Ohio News


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


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

Current Ohio Governor (and former Congressman) John Kasich (R) is running for reelection against Cuyahoga County Executive Ed Fitzgerald (D). Fitzgerald’s stand on economic issues is promising, in terms of taxes he’s said “that the wealthy should pay their fair share.” It would be hard to find a sitting governor who has done more to ensure the opposite than Gov. Kasich.

Since his election in 2011 Governor Kasich has championed his own series of regressive tax cuts including income tax rate reductions and creating a special new tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families. Read about ITEP’s work analyzing Governor Kasich’s tax plans here and here.

Governor Kasich hasn’t been shy about his hopes for his next term proclaiming, “I want to work for more tax cuts.” This race isn’t likely one that will capture much attention for fans of the horserace come November, but the outcome will most certainly have a significant impact on Ohio taxpayers. 


State Rundown, Sept. 2: Big Oil Wins In Alaska, Hollywood Wins in California


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Palindrillcollage.jpgOil companies won big in Alaska with a narrow defeat of Ballot Measure 1, which would have repealed the generous regime of tax breaks the legislature gave to oil companies last year. The measure’s defeat was narrow even though those who oppose the measure outspent its proponents by 25 to 1, with BP alone contributing more than $3.5 million to defeat the measure. While the effort to repeal the tax was largely spearheaded by state Democrats, Ballot Measure 1 earned the strong endorsement of former Alaska Gov. Sarah Palin (R), who advocated returning to the oil tax regime that was set in place while she was governor.

Lawmakers in California have brokered a deal that would more than triple the state's film tax credits from $100 million to $330 million annually, thus providing a massive windfall to the state film industry. The move comes in spite of warnings from the state's non-partisan Legislative Analyst Office that it would only further aggravate the race to bottom among states vying for film production and recent studies showing that the economic and fiscal benefit of film production credits have been substantially overstated.  Rather than expanding the state's film tax credit, California should follow the lead of states such as North Carolina, Florida, New Mexico and others that have been backing off their credits. 

Policy Matters Ohio released a report last week that calls the state’s recent expansion of the EITC inadequate and “out of step with nearly all other state EITCs.” Only 3 percent of Ohio’s poorest workers will benefit from the expansion, which raises the state’s capped EITC from 5 percent to 10 percent of the federal EITC, and average additional saving is just $5. Ohio’s EITC credit is also non-refundable, meaning that it can only reduce tax liability, not be put toward a tax refund. Meanwhile, Ohio Governor John Kasich (R) has pledged to use the state’s budget surplus to enact more income tax cuts, rather than increasing support for working families.

In Iowa, gubernatorial candidate Jack Hatch continues to push for an increase in the gas tax to address funding shortfalls for improvements and repairs on the state’s roads and bridges. Under Hatch’s plan, the state gas tax would increase by 2 cents a year for five years. According to an ITEP report, the purchasing power of Iowa’s gas tax (adjusted for inflation) hit an all-time low this year. 

Finally, a new report from 12billion.org reveals that “airlines get state tax breaks on more than 12 billion gallons of jet fuel through obscure tax codes,” costing states over $1 billion in revenues every year. Thanks to the tax breaks, airlines pay effective fuel tax rates that are far lower than those paid by motorists; in California, car drivers pay an average of 50 cents in taxes per gallon of fuel, while airlines pay about 27 cents. 


Cumulative Impact of Ohio Tax Changes Revealed


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Since 2004, Ohio lawmakers - from those living in the Governor’s mansion to those elected to the legislature - have pushed through numerous changes to the Buckeye state’s tax code. Since being elected in 2010, Gov. John Kasich has championed his own series of tax cuts including accelerating already scheduled income tax rate reductions and creating a special new tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families.  Now that Governor Kasich is running for reelection, informed voters ought to be asking, “What’s the cumulative impact of these changes?” After all, voters should know the impact of the tax-cut path their elected leaders have led them down.

Thanks to a new report from Policy Matters Ohio (which includes analyses from ITEP) we know the answer.  The findings in the report are pretty staggering.

The tax changes combined are costing the state $3 billion and are currently reducing tax bills for the state’s most affluent 1 percent of taxpayers by more than $20,000 on average, while the bottom three-fifths of state taxpayers as a group are actually paying more taxes now, on average, than they would if these tax changes had not been enacted. It’s worth noting that the average benefit from these tax changes by the top 1 percent of Ohioans is actually greater than the income of the poorest twenty-percent of Ohioans.

In its editorial about the Policy Matters Ohio report, the Toledo Blade makes the case that “Ohioans needs a new tax policy that works for everyone, not just the wealthiest. It needs a tax system that is fairly based on ability to pay, not one that favors the already favored.” For more on the Ohio tax debate over the years, check out our Ohio page on the Tax Justice Blog


State News Quick Hits: Kansas Budget Woes, Absurd Ohio Tax Cuts


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In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, "It's like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low-income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap - a proposal that Christie already has vetoed several times but is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax. But, Gov. Brewer has made it clear she does not support such extreme ideas. From the Arizona Daily Star: “I think that you need a balance,” she said in an interview with Capitol Media Services. Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”

 


Buckeye State Tax Policy in the News


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Less than a month after Ohio Governor John Kasich signed his most recent round of tax cuts into law the reviews are less than glowing. This week Zach Schiller with Policy Matters Ohio wrote a piece very much worth reading in the Cleveland Plain Dealer. Schiller makes the important point (and one backed up by ITEP data) that most of the recent tax cuts signed into law by Kasich overwhelmingly benefit wealthy Ohioans. He rightly concludes, “Instead of reinforcing inequality with tax cuts that favor the affluent, we should use this revenue to restore funding to local governments, which have cut tens of thousands of workers.”

Kasich’s tax plan did include an increase in the state’s very limited  Earned Income Tax Credit (EITC), but the Cleveland Plain Dealer gets it right in this editorial when they argue that the expansion from five to ten percent of the federal credit wasn’t enough. This is because Ohio’s current credit is nonrefundable, meaning that families with no income tax liability but who pay a large share of their incomes in sales and property taxes do not get the credit. For those with taxable income exceeding $20,000 the already paltry credit is further limited. For more on ways that Ohio and other states can improve their EITCs read ITEP’s comprehensive report on options for expanding these vital credits. 


State News Quick Hits: Regressive Tax Cuts Taking Toll on State Budgets


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In an astonishing shift, Kansas Gov. Sam Brownback has moved beyond calling his tax cuts a great “real live experiment” and is instead likening the state to a medical patient, saying, "It's like going through surgery. It takes a while to heal and get growing afterwards.” Clearly the Governor is feeling the heat of passing two years of regressive and expensive tax cuts. Here’s a great piece from the Wichita Eagle highlighting the state’s fiscal drama.

File this under absurd. Ohio Gov. John Kasich signed his most recent tax cut bill at a food bank touting tax cuts to low-income taxpayers included in the legislation, but in reality the bill actually doesn’t do much to help low income taxpayers. In fact, the poorest 20 percent of Ohioans will see an average tax cut of a measly $4, hardly enough to buy a box of cereal, while the wealthy will be showered with big tax breaks.

Faced with a giant budgetary hole, New Jersey lawmakers are being offered two very different solutions: State Sen. Stephen Sweeney’s proposed “millionaire tax” and Gov. Chris Christie’s plan to renege on earlier promises to adequately fund the state’s beleaguered pension system. Critics of the governor’s plan argue that Christie is failing to honor the state’s promise to make bigger payments to the pension fund as part of a 2010 agreement, which also required beneficiaries to contribute more in an effort to shore up the fund. Sweeney would instead impose higher tax rates on those earning more than $500,000 to bridge the gap - a proposal which Christie has vetoed several times in the past but which is supported by a majority of voters.

The three Republican candidates running to replace Arizona Gov. Jan Brewer (she is not running due to term limits) are campaigning on promises to eliminate the state’s income tax.  But, Gov. Brewer has made it clear she does not support such extreme ideas.  From the Arizona Daily Star:  “I think that you need a balance,” she said in an interview with Capitol Media Services.  Beyond that, Brewer said it’s an illusion to sell the idea that eliminating the state income tax somehow would mean overall lower taxes. She said the needs remain: “It’s going to come from all of us, one way or the other.”


Keeping Score? Real Tax Reform 0. Tax Cuts 2


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Illinois lawmakers are putting the state’s bond rating and already shaky fiscal house in further disorder by failing to address the state’s temporary 5 percent tax rate, which is set to fall to 3.75 percent in 2015.

State lawmakers vigorously debated two tax proposal this legislative session to resolve the issue.The first would have allowed a ballot question in November to amend the state constitution and allow a graduated income tax, and the second would have made the 5 percent income tax rate permanent.  Illinois lawmakers adjourned without going down either path but instead agreed to a fiscal year 2015 budget that is widely viewed as “kicking the can down the road.”

Voices for Illinois Children analyzed the budget and created an infographic that shows why lawmakers' decision will be detrimental to the state: It ignores that the 5 percent income tax is temporary, relies on borrowing from other funds, and under funds state obligations. Many speculate election year politics got in the way, with lawmakers not wanting to cast tough votes in favor of maintaining current tax rates ahead of November.

Meanwhile, in Ohio ...

Lawmakers okayed a $400 million tax cut package that we told you about last week. The package includes accelerating already scheduled income tax rate reductions and increasing an existing tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families. The legislation now goes to Gov. Kasich, who is expected to sign the bill into law. For more on this legislation see Policy Matters Ohio report here.


