Unfortunately, Rhode Island lawmakers rejected Governor Lincoln Chafee’s balanced and reform-minded approach to closing the state’s budget shortfall for next fiscal year.

Senate members gave final approval to the House’s revised spending plan this week, both chambers choosing significant spending cuts over the governor’s sensible tax package.  Governor Chafee proposed closing half of the budget gap with a $160 million comprehensive sales tax reform package that included adding dozens of services to the state’s sales tax base, lowering the state sales tax rate from seven to six percent, and taxing more than 40 currently exempted goods at a one percent rate.  Chafee also supported mandatory combined reporting which would have helped level the corporate tax playing field for in-state businesses.

Caving to special interests who lined up in April to denounce the Governor’s plan, the final budget only adds five items to the sales tax base including non-prescription drugs and sightseeing tour packages.  Combined with a few other minor tax and fee changes, the final budget raises only $30 million in new revenue and reduces spending by more than $150 million.  According to the Providence Journal, more than half of the budget cuts impact programs for the poor, elderly, disabled and homeless.

Photo via J. Stephen Conn Creative Commons Attribution License 2.0

Last year, Rhode Island’s lawmakers very wisely chose to close a large number of loopholes in the state’s Swiss cheese tax code.  Now Ocean State lawmakers have an opportunity to shore up that newly reformed code against the inevitable flood of special interest tax breaks that’s sure to come.

Read the article.

Last week, ITEP testified in front of the Rhode Island House Finance committee on two bills.  One would close down some of the most egregious tax avoidance schemes available to multi-state corporations by mandating “combined reporting.”  The other would ramp up the level of scrutiny applied to Rhode Island’s tax code by requiring that new tax breaks (or “tax expenditures”) be created with a seven-year expiration date, and a specific plan for gathering vital performance data.

The first bill, H5738, would level the playing field between large corporations and mom-and-pop businesses by greatly reducing the ability of multi-state corporations to avoid taxes by artificially shifting income (on paper) to low-tax or no-tax states.  Specifically, H5738 would mandate what’s known as combined reporting, an accounting procedure that’s already required in a majority of states with corporate taxes or similar taxes. 

As ITEP points out in its testimony, combined reporting is already very common in New England.  Massachusetts, New York, and Vermont were each part of a larger wave of states that recently implemented this reform, while two other nearby states—Maine and New Hampshire—have required combined reporting for over two decades.

The other bill, H5737, would require that legislation creating a new tax break include four things: a statement of purpose, detailed performance indicators, data collection requirements, and a provision forcing the tax break to sunset within seven years.  According to ITEP’s testimony, this bill combines a variety of tax expenditure best practices already in use elsewhere around the country. 

For example, Washington State is particularly good about analyzing its tax expenditures in order to judge their efficiency and effectiveness.  Oregon and Nevada, on the other hand, now make use of sunset provisions in order to ensure that tax expenditures are not allowed to continue indefinitely without reconsideration by elected officials.  H5737 combines these two approaches, and in doing so has the potential to produce a framework for scrutinizing tax expenditures more closely than in any other state.

Read ITEP’s testimony on combined reporting in Rhode Island.

Read ITEP’s testimony on tax expenditure procedural reform in Rhode Island.

Rhode Island remains one of a handful of states seriously considering revenue increases to help address significant state budget shortfalls. 

In March, Governor Lincoln Chafee put forth a plan that would expand the state’s sales tax base to several dozen services currently not taxed and lower the state sales tax rate from 7 to 6 percent.  He also proposed a new 1 percent sales tax on some currently exempted goods and a variety of changes to business taxes.  Altogether, his revenue plan would have closed around half of a $331 million budget gap.

At legislative hearings in April, dozens of special interests lined up in opposition to Chafee’s sales tax expansion plan, which has since stalled in the legislature. 

Last week, an alternative revenue-raising plan emerged.  Representative Larry Valencia filed a bill for a temporary personal income tax surcharge of 4.1 percent on the state’s wealthiest residents, which would raise around $130 million. 

