State Tax Issues News


Putting a Face to the Numbers


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For years we’ve been telling you about the various tax cuts that have been signed into law by Ohio governors. Governor Bob Taft (who was elected in 1999) pushed through (among other tax changes) a 21 percent across the board income tax reduction. Those tax cuts were allowed to continue under Governor Ted Strickland. Current Governor John Kasich has pushed through his own series of tax cuts.  We’ve written about and crunched numbers on these flawed plans often. Look here,hereherehere and here.

The numbers are certainly compelling. For example, ITEP found that since 2004 the various tax changes signed into law cost 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.

But the purpose of this post isn’t to rehash these dreadful numbers but to urge readers to check out the recent Rolling Stone piece: Where the Tea Party Rules. Here you’ll read about real families living in Lima, Ohio who are just trying to get by. These families put a real face to ITEP’s numbers. (Added bonus: an ITEP analysis is referred to in the piece!)


Georgians Set to Vote on Income Tax Straightjacket


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By Wesley Tharpe, Policy Analyst
Georgia Budget and Policy Institute (GBPI)

Georgians will vote Nov. 4 whether to permanently enshrine the state’s top income tax rate of 6 percent in the state constitution.

The so-called “tax-cap” amendment sounds American as apple pie. No one looks forward to the day their income tax bill comes due, and the prospect of capping the rate understandably sounds appealing at first. But Georgia voters who take a second look at the proposal will see it for what it truly is:  an attempt to keep taxes for the wealthiest Georgians low and to block future generations from meeting the needs of a rapidly growing state.

States across the country face questions of how to raise enough revenue to meet basic needs, from infrastructure to education and health care. It’s a public policy question that, unfortunately, all too often becomes a political question. Georgia would be the first state to cap income taxes through its constitution, if voters approve. But states like California, Colorado and Illinois have passed other restrictive tax measures in the past and come to regret it later. State governments need flexibility to make course corrections when their needs outweigh available funds. Georgia’s proposed amendment is one example of efforts to prevent states from doing so by tying their hands for the future. 

In the 2014 legislative session, Georgia lawmakers placed Senate Resolution 415 on the ballot for voters to decide in November. The ballot question asks, “Shall the Constitution of Georgia be amended to prohibit the General Assembly from increasing the maximum state income tax rate?” If voters approve, Georgia’s top income tax rate will never surpass its current 6 percent, barring the unlikely removal of the cap in a future vote.

Here’s the problem. Income taxes are one of the main tools for state lawmakers to meet taxpayers’ needs, and Georgia’s needs have exploded in recent decades. The state’s population more than doubled in the past half century, rising from 15th most populous in 1970 to 8th most today. If Georgia’s growth continues apace, it could break into the top five by the middle of this century. Georgia is no longer a small, sleepy, agricultural corner of the South. It is a complex modern economy that needs a qualified workforce, world-class transportation and adequate health infrastructure to compete.

Meeting these challenges requires public investments with an eye on the future, and those investments require tax revenue. Georgia’s current leadership is unwilling to confront that essential truth, choosing instead to further erode the state budget through new tax cuts and business tax breaks. Lack of public investment has consequences. Georgia today is plagued by overcrowded classrooms, congested roads and one of the most underfunded health systems in the country. That trifecta scares away high-wage businesses and makes Georgia less attractive for workers, families and entrepreneurs.

Future generations of Georgians might be willing to forge a better path. Twenty, 50 or 100 years from now, state lawmakers might want to consider, say, adding a 7 percent top rate to fund universal pre-kindergarten or a modern transportation system. They might want to temporarily raise income taxes to confront some extraordinary need like a natural disaster or deep recession. If the amendment is approved, making those choices will be off the table.

That raises the second problem. Georgia will inevitably need a way to raise more revenue in the future, but capping the state’s income tax will shield the wealthiest Georgians from paying their fair share. Other sources of revenue, such as sales taxes and fees, fall disproportionately on low-wage and middle-class workers, whereas income taxes fall more on the wealthy. That means deemphasizing income taxes will likely raise taxes on most Georgia families long-term.

It could also worsen the growing gap between the wealthiest Georgians and regular working families. The share of Georgia’s yearly income taken home by the top 1 percent nearly doubled to 18.7 percent in 2007 from 9.5 percent in 1979. And evidence already suggests that rising inequality makes it harder for states to fund the people’s business, since the wealthy are often able to shield much of their income from taxes.

Georgia voters will soon make a pivotal choice. Voting to cap the state income tax might seem like a no brainer to many. But if voters gave it more thought, they’d realize capping Georgia’s income tax does nothing to clear a path to prosperity for Georgia businesses or families. Instead, it will put future generations in a financial straightjacket, unable to solve our most pressing problems. It is a shortsighted and unnecessary restriction that could haunt Georgia down the road. 


What's the Matter with Kansas Is What Ails All 50 States


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It’s easy to hold up Kansas as the poster child for regressive tax policies gone awry.

By now it’s apparent Gov. Sam Brownback and his allies in the state legislature were wrong when they predicted lopsided tax cuts would boost the state’s economy.  The state will have trouble funding priorities such as education and services for the disabled since its revenue is hundreds of millions less than projected. And just last month, Standard & Poor’s downgraded the state’s bond rating because Brownback’s tax cuts cost far more than promised.

But make no mistake. The tax cuts, which disproportionately benefited higher-income earners and corporations, made worse an already regressive tax code. And in that sense, Kansas is not alone.

When all taxes assessed by state and local governments are taken into account, every state imposes higher effective tax rates on low-income families than the richest tax payers. On average, the lowest income households (bottom 20 percent) pay 11.1 percent of their income in state taxes, middle income households pay about 9.4 percent and the top 1 percent only pay 5.6 percent. This means state tax systems are actually making it harder for families to escape poverty.

Given a high poverty rate, stagnant wages and eroding family wealth, it’s perplexing that governors and state legislatures are getting away with selling the public the bill of goods that is trickle-down economics. We don’t all do better when the wealthy prosper at the expense of everyone else. In fact, we’re all worse for the wear and tear.

State and local data on income and poverty released today by the U.S. Census reveal, as did the national numbers, that not much has changed since the previous year and poverty remains significantly higher than before the Great Recession took hold. Most state poverty rates held steady. Three states experienced an increase in the number or share of residents living in poverty, and two states had a decline.

As I mentioned in a previous post, new Census poverty data is newsworthy more so because we’ve all become desensitized to a poverty rate that continually grew throughout the 2000s and remains higher (currently 2 percentage points) than it was before the Great Recession.

But when experts project the youngest generations may be worse off than their parents, or when median family income is 8 percent less today that it was in 2007, or when poverty is near generational highs, we all should pay attention, especially our elected officials.

The Institute on Taxation and Economic Policy today released a study, State Tax Codes as Poverty Fighting Tools, which examines four specific tax policies in each of the 50 states. The report recommends that states should enact or expand refundable Earned Income Tax Credits (EITC), offer refundable property tax credits for low-income homeowners and renters, create refundable, targeted low-income credits to help offset regressive sales and excise taxes, and increase the value of existing child- related tax credits. The full report includes state-by-state analysis of current polices.

Specifically, the report notes, “In most states, a true remedy for state tax unfairness would require comprehensive tax reform. Short of this, lawmakers should use their states’ tax systems as a means of providing affordable, effective and targeted assistance to people living in or close to poverty in their states.”

This is certainly a better approach than soaking the poor. A Standard & Poor’s study released earlier this week demonstrated that growing income inequality is a reason states are failing to collect enough revenue to meet their needs. It’s easy to surmise that, as wealth concentrates at the top and incomes stagnate for low- and middle-income people, states’ tax the poor more strategies result in flat or declining revenue and ultimately more difficulty funding priorities from education to infrastructure.

There’s a better way. A recent report from Citizens for Tax Justice reveals the average single-parent, two-child family receives a $4,550 income boost with the federal EITC, and a two-parent, two-child low-income, working household receives a boost of $5,790.  Twenty-five states and the District of Columbia offer state Earned Income Tax Credits based on the federal EITC, and a May 2014 report from ITEP outlines how this is an effective tool.

We are under no illusion that progressive taxation will solve poverty, but it can play a big role in mitigating poverty. And the harsh reality is that no state is fully living up to that promise. What is painfully clear, as Kansas tax cuts have demonstrated, is that adding more regressive tax cuts to an already unfair tax structure exacerbates poverty, shortchanges families, and starves states of funds to invest in vital services on which we all rely.


New S&P Report Helps Make the Case for Progressive State Taxes


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The latest report from Standard & Poor’s Rating Services reminds us that progressive tax reform can help mitigate income inequality and ensure states have enough revenue to fund their basic needs.

As has been documented by everyone from the Federal Reserve Board to Thomas Piketty, the share of income and wealth accruing to the very best-off Americans has grown substantially over the past century. The problem worsened in the years immediately following the financial crisis. This trend raises important philosophical questions about whether low-income Americans really have the same opportunities to share in the American dream that the wealthiest have been granted.

But Standard & Poor’s new report finds that there’s also a more mundane, practical reason to be concerned about inequality: it can make it harder and harder for state tax systems to pay for needed services over time. The more income that goes to the wealthy, the slower a state’s revenue grows. Digging deeper, S&P also found that not all states have been affected in the same way by rising inequality. States relying heavily on sales taxes tend to be hardest hit by growing income inequality, while states relying heavily on personal income don’t see the same negative impact.

This finding shouldn’t be surprising. As we have argued before, it doesn’t make sense to balance state tax systems on the backs of those with the least income.  When the top 20 percent of the income distribution has as much income as the poorest 80 percent put together, relying disproportionately on the poorest Americans to fund state services is not the path to a sustainable, growing revenue stream. The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay—so when the richest taxpayers grow even richer, these exploding incomes hardly make a ripple in state tax collections. And when the same states see incomes stagnate or even decline at the bottom of the income distribution it has a palpable, devastating effect on state revenue.

Conversely, when states like California enact progressive personal income tax changes that require the best-off taxpayers to pay something close to the same tax rates applicable to middle-income families, growth in income inequality doesn’t appear to damage state revenue growth significantly.

But the clear trend at the state level has been exactly the opposite: regressive tax systems relying more heavily on sales tax and less on the progressive personal income tax. Far more typical of the most salient tax “reform” ideas afoot at the state level these days is Kansas Gov. Sam Brownback’s hatchet job on the state income tax. And, as a front-page New York Times article reminds us today, states considering a shift from income to sales taxes are likely to regret it. S&P and Moody’s have recently downgraded Kansas’s bond rating precisely because reckless income tax cuts have endangered the state’s ability to pay for needed public investments.

Income inequality and declining state tax revenues are both serious issues that go to the heart of our ability to provide economic opportunity for individuals and businesses. Because of growing income inequality, it is more important than ever for states to move toward a more progressive tax system. Regressive tax systems hitch their wagons to those with shrinking or stagnant incomes.  Progressive tax reform is needed to make our tax code more fair and ensure that income inequality does not do damage to states’ ability to collect adequate revenue over the long-term.


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. 


Wisconsin Contemplates Property Tax Shift from Business to Homeowners


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No one would describe Wisconsin’s homeowner property taxes as low. So it would likely come as a surprise to many Wisconsinites that state policymakers are now considering a plan that would cut business property taxes in a way that would force homeowner’s taxes even higher. The plan was the focus of a hearing before the Wisconsin legislature’s “Steering Committee for Personal Property Tax” last week at which ITEP staff testified.

The committee hearing focused on whether Wisconsin’s local property tax should continue to apply to business machinery and equipment, as it currently does, or should be narrowed or even repealed. Wisconsin is one of more than 30 states in which the property tax base is defined to include not just “real property” such as buildings and land, but at least some of the “personal property”—potentially including motor vehicles, machinery, office furniture, and more generally any property that can be moved—owned by individuals and businesses.

It might come as news to most Americans that personal property is even taxable. This is because almost every state moved away from taxing the personal property owned by individuals (with the notable exception of motor vehicles) long ago. This gradual contraction generally makes sense—having an assessor evaluate the value of every homeowner’s paper-clip collection would impose a huge administrative burden. But, as ITEP staff testified last week, what remains of the personal property tax in most states—a tax on machinery and equipment owned by businesses—is actually pretty sensible. The property tax was originally envisioned as a fairly universal levy on wealth used to generate income, and the expensive machinery used in manufacturing certainly fits that description. As last year’s tragic explosion at a Texas fertilizer plan reminds us, business personal property imposes its own substantial costs on local governments’ fire-protection and police-protection infrastructure, and the businesses that own this property should help to defray the public costs of maintaining this infrastructure.

Moreover, cutting business personal property taxes would impose a pretty direct cost on homeowners: the Wisconsin Legislative Fiscal Bureau estimates that simply repealing the tax would result in close to a 3 percent increase in Wisconsin homeowner property taxes. And as the experience of Ohio reminds us, state legislative pledges to “hold harmless” local governments for state-imposed property taxes tend to be pie-crust promises: easily made and easily broken. There are certainly sensible ways of reforming the personal property tax where it exists: allowing a de minimis exemption, so that the first $25,000 or $50,000 of personal property is exempt, can sharply reduce the compliance costs associated with the tax. But business personal property taxes are, at the end of the day, worth keeping. 


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


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Voters in 36 states will be choosing governors this November. Over the next several months, the Tax Justice Blog 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 Arizona.

The dust has temporarily settled in Arizona where a Republican gubernatorial candidate emerged last week out of a crowded field of six people vying for the top job in the Grand Canyon State.  Doug Ducey, currently Arizona’s state treasurer and the former CEO of Cold Stone Creamery, will be facing Fred DuVal(D) in November’s election. 

Tax policy was a key issue in the run-up to the primary with four of the six candidates promising significant tax cuts if elected and will continue to play a central role in the months leading to November.  The state budget will likely end the year $300 million short of needed revenues and a court-ruling issued last month on K-12 school financing means lawmakers will need to come up with $316 million in additional education funding next year and more than $1.6 billion over the next five years. It goes without saying that Arizona’s fiscal situation is not very pretty and whoever is elected will have his hands full from the start.

Despite this backdrop of spending and revenue pressures, Ducey wants to gradually eliminate Arizona’s personal and corporate income taxes, but has yet to say how or if he would replace the more than $4 billion the state would lose if his plan is enacted or how he would raise the needed revenues for the education court mandate. Duval says the idea of repealing the state’s income taxes is not realistic given the needs in the state and intends to make Ducey divulge more details about his tax cutting plan. 

If Ducey wins in November, he will likely lead Arizona in the direction of Kansas and North Carolina where significant tax cuts are coming up short.  In fact, revenue in both states has come in far under projections and bond rating agencies think Kansas’ poor recent fiscal management makes the state less credit-worthy. Standard and Poor’s downgraded the state’s credit rating last month, meaning that every time the state chooses to borrow money to fund long-term capital investments such as roads and bridges, it will cost the state more to do so. 


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


How to Combat the Rapid Rise of Tobacco Smuggling


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According to the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), an estimated $7 and $10 billion is lost in federal and state tax revenue annually due to cigarette smuggling, which is astounding considering that total federal and state tobacco tax collections were about $32 billion in 2013. This means that as much as a quarter of all tobacco tax revenue is being lost each year.

One of the biggest drivers of the extensive cigarette smuggling is the substantial differences in state excise taxes. For example, Virginia's state tax is only 30 cents on a pack of 20 cigarettes, whereas New York’s combined state and city excise tax is 19.5 times higher at $5.85 per pack. From a practical perspective, this means that an individual could evade $166,500 in tobacco taxes by simply buying up 50 cases of cigarettes in Virginia, driving them to New York City and then illegally reselling them to retailers in the city.

While some level of smuggling may be inevitable due to the high profitability of this enterprise, the good news is that there are a host of simple measures that state governments can take to combat the flow of cigarette smuggling, including simply increasing the quality of tobacco tax stamps and better record keeping by retailers. Lawmakers in Virginia and Maryland, for instance, have already started to crack down on cigarette smuggling by stepping up enforcement and increasing criminal penalties on smugglers.

On the federal level, Rep. Lloyd Doggett has proposed the Smuggled Tobacco Prevention (STOP) Act, which would require unique markings on tobacco products for tracking purposes, ban the use of tobacco manufacturing equipment to unlicensed persons, require better disclosure by export warehouses and increase the penalty on tobacco smuggling offenses. Taken together, these measures provide the critical framework needed for federal and state authorities to significantly stem the flow of cigarette smuggling.

Taking a step back, it's important for state and federal lawmakers to remember that tobacco taxes are most useful as a mechanism to discourage smoking, rather than a particularly desirable revenue source given that they are regressive and the amount of revenue they generate declines over time. Still, allowing tax evasion to erode this revenue source at the state and federal level is simply unacceptable.


Tobacco Industry Games Rules to Dodge Billions in Taxes


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What's the biggest difference between small and large cigars or pipe and roll-your-own tobacco? Their level of taxation, according to the Government Accountability Office (GAO), which estimates that tobacco companies have managed to dodge an estimated $3.7 billion in federal excise taxes since 2009 by superficially repackaging their products to fit within the legal definitions of the least taxed forms of tobacco.

A Senate Finance Committee hearing last week examined the egregious methods tobacco companies use to accomplish this. One panelist related in his testimony (PDF) that Desperado Tobacco had literally pasted a label saying "pipe tobacco" onto its existing roll-your-own tobacco packages so it could avoid the higher rate on roll-your-own tobacco. Perhaps even more stunning, another panelist noted during the hearing that some companies had added cat litter to small cigars to add enough weight to their product so that it fit the definition of the lower taxed "large cigars."

What's driving these outrageous tactics is the substantial difference in the way each product is taxed. For example, roll-your-own tobacco is taxed by the federal government at a rate of $24.78 per pound compared to the $2.83 per pound rate on pipe tobacco. Similarly, small cigars are taxed at a rate of $50.33 per thousand, whereas large cigars are taxed as a percentage of the manufacturer's price, which in many cases results in a tax of about half that for small cigars. These differences in tax levels are so significant that according to the GAO, over the past few years there has been a dramatic rise (PDF) in both the purchase of large cigars and pipe tobacco along with a simultaneous collapse in the market for small cigars and roll-your-own tobacco, as consumers flock to the lower-priced alternatives.

The best way to solve this tax avoidance by tobacco companies would be for Congress to equalize the level of taxation of the varying tobacco products, which would once and for all end the incentive for companies to repackage their product to fit the different product definitions. In the event of congressional inaction, the Alcohol and Tobacco Tax and Trade Bureau (TTB) also has authority to issue clearer definitions between the varying tobacco products. For example, TTB could require that large cigars be defined as being six rather than three pounds per thousand. But it's unlikely that any definitions the bureau could issue would adequately solve the problem of companies gaming their products.

While tobacco taxes are not the best source of revenue given that they are regressive and decline over time, they still provide billions in much needed revenue at the state and federal level to offset some of the social costs of smoking. For these reasons, lawmakers should put an end to the ridiculous games tobacco companies are playing to avoid paying taxes.


Missouri Voters Reject Regressive Sales Tax Increase


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Yesterday voters in Missouri soundly defeated Amendment 7, a ballot measure that would have raised the sales tax by three-fourths of a cent to fund transportation needs.

Sales taxes are largely regressive, capturing a larger share of income from the poor than from more affluent people. The move to temporarily raise the state sales tax to pay for roads and bridges comes just months after the state legislature overrode Gov. Jay Nixon’s veto and passed income tax cuts that overwhelmingly benefit high-income taxpayers.

The vote defeating the sales tax increase sends a message to lawmakers to go back to the drawing board in terms of finding ways to pay for needed infrastructure. Lawmakers projected the new sales tax to generate $5.4 billion over ten years for transportation projects across the state. Now that the sales tax hike has been defeated critical work won’t begin on the more than 800 projects the Missouri Department of Transportation identified as “critical safety improvements.”

In what has been called “a study in bad behavior” the fact that lawmakers put a tax hike before the voters after just passing income tax cuts boggles the mind. Lawmakers in Jefferson City recently approved mammoth income tax cuts that overwhelmingly benefit high income taxpayers, yet seemed to have few qualms about asking voters to support a regressive sales tax hike that would have actually raised taxes on low income families. The income tax cuts that were contentiously passed this year included a drop in the top income tax rate and a new deduction for business income. ITEP found that under this legislation the poorest 20 percent of Missourians will see a tax cut averaging just $6, while the top one percent of families will enjoy an average tax cut of $7,792 once the cuts are fully phased in.

Lawmakers clearly see the need for increased transportation funding--why put a sales tax on the ballot if that isn’t so--but they arguably wouldn’t need to raise $500 million in new sales tax revenue if they hadn’t just cut an even larger amount of income tax revenue.

Lawmakers’ procrastination on this issue is the root cause of Missouri’s transportation funding shortfall. The state’s has raised it current 17-cent gas tax in 18 years, and it isn’t generating the revenue necessary to keep up with demands on Missouri’s infrastructure. If lawmakers don’t act, ITEP estimates that Missouri’s gas tax rate will reach an all-time inflation-adjusted low by 2020. In 2011, ITEP found the state’s gas tax rate would need to be increased by 9.6 cents just to return its purchasing power to the level it had when it was last raised back in 1996. Right now, Missouri’s gas tax is lower than the tax in all of its neighboring state except Oklahoma. Increasing and indexing the gas tax is a better solution for Missouri’s transportation woes because fuel taxes are a very good proxy for the wear and tear vehicles put on the road. However, the gas tax would also have a worrying impact on tax fairness that can be overcome by introducing a targeted low-income tax credit.

Given the defeat of Amendment 7 what’s to happen to Missouri’s crumbling infrastructure? Transportation commissioners are set to meet to discuss next steps. Let’s hope Missouri lawmakers also regroup and look toward other funding alternatives. Surely it’s not too much to ask that Missourians have safe bridges and quality roads that are paid for in fair and sustainable ways.


Tax Policy and the Race for the Governor's Mansion: Illinois 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 Illinois.

The outcome of the Governor’s race in Illinois will have major  and immediate implications on the state’s ability to provide adequate funding for education, health care, transportation and other important services.  The context for this heated race is especially important. The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. To make matters even worse, the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in January leaving the state with a $2 billion budget gap.

This year Illinois lawmakers adjourned without making the temporary income tax rate hike permanent.  The legislature also failed to enact legislation that would have allowed Illinois voters to weigh in on a ballot question in November that would amend the state’s constitution to allow a graduated income tax.  Yet, the budget passed assumes the higher 5 percent rate is allowed to continue and leads Illinois down the path of deeper program cuts if lawmakers cannot agree  to increase the rate by the end of the year.  It’s largely agreed that the budget Governor Pat Quinn signed into law was the equivalent of “kicking the can down the road” and that 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.   According to the Fiscal Policy Center at Voices for Illinois Children, the budget was also balanced “by borrowing and by underfunding existing obligations, which will further add to the state’s backlog of unpaid bills.”

Given this backdrop the choice between Governor Quinn and businessman Bruce Rauner couldn’t be more stark. Quinn has said that he supports making the temporary 5 percent income tax rate hike permanent. In his 2014 budget address he stressed the harm that will come if the income tax rate is allowed to expire and new revenue isn’t raised, “mass teacher layoffs, larger class sizes and higher property taxes.” Quinn has gone beyond saying that the income tax rate should be 5 percent-  he’s also been a long-time supporter of a graduated income tax.

Rauner initially proposed allowing the temporary income tax hike to immediately expire, but he changed his position once the reality set in that as governor he would need to fill the $2 billion hole created in the budget once the rate hike expired. More recently Rauner has said that he will allow the temporary tax increase to expire over four years and will keep property taxes at their current level. Rauner would make up $600 million of lost income tax revenue by broadening the sales tax base to include many business services like advertising, printing and attorney fees. Sales tax base broadening makes good sense in terms of modernizing a state’s tax structure and making it more sustainable over the long term. But Rauner’s plan is regressive and taxing business to business services is problematic. For more on applying the sales tax to services, read this ITEP brief. Stay tuned. This gubernatorial race is one to watch.


Tax Policy and the Race for the Governor's Mansion: Michigan 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 Michigan.

michigan.jpgThe gubernatorial race in Michigan pits incumbent Rick Snyder (R), a businessman who won election four years ago as a technocratic outsider, against challenger Mark Schauer (D), a former congressman from Battle Creek. Taxes are a contentious campaign issue – the governor and Republican legislature passed a tax package in 2011 that decreased business taxes and increased taxes on seniors and working families, and Schauer has vowed to repeal the increases. Since enacting his tax plan, Gov. Snyder has sought to move to the middle, alienating some of his more conservative supporters in the process.

The race is a dead-heat. A recent poll for NBC News found registered voters backing Snyder 46 percent to Schauer’s 44 percent, with 9 percent undecided. While the incumbent is still favored to win and will likely outspend his challenger, Gov. Snyder is in a tough spot; no poll shows him with the support of 50 or more percent of voters, and Schauer continues to gain on Snyder despite the governor’s improved job performance ratings.

Gov. Snyder’s 2011 tax-cut bill was the largest Michigan had seen in 17 years. The package eliminated the Michigan Business Tax, enacted in 2008, and replaced it with a 6 percent corporate income tax. The tax cut, estimated at $1.65 billion, benefited 100,000 Michigan businesses. To help pay for the cut, Snyder and Republican legislators increased taxes on pensioners (by eliminating the pension tax exemption for those born after 1952), middle-income families (by eliminating the Homestead Property Tax Credit for those making over $50,000 and the $600-per-child tax credit), and working families (by reducing Michigan’s Earned Income Tax Credit from 20 percent to 6 percent of the federal credit.) The net result left a $220 million hole in state revenues.

Gov. Snyder remains a traditional business-establishment Republican, but he angered state Republicans by embracing the ACA’s Medicaid expansion and Common Core, and has attempted to triangulate to shore up his reelection prospects. His proposed 2014 budget retroactively restored the Homestead Property Tax Credit for those in the $50,000 to $60,000 income range, increased education funding for K-12 and higher education, and increased state aid to local governments. Critics derided the budget as an election-year stunt that didn’t reverse the damage of his earlier tax cut, or offer relief to pensioners burdened with higher taxes.

Schauer, a former one-term congressman from Battle Creek, has forged a progressive campaign built on repealing Snyder’s 2011 tax package – nixing the tax increases on pensions, restoring the cuts to the Earned Income Tax Credit and Homestead Property Tax Credit, and bringing back the child tax credit. He also pledged to increase education and road funding and enact other measures designed to support women and working families, such as paid sick leave and increased unemployment benefits. However, he has offered few ways to pay for these proposals other than ending tax breaks for companies that outsource Michigan jobs and eliminating “wasteful spending.” He also does not want to increase the corporate income tax. The coming months will determine if he can convert his recent momentum into a lasting advantage, as no poll has shown him leading the governor.

One issue that has put Snyder and Schauer on unlikely sides of the usual partisan divide is transportation funding. Gov. Snyder has been a high-profile proponent of raising the gas tax and increasing automobile fees to fund roads and transit projects, though his proposals have not gained much traction. Schauer has flatly said he doesn’t support a hike in the gas tax, saying that he instead would insist on getting Michigan’s fair share of federal gas tax revenues and impose a higher fee on heavy commercial trucks. 


The Truth about Sales Tax Holidays


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Everyone loves a bargain, so it’s no surprise that sales tax holidays are hugely popular in the 17 states hold them.

Over the past few weekends, 13 states temporarily suspended their sales tax, and four more will do so in the coming weeks.  Most state sales tax holidays will coincide with back to school season, but a subset of these 16 states also hold separate sales tax holidays to help consumers save on purchases tied to hurricane and hunting season. State lawmakers reap public relations benefits from these “holidays”, and media tend to cover them favorably.

But taxpayers should look beyond political talking points, long lines and bargains. The truth about sales tax holidays is that they are a costly gimmick. While they may provide taxpayers some savings on necessary purchases, they are a distraction from the bigger picture problem with regressive state tax systems.

Virtually every state’s tax system takes a much greater share of income from middle- and low-income families than from wealthy families. Nationwide, the poorest 20 percent of households pay more than 11 percent of their income in state and local taxes on average, compared to just 5.6 percent for the top 1 percent. States’ heavy reliance on sales taxes exacerbates this problem.

In theory, sales tax holidays should help mitigate this problem. But temporary reprieves from taxes on back to school items aren’t well targeted. In fact, temporarily suspending sales taxes often benefits wealthy families more than low- to moderate-income families.  Better-off families are positioned to time their big purchases to occur during sales tax holidays–a luxury that often isn’t available to folks living paycheck to paycheck. One recent study found that households earning more than $30,000 per year are more likely to shift the timing of their clothing purchases to coincide with sales tax holidays than lower-income households. Further, low-income seniors and families without children who have no need to purchase “back to school” items get nothing from sales tax holidays.

Another problem is sales tax holidays often apply to an arbitrary assortment of items that may have more to do with lobbying power than consumer needs.  Maryland, for example, continues to tax wedding veils, but it exempts bridal gowns and tuxedos during its sales tax holiday.  Diapers are also exempt, but don’t expect to buy any diaper bags or receiving blankets tax-free. In New Mexico, ice skates are taxed, but not ski boots; chalkboards are taxed, but not chalk or erasers.  In Texas, golf cleats and football pads are taxed but not swim suits or tennis shoes.

Sales tax holidays will collectively cost states more than $300 million this year. This is money states can ill afford to lose. The revenue lost through sales tax holidays will ultimately have to be made up somewhere else, either through spending cuts or increasing other taxes.

Instead of expending resources planning, promoting and implementing sales tax holidays, policymakers would do better to focus on long-term solutions with real benefits for working families.  They could implement policies such as sales tax credits for low-income taxpayers, expand or implement a state earned income tax credit, or permanently reduce sales taxes rates and shift toward a progressive personal income tax.

If lawmakers really want to help families’ bottom lines, they should look to these more thoughtful and permanent reforms.


Sales Tax Holidays = Not Worth Celebrating


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Consumers in 16 states this year will be given the opportunity to participate in a sales tax holiday (most of which will happen this weekend). These so-called holidays are a temporary break on paying sales tax on purchases of clothing, computers and other select items. These holidays are normally heavily promoted, but really they aren’t worth the hype. Sales tax holidays are poorly targeted, costly and represent a lost opportunity to get tax fairness right.

Sales tax holidays are advertised as a way to give people a break from paying the sales tax. On the surface, this sounds good given that sales taxes fall most heavily on low-income families. However, a two- to three- day sales tax holiday for selected items does nothing to provide relief to low- and moderate-income taxpayers during the other 362 days of the year. In the long run, sales tax holidays leave a regressive tax system basically unchanged. For more on why sales tax holidays aren’t all they're cracked up to be, read ITEP’s brief “Sales Tax Holidays: An Ineffective Alternative to Real Sales Tax Reform.”


New Report on Wealth Inequality in the Great Recession Highlights Need for Asset-Building Strategies


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Three months after the publication of Thomas Piketty’s “Capital in the Twenty-First Century,” it remains an open question whether Piketty’s tome will be remembered more for its thorough documentation of the growth of global inequality or for the shabby treatment it has received from those seeking to discredit the book’s findings. That’s a shame, both because the book does marshal the best data available on the tricky topic of wealth inequality and because persistent wealth inequality is a problem worth paying attention to.

A new study (PDF) funded by the Russell Sage Foundation reminds us that growing inequality is a well-documented fact of American life. The Sage report provides a fascinating and sobering first look at how the Great Recession reshaped the levels and distribution of wealth between middle-income families and the best-off Americans. (The report also has the merit of clocking in at a mere two pages, slightly less than Piketty’s magnum opus.) The study finds that over the past decade, the net worth of the median American household has fallen, adjusted for inflation, by more than a third—even as the best-off Americans have seen double-digit growth in their real net worth. In particular, the median household saw its net worth decline from just under $88,000 in 2003 to $56,335 in 2013 (meaning that 36 percent of the median group’s real wealth vanished over this decade).  At the same time, the best-off 10 percent of American households have seen their real worth grow by almost 15 percent.

There’s a straightforward reason for this: the assets owned by the richest Americans are very different from those owned by middle-income families. While the wealth holdings of the “1%” and those in their immediate vicinity are dominated by stock and bonds, asset ownership for the vast American middle class means owning a home. And while the stock market has recovered well since the disastrous declines of the Great Recession, housing markets remain depressed relative to where they were ten years ago.

All of which highlights the importance of public policies designed to create wealth among middle- and lower income families that isn’t limited to the value of homes. The Corporation for Enterprise Development’s Assets and Opportunity Scorecard gives an encyclopedic look at the tax, and non-tax, policy strategies available to states in advancing this important goal.Policymakers can take steps to make sure that low-income families are able to save some of their income—and tax reform can play an important role in this effort. When the limited wealth of middle-income families is tied up in homes, that means these homeowners often have no other source of wealth to rely on to get them through hard times. A tax system that taxes poor people further into poverty (as ours does) makes saving more difficult, if not utterly impossible, for fixed-income families. See ITEP’s “State Tax Codes as Poverty-Fighting Tools” for a sensible overview of the ways in which state tax reform can assist, rather than undermining, other asset-building efforts, by reducing the tax load on the very poorest Americans.  


State News Quick Hits: Migration, Film Tax Credits and More


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On the same day that the New York City Independent Budget Office released a report showing that wealthy New York City residents who move are overwhelmingly choosing high-tax states to live in journalist David Cay Johnston penned an editorial in the Sacramento Bee again making the point that taxes are far from the major consideration in wealthy households’ location decisions. Examining the supposed economic destruction that never materialized as a result of California’s 2012 sales and income tax hikes, Johnston points out that quality “commonwealth amenities” like schools, law enforcement, and parks, are far better draws than low taxes.

Getting a 43 cent return on every dollar invested would seem like a bad deal to most of us, but that doesn’t seem to be the case when in comes to subsidizing the film industry in New Mexico. A new study finds that the state’s film tax breaks generated just 43 cents in tax revenue for every incentive dollar spent between 2010 and 2014. Read the full study here.

Moderate Republican lawmakers in Missouri are feeling the wrath of conservative donor Rex Sinquefield during this year’s election season. The Missouri Club for Growth, a group funded largely by Sinquefield, has thrown its support (and dollars) behind candidates running against Republican legislators who voted with Democrats this year to uphold Governor Jay Nixon’s veto of an irresponsible income tax cut package. Though the wealthy donor has thus far seen very few victories for his conservative state fiscal agenda, there is evidence that his ideas may slowly gain traction over the years as his money continues to roll in, spelling disaster for anyone concerned with fiscal responsibility and progressive taxation.

Corporate tax avoidance is back in the spotlight in the wake of an Oregon Supreme Court ruling that allows profitable companies to avoid paying the state’s minimum corporate tax.  The minimum tax, which was sensibly expanded from a trivial $10 to a higher, tiered structure due to a vote of the people in 2010, can now be reduced to zero by companies claiming certain tax credits. The problem is that the statutory language of the minimum tax does not explicitly say that tax credits can never be used to offset the minimum tax. This will likely come as unwelcome news to Oregon voters, who presumably thought that when they approved a measure “establishing a flat $150 minimum tax,” they were doing just that. But this case, led by Con-Way Inc., means that the state can anticipate a $40 million hit this year as corporations rush to amend prior years’ returns to take advantage of the loophole. The good news: the court decision is based on a technical glitch in the minimum tax statute, and glitches are easily fixed. Petitioners are now calling on state lawmakers to modify the language of the law to ensure that companies like Con-Way will pay a “minimum tax” that actually exceeds zero. 


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


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South Carolina voters should have no problem drawing distinctions this fall when it comes to their gubernatorial candidates’ visions for the state’s tax structures (or lack thereof) in a year when the issue of fairness in state taxation is likely to loom large.

Republican Gov. Nikki Haley continues to tout her income-tax elimination plan on the campaign trail, while challenger Vincent Sheheen, currently a Democratic state senator, is pushing a multifaceted recalibration of numerous state and local taxes to, as he says, restore fairness to the tax system.

The linchpin of Gov. Haley’s campaign is the eventual elimination of the state’s income tax. Her attempt to repeal South Carolina’s tax in order to “bring jobs and investment to the state” has been years in the making. In 2010, then-candidate Haley campaigned on the promise of lowering income taxes. This year, the governor’s proposed budget included eliminating the state’s 6 percent income tax bracket, which applies to income between $11,520 and $14,400 (estimated to cost $27 million for the year), a provision that state lawmakers did not approve. Haley previously signed a bill in mid-2012 reducing the tax rate on “pass-through” business income from 5 percent to 3 percent over three years.

Critics have characterized the governor’s income tax proposal as a fantasy, taking issue with the fact that Haley has given no timetable for implementation and has presented no viable options for replacing lost revenue from the tax, which is currently the source of over half of the state’s general fund revenues. Eliminating the tax outright would be catastrophic for the state’s fiscal picture and even with a pay-for mechanism, repeal would mean the loss of the state’s most progressive revenue source, exacerbating income inequality in the state.

Challenger Vincent Sheheen bookends his comments on tax reform with the word “fairness.” Sheheen’s plan seeks to preserve important revenue sources and targets multiple taxes in an attempt to rebalance the distributional effects of the overall state tax levy. He calls the state’s current tax system “a giant mess littered with special interest loopholes.”