Ohio Tax Cuts Would Disproportionately Benefit Top 1 Percent


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Since Ohio Governor John Kasich ran for office on a promise to gradually eliminate the state income tax, tax cuts have been almost constantly on the agenda in the Buckeye state. Last week, the state Senate advanced a $400 million tax cut plan that would accelerate already-scheduled income tax rate reductions and increase an existing tax break for “pass through” businesses, while providing much smaller tax breaks to low- and middle-income families. The plan next goes to a joint House-Senate conference committee.

An ITEP analysis of the Senate plan, featured in a  newly-released report from Policy Matters Ohio, shows that these tax cuts next year would disproportionately benefit the best-off Ohioans: the top 1 percent of Ohio taxpayers, would receive an average tax cut of $1,846, while the middle fifth of Ohio taxpayers would see an average tax cut of $36. The poorest 20 percent of Ohioans would see a tax cut averaging just $4.

Ohio’s tax break for “pass through” business income (that is, profits that are taxed under the personal income tax as they “passed through” to the owners) is already one of the more misguided carve outs in the state’s tax law. Described misleadingly by its supporters as a “small business” tax break, it allows any individual to deduct 50 percent of a whopping $250,000 of pass-through income. The Senate bill would ramp up the deduction to 75 percent for one year. But a better approach might be to examine the wisdom of the deduction that already exists. Policy Matters Ohio’s Zach Schiller notes sensibly in the Columbus Dispatch that “[w]e certainly haven’t seen some big job surge since this tax break was created.” The true cost of the existing deduction remains uncertain. Since some eligible business owners appear not to be claiming it, the $230 million the deduction has cost this year alone will likely be much higher in the long term.

Faced with a ballooning tax giveaway that offers little or nothing to middle-income families, the sensible solution would be to pull the plug on this tax break. Instead, Ohio lawmakers seem poised to expand it.


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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

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

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

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

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

Read the full report


Big News in Ohio: Governor's Unfair Tax Cut Plan Unveiled


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Last week, Ohio Governor John Kasich released his “Transforming Ohio for Jobs + Growth” tax cut package. As we predicted, the plan includes an 8.5 percent across the board income tax rate reduction which would drop the top tax rate from 5.33 to 4.88 percent. The proposal also slightly increases the state’s small non-refundable Earned Income Tax Credit (EITC), introduces an extra exemption for low income families, and raises the cigarette tax. Institute on Taxation and Economic Policy (ITEP) staff quickly produced an analysis of the proposal’s main provisions. Policy Matters Ohio (PMO) published this analysis in their brief “Kasich Tax Plan: Advantage, Top 1 Percent” and concluded that better off Ohioans would do much better under the Kasich plan. In fact, the plan delivers annual tax cuts on average worth $2,847 to the top 1 percent of Ohio taxpayers while taxpayers in the bottom two-fifths on average would pay more than they do now.

Though increases in the EITC and the new personal exemption are small steps toward tax fairness, increasing tobacco taxes and cutting income tax rates would would be a step backward. PMO research director Zach Schiller says, “Boosting the EITC and personal exemptions for the least affluent are positive steps that would help low- and moderate-income Ohioans. But these measures do not change the fundamental math of the proposal:  It is an additional tax shift from those most able to pay to poor and moderate-income Ohioans.”

There is no guarantee that the proposal will actually become law. The anti-tax group headed by Grover Norquist called the proposal “less than inspiring.” Some lawmakers have already asked the fiscally irresponsible question about what it would cost to preserve the revenue cuts while removing the tax hikes from the plan, other lawmakers are asking for evidence that tax cuts actually create jobs. For those interested in political theatre this is a state to watch.  A recent editorial in the Toledo Blade predicts that the proposal “will dominate the legislative and campaign debates.” Stay tuned.


State News Quick Hits: State Policy Makers Need a Tax History Lesson


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The Cleveland Plain Dealer provided a helpful history lesson in its recent editorial on Governor John Kasich’s State of the State speech. In the speech, Kasich predictably called for yet another round of tax cuts to fix all that ails the state, but as the editorial board smartly points out, “if tax cuts were the key to rebirth, Ohio's troubles should have ended long ago.” The paper goes on to chronicle six substantial state income tax cuts implemented since 1985, none of which generated the economic boom promised by proponents. If state legislators unwisely go along with Kasich’s attempt to repeat history, they shouldn’t expect a different result.

The Idaho Trucking Association has come out in favor of a six-cent increase in the state’s 25-cent gas tax, adding Idaho to a list of states considering long-overdue gas tax hikes this year. If passed, the bill (PDF) would raise the state fuel tax two cents a year for the next three years, and would be the first such increase in 18 years. A gas tax increase is needed to close a $262 million hole in the state’s transportation budget, according to the Governor’s Task Force on Modernizing Transportation Funding. Republican Governor Butch Otter has been a vocal advocate of a gas tax increase, but was rebuked by the legislature on the issue in the past. AAA Idaho has come out against the bill in part because they don’t think it asks enough of the long-haul trucks that produce a disproportionate amount of wear and tear on the state’s roads. We will continue to monitor developments.

The Georgia Senate passed a constitutional amendment last week that would cap the state’s individual income tax rate at the current six percent level. As the Georgia Budget and Policy Institute has previously explained, this is an immensely silly idea, tying the hands of future policymakers by arbitrarily locking in current tax rules. The amendment’s key sponsor has described the effort as a “first step toward moving Georgia away from taxing income.” But personal income taxes are the fairest of the main revenue sources relied on by state governments. Senate Resolution 415 must now win a two-thirds vote in the House and then, if successful, approval by the voters in November.

In the 36 states where Governors are up for election, campaign season is well underway. This is especially true in Wisconsin. Governor Scott Walker isn’t likely to fulfill his 2010 campaign pledge of creating 250,000 jobs, but that isn’t stopping him from making a whole new promise. This time he is pledging that property taxes won’t be increased over his next term. Details about how he will keep property taxes at current levels aren’t available yet, but it’s likely he will recommend some kind of ill-advised property tax cap, as well as an increase in state aid to localities.


Either Way - Reducing Ohio's Top Income Tax Rate to 4 or 5 Percent is a Bad Idea


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Ohio Governor John Kasich is expected to unveil his latest tax cut proposal soon and it doesn’t take a deep understanding of Ohio politics to know that the Governor’s plan will likely include large across the board income tax rate reductions. Last week he mentioned wanting to lower the top income tax rate to below 4 percent after persistently advocating in recent months for reducing the top rate to less than 5 percent (the current top income tax rate is 5.333 percent).

In anticipation of the governor’s latest proposal, Policy Matters Ohio (PMO) released a new report, using ITEP data,“Income-tax cut would favor well-to-do”, which shows the impact of an across the board income tax rate reduction that lowers the top income tax rate to just under 5 percent. The biggest beneficiaries of this proposal are by far the wealthiest Ohioans. In fact, 69 percent of the benefits go to Ohioans in the top 20 percent of the income distribution.

We often don’t get to talk about tax policy as it relates to pizza, but PMO finds “that the across-the-board cut in rates needed to [get the top rate to below 5 percent] may allow low-income Ohioans to buy a slice of pizza a year, on average. Middle-income Ohioans could purchase a cheap pizza maker. For the state’s most affluent taxpayers, on average it would cover round-trip airfare for two to Italy, with some money left over to pay the hotel bill and buy some real Italian pizza.”

If the Governor aggressively pushes getting the top rate below 4 percent the benefits to the wealthy will be even greater and could mean a second trip to Italy with a stop over in France to pick up a bottle of wine. Either way, reducing the top income tax rate below 4 or 5 percent would enhance the unfairness already apparent in Ohio’s tax structure and makes it more difficult for the state to fund necessary services.


Beware of the Tax Shift (Again)


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Note to Readers: This is the second of a five-part series on tax policy prospects in the states in 2014. Over the coming weeks, the Institute on Taxation and Economic Policy (ITEP) will highlight state tax proposals that are gaining momentum in states across the country. This post focuses on tax shift proposals.

The most radical and potentially devastating tax reform proposals under consideration in a number of states are those that would reduce or eliminate state income taxes and replace some or all of the lost revenue by expanding or increasing consumption taxes. These “tax swap” proposals appeared to gain momentum in a number of states last year, but ultimately proposals by the governors of Louisiana and Nebraska fell flat in 2013. Despite this, legislators in several states have reiterated their commitment to this flawed idea and may attempt to inflict it on taxpayers in 2014. Here’s a round-up of where we see tax shifts gaining momentum:

Arkansas - The Republican Party in Arkansas is so committed to a tax shift that they have included language in their platform vowing to “[r]eplace the state income tax with a more equitable method of taxation.” While the rules of Arkansas’ legislative process will prevent any movement on a tax shift this year, leading Republican gubernatorial candidate Asa Hutchinson has made income tax elimination a major theme of his campaign.  

Georgia - The threat of a radical tax shift proposal was so great in the Peach State that late last year the Georgia Budget and Policy Institute published this report (using ITEP data) showing that as many as four in five taxpayers would pay more in taxes if the state eliminated their income tax and replaced the revenue with sales taxes. This report seems to have slowed the momentum for the tax shift, but many lawmakers remain enthusiastic about this idea.

Kansas – In each of the last two years, Governor Sam Brownback has proposed and signed into law tax-cutting legislation designed to put the state on a “glide path” toward income tax elimination.  Whether or not the Governor will be able to continue to steer the state down this path in 2014 may largely depend on the state Supreme Court’s upcoming decision about increasing education funding.

