.

An outstanding news analysis in the Cincinnati Inquirer describes Ohio Governor John Kasich’s longstanding desire to eliminate the personal income tax altogether, and his current (failing) effort to pay for it with a fracking tax. The story cites a wide range of policy sources, including ITEP’s report debunking the myth that states without income taxes do better, and concludes that low income taxes alone do not make for stronger economies.

A new report from the Political Economy Research Institute at UMass Amherst examines the research on potential responses to states raising taxes on wealthy households.  They conclude that while it can lead to tax planning changes among the more affluent, a permanent reasonable tax increase will improve a state’s revenue picture and, contrary to conventional wisdom, will not cause wealthy residents to flee to lower tax states.

Legislation pending in Maryland would require the state to evaluate whether its tax credits are achieving the goals for which they were enacted.  The vast majority of states still have no system in place for determining the costs and benefits of tax credits.  As in Oregon, the legislation would use sunset provisions (or expiration dates) to force lawmakers to review the evaluations before allocating more funds.  The Institute on Taxation and Economic Policy ( ITEP) has a policy brief on accountability in tax credits and testified in support of a similar bill in Rhode Island last year.

The grassroots group Alabama Arise is getting positive news coverage for a rally they organized in Montgomery last week calling on lawmakers to exempt groceries from the sales tax and replace the revenue by eliminating a tax break that primarily benefits the wealthiest Alabamians.

In response to Ohio Governor John Kasich’s proposal to cut income taxes (paid for by increased taxes on gas mining) Policy Matters Ohio released a brief showing that Ohioans in the top one percent would get an annual tax cut of about $2,300 while middle income Ohioans ($32,000 to $49,000) would only get about $42.  Meantime, the powerful House Finance Chairman, Rep. Ron Amstutz, is postponing action on the Governor’s proposal, saying, “the more the members of our caucus have learned about this particular proposal, the more concerned I’ve become that there are key questions that cannot be sufficiently answered and resolved within the available legislative time frame.”

In his State of the State speech, Ohio Governor John Kasich boasted, “in six months we eliminated an eight billion dollar budget shortfall without a tax increase—eliminated it. We are now balanced. In fact, we cut taxes by $300 million.”  What the governor failed to mention is that these cuts have had enormous consequences. For example, these cuts are making it harder for senior citizens centers to stay open, forcing public libraries to go begging for local tax dollars and raising college tuition.

It doesn’t have to be this way.

Ohio lawmakers concerned with the state’s ability to meet the needs of its citizens should be looking into ways to both restore these harmful spending cuts and reverse an earlier round of regressive across the board income tax cuts passed in 2005. One step toward these ends is to follow the prescription laid out by Policy Matters Ohio (PMO) to ask the wealthiest one percent of Ohioans, whose income averages $981,000 a year, to pay 1.2 percent more in personal income tax.  In their report (which uses ITEP data), PMO says the “proposal would not change the amount of taxes paid by nearly 99 percent of Ohio taxpayers. It would affect only the most affluent, who can most afford to pay, and the increases for them would be relatively small. Yet it would allow the state to make up nearly half the cuts made to public schools and local governments in the current two-year budget.”

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 particular.  Here are some states to watch for more bad business tax policy (followed by a few glimmers of hope).

South Carolina – South 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.

Kentucky – State 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 – In 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.

Idaho – Governor 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

On June 30, Ohio Governor John Kaisch signed into law a $56 billion, two-year budget that includes painful cuts to many public services including education. That didn’t stop the governor and legislators from finding room to give tax breaks to the wealthy. 

Ohio’s biggest revenue drop and boon for the state’s wealthiest taxpayers will come from the repeal of the state’s estate tax.  Ohio law held that estates worth more than $338,333 would be taxed before it was distributed to heirs or beneficiaries.  That’s less than 10 percent of all decedents’ estates in the state. Unfortunately, the loss of this highly progressive tax in Ohio will probably be made up through increases in regressive local taxes.  A recent CTJ article highlighted the need for an estate tax.  Eighty percent of the tax revenue from estates goes to local governments, which amounted to $230.8 million in FY 2011.  Coupled with other cuts in public services including education, local governments will really be feeling the pain this fiscal year.

A last minute addition to the budget is a new tax break for investors of Ohio small businesses worth up to $100 million a year, dubbed “InvestOhio.”  While supporters of the law claim it will spur job creation, there a few important details that suggest Ohio may just be wasting badly needed revenue.  Qualified investors will receive a tax credit, but nothing in the law requires that investment to contribute to job creation. Furthermore, the law may be subsidizing investing activity that would’ve happened anyway.  State Representative Mike Foley put it succinctly: “It’s basically just a giveaway to rich people.”

Perhaps the most telling part of the budget is what was left out. A common-sense law that would have required a review of Ohio tax expenditures (deductions, credits, and exemptions) worth $7 billion a year was removed from the final budget.  This sunshine provision would have allowed lawmakers to openly review and report on the success (or lack thereof) of tax policies annually.  By stripping the review law, the conference committee undermined the legislature’s authority, and demonstrated to Ohioans that accountability and transparency are too easily sacrificed in favor of narrow special interest groups.