Rhode Island’s top marginal tax rate of 5.99 percent currently applies to taxable income of $125,000 and above for all taxpayers.  Under Rep. Valencia’s plan, a fourth bracket would be created.  Married couples with taxable income of $250,000 and single people with taxable income more than $200,000 would pay 10.09 percent on their incomes above those amounts.  

An Institute on Taxation and Economic Policy analysis of the proposal found that only 2 percent of the state’s taxpayers would be impacted by the tax increase.  More than 90 percent of the increase would be paid by the wealthiest 1 percent of Rhode Islanders, who have average incomes of close to $1 million.

Representative Valencia considers his bill a reversal or ‘recapture’ of the federal tax cut wealthy Rhode Islanders will receive as a result of the extension of the Bush tax cuts Congress enacted last December.

Will Rhode Island be the next state to allow special interests to prevent it from bringing its sales tax into the 21st century? 

Despite near-universal agreement among economists on the wisdom of broadening sales tax bases and dozens of state tax commissions recommending such a move, state lawmakers across the country have crumbled under the pressure from service providers who do not believe their products should have to compete on the same playing field as goods. 

As a result, no state in recent years has succeeded in implementing a comprehensive sales tax base broadening plan.  The political ramifications of taking on previously untaxed businesses may make some policymakers wary.

This must change. As states shift from manufacturing economies to service economies, it's essential that tax structures change too.

Rhode Island Governor Lincoln Chafee included an expansive sales tax modernization plan in his budget proposal this year which would broaden Rhode Island’s sales tax base to include dozens of services, lower the general state sales tax rate, add a one percent tax on most currently exempted goods, and raise additional revenue to help mitigate budget cuts. 

Governor Chafee is one of only a handful of governors willing to protect vital public services by supporting new revenues as part of a balanced budget plan. He is also one of just two governors willing to consider making long-term and necessary improvements to his state’s sales tax rather than just simply raising the rate.

Rhode Island House and Senate Finance members took up the governor’s proposal this week.  More than 90 individuals spoke against the plan at the House Finance Committee hearing on Wednesday with hundreds more on site to voice their opposition.  As to be expected, everyone from the auto mechanics to landscapers to salon and bowling alley owners lined the halls to say, “Don’t tax me.” 

ITEP submitted testimony to both committees in support of the modernization proposal.

Democratic Representative Jan Malik, who asked business owners during the hearing why they should not be taxed while other businesses are, said “I feel their pain… But I understand what the governor is trying to do here. Why is it fair for my business to get taxed [Malik owns a liquor store] but not your business? These are the questions that have to be answered. We all have to share the pain in this state.” 

Kate Brock of Ocean State Action, one of the few to speak in favor of the governor’s plan, asked why the state taxes lawnmowers but not landscapers, and nail polish but not nail salons. She said, “It is illogical to tax a good but not a service that results in the same outcome.”

It looks like the special interests triumphed at least in the short term in Rhode Island. House Speaker Gordon Fox said that the majority of house members will not be supporting the governor’s plan in its current form, but will work with him to come up a viable alternative.  Senate President M. Teresa Paiva Weed also announced that the Senate is working on alternative ways to address the state’s budget shortfall.  Neither would say that changes to the sales tax are altogether off the table. 

Governor Chafee said he was open to hearing suggestions from the House and Senate, but reasserted the need to update the sales tax to “stabilize the state’s revenues during downturns in the economy and to better align it with modern-day customer’s spending habits.”

Many lawmakers are not only rejecting the governor’s sales tax overhaul proposal, but are also objecting to the idea of raising revenue at all to address the state’s $300 million budget gap.  One of the "alternatives" will likely be more cuts to education and other core services.

If there’s one valid criticism of the proposal, it’s that even though taxing services is generally less regressive than a sales tax rate increase, it remains a regressive tax no matter how broad the base. The governor’s plan therefore asks more of low-income households than of the wealthiest in the state. 

Coupling the base expansion with a fully refundable state Earned Income Tax Credit would ensure low-income households are not disproportionately impacted by the governor’s (otherwise sensible) sales tax modernization proposal.