New Mexico - During the 2013 legislative session a tax shift bill was introduced in Santa Fe that would have eliminated the state’s income tax, and reduced the state’s gross receipts tax rate to 2 percent (from 5.125 percent) while broadening the tax base to include salaries and wages. New Mexico Voices for Children released an analysis (PDF) of the legislation (citing ITEP figures on the already-regressive New Mexico tax structure) that rightly concludes, “[o]n the whole, HB-369/SB-368 would be a step in the direction of a more unfair tax system and should not be passed by the Legislature.” We expect the tax shift debate has only just started there.

North Carolina - North Carolina lawmakers spent a good part of their 2013 legislative session debating numerous tax “reform” packages including a tax shift that would have eliminated the state’s personal and corporate income taxes and replaced some of the revenue with a higher sales tax. Ultimately, they enacted a smaller-scale yet still disastrous package which cut taxes for the rich,hiked them for most everyone else, and drained state resources by more than $700 million a year. There is reason to believe that some North Carolina lawmakers will use any surplus revenue this year to push for more income tax cuts.  And, one of the chief architects of the income tax elimination plan from last year has made it known that he would like to use the 2015 session to continue pursuing this goal.

Ohio - Governor John Kasich has made no secret of his desire to eliminate the state’s income tax. When he ran for office in 2010 he promised to “[p]hase out the income tax. It's punishing on individuals. It's punishing on small business. To phase that out, it cannot be done in a day, but it's absolutely essential that we improve the tax environment in this state so that we no longer are an obstacle for people to locate here and that we can create a reason for people to stay here." He hasn't changed his tune: during a recent talk to chamber of commerce groups he urged them “to always be for tax cuts.”  

Wisconsin - Governor Scott Walker says he wants 2014 to be a year of discussion about the pros and cons of eliminating Wisconsin’s most progressive revenue sources—the corporate and personal income taxes. But the discussion is likely to be a short one when the public learns (as an ITEP analysis found) that a 13.5 percent sales tax rate would be necessary for the state to make up for the revenue lost from income tax elimination. 


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.  


Will Ohio Medicaid Savings End Up as Tax Cut for the Rich?


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Ohio’s John Kasich is one Republican governor who wants his state to accept federal dollars from the Affordable Care Act to extend Medicaid to his neediest constituents. Kasich included that money in his budget proposal early this year, but the legislature rejected it.  But then the Governor vetoed the language rejecting those dollars in the budget bill that he finally signed. Enter the Ohio State Controlling Board – a board of six legislators and a policy adviser for the Ohio Office of Budget and Management– whose members then went ahead and voted that the state will follow the Governor’s lead and expand its Medicaid program using the federal funds. But now, six House members are plaintiffs in a lawsuit challenging the authority of the Board to tap into that federal Medicaid money.

Now it’s up to the courts to decide whether the Controlling Board’s actions were constitutional, but a State Senator who serves on the Board (and who also voted for the expansion) has a very specific idea of how to spend the money. Senator Chris Widener is sponsoring a bill that would turn the savings generated from Medicaid expansion (about $400 million in savings from now through June 2015) into a 4 percent across the board permanent personal income tax rate reduction.

Widener’s plan is doubly irresponsible. First, the Medicaid expansion isn’t a done deal, so the revenue to pay for a tax cut may never materialize. Secondly, legislative staff has estimated the cost of the  proposed tax cut at more than $500 million by the end of the next fiscal year—substantially more than the $404 million Ohio could see from Medicaid expansion. The tax cut Widener proposed would also disproportionately benefit the wealthiest Ohioans. The Institute on Taxation and Economic Policy’s (ITEP) analysis of the tax cut proposal in this Policy Matters Ohio (PMO) report found that Ohioans in the top 1 percent of the income spectrum would receive an average state tax cut of $1,437 a year. Middle-income families would get an average of $28, and the poorest twenty percent of Ohioans would see a tax cut averaging $1.

PMO argues that it is inappropriate to discuss tax cuts when the state has so many other unmet needs. Check out PMO’s report, “Use Medicaid savings to improve Ohio, not to give even more tax cuts to the affluent.” It gives a slew of ways in which the expected $400 million in savings could be used more productively, such as hiring police, firemen and teachers and funding preschool programs. Ohio has suffered multiple rounds of tax cuts that have eviscerated state services and local governments; any windfall revenues should be spent trying to undo some of that damage.

Thankfully, the Columbus Dispatch is reporting that the “income-tax cut is getting a cool reception from House GOP leaders.” House Speaker William Batchelder seems to agree with PMO, when he says, “The veterans are not being adequately treated. We have tremendous problems with heroin addiction in this state. We have a lot of problems, and we’d probably look there first ... before we do a (tax) cut of that size.”

 

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).

 


Congress Members' Home States Have Fiscal Stake in Immigration Reform


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We still don’t know what the U.S. House of Representatives is going to do about immigration reform. The Senate passed a bill with a solid majority, and that legislation enjoys support from the Chamber of Commerce and the labor movement, from George W. Bush and Barack Obama.  What we do know, though, is that members of the House leadership had a nice long talk about it this week because they know the pressure is on them to do something. 

Also this week, the Institute on Taxation and Economic Policy (ITEP) released a study with a bland title, Undocumented Immigrants’ State and Local Tax Contributions, that held some interesting numbers. What it shows is that once unauthorized immigrants are legalized and participating fully in the tax system, state tax revenues will go up, just as the CBO showed they would at the federal level. In fact, the report shows that state tax payments from this population are already at $10.6 billion a year, and that will rise by $2 billion under reform. The report (with a clickable map on the landing page!) shows how those tax dollars are distributed state by state.

According to reports, the following Representatives are now the key players on whatever immigration bill comes from the House. So, in hopes of informing the debate, we are sharing the total amount of estimated annual revenue each of their respective states would get in the form of tax payments from legalized immigrants following reform.

Rep. Mario Diaz-Balart, Florida: $747 million a year, up $41 million
Rep. Raul Labrador, Idaho: $32 million a year, up $5.5 million
Rep. John Boehner, Ohio:  $95 million, up $22 million
Reps Michael McCaul, John Carter and Sam Johnson, Texas: $1.7 billion, up $92 million
Rep. Jason Chaffetz, Utah: $133 million, up $31 million
Reps Eric Cantor and Bob Goodlatte, Virginia: $260 million, up $77 million
Rep. Paul Ryan, Wisconsin: $131 million, up $33 million


Bad Budgets Become Law in Ohio and Wisconsin


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Legislative sessions are ending, new fiscal years are beginning and Governors in both Ohio and Wisconsin signed budgets into law this weekend.

Despite a series of Institute on Taxation and Economic Policy (ITEP) analyses published by Policy Matters Ohio (PMO) which showed that the wealthiest Ohioans would receive an outsized tax cut of ($6,000 on average) from a plan proposed by House and Senate Republicans, Ohio Governor John Kasich signed into law the tax cut legislation on Sunday. The new law include an across-the-board, 10 percent income-tax rate cut (which reduces taxes for high earners more than low), a deduction for pass-through business income (a giveaway to the wealthy), an increase in the state sales tax from 5.5 to 5.75 percent (a larger burden on low income families) and the introduction of a 5 percent, nonrefundable Earned Income Tax Credit. But that modest credit for working families was not enough to redeem the overall distribution of the bill: ITEP found that the only income group to see a tax increase from the legislation would be the bottom twenty percent. Governor Kasich may be “proud of the tax cuts” but he’s wrong to call them “another installment in Ohio’s comeback.”

Wisconsin Governor Scott Walker also signed into law a budget Sunday that included income tax cuts totalling more than $650 million. The tax plan reduced income tax rates from 4.6 percent, 6.15 percent, 6.5 percent, 6.75 percent, and 7.75 percent to 4.4 percent, 5.84 percent, 6.27 percent, and 7.65 percent. The legislation also reduced the number of tax brackets from five to four. ITEP analyzed both the Governor’s initial proposal and another from Representative Dale Kooyenga. We found both plans were regressive and benefited wealthy Wisconsinites more than low and middle-income families. According to the Legislative Fiscal Bureau (PDF), the permanent tax cuts signed by Governor Walker will cost the state $632.5 million over two years and the distribution is, like Ohio’s new law, skewed to benefit the wealthiest Wisconsinites. Even worse? The budget Governor Walker just signed also  created a structural deficit of $505 million in the next biennium.

 


A Reminder About Film Tax Credits: All that Glitters is not Gold


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Remember the 2011 Hollywood blockbuster The Descendants, starring George Clooney? Odds are yes, as it was nominated for 5 Academy Awards. Perhaps less memorable were the ending credits and the special thank you to the Hawaii Film Office who administers the state’s film tax credit – which the movie cashed in on.

Why did a movie whose plot depended on an on-location shoot need to be offered a tax incentive to film on-location? The answer is beyond us, but Hawaii Governor Abercrombie seems to think it was necessary as he just signed into law an extension to the credit this week.

Hawaii is not alone in buying into the false promises of film tax credits. In 2011, 37 states had some version of the credit. Advocates claim these credits promote economic growth and attract jobs to the state. However, a growing body of non-partisan research shows just how misleading these claims really are.

Take research done on the fiscal implications such tax credits have on state budgets, for example: 

  • A report issued by the Louisiana Legislative Auditor showed that in 2010, almost $200 million in film tax breaks were awarded, but they only generated $27 million in new tax revenue. According a report (PDF) done by the Louisiana Budget Project, this net cost to the state of $170 million came as the state’s investment in education, health care, infrastructure, and many other public services faced significant cuts.

  • The Massachusetts Department of Revenue – in its annual Film Industry Tax Incentives Reportfound that its film tax credit cost the state $200 million between 2006 and 2011, forcing spending cuts in other public services.