On the topic of the income tax, Sheheen proposes to adjust the brackets (presumably by revising the thresholds upward) to create a structure appropriate for the 21st century and to reinstate a measure of balance. Sheheen would also enact a refundable Earned Income Tax Credit to reward low-income working families. The state currently lacks such a credit, a mechanism ITEP has frequently endorsed as one of the most effective ways to combat regressivity in the tax code and pull low-income families out of poverty.

Sheheen’s income tax plan is likely to come with its own significant costs, some of which may be offset via his proposal to eliminate loopholes for special interests and corporate tax breaks – revenue losers that both complicate the tax code and reduce the fairness of the overall tax system. Another reform proposed by the candidate is the broadening of the sales tax base, using revenue gains from such a move to reduce the overall state sales tax rate, currently at 6 percent. South Carolina is one of several states that currently fail to tax many services, creating unfair advantages for sellers and purchasers of goods and leading to a narrowing of the tax base over time. Sheheen’s plan would also eliminate local property taxes that go toward funding schools and institute a uniform statewide property tax in their place, which he says would allow for a lower rate, incorporate the entire state property tax base, and allow property values to be calculated in a uniform and fair way. In particular, the candidate is proposing to lower the industrial property tax rate, which he says currently disadvantages South Carolina manufacturers who pay the highest rates in the country.

The outcome of this fall’s election may determine whether South Carolina goes the way of states like Kansas and North Carolina, whose governors have placed all of their proverbial eggs in the basket of supply-side economics by implementing heavy income tax cuts and who continue to see their fiscal and economic health falter as a result.


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


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

The gubernatorial race in Iowa pits veteran incumbent Terry Branstad (R) against challenger Jack Hatch (D). Branstad, 67, is asking Iowa voters to reelect him to an unprecedented sixth term as governor; if he wins, he will be the longest-serving governor in American history. In addition to his career in political office, Branstad has been an attorney, financial advisor, and president of Des Moines University. Hatch, 64, is a state senator from Des Moines and a former member of the Iowa House of Representatives. He is a real estate developer and businessman who founded Hatch Development Group, a company that builds affordable housing.

With an $850 million revenue surplus, it’s no surprise that both candidates favor tax cuts. However, the two men offer Iowans very different visions when it comes to overall tax policy. Hatch wants to target tax cuts to the middle class. His tax plan would raise Iowa’s per-child tax credit from $40 to $500, give two-earner households a credit of $1,000, and raise the filing threshold for individuals and families by $11,000. Hatch would also collapse Iowa’s eight tax brackets into four, and reduce the top rate from 8.98 percent to 8.8 percent, and eliminate Iowa’s federal deductibility provision. Iowa is one of five states that allow residents to deduct federal tax payments from their taxable income on their state returns. Hatch argues that this provision makes Iowa’s rates appear artificially high, since most Iowans pay a much lower effective rate. As ITEP has reported, the provision is also costly and regressive, and its elimination would be a huge victory for Iowa progressives. Hatch’s tax reform proposal would cost $615.3 million over two years, which he claims will be offset by the state’s existing budget surplus and future revenue growth.

Branstad, meanwhile, has not made tax policy a centerpiece on his reelection campaign. However, Branstad pushed for and signed into law the largest tax cut in Iowa’s history last year, when the legislature approved a compromise that cut property taxes for businesses, limited residential property tax increases, and expanded a number of individual credits, including the Earned Income Tax Credit (EITC). Critics of the bill point out that while low-income workers gained $35 million in tax relief from the EITC expansion, property owners gained ten times as much. They further charge that the property tax changes will strain local government budgets and hamper the ability of state officials to meet citizens’ needs. The total cost of Branstad’s property tax reform alone is $3.1 billion over ten years, to FY 2024.

Branstad has also backed efforts to enact an optional flat tax system, though he declined to endorse House Speaker Kraig Paulsen’s flat tax proposal during this year’s legislative session, bowing to political realities. Under the proposed plan, Iowans would have the option of paying a 4.5 percent flat tax without deductions (including federal deductibility), rather than using the current income tax schedule. It would overwhelmingly benefit wealthy Iowans and impair the state’s ability to fund crucial services. Opponents fear that Branstad will revive the flat tax if he wins reelection, and that his current wishy-washiness is a front.

On the issue of the gas tax and infrastructure, Hatch wants to raise Iowa’s state fuel tax by 2 cents each year for five years. He also wants to capture 20 percent of the state’s budget surplus (and 20 percent of any future surpluses) for road improvements, bridge repairs, school renovation and construction, and broadband internet infrastructure. Branstad has chosen to remain on the sidelines of the gas tax debate, declining to endorse an increase in the tax but saying he would not veto an increase either.

In a June Quinnipiac poll, Branstad led Hatch 38 percent to 14 percent, but 47 percent of voters remain undecided. The number of undecided voters has increased in recent months, after a spate of bad publicity for Branstad’s administration; it remains to be seen if Hatch can capitalize on the incumbent’s woes and reluctance to take firm policy positions, or if Branstad’s cautious campaign will win the day.


The Dilution of State Estate Taxes Spells Trouble for Tax Fairness


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The Institute on Taxation and Economic Policy published a report on Monday highlighting a disturbing trend that’s made inroads even in solidly progressive states over the past year: the weakening or complete dismantling of state estate taxes. Three states – Indiana, North Carolina, and Ohio – repealed their estate or inheritance tax in 2013, bringing the total number of states still maintaining their own estate or inheritance tax down to only 19, plus the District of Columbia. Seven other traditionally Democratic states plus D.C. sapped the potency of their tax, either seeing their exemption levels increase in 2013-2014 or passing legislation calling for future increases.

In an era when a dense economic treatise on inequality tops the New York Times bestseller list, developments like these threaten efforts to mitigate a troubling degree of wealth concentration in the United States (the wealthiest 1 percent of American households owned 35.4 percent of the nation’s wealth in 2010) – efforts made all the more important in the realm of regressive state taxation. The estate tax helps to prevent intergenerational transfers from clustering large amounts of wealth in the hands of a few – a phenomenon which has negative implications for equality in the democratic process. States’ recent changes to the tax undermine that purpose and further shift the cost of government onto lower-income taxpayers.

Two of the states (plus D.C.) taking steps to increase their exemption thresholds plan to match the federal per-spouse exemption by 2019 or later, which will top $6 million. Calling this exemption level high by historical standards is a bit of an understatement, and states adopting it effectively exempt many very wealthy households from estate taxation. The five other states raising their exemption thresholds in the past year are moving in the same direction, seeing exemption levels as high as $2 million-$4 million. This means that the overall state tax levy shifts even more toward the low- and middle-income households who already pay a higher share of their income in state taxes. And the fact that predominantly progressive states are making these changes is a step back particularly for places like D.C., which passed smart tax reform this year when it expanded its Earned Income Tax Credit.

Outright repeal in Indiana, North Carolina, and Ohio came on the heels of other ill-advised tax “reforms.” Indiana Governor Mike Pence authorized a sudden repeal of that state’s inheritance tax last year, which had been scheduled to phase out by 2022. ITEP ranked Indiana among the 10 most regressive tax states in last year’s “Who Pays?” report. The elimination of the inheritance tax will compound the fairness issue in a state which recently passed income and corporate tax cuts whose benefits will overwhelmingly accrue to wealthy taxpayers. North Carolina and Ohio similarly passed large income tax cuts last year in addition to their estate tax repeals, with North Carolina also eliminating its Earned Income Tax Credit.

All of these states would do well to heed this simple truth: failing to address large inequities in wealth isn’t good for the democratic process, nor is it good tax policy.


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.”

 


The House Votes to Treat the Internet Like an Infant


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Somehow, arguments that conservative lawmakers usually make about not interfering with the economy and respecting states’ rights have fallen silent as Congress rushes to pass a bill that provides special treatment for an industry that has grown very profitable and powerful.

The infant of 1998 now has the keys to the American economy.

On Tuesday the House of Representatives voted to make permanent a law banning state and local governments from taxing Internet access just as they tax other goods and services. First enacted as a temporary ban in 1998 (the Internet Tax Freedom Act) under the argument that the Internet was an “infant industry” needing special protection, the ban has been extended several times and is now scheduled to expire on Nov. 1.

As we have argued previously, the infant of 1998 now has the keys to the American economy, and yet Congress is still coddling it by shielding it from taxes that apply to other comparable services, such as cable television and cell phone service.

The pending bill is going one step further than previous extensions by stripping out the grandfather provision that allowed seven states that had enacted Internet taxes prior to 1998 to keep those laws in place. This move would cost those states half a billion dollars in revenue each year. And the remaining states would collectively forgo billions in revenue that they could otherwise raise each year if they chose to tax Internet access.

Members of Congress will take credit for shielding the Internet from taxes but the cost will be borne entirely by state and local governments. In other words, continuing the ban on taxing Internet access introduces distortions in the economy by favoring some industries over others and it interferes with state governments’ ability to raise revenue in the ways they find most sensible.


Tax Policy and the Race for the Governor's Mansion: Wisconsin 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 Wisconsin race.

During his first term in office,  Wisconsin Gov. Scott Walker passed three rounds of property and personal income tax cuts, and now he is on the campaign trail touting the so-called benefits.

But the truth is that Gov. Walker’s tax cuts disproportionately benefited the wealthiest Wisconsinites while lower-income people received little to no benefit. The Wisconsin Budget Project (WBP), using ITEP data, concluded that Gov. Walker’s tax cuts will give the bottom 20 percent – those earning an average of $14,000 a year – an average tax break of just $48 in 2014. In contrast, the top 1 percent of earners, or those whose average income is $1.1 million, will receive an average tax cut of $2,518.

If Gov. Walker is re-elected, tax cuts will likely remain a priority. He’s already pledged that property taxes won’t increase through 2018.  Even more worrisome, Gov. Walker has said he wants to discuss income tax elimination. While telling voters that he’d like to eliminate their state income tax bills may sound good on the campaign trail, Wisconsinites should know that most taxpayers, especially middle- and low-income households, will pay more under his plan. An ITEP analysis found that if all revenue lost from income tax repeal were replaced with sales tax revenue the state’s sales tax rate would have to increase from 5 to 13.5 percent.  ITEP also found that the bottom 80 percent of state taxpayers would likely see a net tax hike if the sales tax were raised to offset the huge revenue loss associated with income tax elimination.

Challenger Mary Burke, a Trek Bicycle Corporation executive and former state Commerce Department secretary, has yet to put out her own tax plan, but she recently told the Milwaukee Journal Sentinel that she would not take a pledge to not increase taxes, saying, “I'd want to look at the totality. We collect revenue in a lot of different ways. I certainly wouldn't look at raising (taxes), but I'd also want to look at it in the context of our finances, our budgets ….”

When asked specifically about her tax plan she remained vague, “My focus would be tax cuts targeted to the middle class and working families instead of breaks to businesses and those at the top that don’t create jobs….I’m particularly concerned about the very high property taxes across the state.”

As with every election, there’s a lot at stake in the upcoming Wisconsin governor’s race. Tax revenue funds every level of government not to mention vital programs and services. Low- and middle-income Wisconsinites pay a disproportionately higher percentage of their income in state taxes than the rich. Voters deserve to know details about each candidate’s plan for the state. In the coming months, let’s hope Burke provides more details about her tax plan, especially since the direction Gov. Walker wants to take the state seems particularly clear.  

 


Art Laffer's Traveling Fiscal Circus


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He’s like the monorail man, 
except, he’s totally opposed to
public infrastructure spending

It is a truism in Washington that being wrong does not preclude one from wielding influence. There are, however, some pundits who are so egregiously wrong that it boggles the mind to find policymakers taking their advice.

Art Laffer is one of these pundits.

Laffer, an economist most famous for developing consequential fiscal policy on the back of cocktail napkins, is the father of supply-side economics. If you’re unfamiliar with the term, it basically means that cutting taxes for the wealthy will create a rising economic tide that lifts all boats. Three decades of empirical research says this notion is false.

And yet here is Art Laffer, barnstorming the country to spread the gospel of tax cuts to red-state governors, with predictably disastrous results. Not content to have started a bender of deficit spending and ill-advised tax cuts during the Reagan years, Laffer and his associates have turned their sights on state budgets. Recent news from the states that have fallen for their shenanigans tell the tale.

First up is Kansas, where Governor Sam Brownback and the legislature pushed through what is widely acknowledged to be the worst tax “reform” measure in recent years. No only did state officials follow Laffer’s advice and slash marginal tax rates, they also put Kansas on a glide path to eliminating its personal income tax altogether. And while most Kansans will pay less in taxes (though the poorest will pay considerably more), budget shortfalls have been so great that the legislature was forced to dip into reserve funds, causing a downgrade of the state’s credit rating. Ominously, the reserves are expected to run dry by the middle of next year.

Middle-class families in Kansas after the
Brownback tax cut.

Next, North Carolina. Following Laffer’s advice and promises of economic nirvana, Republican lawmakers slashed taxes for the rich and hiked them on many poor and middle-class families. The result, unsurprisingly, was a hole in the budget you could drive a semi truck through. Worse, the promised jobs and economic growth have yet to materialize, and lawmakers are left with little cash to fund much-needed priorities like teacher pay raises and healthcare for low-income families. Lawmakers have responded to the revenue shortage with a variety of gimmicks. One proposal would pay teachers’ salaries by enticing more people to play the state lottery; another idea is just hoping North Carolinians opt to pay higher income taxes voluntarily. Maybe next they can just replace all high school economics classes with Intro to Panhandling, and have the kids pay their own way.

And finally, we come to Indiana, where Governor Mike Pence recently convened a conference of “leading tax reform thinkers” to simplify Indiana’s tax code and make the state more competitive. The luminaries included Grover Norquist and Art Laffer, who delivered the keynote. Not present at the conference were members of the general public, who will bear the brunt of the draconian cuts Laffer no doubt suggested.

It remains to be seen if Indiana will follow in the footsteps of Kansas and North Carolina – in many cases, state officials are wise enough to know gutting their revenues is foolhardy public policy. A sense of self-preservation (if not public duty) is enough to prevent many governors and legislatures from adopting Laffer’s proposals. But when dealing with hardliners, you just never know.

Until his reemergence in Indiana last month, Laffer had been noticeably absent from the public stage. But lest you think a profound sense of shame had begun to weigh on him, think again! Apparently he was busy writing a book to squeeze a few more pennies from a bankrupt ideology. Old habits do indeed die hard. 


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: Undocumented Immigrants, Tax Deform and More


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This shouldn’t be news to anyone, but undocumented immigrants do pay taxes. This week the Iowa Policy Project (IPP) released a report detailing their contributions to Iowa revenues using ITEP data. IPP found that undocumented immigrants pay an estimated $64 million in state and local taxes. Read IPP’s full findings here.

A News & Observer editorial last week lamented the revenue boom North Carolina might have enjoyed this year but for the package of steep income and corporate tax cuts passed in 2013. While numerous other states, including California, are beginning the fiscal year with healthy reserves, the N.C. Budget and Tax Center, using ITEP data, estimates that the cost of their state’s tax cuts could balloon to over $1 billion this year (almost double the reported amount of the tax cuts).

Rhode Island lawmakers recently enacted a budget for the new fiscal year which received a lot of attention for changes made to the corporate income tax (rate cut and adopting combined reporting) and cutting the state’s estate tax for a few wealthy households.  But, as Kate Brewster of the Economic Progress Institute helps to explain in this op-ed, the budget deal also quietly hiked taxes on many low- and moderate-income families by eliminating a refundable credit used to offset regressive property taxes for non-elderly homeowners and renters.  Brewster opines: “Given the struggles facing middle class Rhode Islanders — enduring unemployment, stagnant wages and a lack of affordable housing — it is hard to believe the state’s new budget includes huge giveaways for a handful of heirs while quietly taking money directly out of the pockets of low- and middle-income Rhode Islanders.

Next month Missouri voters will be asked to decide whether the state’s sales tax rate should be increased to pay for transportation improvements. The debate is raging, though no one seems to dispute Missouri has huge transportation needs. Tax justice groups like the Missouri Association for Social Welfare and even Governor Jay Nixon have argued that hiking the sales tax in the wake of income tax reductions would make the state’s tax system even more unfair. In a statement Nixon said, “This tax hike is neither a fair nor fiscally responsible solution to our transportation infrastructure needs.” It’s worth noting that the state has gone 18 years without an increase in their gas tax.


Tax Policy and the Race for the Governor's Mansion: Kansas 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 Kansas.

This Kansas gubernatorial election is shaping up to be a referendum on Governor Sam Brownback’s tax cuts and supply-side economics generally. Governor Brownback’s record on taxes has made national headlines. Two years ago, Brownback declared that his plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state's poorest residents), assuring the public these cuts would pay for themselves. Yet, the state ended this fiscal year $338 million short of total projected revenue amid concerns that Brownback’s income tax cut package is causing more bleeding than initially anticipated.

House Minority Leader Paul Davis is the Democrat who will most likely be challenging Brownback in November (the primary is in early August). Davis recently unveiled an economic plan which includes postponing the last round of Governor Brownback’s income tax cuts thus keeping income tax rates at their January 1, 2015 levels (though Davis has stopped short of calling to undo all of the Brownback tax cuts). He is also proposing a bipartisan tax commission to study “accountability measures within the tax code and targeted incentives for job growth” and “proposals aimed at reversing the $400 million property tax increase that has occurred during the Brownback administration.”

Perhaps no gubernatorial election this year will be as intensely focused on taxes as the contest in Kansas. Stay tuned. 


Tax Policy and the Race for the Governor's Mansion: Arkansas 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 Arkansas.

No matter who wins the governor’s race in November, income tax cuts are coming to Arkansas. The state finds itself in a unique position this year – because of a law imposing term limits on the governorship, neither of the 2014 gubernatorial candidates is an incumbent, yet both are attempting to fashion themselves in the image of current Democratic Governor Mike Beebe as they push long-term income tax overhauls.

Back in 2006, then-candidate Beebe made slashing the state’s historically unpopular sales tax on groceries the cornerstone of his campaign, a promise he kept as governor as he gradually reduced the rate over the course of his 8-year term from 6% to 1.5%. Beebe was commended both at home and in national policy circles for successfully implementing a common-sense tax cut which lessened the regressivity of the sales tax for low-income Arkansans while also minding the health of the state’s revenue stream – not cutting too deeply too quickly.

In the current gubernatorial race, Republican candidate Asa Hutchinson and Democratic candidate Mike Ross have both invoked Beebe’s duly cautious sales tax reduction strategy as a model for their own income tax cut proposals. But the thing is, the income tax is fundamentally different – state sales taxes are known to be highly regressive, but the income tax is a progressive tax that has the potential to increase the overall fairness of state taxes. As always, the cost of reform to the state should be no small consideration in any evaluation of the candidates’ proposals, but just as important is the extent to which broad income tax cuts would be a loss for progressivity in state taxation.

Arkansas’ current income tax brackets were designed back in 1971 and were left unchanged for 26 years until 1997, when the state legislature first began indexing the brackets to inflation, with a 3% cap. But the legislature declined to apply the indexing retroactively, meaning that bracket boundaries have only risen alongside inflation for 17 of their 43 years of existence (a problem exacerbated by recent low levels of inflation). In real terms, then, the dollar value of the state’s current bracket boundaries are stuck in the 1980s, with the top bracket starting at $34,000. This would be fine if prices and incomes were still at 1980 levels, but inflation inevitably does what it does best – inflates – and has pushed many middle-income Arkansans into unjustifiably high tax brackets.

Mike Ross has proposed a relatively simple, measured hike in the bracket thresholds that retains the tax’s original structure. Ross would lower rates across the board by 0.1% (except the top rate, which is already being lowered by the same amount as part of last year’s tax cut package) and retroactively index the tax brackets to inflation for the 26 years prior to 1997. Applying this type of broad reform, with the adjusted top bracket starting at a more reasonable $75,100, would certainly target relief toward the low- and middle-income taxpayers most affected by inflationary tax hikes under the current structure, but it would also afford unnecessary benefits to the higher end of the income ladder.

Critics have taken issue with the fact that Ross’s timetable for implementation is indeterminate, with the candidate saying only that he will “implement [the proposal] in a gradual, fiscally responsible way -- as the state can afford it.” The plan also comes with a $575 million price tag, as projected by the Arkansas Department of Finance and Administration (DFA), once it is fully phased in.

Hutchinson is pushing a more rapid timetable for his own income tax cut plan, which has some worried about unmanageable revenue impacts. The candidate is proposing immediate first-year rate cuts – namely, lowering the rate for those in the $20,400-$33,999 bracket from 6% to 5%, and from 7% to 6% for those earning $34,000 to $75,000. The phased-in portion comes via the implementation of an ill-advised rate cut for those earning more than $75,000 “as surpluses and growth allow.” Extrapolating from Hutchinson’s pledge that no one earning over $75,000 will receive a tax cut under his initial plan, the benefit of the lower rates would likely be phased out over some income range just under $75,000. The plan would target around 500,000 middle-income taxpayers, but would do nothing to lower the taxes paid by the poorest Arkansans – those earning under $20,400.

The campaign estimates the first-year cost at $100 million (the major caveat here is that the cost for the Hutchinson plan cannot be compared to the cost of the Ross plan and should not be taken as an official estimate because the Hutchinson campaign has refused to release plan details to the DFA to model). Hutchinson intends to use surplus funds to cover the cost of the cuts in 2015 and is counting on state revenue growth in future years – a tenuous strategy given the eventual $140 million per year cost of last year’s tax cut package that will be competing for new revenues.

With the price of both plans likely to be a major factor, Hutchinson’s plan at least appears to be preferable in terms of fairness, with high-income taxpayers seeing no cut. But unfortunately, the plan is a red herring. The candidate has made no bones about his end goal – the total elimination of the income tax in Arkansas. Such a move would wipe out a major piece of the state’s tax base and take away the only meaningful mechanism for reducing regressivity, and that outcome has far greater implications for both fiscal health and fairness than Ross’s across-the-board cuts.


The DC Tax Reform Story Everyone Missed


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By now, the familiar media narrative about the nation’s capitol is one of glittering condos, staggering inequality, and the fraught race relations between newcomers and older residents. The trope shapes the coverage of everything from sports to politics, education to public transportation. When it comes to our nation’s capital, every reporter is Charles Dickens.

And so it was last week, when the DC City Council passed an ambitious tax reform package. “D.C. Council votes to keep ‘yoga tax’ as part of tax-cutting budget deal,” wrote The Washington Post, portraying the deal as an epic showdown between established progressive backbenchers and ritzy health-conscious transplants. (To be fair, The Post’s coverage of the recent tax bill has been far more substantive than reporting from other outlets, which wrote about the yoga tax controversy without providing context.)

The story most people missed? Washington, D.C. managed to pass a mostly sensible and progressive tax cut package that will deliver the biggest benefits to middle- and low-income residents – and the ‘yoga tax’ is just one small part of a much larger plan. What’s more, the DC City Council largely followed the recommendations of a nonpartisan commission designed to study the issue. 

The council also voted to expand the District’s Earned Income Tax Credit (EITC) for childless workers. Working low-income taxpayers who qualify for the federal credit will receive a D.C. credit worth 100 percent of the federal benefit (increased from 40 percent of the federal).  But, the policy change actually expands upon the federal program by allowing childless workers to continue receiving the tax credit above and beyond the federal income limits.   The tax cut lowers the income tax rate for those earning $40,000 to $60,000, from 8.5 percent to 7 percent (the rate will go down to 6.5 percent if the city meets revenue targets). The measure also increases the standard deduction and personal exemption to federal levels by 2017, with interim increases going into effect in 2015.

The EITC is one of the most effective anti-poverty programs, and is an economic winner as well: The Center for Budget and Policy Priorities estimated that the EITC put about $128 million into the DC economy in 2011.  Workers receive the tax credit based on their wages. If the credit exceeds the amount of tax a worker owes, then that worker receives the difference as a refund.

Hell Frozen Over

Pictured: Hell.

Of course, cutting taxes is easy – paying for tax cuts is the difficult part. Here again, the D.C. proposal shines. Instead of relying on regressive sales tax rate increases that disproportionately hurt the lower and middle classes, as states like Kansas have done in recent years, the District took the route supported by academic research and sound policy: they broadened the sales tax base. The city expanded the sales tax to cover additional services, such as construction contracting, storage units, carwashes, health clubs and tanning salons – yes, including yoga studios. Expanding the sales tax to cover services as well as goods in an increasingly service-based economy makes a lot of sense.

The D.C. Council, known more in recent years for political tawdriness than prudent fiscal management, has made the right move for the city’s residents and the city’s fiscal future. Many of the proposed cuts are tied to future economic growth, and will not take effect if this growth doesn’t materialize.

If there’s something not to like, it’s the Council’s decision to increase the threshold for application of the estate tax from $1 million to $5.25 million (the federal threshold). This proposal will benefit a handful of families and cost the city almost $15 million in lost revenue. Even this proposal, however, is tied to future revenue increases.  Businesses also got a significant cut in rates, from 9.975 to 9.4 percent, with the goal of reaching 8.25 percent by 2019. 

So hats off to the D.C. City Council for proving that tax cuts don’t have to be a giveaway to the rich, and that tax reform doesn’t have to soak the poor. Other jurisdictions should follow their lead.


State News Quick Hits: Governors Misguidedly Oppose Progressive Taxes


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New Jersey Governor Chris Christie signed a FY15 budget on Monday after nixing Democratic bills which would have fully funded the state’s promised pension payments through a new “millionaire’s tax.” The effects of the governor’s decision to forgo making the full payments required under his much-lauded 2011 pension reform law are yet to be seen - Standard & Poor’s has threatened to downgrade the state’s debt again while a judge could still reverse Christie’s decision and require the payments to be made.

Indiana Governor Mike Pence pledged to make tax reform a priority during the next legislative session at a conference last week attended by infamous supply siders Arthur Laffer and Grover Norquist, and former Bush administration economic advisor Glenn Hubbard. Pence claims that the tax code must be simplified in order to create a better environment for economic growth, but Indiana House Minority Leader Scott Pelath argues that the language of “simplification” is really just a ruse to disguise the objective of reducing the progressive personal income tax.

Rhode Island and Indiana saw drops in their corporate tax rates Tuesday, a misguided tactic used by states to promote job creation with little proof of success. Rhode Island will drop its rate from 9 to 7 percent, while Indiana’s rate will gradually be reduced to 4.9 percent (this is on top of a gradual reduction from 8.5 to 6.5 percent enacted a few years ago).  However, at least Rhode Island lawmakers sensibly coupled the corporate rate drop with base broadening policies including mandatory combined reporting  which requires a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report.

Kansas’s June revenue collections came in $28 million under projections, according to officials. The state ends the fiscal year $338 million short of total projected revenue amid concerns that Governor Brownback’s income tax cut package is causing more bleeding than initially anticipated. Concerned that the state may be spiraling into a budget crisis, House Democratic leader Paul Davis has proposed postponing the next phase of the governor’s tax cuts.


Kansas: Repercussions of a Failing Experiment


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Two years ago, Kansas Gov. Sam Brownback declared that his plan to gradually repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two consecutive income tax cuts that disproportionately benefited the richest Kansans (while actually hiking taxes on the state's poorest residents), assuring the public these cuts would pay for themselves.

But the Governor’s experiment now appears to be in meltdown mode: revenues for the last two months have come in way under projections and may leave the state short of the cash needed to pay its bills.

And, while the governor takes credit for cutting taxes at the state level, taxpayers in cities and rural areas are finding themselves paying more in local taxes. The Wichita Eagle cautions that municipalities aren’t even close to being out of the woods yet: “[t]he picture for cities, as well as counties and school districts, could darken over the next year if the state’s revenues don’t better align with projections.”

This tax shift isn’t just happening in Kansas cities. Rural areas are feeling the pinch in terms of increased property taxes. A professor from Wichita State University opined about dramatic property tax increases across the state and concludes “Brownback’s tax experiment is driving these shifts.

Need further evidence of the state’s meltdown mode? Read this superbly titled New York Times piece, “Yes, if You Cut Taxes, You Get Less Tax Revenue, Kansas Tax Cut Leaves Brownback With Less Money.”

 


Congress, Take Note: More States Are Reforming Antiquated Fuel Taxes This Summer


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Transportation funding in the United States is in trouble. With the Highway Trust Fund set to go broke by late August, Congress has forgone any increase in the grossly inadequate federal gas tax (unchanged at 18.4 cents per gallon since 1993) in favor of plugging recurring funding gaps with general revenues. Currently, Senators Chris Murphy (D-Connecticut) and Bob Corker (R-Tennessee) are floating a proposal to hike the federal tax by 12 cents, but the new revenues would be offset by new tax cuts and its chances of passage are at any rate tenuous before a full legislature that habitually shies away from increasing taxes.

Fortunately, states need not wait for Congress to take action. With an eye toward long-term sustainability, several states will increase their own fuel taxes on Tuesday, July 1.

According to an analysis by the Institute on Taxation and Economic Policy (ITEP), four states will hike their gasoline or diesel taxes next week. The changes generally take two forms – automatic inflationary increases designed to keep pace with the rising cost of building and maintaining transportation infrastructure and hikes resulting from recent legislation.

 

Four states will see gasoline tax increases on Tuesday. Increases in Maryland and Kentucky are the result of 2013 legislation requiring an annual adjustment to reflect growth in the Consumer Price Index and a quarterly adjustment reflecting an increase in wholesale gas prices, respectively. New Hampshire deserves special kudos after the state legislature passed its first gas tax increase – and the largest of any state this year – since 1991. An additional levy of 4.2 cents per gallon – a decade’s worth of inflationary value – will be added at the pump on Tuesday to support needed transportation projects. Unfortunately, the tax is essentially a fixed rate increase rather than a variable-rate design which could have kept pace with annual increases in infrastructure costs, and it will be repealed in roughly 20 years when bonds for the I-93 project are paid off. Vermont will see a second structural tweak in its tax formula as a result of 2013 legislation overhauling the state’s gasoline and diesel taxes. The imposition of a higher motor fuel percent assessment combined with a decrease in the per gallon tax will result in an overall net increase next Tuesday of 0.6 cents per gallon.

 

On the diesel tax front, four states will see hikes next week ranging from 0.4 to 4.2 cents per gallon. Changes in Maryland and Kentucky again reflect annual or quarterly price growth. New Hampshire’s diesel tax increase matches that for gasoline (4.2 cents per gallon). Vermont will raise its diesel tax by an additional 1 cent on top of last year’s 2 cent hike as the state’s 2013 tax structure overhaul is fully phased in.

Two more states should have made the list this year, but officials there have actually blocked scheduled fuel tax increases. Georgia Governor Nathan Deal suspended an automatic 15% increase in his state’s variable-rate gas tax by way of executive order earlier this month, citing concerns over the cost burden for families and businesses. North Carolina lawmakers passed legislation during the 2013 session freezing the state’s variable-rate gas tax at 37.5 cents per gallon, effective through June 30, 2015. Officials in these states will likely take credit for enacting “tax cuts” this year as infrastructure projects go underfunded.

Two other states will see their fuel taxes decrease on Tuesday. California will cut its gasoline excise tax from 39.5 to 36 cents per gallon, reflecting a decrease in gas prices. Connecticut’s diesel tax rate is revised each July 1 to reflect changes in the average wholesale price over the past year, and will see a decrease this year of 0.4 cents per gallon.

Fortunately, gasoline tax reform is already on the horizon in Rhode Island, where lawmakers agreed as part of this year’s budget plan to index the tax to inflation, which will mean a roughly 1 cent increase effective July 1, 2015. Michigan’s legislature was expected to come to an agreement this session on a fuel tax increase after voters there expressed a willingness to pay for repairs on badly deteriorating roads and bridges, but proposals to increase the tax by 25 cents per gallon over four years or to index it to keep pace with construction costs stalled. With lawmakers promising to take up the issue again in the fall, another summer construction season is now lost in the state.

Including the budget agreement passed by Rhode Island earlier this month, the total number of states with variable-rate fuel taxes designed to rise alongside the price of gas, overall inflation, or both increases to 19 (plus DC). In the past year, Massachusetts, Pennsylvania, and DC have all switched from fixed-rate fuel tax structures to variable-rate structures.

Given the level of debate and the major changes in states’ fuel tax structures that have taken place in 2013 and 2014, it seems that more states are recognizing the need for a sustainable fuel tax capable of keeping pace with the inevitable increases in transportation infrastructure costs.

NOTE: Differences among states in the direction and magnitude of gas price changes evident in rate revisions reflect states' use of state-specific price data as the basis for rate changes. In particular, California experienced the largest gasoline price drop of any state over the past year and will, therefore, see a large negative change in their rate.


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.”


Dear Congress: The Internet Never Was an Infant Industry That Needed Coddling


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1998 was a lifetime ago in the world of technology. E-commerce was in its infancy, Mark Zuckerberg was a 14-year-old and Napster hadn’t yet been invented. But even then, many people rightly scoffed at the notion that the Internet was an “infant industry” requiring special protection from state taxes.

Congress, however, agreed the Internet required exclusions and enacted the “Internet Tax Freedom Act” (ITFA), which placed a moratorium on state and local sales taxes on Internet access (the monthly fee consumers pay for home Internet access) and prohibited all “multiple or discriminatory” taxes on sales of items purchased over the Internet. Since the ITFA expired in fall of 2001, Congress has extended the ITFA moratorium several times, and it is now set to expire in November of 2014.

If the “infant industry” argument was highly questionable in 1998, it’s utterly absurd now. From books to airline tickets, virtually everything consumers purchased in “brick and mortar” stores in 1998 is now available online. Internet access, while not yet omnipresent is widely accessible. Many traditional retailers are going under due to competition from companies such as Amazon.com. Sixteen years later, the infant of 1998 now has the car keys to the American economy.

Nonetheless, Sens. John Thune and Ron Wyden have cosponsored the “Internet Tax Freedom Forever” act, which would turn the moratorium into a permanent ban on Internet access taxes. A glowing Wyden press release claims the bill will “giv[e] online innovators and entrepreneurs the stability they need to grow their businesses.”

While other tax bills have deadlocked Congress, the Internet Tax Freedom Forever act has garnered 50 co-sponsors in the U.S. Senate. The most likely reason is Congress is playing with other people’s money. The fiscal impact of ITFA in 2014, as in 1998, falls entirely on state and local governments. So Wyden and Thune can breezily pre-empt an entire economic sector from tax without hurting the federal budget’s bottom line. But for state and local governments, the bill would represent a real hit on their ability to balance budgets in the long term.

Besides taking a bite out of state budgets, “Internet tax freedom” is simply bad policy. A sustainable sales tax should apply to personal consumption as universally as possible—and it’s especially vital that the tax apply to sectors that are growing most rapidly. By permanently exempting Internet access from sales taxes, the Thune-Wyden bill will make it more likely that state governments will have to hike the sales tax rate on all the other items subject to the tax to make up the revenue loss.

This year’s bill goes beyond simply turning a temporary bad idea into a permanent one. It would also eliminate a “grandfather clause” that allows nine states (Hawaii, New Hampshire, New Mexico, North Dakota, Ohio, South Dakota, Texas, Washington and Wisconsin), which had enacted taxes on Internet access before the original ITFA, to continue to levy these taxes.  So in addition to choking off future state revenues, the Thune-Wyden bill would also put an immediate hit on budgets in the nine states that have been sheltered by the grandfather clause to date.

To be sure, state sales taxes have their flaws. They’re regressive, falling most heavily on low-income families, and are littered with special-interest exemptions. As we have argued elsewhere, shifting away from sales taxes and toward the progressive personal income tax is a sensible reform strategy for states. But a federal ban on internet access taxes is not a way to move this debate forward.


State News Quick Hits: Red Ink Mounting in Tax Cutting States


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News we cannot make up from our friends at the NC Budget and Tax Center: The North Carolina Senate wants to take a sacred public trust, the education of our children, and subject it to the whims of a voluntary funding system. After frittering away precious resources for schools by giving millionaires – among the only people who have prospered much in recent years – an income tax cut they didn’t need, the Senate now wants North Carolinians to voluntarily give back part or all of their income tax refunds so teachers can get a pay raise. A better, saner solution would be for the Senate to acknowledge reality: the tax plan that it and the House passed last year and the governor signed into law is failing the people of North Carolina – and their kids. Read more about this ridiculous plan here.

Kansas lawmakers should be prepared to see lots of red ink within the next year. Former state budget director Duane Goossen has said the state simply won’t have enough money to pay its bills. One reason Kansas is going down this path is because the state no longer taxes pass-through business income, and the price tag of the deduction is largely unknown.  Perhaps this is the evidence Kansans need to prove that Governor Brownback’s experiment has failed.

Tax Fairness advocates take heart! Kudos to Missouri Gov. Jay Nixon for coming out against a sales tax hike for transportation. The governor said, “The burden of this ... sales tax increase would fall disproportionately on Missouri's working families and seniors.” The need for increased transportation funding is real, but it makes little sense to hike the sales tax almost immediately after cutting income taxes.

Perhaps South Carolina Governor Nikki Haley hasn’t closely watched the income tax elimination debate that has sputtered to a halt in other states. If she were paying attention she would see that each of these proposals has gone  nowhere, yet she is proposing that very same thing in the Palmetto State.


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.


ITEP Powers Wisconsin Tax Calculator


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Recently the Wisconsin State Journal ran an important piece describing the current tax debate in the Badger State. Gov. Walker has said he is interested in income tax repeal and already pushed through three major tax cuts during his term in office.  