Rhode Island’s sales tax base is one of the narrowest in the country, largely limited to tangible goods and even many of those are exempted from taxation.  As currently structured, Rhode Island’s general sales tax is unsustainable, inadequate, and unfair. Governor Chafee’s proposed reforms would take important steps towards repairing each of these problems, and in particular would help stabilize revenue.

If Rhode Island (or any state for that matter) wants to continue relying on a sales tax as a substantial and reliable revenue source, lawmakers are going to have to take a stand against the service industry sooner rather than later.

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

Read the ITEP brief.

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

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

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

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

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

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

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

This week, Rhode Island Governor Lincoln Chafee joined the very short list of governors supporting a balanced approach to addressing significant revenue shortfalls.  Like governors in Connecticut, Minnesota, Illinois, Hawaii, and North Carolina, Chafee included new revenue in his budget proposal, which will help mitigate the impact of otherwise devastating spending cuts. 

Significant changes to Rhode Island’s sales tax would raise enough revenue to close roughly half of the state’s $331 million budget gap.  Chafee proposes a two-tier sales tax rate structure, a 6 percent rate on most goods and some services and a 1 percent rate on certain additional items currently not taxed. 

The 6 percent sales tax would be a broader version of the existing tax. Chafee would expand the base of the sales tax to include an array of services currently not taxed as well as some goods that are legislatively exempt from the sales tax, including newspapers, live entertainment, car washes, and dry cleaning services.  The main sales tax rate would be lowered from 7 percent to 6 percent and the combined change would raise around $78 million for next fiscal year.

Chafee’s plan would also apply a new 1 percent sales tax to more than 40 goods currently exempt from the sales tax including clothing, boats, flags and farm equipment. 

Under the plan, food, prescription drugs, durable medical products and gasoline would continue to be exempt from state sales taxes. 

Chafee’s budget proposal also included an overhaul of business taxation, including enacting combined reporting, phasing down the corporate income tax rate from 9 to 7.5 percent, and restructuring the corporate minimum tax so that corporations pay differing amounts based on their total sales in Rhode Island.  These combined changes would result in a net revenue loss of $14.5 million once fully implemented in FY16, but Chafee champions the package as one that will make the state more business-friendly and competitive with neighboring states.

Kate Brewster, Executive Director of the Poverty Institute, commented on the governor’s budget proposal to GoLocalProv: “We are pleased that our Governor has taken a balanced approach to balancing the budget that includes revenue raising proposals rather than relying on a cuts-only strategy… His proposals to close corporate loopholes through combined reporting and bring our sales tax into the 21st century are responsible tax policies.”

While we agree Governor Chafee should be applauded for embracing a balanced approach to the budget that includes important tax modernization changes, relying solely on the sales tax to raise revenue inevitably means that the state’s poorest residents will shoulder the largest share of the tax increase.  An ITEP analysis found that the bottom 20 percent of taxpayers will pay on average an additional 0.8 percent of their incomes in sales taxes while the top 1 percent on average will only pay an additional 0.2 percent. 

In order to lessen the impact of the sales tax changes on low- and moderate-income households, Rhode Island lawmakers should consider increasing their state Earned Income Tax Credit (EITC).  Rhode Island currently allows for a 15 percent refundable EITC or an optional 25 percent non-refundable EITC.  According to ITEP analysis, eliminating the optional non-refundable EITC and increasing the refundable credit to 25 percent (in other words, all eligible taxpayers would receive a refundable EITC that is 25 percent of their federal credit), would offset the impact of the sales tax changes on the poorest 40 percent of households.  This change would cost an estimated $26 million, which could be paid for by scaling back the governor’s corporate income tax rate reduction.

It is also curious that Governor Chafee chose a two-tiered sales tax rate structure rather than simply applying his entire list of currently exempt items to the higher sales tax rate.  If Rhode Island had one sales tax base, the main sales tax rate could be reduced even lower than 6 percent while still raising a significant amount of revenue.

CTJ’s critique of claims that wealthy New Yorkers are fleeing the state’s so-called “millionaires’ tax” was publicized by two media outlets this week.  Similar claims being made in Connecticut and Rhode Island were also shot down in the media.

In last week’s Digest, CTJ pointed out numerous distortions in the Partnership for New York’s claims that wealthy New Yorkers were fleeing as a result of a recent tax increase on high-income earners.  (The Fiscal Policy Institute also issued a detailed rebuttal). 