  • In 2011, the North Carolina Legislative Services Office found (PDF) that while the state awarded over $30 million in film tax credits, the credits only generated an estimated $9 million in new economic activity (and even less in new revenue for the state).

  • The current debate over the incentive in Pennsylvania inspired a couple of economists to pen an op-ed in which they cite the state’s own research: “Put another way, the tax credit sells our tax dollars to the film industry for 14 cents each.”

  • A more comprehensive study done by the Center on Budget and Policy Priorities (CBPP) examined the fiscal implications of state film tax credits around the country. This study found that for every dollar of tax credits examined, somewhere between $0.07 and $0.28 cents in new revenue was generated; meaning that states were forced to cut services or raise taxes elsewhere to make up for this loss.

Not only do film tax credits cost states more money than they generate, but they also fail to bring stable, long-term jobs to the state.

The Tax Foundation highlights two reasons for this. First, they note that most of the jobs are temporary, “the kinds of jobs that end when shooting wraps and the production company leaves.” This finding is echoed on the ground in Massachusetts, as a report (PDF) issued by their Department of Revenue shows that many jobs created by the state’s film tax credit are “artificial constructs,” with “most employees working from a few days to at most a few months.”

Second, a large portion of the permanent jobs in film and TV are highly-specialized and typically filled by non-residents (often from already-established production centers such as Los Angeles, New York, or Vancouver). In Massachusetts, for example, nearly 70 percent of the film production spending generated by film tax credits has gone to employees and businesses that reside outside of the state. Therefore, while film subsidies might provide the illusion of job-creation, they are actually subsidizing jobs not only located outside the state, but in some cases – outside the country.

While a few states have started to catch on and eliminate or pare back their credits in recent years (most recently Connecticut), others (including Maryland, Nevada, Pennsylvania, and Ohio) have decided to double down. This begs the question: if film tax credits cost the state more than they bring in and fail to attract real jobs, why are lawmakers so determined to expand them?

Perhaps they’re too star struck to see the facts. Or maybe they, too, want a shout out in a credit reel.

The Ohio Senate is considering a fiscal 2014-15 budget that includes a $1.4 billion business tax cut. The cut – which would exempt a full $375,000 in business income from the income tax – is similar to a widely-criticized plan enacted by Kansas last year. As Policy Matters Ohio explains, however, none of the tax cuts under consideration (including the Governor's) will help Ohio’s economy: “They are bad for low- and moderate-income Ohioans, and slash revenue Ohio needs to support our economic success and improve our quality of life.”

On May 23, the Massachusetts Senate approved a fiscal 2014 budget that would generate $430 million in new tax revenues, in part by extending the sales and use tax to some computer-related services, raising the gas tax by 3 cents, and increasing tobacco excise taxes.  Differences between the Senate budget and a broadly similar plan passed by the State House will now be worked out by a six-member conference committee.

If he ever decides to leave Hollywood, Nicolas Cage might have a future ahead of him in lobbying. After Cage visited Nevada, the state Senate approved a $20 million tax break for filmmakers. Unfortunately for Nevadans, however, film tax credits have been shown time and time again to be ineffective at spurring economic growth.

The Virginia Commonwealth Institute discusses the problems with lawmakers’ recent decision to cut the state’s gas tax by roughly 6 cents per gallon.  As the Institute explains: “gas taxes are not to blame for high and volatile gas prices… [and] Virginia’s gas tax, which has been a steady 17.5 cents per gallon since 1987, was failing to produce enough resources to fuel adequate investment in our infrastructure.” The same is generally true nationwide.

 

Tuesday, the Ohio House of Representatives approved their budget bill which included an across the board 7 percent reduction in income tax rates. Though the House tax plan is less costly than the Governor’s original proposal, Policy Matters Ohio, using Institute on Taxation and Economic Policy (ITEP) data, makes the point that this reduction will still benefit the wealthiest Ohioans. “For the top 1 percent, the tax plan would cut $2,717 in taxes on average. For the middle 20 percent, it would amount to a $51 cut on average. For the bottom 20 percent, it would result in $3 on average.”

This week the Minnesota Senate unveiled their tax plan which, (unlike Governor Dayton’s plan and the House plan wouldn’t create a new top income tax bracket,) would raise the current top rate from 7.85 to 9.4 percent. About 6 percent of taxpayers would see their taxes go up under the Senate plan. Both houses of the legislature and the Governor are committed to tax increases and doing the hard work necessary to raise taxes in a progressive way. Senator Majority Leader Tom Bakk recently said, "Some people are probably going to lose elections because we are going to raise some taxes, but sometimes leading is not a popularity contest."

We’d be remiss if we didn’t draw your attention to this study (PDF) by Ernst and Young for the Council on State Taxation which cautions state lawmakers about expanding their sales tax bases to include services purchased by businesses. Louisiana Governor Bobby Jindal’s failed attempt at income tax elimination included broadening the sales tax base to include a variety of services, including business-to-business services. Ironically, Ernst and Young was hired by the Governor to consult about his plan. Toward the end of the tax debate there, the AP pointed out the disparity between the Governor's consultants’ stance on taxing business-to-business services and what the Governor himself was proposing.

Rhode Island analysts are urging lawmakers to take a closer look at the $1.7 billion the state doles out in special tax breaks each year.  A new report from the Economic Progress Institute recommends rigorous evaluations of tax breaks to find out if they’re working. It then recommends attaching expiration dates to those breaks so that lawmakers are voting whether to renew them based on solid evidence about their effectiveness. These goals are also reflected in a bill (PDF) under consideration in the Rhode Island House -- Representative Tanzi’s “Tax Expenditure Evaluation Act.”

We’ve criticized Virginia’s new transportation package for letting drivers off the hook when it comes to paying for the roads they use, and now the Commonwealth Institute has crunched some new numbers that make this very point: “Currently, nearly 70 percent of the state’s transportation revenue comes from driving-related sources ... But under the new funding package, that share drops to around 60 percent ... In the process the gas tax drops from the leading revenue source for transportation to third place; and sales tax moves into first.”


State News Quick Hits: Kansas Named Worst in the Nation for Taxes, and More


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This week Missouri is offering a sales tax holiday on energy efficient appliances. Not only are these holidays costly for state budgets, they are poorly targeted. That is, it’s generally wealthier folks who have the cash flow flexibility to time their purchases to take advantage of these holidays, when it’s poorer residents who feel the brunt of sales taxes in the first place. To learn more about why these holidays aren’t worth celebrating, check out The Institute on Taxation and Economic Policy’s (ITEP) policy brief here (PDF).

Here’s a great investigative piece from the Columbus Post Dispatch about the nearly $8 billion in tax code entitlements (aka tax expenditures) Ohio currently offers. The state needs to closely study these tax expenditures and determine if they are actually producing the economic benefits promised. Before debating extreme income tax rate reductions, Ohio lawmakers should also take a look at this ITEP primer on what a thoughtful, productive discussion of state tax expenditures looks like.

In this Kansas City Star article, ITEP’s Executive Director, Matt Gardner, talks about the fate of many radical tax plans this year in the states. “The speed with which these plans have fallen apart is as remarkable a trend as the speed with which they emerged,” he says. Kansas and its budget crisis have become a cautionary tale for other states considering tax cuts, but even the latest plans passed by the Kansas House and Senate are radical and could eventually lead to the complete elimination of the personal income tax.

Criticism of the tax cuts enacted in Kansas last year continues to mount.  We already wrote about Indiana House Speaker Brian Bosma’s caution that his state might become another Kansas, but now a number of media outlets have picked up on the fact that both the Center on Budget and Policy Priorities and the Tax Foundation called that Kansas tax cuts the “worst” (ouch!) state tax changes enacted in 2012.

Watch out, North Carolinians! It appears that Americans for Prosperity (AFP) is coming to town to the tune of $500,000 to pay for town hall meetings, “grassroots” advocacy and advertising all to support the dismantling of the state’s tax structure. Let’s hope the facts can defeat AFP’s cash.


State News Quick Hits: Promoting Tax Justice in the States on April 15


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On April 15, the majority of Americans file their income taxes, federal and state. As CTJ and ITEP demonstrate in their annual Who Pays Taxes in America, state tax systems are overwhelmingly regressive and the federal system just barely makes up for that. Today we highlight some great, creative efforts in a few states promoting the importance of state tax fairness.

Michigan: The Michigan League for Public Policy organized a social media campaign and video called “Pay it Forward Michigan.” The League explains that “its aim is to remind us about the good things our tax dollars create or protect — clean water, parks, good schools, safe streets, good roads, protection for children, great universities, the arts, bike paths, pristine beaches and more.”

North Carolina: Russell the Public Investment Hound was back and starring in a new film, The Great Tax Shift.  Also, check out this tax day Fair Fight Luchadora (Mexican wrestling) showdown that was staged across the street from the North Carolina General Assembly building. From the press advisory: “Tax Day is a reminder that wealthy and powerful special interests aren’t made to pay their fair share because too few lawmakers in Raleigh and in D.C. care about being champions of the People who elected them. This year, working people will get to settle the score!” Spoiler alert: the people’s champ won!

Ohio: Amy Hanauer of Policy Matters Ohio writes in the Cleveland Plain-Dealer about why income tax cuts won’t help the state’s economy, and highlights research from ITEP to make her case.  She also shares a personal experience with a fire in the basement of her home just days before Tax Day in 2001. “The firefighters arrived in minutes and put out the still-tiny fire ... and I suddenly had a more vivid picture of what my un-mailed taxes would pay for. Twelve years later, I can thank countless teachers, crossing guards, snowplow drivers, police officers, water inspectors and others for helping keep my kids educated, protected, safe and happy in our community.”