Governor Walker’s major challenger, Mary Burke  has said, “My pledge is not to raise taxes overall and to make sure that Wisconsin taxes and fees are in line with other states.”

Clearly tax issues will be a hotly debated issue over the course of the gubernatorial campaign. At the request of the Wisconsin State Journal the Institute on Taxation and Economic Policy provided data that powers a new interactive tax calculator that allows readers to answer the question “What’s the right tax  mix for Wisconsin?”


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.


Junk Economics: New Report Spotlights Numerous Problems with Anti-Tax Economic Model


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When anti-tax groups working in the states need a data point to help them argue in favor of their newest tax cutting idea, they often look to the Beacon Hill Institute (BHI).  BHI is housed in the economics department at Suffolk University, but its mission is more ideological than academic: providing research to voters and policymakers that promotes a “limited government” and “free market” perspective.  The cornerstone of BHI’s research is a computerized economic model it calls the State Tax Analysis Modeling Program (STAMP).

To a casual observer, STAMP may appear to be a rigorous model worthy of consideration.  But new research from the Institute on Taxation and Economic Policy (ITEP) explains in great detail the myriad ways in which STAMP is rigged to portray tax cuts as hugely beneficial to state economies, and tax increases as an inefficient drag on economic growth.

The broad ways in which STAMP fails to accurately gauge the impact of taxes on state economies include:

  • STAMP underestimates the economic importance of public services such as education and infrastructure to both the short- and long-term health of state economies.
  • STAMP assumes that workers, consumers, and businesses are hypersensitive to tax changes, causing private sector economic activity to boom (or bust) as a result of modest changes in after-tax incomes and prices.
  • STAMP depicts tax changes as having an instantaneous impact on the economy, even when that impact involves long-run issues such as migration, property value changes, and business formation.
  • STAMP assumes a simplistic, perfectly efficient marketplace where everybody who wants a job already has one.  This assumption simplifies the math behind the model, but is a poor reflection of the economy that actually exists today.

ITEP’s report also describes a number of instances where STAMP’s findings have been contradicted by academic researchers and state revenue officials.  In one particularly implausible analysis, for example, STAMP actually found that cutting Rhode Island’s sales tax rate by more than half would not only benefit the state’s economy—it would actually raise $61 million in tax revenue.

In another analysis, STAMP predicated that roughly 40,000 jobs would be created by a tax cut enacted in Kansas.  Since that analysis was released, Kansas’ economy has underperformed and the state actually saw its credit rating downgraded because of slow economic growth and lagging tax revenues.

As ITEP’s report explains: “STAMP’s flimsy foundation, biased assumptions, and highly questionable results are ample reason to avoid using it as a tool for understanding how changes to a state’s tax system will affect its economy.”

Read the report:

STAMP is an Unsound Tool for Gauging the Economic Impact of Taxes


Just in Time for Memorial Day: Primers on Federal and State Gasoline Taxes


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The summer driving season is kicking off this weekend, so our colleagues at the Institute on Taxation and Economic Policy (ITEP) have released a pair of updated policy briefs explaining everything you need to know about the federal and state gasoline taxes that pay for our roads and transit systems.

The federal brief explains that the nation’s 18.4 cent gas tax has been stuck in neutral for over 20 years, and that construction cost inflation and fuel efficiency gains have steadily chipped away at the value of the tax.  Since 1997 (the year in which the gas tax was rededicated exclusively to transportation spending), the federal gas tax has lost 28 percent of its value as a result of these two factors.

The state brief is slightly more optimistic, noting that while most states still levy stagnant fixed-rate gas taxes similar to the federal tax, the clear trend is toward a more sustainable, variable-rate design where the tax rate can grow over time alongside inflation or gas prices.

Read the briefs

The Federal Gas Tax: Long Overdue for Reform

State Gasoline Taxes: Built to Fail, But Fixable


State News Quick Hits: How to Tax Twix and Much More


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The Illinois Fiscal Policy Center just unveiled its new Earned Income Tax Credit (EITC) website called EITC Works! The site allows users to plug in an address and learn the number of households in their House district currently receiving the credit, the number of children who benefit, and the economic benefits of the credit. Policymakers should be especially interested in this new resource because it also shows the impact of doubling the credit to 20 percent of the federal. The site is a great tool for anyone interested in understanding the local impact of this successful anti-poverty policy.

File this under things that make you go, “hmm.” Did you know that in some states plain Hershey bars are subject to the sales tax, but Twix bars are not because Twix contain flour?  Here’s an interesting read on the intricacies of taxing food, specifically take-and-bake pizzas. The piece affirms the importance of the Streamlined Sales Tax Governing Board and its goal “To assist states as they administer a simpler and more uniform sales and use tax system.”

Why would voters be inclined to vote for local referenda that raise taxes, but seem less supportive of state or national efforts to raise taxes? Read about the central Louisiana experience that may help answer this question here.

On the heels of the Missouri state legislature’s override of Governor Jay Nixon’s veto of a costly income tax cut package, a proposal that would increase the state sales tax to fund transportation projects is looking increasingly unlikely. Calling the proposed hike “hypocritical” in the face of the newly passed income tax cuts, which will largely benefit higher-income individuals, House Democrats are beginning to withdraw their support. Read about it here.


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


States' Failed Tax Policies Have Some Governors Throwing Red Herrings


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Two years ago as part of the fiscal cliff deal, members of Congress sensibly allowed a subset of the Bush tax cuts for the wealthy to expire, including an increase in taxes on capital gains. Many wealthy investors, who have the benefit of tax advisors, chose to sell stocks in 2012 rather than wait for potentially higher federal income tax rates in 2013. The result was a boost in federal and state income tax collections in fiscal year 2013.

To be clear, the fiscal cliff deal’s anticipated tax hikes on the investor class didn’t increase the amount of revenue from capital gains income—it just shifted that income from fiscal year 2014 to fiscal year 2013. This meant that state lawmakers needed to plan for an extra shot of revenue in 2013, and an equivalent amount of missing revenue in 2014.

Most states planned accordingly. In states such as California, this basic budgeting matter hardly caused a ripple: the Golden State experienced a surge in personal income tax revenues in April 2013 and a large decline this year.  But, they saw the decline coming and when the dust cleared, the state actually brought in more money from personal income taxes than expected in April.

A handful of other states, however, didn’t plan as well and are attempting to blame their failed tax policies on the fiscal cliff deal. Kansas is a prime example.

Two years ago, Kansas Gov. Sam Brownback declared that his plan to repeal the state’s income tax would be “a real live experiment” in supply-side economics. He pushed through two successive tax cuts that disproportionately benefited the richest Kansans, assuring the public these cuts would pay for themselves. Now he is facing a barrage of criticism over growing evidence that state tax revenues are declining in the wake of these cuts.

The pressure seems to be getting to the Brownback administration: earlier this month, Brownback’s revenue secretary, faced with a 45 percent decline in April tax revenues relative to the same month in 2013, called the month’s revenue slide “an undeniable result of President Obama’s failed economic policies.”

Kansas experienced the same revenue bubble in 2013, and the same trough in 2014, as did California and many other states. The state Department of Revenue’s April 2014 tax report notes that April 2013 revenues “increased dramatically from the previous year, about 53 percent,” due to accelerated capital gains encouraged by the fiscal cliff deal. In that context, the reported 45 percent decline in April 2014 is not only predictable, it sounds like a pretty good deal.

So why is Gov. Brownback’s administration citing this income-tax timing shift as evidence that President Obama’s policies have caused “lower income tax collections and a depressed business environment?” And why are governors in New Jersey and North Carolina making similar claims? In both Kansas and the Tarheel State, the governor is under pressure to defend the affordability of recently enacted income tax cuts.

Pinning the blame for revenue shortfalls on the fiscal cliff deal deflects scrutiny from state tax cuts costing more than advertised. In New Jersey, as the Tax Foundation has noted, Gov. Christie has been accused of using wildly optimistic revenue forecasts as part of his 2013 reelection campaign, and now he has some explaining to do about why his projections were so wrong. Once again, the Obama Administration serves as a convenient scapegoat for poor fiscal management decisions by state leaders.

But the news is not all bad out of Kansas: in a rhetorical flourish that would make North Korea envious, just one month before the Kansas Department of Revenue blamed President Obama for April’s decline in tax revenues, they explained a March increase in tax revenues as evidence that “ [w]e’re seeing the Kansas economic engine running.”

Kansas is, by all accounts, in a real fiscal jam. The ballooning cost of Brownback’s tax cuts and a recent state Supreme Court mandate that Kansas spend additional money on schools has made the task of a balanced budget very difficult for state lawmakers. But if Kansas lawmakers are in a fiscal hole, they need look no further than the state capitol to determine who is wielding a shovel.


Déjà vu: Oklahoma Enacts Tax Cut Voters Don't Want


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Oklahoma voters have had a rough year.  In the span of less than twelve months, their elected officials passed an income tax rate cut that a majority of Oklahomans opposed, saw that cut thrown out by the state’s supreme court for technical reasons, and then watched their elected officials re-pass the cut even though opposition had increased among Oklahoma voters.

The cut gradually lowers the state’s top personal income tax rate from 5.25 to 4.85 percent, and is likely to take full effect in 2018.  Our colleagues at the Institute on Taxation and Economic Policy (ITEP) analyzed the cut, and found that the top fifth of Oklahoma households will receive a whopping 71 percent of the total benefits.  The bottom 60 percent of Oklahomans, by contrast, will see just 9 percent of the benefits.

After being told about the plan’s lopsided distribution, 61 percent of Oklahoma voters polled said they opposed the cut this year—slightly more than the 60 percent share who opposed it the year before.  And even among Oklahomans who were not told any details about the cut, less than half of all voters polled said they currently support it.

The Tulsa World reacted to the re-passing of this regressive and unpopular tax cut by calling it “a bad choice for a state that is desperately short on money for essential services, including schools, roads and public safety,” and by explaining that those public services are more important to the state’s economy than income tax cuts.

That same editorial also shined a bright light on the absurdity of lawmakers opting to yet again prioritize income tax cuts: “we saw no public groundswell to cut taxes this year. On the contrary, a few weeks ago the largest public political demonstration in state Capitol history brought an estimated 25,000 supporters of public schools to Oklahoma City.”


New Analysis: Gas Tax Hits Rock Bottom in Ten States


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The lack of adequate funding for roads, bridges, and transit has been a major topic of debate in the United States for years.  Anti-tax groups often claim that the problem could be fixed by redirecting education funds toward roads, or by simply cutting “waste” in the transportation budget.  But those arguments just got a lot harder to make in ten states, where our partners at the Institute on Taxation and Economic Policy (ITEP) have discovered that the gas tax has reached its lowest level ever, after adjusting for inflation.

The ten states where the gas tax rate is at an all-time low are Alabama, Alaska, Delaware, Idaho, Iowa, Nebraska, New Jersey, South Carolina, Utah, and Virginia.  As the report explains, it should come as little surprise that many of these states have debated gas tax increases or reforms in recent months, given just how difficult it is to balance a transportation budget with a gas tax that has “hit rock bottom.” 

Having a safe and efficient transportation network costs money.  Given this fact, levying a gas tax rate that’s so low as to be historically unprecedented is doing more harm than good.

Read: Gas Tax Hits Rock Bottom in Ten States


What's the Matter with Kansas (and Missouri, and ...)


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An anti-tax, Republican super majority in the Missouri Legislature claimed victory yesterday in a year-long battle with Gov. Jay Nixon over taxes by voting to override Nixon’s veto of a $620 million income tax cut. This comes one year after Gov. Nixon’s veto was enough to stop a similar measure from becoming law.

The new law, Senate Bill 509, will gradually drop the top income tax rate from 6 to 5.5 percent and create a new tax break for “pass through” business income. Besides blowing a hole in the state’s budget, the tax cut will also make Missouri’s already-unfair tax system even worse: a Missouri Budget Project report, using data from our partners at the Institute on Taxation and Economic Policy (ITEP), found that the poorest 20 percent of Missourians will see a tax cut averaging just $6, while the top one percent of families will enjoy an average tax cut of $7,792.

Throughout this bruising battle, Missouri lawmakers made it clear that similar income tax cuts enacted by neighboring Kansas in 2012 and 2013 were a motivating factor in dropping Missouri’s tax rates. Clearly these lawmakers did not read news stories last week when Moody’s lowered Kansas’s bond rating due, in part, to the fiscal crunch created by that state’s income tax cuts.

But it shouldn’t take a bond downgrade to convince lawmakers that unfunded tax cuts can have a devastating effect on a state’s economy. What has just happened in Missouri and recently in Kansas is a symptom of a larger problem. Anti-tax proponents across the country are pushing a message that taxes are inherently bad without regard to what less revenue does to basic public services, from infrastructure to education. This fallacious messaging has allowed a number of states in the last few years to push through tax cuts that disproportionately benefit the wealthy.

For many states, it’s too soon to tell the long-term impact. But it is likely that other states could experience the same negative consequences as Kansas, including cuts in public services and downgraded bond ratings. Just last week, North Carolina lawmakers (who enacted a massive tax cut package last year) got word that revenues are coming in more than $445 million below projection in the current fiscal year and are likely to be down next year as well thanks in large part to under valuing the impact of their regressive tax cuts. 

Fortunately, Missouri tax cuts won’t begin to phase in until 2017, and even then are contingent on future economic growth. But in the long run, Governor Nixon’s bleak assessment of the bill’s impact—that it’s an “unfair, unaffordable and dangerous scheme that would defund our schools, weaken our economy, and destabilize the strong foundation of fiscal discipline that we’ve worked so long and hard to build” may prove prophetic.  

Results from Governor Brownback’s “real live experiment” (the passage of two rounds of extreme tax cuts under the guise of stimulating the economy) are trickling in and they aren’t good.  The Kansas City Star is reporting that the state’s “plummeting revenues” and increased need are some of the reasons why the state’s bond rating is now down from the firm’s second highest rating of Aa1 to Aa2.

Regrettably, Florida lawmakers just approved those “super-sized” sales sales tax holidays we told you about a few weeks ago. Read why sales tax holidays are a bad deal for both consumers and the Sunshine State in the Institute on Taxation and Economic Policy’s (ITEP) policy brief.

We offer our congratulations to former President George H.W. Bush on being awarded the Profile in Courage Award for raising taxes in 1990 despite his “Read my lips: no new taxes” pledge.  John Sununu, the President’s chief of staff, said, “George Bush did the right thing for the country, and it’s nice to see people are beginning to appreciate it.”

Calls for the Texas legislature to remedy a state tax law that has allowed commercial properties to be assessed at an (often large) discount are still being heard, loud and clear. An opinion piece in the Dallas News calls the lower property tax bills that many businesses have been receiving “unfair,” and cites examples of some of the state’s largest commercial buildings being assessed at a 35-40% discount.

 


Plan to Make Illinois Tax System More Progressive Stalls


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At a time when many states have toyed with the idea of paring back their progressive income taxes, Illinois policymakers this year showed real interest in a progressive change.

The state currently has one of the nation’s most regressive tax systems, applying the same income tax rate to minimum wage workers and millionaires. A proposal (The Fair Tax) would have authorized lawmakers to devise a progressive, graduated income tax structure with higher rates applied to higher income levels. (Note: this Fair Tax proposal is very different from the so-called “fair tax” proposals in other states designed to dismantle state tax systems by eliminating income taxes and replacing their revenue with increased sales taxes.)

Unfortunately, the Senate adjourned Tuesday without voting on this transformative proposal. Lawmakers had appeared poised to take up legislation that, if passed by a supermajority in both the House and Senate, would have allowed voters to amend the state’s constitution to permit a more progressive tax structure.

This battle led by Sen. Don Harmon was especially timely because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. In fact, Sen. Harmon went one step beyond just urging lawmakers to cast their vote in favor of a graduated income tax and actually developed his own proposal whereby taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxable income over $180,000 would be taxed at 6.9 percent. 94 percent of Illinoisans would not see their taxes go up under his plan, and no Illinoisan with income under $200,000 would see a tax increase.

In the wake of this setback, progressive policymakers and advocates are now setting their sights on 2016 as the next opportunity to put the Fair Tax proposal before voters. The campaign for the Fair Tax was spearheaded by a A Better Illinois Coalition . The Coalition released a statement saying that despite their obvious disappointment, “the fight for a Fair Tax – which enjoys the support of 77% of Illinois voters – is far from over.  Our statewide grassroots campaign, including more than 250,000 petition signatures and the support of more than 750 small businesses, faith leaders, labor and education groups, and civic and community organizations from every corner of the state brought us closer to implementing a Fair Tax in Illinois than ever before.”

Despite this setback there is, in fact, plenty Illinois lawmakers can do right now to raise needed revenues in a fair way. Preserving temporary income tax increases, possibly with low-income offsets, can achieve the same goals as the stalled effort at constitutional reform.

Tax justice advocates should take these words of Abraham Lincoln to heart: “Always bear in mind that your own resolution to succeed, is more important than any other one thing.” The Illinois tax reform debate is hardly over and this week’s activities should only act to encourage and shore up the resolve of advocates in Illinois and elsewhere.

The natural gas extraction industry’s free ride in Pennsylvania may finally be coming to an end. Five years after natural gas companies entered the state to take advantage of the Marcellus Shale, legislators are considering an extraction tax (aka, a severance tax) to make up for lower than expected revenues and an otherwise tight budget. Drillers currently face what’s called an “impact fee,” but it raises little revenue, especially when compared with other energy-producing states. While a severance tax is still far from becoming law (the Governor still needs to be convinced, for example), some savvy observers are convinced the coming debate will not just be idle talk.

For years, state lawmakers have been falling all over themselves trying to get Hollywood to come to their states to make movies.  But even Virginia, which has a film tax credit, recognizes that not every potential tax credit deal is a good investment for their economy.  When Maryland decided not to expand its film tax credit, Netflix’s “House of Cards” began looking into whether it should film somewhere else.  But Virginia’s Film Office thinks the show is asking for too many incentives without offering enough in return.

John Archibald of the Birmingham News had a great column last week on Alabama’s tragic policy of taxing the poor deeper into poverty. As he explains, “We like to imagine Alabama a low-tax state…. But it's not a low tax state if you're broke.” This is because Alabama relies heavily on the regressive sales tax, making the state’s tax system one of the most upside-down in the country. Archibald’s column comes a few weeks after a similarly powerful editorial in the Montgomery Advertiser, arguing that while state taxes may be low, public investments are suffering as a result.

Starting Thursday May 1, Amazon.com will finally begin collecting sales taxes on purchases made by Florida residents.  As a result, the percentage of Americans living in a state where Amazon must collect sales tax will increase from 60 to 65 percent.  Until the U.S. House of Representatives acts on the Marketplace Fairness Act, however, enforcement of state sales taxes on purchases made over the Internet will not be possible on a comprehensive basis.


Trend Toward Higher Gas Taxes Continues in the States


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New Hampshire’s gas tax will be increasing for the first time in nearly 23 years under a bill that will soon be signed into law by Gov. Maggie Hassan.  This increase comes on the heels of gas tax increases or reforms enacted in six states and the District of Columbia last year.

The 4.2 cent increase won’t be enough to offset the loss in purchasing power that the state’s 18 cent tax has seen over these last two decades, but it will help generate some long-overdue revenue for transportation infrastructure.  Unfortunately, New Hampshire lawmakers chose not to allow the tax rate to rise alongside inflation in future years, as is the case in 18 states today.  But proposals for this kind of reform are still alive this year in at least three states:

Delaware: Governor Jack Markell continues to make the case for raising his state’s gas tax by 10 cents and linking the tax rate to inflation in future years.  The plan has received a lukewarm reception in the legislature where lawmakers are up for reelection this year, but Markell is right when he describes the basic problem with not adjusting the tax for inflation: “It's not political. It's not philosophical. It's math.”

Iowa: It seems that a gas tax increase is always just out of reach in the Hawkeye State, but some lawmakers were recently encouraged to hear that Governor Terry Branstad thinks reforming the tax so that it grows alongside gas prices is a good idea.  While a gas tax increase or reform in Iowa is unlikely this year, it’s not impossible.

Michigan: The Republican majority in Michigan’s House recently unveiled a plan that would increase the state’s diesel tax and allow for future gas and diesel tax increases tied to the price of fuel.  The plan’s proposal to redirect millions in revenue away from the general fund and toward roads and bridges is troubling, but the fact that Michigan has an all-year legislative session means that lawmakers have plenty of time to work out these kinds of problems before voting on gas tax reform.


Missouri Lawmakers Relentless in Quest to Cut Taxes for the Wealthy


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The anti-taxers are at it again in Missouri. The House and Senate for the second time in as many years passed a bill that would lower taxes on the wealthiest Missourians and reduce taxes on business income.

Fully aware Missouri Gov. Jay Nixon doesn’t support these irresponsible cuts, the Republican lawmakers behind this plan aren’t resting on their laurels; they’re working to drum up enough support to override an anticipated veto.

This tax cut package (Senate Bill 509) would eliminate the state’s top income tax bracket and introduce a 25 percent deduction for business income; It also includes a token exemption for low-income Missourians. A Missouri Budget Project report, using data from our partners at the Institute on Taxation and Economic Policy (ITEP), found that the poorest 20 percent of Missourians would see a tax cut of just $6 while the top one percent of families would see an average tax cut of $7,792.

Interestingly, at least one legal expert notes the bill’s language may be fatally flawed by not just eliminating the top tax bracket (which starts at $9,000), but actually doing away with taxes on income over $9,000. Such a drafting error would effectively end the state’s income tax. It would also balloon the bill’s price tag from $620 million to $4.8 billion.

The Governor hasn’t yet vetoed the bill and is instead allowing time for more administrative review. But his feelings on the bill are pretty clear. In a statement released Tuesday he said, “With the simple stroke of my pen, this bill would separate Missouri from every state in the nation – as the only one unable to meet even the most basic obligations to its people.”

This isn’t the first time Missouri legislators have tried to give the wealthy a tax break at the expense of everyone else.  In 2013, Gov. Nixon vetoed a regressive tax cut package passed by Republican lawmakers that would have cost the state $700 million annually. In his veto message the Governor called the legislation an “ill-conceived, fiscally irresponsible experiment that would inject far-reaching uncertainty into our economy, undermine our state’s fiscal health and jeopardize basic funding for education and vital public services.”

Last year, in a victory for tax justice advocates, his veto withstood an attempted override by the legislature.  Stay tuned as this debate over bill language, state funding, and fairness play out once again.


State News Quick Hits: Tax Breaks for Expensive Artwork and Apple Inc.


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Have you recently purchased a multimillion dollar piece of artwork (say, a $142 million Francis Bacon)? If the answer is yes, we have a great tax loophole for you. Rather than immediately bringing the piece of art home with you -- in which case you would be expected to pay use or sales tax on the purchase -- first loan it for a few months to a museum in a state that doesn’t have a use or sales tax. Museums in these states aren’t complaining about this “first use” exemption, which is found in many state tax codes, but taxpayers across the country should be. The buyer of the aforementioned Bacon painting will likely save $11 million in Nevada use tax by loaning it for 15 weeks to a museum in Oregon.

The most recent development in the income tax fight in Illinois comes from Chicago Mayor Rahm Emanuel, who ruled out a city income tax last week. Emanuel faces serious pension gaps in his municipal budget, which is why he is pushing for a $250 million increase in property taxes. But some, including Chicago Tribune columnist Eric Zorn and Center for Tax and Budget Accountability Executive Director Ralph Martire, think the mayor’s position is misguided and that a city income tax is worth considering. Regular Quick Hit readers will find Zorn’s and Martire’s arguments familiar: unlike property taxes, income taxes can be easily targeted at those most able to pay. ITEP’s own Matt Gardner was quoted in Zorn’s column, rebuffing arguments on the other side that a city income tax will drive people out of the city and kill jobs.

Arizona Governor Jan Brewer signed a pair of business tax cuts into law last week. In addition to a sales tax exemption for electricity used by manufacturers, she also signed a $5 million tax break that many expect will only benefit Apple, Inc. Regular readers may recall that Apple currently has billions of dollars stashed in foreign tax havens.

Oklahoma lawmakers have gone over a quarter century without approving an increase in their state’s gasoline tax, and have instead opted to fund transportation by redirecting money away from other areas of the budget. But that redirection of funds may have gone too far, as the Oklahoma Policy Institute explains that “Oklahoma’s transportation spending has grown considerably at a time when almost every other area of public services has seen cuts or flat funding.” Now lawmakers, at the urging of 25,000 Oklahomans who recently rallied at the state capitol, are considering legislation that would boost funding for schools by scaling back the amount of general fund money being spent on transportation.


Property Tax Loans Another Frontier for Predatory Lenders


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Unscrupulous lenders in Texas are takingadvantage of homeowners struggling to pay their property taxes--a practice Texas lawmakers could halt by providing relief to homeowners once property taxes reach a certain percentage of income.

This form of predatory lending has nothing to do with more common payday advances, tax refund anticipation loans, or auto title loans. Instead, property tax lenders pay off homeowners' delinquent taxes and allow them to repay the loan over a set period. These lenders take advantage of consumers much in the same way as other predatory companies by offering loans at usurious rates and entangling customers in a web of debt that most can ill afford.

The industry, not surprisingly, claims it provides a service to homeowners facing financial pressure from rising property taxes, but as Robert Doggett, an attorney for Texas Rio Grande Legal Aid, explained, these borrowers are “jump[ing] from a frying pan into a fire.” Property tax loans, which totaled $224 million in 2011, give the lender first priority at recouping its money at foreclosure.

“Low” Taxes Cost

Texas prides itself on being a low-tax state. But in truth its regressive tax structurerequires fairly high tax payments from poorer residents. The poorest 20 percent of Texans pay more of their income in taxes than the rest of the state’s population, and they pay more than low-income residents in all but five states. This is in part due to high sales and property taxes.

Just as payday loans are not the solution to persistent poverty and the plethora of low-wage jobs, property-tax loans are not a solution for homeowners struggling to pay property taxes.

Property-tax lenders are a business foremost concerned with profitability. They don’t have consumers’ best interest in mind. While a local government may be willing to put a resident on an installment plan to prevent foreclosure -- and all the negativeeconomic and social costs that come with it -- private property tax lenders are all too happy to scare consumers into predatory loans and push homes into foreclosure.

State authorities are trying to regulate the industry, and state lawmakers have recently passed legislation that would give homeowners better options for paying off delinquent property taxes. But one simple way to prevent the root cause of the problem has been overlooked: a property tax circuit breaker.

Policy Solution

Property tax circuit breakers provide a tax credit to homeowners (or, in some cases, renters) once property taxes reach a certain percentage of their income. Thirty-three states and the District of Columbia have some form of the credit in their tax code, but not Texas. In fact, Texas Gov. Rick Perry vetoed legislation in 2009 that would have required the state comptroller merely to study the feasibility of a circuit breaker. Circuit breakers protect low- and moderate-income taxpayers from unaffordable property tax increases, which helps avoid tax delinquency and the subsequent need for property tax loans. Texas would be wise to consider such a policy.

 


Norquist-Backed Tax Cut for the Rich Fails in Tennessee


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Grover Norquist’s Americans for Tax Reform, along with the Tax Foundation and Koch brothers-backed Americans for Prosperity all tried to convince Tennessee lawmakers that the state’s wealthiest investors need a tax cut.  Fortunately for Tennesseans, their elected officials rejected that idea this week.

 At issue was the state’s “Hall Tax,” a 6 percent levy on stock dividends, certain capital gains, and interest.  Tennessee does not tax wages, business income, pensions, Social Security, or virtually any other type of income imaginable.  But for anti-tax groups, even the state’s narrow income tax on investors was too much to stomach.

The Tax Foundation put out an alert claiming Tennessee could improve in its (highly questionable) tax climate ranking by repealing the tax, while Grover Norquist traveled to Tennessee to urge repeal and Americans for Prosperity ran a series of radio ads doing the same.

The state’s comptroller got in on the action as well, bizarrely suggesting that the Hall Tax is bad policy because it is not primarily paid by large families or low-income people lacking health insurance.

But ultimately, sensible concerns that repeal would require damaging cuts in state and local public services eventually won out, and the bill’s sponsor dropped his plan.

This is good news for people concerned with the fairness and adequacy of state tax systems.  As our colleagues at the Institute on Taxation and Economic Policy (ITEP) explained in a report picked up by The Tennessean, these cuts in public investments would have come with no corresponding tax benefit for the vast majority of households:

“Nearly two-thirds (63 percent) of the tax cuts would flow to the wealthiest 5 percent of Tennessee taxpayers, while another quarter (23 percent) would actually end up in the federal government’s coffers. Moreover, if localities respond to Hall Tax repeal by raising property taxes, some Tennesseans could actually face higher tax bills under this proposal.”

Tennesseans can breathe a sigh of relief that this top-heavy tax repeal plan didn’t make it into law this year.  But you can bet that Grover et al. will try again soon as they attempt to set in motion a national trend away from progressive income taxes.


Kansas Lawmakers Compliance With Supreme Court Decision Proves Difficult


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Kansas lawmakers just passed legislation to comply with the recent state Supreme Court ruling mandating increased K-12 funding to poor school districts, but it didn’t come easy.

The Kansas City Star notes that “[l]awmakers discussed taking the money out of the state’s reserve fund, but those dollars are needed just to keep the lights on in state government. They talked about taking from some educational funds to give to others. They considered shaking out pockets looking for spare change. At one point, senators were reduced to eying the $2 million in the problem gambling fund.”

These difficult choices are a direct result of the last two years of radical tax cuts. Governor Sam Brownback’s supply-side promises notwithstanding, his regressive income tax cuts show no sign of paying for themselves anytime soon, which means lawmakers must look under cushions to meet their court-mandated funding obligations.

The current budget is balanced precariously. As the Kansas City Star reminds us, “Right now, the budget is balanced only by dipping into reserve funds. If current revenue and spending trends continue, it will go underwater in 2016. After that, a state that is shortchanging its universities and disabled citizens will have to start cutting more deeply; forecasters estimate $962 million in cuts by the 2019 fiscal year. Kansas already is raiding its highway fund to pay for transportation of school students and even a chunk of the debt service for the recently completed statehouse reconstruction. Part of the teachers’ pension funds are coming from gambling revenues, in apparent violation of state statute.”

Having found $129 million in new money for poor school districts, the legislature clearly felt the need to dispel any illusion on the part of voters that they actually value public schools, and added legislative measures to undermine them. Kansas is now the latest state to enact “neo-vouchers,” corporate tax credits for companies making contributions to private schools. As we’ve explained in the past, this back-door approach to school vouchers erodes corporate tax revenues, takes money away from already-strapped public schools, and limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. In other words, having grudgingly given new revenue to public schools with one hand, they now will be taking it away with the other.


State News Quick Hits: Maine Cracks Down on Tax Havens and More


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Maine legislators are poised to crack down on corporations that use foreign tax havens to hide income from state tax authorities. The legislation, which has now been passed by both the House and Senate but still faces further votes, requires multinationals doing business in Maine to declare income otherwise attributed to more than thirty countries known to be popular tax havens (like the Cayman Islands and Bermuda, not to mention the Bailiwick of Guernsey, which turns out to be an island off the coast of France). Analysts estimate that such a change would increase state revenue by $10 million over the next two years. And U.S. PIRG, among other public interest organizations, has been beating the drum for this sensible reform, which we discussed in our recent report: 90 Reasons We Need State Corporate Tax Reform. Oregon and Montana already have similar laws on their books.

Thanks to a refundable tax credit included in New York’s budget this year, theater companies who launch their productions in upstate New York will enjoy having taxpayers foot the bill for 25 percent of the cost of “their so-called tech periods, the weeks long process in which a production gathers the costumes, tests the sets and choreography and establishes the lighting and musical cues.” Despite the credit’s extreme generosity, we’re still not sure it would have been enough to save Spider-Man.

Tax swap proposals that would trade income rate reductions for sales tax increases have been all the rage in conservative states in recent years. But what if your state doesn’t even have an income tax to begin with? Not wanting to be left out of the tax swap craze, Republican candidate for Texas Comptroller Glenn Hegar has a solution: completely replace property taxes with an increased sales tax. Texas already has a horribly regressive state tax system (PDF), but eliminating the property tax -- which is at least close to proportional in its distribution across income groups -- would only make matters worse. And while it is “easy to hate” the property tax, without it Texas would need to drastically cut services or more than double the sales tax. Such a trade could also mean less autonomy for localities (PDF) and a revamped school financing system.

Grover Norquist and the Koch brothers’ Americans for Prosperity are continuing to push for eliminating income taxes on investors in Tennessee, and there’s a chance they may succeed.  The state’s tax-writing committees will be voting this week on whether or not to gradually repeal Tennessee’s “Hall Tax” on dividends, interest, and some capital gains.  But repeal would be steeply regressive, as our partners at the Institute on Taxation and Economic Policy (ITEP) showed in a report cited by The Tennessean.  And on top of that, a spokesman for Governor Bill Haslam explains that “we’re in the middle of dealing with difficult budget realities … and this legislation would automatically put the issue above other priorities when revenues come back.”


Cuomo Gets His Election-Year, Tax Cut Wish


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New York Governor Andrew Cuomo got his election-year wish: a $2 billion tax cut package that doles out goodies to Wall Street banks and rich homeowners. Cuomo, a Democrat who likely has presidential ambitions, sold the tax cuts under the false promise that they would help New York businesses “thrive.” Tax cuts have become something of an obsession for Cuomo, despite the fact that important public investments have been neglected by five consecutive years of austerity budgets.

Here’s a run-down of the tax changes in the budget deal:

Property tax: A three-year property tax rebate program will cut homeowners’ taxes by $1.5 billion by “freezing” the amount many currently pay. But the cuts won’t be evenly distributed and generally won’t target those most in need of relief. For those living in local jurisdictions that comply with a 2 percent property tax cap and working to consolidate services with neighboring jurisdictions, the state will send homeowners (only those with household income under $500,000 qualify) a check for the amount of any increase in property taxes over the prior year (the checks are conveniently scheduled to be sent out for right before the November elections). For those living in New York City, which is not subject to the tax cap, low-income homeowners and renters will be eligible for a small, refundable property tax circuit breaker credit which will cost $85 million a year. Unfortunately, an expanded circuit breaker tax credit available to homeowners across the state-- one of the best ways to provide targeted property tax reductions-- was dropped from the final bill.

Business taxes: Corporations will get more than $500 million in tax cuts, including a permanent across-the-board corporate income tax rate cut from 7.1 percent to 6.5 percent. Manufacturers will be zeroed out from paying the corporate income tax altogether and will also receive a new property tax credit. Though Cuomo has heralded his business cuts as a boon to manufacturers, they in fact already pay very low rates (Our recent state corporate tax study found that Corning, for example, paid only a 0.3% state tax rate on $3.5 billion in profits over the past five years) and the primary beneficiaries are predominantly Wall Street banks.  The package eliminates the state’s bank tax, subjecting banks instead to the corporate income tax, and also allows them to pay only 8 percent of their income from qualified financial instruments (securities) under the assumption that 92 percent of their income from these sales comes from customers outside of New York.

Estate tax: Though there had been talk of also lowering rates, legislators ultimately agreed to cut the state’s estate tax by increasing the exemption from $1 million to $5.25 million, the threshold currently used at the federal level.

We’ll let others analyze the budget as a whole, which is worth $138 billion and includes important provisions on charter schools, pre-K, and campaign finance. But on the tax front, the bill falls far short of the type of targeted, progressive reform that is so badly needed.


Good and Bad Tax Policy in Maryland


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The estate tax, Earned Income Tax Credit (EITC), and film tax credits were all major topics of debate in Maryland this year.  Now that the state’s legislative session has ended, here’s a quick look at what happened on each of these issues.

Estate tax:  Despite having the highest concentration of millionaires in the country, Maryland lawmakers say they’re very concerned the estate tax may be driving wealthy residents out of the state.  Because of this, both the House and Senate approved a bill benefiting estates worth more than $1 million.  Assuming the governor signs the bill, which seems likely, Maryland’s estate tax exemption will increase from $1 million to more than $5.3 million by the end of the decade.  This is unfortunate since, as CTJ explained in testimony before both of Maryland’s tax-writing committees, an estate tax cut will reduce the adequacy and fairness of the state’s tax system without producing any economic benefit.

Earned Income Tax Credit:  In better news, Maryland lawmakers unanimously agreed to expand the state’s EITC.  Maryland currently allows taxpayers to choose between a refundable EITC equal to 25 percent of the federal credit, or a 50 percent nonrefundable EITC.  Legislation approved on Monday will gradually increase the refundable portion of the credit to 28 percent, which means low-income taxpayers who earn too little to owe personal income taxes will receive a somewhat larger refund to help offset the significant amounts (PDF) of sales and property taxes they pay each year.

Film tax credit:  A couple months ago, the producers of Netflix’s “House of Cards” threatened to leave the state unless lawmakers gave them more taxpayer dollars through the state’s film tax credit program.  Despite trying mightily to comply with their demand, the legislature ultimately failed to reach an agreement on a bill that would have shelled out an extra $3.5 million to the filmmakers.  Less encouraging, however, is that the show could still collect another $15 million in tax credits—on top of the millions it has already received.