For starters, the Partnership erroneously claimed that a “9.4 percent decrease in the state's taxpayers who earn $1 million or more” occurred between 2007 and 2009.  But the data it used (but failed to cite) actually show a 9.4% drop in New Yorkers with wealth exceeding $1 million.  Since New York’s income tax obviously applies to income — not wealth — this is an important distinction. 

The Partnership has since revised its report to correct this mistake, but it continues to ignore a much more important one: according to the same dataset, every state in the country saw its number of wealthy taxpayers decline between 2007 and 2009 (due to the recession) and 43 states experienced declines exceeding New York’s 9.4% drop.  In fact, Phoenix International – the firm that released the data – made very clear in its 2009 press release that the U.S. as a whole saw its millionaire population decline by nearly 14%.  So it’s a little odd, to say the least, that the Partnership would interpret New York’s 9.4% rate of decline as providing any evidence that could be useful in its crusade against taxing high-income earners.

Fortunately, Robert Frank at the Wall Street Journal’s Wealth Report quickly publicized CTJ’s analysis, and labeled the Partnership’s migration claims a “myth.”  Frank also followed up with the Partnership’s CEO, who when confronted with the data problems described above retreated by saying: “It’s a very difficult thing to measure… We get a lot of it anecdotally.”

Crain’s New York Business similarly picked up on the CTJ analysis, ultimately declaring that “the nationwide decline suggests that New York lost millionaires primarily because New Yorkers made less money and saw their property values drop during the recession, not because they moved to other states.” 

Crain’s does err, however, in claiming that the data might partially reflect the fact that “New Yorkers could have left the state in mid-2009 and filed 2009 tax returns as residents of their new states.”  The 2009 data in question was actually released in early July 2009, and was left unchanged in the September 2010 update.  It is exceedingly unlikely that a dataset released just two months after the May 2009 enactment of New York’s “millionaires’ tax” could have captured the effects of any tax-induced wealth flight.

In addition to beating back ridiculous claims in New York, the WSJ’s Wealth Report also recently debunked similar claims being made in Connecticut by the Connecticut Policy Institute.  The story is a familiar one:

“How do we know why or even if high-earners moved out? It is possible that some previously high earners simply fell below the $1 million-dollar-a-year mark because their incomes fluctuated. In the land of hedge funds, this seems to be just as likely as people moving to Florida. It also is unclear whether the population of high-earners in Connecticut is aging and simply moved to warmer, more golf-friendly climes...The report doesn’t break down the destinations. Still, it says many go to Florida and New York. Florida, of course, has no state income tax. But New York state has a top tax rate of 8.97% and New York City’s top rate is 3.876%. Combined that is nearly twice as high as Connecticut’s tax. If the rich decide where to live based on taxes, why would they be moving to a higher-tax city? Perhaps because the quality of their life matters as much or more than the quantity of their taxes—up to a point, of course.”

Finally, Rhode Island claims of wealth flight ran into similar resistance in the media when Politifact took a lengthy look at the Ocean State Policy Research Institute’s (OSPRI) migration claims, and ultimately found them to be “false.” 

OSPRI’s report attempts to show that “the most significant driver of out-migration [from Rhode Island] is the estate tax.”  But as Politifact notes, “IRS data cited by OSPRI shows that Florida was increasingly attractive to Rhode Island taxpayers in the years when it had an estate tax. The flow slacked off significantly when the [Florida estate] tax was eliminated. That runs contrary to the trend OSPRI claims to have proven.” 

Moreover, Politifact points out that even the conservative Tax Foundation — hardly a big fan of the estate tax — hasn’t jumped onto the migration bandwagon: “Kail Padquitt, staff economist for The Tax Foundation … said he hasn’t seen any proof that the prospect of paying estate taxes drives people to move.”  We certainly haven’t either.

There’s a definite trend forming among conservative ideologues when it comes to exaggerating the effect of taxes on individuals’ decisions about where to live.  Maryland, New Jersey, and Oregon have all seen bogus claims of this type arise in the last year or two, and Illinois’ recent tax increases have sparked some empty chatter of a similar type.  Unfortunately, Rhode Island can now be added to that list as well.