Wisconsin: Ever wonder what Wisconsin income taxes help fund? Read all about it here and check out the gorgeous infographic showing how tax revenues are an economic investment.

Photo courtesy of FairFight North Carolina.

Oklahoma Governor Mary Fallin’s proposal to repeal the state’s top personal income tax bracket is “gaining traction,” according to The Oklahoman.  The plan has already passed the House, and has the support of the state Chamber of Commerce. But the Oklahoma Policy Institute explains that this cut is stacked in favor of high-income residents: “the bottom 60 percent of Oklahomans would receive just 9 percent of the benefit from this tax cut, while the top 5 percent would receive 42 percent of the benefit.”  

Texas and Washington State are continuing to search for ways to make it easier to identify and repeal tax breaks that aren’t worth their cost.  The Texas Austin American-Statesman reports on a bill that “would put the tax code under the microscope, examining tax breaks in a six-year cycle similar to the Sunset process that evaluates whether state agencies are performing as intended.”  And the Washington Budget and Policy Center explains in a blog post how “all three branches of state government have taken, or are poised to take, actions that could greatly enhance transparency over the hundreds of special tax breaks on the books in Washington state.”

This Toledo Blade editorial gets it right about Ohio Governor Kasich’s plan to broaden the sales tax base to include more services: “There is merit, in theory, to expanding the sales tax to include more services. But the experience in states such as Florida — which broadened its tax base, then abandoned the effort as unworkable — suggests it should be done slowly and for the right reasons.” Broadening the sales tax base is good policy, but the Kasich plan is bad for Ohioans because overall the plan (according to an Institute on Taxation and Economic Policy analysis) increases taxes on those who can least afford it while cutting taxes for the wealthy.

ITEP is waiting for full details of Louisiana Governor BobbyJindal’s tax swap plan, but already clergy and ministers in the state are weighing in against the Governor’s plan to eliminate state income taxes and replace the revenue with a broader sales tax base and a higher rate. In this commentary, the Right Rev. Jacob W. Owensby, (bishop of the Episcopal Diocese of Western Louisiana), worries: “It is difficult to see how increased sales taxes will pass the test of fairness that we would all insist upon. Our tax system has lots of room for improvement. But relying on increased sales tax will not give us the fair system we need. Raising sales taxes will increase the burden on those who can least afford it.”

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

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

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

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

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

A new report from the Center on Budget and Policy Priorities (CBPP) outlines the anti-tax agenda of the American Legislative Exchange Council (ALEC) and ALEC scholar and economist, Arthur Laffer.  It explains the multitude of problems with their policy recommendations and the so-called research they produce to make the case for those recommendations.  The CBPP report builds on the Institute on Taxation and Economic Policy’s (ITEP) work debunking Arthur Laffer as it examines the “weak foundation of questionable economic and fiscal assumptions and faulty analysis promoted by ALEC and its allies.”

The DC Fiscal Policy Institute explains how closing corporate tax shelters has significantly improved the District of Columbia’s finances.  The city saw its strongest growth in corporate income tax collections in almost two decades, due in part to a reform called “combined reporting” (PDF) that makes it more difficult for companies to disguise their profits as being earned in other states, particularly those with low or no corporate income tax.

This Columbus Dispatch article cites academic research, policy experts and the Congressional Budget Office to examine Ohio Governor Kasich’s repeated assertion that tax cuts lead to jobs, including critiques that “when one dives deeper into the numbers, the correlation between income-tax cuts for small-business owners and more jobs is strained at best.”  The story also covers that larger supply-side economics debate, which the Institute on Taxation and Economic Policy (ITEP) has engaged with here and elsewhere.

Tax hikes on low- and moderate-income working families are under debate in both Vermont and North Carolina where lawmakers have proposed reducing the benefit of their states’ Earned Income Tax Credits (EITCs) (see this PDF on state EITC policy). Vermont’s Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs. In North Carolina, lawmakers are advancing a bill that would cut the EITC from 5 to 4.5 percent of the federal credit and potentially let it expire altogether – a rejection of Washington’s recent five-year extension of a more robust federal EITC. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute as well as a new brief from the North Carolina Budget and Tax Center both cite ITEP’s Who Pays data to make a case for why each state should maintain its EITC.

North Carolina’s newly-elected Governor, Pat McCrory, is keeping everyone guessing about his plans for tax reform in the Tarheel State.  During his state of the state address this week, McCrory said tax reform would be a priority of his administration but was short on specifics, saying only that he wants to lower rates, close loopholes and make North Carolina’s tax code more business friendly. The state’s Senate leadership has been touting a plan to eliminate the personal and corporate income taxes and replace the lost revenue with a higher sales tax and new business license fee.  It remains to be seen whether the Governor will follow the Senate’s lead or puts forth his own version of reform.

The Cleveland Plain Dealer published a new analysis of Ohio Governor Kasich’s “tax swap” plan that “suggests lower and middle income families would not do as well as higher earners under the new system.”  The Plain Dealer notes that its findings bolster a new report by Policy Matters Ohio and our partner organization, the Institute on Taxation and Economic Policy (ITEP).

Online retailer Amazon.com just struck a deal with yet another state to begin collecting sales taxes.  The new agreement with Connecticut will go into effect in November, just in time for the holiday shopping season.  The company also announced that it plans to build an order-fulfillment center in the state – a move which would have clearly established a “physical presence” (PDF) and therefore required the company to begin collecting sales taxes anyway.

The Atlanta Journal-Constitution reports that Georgia may soon join Connecticut on the long list of states that have struck deals with Amazon.  According to the paper, “the world’s largest online retailer has not collected the tax [this year], despite a new state law requiring online retailers to charge it at the start of the year.”  But the Georgia Retail Association expects that Amazon will build a distribution center in the state soon, which would make it impossible for the company to continue ignoring this legal requirement.

Minnesota Governor Mark Dayton reaffirmed his support for progressive, comprehensive and revenue-raising tax reform in his State of the State address last week and mentioned our partner organization, the Institute on Taxation and Economic Policy (ITEP) when referring to the upside down nature of his state’s tax structure:

“Thanks to the excellent work of Minnesota 2020, I recently became aware of a new study, by the Institute on Taxation and Economic Policy, which confirms the Department of Revenue’s analysis. It found that middle-class Minnesotans pay 26 percent more state and local taxes per dollar of income than do the top one percent of our state’s income earners. When people who have the most pay the least, this state and nation are in trouble. When lobbyists protect tax favors for special interests at the cost of everyone else’s best interests, this state and nation are in trouble. My goal is to get us out of trouble.”


Voters Asked to Make Up Local Revenues States Stopped Providing


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Local governments in Ohio have taken tremendous fiscal hits in recent years and now many are resorting to the ballot box to close their budget gaps. Next week Ohio voters will be voting on 194 school levies, including 123 for additional funding. According to the Columbus Dispatch this is “the highest percentage of new tax issues in a general election in at least the past decade.” Recently, the state cut aid to local governments from by more than a billion dollars and then eliminated the state’s estate tax, a key revenue source for cities and towns which brought in $230 million to local government coffers in 2010, for example.  Wendy Patton with Policy Matters Ohio wrote earlier this summer, “Gov. John Kasich and the General Assembly pushed the fiscal crisis down to local schools and communities.”  

Ohio is not the only state where local governments are turning to voters this year to approve new revenue in the wake of state aid reductions.  More than 1000  local governments across the country in more than a dozen states have tax or fee related questions on their November 6 ballots.

California voters will not only have to decide on two competing statewide tax increase measures, but will also likely face similar decisions at the local level.  Hundreds of measures will appear on local ballots including sales tax increases, school parcel taxes, and hotel tax hikes.  The revenue raised from these initiatives will be used for everything from schools to police and fire services to the upkeep of parks.


Quick Hits in State News: Tricks, Treats and Taxes!


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Happy Halloween to our readers!

In honor of the spookiest of all holidays, we want to start by sharing this recent Wall Street Journal piece called Meet One of the Super-PAC Men which profiles Missouri’s Rex Sinquefield, the masked financier behind of one of the scariest state tax policy proposals around -- eliminating Missouri’s income tax and replacing it with increased sales tax revenues.

Word is that fracking taxes, income tax cuts, bank “tax reform” and possibly privatizing the Ohio Turnpike could all be priorities for Ohio’s ghoulishly anti-tax governor, John Kasich. Given the Governor’s track record of supporting tax cuts above all else, we are more than a little afraid about what is to come in the Buckeye State.

Kansas Governor Sam Brownback recently proposed a “property tax transparency” plan which will prevent automatic property tax increases when property values rise. But this proposal leaves local governments who depend on the property tax at the mercy of a zombie math formula. Brownback’s plan should spook all the citizens who depend on local government services.

This one will send a shudder up the spines of supply-siders who want to cut taxes on businesses and the wealthy under the guise of economic development.  The Wisconsin Budget Project is reporting on a national poll which found that a “majority of small-business owners believe that raising taxes on the top 2% of taxpayers is the right thing to do.” On this issue, anyway, it looks as though the good goblins are giving Grover a run for his money!

 


Quick Hits in State News: Don't Be Like Louisiana, Don't Be Like Kansas


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Bad news out of Louisiana, where the chairman of a commission reviewing the state’s tax breaks says they will likely fail to make recommendations for which breaks should be reformed or eliminated.  Turns out no one has been collecting useful data on their cost and performance, and no methodology for comparing tax breaks against each other is available. Both of these shortcomings could have been prevented had the state followed ITEP’s five recommendations for tax expenditure reform .