ITEP Predicts Illinois Tax Reform Debate...and Then Puts Crystal Ball Away


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Earlier this year our partners at the Institute on Taxation and Economic Policy predicted Illinois would be a state “taking on real tax reform.” Policymakers in Illinois are making our crystal ball look very reliable as a bevy of tax reform measures are being seriously discussed. The pressure is on Illinois lawmakers to do something to enhance revenue because the state’s temporary 5 percent income tax rate is set to fall to 3.75 percent in 2015. The following is a roundup of some of the proposals being discussed.

Last week, Gov. Pat Quinn delivered his budget address. During the speech he discussed “comprehensive tax reform [that] protects children, working families and seniors while preventing radical cuts to critical services.” The governor’s proposal includes making permanent the temporary income tax hike, doubling the state’s small Earned Income Tax Credit (EITC), providing a new $500 refundable tax credit for homeowners, and new tax cuts for businesses.

The day before Gov. Quinn’s address, Sen. Don Harmon released his own version of tax reform that would increase the progressivity of the state’s income tax by introducing a graduated rate structure. Taxpayers would see their first $12,500 of taxable income taxed at 2.9 percent. Taxable income between $12,500 and $180,000 would be taxed at 4.9 percent, as opposed to the current 5 percent rate. And taxpayers with taxable income over $180,000 would see that income taxed at 6.9 percent. No Illinoisan with income under $200,000 would see a tax hike under this plan.

Since the Illinois constitution mandates a single income tax rate, Senator Harmon’s plan would require a 3/5th majority vote in the House and Senate, as well as a vote of the people. Illinois Voices for Children rightly argues that Senator Harmon’s proposal (or one like it) is necessary to create a more equitable tax structure.

But Harmon and Quinn’s plans are hardly the only ones under discussion. Late last week, House Speaker Michael Madigan put forward his own constitutional amendment that levies a 3 percent surcharge on Illinois millionaires. The proposal was approved by the House Revenue Committee. Speaker Madigan admits his plan wouldn’t solve the state’s budget woes noting that this is especially true if the current income tax rate is allowed to expire, “We’ll still struggle with a budget for the state of Illinois because there will be a great loss of revenue unless we extend the increase in the income tax.” That same House committee voted down a proposal that would eliminate the state’s current flat rate income tax and replace it with graduated rates and brackets. Let’s hope there is more debate on this important issue.

We aren’t going to press our luck again and dust off our crystal ball to predict what the outcome of this debate will be. But tax justice advocates everywhere should be heartened to hear that real reform is being discussed in a state where there is a desperate need for it. The Illinois tax structure is one of the ten worst in the nation in terms of fairness, and income tax reform could go a long way to improving this grim situation.


How Long Has it Been Since Your State Raised Its Gas Tax?


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State gas tax policies have changed a lot in recent months, which makes two new fact sheets from the Institute on Taxation and Economic Policy (ITEP) especially useful in understanding where states stand on this issue.

The first fact sheet shows that 24 states have gone a decade or more without increasing their gas tax rate, and that 16 states have gone two decades or more.  This lack of action has allowed for a significant drop in the purchasing power of these states’ gas tax dollars as the cost of construction and maintenance has increased.  The worst gas tax procrastinators are Alaska (43.9 years), Virginia (27.3 years), Oklahoma (26.9 years), Iowa (25.3 years), Mississippi (25.3 years), and South Carolina (25.3 years). 

The fact sheet also shows that four states are “celebrating” gas tax anniversaries this week.  As of April 1st, it has been exactly 18 years since Idaho and Missouri raised their gas tax rates, while South Dakota and Wisconsin have gone 15 and 8 years, respectively.  The only state raising its gas tax this April 1st is Vermont, where the rate is rising by less than a tenth of a penny per gallon.

The second fact sheet from ITEP puts a spotlight on those 18 states, plus the District of Columbia, that actually levy a smarter gas tax.  Rather than going years on end without a change in their gas tax rates, these states allow for modest increases in their tax rates each year through the use of a “variable-rate” tax that rises with inflation or gas prices. 

As a result of reforms enacted in four states last year, a majority of the country’s population now lives in a state where the gas tax rate is “indexed” in this way.  This isn’t a radical idea.  More states, and the federal government, should take a serious look at switching to a variable-rate gas tax.

Read the fact sheets:

How Long Has it Been Since Your State Raised Its Gas Tax?

Most Americans Live in States with Variable-Rate Gas Taxes

 


State News Quick Hits: State Lawmakers Not Getting the Message


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

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

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

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

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


Grover Norquist cares a lot about Tennessee taxes. You should too.


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(Blog Post Originally Appeared in The Hill)

It’s not breaking news that partisanship has gridlocked Congress these last few years, and most policy change has occurred at the state level. State legislatures have debated and enacted laws affecting issues as varied as minimum wage, infrastructure investment, education, environmental protection, and voting rights.

National groups seeking to cut taxes for the wealthy are well aware that policy change in states may be their best bet right now, and they’ve set their sights high. Grover Norquist’s Americans for Tax Reform, as well as Koch brothers-backed Americans for Prosperity and other conservative groups, continue to advocate for full repeal of state income taxes, with an eye toward setting a national trend in motion.

So far, most proposals to do away with state income taxes have run into a brick wall called reality after legislators learned that repeal would mean damaging cuts in public investments and significant tax hikes on the poor and middle-class. Proposals for income tax repeal recently failed in Louisiana, Missouri, Nebraska, North Carolina, and Oklahoma. The only state in U.S. history to repeal its personal income tax is Alaska, which threw out the tax in the 1980s when it was awash in newfound oil tax revenues.

Now it seems anti-tax proponents have found a test case in Tennessee. The Volunteer State has a regressive tax code built mainly around the sales tax. Unlike most states, it doesn’t have a general income tax on salaries and wages. But it does levy the Hall Tax, a modest 6 percent assessment on investment income that largely falls on wealthy Tennesseans with large stock portfolios. In recent months, a number of right-wing groups have spent significant resources backing a bill that would repeal this tax.

These groups are toeing their typical line, saying repeal will make Tennessee “economically competitive.” But the mediocre experiences of states that have recently cut income taxes don’t support that assertion.

Moreover, the vast majority of Tennesseans don’t pay the Hall Tax. The law exempts business income, wages, pensions, Social Security, and most other types of income Tennesseans earn. Only people with more than $2,500 in dividends, interest, and certain capital gains pay anything at all. Low- and moderate-income residents over age 65 are entirely exempt.

Given the Hall Tax’s limited scope, it generates only about 1 percent of the state’s revenue, making it low-hanging fruit for tax repeal advocates who have met with failure in states where personal income taxes generate significantly more revenue. 

While repealing the Hall Tax could yield fruit for the no-tax agenda, it’s not in Tennesseans’ best interest. My colleagues and I at the Institute on Taxation and Economic Policy produced an analysis that found the top 5 percent of earners would receive a whopping 63 percent of the benefits of the tax cut. Another 23 would go to the federal government because residents who pay the tax would no longer be able to write-off those payments on their federal tax returns. The remaining 14 percent of revenue lost by the cut would be spread thinly among the bottom 95 percent of households.

Although most ordinary working Tennesseans would see no benefit to their pocketbooks, they certainly would see the effect on state and local budgets. The $260 million revenue loss resulting from Hall Tax repeal would require Tennessee to scale back investments in education, infrastructure, and other services vitally important to the state’s success. Local communities would be hit particularly hard since more than one out of every three dollars generated by the tax goes to local government budgets. And if communities respond to this revenue loss by increasing property taxes, many Tennesseans could see their overall tax bills rise under this so-called “tax cut.”

The vagaries of Tennessee legislation may seem inconsequential for people outside the Volunteer State. But anyone concerned about how states and local governments fund basic services should be worried that national anti-tax groups have set their sights on repealing the Hall Tax. Tennessee isn’t this train’s first stop, and it won’t be the last.


Tax Cuts Fall Flat in Idaho


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Tax cuts for corporations and wealthy individuals were on the table in Idaho this year, but lawmakers ultimately decided that adequately funding education is more important.  Governor Butch Otter started the year by trying to couple income and property tax cuts with an increase in education funding, but the legislature opted to drop the tax cuts entirely and double his education funding proposal.  Far from being upset at the development, Otter conceded that “I think that they found a better use for the money than tax relief this year.”

Idaho’s big business lobby reacted very differently, complaining that lawmakers didn’t “truly do what’s right for business.”  In their eyes, it’s more important to eliminate the property tax on large businesses’ equipment and machinery, despite the fact that the largest beneficiary of that plan (IDACorp) is already managing to avoid paying anything in state corporate income taxes.

The other major tax cut ideas under discussion were reducing the state’s corporate income tax rate, as well as its top personal income tax rate.  But in a report we issued last week, we showed that many companies are already paying very little in state corporate income tax thanks to “copious loopholes, lavish giveaways and crafty accounting.”  And when the Institute on Taxation and Economic Policy (ITEP) analyzed the impact of an earlier cut in the state’s top personal income tax rate, we found that most of the tax cuts flowed to the state’s top 1 percent of earners, and that the vast majority of Idahoans received no benefit.

Idahoans should feel relieved that none of these regressive ideas were enacted into law this year.


State News Quick Hits: To Cut or Not to Cut?


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A battle over New York Governor Andrew Cuomo’s proposed property tax cuts is heating up, with protesters pouring into the New York State Capitol in Albany last week, a new TV ad hitting the airwaves, and the introduction of alternative tax cut plans from the Assembly and Senate. The governor’s plan would “freeze” property tax increases over the next two years by giving a refundable tax credit to homeowners for the amount of any increase in taxes over the prior year (and only to those living in jurisdictions complying with a 2 percent property tax cap and showing an effort to consolidate services with neighboring jurisdictions). In the third year, the freeze would be replaced with an expanded homeowner circuit breaker property tax credit and new renter’s tax credit. State legislators and many local leaders have voiced unease with the proposal. The Assembly’s plan would skip the freeze altogether and simply offer the homeowner and renter circuit breaker credits with less restrictions.

Illinois House Speaker Michael Madigan has called for a state constitutional amendment (PDF) to charge millionaires a tax surcharge and use the resulting $1 billion in revenue to fund public education. The proposal is likely the first of many attempts by both political parties to define the electoral turf prior to the gubernatorial election in November, which the Chicago Tribune has dubbed the “governor's race of a generation.” Current Governor Pat Quinn is running for re-election against Republican Bruce Rauner, who happens to be a multimillionaire. Even if the constitutional amendment doesn’t make it on the ballot (it would first have to be approved by supermajorities in the House and Senate), voters will face a stark choice on taxes: the state’s temporary income tax rate increase is set to decrease in 2015, and the two candidates will likely have different views on how to make up the lost revenue.

Most Oklahomans don’t want lawmakers to enact the income tax cut approved by the state Senate last month. A new poll reveals that when voters are told about the Institute on Taxation and Economic Policy’s finding that much of the tax cut will flow to the state’s wealthiest residents, 61 percent of voters oppose the plan compared to just 29 percent in support. Even among voters who aren’t told about this lopsided impact, less than half support the rate cut, and fewer people support the cut than did so last year.

Colorado spends roughly $2 billion per year on special tax breaks and a new law just signed by Governor John Hickenlooper (backed by the Colorado Fiscal Institute, among others) ensures that basic information about those breaks will continue to be made public going forward. Colorado’s Department of Revenue published the state’s first comprehensive tax expenditure report in 2012, and now the department is required to update that information every two years. Our partners at the Institute on Taxation and Economic Policy (ITEP) explain that “a high-quality tax expenditure report is a bare minimum requirement for even beginning to bring tax expenditures on a more even footing with other areas of state budgets.”


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: Don't Expect Much from Congress


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

 

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

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

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

 


Indiana Lawmakers Shower More Breaks on Low-Tax Corporations


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The state corporate tax study Citizens for Tax Justie and the Institute on Taxation and Economic Policy released today shows that three very profitable Fortune 500 companies headquartered in Indiana paid an effective corporate income tax rate ranging from just 0.4 to 1.5 percent over the last five years.  Eli Lilly, NiSource, and WellPoint earned a total of over $35 billion in profits between 2008 and 2012, but thanks to a variety of tax avoidance techniques none of these companies even came close to paying the statutory 8.5 percent rate that was in effect in Indiana for most of this five-year period.  Despite this fact, Indiana lawmakers inexplicably decided last week to enact yet another corporate income tax rate cut, as well as a property tax break for business equipment.

Less than three years ago, former Governor Mitch Daniels signed into law a bill gradually lowering the state’s corporate tax rate from 8.5 percent to 6.5 percent.  The final stage of that tax cut is still over a year away, and yet Governor Pence says he’s “pleased” with the fact that the current legislature just sent him another corporate tax bill that will eventually lower the rate to 4.9 percent.  The Institute on Taxation and Economic Policy (ITEP), notes: “When some of Indiana’s most successful corporations are paying such a small fraction of their profits in state income taxes to states around the country, it raises serious questions about whether reducing the corporate income tax is a worthwhile priority.”

But this corporate tax rate cut isn’t the only giveaway for big business that Governor Mike Pence will soon be signing into law.  The same legislation containing the corporate tax rate cut also grants localities the option to begin a race-to-the-bottom by eliminating their property taxes on new business equipment.  A report (PDF) from the Indiana Fiscal Policy Institute explains that giving localities this option is unlikely to draw any new businesses into the state, though it may reshuffle existing businesses around within the state’s borders.  And the president of the Institute explains that “I’m a little worried about the nature of allowing local governments to adopt this when some counties depend so much on business personal property tax and some don’t.”

Indiana’s largest and most successful companies already enjoy a shockingly low tax rate, and that rate is about to get a lot lower.  Hopefully next session lawmakers will turn their attention toward initiatives that could actually benefit ordinary Indiana residents—like improving the state’s education system and infrastructure.


Film Tax Credit Arms Race Continues


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Tax credits for the film industry are receiving serious attention in at least nine states right now. Alaska’s House Finance Committee cleared a bill this week that would repeal the state’s film tax credit, and Louisiana lawmakers are coming to grips with the significant amount of fraud that’s occurred as a result of their tax credit program. Unfortunately for taxpayers, however, the main trend at the moment is toward expanding film tax credits. North Carolina and Oklahoma are looking at whether to extend their film tax credits, both of which are scheduled to expire this year. And California, Florida, Maryland, Pennsylvania, and Virginia lawmakers are all discussing whether they should increase the number of tax credit dollars being given to filmmakers.

The best available evidence shows that film tax credits just aren’t producing enough economic benefits to justify their high cost. While some temporary, relatively low-wage jobs may be created as a result of these credits, the more highly compensated (and permanent) positions in the film industry are typically filled by out-of-state residents that work on productions all over the country, and the world. And with film tax credits having proliferated in recent years, lawmakers who want to lure filmmakers to their states with tax credits are having to offer increasingly generous incentives just to keep up.

Saying “no” to Hollywood can be a difficult thing for states, but here are a few examples of lawmakers and other stakeholders questioning the dubious merits of these credits within the last few weeks:

North Carolina State Rep. Mike Hager (R): “I think we can do a better job with that money somewhere else. We can do a better job putting in our infrastructure … We can do a better of job of giving it to our teachers or our Highway Patrol.”

Richmond Times Dispatch editorial board: [The alleged economic benefits of film tax credits] “did not hold up under scrutiny. Subsidy proponents inflated the gains from movie productions – for instance, by assuming every job at a catering company was created by the film, even if the caterer had been in business for years. The money from the subsidies often leaves the state in the pockets of out-of-state actors, crew, and investors. And they often subsidize productions that would have been filmed anyway.”

Oklahoma State Rep. James Lockhart (D): According to the Associated Press, Lockhart “said lawmakers were being asked to extend the rebate program when the state struggles to provide such basic services as park rangers for state parks.” “How else would you define pork-barrel spending?”

Alaska State Rep. Bill Stoltze (R): “Some good things have happened from this subsidy but the amount spent to create the ability for someone to be up here isn't justified. And it's a lot of money … Would they be here if the state wasn't propping them up?”

Sara Okos, Policy Director at the Commonwealth Institute: “How you spend your money reveals what your priorities are. By that measure, Virginia lawmakers would rather help Hollywood movie moguls make a profit than help low-wage working families make ends meet.”

Maryland Del. Eric G. Luedtke (D): Upon learning that Netflix’s “House of Cards” will cease filming in Maryland if lawmakers do not increase the state’s film tax credit: “This just keeps getting bigger and bigger … And my question is: When does it stop?”

Picture from Flickr Creative Commons

With pothole season well under way, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has been in the news quite a bit recently for its research on the need for more sustainable federal and state gasoline taxes. USA Today ran a story this week featuring quotes from ITEP staff and six different infographics based on ITEP data that explain where state gas taxes are, and aren’t, being raised.  In addition, ITEP’s Carl Davis appeared on both CBNC and NPR’s Marketplace to talk about the gas tax.

The Missouri legislature is poised to offer Kansas a truce in the never-ending battle to shower Kansas City-area companies with tax credits. Both the Missouri Senate and House recently passed similar bills that would ban state tax incentives for companies that agree to move from the Kansas side of the Kansas City border (Wyandotte, Johnson, Douglas, or Miami counties) to the Missouri side (Jackson, Clay, Platte, or Cass counties). It seems Missouri has finally realized that tax breaks used to lure companies across the border — otaling $217 million between both states in recent years by one estimate — don’t actually create new jobs for the region’s residents and would be better spent on much needed public services. The one catch: the Missouri bill would only go into effect if Kansas agrees to a similar ceasefire within the next two years.

Perhaps this is the year that Utah will establish a state Earned Income Tax Credit (EITC). A bill creating the much-heralded working family tax credit was passed out of the House Revenue and Taxation Committee last month. Last year, a similar bill was passed by the full House, but stalled in the Senate. This year’s bill, which is again sponsored by Representative Hutchings, would give over 200,000 low-income Utahns a refundable tax credit worth 5 percent of the federal EITC, or roughly $113 on average. But one change from last year’s bill is that the credit will not go into effect until Utah is allowed to start collecting sales tax from online shoppers — something that won’t happen until Congress passes legislation granting the states that power. Such a bill has already passed the U.S. Senate and is supported by President Obama, but it is still pending in the U.S. House.

While a full solution to the problem of uncollected sales taxes on online shopping will have to come from the federal government, Hawaii’s House of Representatives wants to chip away at the problem by expanding the number of online retailers that have to collect sales tax right now. Under a bill backed by the state Chamber of Commerce, retailers partnering with Hawaii-based companies to solicit sales would have to collect sales taxes on purchases made by their Hawaii customers.  This move to apply the state’s sales tax laws more uniformly to both online retailers and traditional brick-and-mortar stores would be one step toward a more modern sales tax in the Aloha State.


Kansas Supreme Court Case Shows Public Services Suffer When Tax Breaks for Wealthy Take Priority


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Far too often, lawmakers use tax cuts to score political points and throw around phrases such as “more effective government” to gloss over the lasting, negative effects of starving public investments.

In the case of Kansas, public schools are paying the price. The state Supreme Court ruled last Friday that the state Legislature hasn’t allocated enough money to poorer school districts but must do so by July 1. Although the Court didn’t designate a specific dollar amount, state Department of Education officials have estimated that complying with the Court ruling will cost at least $129 million.

Unfortunately, state political leaders have already signaled their intention to skirt the Court’s decision. Quoted in the New York Times, state Rep. Kasha Kelly, the Republican chair of the House Education Committee, said the legislative branch has the “power of the purse.” And Gov. Sam Brownback lauded the Court for not declaring a dollar amount, stating that equity is more about equality of opportunity rather than dollars spent.

Such rhetoric has no basis in reality. Indeed, state lawmakers have a responsibility to be stewards in the public interest. This means deciding how to raise revenue as well as spend revenue. Too often, lawmakers interested in backing the narrow interests of an elite few discuss taxes in a vacuum as though they are unrelated to how states fund critical priorities. This makes it easier to push through tax cuts under the guise of stimulating the economy without talking at the same time about long-term implications of less revenue for basic public services—or, in the case of Kansas, equitable funding for public schools.

Gov. Brownback has led the way in a recent wave of governors advocating for large tax cuts for the affluent under the misguided premise that tax cuts pay for themselves.

In Kansas, recent state budget cuts have meant increased classroom sizes and fewer resources for extra-curricular activities, not to mention cuts in other public services.  State funding per student has dropped since the economic recession from $4,400 five years ago to a reported $3,838 today. Kansas lawmakers initially claimed they had to cut funding for K-12 education due to the lingering effects of the recession. But even as state revenue rebounded, legislative leaders astonishingly moved to cut income taxes rather than restore funding for public education and other services.  In fact, the Legislature enacted two rounds of major tax cuts that disproportionately benefit the wealthiest Kansans. The first round, in 2012, dropped the top tax rate from 6.45 to 4.9 percent and exempted all “pass-through” business income from the personal income tax.

The next round, enacted in 2013, doubled down by dropping the top tax rate even further, to 3.9 percent, and setting the income tax on track for complete elimination if, as Gov. Brownback has said, the state meets revenue targets. The long-term fiscal impact of these tax cuts in Kansas will be a whopping $1.1 billion.

If, as Gov. Brownback says, he is for equality of opportunity, he should concede that overcrowded classrooms and reduced services are not the way to achieve this. Lawmakers would be wise to consider rolling back some of Gov. Brownback’s tax cuts by not allowing the top income tax rate to fall further and by eliminating the costly deduction for pass through business income.


Wisconsin Lawmakers Move Forward with Tax Cuts


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This week Wisconsin’s Senate followed the lead of the General Assembly and approved Governor Scott Walker’s $537 million (over two years) in property and income tax cuts. Governor Walker proposed the tax cuts as a way to “return the state’s surplus to the people who earned it” and his signature on the legislation is all but guaranteed. The cuts include $404 million in across the board property tax cuts and $133 million in income tax cuts that result from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax.

It’s worth noting that the tax cuts are permanent yet the state’s “surplus” is not guaranteed to last. According to the Wisconsin Budget Project, the tax cuts will mean that “the next state budget will be $658 million in the red before budget deliberations even begin.”

Too bad lawmakers weren’t persuaded by editorial boards at the Milwaukee Journal Sentinel and the Wisconsin State Journal that both (rightly) responded to Governor Walker’s tax cut proposals by encouraging lawmakers to instead use the one-time surplus to help curb the state’s growing structural deficit, or use it towards serious problems like poverty reduction and enhancing K-12 education.


State News Quick Hits: Tax Breaks for NASCAR and House of Cards


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Tax cut one-upmanship continues to be a major theme in the race to be Maryland’s next governor. As of right now, at least two gubernatorial candidates want to completely eliminate the state’s personal income tax–a revenue source that funds about half of the state’s spending on schools, hospitals, and various other services. In terms of how to pay for this massive cut, the best that Harford County Executive David Craig could come up with is a 3 percent across-the-board spending cut (that math seems a little fishy to us), while businessman and candidate Charles Loller seems to have bought into Arthur Laffer’s wild claims that tax cuts pay for themselves. But even if the cost of repeal weren’t an issue, it’s still the case that the personal income tax is an essential element of any fair and sustainable tax system, and should not be on the chopping block in any state.

Lawmakers in Iowa are poised to give NASCAR a $9 million tax rebate. The bill (PDF), which passed a key Senate subcommittee last week, would extend a five percent rebate for all sales tax collected at Iowa Speedway, a racetrack located about 30 miles outside of Des Moines. The sweetheart deal had originally required that the track be owned at least 25 percent by Iowans, but the Florida-based NASCAR company bought the track last year, prompting legislators to scramble to amend the law. (Racetrack owners are already the beneficiary of a notorious federal tax break, which is part of the group of tax “extenders” currently languishing in Congress.) It is unclear why NASCAR, a profitable company in its own right, needs the handout. It already owns the facility and has plans to host four races there in 2014. Some in the state are hoping that the rebate will be used to upgrade the track so that it can host a lucrative Sprint Cup race, but NASCAR has made no such promise.

Our colleagues at the Institute on Taxation and Economic Policy (ITEP) have seen a lot of attention directed toward their analysis of an Oklahoma proposal to cut the state’s top income tax rate–including two opinion pieces, a front-page news story, and a paid advertisement (PDF) taken out by the state’s former Governor. While the top rate cut proposed by current Governor Mary Fallin is extremely lopsided (contrast a $29 tax cut for a middle-income family with a $2,000+ tax cut at the top), it appears that the Senate has some interest in improving upon the bill. Rather than simply cutting the top tax rate and slashing public investments, the Senate’s tax-writing committee recently advanced a bill that pairs the cut with a very sensible expansion of the state’s income tax base: eliminating the nonsensical state income tax deduction for state income taxes paid.

House of Cards–a Netflix show about politicians making bad decisions–is trying to get Maryland’s politicians to make some bad decisions in real life. The Media Rights Capital production company says they’ll shoot the third season of their program elsewhere unless lawmakers direct more taxpayer dollars their way in the form of an expanded film tax credit. Upon learning of the threat, lawmakers on both sides of the aisle had some entirely appropriate reactions: “Is it possible that they would just leave after we gave them $31 million?” “We’re almost being held for ransom.” “When does it stop?”


State Tax Breaks Pile Up


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Denver and Baton Rouge are 1,200 miles apart (not to mention some steep elevation change), but state lawmakers in these distinct capitals are grappling with a similar challenge: a tax code increasingly clogged with special interest tax breaks.

In Colorado, legislators have proposed a “bumper crop” of tax credits this year. The legislature has already had to beat back a bill that would have provided $11.6 million in tax credits for parents who send their children to private schools, but dozens more are awaiting consideration. Tim Hoover, communications director for the Colorado Fiscal Institute, has compared the atmosphere at the Capitol to a recording of “Oprah”: “Tax incentives are handed out the way Oprah gives away cars to her audience members. You get a tax credit! You get a tax credit. Everybody gets a tax credit."

In 2009, Colorado lost $2.7 billion to various tax credits, exemptions, and deductions. The only reason we’re even able to put a number on these otherwise hidden tax provisions is because the state recently joined most of the rest of the country by publishing a tax expenditure report (PDF). The good news is that some Colorado legislators are now trying to make this report a regular feature of the state’s budgeting process, published every two years. The bad news (other than all the new breaks that lawmakers are trying to pile on) is that the report does nothing to show if the state’s tax breaks are having their intended effect. This is one reason why Colorado was ranked as “trailing behind” in the pursuit of evidence-based tax policy by the Pew Center on the States.

While Louisiana is ranked higher by Pew as a result of having evaluated at least some of its tax breaks, its tax code is similarly jam-packed with special interest giveaways. But thanks to Louisiana State House Speaker Chuck Kleckley, the effectiveness of these exemptions will be the subject of a new, independent tax study this year, with recommendations to be released next spring. Don’t get too excited, though. In 2012, Louisiana created the Legislature's Revenue Study Commission which recommended better monitoring of tax exemptions, but that recommendation has yet to have much of a tangible impact.

Colorado and Louisiana, like most states, still have a long way to go in making regular evaluation of their tax breaks a reality, but if they’re looking for a little inspiration they may want to direct their attention toward the progress being made in Rhode Island.  The Ocean State now requires that state analysts determine the number of jobs actually created by certain “economic development” tax breaks, and that the Governor make recommendations on those tax breaks in his or her budget proposal.


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.


The Tax Foundation's Summary of Economic Growth Studies is Misleading


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Whenever it’s trying to justify cutting taxes (or not raising them), the Tax Foundation likes to direct readers toward one of its reports from 2012, in which it concluded that “nearly every empirical study of taxes and economic growth published in a peer reviewed academic journal finds that tax increases harm economic growth.”  As it turns out, this conclusion is simply wrong.

In a new report just released this week, the Center on Budget and Policy Priorities (CBPP) digs more deeply into the literature and finds that “12 of the 26 studies that the Tax Foundation cites do not support its flat assertion that tax increases harm growth.”  To take just one example, the Tax Foundation selectively cited a 1997 study in order to obscure its finding that tax increases could actually improve economic growth if they were used to fund education or deficit reduction.

Equally damning is CBPP’s finding that the 26 studies the Tax Foundation cited are hardly the only research on this topic, noting that “the Tax Foundation’s review omitted dozens of relevant studies published in major journals or edited compilations since 2000.”  This is a serious shortcoming given that the Tax Foundation claims to possess insights into the findings of “nearly every empirical study of taxes and economic growth,” and that it says it’s discovered a “consensus among experts” about the negative economic impacts of taxes.

Unsurprisingly, many of the studies omitted by the Tax Foundation contradict its claims about the disastrous effects of higher taxes—and some directly contradict the exact studies that the Tax Foundation chose to cite.

This CBPP study, as well as an earlier one looking just at the state-level studies included in the Tax Foundation report, reveal that the Tax Foundation’s so-called “literature review” is more spin than substance.


Missouri: Done Deal? Let's Hope Not


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Last year, Missouri Governor Jay Nixon, a Democrat, vetoed a regressive tax cut package passed by Republican lawmakers that would have cost the state $700 million annually. In his veto message the Governor called the legislation an “ill-conceived, fiscally irresponsible experiment that would inject far-reaching uncertainty into our economy, undermine our state’s fiscal health and jeopardize basic funding for education and vital public services.” In a victory for tax justice advocates, his veto withstood an attempted override by the legislature.

But, last week, Nixon reached a flawed tentative agreement with Republican State Senator Will Kraus to reduce the top individual income tax rate by half of one percentage point, but only if certain budget conditions are met. Half of the tax cut is contingent on the state bringing in $200 million in revenue growth and fully funding the state’s schools. The other half would be triggered by legislation that lowers the cap on two tax credits: one for low-income housing development and the other for historic building preservation. If all the contingencies are met, the Governor’s proposal would cut taxes by roughly $400 million a year, less than half of what Republicans in the legislature are asking for ($928 million a year when fully phased in), but still a significant tax cut.

In terms of fairness, an Institute on Taxation and Economic Policy (ITEP) analysis published in a brief from the Missouri Budget Project (MBP) found that reducing the top rate to 5.5 percent overwhelmingly benefits the wealthiest Missourians. In fact, ITEP found that 76 percent of the tax reduction would fall to the wealthiest 20 percent of Missourians. The impact by income group of this tax cut clearly illustrates that the wealthier do better under this proposal, Missourians in the top 1 percent, those with average incomes over $1.094 million – would receive a tax cut averaging $3,779 per year. In contrast, the average Missouri family with incomes from $33,000 - $52,000 would receive just a $47 tax cut per year, about enough to buy one hamburger each month. And the lowest income Missourians, those with incomes under $18,000, would get zero benefit.

In terms of adequacy, MBP rightly notes that over the long term there is no guarantee that school funding won’t be cut, “there are no ongoing protections for funding of public education.” There is a long history of states promising to hold services harmless and failing to do so.

Of course, there is a better way. Missouri’s Governor and lawmakers could work together to cut taxes for those who can least afford them and further invest in schools, healthcare and transportation by asking the wealthy to pay more. Let’s certainly hope this “deal” isn’t done.


State News Quick Hits: Party With Boeing, Targeted Tax Cuts and More


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It’s an age-old question: How do you thank legislators who give your profitable company an $8.7 billion tax subsidy? Most etiquette experts agree that a handwritten note just won’t do. But a lavish party thrown in your benefactors’ honor — that’s more like it. Recently, Boeing threw a party for Washington state lawmakers to thank them for the record amount of taxpayer money they delivered to the company in a special legislative session late last year. The reception was conveniently held across the street from the Capitol. Thankfully for Boeing, the cost of the party will likely be written off as a business expense on next year’s taxes.

Indiana lawmakers are looking in all the wrong places for a way to boost their state’s economy. The Indiana Senate has passed a bill eliminating the business equipment tax for companies with less than $25,000 worth of equipment, while the House version would give localities the option of eliminating the tax entirely for new machinery. But a new report (PDF) from the Indiana Fiscal Policy Institute explains that localities are in no position to deal with yet another cut in their property tax bases, and that giving localities the option of eliminating this tax is unlikely to draw any new businesses into the state (though it may reshuffle existing businesses around within the state’s borders).

The Arizona Daily Star reports that “a bid to enact a flat income-tax rate in Arizona is dead.” State Representative J.D. Mesnard had hoped to begin flattening one of the state’s only major progressive revenue sources by reducing the number of income tax brackets from five to three, but he appears to have abandoned that effort after failing to gather any support. But income tax cuts are hardly off the agenda. Mesnard still wants to funnel any new sales tax revenue collected from cracking down on online sales tax evasion into income tax cuts that are likely to benefit the rich. Much more reasonable, however, is his proposal to index the state’s tax brackets to inflation—a change that would actually help retain the progressivity of Arizona’s income tax over time.

Michigan Governor Rick Snyder has a better tax-cutting plan than his colleagues in the legislature. Rather than rewarding wealthy taxpayers with a cut in the state’s income tax rate, Snyder wants to provide targeted property tax relief to middle-income families through an expansion of the state’s circuit breaker program. The expansion would help offset a reduction in the circuit breaker passed in 2011 to help pay for a massive business tax cut sought by the Governor. But while Snyder’s plan is an improvement over plans to cut the income tax rate, the Michigan League for Public Policy notes that Snyder’s plan is hardly perfect: “a critical omission [from Snyder’s budget] was the failure to restore cuts in the state’s Earned Income Tax Credit, the best tool for helping families with the lowest wages.” And there are also serious questions about whether Michigan lawmakers should be discussing tax cuts at all—a new poll shows that in terms of their top priorities, voters rank tax cuts a “distant third” behind spending on schools and roads.


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


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

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

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

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


The States Taking on Real Tax Reform in 2014


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Note to Readers: This is the fifth post of a five-part series on tax policy prospects in the states in 2014. Over the course of several weeks, The Institute on Taxation and Economic Policy (ITEP) highlighted tax proposals that were gaining momentum in states across the country. This final post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax policy proposals are not all bad news this year.  There are some promising efforts underway that would fix the structural problems with state tax codes and improve tax fairness for low- and middle-income families. All eyes are on Illinois as lawmakers grapple with how to raise much needed revenue after their temporary income tax hike expires. Many are hoping the timing is now right for a real debate about a graduated income tax. Washington DC’s Tax Revision Commission has proposed a number of sensible reforms. And, lawmakers in Hawaii and Utah are expected to seriously debate ways to improve their states’ tax fairness.

Illinois - Though there has been much legislative activity in Springfield about corporate tax breaks, the arguably more important issue facing lawmakers is the state’s temporary income tax rate increase that is set to decrease in 2015. Given this upcoming rate reduction, lawmakers and the public are weighing in on alternative ways to fund vital services, including the merits of a progressive income tax.

District of Columbia - DC’s Tax Revision Commission set the stage for real tax reform this Spring when it recommended expanding the sales tax base, enhancing the city’s Earned Income Tax Credit (EITC) for childless workers, boosting the personal exemption and standard deduction, reforming the District’s income tax brackets, and phasing-out the value of personal exemptions for high-income taxpayers. The Commission’s proposal is hardly perfect: it includes an expensive giveaway for people with estates worth over $1 million, as well as a slight cut in the city’s top income tax rate (in exchange for making that temporary rate permanent).  But the plan still contains a lot of good ideas worthy of the word “reform.”

Hawaii - Hawaii levies the fourth highest state and local taxes on the poor in the entire country, but some lawmakers would like to change that.  Proposals to enact an Earned Income Tax Credit (EITC) managed to pass both chambers of the legislature last year before eventually being abandoned, and lawmakers gave serious consideration to other low-income tax credit changes as well.  The Hawaii Appleseed Center’s recent report (PDF) on enhancing low-income tax credits, and options to pay for those enhancements, provides a wealth of information for the many lawmakers and advocates who intend to pick up where they left off last year.

Utah - Last year’s effort to improve Utah’s regressive tax system (PDF) by enacting an Earned Income Tax Credit (EITC) ultimately fell short, though a bill that would have created such a credit did make it out of the state’s House of Representatives.  That push will be resumed this year.


Is Tax Reform Coming to the District?


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This week the DC Council will be hearing tax reform recommendations from the experts they appointed to study the District’s tax system. While far from perfect, the DC Tax Revision Commission’s suggested changes include many sensible reforms. Here’s a quick overview of what’s being discussed.

The Commission recommends expanding the District’s Earned Income Tax Credit (EITC) for workers without children—the one group for whom this important anti-poverty and pro-work program currently provides little benefit.

Some middle-income taxpayers would benefit from lowering the middle tax bracket’s rate from 8.5 to 6.5 percent. And both lower- and middle-income families would benefit from a substantially increased personal exemption and standard deduction.

In order to partially fund these targeted low- and middle-income tax cuts, the Commission also recommends phasing out (PDF) the District’s personal exemption for high-income taxpayers, and making permanent the city’s temporary top tax bracket on incomes over $350,000 (albeit at a reduced rate).

And as with many tax reform efforts, the DC Commission’s plan also includes a long-overdue expansion of the District’s sales tax to include more personal services. Haircuts, tanning studios, car washes, and various other services (PDF) would finally be included in the sales tax base.

Among the more troubling aspects of the Commission’s plan is its price tag. The Commission wants to cut into the District’s revenues by $48.8 million, despite the fact that the DC Council only set aside $18 million to fund the Commission’s recommendations. And not all of the tax cuts contained in the Commission’s proposal are justified. A $15.8 million estate tax cut is unlikely to benefit (PDF) the District’s economy, and a $57 million corporate and business tax rate cut won’t do any good, either.