The Ocean State Policy Institute (OSPI) recently released a report claiming that the estate tax is driving affluent Rhode Islanders from the state.  As Wall Street Journal blogger Robert Frank points out, however, there is very little evidence in the report to support this claim.

The most cited rebuttal to OSPI’s report was issued by the Rhode Island Poverty Institute.  In it, the Poverty Institute starts by making one obvious point that you’d never guess from reading the OSPI report alone: Both the state’s overall population, and the number of wealthy taxpayers contained within its borders, have grown in the last decade.

Moreover, the Poverty Institute points out that “only a handful of Rhode Island taxpayers will ever have an estate that is actually subject to an estate tax, making it highly unlikely that the average Rhode Islander moving to another state is doing so for this reason.”  In fact, Massachusetts, which also has an estate tax, is the favorite destination of outgoing Rhode Islanders.  Admittedly, a sizeable number of Rhode Islanders do move to Florida (which lacks an estate tax), but the same can be said for New Hampshire residents.  And New Hampshire, like Florida, has neither an estate tax nor a personal income tax.

Ultimately, any reasonable person is going to think about a lot more than their tax bill when deciding where to live.  Just don’t expect this fact to be acknowledged by the anti-tax crowd anytime soon.

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

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

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

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

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

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

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.

On Tuesday, voters in 37 states went to the polls to vote for Governor. The results of nine gubernatorial races provide a small glimmer of hope for sensible, balanced, and progressive approaches to addressing the next round of state budget shortfalls.  Two candidates campaigned on raising taxes, four incumbents were re-elected after implementing new taxes to close previous budget gaps, and three governors-elect won races against opponents who sought to dismantle progressive tax structures.

As for those governors-elect who have rejected revenue increases, the next four years will be quite a challenge. In Texas, Governor Rick Perry will face a projected two-year $21 billion budget shortfall.  Likewise in Pennsylvania, Governor-elect Tom Corbett is staring at a $5 billion budget deficit next year.  Faced with these problems, this new crop of state executives can take either a dogmatic cuts-only approach or they can opt for a more flexible approach that allows for raising new revenue by closing tax loopholes or implementing other reforms.

Candidates Who Campaigned on Raising Taxes

In Minnesota, Mark Dayton ran for governor on a progressive tax platform, calling taxes “the lubricant for the machinery of our democracy." He has proposed increasing taxes on the wealthiest 5 percent of Minnesotans to raise revenue to address the state’s continuing budget woes and to improve tax fairness.  Although the Minnesota gubernatorial race remains undecided and Dayton may face a recount, Dayton’s small lead demonstrates the support he has received for purposing such a beneficial progressive tax plan.

In Rhode Island, Lincoln Chafee won a three-way race against Republican John Robitaille and Democrat Frank Caprio.  Like Dayton, Chafee championed tax increases aimed at refilling the state’s depleted coffers.  During the campaign Chafee, whose father lost a Rhode Island gubernatorial race 42 years ago after supporting a state income tax, proposed a one percent sales tax on previously exempted items.  Though more likely to adversely affect low-income families than Dayton’s plan, Chafee deserves credit for supporting a moderate tax plan in this cycle of anti-government sentiment.

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

Besides Dayton and Chafee, three other winners on Tuesday night defeated opponents who sought to drastically cut taxes and reduce spending and government services.  In California, Jerry Brown defeated Meg Whitman, who supported a regressive tax cut that would only benefit taxpayers who claim capital gains income. 

In New York, Andrew Cuomo defeated Carl Paladino, who promised to cut taxes by 10 percent and spending by 20 percent in his first year.  Unfortunately, however, Andrew Cuomo has not fully distanced himself from Paladino’s vilification of taxes.  Instead, Cuomo, along with eleven newly elected Republican Governors, has pledged to freeze taxes, vetoing any hike that comes his way.  This absolutist approach does nothing to alleviate the enormous deficit problems faced by each of these states.