Policy Matters Ohio has a new report reinforcing the idea that gambling revenue is not a panacea (PDF) for ailing state and local budgets.  The report’s major finding?  “New casino tax revenue will provide less than a quarter of the nearly $1 billion in annual losses local governments will see because of cuts in state aid... Ohio needs to boost its investment in schools, local governments and human services with additional revenue from those who can afford to pay. Revenue from gambling does not suffice.”

Here’s a great blog post from our friends at the Oklahoma Policy Institute (OKPolicy) about the diastrous tax plan that Kansas Governor Sam Brownback signed last May, and why Oklahoma policymakers shouldn’t pursue the same sorts of costly and regressive tax cuts enacted by their neighbors in the Sunflower State.  OKPolicy concludes, “Oklahoma does not need to be the next laboratory for Kansas’ radical tax experiment.”

Picking up on Mitt Romney’s infamous assertion about the 47 percent, this post from the Wisconsin Budget Project answers the question “Who’s in the “47%” in Wisconsin?” They use Census data and figures from the Center on Budget and Policy Priorities (CBPP) to figure out who really are the “moochers.” The Budget Project argues that there are “numerous Wisconsin workers who would probably love to earn enough to owe income taxes,” so the smart move would be implementing policy options to improve their compensation and help them join the tax -paying ranks.


Quick Hits in State News: Wisconsin Billionaires Go Tax Free, and More


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Politifact highlights an increasingly common complication for those who sign Grover Norquist’s “no tax” pledge.  On July 31, Georgia voters will decide on a referendum to increase the sales tax to fund transportation, a measure that’s backed by Republican Governor Nathan Deal.  But having signed Norquist’s no-new-taxes pledge, the Governor is struggling to justify supporting a “new tax” that he believes will benefit his state’s economy.

More evidence that Wisconsin’s tax structure is unfair: two of the state’s billionaires paid no state income taxes in 2010.

Here’s a compelling read by former Congressman Berkley Bedell of Iowa, championing the “ability to pay” principle of taxation that he says accounts for the Great Prosperity period in post-war America.

An investigative series in the Toledo Blade reveals the Ohio Finance Agency isn’t properly overseeing the state’s low-income housing tax credit program.  Many of the beneficiaries of the credits are “large corporations such as banks, insurance companies, and tech firms [that] receive tax breaks even as the low-income rental homes for which they received the credits fall apart.”

 


From Atlantic City to Cincinnati: Legalized Gambling No Jackpot for States


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New Jersey and Ohio don’t have much in common when it comes to their gambling industries.  New Jersey’s Atlantic City is home to a dozen different casinos, the oldest of which has been in operation for over three decades.  Ohio, on the other hand, only legalized casino gambling in 2009, and its first two casinos opened barely a month ago.

But despite their differing backgrounds, all signs from both states are pointing to the same thing: legalized gambling isn’t the revenue miracle that lawmakers often promise.

In New Jersey, a brand new mega-casino called Revel is already a disappointment.  Even with the opening of Revel’s 2,500 slot machines, 120 table games, 1,800 rooms, and 14 restaurants, Atlantic City’s gambling revenues are down nearly 10 percent overall compared to a year ago.

And the explanation from gambling industry analysts (and anyone else who’s been paying attention)? Market saturation. With casinos popping up across the country, gamblers no longer need to travel to distant gambling destinations, and states that rely on casino revenue are increasingly raising that money from their own residents rather than pulling in the coveted out-of-state dollar.

In Ohio, meanwhile, recent reports indicate that the state’s new casinos will cut deeply into the casino revenues in Indiana, Michigan, Pennsylvania, and West Virginia.  Even so, a recent survey by the Cincinnati Enquirer found little optimism among Ohio’s local governments when it comes to the gambling revenues they expect to collect. “Everybody thinks it’s going to fix the world, and it isn’t … I have a hard time believing we have so many people around there that have this kind of money to throw into casinos,” says one county official. According to another, “This is all a big shell game … We’re not really getting anything. All the new money we’re getting is going to be offset by cuts in [state aid].” And in Ohio, the state cuts to cities and counties continue to mount.

For more on the empty promise of gambling revenue, read this policy brief (PDF) from the Institute on Taxation and Economic Policy (ITEP).

 


Quick Hits in State News: Indiana Kills Its Inheritance Tax, and More


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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.

 


Quick Hits in the State News: Taxes Don't Scare Millionaires, and More


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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.”


Bad Idea in Ohio: Pay For Income Tax Cut with a Fracking Tax


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marcellus utica shale.jpgAs a candidate in 2010, Ohio’s now Governor John Kasich made waves by promising to repeal the state’s personal income tax if elected. While this plan proved unrealistic because of the state’s already dire fiscal situation, Governor Kasich now thinks he’s found the way to pay for at least some income tax cuts: a “fracking” tax.

The much-ballyhooed plan he announced earlier this week would tax the anticipated boom in the state’s natural gas mining expected to result from newly available “hydraulic fracturing” technology, and plow every dollar of that new revenue from the tax into cutting personal income tax rates.

This plan likely seems odd to those who have sensibly advocated a “fracking” tax to help pay for the environmental costs associated with this technology, to say nothing of the many Ohio residents who have lived through painful cuts in education, library services, and a host of other vital services during the recent recession.

Moreover, the governor’s claim that his proposed income tax cuts would help “create the jobs-friendly climate that will get our state back on track” rings false, coming on the heels of a much bigger income tax cut pushed through by then-Governor Robert Taft in 2005. Policy Matters Ohio found that these tax cuts didn’t spur economy growth, and actually concluded that “the state’s relative economic decline accelerated” after those tax cuts were passed.

Policy making requires economic projections, and some things are harder to predict than others.  Energy extracting industries are hard.  Using an uncertain revenue source to pay for irresponsible tax cuts is two kinds of bad in one policy. There are smarter ways to rebuild revenues and the economy at the same time.

Cuts Are the Wrong Answer, Governor Kasich; Here's a Better One


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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.”


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


Ohio Budget Has Priorities Backwards


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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.


Ohio Estate Tax in Peril


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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.


Trouble Brewing in Ohio


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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: Get Mojo Back by Slashing Taxes for Wealthy Investors


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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.


Ohioans Battle Stormy Conditions


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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."


Flood of Bad Tax Ideas Coming from the States


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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.


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.


Voters Embrace Higher Taxes at the Local Level


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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 ArizonaKansas, 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.


Kasich at Odds with Ohio's Best and Brightest


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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.


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.


Ohio: Can We Get an "Amen?"


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This week The Toledo Blade published an op-ed from Zach Schiller at Policy Matters Ohio discussing the disastrous fiscal impact of tax cuts enacted in the last decade. As the debate about tax cuts remains on the front burner on both the federal level and in many states, it's important that the Ohio story continue to be told.

In 2005, Ohio lawmakers voted to slash the state income tax (gradually reducing income tax rates by 21%) and eliminate two major business taxes. Now the state is facing a massive budget shortfall and those tax cuts haven't paid for themselves and aren't generating economic growth. Schiller says, "The idea was that tax cuts would help Ohio's economy grow. It hasn't happened. Since 2005, Ohio has continued to lose ground to other states."

And the tax cuts themselves were regressive. Citing ITEP data, Schiller says, "More than 40 percent of the income-tax cuts, when they are fully implemented next year, will go to the 5 percent of families with income of $135,000 or more a year."

He goes on to say, "We need to revitalize the income tax, in particular for high earners. We need to restore revenue from business taxes to levels that existed before the 2005 tax changes. Doing so would still leave the business share of state and local taxes well below where it was 30 years ago. Ohio needs to invest in our people, education system, and infrastructure. We should overhaul our tax system to produce the revenue we need to do so." We couldn't have said it better ourselves.


Let the Buckeye State Be a Warning for the Other 49


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Ohio is facing a multi-billion dollar shortfall in its next biennial budget. Perhaps it comes as no surprise that, in this election year, current lawmakers aren't falling all over themselves to give specific details about how they would fill this gigantic hole. The aim of the Ohio Budget Planning and Management Commission is to offer "a strategy for balancing the state budget for fiscal years 2012 and 2013." This week, Policy Matters Ohio (PMO) submitted a lengthy report to the Commission offering detailed information on one of the reasons the state is in crisis — mainly the 2005 tax overhaul which slashed income tax rates and eliminated two major business taxes. PMO estimates that these changes alone cost the state $2.1 billion annually. This report should be required reading for the Commissioners and other lawmakers who want to understand why Ohio's budget is on shaky ground.

Lawmakers in the other 49 states should see Ohio's experience as a warning and not rely on the flawed hope that drastically reducing tax revenue will somehow jumpstart a state's economy. PMO says in their report to the Ohio Budget Planning and Management Commission, "the tax cuts have not proven to be the magic potion for Ohio’s economy. Key measures of economic performance show the opposite: Ohio’s economy has produced relatively fewer jobs, fewer manufacturing jobs, less overall output and lower personal income growth than the country as a whole since the tax overhaul was approved in June 2005. Ohio’s share of the nation’s jobs has shrunk since then from 4.06 percent to 3.87 percent."

We hope the Commission follows the recommendations noted in this report "that we revitalize the income tax, in particular for high earners, and restore revenue from business taxes to levels that existed prior to the 2005 tax changes. This would still leave the business share well below where it was 30 years ago. Ohio’s tax system should be overhauled to produce the revenue we need for public services and investments that support our economic success and maintain our quality of life."