Against this backdrop, the Commission’s decision to recommend increasing the sales tax rate from 5.75 to 6 percent is an odd one. The $22 million in revenue raised by this regressive tax increase could easily be generated in a fairer way by scaling back the estate and corporate tax cuts, and/or by retaining the 8.95 percent rate on incomes over $350,000, as opposed to the lower 8.75 percent rate the Commission suggests.

Overall, the Commission’s proposal is a good starting point, but there’s still plenty of room for the DC Council to improve upon it before enacting any reforms into law.


State News Quick Hits: EITC Awareness, Grover Norquist's New Target and More


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Community organizations, state tax departments, and editorial pages across the country celebrated National EITC Awareness Day last Friday. Roughly 80% of those eligible for the federal Earned Income Tax Credit take advantage of it each year, a higher participation rate than most other social programs. But keeping this figure high -- and ensuring that busy, working people are also aware of state and local EITCs they may qualify for -- requires continued vigilance. One way to boost participation, and to save beneficiaries from wasting their refund on paid tax preparers, is by joining the volunteer income tax assistance (VITA) program. We also need anti-poverty advocates on the front lines fighting plans in some states to eliminate or weaken their state EITC, as North Carolina did last year.

Like many Americans, Grover Norquist is apparently sick of Congressional gridlock (despite having played no small part in causing it through his inflexible no-new-taxes pledge).  But rather than sit around while federal tax reform continues to stall, Grover has turned his sights toward Tennessee.  Grover wants to see Tennessee repeal one of the few bright spots of its staggeringly regressive tax system (PDF): its “Hall Tax” on investment income.  The Massachusetts native and current DC resident is signaling his intention to push lawmakers to repeal the tax, according to The Tennessean.

With an election just a few months away, Florida Governor Rick Scott has made clear that he wants tax cuts, yet again, to be a top priority in the Sunshine State.  His newest list of ideas includes cutting motor vehicle taxes, cutting sales taxes on commercial rent, cutting business taxes, and cutting business filing fees.  He’d also like to give shoppers a couple of sales tax holidays — a perennial favorite among politicians that like their tax cuts to be as high-profile as possible.

Check out the Kansas Center for Economic Growth’s new blog! Their latest post makes the salient point that two rounds of radical income tax cuts “have failed to create prosperity and are leaving low- and middle- income Kansas families struggling to make ends meet.”


Gas Tax Remains High on Many States' Agendas for 2014


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

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

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

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

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

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

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

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

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

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

Photo via herzogbr Creative Commons Attribution License 2.0 


A New Wave of Tax Cut Proposals in the States


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Note to Readers: This is the third 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 proposals to cut personal income, business, and property taxes.

Tax cut proposals are by no means a new trend.  But, the sheer scope, scale and variety of tax cutting plans coming out of state houses in recent years and expected in 2014 are unprecedented.  Whether it’s across the board personal income tax rate cuts or carving out new tax breaks for businesses, the vast majority of the dozen plus tax cut proposals under consideration this year would heavily tilt towards profitable corporations and wealthy households with very little or no benefit to low-income working families.  Equally troubling is that most of the proposals would use some or all of their new found revenue surpluses (thanks to a mostly recovering economy) as an excuse to enact permanent tax cuts rather than first undoing the harmful program cuts that were enacted in response to the Great Recession.  Here is a brief overview of some of the tax cut proposals we are following in 2014:

Arizona - Business tax cuts seem likely to be a major focus of Arizona lawmakers this session.  Governor Jan Brewer recently announced that she plans to push for a new tax exemption for energy purchased by manufacturers, and proposals to slash equipment and machinery taxes are getting serious attention as well.  But the proposals aren’t without their opponents.  The Children’s Action Alliance has doubts about whether tax cuts are the most pressing need in Arizona right now, and small business groups are concerned that the cuts will mainly benefit Apple, Intel, and other large companies.

District of Columbia - In addition to considering some real reforms (see article later this week), DC lawmakers are also talking about enacting an expensive property tax cap that will primarily benefit the city’s wealthiest residents.  They’re also looking at creating a poorly designed property tax exemption for senior citizens.  So far, the senior citizen exemption has gained more traction than the property tax cap.

Florida - Governor Rick Scott has made clear that he intends to propose $500 million in tax cuts when his budget is released later this month.  The details of that cut are not yet known, but the slew of tax cuts enacted in recent years have been overwhelmingly directed toward the state’s businesses.  The state legislature’s more recent push to cut automobile registration fees this year, shortly before a statewide election takes place, is the exception.

Idaho - Governor Butch Otter says that his top priority this year is boosting spending on education, but he also wants to enact even more cuts to the business personal property tax (on top of those enacted last year), as well as further reductions in personal and corporate income tax rates (on top of those enacted two years ago). Idaho’s Speaker of the House wants to pay for those cuts by dramatically scaling back the state’s grocery tax credit, but critics note that this would result in middle-income taxpayers having to foot the bill for a tax cut aimed overwhelmingly at the wealthy.

Indiana - Having just slashed taxes for wealthy Hoosiers during last year’s legislative session, Indiana lawmakers are shifting their focus toward big tax breaks for the state’s businesses.  Governor Mike Pence wants to eliminate localities’ ability to tax business equipment and machinery, while the Senate wants to scale back the tax and pair that change with a sizeable reduction in the corporate income tax rate. House leadership, by contrast, has a more modest plan to simply give localities the option of repealing their business equipment taxes.

Iowa - Leaders on both sides of the aisle are reportedly interested in income tax cuts this year. Governor Terry Branstad is taking a more radical approach and is interested in exploring offering an alternative flat income tax option. We’ve written about this complex and costly proposal here.

Maryland - Corporate income tax cuts and estate tax cuts are receiving a significant amount of attention in Maryland—both among current lawmakers and among the candidates to be the state’s next Governor.  Governor Martin O’Malley has doubts about whether either cut could be enacted without harming essential public services, but he has not said that he will necessarily oppose the cuts.  Non-partisan research out of Maryland indicates that a corporate rate cut is unlikely to do any good for the state’s economy, and there’s little reason to think that an estate tax cut would be any different.

Michigan - Michigan lawmakers are debating all kinds of personal income tax cuts now that an election is just a few months away and the state’s revenue picture is slightly better than it has been the last few years.  It’s yet to be seen whether that tax cut will take the form of a blanket reduction in the state’s personal income tax, or whether lawmakers will try to craft a package that includes more targeted enhancements to provisions like the Earned Income Tax Credit (EITC), which they slashed in 2011 to partially fund a large tax cut (PDF) for the state’s businesses. The Michigan League for Public Policy (MLPP) explains why an across-the-board tax cut won’t help the state’s economy.

Missouri - In an attempt to make good on their failed attempt to reduce personal income taxes for the state’s wealthiest residents last year, House Republicans are committed to passing tax cuts early in the legislative session. Bills are already getting hearings in Jefferson City that would slash both corporate and personal income tax rates, introduce a costly deduction for business income, or both.

Nebraska - Rather than following Nebraska Governor Dave Heineman into a massive, regressive overhaul of the Cornhusker’s state tax code last year, lawmakers instead decided to form a deliberative study committee to examine the state’s tax structure.  In December, rather than offering a set of reform recommendations, the Committee concluded that lawmakers needed more time for the study and did not want to rush into enacting large scale tax cuts.  However, several gubernatorial candidates as well as outgoing governor Heineman are still seeking significant income and property tax cuts this session.

New Jersey - By all accounts, Governor Chris Christie will be proposing some sort of tax cut for the Garden State in his budget plan next month.  In November, a close Christie advisor suggested the governor may return to a failed attempt to enact an across the board 10 percent income tax cut.  In his State of the State address earlier this month, Christie suggested he would be pushing a property tax relief initiative.  

New York - Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Governor Cuomo unveiled a tax cutting plan in his budget address that will cost more than $2 billion a year when fully phased-in. His proposal includes huge tax cuts for the wealthy and Wall Street banks through raising the estate tax exemption and cutting bank and corporate taxes.  Cuomo also wants to cut property taxes, first by freezing those taxes for some owners for the first two years then through an an expanded property tax circuit breaker for homeowners with incomes up to $200,000, and a new tax credit for renters (singles under 65 are not included in the plan) with incomes under $100,000.  

North Dakota - North Dakota legislators have the year off from law-making, but many will be meeting alongside Governor Jack Dalrymple this year to discuss recommendations for property tax reform to introduce in early 2015.  

Oklahoma - Governor Mary Fallin says she’ll pursue a tax-cutting agenda once again in the wake of a state Supreme Court ruling throwing out unpopular tax cuts passed by the legislature last year.  Fallin wants to see the state’s income tax reduced despite Oklahoma’s messy budget situation, while House Speaker T.W. Shannon says that he intends to pursue both income tax cuts and tax cuts for oil and gas companies.

South Carolina - Governor Nikki Haley’s recently released budget includes a proposal to eliminate the state’s 6 percent income tax bracket. Most income tax payers would see a $29 tax cut as a result of her proposal. Some lawmakers are also proposing to go much farther and are proposing a tax shift that would eliminate the state’s income tax altogether.


State News Quick Hits: Transformers and Tax Breaks for the Rich in Disguise


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Editorial boards at the Milwaukee Journal Sentinel and the Wisconsin State Journal have both (rightly) responded to Governor Walker’s property and income tax cut proposals by encouraging lawmakers to instead curb the state’s growing structural deficit, or put any surplus revenue toward serious problems like poverty reduction and enhancing K-12 education. Perhaps the editorial boards were persuaded by Institute on Taxation and Economic Policy (ITEP) findings that wealthier folks benefit more from the tax cuts than low-and middle-income families. For more on ITEP’s analysis read this Milwaukee Journal Sentinel piece.

Idaho’s House Speaker has proposed dramatically scaling back the state’s grocery tax credit in exchange for a regressive $70-80 million cut to the individual and corporate income tax rates. But economist Mike Ferguson of the Idaho Center for Fiscal Policy points out that the Speaker’s plan would amount to a giveaway to the rich, while further squeezing the middle class.  An Idahoan making $50,000 per year, for example, could expect to see about $305 tacked on to their state tax bill under this change. Governor Butch Otter has been saying the right things about taking a break from tax cuts (kind of) and instead making education spending a priority this year. But the Governor recently said he was open to the Speaker’s idea, and the Idaho Statesman provided a partial endorsement. Idaho legislators should tread carefully: raising taxes on the middle class to pass another trickle-down tax cut is bad public policy and even worse politics.

A Wichita Eagle editorial, “Pressure on sales tax”, shares our concerns about one of the major consequences of the tax cuts and “reforms” enacted in Kansas over the past two years.  With the gradual elimination of the state’s personal income tax and pressure on local governments to raise revenue, it is inevitable that the state’s sales tax rate will continue to rise at the detriment of low- and moderate-income working families who are stuck footing the bill. And, in order to have sufficient revenue to fund services over the long-run, Kansas lawmakers will need to make the politically difficult decision to broaden the sales tax base, something they’ve shown little stomach for so far. The editorial states, “as Kansas strains to deal with declining tax collections and reserves according to Brownback’s plan to become a state without an income tax, the sales tax will be one of the only places to go for more revenue.”

Indiana lawmakers want to get a better handle on whether their tax incentives for economic development are actually doing any good.  Last week, the House unanimously passed legislation that will require every economic development tax break to be reviewed ov

er the course of the next five years.  Our partner organization, the Institute on Taxation and Economic Policy (ITEP), recommends that all states implement these kinds of ongoing evaluations.

Illinois Governor Pat Quinn is pushing back against a string of bad publicity regarding film tax credits. Quinn says that an entertainment boom is occurring in Illinois in part because of the Illinois Film Services Tax Credit, an uncapped, transferable credit that was extended in 2011. What Governor Quinn fails to mention, however, is how much taxpayers lost in the process. The credit costs roughly $20 million a year, requiring higher taxes or fewer public services than would otherwise be the case. Research from other states indicates that only a small fraction of that amount would be recouped via higher tax receipts. Moreover, film subsidies often waste money on productions that would have located in the state anyway and are unlikely to do much good in the long-term since the industry is so geographically mobile. Indeed, one of the producers of Transformers 3 admitted that he would have filmed in Chicago even without the credit, which cost taxpayers $6 million. Instead, the decision was based on “the skyline, the architecture and the skilled crews here, among other factors.”

After some high-quality investigative journalism from the Orlando Sentinel last year, prominent state lawmakers in Florida are setting their sights on sunsetting or redesigning a poorly tailored tax break for companies that locate in high-crime areas. The tax provision at issue — the Urban High-Crime Area Job Tax Credit Programallows cities to draw expansive (and unalterable) borders around purported “high crime areas” that are anything but. Companies benefiting from the loophole include Universal Orlando, which has received over $8 million from the program since the provision’s adoption sixteen years ago. Universal is planning to cash in again this year with the opening of its second Harry Potter-themed amusement park (prompting one columnist to ask jokingly if being chased by an imaginary dragon constitutes attempted murder). Dubious corporate subsidies are nothing new in Florida, and the value of this credit is not about to break the bank ($500 to $1,500 per employee and capped statewide at $5 million each year). But by highlighting these abuses, the Sentinel has provided a healthy reminder that even well-meaning corporate tax breaks often create unintended, negative consequences and should be eliminated.

Despite failing to win over the legislature with his tax swap proposal last year, Nebraska’s Governor Heineman is back to hawking large reductions in the personal income tax. While it’s true that Nebraska is sitting on a budget surplus, the legislature's Tax Modernization Committee held hearings last year and recently recommended only minor changes. Perhaps some middle ground comes in the form of two tax proposals introduced by legislators this month that target relief to low- and middle-income families (imagine that!). Senator Conrad (D-Lincoln) has called for an increase in the state Earned Income Tax Credit (EITC). And Senator Bolz (D-Lincoln) is proposing an increase in the state’s child care tax credit for middle income families. Conrad’s legislation would increase the refundable state EITC from 10% of the federal credit to 13%, which would make a substantial difference in the lives of Nebraska’s working poor. For a family with three children earning the maximum EITC benefit in 2014, such a change would put more than $180 back in their pockets. Bolz’s bill would increase the child care credit for those making more than $29,000 from 25% of the federal credit to 28%. Unlike the federal government, Nebraska already makes its child care tax credit partially refundable (for those making less than $29,000 a year), an admirable feature of the state’s tax code. Bolz’s proposal wouldn’t change the refundability equation and could be better targeted at low-income families, but, like Conrad’s EITC bill, is a step in the right direction.

The Baltimore Sun has rightly poured cold water on an idea from some Maryland legislators to gut the state’s estate tax. House Speaker Michael Busch and Senate President Mike Miller have proposed increasing the value of an estate that can be passed on tax-free from $1 million to $5.25 million (more information on the mechanics of state estate and inheritance taxes can be found here).  The state comptroller has also signed onto the idea.  But the Sun editorial points out that supporters’ reasoning — that Maryland has become an inhospitable place for rich people to die — is faulty.  According to a recent study, 7.7 percent of Maryland households are millionaires — the highest percentage of any state — and only 2.8 percent of Maryland estates pay any state tax under the current regime.  Maryland policymakers — including Governor O’Malley, who has not yet committed either way hould resist this election-year giveaway to the rich.

Wisconsin Governor Scott Walker learned last week that the state is expecting a $912 million surplus. The Governor is expected to propose both property and income tax cuts.  But the Wisconsin Budget Project (WBP) rightly cautions that tax cuts aren’t necessarily the best way to spend the surplus.  WBP argues that this revenue “gives lawmakers an excellent opportunity to invest in Wisconsin’s economic future and to put the state on a sounder fiscal footing by filling budget holes.”


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.  


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


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

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

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

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

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


How to Understand New York Governor Andrew Cuomo's Proposed Tax Cuts


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Of all the governors across the United States supporting tax cutting proposals, New York Governor Andrew Cuomo has been one of the most aggressive in promoting his own efforts to cut taxes. Taking his tax cut efforts one step further this election year, Cuomo is now proposing to expend the entirety of his state’s hard-won budget surplus on more than $2 billion in annual tax cuts.

While the term "budget surplus" may make it sound like that there is extra money lying around in Albany, the reality is that the surplus is the product of five consecutive years of austerity budgets and a budget plan that would continue this austerity for years to come. In other words, rather than using the surplus to restore funding to state and local services that have taken a hit over the past years, Cuomo is insisting that the money be used for tax cuts (many permanent) instead.

Unfortunately, tax cutting has become a pattern during Cuomo's time as governor. In June 2011, Cuomo pushed through a property tax cap, which severely limited the ability of cash-strapped local governments to raise enough revenue to fund basic services. In December of the same year, Cuomo further starved the state of much needed revenue by killing efforts to fully extend a millionaire's surtax, and instead pushing through a scaled back surcharge that raised half as much revenue as the original. Just last year, Cuomo pushed through a program of unproven and expensive corporate tax breaks, which a CTJ investigation found could actually harm many existing New York companies.

Even worse, to defend his past and newest tax cut proposals, Cuomo has embraced the cringe-worthy rhetoric of anti-tax governors like Kansas Governor Sam Brownback in arguing that ending "high taxes" and enacting corporate tax breaks will make the state more "business-friendly" and help improve New York's economy. The problem, of course, is that taxes are crucial to funding what really drives economic development: a highly educated workforce, good infrastructure and quality healthcare.

Cuomo's anti-tax approach is in direct contrast to the newly-elected New York City Mayor, Bill de Blasio, who ran and won a landslide victory on a campaign platform of addressing growing income inequality primarily through hiking taxes on the rich to provide universal citywide pre-kindergarten classes. De Blasio's call for higher taxes has proven not only popular in New York City, but also garnered the support of 63% of New York voters statewide. What de Blasio's election proves is that a significant majority of New Yorkers, unlike Cuomo, are not only willing to forgo tax cuts, but are actually willing to support higher taxes in order to help fund critical public services.

Cuomo's Tax Proposal a Mixed Bag in Terms of Tax Fairness

While many of Cuomo’s past tax proposals have offered little or nothing to those in need, Cuomo's new plan does includes a few potentially good ideas as well as few a very bad ones. On the good side of things, Cuomo proposes to substantially expand the state's property tax circuit breaker and create a renters credit, which could potentially provide a well-targeted income boost to low-income families. While the proposals sound good, their effectiveness will really depend on their details, which are yet to be released.

Regrettably, Cuomo is also proposing a significant cut in the state's corporate income and estate taxes, which will almost exclusively go to only a very small portion of the richest New Yorkers. Considering the recent series of tax cuts already passed by Cuomo and the years of budget cuts, piling on these additional tax breaks for the rich is simply unconscionable and would make an already unfair tax system (PDF) even worse.

 


DC Council Gets it Half Right on Property Taxes


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Much like their colleagues to the north, District of Columbia lawmakers are giving serious thought to cutting taxes now that an election is approaching.  According to the Washington Post, “10 of the council’s 13 members [are] running for re-election or higher office this year.”  It should come as little surprise, then, that the Council recently voiced unanimous support for a generous (but ill-conceived) property tax break for one of the city’s most politically popular groups—its senior citizens.  More encouraging, however, was the Council’s decision to delay action on an even more problematic bill that would have showered most of its benefits on owners of the city’s most valuable homes.

The first bill, introduced by Councilmember Anita Bonds, completely eliminates the property tax for any long-term DC resident over age 75 as long as they earn less than $60,000 per year.  But as Ed Lazere of the DC Fiscal Policy Institute (DCFPI) points out: “If you're 74, you get nothing … If you're 75, you have your taxes entirely limited.”  While it’s true that some senior citizens struggle with their property tax liabilities because they are “house-rich” but “cash-poor,” this isn’t a problem limited to taxpayers over age 75.

Rather than wiping out property taxes altogether for those taxpayers fortunate enough to have lived a long life, the District is better off providing this kind of relief more broadly through its property tax “circuit breaker” credit.  The credit, which is currently being expanded, will soon be available to both renters and homeowners of all ages earning up to $50,000 per year.  It also uses a more sophisticated formula than Bonds’ proposal to ensure that Washingtonians’ property tax bills do not exceed the income they have available to pay those bills.  An expert commission created by the Council recently recommended making no further changes to DC’s property tax system, but if the Council nonetheless wants to charge ahead with property tax cuts, the city’s circuit breaker credit is the better tool for the job.

The second bill, introduced by Councilmember (and current mayoral candidate) Jack Evans, would have tightened the District’s existing property tax cap to prevent tax increases of more than 5 percent per year.  As the Institute on Taxation and Economic Policy (ITEP) explains, these kinds of tax caps are poorly targeted, extremely costly, and often grossly inequitable.  Most of the tax breaks doled out under such a cap would flow to owners of expensive homes.  For example, DCFPI estimates that nearly two-thirds of the benefits of Evans’ proposal would go to owners of homes worth over $550,000, despite the fact that this group makes up just 31 percent of all DC homeowners.  Further inequity arises when, for example, a resident who has owned their current home for a number of years (and racked up substantial tax cap benefits over that time) ends up enjoying a significantly lower tax bill than the first-time homebuyer in an identical rowhouse next door.

Mayor Vince Gray opposes the 5 percent property tax cap because of its “negative financial impact on the District’s revenues, its inequitable treatment of District homeowners and because it does not increase the District’s competitiveness regionally.”  These objections are well stated, though all of them also apply, to a lesser extent, to the over-75 giveaway sought by Councilmember Bonds.


Will Basic Constitutional Rights Be the Next Casualty of Kansas' Supply-Side Experiment?


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Almost every American would agree that education is a fundamental right. Any serious commitment to the notion of “equal opportunity” means ensuring that kids have an opportunity for a quality education—and that this opportunity should be as available to the very poor as it always has been to the very rich. As it happens, every state’s constitution includes a provision guaranteeing a basic education to its residents. But as an excellent op-ed in today’s New York Times notes, if some Kansas policymakers have their way, that state’s constitutional guarantees may be the latest victim of Governor Sam Brownback’s income tax cuts.

It’s worth reviewing how Kansas lawmakers found themselves talking about jettisoning fundamental constitutional rights. In 2012, Governor Brownback pushed through huge tax cuts for the affluent based, in part, on the argument that these tax cuts would be largely self-financing. (Brownback was apparently influenced heavily by the half-baked supply-side claims of Arthur Laffer that cutting income taxes will automatically spur economic growth.) Rather than requiring harmful cuts in state and local public investments, Brownback argued, his tax cuts would be “a shot of adrenaline into the heart of the Kansas economy,” generating new economic activity that would actually boost tax collections.  But as the Center on Budget and Policy Priorities notes, it hasn’t worked out that way. State lawmakers were forced to enact substantial spending cuts across the board, and per-pupil funding plummeted from nearly $4,500 less than a decade ago to $3,838 last year. After a group of Kansas parents brought suit against the state, a lower state court ruled (PDF) that these cuts were an unconstitutional violation of the state’s basic education guarantees—and prescribed a remedy that returns per-pupil funding to the levels achieved in the last decade.

In response to the court’s finding (which is now being reviewed by the state Supreme Court), policymakers in the Brownback administration have argued that the court’s mandate for more school spending prevents them from adjusting spending levels to reflect economic downturns. As the state’s solicitor general argued last year, “The Legislature has to deal with the real world…the constitution shouldn't be a suicide pact." But this argument is ludicrous: as the court sensibly pointed out in its ruling, state lawmakers gutted education spending at the same time that they were pushing through huge tax cuts, making it “completely illogical” to argue that the unconstitutional education cuts are anything other than “self-inflicted.” Notwithstanding this, some policymakers have called for amending the state constitution to modify or even eliminate the guarantee of a basic education in response to this ruling. In other words, when the state constitution conflicts with supply-side tax cuts, it must be the constitution’s fault.  

The good news is that most other states have, so far, resisted the siren call of Laffer’s calls for huge income tax cuts. But in Kansas, some policymakers are so enamored with the Brownback tax cuts that they appear to be willing to write off their most basic constitutional guarantees. 


State News Quick Hits: 2014 Off to Rocky Start


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2014 is just a few days old, and already it’s not off to such a happy start in terms of tax fairness:

This editorial in the Kansas City Star predicts that in Missouri, “[m]any state lawmakers, and their constituents, found 2013 to be a taxing legislative session. But it may pale in comparison to what’s ahead in 2014.” Republican legislators aren’t going to give up on “tax reform” after their failure to override Governor Jay Nixon’s veto of an extreme tax plan last year. Instead, those lawmakers are pledging to propose another round of income tax cuts and potentially a ballot initiative if the tax cuts can’t be passed through the legislative process.

The proliferation of state film tax incentives among states seeking to siphon off Hollywood production spending has been widely criticized. But the fact that some in California are now contemplating enacting film tax breaks to prevent a home-grown industry from leaving the state is a stark reminder that the “race to the bottom” in state corporate income taxes will leave every state poorer.

January 1st marked the beginning of a new, highly regressive era in North Carolina tax policy.  An array of tax changes went into effect which will further shift the responsibility for paying for North Carolina’s public investments away from wealthy households and profitable corporations onto the backs of middle- and low-income families.  Most notable among the changes includes the collapse of the state’s graduated personal income tax structure which was replaced with a flat rate of just 5.8% and allowing the state’s Earned Income Tax Credit to expire. Lawmakers who championed the tax package have falsely claimed for months that every North Carolina taxpayer will benefit from the changes.  As  ITEP and the NC Budget and Tax Center have repeatedly pointed out (and NC fact-checking reporters and the NC Fiscal Research division have substantiated), many families will pay more.  

This week, the Small Business Development Committee in the Wisconsin Assembly heard a bill about two proposed sales tax holidays. The first two-day holiday would be held in early August and would suspend the state’s 5 percent sales tax on computers and back-to-school items. The other two-day holiday would take place in November and be available for Energy Star products. Thankfully the proposal seems to be getting mixed reviews. Senate Majority Leader Scott Fitzgerald views the proposal as a gimmick and he couldn’t be more right. For more information read ITEP’s Policy Brief.


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


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

 

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

 

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


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

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

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


Hey, Hey, Ho, Ho, Tax Simplicity Has Got to Go, says Iowa Governor


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Iowa Governor Terry Branstad is reportedly interested in implementing an alternative income tax structure for the Hawkeye State’s wealthiest taxpayers.

The state’s income tax rate structure is a bit deceptive because Iowa is one of just six states offering a deduction for federal income taxes paid. ITEP has written a whole report on this costly and regressive loophole available here (PDF). The ability of Iowans to write off all of their federal income taxes on their state income tax forms means that the state needs higher income tax rates in order to raise necessary revenue. The state’s top personal income tax rate is 8.98 percent—and some elected officials believe this makes it difficult to attract businesses to the state. But, Iowans pay an effective tax rate far lower than 8.98 percent because of the generous deduction for federal income taxes paid.

In order to combat this public relations problem, Governor Branstad is considering proposing an alternative income tax that has lower rates and no deduction for federal income taxes paid. Iowans would be allowed to file their taxes either way, but of course, most taxpayers would compute their income tax bills twice to determine which results in lower tax liability. In other words, the proposal completely disregards the tax policy principle of simplicity. It’s also likely that offering this “optional” income tax would cost the state in terms of revenue, since most people will choose it only if it saves them money.

The Governor’s proposal has come under scrutiny from some in the legislature and from various advocacy groups. Iowa Citizens for Community Improvement released a statement saying, “Iowa’s wealthiest citizens need to pay their fair share in taxes. They don’t need more options for how to pay less.”

The track record for proposals of this type isn’t very good. One need only look to the 2008 presidential campaign and Senator John McCain’s tax proposal. During the campaign Citizens for Tax Justice analyzed the Senator’s alternative “simplified” tax and found that in 2012 alone, the alternate tax “would cost $98 billion, and 58 percent of this would go to the richest five percent of taxpayers.” Let’s hope Governor Branstad’s proposal falls the way of McCain’s.

Governor Scott Walker says that one of his goals is to lower taxes for all Wisconsinites. He’s asked Lt. Gov. Rebecca Kleefisch and Revenue Department Secretary Rick Chandler to host a series of roundtable discussions about the state’s tax structure. Regrettably, transparency clearly isn’t another one of the Governor’s goals as the first roundtable discussion was closed to the public (and press) and only business leaders were invited.

In “race to the bottom” news, Missouri lawmakers approved a 23-year, $1.7 billion package of tax cuts for Boeing in an attempt to lure the manufacturer to the state. Missouri is one of twelve states vying for the opportunity to make the new 777X passenger jets. As we have explained, Missouri seems eager to repeat the mistakes of of Washington State, which recently provided Boeing with the largest state tax cut in history, at $8.7 billion.

It turns out that Kansas’ recent tax cuts aren’t just 
bad policy.  They’re also unpopular.  The income tax cuts, sales tax hikes, education cuts, and social service cuts that resulted from Governor Brownback’s tax plan are all opposed by a majority of Kansans, according to polling highlighted in The Wichita Eagle.

Due to the extensive changes to North Carolina’s personal income tax starting in 2014, the state’s Department of Revenue has 
asked all employers to distribute new state income tax withholding forms to their employees.  The need for a new form has unfortunately led to a lot of confusion and some really inaccurate press coverage on the regressive and costly tax “reform” package enacted this year.  Some articles mistakenly reported that everyone will get an income tax cut (and thus a little more money in their paychecks next year), but we know this is not the case.  The loss of the state’s Earned Income Tax Credit, personal exemptions (despite a higher standard deduction), and numerous other deductions and credits will negatively impact many working North Carolina families and seniors living on fixed incomes.  And, these stories all failed to point out that while income taxes may be going down for some, sales tax on items including movie tickets, service contracts and electricity will be going up in 2014.


Oregon Governor has Bad Intel on Corporate Tax Breaks


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State tax giveaways for business are reaching a fever pitch in the Pacific Northwest. Washington lawmakers last month enacted an $8.7 billion “mega-deal” package of state and local tax breaks designed to keep the state’s aerospace industry, dominated by Boeing, in the state. The sheer scale of the package, which is designed to last until 2040, has prompted some to wonder whether the time has finally come to end the tax-incentive arms race between the states. 

But across the Columbia River in Oregon, Governor John Kitzhaber is having none of this talk. Computer chipmaker Intel has just inked a new package of guaranteed tax breaks, not through legislative action but through direct negotiation with Governor Kitzhaber. In brief, Intel gets a guarantee that it will be able to use the coveted “single sales factor” manufacturing tax break for 30 years– even if the legislature repeals it for everyone else doing business in the state.

In return for a tax break that will outlive many current Oregon voters, Intel agrees to do...nothing they weren’t already doing. As the Oregon Center on Public Policy points out, the company has already begun construction of a new research facility in the state, and the result of this agreement is simply that they will continue building the facility. Intel senior leaders admit that Intel’s current investments on this site are “nothing new...just continued expansion of the site.”

Why does Governor Kitzhaber have the power to unilaterally negotiate tax deals with Fortune 500 companies? Because the legislature gave him that power. In a special legislative session last year, the legislature enacted a bill (PDF) initially designed to authorize a similar tax break package for the Nike corporation, but ultimately crafted to allow any large company to negotiate directly with the governor on tax incentive packages, as long as those negotiations took place before the end of 2013. (Reminder to mom-and-pop businesses in Oregon: you’ve got just two short weeks left to set up your personal meeting with Kitzhaber if you want to secure similar tax breaks– better get with the program!)

The good news is that in the limited time Kitzhaber has had access to his “magic wand” for granting tax breaks, he’s only done it for Intel and Nike. So when Kitzhaber turns over a new leaf and starts pushing for comprehensive tax reform after the next gubernatorial election, he’ll have to spend a bit less time undoing the damage he’s wrought in 2013.

What makes this all the more astonishing is that Kitzhaber and the legislature have no idea whether these companies are paying a meaningful amount of income tax to Oregon to begin with—and there’s anecdotal evidence that they don’t. A 2011 report from Citizens for Tax Justice and the Institute on Taxation and Economic Policy shows that Intel was one of over a dozen Fortune 500 companies that, despite being hugely profitable between 2008 and 2010, managed to pay not even a dime of state corporate tax nationwide during this three-year period.

Public disclosure of corporate tax payments (PDF) remains a terrific, if largely unfulfilled, step toward reform, and it’s worth asking: if Kitzhaber, to say nothing of Oregon taxpayers, knew just how little income tax Intel is paying right now to Oregon, would this horrific deal have ever seen the light of day?


Will Indiana Cut Local Revenues Yet Again?


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Having already cut taxes for the state’s wealthiest residents, Governor Mike Pence and Indiana’s legislative leadership have shifted their focus toward cutting taxes for businesses.  Specifically, they’ve declared eliminating or reducing the business personal property tax to be a top priority for the upcoming legislative session.  The business personal property tax, levied mainly on equipment and machinery, currently raises over $1 billion each year for localities, school districts, and library districts.  State lawmakers would not see their revenues directly affected by repeal of the tax.

Governor Pence says that he wants to take this revenue source away from local governments in a way that would not “unduly harm” them, though he did not specify how he would accomplish this goal, or what an acceptable level of “harm” would be.  While some localities collect just 3 percent of their total property tax revenues from business property, others depend on the tax for as much as 40 percent of their property tax collections.

If the tax is repealed, state aid would be hugely important in avoiding deep cuts in local services, but other states’ track records in providing such aid is less than encouraging.  Lawmakers face a constant temptation to renege on promises they’ve made to localities as they begin to look for ways to pay for their own tax or spending priorities, or when the state budget eventually falls on hard times.

Unsurprisingly, then, the head of the Indiana Association of Cities and Towns says that “every mayor that I have spoken with is deeply concerned about what the elimination of the personal property tax might mean to local government.”  The Associated Press also provides some important context for their concern, noting that “many communities are still struggling with their budgets five years after the enactment of statewide property tax caps.”

If the business personal property tax is repealed and local governments are left to fend for themselves, Dr. Larry DeBoer of Purdue University estimates that other property owners would be asked to make up about half of the lost revenue.  Specifically, he expects that they would see their property taxes raised by a combined total of about $453 million per year.  In part because of the 2008 property tax caps, however, localities would also have to cut their budgets to make up much of the difference.  Unless state lawmakers devise a plan to truly make localities whole (and actually to stick to that plan), Indiana residents could expect their local services to be cut by up to $510 million each year, on top of the cuts that have already gone into effect.


Missouri Lawmakers to Washington: We'll See Your $8.7 Billion, And...


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When Washington State lawmakers approved a record $8.7 billion in tax breaks for Boeing and other aerospace companies last month, many observers hoped that the unprecedented scale of the new tax cuts—which will last through 2040—might open policymakers’ eyes to the folly of the “race to the bottom” that will eventually result from ever-increasing corporate giveaways. But Missouri Governor Jay Nixon’s eyes remain firmly shut. Nixon has called a special legislative session to urge the Missouri legislature to approve tax cuts totaling $1.7 billion , also geared toward Boeing and other aerospace companies.

Nixon’s professed hope is that the tax breaks will entice Boeing to produce their 777X commercial aircraft in Missouri. But Boeing’s own taxpaying behavior suggests that for some, the “race to the bottom” may already be over: a recent CTJ report found that over the past decade Boeing managed to avoid paying even a dime of state income taxes nationwide on $35 billion in pretax U.S. profits.


Supreme Court Won't Rule on New York's "Amazon Law"


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This week, the Supreme Court declined to hear the e-commerce industry’s challenge to New York’s trend-setting “Amazon law.”  The law, which was upheld by New York’s highest court, successfully expanded the number of online retailers collecting New York sales taxes.  It did this by requiring any e-retailer to collect the tax if they partner with New York based “affiliates” to generate over $10,000 in sales.  Because of the law, Amazon.com has been collecting sales taxes from its New York customers for more than 5 years, generating millions in revenue for public services and making the state’s sales tax base slightly more rational.

In the wake of the Court’s refusal to hear Amazon.com and Overstock.com’s appeals, some observers are already predicting that more states will be tempted to follow New York’s lead.  And follow it they should.  More than a dozen states have “Amazon laws” patterned after New York’s and while they’re not a panacea for the tax base erosion that online shopping has caused, they are the best option states have available to them right now.

If anybody needs to pay attention to the Court’s ruling, though, it’s the U.S. House of Representatives.  Almost seven months ago the Senate passed a bipartisan bill that would have made New York’s law irrelevant by empowering all states to apply their sales tax collection laws more broadly to all e-retailers above a certain size.  The bill has widespread support among traditional retailers and a broad coalition of state-level lawmakers, but has so far been stopped—like many other reforms—by the House’s aversion to virtually anything that would improve tax collections at any level of government.


This Holiday, The Tax Justice Team Is Thankful For...


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During Thanksgiving we tend to reflect on the year’s events and remember what we’re grateful for. This was a doozy of a year for tax analysts, with the federal government shutting down and state legislatures across the nation threatening deep cuts to major sources of revenue. But, nonetheless, as we look back on the year we have many things to be grateful for:

— That the taxes we all pay help make our communities, our states and country stronger and more vibrant.  Our tax dollars are used to provide public education, clean air and water, well-connected road and public transit systems, safe streets, affordable health care, and income supports for working families.

— That every state that started 2013 with a personal income tax continues to have one, despite efforts in LouisianaNebraska, and North Carolina to dismantle their most progressive form of taxation.

— That poor families in Colorado, Iowa, Minnesota, Oregon, the District of Columbia, and Montgomery County, Maryland will find it a little easier to make ends meet now that lawmakers in those states and localities approved expansions to various low-income tax credits.