In Colorado, Democrat John Hickenlooper defeated Republican Dan Maes and Independent Tom Tancredo.  Maes, who lost voter support after the Republican primary, promised to lower income taxes and cut spending.  As Maes’ popularity decreased, Tom Tancredo began to gain steam, eventually garnering around 37% of the vote.  In their final debate Tancredo proposed removal of “any tax rebates or incentives.”  For his own part, Hickenlooper never committed to raising or lowering taxes, but did call for a "voluntary" tax on the oil and gas industry to fund higher education.

Incumbents Re-elected After Raising Taxes

The Governors of Maryland, Illinois, Arkansas, and Massachusetts pulled off victories after enacting or supporting new taxes during their previous terms. 

In Maryland, Martin O’Malley, who defeated former Governor Robert Ehrlich, oversaw tax increases in his first term to fix a $1.7 billion deficit.  O’Malley’s plan relied in part on progressive tax increases, including a temporary increase in the income tax rate paid by millionaires. While Republicans criticized the tax increases, the citizens of Maryland approved enough to re-elect O’Malley with over 55% of the vote.

In Illinois, Governor Pat Quinn is the likely winner of a tight race against Republican challenger Bill Brady.  Since becoming Governor in the wake of former Governor Blagojevich’s scandal, Pat Quinn has repeatedly proposed to raise income tax rates to fill budget holes.  Quinn would use the revenue raised to fund education.  Meanwhile Brady, Quinn’s opponent, championed tax cuts that included repealing the sales tax on gasoline and eliminating the inheritance tax.

In Arkansas, Republican Jim Keet was soundly defeated by Governor Mike Beebe in his re-election bid.  During his first term, Beebe implemented a significant hike in tobacco sales taxes, raising the tax on a pack of cigarettes by 56 cents.  The increase was designed to increase revenues by $86 million to fund statewide trauma systems and expanded health care coverage for children.

In Massachusetts, Deval Patrick was re-elected Governor after signing last year’s budget that included an increase in the sales tax rate. Patrick also showed interest in improving fairness in Massachusetts’ tax code. Bay State voters rewarded Patrick for his tough decisions by handily re-electing him.

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.

In an attempt to win votes, lots of gubernatorial candidates have been promising lots of tax cuts — despite the fact that many of their states face very bleak budgetary outlooks.  Here are examples from five states:

Rhode Island — John Robitaille won the Republican nomination for governor this past Tuesday on a platform that includes amending the state constitution to cap property tax increases at 2.5 percent per year.   Massachusetts's experience with a similar cap indicates that this proposal could have a very negative impact on local government services.

Wisconsin — Scott Walker was the winner of Wisconsin's Republican primary on Tuesday.  Walker is also running on an anti-tax platform, including a property tax "freeze" that would only allow revenue growth to the extent that new construction occurs.  Democrat Tom Barrett is also running on a campaign that heavily emphasizes cutting government spending, and enacting so-called "targeted" business tax cuts to create jobs.

Michigan — Republican gubernatorial candidate Rick Snyder's proposal to cut taxes on Michigan corporations by $1.5 billion received some attention in the media this week.  Specifically, Snyder would repeal the Michigan Business Tax and replace it with a much smaller corporate tax.  Recent polling indicates that Snyder holds a substantial lead over Democrat Virg Bernero.

Florida — Some of the most absurd tax proposals we've seen in a gubernatorial race this year have come from Florida Republican Rick Scott.  In his very first year in office, Scott wants to slash both school property taxes and the corporate income tax — to the tune of $2.1 billion total in tax cuts.  Unspecified cuts in government spending would then be made to keep Florida's budget in balance.  After this, Scott claims he would focus his energy on eliminating Florida's corporate income tax entirely. Thankfully, Democrat Alex Sink is opposed to cutting the corporate income tax, though she has jumped on the job-creation tax credit bandwagon.

Maine — Both Democrat Libby Mitchell and Republican Paul LePage are running on anti-tax platforms in Maine.  Neither is open to the idea of using tax increases to balance the state's budget.  Mitchell claims that "Maine's income tax is too high and I will continue the effort to lower it."  LePage has stated that "Reducing the overall tax burden for all Maine citizens and small businesses is my vision for tax reform."