Tax Breakthrough in Ohio


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The Ohio House and Senate passed a bill last night that would delay the last phase of a gradual income tax reduction enacted under the previous governor, which lowered the state's income tax rates by 20% over five years. The current governor, Ted Strickland, proposed this measure in the fall. Despite support from the Ohio Chamber of Commerce and other business groups, the fate of Governor Strickland's proposal was still up in the air until yesterday.

This stand-off made the education community pretty nervous. If a resolution wasn't reached by December 31, that could have meant harmful cuts to fill the state's $851 million shortfall.

The deal finally reached in the Senate will delay the income tax rate reductions and also create a pilot program that will ideally reduce the cost of state-funded construction programs.  Governor Strickland is expected to sign the legislation.

Of course, Ohio isn't out of the woods yet. As Policy Matters Ohio's Research Director, Zach Schiller, says, "While this fills the hole for now, we have a gigantic, yawning gap ahead in the next budget. Even just continuing this, we would have billions of dollars in additional cuts and revenue needed."


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.


New Ohio Report Highlights ITEP Analysis


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After some delay, Ohio Governor Ted Strickland is moving in the right direction regarding the need to raise revenue to fill the state's budget gap in a progressive way. The Governor has proposed temporarily repealing the last year of a five-year, 21 percent income-tax cut approved in 2005.

However, Policy Matters Ohio this week issued a report (utilizing analyses from ITEP) which urges policymakers to go even farther. The report makes the argument for repealing a year of the tax cuts and also reinstating the state's previous tax bracket of 7.5 percent for taxable income over $200,000. The report also urges lawmakers to consider introducing an 8.5 percent bracket for Ohioans with taxable income over $500,000.  According to ITEP estimates, this measure is estimated to increase revenues by $950 million in 2009 alone.

The paper makes a strong case for hiking taxes on upper-income taxpayers because "affluent Americans have benefited far more from economic growth in recent decades than those lower down on the income ladder...High-income Ohioans are most able to pay additional taxes -- and the revenue is badly needed." We couldn't have said it better ourselves.


Good News From the Buckeye State


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Last week we told you about a ruling from the Ohio Supreme Court that put a roadblock in front of Governor Ted Strickland's plan to add video slot machines at horseracing tracks. We also argued that this presented an opportunity to instead make the state's revenue stream fairer and more sustainable.

On Wednesday, Governor Strickland took a step toward doing just that. He proposed postponing the last phase of the income tax rate reductions passed under the previous governor, which lowered the state's income tax rates by 20% over five years.

Policy Matters Ohio has said that the tax cuts haven't lived up to their promise of improving economic conditions for ordinary Ohioans. While a complete repeal of the Taft tax cuts would be ideal, Governor Strickland's proposal comes as welcome news.


Ohio Supreme Court Weighs in on Two Key Revenue Issues


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Monday, the Ohio Supreme Court sided with a group that wants to put Governor Ted Strickland's proposal to install 17,500 slot machines at seven area horse tracks to a vote of the people in November 2010. This can't be welcome news to the Governor or his supporters who wanted to quickly implement the plan without such a vote and raise an estimated $933 million to balance the state's budget.

Despite the ruling, the Governor could order that the slot machines be placed anyway, but the political ramifications of moving before the vote could be unpredictable. The Akron Beacon Journal recently opined that the Court's ruling gives the Governor a second chance, and that "the opportunity the court has presented involves heading in a new direction, addressing the deficit in a simple and responsible way." 

There certainly are more responsible and progressive ways to address the deficit than relying on slots, a point that Policy Matters Ohio has been making for several years. For more dtails, see their timely report, A Step Toward Fiscal Balance: Options for Ohio's Income Tax.

In brighter news for Ohio's budget, the Ohio Supreme Court ruled last week that grocery stores were indeed responsible for paying the state's Commercial Activity Tax (CAT) despite language in the state's constitution which forbids taxing food.

The CAT functions like a gross receipts tax. The Ohio Grocers Association challenged the tax's constitutionality, arguing that the tax is, in fact, a tax on food because it is calculated from the gross receipts of grocery stores. But Justice Maureen O'Connor disagreed. She wrote in the majority opinion, "When the CAT's practical operation is considered, it becomes evident that it is what it purports to be: a permissible tax on the privilege of doing business, not a proscribed tax upon the sale or purchase of food."

The Court's ruling means that the cash-strapped state can keep $350 million in CAT revenue it has already collected from grocers and can expect another $370 million over the next two years.


Gubernatorial Hopefuls Talk about Income Tax Elimination Rather Than Real Solutions


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When someone demands that Congress abolish the federal income tax, we typically consider that a fairly extreme position. But then again, we don't run in the same circles as Georgia gubernatorial candidate John Oxendine, who feels that his peers in the anti-tax community are too wishy-washy if they don't also call for a repeal of state income taxes. 

He recently said, "I think it's very hypocritical for state officials to be running around bad mouthing the federal government for having an income tax when the state of Georgia does the same [thing]. As governor, I want to get rid of the state income tax." Oxendine thinks that states like Georgia must lead the way and eliminate their state income taxes.

In Georgia, inadequate tax revenue is a threat to justice -- quite literally, in the sense that the state is not able to carry out the basic administration of justice through its court system. As the Wall Street Journal reports, "the wheels of justice in Georgia are grinding more slowly each day" because "Cuts in spending for the state court system have led to fewer court dates available for hearings and trials, creating a growing backlog of cases."

Now, just three months into the state's fiscal year, already under-funded state agencies are being asked to cut another 5 percent from their 2010 budget. Now is likely not the time to eliminate the state's largest source of revenue.

Former Ohio Congressman John Kasich is running for Ohio Governor and is also promising to repeal the state's income tax. However, the severity of Ohio's budget situation has apparently provoked some caution. The Columbus Dispatch recently reported "Kasich also said that the state's dire budget situation would make it difficult to begin phasing out the state income tax in his first term." He apparently assumes that the state's current budget crisis is the last the state will ever face, freeing it to abolish a major source of revenue in the future.

Of course, abolishing a state's income tax is a terrible idea even in times of surplus because income taxes are fairer than any other type of revenue source. A recent ITEP report makes this point in analyzing a recent proposal in Missouri to eliminate corporate and individual income taxes and replace the revenue with an enormously expanded sales tax. The Missouri proposal (which was not enacted) would have effectively slashed state taxes for wealthy residents while sending the bill to working families who spend most of their income purchasing necessities.  


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.


Ohio Report Highlights Need for State EITC


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A new report from Policy Matters Ohio offers a wealth of information on the benefits of enacting a state level EITC. Over twenty states already offer such a credit, though as the report points out, Ohio policymakers in recent years have instead focused on providing "extensive reductions in tax payments for higher-earning taxpayers." The report includes data on the use of the federal EITC in Ohio, data on the breakdown by district of benefits from a state EITC, and a distributional analysis from ITEP.


Making the News: Progressive Changes to Ohio, Minnesota, and Montana's Income Tax


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We've been lamenting for the past several years about the folly of Ohio's former Governor Bob Taft pushing through a phased-in 21 percent cut in income tax rates. Of course, the tax reductions made Ohio's overall tax structure less fair. Policy Matters Ohio recently released a report detailing the impact of the Taft tax cuts. Analysts there found that "key economic trends continued to go in the wrong direction after the tax overhaul." Despite this evidence, current Governor Ted Strickland has vowed to continue Taft's tax cutting legacy. But there is some hope brewing in the Buckeye state.

Representative Michael Skindell has called for freezing the phase-in of the Taft tax cuts for the wealthiest Ohioans. It's estimated that adopting Skindell's recommendation would bring in over $200 million and it's certainly a step toward making Ohio's income tax more progressive.

For tax justice advocates in Minnesota, it's a bleak time. Governor Tim Pawlenty is vehemently anti-tax, and his 21st Century Tax Reform Commission has largely followed his lead with recommendations to eliminate the state's corporate income tax and enact several investment tax credits, though in fairness the Commission does recommend two revenue raising options: expanding the sales tax base and increasing cigarette taxes. It's too bad that progressive revenue raising options weren't mentioned. It's hardly a surprise that some would like to see income tax cuts for the wealthiest Minnesotans preserved. But Wayne Cox at Minnesotans for Tax Justice argues against tax cuts in a recent commentary, correctly arguing that increasing the progressivity of Minnesota's tax structure would not harm the state's business climate. He warns that "the alternative is carrying out an even riskier plan that trims muscle, not fat."

There are more good proposals on improving the progressivity of state income taxes. Next we turn to Montana where Representative Dave McAlpin is trumpeting a "fix" to the state's 2003 major tax revision that reduced the top tax rate and bracket. State estimates were that the tax changes were supposed to cost $26 million a year, but in reality they actually cost the state $100 million. His legislation would introduce a new top income tax rate of 7.9 percent on Montanans with taxable incomes over $250,000, and help to right the wrongs of the 2003 revisions. If Rep. McAlpin's bill is adopted, the state could see $26 million in additional revenue and improve the progressivity of Montana's tax structure.

For more on the importance of progressive income taxes read ITEP's policy brief on this topic.


How Ohio's Former Governor Taft Turned the Business Tax into Swiss Cheese


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In 2005, Ohio's former Governor Bob Taft signed sweeping tax legislation that phased out the state's Corporate Franchise Tax, the state's corporate income tax, and the Tangible Personal Property Tax, a local tax on things like machinery and equipment, and replaced all these important revenue generators with the Commercial Activity Tax (CAT). Four years later, the CAT is one of the reasons why Ohio is facing an enormous budget deficit and the tax itself has come to resemble swiss cheese.