— For the Americans who have demanded that Congress address the tax avoidance uncovered by CTJ and carried out by huge corporations like GE, Apple, and Boeing.

— That CTJ’s proposal to increase the Medicare payroll tax for the wealthy, and subject their investment income to the same type of tax, is part of the health care reform law in effect now.

— That Senator Max Baucus’s tax reform proposals (so far) do not give corporations their dream of ending all U.S. taxes on profits they claim to earn offshore and that many members of Congress are signalling a new seriousness about closing loopholes that allow corporations to shift profits into offshore tax havens.

Additionally, we thank our donors and friends for making our work possible.  Unlike other groups, who have one large benefactor, CTJ and ITEP rely on our thousands of supporters for funding.  2013 has been a banner year for CTJ and ITEP as we have seen a dramatic increase in online contributions, but our work has never been so important, so please consider CTJ or ITEP in your holiday giving to help us prepare for the tax fights ahead in 2014.

We wish you all a very happy Thanksgiving!


Scott Walker's Tax Record Will Be on the Wisconsin Ballot Next Year


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Voters in 36 states will be choosing governors next year.  Over the next several months, the Tax Justice Digest will be highlighting 2014 gubernatorial races where we expect taxes to be a key issue. Today’s post is about the race for the Governor’s mansion in Wisconsin.

To many Wisconsinites, it may seem like yesterday that Governor Scott Walker survived a recall election against Milwaukee Mayor Tom Barrett. But in less than a year, he’ll be up for reelection. This time Mary Burke, a Trek Bicycle Corp. executive and state Commerce Department secretary, is the Democrat hoping to unseat him.  During the campaign, Walker will most certainly tout his record of cutting taxes, but anyone who’s paid attention knows his record is nothing to be proud of.

This year alone he signed legislation that both cut property taxes and reduced income tax rates in a way that does little for Wisconsin’s neediest residents – the opposite, actually. In fact, the budget he introduced in 2011 was called a betrayal of Wisconsin values by the Center on Wisconsin Strategy and other public interest groups because he ultimately approved legislation that reduced the Earned Income Tax Credit (EITC), thus increasing taxes on the state’s poorest working families. That budget also included $2.3 billion in tax breaks over a decade, in the form of a domestic production activities credit, two different capital gains tax breaks for the rich, and a variety of new sales tax exemptions, including for snowmaking and snow grooming equipment.

Challenger Mary Burke is being cautious and has yet to put out her own tax plan. She recently told the Milwaukee Journal Sentinel, however, that she would not take a pledge to not increase taxes, saying, “I'd want to look at the totality. We collect revenue in a lot of different ways. I certainly wouldn't look at raising (taxes), but I'd also want to look at it in the context of our finances, our budgets …” When we learn more about her plan, we’ll review it for you here.

 


Gas Tax Reform Draws Close in Pennsylvania as Debate Continues in 3 More States


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Update: Pennsylvania Governor Tom Corbett signed the gas tax increase described below into law on November 25, 2013.

One of 2013’s biggest state tax policy issues—the gasoline tax—continues to make headlines long after most state legislative sessions have come to a close for the year.  We’ve already written about how lawmakers in Maryland, Massachusetts, Vermont, Virginia, Wyoming, and the District of Columbia enacted gas tax increases or reforms earlier this year.  But within just the last week, four more states have been in the news with high-profile proposals to raise their own gas taxes—including Pennsylvania, which appears to be on the verge of both increasing and reforming its tax.  Here’s what’s been happening:  

Pennsylvania is one of a small number of states where the legislature is still in session (most state sessions ended this spring).  This week, both the Pennsylvania House and Senate passed a bill that would gradually raise the gas tax by allowing it to rise alongside gas prices, much like an ordinary sales tax.  This is not a new idea in the Keystone State.  Prior to 2006, Pennsylvania’s gas tax actually functioned in exactly this manner, though the 32.3 cent tax has since run up against a poorly designed gas tax “cap” that the legislature is now seeking to lift.  When combined with increases in vehicle registration fees, license fees, and traffic fines, the overall package is expected to raise $2.3 billion per year for roads and transit.  As of this writing the bill needs to be approved by the House one more time before going to Governor Tom Corbett’s desk where it is expected to be signed into law.

In Washington State, The Olympian is reporting that “a bipartisan transportation revenue package now looks possible” after the coalition of lawmakers in control of the state senate backed an 11.5 cent gas tax increase.  The tax increase would be phased-in over the course of three years and is actually somewhat larger than the 10 cent increase sought by Governor Jay Inslee and House Democrats earlier this year.  As we explained in June, Washington’s gas tax would remain relatively low by historical standards even if the Governor’s 10 cent increase had been enacted into law.  The same is true of an 11.5 cent increase.  Lawmakers could potentially act on the 11.5 cent plan within the next few weeks if a special legislative session is called.

Utah business leaders, local officials, and other stakeholders are continuing to make the case that public investments in infrastructure will help the state’s economy succeed, and that the gas tax is the best way to pay for those investments.  On Wednesday, local officials testified before an interim transportation committee in support of a plan to allow localities to levy a 3 percent gas tax.  Unlike Utah’s fixed-rate gas tax—which actually stands at its lowest level in history as a result of inflation—this 3 percent tax should do a reasonably good job keeping pace with future growth in the cost of transportation construction and maintenance.  At the same hearing, a Republican state representative testified in support of his own plan to raise the state’s gas tax by 7.5 cents per gallon, phased-in over the course of five years.

The gas tax has been a frequent topic of discussion in Iowa these last few years, and it doesn’t seem like that’s about to change any time soon.  As in Utah, Iowa’s gas tax is at an all-time low (after adjusting for inflation), but one of the state’s candidates for governor in 2014 would like to change that.  Democrat Jack Hatch has proposed raising the tax by a total of 10 cents over the course of 5 years.  Current Governor Terry Branstad, who is eligible to seek reelection next year, is noticeably less excited about the idea.  But Branstad has said he won’t veto a gas tax increase if one makes it to his desk.


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


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

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

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

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


Jay Nixon's Proposed Truce Is Long Overdue


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For years, the economic border war between Missouri and Kansas has been the topic of discussion in those states’ respective statehouses. In a January report titled The Job-Creation Shell Game, Good Jobs First writes, “There is no jobs border war more intense these days than the one raging in the Kansas City metropolitan area...Both states unabashedly poach businesses from each other, aided by similarly structured tax credits that allow footloose companies to retain large portions of their employees’ state personal income tax.”

Now, it appears, Missouri Governor Jay Nixon is finally determined to change that.  Nixon recently told a business group that, “This so-called border war between our two states has gone on long enough” and described it as “bad for taxpayers … bad for our state budget, and it’s not good for our economy.”  Since making these statements, Kansas Governor Sam Brownback has indicated that he’s open to the idea of a truce, and the Kansas City Star explained how discussions surrounding how to implement such an agreement have been underway for more than a year.

In testimony before the National Conference of State Legislatures’ tax policy task force, the Institute on Taxation and Economic Policy (ITEP) made a strong case against the use of tax incentives to lure businesses: they often reward companies for activities they would have undertaken anyway; it’s difficult to ensure that their benefits remain entirely in-state; they often result in simply “poaching” jobs from one jurisdiction to another; and their costs can balloon far beyond what lawmakers anticipated.

The Kansas City border war is a particularly egregious example of many of these problems.  Cutting back on the wasteful use of incentives is the obvious first step that Missouri and Kansas lawmakers should take; the proposed truce would be immediately helpful to both Kansas and Missouri, and in the long run could help more states recognize that there are benefits to ending the tax incentive arms race.


Avoiding Tax Cut One-upmanship in Maryland


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Maryland has made some notable improvements to its tax system these last few years.  In 2012, lawmakers made the state’s regressive tax system (PDF) somewhat less unfair by limiting personal income tax exemptions and raising tax rates on high-income earners.  Then, in 2013, the state increased and overhauled its unsustainable gasoline tax despite the tough politics that accompany any policy that could lead to higher gas prices.

But with a major state election now less than a year away, the conversation seems to be taking a familiar, and less grown-up, tone.  The Baltimore Sun reports that four of the six candidates for governor have already incorporated “crowd-pleasing” tax cuts into their platforms in an effort to woo voters, and that the speaker of the House and president of the Senate appear interested in following their lead.  Corporate income tax cuts have attracted the most attention so far, and the Sun expects that proponents of a corporate tax cut will get a boost from some business leaders when they unveil their legislative priorities next month.

Rather than stand idly by and risk the election becoming a contest to see who can promise the longest list of tax cuts, some advocates in the state have already begun to do the hard work that’s needed to explain to lawmakers, candidates, and voters the ways in which taxes benefit the state.  The goal is to make the election year tradition of demonizing taxes a little less politically rewarding.

One recent example of such work comes from the Maryland Budget and Tax Policy Institute (MBTPI), who spotlights a recent nonpartisan study that found that a corporate income tax cut could actually result in fewer jobs, less disposable income, and/or slower population growth.  More publicity around these kinds of basic facts will be needed if the candidates whose names will appear on Maryland’s (and other states’) ballot next year are going to be convinced that they should drop their familiar refrain about the job-creating power of tax cuts

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Washington Governor Jay Inslee testified before legislators on the first day of a special session in favor of allowing tax breaks for Boeing that are estimated to cost the state $9 billion. Washington State Budget and Policy Center’s Remy Trupin issued this statement reminding lawmakers “It does not do our state’s economy any good to subsidize Boeing as they ship jobs out of state. We must ensure that significant state investments in Boeing benefit all Washingtonians.” Update: Governor Jay Inslee signed into law  tax breaks for Boeing.
 

There is a promising movement afoot in Minnesota to better fund the state’s transportation needs. The Minnesota Transportation Alliance, in next year’s legislative session, is going to propose either increasing the gas tax or, better yet, reforming it so that it grows alongside gas prices.
 

Here’s some temporary good news: The Illinois Senate adjourned without approving the litany of corporate tax breaks we told you about in an earlier post. So for now at least $88 million will stay in the state’s coffers. But the sponsor of the tax break bill, Sen. Thomas Cullerton says he expects to bring up the bill again next month. The Chicago Tribune is reporting, “even though [Cullerton] is positive he has enough votes to send the ... bill to the House, he would like to secure more.”
 

Amazon.com, the world’s largest online retailer, managed to score a $7 million subsidy from Wisconsin taxpayers in exchange for building a distribution center in their state.  But as our partner organization, the Institute on Taxation and Economic Policy (ITEP) explains, these kinds of tax incentives are a zero-sum game that rarely pay off with any real economic benefits.

 


Tax Policy Roundup for the 2013 Election


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Despite being an off-year election, there were a few significant tax policy issues at stake in the elections held this week in Colorado, Minnesota, New Jersey, Ohio, Texas, Virginia, and New York City.

Ballot Measures

Colorado voters rejected Amendment 66, which would have raised $950 million in new tax revenues for education each year by converting the state’s flat rate income tax into a more progressive, graduated rate tax.

Colorado voters approved Proposition AA, imposing a 25 percent sales and excise tax rate on recreational marijuana, which voters legalized one year ago.  This 25 percent tax will be stacked on top of the 2.9 percent statewide sales tax and any local sales taxes (which average 3.2 percent).

Texas voters approved three very narrowly tailored tax breaks.  Those breaks will benefit disabled veterans, surviving spouses of military members, and manufacturers of aircraft parts.

While residents of Minnesota and Ohio didn’t vote on any statewide ballot measures this week, most of the local school tax levies on the ballot in those two states were approved by voters.

Major Candidates with Tax Plans

New Jersey residents voted to keep Governor Chris Christie in the governor’s mansion, rather than replace him with Democrat Barbara Buono.  Buono’s tax platform included raising taxes on incomes over $1 million and reversing the cut in the state’s Earned Income Tax Credit (EITC) that Christie signed in 2010.  Christie, by contrast, has said he wants to cut income taxes across the board.

Virginia voters chose Democrat Terry McAuliffe over Republican Ken Cuccinelli to be their state’s next governor.  Both candidates ran on a platform of reducing or eliminating local business taxes, though neither specified how to offset the resulting revenue loss.  Cuccinelli also said that, if elected, he would have pushed for regressive personal and corporate income tax cuts, as well as a spending cap similar to Colorado’s TABOR law.

New York City residents elected Democrat Bill de Blasio over Republican Joe Lhota in the city’s mayoral race.  De Blasio wants to expand pre-K education in the city by raising taxes on incomes over $500,000, but it’s not clear whether Governor Cuomo—whose approval would be needed for the tax increase—will support such a change.


More Illinois Companies Trying to Extort Tax Breaks


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We’ve followed the tactics of corporations in Illinois, from Motorola to CME Group, who again and again ask lawmakers for pricey handouts they claim they need to keep doing business in the state. House Majority Leader Barbara Flynn Currie has called this egregious behavior “blackmail.” She recently said, "[i]t essentially is saying, if you don’t jump to, if you don’t go do this for us we might think about going somewhere else."  

Now the list of companies asking for handouts is growing, including: Archer Daniels Midland Company, OfficeMax, Zurich North America Insurance, Univar, and High Voltage Software. Giving individual companies special treatment is a violation of the neutrality principle and means that similarly situated companies are treated differently based on who can get the Legislature to bend to their will. Granting these singular incentives creates an environment wherein states end up competing in a “race to the bottom” and, ultimately, ordinary taxpayers pay the price through higher taxes or fewer services.

Illinois is facing an enormous budget crisis, due in part to the tax breaks for big multistate corporations that lawmakers have enacted over the years. Now is not the time for pandering to corporations at the expense of investing in the state’s future.

 

 


State News Quick Hits: Amazon's Esoteric Tax Dodge, and More


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Iowa Senator Jack Hatch is one of three Democratic candidates running to unseat Governor Terry Branstad. If elected, the Senator intends to pursue a package of tax changes that would cost the state $415 million in Fiscal Year 2015 and $300 million in the following years. Most components of his plan are quite progressive: eliminating the flawed deduction for federal income taxes paid and asking the wealthiest Iowans to pay more overall.  But we wonder if permanently reducing tax revenues is the best approach when (for example) food insecurity in the state is rising.

Interested in how college textbooks are taxed in your state? Check out this New York Times piece which also explains why Amazon is telling its customers not to carry the textbooks they “rent” from Amazon across state lines. It’s one of the many convoluted steps the company takes in efforts to dodge its sales tax collection responsibilities.

The Kansas City Star explains in an editorial why the gas tax is a better tool for funding infrastructure than the sales tax.  As the Star notes, relying on a general sales tax to pay for roads “is a big leap away from the “user pays” world in which motorists help finance road repair and construction … [and] many drivers from outside the state who use the state’s roads would pay little if anything in sales taxes to maintain them.”  Our partner organization, the Institute on Taxation and Economic Policy (ITEP) makes a similar point in its 50-state report on the gas tax.

Nebraska’s Tax Modernization Committee, which we have been following, has moved on from taking public comment and is now back to deliberating potential changes to the Cornhusker state’s tax system.  At the suggestion of the Committee’s Chairman, members are focusing first on how they would pay for any proposed tax cuts – which could include fully exempting social security from the personal income tax and providing state aid to help reduce property taxes. While tapping into the state’s Rainy Day Fund and reserves is one option under consideration, many lawmakers wisely cautioned against using one-time money to pay for permanent tax changes. We are also happy to see that some Committee members are making tax fairness an important part of the debate. To this point, State Senator Jeremy Nordquist said, “There's a number of options for us to address the regressivity of our state and local tax system, and that's certainly what my goal will be."

 

 

 

 


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


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Happy Halloween to our readers!

 

Kansas Governor Sam Brownback’s bloodcurdling vision for his state is on display in a new article in Governing magazine, which poses the question “Can Tough Love Help Reduce Poverty?” As the article notes, Brownback has demanded that poverty-stricken Kansans get off welfare and get a job, despite the dearth of quality employment opportunities in the state. What makes this fanciful approach to poverty-alleviation even more revolting is that Brownback’s own policies don’t support the working poor. For example, he has proposed to eliminate the state’s Earned Income Tax Credit -- which, as the name implies, only goes to those with wages earned through work during the year. While that proposal was rejected by the legislature, the tax cut bills he ultimately signed in 2012 and 2013 were wildly unfair, raising taxes on low-income families in order to give tax breaks to the wealthy.
 

The frighteningly incoherent world of online shopping sales taxes is undergoing yet another change this week.  We recently wrote about how a court ruling in Illinois limits the state’s ability to enforce its sales tax laws. In other states, though, things are moving in exactly the opposite direction.  The world’s largest online retailer--Amazon.com--will begin collecting sales taxes in Massachusetts and Wisconsin this Friday under agreements reached with those two states.
 

Advocates of "pay-per-mile" taxes are continuing to tell hair-raising stories about how the gas tax is doomed by the growing popularity of hybrids and alternative fuel vehicles--most recently in the Los Angeles Times.  But while fuel-efficiency gains may spell trouble in the long-term, the Institute on Taxation and Economic Policy (ITEP) recently explained that the root cause of our current transportation funding nightmare is much more straightforward.  78 percent of the gas tax shortfall we see today is simply a result of Congress’ failure to plan for inflation.
 

ITEP got a shout-out in a recent New York Times editorial urging voters to reject New York Governor Andrew Cuomo’s shortsighted plan to increase the number of casinos in the state. As the editorial points out, ITEP has shown that higher state revenues from casino gambling are fleeting, often vanishing like a ghost to neighboring states and leaving in-staters, particularly those afflicted with gambling addictions, holding the bag.


 


State News Quick Hits: Maine's Millionaires Abandon the 47%, and More


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Colorado’s Child Care Tax Credit would be expanded for low-income families under a bill approved by a special task force of legislators last week.  As the Colorado Center on Law and Policy explains (PDF), some Colorado households are actually too poor to benefit from the federal credit right now because it's only available to families who make enough to have some income tax liability; if you don't pay income taxes, you can't receive any state tax credit.  This bill would fix that problem at the state level by letting families earning under $25,000 claim a credit equal to 25 percent of their child care expenses, regardless of what credit they did (or did not) receive at the federal level.

Montgomery County, Maryland continues to make progress toward restoring its Earned Income Tax Credit (EITC) to its pre-recession level: 100 percent of the state’s EITC.  The enhancement was approved by a committee on Monday and will now go before the full council.  For more information, see our blog post on the history, and the benefits, of Montgomery County’s EITC.

Maine Governor Paul LePage is coming under fire for wildly inaccurate comments he made (which were secretly recorded) at a meeting of the Greater Portland chapter of the Informed Women’s Network.  Gaining him national attention, LePage told his audience  that “47 percent of able-bodied people in Maine don’t work,” a claim that is ridiculous.  At the same meeting LePage also said the following to justify his proposals to cut taxes for wealthy Mainers: “25 years ago Maine had about 2,000 millionaires. Maine has 400 now. New Hampshire at the time had about 500, right now they have 4,000. That’s the difference. That’s when you talk about prosperity and you talk about building an economy those are the things that you need to concern yourself with. So, I am looking at taxation as a big issue.”  Like his 47 percent claim, LePage evidently pulled these numbers out of thin air as data from the IRS do not back this statement. In fact, the number of tax returns with more than $1 million of income increased more in Maine (83%) than in New Hampshire (64%) between 1997 and 2011 (the years IRS data are available).

Some bad ideas just won’t die. Despite being rejected by the Pennsylvania House of Representatives by a vote of 138-59 last month, a proposal to eliminate school property taxes and reduce spending for schools is now being reconsidered by the state’s Senate. The bill, SB 76, replaces the property tax with higher sales and income taxes but then limits how much of the new revenue would flow to schools. The legislature’s own Independent Fiscal Office warned last week that the bill would create a $2.6 billion funding gap within five years. While reducing property taxes, which have been rising in recent years, may make sense (for low-income renters and fixed-income homeowners in particular), it should not be done at the expense of students, nor in the form of across-the-board cuts that also benefit big businesses. The House-passed HB 1189 at least ensured that the lost property tax revenues would be replaced with some other source, but neither bill addresses the longstanding problem of inadequate and unequal school funding in Pennsylvania.

 


Illinois Ruling Strengthens Case for a Federal Solution to Online Tax Collection


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Last week, the Illinois Supreme Court struck down a state law (commonly called the “Amazon law”) that would have helped solve some of the sales tax enforcement problems surrounding online shopping.  As things currently stand in Illinois (and most other states), traditional retailers with stores, warehouses, or actual employees in Illinois are required to collect  state sales taxes from their customers, while online retailers who don’t employ any Illinois residents (or have any other “physical presence”) are given a free pass.  Online shoppers are supposed to pay the sales tax directly to the state when e-retailers fail to collect it, but few shoppers actually do this in practice.

Illinois, along with nine other states, had tried to strengthen its sales tax enforcement by requiring more online retailers to collect the tax (specifically, those retailers partnering with Illinois-based “affiliates” to market their products).  But this court ruling strikes down Illinois’ law on the grounds that it treats companies partnering with online affiliates differently than companies who advertise in Illinois through traditional media.  According to a majority of the justices, this feature of Illinois’ “Amazon law” violates a federal law enacted in 2000 that bars “discriminatory taxes on electronic commerce.”

In his dissent, Justice Lloyd Karmeier points out that Illinois’ “Amazon law” didn’t actually impose any new taxes—it simply required a larger number of retailers to be involved in collecting and remitting sales taxes that are already due.  Karmeier went on to say that he would have upheld the law – in much the same way that New York’s highest court did with a similar law in that state earlier this year.

With Illinois’ and New York’s courts disagreeing on this issue, legal observers seem to think there’s a growing chance that the U.S. Supreme Court will consider the case next year.  But it’s a shame it’s come to this.  The Supreme Court already made clear over two decades ago that Congress has the authority to set up a more rational, nationwide policy for how states can tax purchase made over the Internet.  The U.S. Senate did exactly that this May with a bipartisan vote in favor of the Marketplace Fairness Act, but so far the U.S. House of Representatives has yet to act on it.  We presume it’s the political disagreements among activists and lobby groups that’s prevented the House from acting so far, but it’s increasingly urgent that states finally be allowed to resolve the mess that is tax collection for online shopping.

Cartoon by Monte Wolverton, available at and courtesy Cagle Cartoons.


Governor Scott Walker Appropriates State Budget Surplus for Campaign Season Tax Cut


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Earlier this month, with an unexpected $100 million biennial budget surplus burning a hole in his pocket, Wisconsin Governor Scott Walker proposed to use the one-time surplus to permanently cut local property taxes. In a whirlwind legislative session, a bipartisan group of Wisconsin lawmakers approved Walker’s tax cut with little opposition. Walker signed it into law over the weekend in a media-friendly event, with a red barn as the backdrop and children as nearby props.

The new law adds $100 million in state aid to local school districts over the next two years—which, due to the state’s strict local revenue limits, means that local governments receiving the new aid will be forced to reduce their property taxes dollar for dollar.

But there’s a hitch. The forecast $100 million surplus may be just a memory two years from now, but the new state aid will be permanently on the books. As the Wisconsin Budget Project (WBP) points out, using a one-time budget surplus to fund a permanent property tax cut is a recipe for long-term fiscal difficulties. Down the road, lawmakers will likely be forced to either hike state taxes or cut other areas of spending to pay for Walker’s tax cut. And “down the road” isn’t that far off: the Legislative Fiscal Bureau is already estimating a budget shortfall of about $725 million for the biennium starting in 2015.

Even worse, the new law will offer trivial tax breaks to homeowners, despite its huge price tag. The typical homeowner will see just $33 in property tax cuts over the next two years and many ordinary homeowners will see no cut at all. This is because the Governor’s plan will cut property taxes across the board, offering tax breaks to big corporations, shopping malls and vacation homes in addition to Wisconsin homeowners who happen to live in the right school districts.

In an attempt to disguise this campaign season ploy as a fiscally responsible plan, defenders of the new law argue that a new deal requiring Amazon.com to collect sales taxes in Wisconsin will help pay for the cut. But the estimated $30 million a year from that deal is not “new revenue,” and it’s already got a purpose—it’s legally-owed sales tax revenue that should already have been helping to fund schools, roads and medical care for years.

One of the few responsible legislators who voted against the tax bill offered some illuminating observations. Noting that it amounts to less than a dollar a month for the average home owner, State Senator Tim Cullen said that this trumpeted “tax relief” was aimed at nothing more than ensuring Governor Walker’s re-election. “That at the end of the day is what this is all about — $100 million of property tax relief. Nice headline." More specifically, many share the view that the Governor was more interested in scoring political points than promoting good tax policy, and it’s a shame so many members of his legislature willingly played along.

 

 

 


Will New Jersey Re-elect the Fiscally Reckless Chris Christie?


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In his reelection campaign, New Jersey Governor Chris Christie has been touting his record as a self-proclaimed fiscal conservative, bragging that “not one tax has been raised since I’ve been governor.” Many low-income New Jersey families would disagree. That is because Christie cut the state’s property and earned income tax credits, two critical anti-poverty measures for low-income workers, during his first term.

On property taxes, Christie boasts that he “successfully implemented a 2-percent property tax cap.” But many low- and moderate-income homeowners actually pay more now in property taxes than before the cap took effect. That is because he reduced funding for the Homestead Benefit and Senior Freeze programs, costing working families hundreds of millions of dollars. That is one reason why the public’s view of Christie’s handling of the property tax issue is so low.

On income taxes, Christie reduced the state’s EITC by 20 percent in 2010, costing 1.5 million workers a total of $100 million in tax credits over the last two years. The governor then refused to restore the cuts unless he got his way on an across-the-board income tax cut. In fact, he twice vetoed legislation that would restore the EITC, effectively holding low-income New Jersey workers hostage to his demands.

In contrast, Christie’s opponent, Barbara Buono, has promised to “restore New Jersey’s Earned Income Tax Credit and protect property tax relief for the families who need it most.” At the same time, Buono is supporting a millionaire’s tax that Governor Christie rejected (vetoing it three times) in order to fill in revenues needed for education in particular, which has been severely cut during Christie’s tenure.

A candidate for governor who says, as Buono does, that tax credits and incentives work best when targeted is one who better understands the role of taxes in the economy and budget than one committed to across-the-board income tax cuts (which do zero for a state’s economy and always benefit the wealthiest instead of taxpayers who actually need relief).   


State News Quick Hits: Criticism of "Business Climate" Rankings Grows, and More


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Nebraska’s Tax Modernization Committee, which we promised to keep tabs on in July, is scheduled to hold its final public hearings this week. But rather than wait to hear what the panel has to say, Governor Dave Heineman decided to renew his calls for lower property and income taxes. While some have argued that Nebraska’s property taxes are too high, slashing property taxes without increasing state aid to local governments would put significant strain on vital local services. Today, Nebraska ranks 43rd nationally in the amount of state aid it provides to local governments, and 49th in the aid it gives to schools. If Governor Heineman succeeds in his quest to cut state taxes, increasing local aid will become even more difficult. The Open Sky Policy Institute has issued thoughtful recommendations on this and other issues facing the Committee.

If you’re wondering whether you should put any stock in the Tax Foundation’s newest “Business Tax Climate Index,” the answer is No.  For starters, Good Jobs First has shown that, contrary to popular belief, the Tax Foundation’s rankings aren’t a very good predictor of how much a business would actually pay in taxes if it were located in any given state.  And now Governing magazine has taken a critical look at the rankings in a new article, and concludes that states earning high marks from the Tax Foundation don’t actually have stronger job markets or higher medium wages.

U.S. News & World Report is running an opinion piece by Carl Davis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), highlighting the fact that the federal gas tax has not been raised in exactly 20 years – and has been losing value ever since. The essay draws heavily from research that ITEP published late last month, and concludes that “it's time for our elected officials to accept that keeping the gas tax cryogenically frozen at 18.4 cents per gallon is costing Americans a lot more than it's helping them.”

West Virginia is thinking about how best to use the tax revenues it expects to collect from sales of its natural gas resources. The Associated Press reports that “[f]or decades, coal from West Virginia's vast deposits was mined, loaded on rail cars and hauled off without leaving behind a lasting trust fund financed by the state's best-known commodity. Big coal's days are waning, but now a new bonanza in the natural gas fields has state leaders working to ensure history doesn't repeat itself.” According to the AP, the state’s Senate president, Jeff Kessler, is looking to use some of the severance tax revenues on oil and natural gas to create an enduring trust fund, as other states with significant natural resources have done. “His goal: a cushion of funds long after the gas is depleted to buoy an Appalachian mountain state chronically vexed by poverty, high joblessness, and cycles of boom and bust.”

Arkansas Advocates for Children and Families Executive Director, Rich Huddleston, was one of four Arkansas leaders invited to contribute to Talk Business Arkansas magazine with ideas for how to “construct a fairer state tax code.” His proposal (citing ITEP data) is here, and begins: “The goal of any good tax system is to raise enough revenue to fund critical public investments that improve well-being of children and families while also promoting economic growth and prosperity.”


New Analysis: Replacing Flat Tax Would Improve Colorado's Tax System


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In less than a month, Colorado voters will decide whether to abandon the state’s flat-rate income tax in favor of a more progressive, graduated rate tax.  The main purpose of this reform is to raise nearly $1 billion in new revenue each year to offset the disastrous effects that strict constitutional limits on tax collections (i.e. TABOR) have had on the state’s K-12 education system.  But a new analysis from our partner organization, the Institute on Taxation and Economic Policy (ITEP), shows that the proposal would have another benefit: improving the fairness of Colorado’s regressive tax system (PDF).

According to ITEP’s Who Pays? report, the poorest 20 percent of Coloradans currently spend 8.9 percent of their income paying state and local taxes, while the wealthiest 1 percent pay just 4.6 percent of their income in tax.  One reason for this gap is that unlike most states, Colorado’s income tax uses a single flat rate, and therefore doesn’t live up to its potential for offsetting the steep regressivity of sales and excise taxes.

The proposal being voted on in November (Amendment 66) would change this by giving Colorado a fairer, two-tiered income tax.  Specifically, the Amendment would raise the state’s income tax rate from 4.63 percent to 5 percent on incomes below $75,000, and from 4.63 percent to 5.9 percent on incomes over that amount.  If approved by voters, the gap in overall tax rates paid by Coloradans at different income levels would be reduced.  The wealthiest 1 percent would see taxes rise by 0.8 percent relative to their incomes, while lower-income taxpayers would see just a 0.1 percent increase.

Amendment 66 asks the most of those taxpayers currently paying the lowest effective tax rates.  While most families would see a modest increase in their income tax bills under the amendment, just 16 percent of the revenue raised by Amendment 66 would come from the bottom 80 percent of earners.  The bulk of the revenue (63 percent) would come from the wealthiest 20 percent of Coloradans.  And the remainder (21 percent) would not come from Coloradans, but rather from the federal government as Coloradans reap the benefits of being able to write-off larger amounts of state income tax when filling out their federal tax forms.

As the Colorado Fiscal Institute points out, that 21 percent federal contribution is a big deal.  If Coloradans reject Amendment 66 this November, they’ll essentially be turning down $200 million in federal dollars that their K-12 education system could put to very good use.

Read the report

 


State News Quick Hits: Brownback Under Fire, and More


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Governor Sam Brownback’s tax policies are being challenged by a state legislator who’s running to unseat him, Paul Davis. "Gov. Brownback's `real live experiment' is not working," Davis said, using Brownback’s own description of the extreme tax changes he signed into law. Davis was referring to rising unemployment rates and a new Kansas Department of Revenue report showing revenues are falling below projections. Kansas lawmakers have slashed taxes over the past two legislative sessions and, despite what supply-siders would have you believe, tax cuts really don’t pay for themselves.

The Institute for Illinois’s Fiscal Stability at the Civic Federation in Chicago issued a report describing the lack of movement on fiscal issues as a “lost opportunity” for the state (we agree). Laurence Msall, president of the Civic Federation said, “This year was a lost opportunity as legislators failed to prepare for the extreme financial challenges everyone knows are on the immediate horizon. We see some progress this year on the backlog of unpaid bills, but nothing to address the unresolved pension crisis or to plan for the revenue loss coming next year.”  Next year, the state’s income tax rate is scheduled to be reduced and with that even larger shortfalls in the state’s budget are expected.

Following up a story from last week about Archer Daniels Midland Company (ADM) asking for $20 million in tax breaks from Illinois, Illinois Governor Pat Quinn is now saying that he won’t approve any ADM tax breaks until the state’s pension system has been reformed.

For evidence of why special “tax incentives” don’t work in boosting state economies, look no further than this Washington Post story on the tax breaks that the District of Columbia tried to give LivingSocial last year.  Shortly after being offered $32.5 million to expand its DC presence, the tech company did exactly the opposite, cutting its DC payroll from nearly 1,000 employees to just over 600.  Today, just 244 DC residents work for the company.  Had LivingSocial seen a rising demand for its product, it would no doubt have expanded its payroll and happily collected a $32.5 windfall courtesy of DC taxpayers. But promises of a special tax break aren’t enough on their own to convince a smart business owner to expand.

 


What's the Matter with Oregon's New Tax Deal?


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After three days of debate and backroom deals, lawmakers in Oregon delivered hundreds of millions of dollars in unwarranted tax cuts to businesses as part of the state legislature’s 2013 special session on Wednesday.

The Governor’s objective for calling the special session was to increase education spending, reduce public employee pensions, and limit regulation of genetically modified agriculture, among other priorities. But buried in one of the five bills that came up for consideration – all of which passed on Wednesday – were tax rate cuts for partnerships, limited liability companies, and "S corporations.”

As we and the Oregon Center for Public Policy have demonstrated, these cuts far outweighed increased assistance for working families, which came in the form of a modest increase in the state Earned Income Tax Credit (EITC). Moreover, the budget math only works for the first two years. Oregon’s own Legislative Revenue Office expects the costs of those business tax cuts to grow rapidly starting in 2015, eating away at the limited new revenues in the deal. This will likely create another budget crunch a few years down the road. And despite the political rhetoric about jobs and small business surrounding the tax cuts, the beneficiaries are almost exclusively individuals in the top 1 percent.

Rep. Brent Barton, D-Oregon City, himself a lawyer in private practice, asked an important question about the deal: "What is the message that this Legislature is sending when we cut my taxes 20 percent? We cut taxes on thousands of lawyers, doctors, lobbyists, accountants on the same day that we cut benefits for retirees. What message does that send?"

Unfortunately, advocates for working Oregonians will have little time to recover from the special session fight before they’re confronted with Governor Kitzhaber’s next pet project: weakening Oregon’s so-called “over-reliance” on income taxes.

 


State News Quick Hits: Andrew Cuomo Loves Tax Cuts, So Does ADM, and More


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States are just beginning to come to terms with the impact that the shutdown of the federal government will have on state residents. This informative blog post from the Wisconsin Budget Project tells us what programs folks should and shouldn’t be worried about on the state level and links to several resources from The Center on Law and Social Policy (CLASP) that readers might find helpful.

Another day...another company asking for enormous state corporate tax breaks. This time Archer Daniels Midland Company (ADM) is asking Illinois lawmakers for $20 million in tax breaks to keep their headquarters in Decatur. During a House Revenue and Finance Committee hearing, Rep. Barbara Flynn Currie characterized testimony of an ADM executive as “essentially blackmailing the state ... saying if you don’t go through this hoop for us, we may think about going somewhere else.”  (H/T POLITICO's Morning Tax.)

The Tax Foundation and the National Taxpayers Union are urging the U.S. Supreme Court to hear a case that could allow Overstock.com -- and other online vendors like Amazon.com -- to shirk  their responsibility for collecting state and local sales taxes. While a previous Supreme Court precedent bars states from requiring sales tax collection by vendors who have no “physical presence” in the state (a ban which Congress is considering lifting via the Marketplace Fairness Act, which passed the Senate by a rare bipartisan vote in May), some states have chipped away at e-tax-evasion by interpreting “physical presence” more broadly than others. In New York, for example, Overstock.com has agreements with in-state affiliates to pay for customer referrals, thus requiring the company to collect sales taxes from its New York customers under a 2008 state law that has been upheld by the New York Court of Appeals. While a national solution that levels the playing field between all online vendors and the brick-and-mortar stores who have always collected sales tax is preferable, states should be free in the meantime to require sales tax collection from online retailers who have legitimate ties to their local economies. Hopefully the Supreme Court agrees.

Having already made some backwards moves on the tax policy front, New York Governor Cuomo now appears to be abandoning his commitment to study and improve the state’s tax structure. In December, he announced the New York State Tax Reform and Fairness Commission. The Commission was “charged with addressing long term changes to the state tax system and helping create economic growth.” But instead of going forward with this thorough examination, the Governor has just appointed former Governor George Pataki and Controller Carl McCall to head a task force whose sole objective is to find a way to cut between $2 and $3 billion in taxes next year, in just one year! Maybe the junior Cuomo really does plan on running for President -- of Texas.

 


Inequality for All, Starring ITEP Board Member Robert Reich, Opens Today


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Professor Robert Reich is a former Secretary of Labor, the star of a new documentary generating all kinds of buzz, and he is also a member of the board of our partner organization, the Institute on Taxation and Economic Policy (ITEP).  His new movie, "Inequality for All," examines the scale and causes of the economic inequality that plagues the United States (including, argues Reich, our democracy). Watch the trailer!