Public services provided by state governments help some families accumulate great wealth, and Ohio has recognized this for a century by levying an estate tax on well-off residents. This tradition may soon come to an end, as Governor John Kasich has promised to sign legislation repealing Ohio's estate tax if it's included in the General Assembly's final budget.

Last month, Ohio’s House of Representatives voted to repeal the tax, and this week the Senate included the repeal in its revamped budget proposal. 

Since the vast majority of Ohio’s estate tax revenue (80 percent) goes directly to local governments, eliminating this tax would mean a loss of more than $200 million annually for local coffers. 

Opponents of the estate tax repeal have argued that the scope of the revenue loss at the local level will lead to deep cuts in services, local tax increases, and lowered bond ratings.
 
Supporters of the repeal claim that the estate tax harms middle class families, but the numbers tell a different story. 

Each year, less than 10 percent of all decedents' estates in Ohio are subject to the tax.  In fiscal year 2010, a quarter of the estates taxed had values of more than $1 million and paid more than 75 percent of the total estate tax collected in the state. 

Furthermore, even though Ohio’s estate tax threshold is relatively low compared to other states, the tax rates are also low, particularly for large estates.

In the end, state policymakers are simply passing the buck to local officials who will have to enact spending cuts or tax increases to make up for the lost revenue. 

Those measures will be probably be hugely regressive compared to the estate tax, which is among the most progressive taxes levied in Ohio.

Capital gains income, which disproportionately flows to the wealthiest taxpayers, is taxed at lower rates than "ordinary" income like wages under the federal income tax. This is unfair for all sorts of reasons, and the unfairness is amplified in the eight states that provide additional, substantial breaks for capital gains. Ohio could soon add itself to this ignominious list.

Ohio Governor John Kasich said this week, “We should not be taxing our capital gains as regular income." Meanwhile, a new proposal in the legislature (House Bill 98) would offer a tax break for elderly Ohioans with unearned income. Policy Matters Ohio (PMO) and the Institute on Taxation and Economic Policy (ITEP) worked together to analyze the impact of changing how capital gains are taxed and the impact that passing HB 98 would have on Ohio’s tax structure.

Policy Matters Ohio concluded, “Cutting the Ohio income tax on capital gains would be costly and most of the gains would go to the most affluent Ohioans, while 92 percent of Ohio taxpayers would get nothing at all.” ITEP found that the cost of HB 98 would be staggering — about $325 million annually.

Though no tax break on unearned income was included in the budget plan presented earlier this week by Governor Kasich, his statement suggests that he supports legislation like HB 98. His budget does, however, make significant cuts to K-12 and higher education, which, coupled with a possible break for capital gains income, would result in a significant shift of priorities away from ordinary Ohioans in favor of the well-off.

Ohio Governor Kasich, an advocate of repealing the state's personal income tax, now apparently thinks that if the full income tax can’t be repealed, then he should make the tax as generous as possible to wealthy Ohioans. There are reports that the Governor wants to introduce a tax break for capital gains income. He said recently, “We can't tax ourselves to prosperity. We need to get the mojo back.”

Kasich should read ITEP’s report on capital gains taxation, which explains that tax breaks for capital gains are an ineffective strategy for economic development.

Like many states, Ohio is experiencing the perfect storm. The Buckeye State has seen its revenues plummet while the need for government programs and services has increased. As a result of the November elections, Republicans took control of the Governor’s mansion and the House of Representatives, and added to their majority in the Senate. The new Governor and a “handful” of House Republicans have vowed to not raise taxes, even though the state is facing a multi-billion dollar shortfall.

A broad coalition of thirty organizations called One Ohio Now has come together to trumpet a message about the need for both tax increases and spending cuts instead of just relying on cuts alone to solve the state’s fiscal crisis.

In a recent press conference, Col Owens with Legal Aid of Southwest Ohio said, “We think in several months, particularly after the budget hits the table and people begin to understand very well what the problems are... that people will be coming to this conclusion with us."

Ill-conceived tax ideas are coming out of statehouses and governors’ mansions at a faster rate than we’ve seen in quite a while.  Here’s a quick summary on recent proposals receiving serious consideration in Arizona, Florida, Idaho, Maine, Michigan, Minnesota, New Jersey, Ohio, and Wisconsin.

Arizona: Business tax breaks and property tax breaks are being pushed by the Arizona Chamber of Commerce, and legislative leaders are taking them seriously.  The specifics have yet to be worked out, but expect at a minimum to see tax subsidies ostensibly aimed at boosting business hiring and investment.  As the Center on Budget and Policy Priorities (CBPP) has explained, however, states cannot stimulate their economies by cutting taxes.

Florida: Newly elected Governor Rick Scott continues to insist that “the way to get the state back to work is to cut property taxes and phase-out the corporate income tax, and we’re going to get that done.”  The state’s enormous budget gap has caused Senate President Mike Haridopolos to approach the issue more cautiously, though he still claims that “if we see some opportunities for tax relief that we feel absolutely confident will create more jobs and actually grow the economy, we’re open to them.”  Haridopolos is also pushing a “Taxpayer Bill of Rights” (TABOR) proposal similar to the one that decimated Colorado’s education funding stream.