Proponents of the CAT, a gross receipts tax, said that it would make Ohio's business climate less burdensome and remove pesky exemptions and deductions that benefit select Ohio companies with access to legislators and lobbyists. But a report released this week by Policy Matters Ohio explains that the CAT is one reason why the state faces an enormous budget shortfall and that the low-rate, broad-based tax that its advocates promised has not come to fruition. Instead, the CAT has become a victim of lawmakers eager to insert special provisions and deductions, just as happened with the taxes that it replaced. The paper offers specific recommendations for how Ohio's business taxes could be improved. Let Ohio's experience be a lesson to other states interested in business tax reform.


New Report: Tax Cuts Don't Improve Ohio's Economy


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In 2005, the Ohio Legislature adopted, and then-Governor Taft signed into law, House Bill 66, a sweeping change to the personal income tax that reduced tax rates "across the board" by twenty-one percent over five years. The cuts were passed with the promise that they would improve economic conditions for Ohioans and make the state more competitive both nationally and internationally. How did the tax cuts perform? Did Ohio see even miniscule growth in key economic indicators?

According to Policy Matters Ohio the answer is simply no.

In a report released this week, Policy Matters Ohio writes, "The results are very clear. Even before the current economic downturn, Ohio was not keeping pace with the nation. Key economic trends continued to go in the wrong direction after the tax overhaul. The report finds unmistakable evidence that the state's relative economic decline accelerated since H.B. 66 was passed." In terms of important economic indicators including economic output, productivity, manufacturing and income, Ohioans haven't enjoyed any of the promises that tax cuts were said to provide.

The enormous tax cuts have already taken millions of dollars away from government's ability to do its work and the state has little to show for its efforts. In fact, according to the report, the state joins the majority of others in facing an enormous budget shortfall of between $4.7 billion and $7.3 billion for the next budget biennium and the gap between services available and those needed is actually widening.

Despite the drastic mistake policymakers made when passing these cuts, it's not too late to undo the mess. Governor Strickland and legislators would be wise to follow the recommendations of Policy Matters Ohio and revise the current income tax structure, introduce an EITC and shore up the state's business taxes.


Buckeye State: Solutions Already Available


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Ohio is one of many states that are facing a budget shortfall. One reason for the state's budget woes is the permanent income tax cuts championed by former Governor Bob Taft. The drastic cuts amount to an across the board twenty-one percent reduction in income tax rates over five years. The last round of these cuts is scheduled to take place in 2009.

Earlier this year, Policy Matters Ohio released A Step Towards Fiscal Balance: Options for Ohio's Income Tax.The report cites ITEP data and offers realistic alternatives to policymakers interested in raising revenue to fill the budget gap instead of relying on painful reductions in services. For example, freezing income tax rates at 2008 levels is offered as an option that should not be dismissed.

Momentum is building for these sound solutions. This week an Akron Beacon Journal editorial cited this report saying that it, "offered the start of an answer for a state lacking the resources to cover basic services."


State Budget Math: Economic Downturns + Enormous Tax Cuts = Painful Spending Cuts


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Like many states, Ohio currently faces a serious budget deficit, one that has prompted the administration of Governor Ted Strickland to announce plans to cut agency budgets by more than $400 million for the FY08-09 biennium. The consequences of those cuts are already being felt around the state, but, as a recent column from Joe Hallett of the Columbus Dispatch implies, they shouldn't be entirely unexpected. The combination of recent income and property tax cuts and the only-partial replacement of Ohio's corporate income tax with a new commercial activities tax (CAT) will mean that the state will lose in excess of $10 billion in tax revenue between 2006 and 2010, making spending cuts all but inevitable.

As Hallett notes, "Tax cuts are easy to love. But the reality is that taxes pay for services citizens want and need." This latestreport from Policy Matters Ohio details the substantial revenue losses Ohio will experience as a result of reductions in personal income tax rates and explains how heavily those reductions are tilted in favor of the rich.


States React to Economic Turmoil


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

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

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

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

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

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

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


Opportunity for Ohio to Save Money


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Newly elected Ohio Governor Ted Strickland has proposed expanding the state's means-tested homestead exemption by eliminating the exemption's current income limits. This year, the homestead exemption is only available for seniors and the disabled with incomes less than $27,000; the benefit of the exemption decreases as incomes grow closer to $27,000. Governor Strickland's plan would provide a blanket property tax exemption for the first $25,000 of a property's market value for elderly and disabled homeowners at all income levels. This week, Policy Matters Ohio and the Institute on Taxation and Economic Policy teamed up to analyze the impact of the Governor's proposal and also to offer less expensive alternatives that provide targeted tax relief - instead of simply providing an exemption that goes to everyone regardless of their need. By targeting property tax relief to select homeowners, Ohio could save $118 million annually. To read the full Policy Matters Ohio report click here.


Grossly Overrated


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Gross Receipts Tax Is Not a Cure-All for the States

Over the past few years, both Texas and Ohio have enacted major changes to their tax systems, choosing to replace existing business taxes with taxes based on companies' total receipts. This takes the form of a "margins" tax in Texas and the "commercial activity" tax in Ohio. Two other states, Illinois and Michigan, are also now considering whether to follow suit by implementing taxes based, at least in part, on gross receipts.

IL Gov Won't Raise Taxes on People, Just Taxes That Are Passed onto People

Despite Illinois Governor Rod Blagojevich coming before the Illinois House in a rare all-day hearing to promote his plan for implementing a gross receipts tax (GRT) his proposal was unanimously defeated by the Illinois House in a 107-0 vote. The Governor's proposal barely passed the Senate Executive Committee. Analyses by the Center on Budget and Policy Priorities and the Institute on Taxation and Economic Policy suggest that gross receipts taxes are generally passed on by businesses to consumers. The Governor, however, said in his address to the House, "I will not raise taxes on people. I won't do it today. I won't do it tomorrow. I won't do it next week, next month, next year." Ironically, the Governor also said that he would oppose any income or sales tax hike because "It's regressive, and people already are paying to much" but many experts think that the GRT is regressive and hits low- and middle-income people hardest.

Eliminating Revenue Source + No Plan to Replace Revenue = Government Shutdown

Since voting last year to repeal the state's Single Business Tax (SBT), which is set to expire on December 31, Michigan lawmakers have been in almost continuous debate regarding ways to replace this vital revenue source. Fearing a government shutdown, the Michigan House and Senate have passed very different tax proposals. The Senate-approved plan would not completely replace the revenue lost from the SBT, while the Governor-supported House plan will raise the same amount of revenue as the current SBT, but would allow for large tax credits for Michigan-based businesses. The House and Senate proposals both have a business income tax component, but the Senate plan relies more heavily on a gross receipts tax element. In the coming weeks, compromise is needed before Governor Granholm has the opportunity to sign this important yet contentious legislation.

Ignore Those Lobbyists Boring Holes into the Gross Receipts Tax

Part of the allure of gross receipts taxes - to hear proponents like Governor Blagojevich tell it, anyway - is that they don't have many of the same loopholes as corporate income taxes and will expand the base of economic activity and economic actors subject to taxation. The reality may prove quite different, however. Gross receipts type taxes have scarcely settled onto the pages of law books in Texas and Ohio, yet businesses in both states have already begun clamoring for - and will soon start receiving - concessions and special treatment. In Texas, the House of Representatives last week approved a bill that would double the exemption for small businesses under the margins tax, would lower the taxes paid by multistate financial services companies under the tax, and would attempt to prevent Sprint Nextel from passing the tax along to its customers.

In Ohio, a provision of the commercial activities tax designed to raise tax rates automatically - should the total amount of revenue generated by the tax begin to fall - will soon be eliminated, thus leaving the state without an important stopgap. These changes may not have a deleterious impact on the fiscal situation in either Texas or Ohio. The changes being debated in Texas would be offset by other revenue measures, for instance. Still, they should give policymakers in Michigan and Illinois pause. What they enact now may ultimately look quite different from what they envision.


EITC Expansion: A Good Idea in Every State


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


Flat Tax Plan Falls Flat in Ohio


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This week Ohio Gubernatorial candidate Ken Blackwell unveiled a plan to introduce a flat rate income tax. So far Blackwell and his staff are speaking only in vague terms about the proposal. However, a new Policy Matters Ohio report delves into the harmful repercussions of a similar plan. As presented, this fiscally irresponsible proposal would raise taxes on the middle class and cut taxes on the wealthiest Ohioans while simultaneously creating a huge budget hole.


Election Year Gimmicks in the Buckeye State


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In a move that highlights election year gimmicks, Ohio legislators sitting on the Ways and Means Committee voted 17 to 1 to accelerate the phasing in of 21% across the board income tax cuts. If this plan is passed through the legislature these regressive and expensive tax cuts will be fully phased in by 2008 instead of 2009 as currently scheduled. The regressive cuts do little to help low and middle income families, and speeding up these tax cuts will leave an even larger hole in the state's budget. For more on the regressive nature of these tax cuts, read this release by Policy Matters Ohio.


TABOR in the States: Successes and Failures


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Advocates of Colorado-style "TABOR" tax and spending limits are seeing mixed success in efforts to get TABOR limits on the November ballot.

Maine voters will have their say on a TABOR proposal that the Portland Press Herald sees as "the wrong approach."

But a restrictive Ohio proposal will likely be pulled from the November ballot. Meanwhile, a terrific Denver Post editorial argues that their TABOR law still hurts the state's economy-- even after being pared back by voters last fall.

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