Here at our blog we track new reports and research on the interaction of tax policy and income inequality. We write about the unequal treatment the tax code gives to investment income in contrast to the ordinary income most Americans take home. We tell anyone who will listen there are no freeloaders when it comes to paying taxes – unless you’re talking about the super rich or big corporations.

In a recent interview, Professor Reich explained,

There’s a lot of confusion about inequality. People know that inequality is surging. Many people have a feeling the game is rigged. But they don’t really understand why, how it’s happened and why it is dangerous. Or what they can do about it. This film also provides a kind of guide to people. There’s a social action movement that is connected to the film. We hope that the film really spurs not just a different discussion in this country, but also a movement to take back our economy and democracy.

Click here to find out when "Inequality for All" is coming to a city near you.

And…. If you are in the DC area, join us Monday! After a screening of "Inequality for All" on October 1 at 7:15 PM at E Street Cinema, ITEP's Executive Director Matt Gardner will join a panel to discuss how what should be done to reverse the growth of income inequality locally and nationally.

The Facebook event has the details – see you there!


Special Session in Oregon Over Pensions and Revenues


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At the request of Oregon Governor John Kitzhaber, the state’s legislature will convene a special session on September 30th to pass a negotiated pension reform and revenue package which lawmakers failed to act on during the regular session this year.  The Governor and key lawmakers have been back and forth for months trying to come up with a “grand bargain” that would please members of both sides of the aisle, allowing the state to move forward on reforming the public pension system and raising revenue to boost education spending.  Lawmakers reached an impasse early this summer because most Democratic lawmakers were willing to raise revenue, but were not eager to support cuts to public employee’s benefits while most Republicans were open to significant changes to the state’s public pension system, but would only accept revenue increases if they are balanced with tax cuts for “small” businesses.  And, even though Democrats have majorities in the House and Senate, thanks to Oregon’s supermajority requirement to enact tax increases, a handful of Republicans were needed to strike a deal. 

Now it appears the impasse has broken.  The Governor and the majority and minority leaders of the House and Senate reached a deal on a plan that will initially raise more than $200 million (over two years) in new revenue for education, further reduce costs to the state’s pension system, give tax breaks to some businesses, and slightly increase the state’s Earned Income Tax Credit.

Is it time to celebrate?  Not so fast.  Our friends at the Oregon Center for Public Policy (OCPP) are calling the deal a “Grandly Flawed Bargain” due to three major flaws with the revenue package:

  • The initial revenue gains shrink substantially after the current budget period.
  • The tax cuts included in the revenue package are highly tilted to the wealthiest 1 percent who will benefit from the new business tax break.  And, the special business tax breaks are the reason for the revenue collapse after the first budget period.
  • Despite proponents’ claims, the revenue package will not create jobs.

The bargain contains two progressive revenue raising elements: eliminating the personal exemption credit for high-income taxpayers; and capping the additional deduction for medical expenses available to older taxpayers and phasing it out for upper-income households.  And, it gives a small tax cut to working families by bumping the state’s Earned Income Tax Credit up from 6 to 8 percent of the federal credit.  But, most of the progressive changes are more than offset and overshadowed by the new optional personal income tax rate structure for taxpayers with pass-through business income, which will amount to more than a $100 million tax break each year for those filers once fully phased-in.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), crunched the numbers OCPP highlights in its report.  ITEP found that the so-called revenue raising package largely amounts to a significant tax cut for the wealthiest 1 percent of Oregonians who report pass-through business income on their returns. This group receives almost 70 percent of the tax cuts contained in the package while low- and moderate-income taxpayers (the bottom 40 percent) who benefit from the increased EITC get less than 10 percent of the total tax cut.

More than 60 percent of the wealthiest 1 percent of taxpayers will actually pay more under the plan thanks to the changes to the personal exemption credit.  So, it is a small number of wealthy business owners sharing the big cut that’s going to cost more than any part of the plan.     

OCPP is recommending lawmakers consider removing the costly wealthy business owner tax break from the bargain package in order to ensure adequate revenue for education, not only for this year but for years to come.  It would also make the tax package more fair, giving tax cuts only to low- and moderate-income working families while raising revenue from the state’s wealthiest residents.

 


States Praised as Low-Tax That Are High-Tax for Poorest Families


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Annual state and local finance data from the Census Bureau are often used to rank states as “low” or “high” tax states based on state taxes collected as a share of personal income. But focusing on a state’s overall tax revenues overlooks the fact that taxpayers experience tax systems very differently.  In particular, the poorest 20 percent of taxpayers pay a greater share of their income in state and local taxes than any other income group in all but nine states.  And, in every state, low-income taxpayers pay more as a share of income than the wealthiest one percent of taxpayers.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP) took a closer look at the Census data and matched it up with data from their signature Who Pays report which shows the effective state and local tax rates taxpayers pay across the income distribution in all 50 states.  ITEP found that in six states— Arizona, Florida, South Dakota, Tennessee, Texas, and Washington —  there is an especially pronounced mismatch between the Census data and how these supposedly low tax states treat people living at or below the poverty line. 

See ITEP's companion report, State Tax Codes As Poverty Fighting Tools.

The major reason for the mismatch is that these six states have largely unbalanced tax structures.  Florida, South Dakota, Tennessee, Texas and Washington rely heavily on regressive sales and excise taxes because they do not levy a broad-based personal income tax.  Since lower-income families must spend more of what they earn just to get by, sales and excise taxes affect this group far more than higher-income taxpayers.  Arizona has a personal income tax, but like the no-income tax states, the Grand Canyon state relies most heavily on sales and excise taxes.

To learn more about how low tax states overall can be high tax states for families living in poverty, read the state briefs described below:

Arizona has the 35th highest taxes overall (9.8% of income), but the 5th highest taxes on the poorest 20 percent of residents (12.9% of income).  The top 1 percent richest Arizona residents pay only 4.7% of their incomes in state and local taxes.

Florida has the 45th highest taxes overall (8.8% of income), but the 3rd highest taxes on the poorest 20 percent of residents (13.2% of income).  The top 1 percent richest Florida residents pay only 2.3% of their incomes in state and local taxes.

South Dakota has the 50th highest taxes overall (7.9% of income- making it the “lowest” tax state), but the 11th highest taxes on the poorest 20 percent of residents (11.6% of income).  The top 1 percent richest South Dakota residents pay only 2.1% of their incomes in state and local taxes.

Tennessee has the 49th highest taxes overall (8.3% of income), but the 14th highest taxes on the poorest 20 percent of residents (11.2% of income).  The top 1 percent richest Tennessee residents pay only 2.8% of their incomes in state and local taxes.

Texas has the 40th highest taxes overall (9.1% of income), but the 6th highest taxes on the poorest 20 percent of residents (12.6% of income).  The top 1 percent richest Texas residents pay only 3.2% of their incomes in state and local taxes.

Washington has the 36th highest taxes overall (9.7% of income), but the 1st highest taxes on the poorest 20 percent of residents (16.9% of income).  The top 1 percent richest Washington residents pay only 2.8% of their incomes in state and local taxes.


Census Says Poverty Persists, Here's What States Can Do About It


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This week, the Census Bureau released new data showing that the share of Americans living in poverty in 2012 remained high, despite other signs of economic recovery.  While the national poverty rate (15%) and the rates in most states are holding steady, the number of people living in poverty today is much greater than in 2007, prior to the start of the recession.

The good news is that policy makers have at their disposal several affordable, targeted and effective tax policy tools to alleviate economic hardship and help families escape poverty.  An updated report from our partner organization, the Institute on Taxation and Economic Policy (ITEP), “State Tax Codes as Poverty Fighting Tools,” provides a comprehensive view of anti-poverty tax policies state-by-state, surveys tax policy decisions made in the states in 2013, and offers recommendations tailored to policymakers in each state as they work to combat poverty. As ITEP lays out in its signature Who Pays report, virtually every state and local tax system is regressive, contributing to the challenges of America’s low-income families; State Tax Codes as Poverty Fighting Tools details some options for reversing that.

See ITEP's companion report, Low Tax for Who?

In most states, truly remedying tax unfairness would require comprehensive tax reform. Short of this, lawmakers should consider enacting or enhancing four key anti-poverty tax polices explained in the report: the Earned Income Tax Credit, property tax circuit breakers, targeted low-income tax credits, and child-related tax credits. (Each of these provisions is also described in an ITEP stand-alone policy brief.) Unfortunately lawmakers in a number of states have moved in the wrong direction this year (North Carolina, Ohio and Kansas are top of the list), pursuing massive tax shifts that would hike taxes on their poorest residents while unjustifiably reducing them for the wealthiest individuals and profitable corporations. 

Given the persistence of poverty in the states as documented by the new Census data, policy makers should be focused on finding ways to boost the incomes of low- and moderate-income families rather than taxing them deeper into poverty in order to provide tax breaks to the well- heeled.

 


It Wasn't Property Taxes that Cost DC Residents their Homes


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No one should be taxed out of their homes. It’s a sentiment that finds support across the political spectrum: homeowners, especially senior citizens and low-income families, should not lose their homes because of their property tax bills. Yet as a Washington Post investigation revealed this week, the DC city government’s use of “tax lien sales,” through which the government allows a small number of private agencies to act as debt collectors for unpaid property tax levies, has given “predatory” private investors license to foreclose on the homes of hundreds of city residents over the past five years.  As a result, some low-income and elderly homeowners have been left with nowhere to live and with no equity in the homes many had owned outright.

The Post article profiles Bennie Coleman, a 76-year-old widower who ultimately lost his house after not paying a $134 property tax bill. When Coleman didn’t pay his bill, the city imposed a tax lien on the property, and then sold the lien to a private investor who was allowed to charge Coleman double-digit interest until the debt was paid. But the interest and penalties charged by this predatory investor pushed the total debt up to $5,000, and the investor foreclosed on the property.

Within a day of the Post report’s publication, Mayor Vincent Gray was vowing that “we cannot allow those kinds of things to happen again,” and City Council chair Jack Evans was preparing emergency legislation to limit private investors’ use of tax lien sales.

As the Post’s coverage makes clear, the cause of these foreclosures was not an out-of-control tax system, but rather the practice of allowing private debt collectors to charge exorbitant fees on top of the often minimal property tax debt. As it happens, Washington DC’s property tax system goes further than many states in minimizing property taxes on at-risk families and seniors: the city allows low-income families to claim a property tax credit of up to $750, and also allows low-income seniors to simply defer unaffordable property tax bills.  Until recently, the tax credit was only available to families with incomes under $20,000 – an amount unchanged for 35 years – leaving out many families living at or below the federal poverty level.  But just this summer, the DC City Council made significant improvements to the property tax credit, increasing income eligibility to $50,000 (about 200 percent of poverty for a family of four) and boosting the credit to $1,000.

In most states, there are only limited mechanisms in place to relieve unaffordable property tax bills for low-income taxpayers. And as an ITEP survey finds, virtually every state could take sensible steps to enact more generous low-income property tax relief programs.

The clear lesson of the abuses documented by the Post is that Washington DC's system for collecting unpaid property taxes must be overhauled. But a more basic lesson any state’s policymakers can learn from this harrowing tale is that it’s vital to design property tax rules in a way that don’t jeopardize low-income, fixed-income and senior homeowners through judicious use of “circuit breakers” and tax deferrals.


State News Quick Hits: Starving Government With TABOR, and More


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TABOR stands for Taxpayer Bill of Rights, but it’s really a destructive law that restricts tax and spending growth with the goal of starving government. Colorado has the most restrictive version of this kind of law and serves as a cautionary tale. The Colorado TABOR and its implications are described in a new policy brief from the Institute on Taxation and Economic Policy (ITEP).  In a nutshell, TABOR’s arbitrary limit on the size of government prevents states from meeting their evolving responsibilities as populations change, services become more expensive, and voters demand new public investments.

Texas Governor Rick Perry is headed to Missouri to stump for a regressive income tax cut that some legislators are trying to enact over Governor Nixon’s recent veto.  If Show Me State residents ignore Perry’s advice, who could blame them? The former presidential candidate’s own state’s tax system is one of the least fair in the country.  Only five states require their poorest residents to pay more in taxes than Texas.

Indiana’s property tax caps, which we’ve long criticized, are causing headaches for local lawmakers in Indianapolis who are facing pleas from law enforcement and other agencies for more funds. Coupled with the revenue slump brought on by the recent recession, officials are grappling with three choices: close their current budget gap by raising the city’s income tax; risk the city’s AAA credit rating by tapping its reserves; or enact even deeper cuts in public services on top of those already in effect.

It looks like taxes will be a hot issue in the 2014 Arkansas gubernatorial election.  Arkansas’ leading republican candidate, Asa Hutchinson, recently said he supported phasing out the state’s personal income tax, but offered no specifics for how he would replace the lost revenue.  Mike Ross, the leading Democratic candidate, took Hutchinson to task, reminding Arkansans that tax cuts come with a price: “So when you start talking about cutting taxes, unless you’re talking about shifting the burden to other taxes, you’re talking about laying off teachers, you’re talking about kicking seniors out of the nursing home.... It’s pretty simple math.”

 


Washington Post Owner Jeff Bezos Does Not Believe in Taxes


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The news that Jeff Bezos, the founder and CEO of Amazon.com, is going to buy the Washington Post for $250 million is shining the light on Bezos’ politics and Amazon's corporate behavior for obvious reasons. The Washington Post is the paper of record in the nation's capital and exerts extraordinary influence over political debates.  As an organization that follows tax policy, we went looking for the track record on taxes and, as it turns out, Bezos and his company have consistently demonstrated a contempt for taxes and an aggressive interest in avoiding them. Here's what you need to know:

1. Bezos personally donated $100,000 to an anti-income tax initiative group in Washington state.
In 2010, Initiative 1098 would have created a five percent tax on income exceeding 200,000 and a nine percent rate on income exceeding $500,000 for individuals in Washington State. It was designed to pay for a cut in the property and business taxes as well as an increase in education spending, but it was defeated with the help of a $100,000 donation from Bezos to the group Defeat I-1098. Passing I-1098 would have not only helped Washington state get on a more sustainable fiscal footing, but it would have gone a long way to improving the fairness of the nation's most regressive (PDF) state tax system.

2. Amazon bullies states to avoid its responsibility to collect state sales taxes.
In late June, Amazon decided to cut ties with all its affiliates in Minnesota to dodge a new law that would have forced it to begin collecting sales tax in the state. This move made Minnesota just the latest casualty among a whole slew (PDF) of states to feel Amazon’s wrath in its relentless pursuit of preserve its tax advantage over local retailers. Fortunately, the federal Marketplace Fairness Act, which would eliminate this tax advantage by allowing states to require Amazon and other websites collect sales taxes, has passed the Senate and could realistically be enacted in the not-too-distant future.

3. Amazon is a notorious international tax dodger.
Amazon has become infamous for its international tax dodging over the last year since the United Kingdom discovered that it "immorally" paid almost no taxes on over £4.2 billion in sales by routing its operations through Luxembourg (a well-known tax haven country). The happy irony is that Amazon’s audacity helped prompt the recent unprecedented international effort to crack down on this sort of international tax dodging.

4. Bezos could reap substantial tax benefits from the purchase of the Washington Post.
Although it is unclear how much time Bezos plans to spend working at the Washington Post, a report by Reuters notes that if he spends about 10 hours each week on it he could realize substantial tax benefits from the purchase of the newspaper. The reason is that business owners like Bezos are able to deduct any losses (of which the Post has tens of millions) from operating the business they own, thus reducing their overall tax bill.

5. Bezos wanted to start Amazon.com on an Indian reservation to avoid taxes.
Illustrating a particularly brash anti-tax philosophy, in an interview almost 17 years ago, Bezos said that he "investigated whether we could set up Amazon.com on an Indian reservation near San Francisco."  He explained the idea was to get "access to talent without all the tax consequences."  Bezos went on to lament that this was not possible because, "[u]nfortunately, the government thought of that first." In other words, Bezos wanted to fully exploit all the "talent" of  Silicon Valley without having to pay for the public investments that nurture that talent and draw the human and other capital that make businesses profitable and industries blossom. 

Front page photo via Dan Farber Creative Commons Attribution License 2.0 


Governor Cuomo's Tax-Free Zones Scheme Is More Cost than Benefit


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Earlier this summer, we tracked New York Governor Andrew Cuomo’s state-wide promotional tour where he touted the benefits of his beloved “START-UP New York” (originally called “Tax Free NY”) – a plan to turn college campuses throughout the state into enterprise zones where new businesses would be exempt from all state taxes. The Governor claimed this would be an innovative way to revitalize the up-state economy while costing the state nothing. We, however, found these claims unwarranted at best, showing they were only a call for more of the same unproven corporate tax breaks that would cost the state millions while putting existing local businesses at an extreme disadvantage.

Nonetheless, Governor Cuomo ignored our warning (and the warnings of others) and rapidly pushed the plan through the legislature where it was introduced, approved, and subsequently signed by him, all in the course of a few weeks in June.

Now, less than two months after its passage, a new analysis shows just how poorly conceived START-UP NY really is. This time, however, the analysis comes directly from the Governor’s own budget office – and its findings are in stark contrast to what the Governor promised during his promotional tour.

While Cuomo campaigned on the notion that his tax-free campus scheme wouldn’t cost the state a nickel, the budget office’s projections (PDF) show the plan will cost $323 million in lost revenue over its first three years alone (projections only go through Fiscal Year 2017, and show costs rapidly ballooning over this period of time).

And in a cartoonesque twist, this lost revenue is not from businesses that will move to New York because the START-UP program incentivized them to do so. According to the report, the $323 million in lost revenue is the result of companies that would have come to New York and paid full taxes anyway, but are now exempt thanks to the Governor’s tax-free program.

With projected budget gaps of $1.74 billion in FY 2015 and $2.9 billion in both FY 2016 and FY 2017, START-UP NY has exacerbated the state’s poor fiscal health – making it even more difficult to invest in government services that are proven to grow the economy, like education and infrastructure. Calling START-UP NY an overpriced gimmick, one assemblyman has announced his plan to repeal the program altogether – a move we think should be taken as soon as possible.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), has shown in detail how rolling back business and corporate taxes is not an effective economic development tool and that public investment in schools, transportation systems, public safety, etc. are the real keys to development. Even in practice, enterprise-zone programs like START-UP NY have demonstrably failed to create jobs while costing states billions.

Thus far, Governor Cuomo has demonstrated an unwillingness to listen to experts or look at the evidence. Will he also ignore his own budget team’s assessment and move forward with his plan? If so, it would be hard to conclude that his governing agenda is anything but reckless and self-serving.

Front page Photo via  Governor Andrew Cuomo Creative Commons Attribution License 2.0


ITEP to Legislators: Business Tax Breaks Don't Live Up to the Hype


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Some of the country’s most influential state tax-writers heard this week from the Institute on Taxation and Economic Policy (ITEP), about why they should reject the conventional wisdom about special business tax breaks being economy-boosters. Best known for its work promoting the collection of sales taxes on purchases made over the Internet, the NCSL Task Force on State and Local Taxation asked ITEP to speak at its meeting in Atlanta on the effectiveness of so-called “tax incentives.”

Among the reasons ITEP urged lawmakers to be skeptical of these special breaks:

  • Tax incentives often reward companies for hiring decisions or investments they would have made anyway. These “windfall” benefits significantly reduce the cost-effectiveness of every tax incentive.
  • State economies are closely interconnected, so the taxpayer dollars given to companies through incentive programs never remain in-state for very long.
  • Tax incentives require picking winners and losers. Incentive-fueled growth at one business usually comes at the expense of losses at other businesses – including businesses located in the same state.
  • Tax incentives must be paid for somehow, and state economies are likely to suffer if that means skimping on public services like education and infrastructure that are fundamental to a strong economy.

To address these problems, ITEP recommended a three-pronged approach to the Task Force: cut back on tax incentives (both unilaterally and through cooperation with other states); reform tax incentives to limit their most obvious flaws; and closely scrutinize incentives on an ongoing basis to weed out the least effective programs.

ITEP staff also participated in a follow-up panel on best practices for “tax expenditure reporting”—the main tool states use to keep tabs on the slew of special tax breaks they offer to businesses and individuals. For that panel, ITEP recommended expanding state tax expenditure reports to include more tax breaks, and to include more information, like the purpose of each tax break and a description of its beneficiaries.  ITEP also explained why lawmakers shouldn’t gut state tax expenditure reports by excluding large tax breaks from their scope; every tax break has supporters and a constituency who insist it’s justified, but every tax expenditure requires equal scrutiny.

Read ITEP’s written remarks on the folly of business tax incentives.

Read ITEP’s written remarks on best practices for tax expenditure reporting.


Montgomery County Poised to Expand Its Exemplary EITC


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There is a strong consensus among scholars, think tanks and advocates around the country that there are concrete benefits to providing earned income tax credits (EITCs) – refundable credits (PDF) designed to offset income tax liability for low-income families and individuals. Not only has the EITC been shown to help alleviate poverty, but it has also succeeded in encouraging greater participation in the workforce, improving infant health, and boosting school achievement, among other things.

While most discussions are about the federal and state EITCs, there are two local EITCs that are often overlooked, including Montgomery County, Maryland’s Working Families Income Supplement (WFIS). Originally introduced in 2000 as a tool to help the county’s poorest residents cope with an extremely high cost of living, the WFIS is one of only two local EITCs in the country (the other is in New York City).

When originally implemented in 2000, the WFIS was set at 100 percent of the state EITC – that is, if a worker received $600 from the Maryland EITC, he or she would also receive $600 from the county. This supplement provided low-income Montgomery County families with the most generous combined EITC in the country. It also gave these households the ability to pay for basic day-to-day necessities like child care, school books, utility bills, and groceries – and most of all it helped reduce poverty and promote upward mobility. (Other reference materials on the WFIS can be found here.)

Through the mid-2000s, the number of people living in poverty declined even as unprecedented numbers of people moved into the county. When the Great Recession began to take hold in late 2007, however, these advances were reversed. As jobs were lost and incomes fell, Montgomery County experienced a spike in poverty even as the Washington, DC region as a whole weathered the recession better than most.

In a case of terrible timing, as county tax revenues began to fall, the Montgomery County Council decided to save a little money by scaling back the WFIS to 72.5 percent of the state EITC in FY 2011, 68.9 percent in FY 2012, and 72.5 percent in FY 2013. This decision only made things worse for low-income families: now, not only were they facing wide-spread layoffs prompted by a weak economy, but they were seeing a significant cut in a critical source of income.

Now, however, members of the Council have proposed a plan that would restore the 100 percent credit that was in place for nearly a decade.

Introduced in March and having undergone public hearings in July, Expedited Bill 8-13 (PDF) would gradually return the WFIS to 100 percent of the Maryland credit by Fiscal Year 2016. This expansion is estimated to help over 30,000 low-income households meet their basic day-to-day needs at a cost to the County of $3 million.  (For context, Montgomery County tax revenues are projected to grow by $30 million a year for the foreseeable future – even when factoring in the possible impact of the federal sequester).

With a committee hearing scheduled for early October, the Council members promoting the bill have just under two months to garner support and move its restoration forward. For over a decade, the Council has demonstrated its dedication to the needs of its low-income residents as it championed one of the most forward-looking income tax credits in the nation.  By restoring the Working Family Income Supplement to 100 percent of the state credit, the Council would be offering critical help to its most vulnerable residents, providing a ladder for upward mobility, and adding a boost to the local economy.

For more information on the structure and benefits of Earned Income Tax Credits:

Rewarding Work Through Earned Income Tax Credits

Institute on Taxation and Economic Policy, September 2011

“Low-wage workers often face a dual challenge as they struggle to make ends meet. In many instances, the wages they earn are insufficient to encourage additional hours of work or long-term attachment to the labor force. At the same time, most state and local tax systems impose greater responsibilities on poor families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve meaningful economic security. The Earned Income Tax Credit (EITC) is designed to help low-wage workers meet both those challenges. This policy brief explains how the credit works at the federal level and what policymakers can do to build upon it at the state level.”

Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School

Center on Budget and Policy Priorities, April 9, 2013

“The Earned Income Tax Credit (EITC), which went to 27.5 million low- and moderate-income working families in 2010, provides work, income, educational, and health benefits to its recipients and their children, a substantial body of research shows. In addition, recent ground-breaking research suggests, the EITC’s benefits extend well beyond the limited time during which families typically claim the credit.”

Ten Years of the EITC Movement: Making Work Pay Then and Now

Brookings Institution, April 18, 2011

“The Earned Income Tax Credit (EITC) … has grown to be called the nation’s largest federal anti-poverty program. The EITC has had significantly beneficial effects for its recipients and their communities. These include encouragement of work, reduction of poverty, and boosting of local economic activity.”


PBS Asks Some Hard Questions About Laffer and His Curve


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Supply-side economist Arthur Laffer has been very busy the last few years trying to convince state lawmakers that cutting taxes and making them more regressive will lead to an economic boom.  At the same time, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has done a lot of work pointing out the serious flaws in Laffer’s so-called research, and explaining why taxes and the public investments they pay for are key to healthy state economies.

Over at PBS, meantime, the fedora-donning business correspondent for the News Hour, Paul Solman, had gotten wind of ITEP’s critiques.  After reading ITEP’s “States with "High Rate" Income Taxes are Still Outperforming No-Tax States” and deeming it “a convincing piece of work,” Solman decided to sit down with Laffer and ask some questions.  Laffer’s response was predictable and anecdote-heavy.  Aside from recycling the same meaningless statistics ITEP has debunked before, he also included a data point that’s hard to rebut unless you live inside his brain, that he and his family moved to Tennessee “exclusively because of taxes.”  (Of course, a guy who’s made a living bashing taxes is not a particularly representative citizen.)

Happily, PBS’s Solman decided to do a little fact-checking and went looking for an expert, “impartial point of view” (his words, not ours) to help glean whether Laffer’s promise of sure-fire economic growth is all that – or all wet.  For his follow up piece, he turned to Joel Slemrod, noted public finance expert and chair of the Economics Department at the University of Michigan.

In one of many subtle but clear swipes at Laffer’s methods, Slemrod explained that while “economists have developed increasingly sophisticated statistical techniques to try to tease out the causal link between policies and performance … Laffer's analysis is not sophisticated.”

Slemrod’s criticisms of Laffer closely parallel those made by ITEP in 2012 and early 2013.  For one thing, Laffer fails to control for non-tax factors that impact growth. For another, the economic measures he chooses (cherry picks, really) don’t capture “what's happened to the … well-being of a typical resident.”  And, Laffer ignores how tax cuts require cuts in public investments that are hugely important to state economies.

On this last point, Slemrod notes that: “Laffer makes clear that … he believes more money does not provide better public services. This is a controversial statement that he backs with a few anecdotes, but it is not one that is widely held.”

In other words, Laffer and his supply-side compatriots have campaigned to frame most every government program as “wasteful” to make the idea (and their ideological obsession) of defunding government seem somehow justified.

Given all of this and his vast expertise, Slemrod concludes that ITEP’s study “make[s] arguably better methodological choices” than Laffer’s.  (We’ll take that as a compliment!) As Slemrod has pointed out in previous interviews, serious research has shown taxes to have little, if any, effect on economic growth; in fact, that “[r]aising taxes and using the money for education and certain infrastructure could certainly be beneficial to an economy.”  Laffer’s tax-phobic worldview notwithstanding, public services do matter to economic growth, and that means we will always need an adequate, fair, and sustainable tax system to pay for them.


Sales Tax Holidays Are Silly Policy


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18 states across the country are gearing up for their 2013 Sales Tax Holiday season, but these tax-free shopping sprees are also increasingly under fire.  Designed to offer a temporary sales tax exemption for specific consumer items, these holidays typically last two to three days and most take place in time for back-to-school shopping. An updated policy brief (PDF) from the Institute on Taxation and Economic Policy (ITEP), however, lays out why there is so little to celebrate this Sales Tax Holiday season.

For starters, the economic benefit of sales tax holidays is unclear at best. While one commonly cited rationale for such holidays is that they increase local consumer spending, boosting sales for local businesses, available research concludes this “boost” in sales is primarily the result of consumers shifting the timing of their already planned purchases.

But not all consumers. And that’s one of the other problems with sales tax holidays as policy: they are poorly targeted. Advertised as a way to give hard-working families a break from paying the regressive sales tax, they actually end up benefiting wealthier taxpayers, who have more liquidity and therefore flexibility to shift the timing of their purchases and take advantage of the tax break.  (And that goes for more affluent consumers in neighboring states, too, who can easily make a road trip of a tax-free shopping weekend next door.)

What else is wrong with them? Sales tax holidays also cost states upwards of $230 million each year. Why, one may ask, do state lawmakers continue to approve these holidays year-after-year if they are ineffective and expensive? Massachusetts Governor Deval Patrick offered a candid answer, saying he’d support his state’s 2011 holiday “not because it is particularly fiscally prudent, but because it is popular.”

And that’s the thing. Sales tax holidays make great politics but they don’t solve real problems in regressive state tax codes.  They fall far short of accomplishing what advocates claim, that is, helping hard-pressed consumers and local retailers. In fact, those retailers would benefit more from the requirement that out-of-state Internet retailers be required to collect the same sales taxes as brick and mortar stores (that is, if the Marketplace Fairness Act became law).

More important, however, is that lawmakers who really want to help struggling consumers have smart alternatives. Popular tax holidays aside, good tax policy would be targeting tax credits for working families.


Massachusetts Becomes Fourth State to Reform its Gas Tax This Year


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Lawmakers are often criticized for not taking a long-term perspective on important issues.  But when it comes to the gas tax, elected officials in four states this year (Maryland, Massachusetts, Vermont, and Virginia), as well as the District of Columbia, have done just that.

As we have shown, collecting a “fixed-rate” gas tax (i.e. one that doesn’t change from year-to-year) leaves state transportation departments totally unprepared to deal with rising infrastructure construction costs and the consequence of growing vehicle fuel-efficiency cutting into gas sales.  At the start of the year, only fourteen states handled this reality by levying gas taxes that gradually grow over time alongside either gas prices or the general inflation rate in the economy.  That number has now risen to seventeen, with Maryland, Virginia, and now Massachusetts joining that group.  (The District of Columbia recently enacted this reform as well, and Vermont reformed its already price-based gas tax in a way that links it even more closely to gas prices.)

The Massachusetts reform comes after months of back-and-forth between Governor Patrick and the state legislature.  The Governor originally proposed a much more far-reaching and progressive revenue package that would not only have raised gas and cigarette taxes, but also reformed the income tax and cut the sales tax rate.  That proposal failed to gain traction, and the legislature ultimately opted just to raise the cigarette tax and the gasoline tax, and to index the gas tax so that it grows alongside inflation in the future.

This reform will put the state’s gas tax on a much more sustainable trajectory.  As the above chart shows, Massachusetts’ gas tax rate was scheduled to fall to its lowest (inflation-adjusted) level in its history next year.  The increase, which takes effect next week, will prevent that from happening.

But lawmakers shouldn’t pretend that the state’s transportation funding problems are completely solved.  While indexing the tax to inflation should make it easier for the state to afford the rising cost of construction materials, it still leaves the gas tax vulnerable to decline as Massachusetts residents switch to more fuel-efficient cars and purchase less gas as a result. Moreover, as Governor Patrick pointed out, the state’s toll road revenue is scheduled to take a major hit in 2017 when tolls on the Massachusetts Turnpike will be reduced. Patrick wanted to include an additional gas tax hike in 2017 to compensate for this loss—and even vetoed the package passed by the legislature in an effort to see it included—but his veto was overridden.  These looming challenges mean that Massachusetts lawmakers will likely have to consider another gas tax increase in a few years, but for now this reform is certainly a step forward.

Looking at the rest of the country, legislatures in most states where gas tax reform was a real possibility have gone home for the year, but there’s still a chance Pennsylvania could revisit the idea this fall. With luck, the number of states levying a smarter gas tax could rise to eighteen before the year is over.


Are Special Tax Breaks Worthwhile? Rhode Island Intends to Find Out


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Rhode Island is about to put seventeen of its “economic development” tax breaks under the microscope, thanks to a new law (PDF) signed by Governor Chafee last week.  This reform is a welcome step forward in a national landscape where states often do nothing at all to figure out whether narrow tax breaks are really helping their economies.

Under Rhode Island’s new reform, state analysts must estimate how many new jobs were actually created as a “direct result” of the $45 million worth of tax breaks within the new law’s scope.  Those analysts must also make a bottom-line recommendation on whether each tax break should be allowed to continue, based on how cost-effective it’s been in achieving its intended goals.

Of course, it remains to be seen how rigorous Rhode Island’s analysts will be in conducting these evaluations, and whether their work will actually be used by lawmakers to inform policy.  After all, as the Pew Charitable Trusts has shown, not all tax break evaluations are of equal quality or influence.

But there are reasons to think that Rhode Island’s evaluations will make a difference.  For starters, the new law requires a much more systematic and rigorous evaluation than what most other states require.  Rhode Island’s evaluations, for example, must investigate whether the benefits of the tax break are flowing largely to businesses or investors outside of the state, and whether changes in data collection laws could allow for even better evaluations in the future.  Rhode Island’s reform also requires the Governor to provide their own recommendation on each newly evaluated tax break when she or he submits budget recommendations to the state legislature each year.

But Rhode Island’s new reform isn’t perfect.  Requiring the Governor’s budget to include recommendations is a good way to get lawmakers to acknowledge the evaluations, but a more effective check is attaching a “sunset” provision (or expiration date) to each break; that’s the best way to ensure these tax breaks come up for a vote after new evidence on their effectiveness is released.

Moreover, the Economic Progress Institute points out that Rhode Island offers a total of 235 different tax breaks, at an annual cost to the state of $1.7 billion.  Evaluating just seventeen tax breaks that cost $45 million leaves the vast majority of the state’s tax law unexamined.  Still, if these initial evaluations prove worthwhile, lawmakers and advocates will have a strong case for expanding this new reform to cover a much larger portion of Rhode Island’s tax code


North Carolina Facing Disastrous New Tax Laws


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After months and months of speculation and deliberation on numerous versions of “tax reform,” political leaders in the Tar Heel state reached an agreement this week on a tax package that will leave the state short of more than $700 million a year to spend on public education, health care, and other vital investments.  And, in the end, the wealthiest North Carolinians and profitable, multi-national corporations are the biggest winners under the agreement.  The new plan moved fast, easily passing out of the House and Senate with little opportunity for debate and Governor McCrory will likely sign the legislation this week. (Find its detailed provisions at the end of this post.)

An analysis from the Institute on Taxation and Economic Policy (ITEP) shows:

  • The final “tax reform” plan is a big giveaway to the richest taxpayers in North Carolina.  Those with average incomes of nearly $1 million will see their share of their income paid in state and local taxes drop by 1.2% for an average cut of more than $10,000.
  • Furthermore, the top 5% of taxpayers are the beneficiaries of almost 90% of the net tax cut from the combined changes to the personal and corporate income taxes, sales taxes, and the change in tax treatment of electricity, natural gas, and entertainment.
  • Contrary to lawmakers’ claims that everyone in the state wins under this plan, there are many losers, as the state’s own bean counters revealed just today. Losers include some low and middle income families who currently benefit from the $50,000 business income pass-through deduction, families with significant deductible medical expenses and other itemized deductions and some elderly families who lose retirement benefits, among others.
  • And, when considering that many low-and moderate-income working families will lose the benefit of a refundable state EITC (set to expire after this year and not extended under this plan), the plan actually hikes taxes on the bottom 80 percent of taxpayers on average.
  • North Carolina’s tax system will become even more upside down, with the bottom 20% of taxpayers paying on average 9.2 percent of their income in state and local taxes while the top 1% will be paying only 5.7%.  Under the current system (with a state EITC in place), the bottom 20% pay 8.9 percent and the top 1% pay 6.5%.

The final negotiated package is being hailed as “historic” and a “jobs plan” for North Carolina by proponents of the plan.  But, as the North Carolina Budget and Tax Center explains, it’s nothing of the sort and instead is going to be a bad deal for North Carolinians into the future:

“[The tax reform agreement] puts at risk the ability to educate our children, care for our elders, keep our communities safe and support businesses, while failing to fix the problems with the state’s tax code. And, it gets rid of policies that work such as the Earned Income Tax Credit.

This is not a historic day for North Carolina; tax reform hasn’t been achieved.  Instead, we’ve been handed a plan that will tarnish our state’s reputation as a leader in the South, a place where people want to live and businesses want to grow.

It is very likely that as a result of this failure to pursue real, comprehensive tax reform, state sales taxes and local property taxes will go up in the future.   That’s what happened in every other Southern state that has personal and corporate income taxes that can’t keep up with growing public needs.

Our state cannot be competitive nationally or internationally with this reckless approach. It undermines the education of our workforce and support for research and innovation.  The prospects of an ongoing race to the bottom for North Carolina now are all too real.”

Key components of the negotiated deal:

Personal Income Tax

  • Flat 5.75% rate (fully phased-in)
  • Eliminates the personal exemption, retirement benefit, business pass-through income deduction, and all credits other than the Child Tax Credit.  Notably, the plan does not restore the state’s Earned Income Tax Credit (EITC) set to expire after 2013.
  • Increases the standard deduction to $15,000 (MFJ),$12,000 (HOH), and $7,500 (Single/MFS)
  • Limits itemized deductions to mortgage interest plus property taxes capped at $20,000 (MFJ), $16,000 (HOH), and $10,000 (single) plus unlimited charitable contributions.  Taxpayers take the higher of the standard deduction or itemized deductions.
  • Retains the child tax credit of $100 and increases it to $125 for taxpayers with AGI under $40,000 (MFJ) or $32,000 (HOH)

Corporate Income Tax (CIT)

  • Reduces the rate from 6.9 to 6% in 2014, to 5% in 2015 and if revenue expectations are met, could be lowered to as low as 3% by 2017.