Idaho: Legislators in Idaho — including the House majority leader — are preparing to revive an idea they first proposed toward the end of last year’s session: slashing the state’s corporate income tax rate from 7.6 percent to 4.9 percent.  Idaho legislators are also discussing cutting the state’s top personal income tax rate from 7.8 percent to 4.9 percent.  Each of these changes would drastically reduce the amount of revenue available to pay for vital state services, though by proposing that these changes be phased-in gradually over the course of the next decade, legislators are hoping to avoid having to spend too much time thinking about what state services will eventually have to be cut.

Maine: State Tax Notes (subscription required) reports that the chairman of Maine’s Senate tax committee plans to make cutting the state’s personal income tax rate his top priority.  Unlike the tax reform package that Maine voters recently rejected, this cut would be paid for not by broadening the state’s tax base, but by cutting spending and hoping for strong revenue growth.  Maine’s legislators are also apparently contemplating a constitutional amendment that would require supermajority support in the legislature in order to raise taxes.  A supermajority requirement of this type would result not only in lower state services, but also in more tax loopholes.  This is because such a requirement would prevent a simple majority of legislators from eliminating a tax loophole unless they also enlarged another loophole or lowered tax rates in a way that resulted in no net revenue gain.

Michigan: House and Senate leadership on both sides of the aisle in Michigan have inexplicably come to an agreement that the state’s EITC should be cut.  It’s unclear why tax increases on low-income families have suddenly become so popular in Michigan.  If Governor Rick Snyder gets his way, some of the revenue generated by taxing low-income families will likely to be used to pay for his proposed $1.5 billion cut in state business taxes.

Minnesota: The Republican leaders of Minnesota’s state legislature made clear this week that business tax cuts will be one of their top priorities.  One Senate leader has proposed cutting the state’s corporate income tax rate in half by 2017 and freezing statewide taxes on business property.  Fortunately, Minnesota Governor Mark Dayton is likely to vigorously oppose these cuts.

New Jersey: Democratic legislators are seriously considering a move to single sales factor apportionment for their corporate income tax.  The bill has already cleared the relevant committee, and will move to the full Senate soon.  See ITEP’s policy brief criticizing the single sales factor for state corporate income taxes.

Ohio: Ohio’s House and Governor have declared repealing the state's estate tax to be a top priority.  Local governments receive a majority of the revenue generated by Ohio’s estate tax, and therefore oppose its repeal.  Ohio’s House leaders would also like to create a business tax credit for hiring new employees.

Wisconsin: Governor Scott Walker has proposed a variety of business tax breaks and, as in Maine, the creation of a supermajority requirement to raise taxes.  More bad ideas are almost certain to come from Wisconsin in the weeks ahead, as Governor Walker made clear during last year’s campaign that he supports the outright repeal of Wisconsin’s corporate income tax.

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.

Last week, the Associated Press took a close look at how local-level tax increases have fared on the ballot leading up to this week’s election.  Out of the 39 states surveyed by the AP, 22 of them held local primary elections or special elections where tax measures were voted on in 2010, and a whopping 19 of those states saw their residents approve more than half of all proposed local tax increases.

Some of the more interesting results highlighted by the AP include the approval of 83% of local tax increases in Louisiana, 72% in Ohio, and 66% in Arizona.  Kansas, Nebraska, and Washington also approved particularly high percentages of local tax increases.

It’s important to note that the AP study was conducted before this week’s election, and therefore doesn’t tell us how local measures fared on November 2.  Moreover, as the AP points out in their review, there is no single source for information on the results of local ballot measures, and even most states fail to publicize local results in a centralized location. 

Unless and until a study of this week’s local measures is completed, we’ll be left to wonder whether trends from earlier this year have continued to hold.  If they have, there could very well be many more stories of local ballot successes like this one in Colorado.

Both Ohio gubernatorial candidates could learn a thing or two from the experts recently gathered by the Columbus Dispatch to discuss the state's fiscal issues. The Dispatch organized "four of Ohio's best budget brains," put them in a room and asked them about their ideas to solve the state's projected $8 billion shortfall.

The two former budget directors and two former state tax commissioners (who served in both Republican and Democratic administrations) agreed that solving the budget shortfall isn't possible with simply spending cuts alone and that all options, including tax hikes, should be on the table. William Wilkins, budget director for former Gov. James A. Rhodes, said, "The next two-year budget is going to require more skill and finesse than any other two-year budget in the last 50 years."

Given the enormity of the budget shortfall and the increased needs of Ohio residents, it's simply unrealistic, and perhaps even immoral, for Republican candidate John Kasich to take the "no new taxes pledge." Kasich has reiterated this sorry stance repeatedly and says he would actually cut taxes. To not even entertain the idea of tax increases may win Kasich points in the election this November, but it's a strategy that is not fair to Ohioans looking for responsible leadership. It comes as no surprise that taking this pledge puts Kasich at odds with some of Ohio's best and brightest.

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.