Estate Tax

  • The state estate tax is eliminated

Sales/Privilege/Franchise Taxes

  • Expands the sales tax base by eliminating a number of exemptions including newspapers, baked goods, some farm exemptions and food sold in dining halls and adds service contracts.
  • Adjusts the tax rates on modular and manufactured homes.
  • Eliminates the gross receipts franchise taxes on electricity and natural gas and in place includes these items in the sales tax base.
  • Eliminates state and local privilege taxes on amusement/entertainment and in place includes these items in the sales tax base.
  • Eliminates the state’s sales tax holiday and energy star appliance tax holiday.

Gas Tax

  • Caps the gas tax at 37.5 cents/gallon for 2 years.

 


Undocumented Immigrants Pay Taxes, and Will Pay More Under Immigration


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As the battle over immigration reform shifts to the U.S. House of Representatives, some opponents of reform continue to focus on the alleged costs of reform. Yet, as a recent Congressional Budget Office (CBO) report reminds us, immigration reform involves both costs (in the form of health, education and other services provided to legalized immigrants) and benefits (in the form of federal taxes paid by newly legal immigrants)—and in the long run, the benefits to the US Treasury from immigration reform are likely to exceed the costs. Put another way, immigration reform will make our federal budget situation better, not worse.

A new report from the Institute on Taxation and Economic Policy (ITEP) shows that state and local budgets will also receive a new jolt of needed tax revenues as a result of immigration reform—and that undocumented taxpayers are already paying a substantial amount of state and local taxes across the nation. The report estimates that these families pay $10.6 billion a year in state and local sales, excise, income and property taxes right now, and would pay an additional $2 billion if these families were, as part of immigration reform, allowed to fully participate in state tax systems.

How are undocumented taxpayers contributing such a large amount right now? The main reason is that the sales and excise taxes that fall most heavily (PDF) on low-income taxpayers don't depend on your citizenship status. Anytime you buy a cup of coffee, a pair of jeans or fill up your tank up with gas, you're paying state and local sales and excise taxes. Property taxes are similarly unavoidable-- especially for renters, who pay them indirectly because landlords generally pass some of their property tax bills on to their tenants in the form of higher rents. And many undocumented taxpayers have state income taxes withheld from their paychecks each year.

The $2 billion in new tax revenues ITEP estimates will be paid by currently-undocumented families as a result of legalization is the product of two factors. Most importantly, legalization will bring all undocumented workers into the income tax system. The best estimates are that about half of undocumented workers are currently “off the books.” But legalization will also likely bring a substantial wage boost for these currently-undocumented workers—further boosting state and local income tax collections as well.

There are, of course, costs associated with immigration reform. Newly-legalized families will (eventually) be able to rely on the same important public services, from education to health care, that U.S. citizens can depend on. This is as it should be. But the scope of these costs will vary substantially depending on how future political battles play out, and are virtually impossible to calculate on a state by state basis at this time – one particular think tank’s lonely insistence that they can notwithstanding. However, the recent CBO report’s finding, that at the federal level these costs would be outweighed by the benefits from new tax revenues, suggest that a similarly positive outcome is likely at the state and local level.  

The undocumented population is notoriously hard to measure —but under any reasonable assumptions about the size and income levels of this population, they are already paying billions of dollars a year to support the state and local services from which they benefit, and will likely pay billions more on legalization.

Front Page Photo via SEIU International Creative Commons Attribution License 2.0


State News Quick Hits: EITCs Go Local, and More


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Some lawmakers and advocates like to complain when gasoline tax revenues are used to fund public transit, but new research by Berkeley economist Michael L. Anderson shows that drivers benefit hugely from the existence of transit. Anderson’s paper shows that “average highway delay increases 47 percent when transit service ceases” because would-be transit riders are forced to take to the roads.  He concludes that “the net benefits of transit systems appear to be much larger than previously believed.”

Arizona Governor Jan Brewer got one out of two right with a pair of vetoes she recently handed down.  The Governor had good reason to be skeptical of the state's research tax credit since the federal version doesn't have a particularly glowing record of actually encouraging worthwhile research.  But her refusal to allow Arizona’s tax brackets to rise alongside inflation will eventually hit the state’s lower- and middle-income families hardest, as the Institute on Taxation and Economic Policy (ITEP) explains (PDF).

ITEP has written in detail (PDF) on how both the Federal and State Earned Income Tax Credits (EITC) alleviate poverty while helping low-wage workers meet their basic needs – but did you know that two localities (New York City and Montgomery County, Maryland) administer their own EITC to supplement the state and federal credits? This week, Montgomery County held public hearings on Bill 8-13 (PDF), a proposal to increase the County’s existing EITC (known as the Working Family Income Supplement) to 80 percent of the Maryland credit beginning in FY 2014, 90 percent in FY 2015, and 100 percent in FY 2016 and beyond.

For most states, July 1st marked the start of a new fiscal year and thus lawmakers across the country agreed to spending plans for their states in advance of that date.  But, not so in North Carolina, where differences in opinion about how best to overhaul the state’s tax structure have held up the budget and kept observers guessing about the outcome of months of tax cutting talk.  On Monday, Governor Pat McCrory urged House and Senate members to reach a deal as soon as possible or abandon tax reform this year.  The truth is, walking away from the plans passed in the House and Senate would be a win for the state, retaining hundreds of millions of dollars for vital public investments and stopping a massive tax cut for wealthy households and corporations and at the expense of low- and middle-income families.  


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


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

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

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

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

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

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

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

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

The Commonwealth Institute of Virginia explains the folly of cutting state corporate income taxes – a move endorsed by Virginia gubernatorial candidate Ken Cuccinelli, among others. The Institute points out that corporations are already paying a smaller share of state income taxes than in years past, and have left individual taxpayers to pick up the rest of the tab. Moreover, Virginia analysts say (PDF) that about three-quarters of any corporate income tax cut would actually flow outside of Virginia’s borders, since most of the cut would go to large, multi-state corporations.

The Washington Post reports on the state of America’s bridges, and provides some consumer-focused context for why raising taxes to fund infrastructure repair is so important.  “In many cases ... a bridge has weakened to the point where it can no longer handle the heavy loads it once did. When lower weight restrictions are imposed, the big trucks that deliver goods of all sorts have to detour, making their routes longer, and that cost generally trickles down to the price consumers pay for almost everything.”

Illinois lawmakers have been focused on pension reform lately, but this Crain’s Chicago Business piece highlights the need for real tax reform in the state. Notably two aspects of the state’s income tax are flagged for reform (the same ones we’ve been talking about for years) – the state’s exemption for all retirement income and a universal property tax credit that’s not based on need.

Last week, Arizona Governor Jan Brewer signed into law SB 1179, a bill containing a wide assortment of tax breaks. The bill’s initial goal was to create a small tax break for one specific industry, but it ended up being a vehicle for tax breaks that lawmakers couldn’t pass individually. The final bill provided certain exemptions for an energy drink company, a sales tax break for companies that rent ignition devices to people with DUI convictions, and an extended property tax break for biofuel manufacturers. The Associated Press reports it this way: “As lawmakers rushed to adjournment last week, those with bills that had languished looked for places for them to land. House members with tax breaks in mind found SB1179, adding four amendments in the late-night hours of June 13.”


Amazon.com Bails on Minnesota, Shows Congress Must Act on Online Sales Taxes


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Throughout most of its existence, online retailer Amazon.com aggressively avoided having to collect state sales taxes from its customers.  Its 5 to 10 percent price advantage relative to local retailers who have to collect the tax wasn’t something that Amazon was willing to give up.

More recently, however, Amazon’s business strategy seems to have shifted.  In order to provide faster delivery times to more of its customers, Amazon has opened up warehouses and distribution centers in a growing number of states (Florida being the most recent example), even though doing so means the company will be subject to the same sales tax collection requirements as Wal-Mart, Home Depot, mom-and-pop bookstores and every other brick and mortar retailer.

But recent events in Minnesota confirm that while sales tax dodging is less central to Amazon’s business strategy than in years past, the company still thinks that not collecting the tax is an advantage.  A new law just passed by Minnesota’s legislature redefines what constitutes a “physical presence” in the state, and it means that Amazon has enough affiliates in Minnesota to have to begin collecting the state’s sales tax this month. So in order to save some nickels and dimes, Amazon has decided to cut its ties with businesses based in the Gopher State so it can keep selling to Minnesotans tax-free.

This development points toward a need for Congressional action for lots of reasons, including these two:

First, it reinforces the point that local retailers are being harmed by their online competitors’ ability to dodge sales tax collection requirements. Why would Amazon bother cutting ties with Minnesota businesses if it didn’t think its market share would suffer from having to play by the same rules as companies with actual stores and employees in Minnesota?

Second, it highlights the degree to which online shopping sales tax laws have become an indefensible patchwork. In geographically large and heavily populated states like Florida and Texas, Amazon has little choice but to have a “physical presence” in the state (and collect sales tax) if it wants to offer reasonably fast delivery times. In other states, however, shipping products from outside the state’s borders is much less of a logistical problem.

There’s no question that Amazon is capable of collecting sales taxes in Minnesota, particularly since the state has already taken steps to simplify its sales tax system by adhering to the Streamlined Sales Tax Agreement.  In fact, Amazon said it plans to begin collecting Minnesota sales taxes as soon as the federal Marketplace Fairness Act (which it supports and which has passed the U.S. Senate) is enacted into law.  In the meantime, however, Minnesota is out of options for getting Amazon to play by the same rules as other businesses selling to its residents.  Amazon’s recent actions make clear that just because the company can do what’s right, that doesn’t mean it will do so voluntarily.


Governor Cuomo, Meet Governor Brown


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California Shows that Geographically Targeted Tax Incentives Don’t Work

Last week, the New York State Legislature overwhelmingly passed START-UP New York (previously known as Tax-Free NY). The approval came after nearly a month of Governor Cuomo’s state-wide campus PR tour where he touted the plan’s infallible greatness, a claim we have explained is almost completely unjustified.

3,000 miles to the west, in California, fellow Democratic Governor Jerry Brown is telling a different story. He has proposed eliminating the state’s costly Enterprise Zone (EZ) Program, citing its ineffectiveness and huge cost as the rationale for the move.

California’s EZ Program was created in 1986 and has been the state’s primary policy tool in attempting to promote economic development in distressed areas. Like START-UP NY, California’s EZ Program provides geographically targeted tax breaks to 40 “zones” determined by the state. (START-UP NY provides tax breaks to over 70 zones, primarily college campuses.)

According to the Public Policy Institute of California, however, the EZ Program has had “no effect on business creation or job growth.” Furthermore, the California Budget Project has found that EZs “have cost the state a total of $4.8 billion in lost revenue since the program’s inception” while benefiting “less than half of one percent of the state’s corporations.”

Governor Brown’s proposal – initially outlined in his May budget revision (PDF) – signifies an important shift away from using geographically targeted tax breaks as an economic development tool. A growing body of research has shown (and shown again) tax incentives of most kinds to be poor tools for economic development, and California’s three decades of experience with its EZ Program is a case in point.

“California’s thirty-year-old Enterprise Zone program is not enterprising, it’s wasteful. It’s inefficient and not giving taxpayers the biggest bang for their buck,” said the Governor in a meeting with business leaders and labor groups. “There’s a better way and it will help encourage manufacturing in California.”

It must be noted, of course, that Governor Brown’s “better way” is only half better; it throws half of those EZ Program dollars at similarly unproven tax breaks while spending the other half – wisely – on a reduction in the sales tax (PDF) businesses pay.  Still, a governor who is beginning to listen to policy experts over pollsters deserves some credit for moving in the right direction.

If Governor Brown’s proposal is enacted (it may be on the ballot next year), it appears we will have a tale of two states: in California, a state trying to learn from the past; in New York, a state blindly shaping policy based on political interests.


New Hampshire Court Agrees: Tax Breaks Cost Public Dollars


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Last year we wrote about an unwelcome mini-trend in state corporate tax policy: the creation of “neo-vouchers,” tax breaks for businesses that donate money to private-school scholarship funds. At the time, advocates for these neo-vouchers were making the (not very convincing) case that these programs shouldn’t be counted as government spending since the programs were quite specifically designed such that “the money would never go into public accounts, making it less susceptible to court challenges.” (The legal challenges are often based on the argument that most private schools are religious in nature and the First Amendment prohibits public funds from supporting religion.) In other words, the argument went, if a company gets a million dollar tax break for donating money to private school scholarship funds, those million dollars never got collected by the state, so they remain somehow private dollars, outside the grasp of the state government.

At the time, a number of states were contemplating enacting tax breaks of this kind, (available to individuals, corporations or both), and New Hampshire subsequently did enact neo-vouchers in June of 2012, overriding a veto by Governor John Lynch, and took effect in January 2013. The law gives New Hampshire corporations a tax credit equal to 85 percent of any contributions they make to private school foundations. The law’s authors also attempts to codify the “private dollars” argument and inoculate it against constitutional challenges by asserting (PDF), “[c]redits provided under this chapter shall not be deemed taxes paid.” If the money was never handed over to the public treasury, it was never the public’s money, right?

Wrong, at least according to a lower court in the Granite State that just ruled the new tax credit is unconstitutional, explicitly rejecting the “private dollars” charade. The judges wrote:

“The phrases ‘public funds,’ or ‘money raised by taxation,’ focuses the Court’s inquiry not on when the government’s technical ‘ownership’ of funds or monies arises, but on when, or at what point, the public’s interest fairly arises in how funds or monies are spent. The Court concludes that the interest of New Hampshire taxpayers in regard to challenging the legality of legislation such as the program at bar does not arise only after money is deposited in the New Hampshire treasury….”

The Court sensibly notes that if “money that would otherwise be flowing to the government is diverted” for private ends, that is essentially the same as direct government spending. This shouldn’t be news to anyone familiar with the “tax expenditure” concept—the notion that a $1 million tax break for a specific business is not meaningfully different from government writing a $1 million check to the same business.

Of course, it’s not hard to see that the neo-voucher idea is bad policy whether it’s constitutional or not. It erodes corporate tax revenues, takes money away from already-strapped public schools, and (in the case of the New Hampshire laws) sharply limits state policymakers’ oversight of the private schools receiving these state-funded scholarships. But the New Hampshire court’s finding underscores the absurdity of the fiction that neo-vouchers subsidized by corporate tax credits can be thought of as “private dollars” outside the purview of state governments—and offers a helpful precedent for advocates seeking to repeal neo-vouchers in other states.

 


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.


Watching a Train Wreck in Kansas


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During the 2013 legislative session, our state policy team has been observing the tenor of the Kansas tax cut debate with some concern. Too many media accounts have focused primarily on the sales tax and whether the temporary hike to 6.3 percent would be extended. (Ultimately the legislature decided to increase the sales tax rate to 6.15 percent.)

But attention is beginning to turn, albeit too late, to some incredibly important provisions of the legislation that was just signed into law by Governor Brownback. As highlighted in this Kansas City Star editorial and this Associated Press analysis, the tax debate was about a lot more than the sales tax.

The Kansas City Star explains the consequences in a sobering editorial: “The two-year spending plan, which Gov. Sam Brownback is expected to approve, places income tax cuts ahead of schools, universities and public safety. Giving tax breaks to wealthy Kansans matters more to state leaders than investing in the state and its citizens.”

The Associated Press reports: “Important but relatively little-noticed provisions in the tax plan approved by Kansas legislators this year embody conservative Republicans' vision for long-term constraints on government spending.” Indeed, the bill that passed the legislature includes arbitrary spending controls and could mandate the eventual repeal of the state’s personal income tax.

Of course all of this is what ITEP argued in a paper (one of many) last April: “Lawmakers and the public should be aware of the devastating impact either the House or the Senate bill would have, regardless of the compromise reached about the current sales tax rate, on the state’s ability to balance its budget and on tax fairness.”

For some combination of political and ideological reasons, lawmakers in Kansas, for two years running, have been falling all over themselves to pass tax cuts of disastrous proportions, despite red flags from experts, editorial boards and their colleagues in other states.  When good policy is not even on the priority list, it seems no amount of evidence can stop elected officials from pursuing their short-term political agendas.


Lots of Losers in Governor Cuomo's "Tax-Free New York"


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Last week we wrote about Governor Cuomo’s ill-conceived Tax-Free NY initiative.  We reserve judgment as to whether it’s politically motivated ( a New York Post column called him “Gov $uck-up”, for instance, and this column also questions the motivation) but we can be pretty sure it will cost more than it will benefit the people of New York, because this is what business tax credits do.

Still, since that post, the Governor has continued his promotional tour of New York campuses, so we spent some time digging into how actual businesses would fare under his plan. As it turns out, the Governor’s focus on rewarding new investment could end up arbitrarily discriminating against existing small businesses (and their employees) who are already doing the same things Cuomo’s plan will reward others to start doing.

Capraro Technologies, Inc. (CTI), for example, has been based in Utica (home to SUNY Institute of Technology) for almost two decades. The company shares the SUNY-IT mission of advancing the field of information technology through research and innovation, and appears to be a model of the kind of business the Governor hopes to attract. But CTI would be ineligible for any benefits under Tax-Free NY, and the company could find itself at a disadvantage relative to other firms who do qualify for the tax-free treatment.

To gain eligibility, CTI would need to “expand its New York operations while maintaining its existing jobs.” But such an expansion would need to take place within one mile from the SUNY-IT campus. Unless CTI were able to obtain a special waiver, this would mean having to open a new office about two miles down the road from its current location; hardly an example of economic efficiency.

CTI is only one of many existing companies throughout the state that could be placed at a disadvantage relative to new competitors. BlueRock Energy, a Syracuse-based company that helps customers lower their energy costs and environmental footprint and would be ineligible for Tax-Free NY benefits if it expanded at its current lots, is another case-in-point. Located about 2.5 miles away from the SUNY College of Environmental Science and Forestry, BlueRock Energy shares a common mission with SUNY-ESF.

And the list goes on. From mobile app creator miSoft Studios near SUNY Binghamton to software developer Wetstone Technologies near SUNY Cortland, existing local businesses across the state will all reap zero rewards for having already done exactly what the Governor will allegedly incentivize other businesses to do in the future.

And of course, you are not only out of luck if you started your business at the wrong time, but place matters, too. State tax expert David Brunori at Tax Analysts summed up one of Tax-Free NY’s absurdities by highlighting, “if you are in the community you don’t pay taxes. If you are outside, even by six inches, you do.”

Existing small businesses are not the only losers because the plan extends to employees, too. Professor John Yinger, an expert in fiscal policy from Syracuse University, says the Governor’s plan “means some businesses are getting lower taxes than others and in this case it means some people are getting much lower taxes than others, those are new sources of inequities.”

There are so many problems with Governor Cuomo’s idea for tax-free zones, it’s hard to know where to begin. But the Institute on Taxation and Economic Policy’s (ITEP) policy briefs library is a good place to look, and we invite the Governor to consider this guidance (all links are PDF’s).

Taxes and Economic Development 101: “Lawmakers are under intense pressure to create a healthy climate for investment. But the simplistic view that tax cuts are the best medicine can result in unintentionally making this climate worse. Unaffordable tax cuts shift the cost of funding public services onto every business that isn’t lucky enough to receive these tax breaks—and makes it harder to fund the public investments on which all businesses rely.”

Accountable Economic Development Strategies: “Some lawmakers are wising up to the idea that subsidies don’t work. But for policymakers who insist on offering incentives, there are some important, simple, and concrete steps that can be taken to ensure that subsidies aren’t allowed to go unchecked.”

Tax Principles: The principle of neutrality (sometimes called “efficiency”) tells us that a tax system should stay out of the way of economic decisions. Tax policies that systematically favor one kind of economic activity or another can lead to the misallocation of resources, or worse, to schemes whose sole aim is to exploit such preferential tax treatment.”


Governor Cuomo Hearts Tax Cuts


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First it was the ill-advised TV campaign to lure new business to his state by bragging about tax cuts, and now New York  Governor Andrew Cuomo has launched his “Tax-Free NY” initiative which would turn many of the state’s public universities, private universities, and community colleges into tax-free havens. Providing a full complement of tax breaks, the Governor’s plan would exempt qualified businesses from paying any sales, property, and corporate taxes for a decade, and would exempt employees of those businesses from the personal income tax.

These no-tax zones include all state university campuses outside of New York City, some private colleges, up to 200,000 square feet in certain campus-adjacent zones, and 20 undisclosed “strategically located” state-owned properties. The Governor’s plan vaguely defines eligible businesses as companies with a relationship to the academic mission of the university and then includes: new businesses, out-of-state businesses that relocate to New York, and existing businesses that expand their New York operations.

Touting the plan as a way to revitalize the upstate economy, the Governor claims the free pass on taxes would “attract start-ups, venture capital, new business, and investments from across the world.” However, economists from across the political spectrum have their doubts (and so do we).

Professor John Yinger of Syracuse University said in response to Cuomo’s plan that: “In New York we have a dizzying array of tax breaks with no evidence they help, and now here’s a new version. You’d do much better improving our schools and infrastructure than giving tax breaks to businesses who would be in the state anyway.”

Others, such as Danny Donohue of the Civil Service Employees Association, argue the plan is another tax giveaway to businesses at the expense of local communities and the middle-class. Donohue says: “The governor doesn’t get the fact that more corporate welfare is no answer to New York’s economic challenges… it’s outrageous that the governor and legislative leaders think we can give away even more to businesses without any guarantee of benefit to taxpayers.”

In addition to creating little if any economic growth, the plan is likely to worsen the state’s already precarious fiscal situation. With the state budget office projecting (PDF) shortfalls ranging up to $3 billion per year in the coming years, removing entire companies from the tax rolls is hardly fiscally responsible.

To move the plan forward, the Governor will need legislative approval before the state’s legislative session ends on June 20th. Quick – someone get this policy brief (PDF) up to Albany!


Tax Plans for Wisconsin Go From Bad to Worse


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Wednesday, June 5, 2013 Update: The Wisconsin legislature’s Joint Finance Committee approved a budget early this morning that included an income tax cut that reduced income tax rates from 4.6%, 6.15%, 6.5%, 6.75%, and 7.75% to 4.4%, 5.84%, 6.27%, and 7.65%. The legislation also reduced the number of tax brackets from five to four. This plan stops short of Rep. Kooyenga’s plan plan described below, but is more costly than Governor Walker’s $340 million initial proposal. According to the Legislative Fiscal Bureau (PDF) these permanent tax cuts cost $632.5 million over two years and the distribution is again skewed to benefit the wealthiest Wisconsinites. Current reporting suggests this plan will pass the full legislature.

This week Wisconsin Representative Dale Kooyenga, an accountant who’s taking a lead roleon tax policy, released his plan to reform the state’s tax code. In a proposal that would more than double the tax cuts proposed by Gov. Scott Walker, Kooyenga seeks to reduce personal income tax rates and cut the number of income tax brackets from five to three. The latter would, as one report put it, put middle income earners like a secretary at a law firm in the same tax bracket as the high-earning lawyers.  Kooyenga touts simplifying the forms taxpayers file and eliminating nearly 20 tax credits.

Earlier this year, Governor Scott Walker proposed his own income tax cut ,which was slammed for mostly benefiting the wealthy (in large part because an Institute on Taxation and Economic Policy (ITEP) analysis showed that it was tilted that way). The Governor’s proposed income tax rate cuts were expected to cost the state $343 million over two years; Representative Kooyenga’s would cost $760 million in the upcoming budget and $914 million in the 2015 budget.

And it’s not just costly, it’s regressive. As the lawmaker himself concedes, “[i]t is nearly impossible to create a tax reform or tax cut that is not going to disproportionately lower taxes for upper-middle-class and rich taxpayers,” and a new ITEP analysis of Kooyenga’s plan shows his is no different. ITEP ran the numbers for the Wisconsin Budget Project (WBP) the impact of the Kooyenga income tax plan was shown to be even more skewed to the wealthy that Governor Walker’s, as WBP writes:

Here is how the tax cut would be distributed among income groups:

- The top 5% of earners alone, a group with an average income of $392,000, would receive more than 1/3 of the benefit of the income tax cuts.

- The top 20% of earners, a group with an average income of $183,000, would receive more than 2/3 of the benefit.

- The bottom 60% of earners – those making $60,000 a year or less – would only receive 11% of the benefit of the income tax cuts.

- The 20% of the Wisconsinites with the lowest incomes would receive just two cents out of every $100 in individual income tax cuts under this proposal.

WBP says that the Kooyenga tax plan’s expansion of Governor Walker’s proposal is a “bad idea made worse,” and they are right.  
 


Congratulations to Minnesota for Crossing the Finish Line


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At 2:00am on Monday morning, Minnesota House members passed groundbreaking tax legislation that raises $2.1 billion over two years. The Senate then approved the legislation and Governor Dayton, long a champion of progressive tax reform, signed it yesterday. The bill increases income taxes on the top two percent of earners, raises the cigarette tax to $1.60, closes some corporate tax loopholes, and extends the sales tax to a handful of services primarily used by businesses, including warehouse storage and telecommunications equipment. Wayne Cox, with Minnesota Citizens for Tax Justice expects much from the legislation: “Shifting taxes from the middle class to those with highest incomes will help the economy.”

A helpful summary of the compromise legislation is available here from the Minnesota Budget Project. Revenues from the cigarette tax will be used to help pay for a new Vikings stadium. This is round two for stadium funding because gaming revenues that were supposed to pay the state’s share of the stadium came in below revenue projections (not surprisingly, PDF). Of course, cigarette taxes (PDF) aren’t very stable revenue sources either, and are likely to decline overtime.

Nan Madden, Director of the Minnesota Budget Project, said of the legislature’s work, “In past years, the response to budget shortfalls has been deep cuts to services and use of timing shifts to kick the problem down the road. This year’s tax bill and budget take a better approach, raising the revenues needed to balance the budget and invest in the future; and reforming our tax system so that we share the responsibility for funding public services more equally.”

So, kudos to Minnesota’s elected leaders for making some difficult decisions and finding a way to balance the state’s books and still provide for quality services into the future. It’s a model other states can learn from.


Louisiana Film Tax Credit Costs More Than It Brings In


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More than a month after Louisiana Governor Bobby Jindal “parked” his widely-panned proposal to repeal the state’s income tax, state policymakers now are returning to what should be a more straightforward tax reform issue. A new report (PDF) from the Louisiana Legislative Auditor critically evaluates the workings of the state’s film tax credit, which gives Louisiana-based film productions a tax credit to offset part of their expenses when they hire Louisiana workers or spend money on production expenses locally.

From a cost perspective alone, it makes sense to take a hard look at this provision: the state has spent over $1 billion on these Hollywood handouts in the past decade.

But the Auditor’s report is also a good reminder of just how little the state is getting in return for this massive outlay. The report estimates that after doling out almost $200 million in film tax breaks in 2010, the state enjoyed just $27 million in increased tax revenue from the film-related economic activity supposedly encouraged by this tax break.

This means a net loss to the state of about $170 million in just one year.

It’s hardly news that film tax credits offer little bang for the buck: last year the Louisiana Budget Project reported (PDF) that each new job created by the film tax credit is costing the state $60,000, and a recent report (PDF) from the Massachusetts Department of Revenue found that a huge chunk of that state’s film tax credits were going to wealthy taxpayers living in other states. Even when these credits create in-state jobs (and they do generate some economic activity), the transitory nature of film productions means those jobs probably will be gone when the production leaves town. And it’s virtually impossible for lawmakers to know whether they’re really attracting film productions to the state—or just rewarding moviemakers for doing what they would have done anyway (as “incentives” often do). Either way, Louisiana taxpayers are still doling out more than they are getting back.

But it’s not all bad, according to the Auditor’s report: the Louisiana credit does appear to be going largely to film productions that are technically eligible for it. So, as far as the Auditor can tell us, the film tax credit is simply ineffective and not an outright scam. Or at least, it wasn’t until this guy pleaded guilty to fraudulently claiming the credit, which is similar to what happened repeatedly in Iowa after that state’s disastrous experiment with Hollywood tax breaks.

After surviving the three-month train wreck that was the rollout of Governor Jindal’s tax plan, Louisiana lawmakers should find the film tax credit an easy problem to solve since they know how much it costs and just how little they’re getting in return. Right now they’re just tinkering around the edges, but pulling the plug on handouts to Hollywood should be high on policymakers’ to-do list.


State News Quick Hits: Why a Revenue Uptick is Not a Surplus, and More


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Colorado lawmakers recently decided to enact a pair of poverty-fighting tax policies: an Earned Income Tax Credit (EITC) and a Child Tax Credit (CTC). Both had been on the state’s books at some point but had either been eliminated or were often unavailable. The EITC, equal to 10 percent of the federal credit, will become a permanent feature of Colorado’s tax code once state revenue growth improves – likely not until 2016. Similarly, the CTC will not take effect until the federal government enacts legislation empowering Colorado to collect the sales taxes due on online shopping.

Kansas legislative leadership and Governor Brownback are in the midst of secret meetings to discuss how the House and Senate will reconcile their varying tax plans. The largest sticking point is whether or not to allow a temporary increase in the state’s sales tax rate to expire. But the larger issue, that is getting less attention, is that (as ITEP’s recent analysis points out) both the House and Senate plans could eventually phase out the state’s income tax altogether.

The Rockefeller Institute is warning (PDF) states and the federal government not to get too excited about the recent “surge” in income tax revenues. Rather than indicating an economic recovery, the surge is likely a result of investors realizing their capital gains a few months earlier than usual in order to avoid the higher federal tax rates that went into effect on January 1st. As the Institute points out: “over the longer term, this could be bad news — it could mean that accelerated money received now, used to pay current bills, will not be there to pay for services in the future.”

California is one state enjoying a sizeable revenue surplus this year. The state’s Legislative Analyst’s Office understands that a good portion of the bump is thanks to rich Californians cashing in on capital gains in 2012 to avoid higher federal tax rates in 2013. Yet as budget season kicks off, lawmakers are sure to be at odds over exactly what to do with the more than $4 billion in unanticipated revenues they will have to either spend or save.  

Here’s an excellent editorial from the Wisconsin State Journal urging Governor Scott Walker and the legislature to be wise about a projected uptick in revenues and invest any “surplus” in public schools, which have endured cuts in recent years. “Our editorial board is less convinced a showy income tax cut makes sense. Up is certainly better than down when it comes to revenue predictions. But some caution is required.” It seems that the Governor may not heed this caution, however, as he appears poised to propose an expansion of his current income tax cut proposal.


Veto is the Only Answer to Missouri Legislature's Tax Package


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The Missouri House and Senate have hammered out a hybrid version of the tax bills each chamber recently passed, but with luck, it will never become law.  When the Senate passed its version in March, we wrote:

This package is billed as Missouri’s answer to the radical tax package passed last year by Kansas Governor Brownback. Its sponsor explained, “I’m trying to stop the bleeding. I’m trying to stop the businesses from fleeing into Kansas,” and then invokes the kind of magical thinking that almost always results in a deficit. According to the Associated Press, State Senator Kraus predicted his plan would “create an economic engine in our state” that would generate enough new tax revenues to make up for the losses.”

The bill the legislature will now send to Governor Nixon is a regressive income tax cut package that includes: a reduction in the corporate income tax rate, a 50 percent exclusion for pass-through business income, an additional $1,000 personal and spouse income exemption for individuals earning less than $20,000 in Missouri adjusted gross income, and a reduction in the top income tax rate from 6 to 5.5 percent.

In order for the legislation to become law, Governor Jay Nixon will have to give his okay, but he has signaled he’s going to veto the legislation. Recently he said, "Taking more than $800 million — literally the equivalent of what you spend on higher education, or literally more than you have for all of corrections or mental health — is not the fiscally responsible approach.”  He reiterated that message again this week.

Assuming Nixon, a Democrat, does veto this expensive tax package (its annual cost will be upwards of $700 million), the Republican-controlled legislature will put an override on their agenda when they return in September for a special veto session.


Oklahoma Poised to Implement Tax Cut Voters Don't Want


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The Oklahoma legislature recently approved a cut to the state’s top personal income tax rate, at the urging of Governor Mary Fallin. When the plan is fully implemented in 2016, the state’s top tax rate will fall from 5.25 to 4.85 percent, at a cost to the state of $237 million per year.  While a slim majority (52 percent) of Oklahomans support the idea of an income tax cut in the abstract, that support evaporates (falling to 31 percent) once the plan is explained in more detail.

That detail is as follows. According to an analysis by our partner organization, the Institute on Taxation and Economic Policy (ITEP), roughly 4 in 10 Oklahomans—generally lower- and middle-income families—will receive no tax cut at all under the plan, while the average tax cut for a middle-income family will be just $30.  The wealthiest 5 percent of taxpayers, by contrast, will receive 40 percent of the benefits, with the state’s top 1 percent of earners alone taking home a tax cut averaging over $2,000 per year.

When these basic facts about the tax plan now on Governor Fallin’s desk were explained to a random sample of registered Oklahoma voters, 60 percent of them said they opposed it, with a full 47 percent describing themselves as “strongly opposed.”

Voters’ reaction was similar upon being informed that the plan will require reducing state services like education, public safety, and health care. This vital piece of information resulted in support for the tax cut dropping to just 34 percent, and opposition rising to 56 percent (with 44 percent “strongly opposed.”)

These polling results are backed up by interviews with Oklahoma citizens conducted by the state’s largest newspaper, The Oklahoman. One Oklahoma resident explains, for example, that “If [the tax cut] harmed education I don't want it. I have a niece that is a schoolteacher and I'd rather have more teachers than the little bit of money.” Another says that “It sounds like the rich are just getting richer.”

Meanwhile, the Oklahoma Policy Institute (OPI) explains that the plan isn’t just unpopular—it’s fundamentally irresponsible: “We have seen no evidence that Oklahoma will be able to afford a tax cut in [2015, when the first stage of the cut takes effect]. Indeed, we are already seeing signs of faltering revenue collections, with revenue falling below last year.” Concern about the sustainability of Oklahoma’s revenues is compounded by the possibility that “the state could be on the hook for as much as $480 million” in additional expenses if a court ruling against its tax break for capital gains is upheld. The Associated Press reports that when the impact of this court ruling is “combined with an estimated $237 million price tag for a tax cut approved by the Legislature this year and expected to be signed into law by Gov. Mary Fallin… the cost to the state could amount to 10 percent of the total state appropriated budget.”

Given these challenges, it’s hard to argue with OPI’s policy prescription: “Now that cuts are scheduled, the only responsible path forward is to pursue real tax reform that goes beyond the top income tax rate. To fund education and ensure a prosperous future for Oklahoma, we need real action to reign in unnecessary tax credits and exemptions that cost us hundreds of millions of dollars every year.”


Iowa Debates Property Tax Cuts


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The debate over how to effectively tax property in Iowa has raged for years. A new report from the Iowa Fiscal Project (IFP) compares and contrasts the property tax reform proposals put forward by the Iowa House and Senate. The report was described in this Des Moines Register editorial with high praise: “No matter which approach prevails, the Iowa Fiscal Partnership deserves credit for an unbiased examination of the impact of the competing property tax proposals on real businesses in Iowa.”

Currently, commercial property taxes are based on 100 percent of their actual values. Residential property is treated very differently. IFP reports that most recently residential property was assessed at just 52.8 percent of actual value. This disparity is something that Governor Branstad, the Iowa House and Senate are working to address. The Senate bill would create a property tax credit which would ultimately mean that some commercial property would be taxed like residential property. The House bill (which has the support of Governor Branstad) would ultimately tax commercial property at 80 percent of its actual value. In its report, IFP raises important questions about how local governments will be reimbursed for the resulting reductions in a significant local government revenue source should either bill become law. The Senate bill provides more targeted tax relief to corporations, whereas the House bill provides a property tax reduction to all businesses.

It could be that this issue gets put on hold for yet another year because Senator Joe Bolkcom (chair of the Ways and Means Committee) is vowing, as he has before, that no compromise on a tax bill will be reached until an increase in Earned Income tax Credit (EITC) is signed into law.

Good Jobs First (GJF) has a new in-depth report revealing how the most aggressively promoted and publicized measures of states’ “business climates” are nothing more than messaging tools “designed to promote a particular political agenda.”  According to the study’s co-author, PhD economist Peter Fisher, “When we scrutinized the business climate methodologies, we found profound and elementary errors. We found effects presented as causes. We found factors that have no empirically proven relationship to economic growth. And we found scores that ignore major differences among state tax systems.” Yet too often, such rankings are reported uncritically in the media and – worse – cited by lawmakers seeking to change policy. Of course, this is precisely the goal of the corporate-backed, ideologically driven organizations generating these simplistic reports.

Looking at indexes from the Tax Foundation, ALEC and other anti-tax groups, GJF finds that “the one consistent theme that the indexes harp on is regressive taxation, especially lower corporate income taxes, lower or flat or nonexistent personal income taxes, and no estate or inheritance taxes.”  While the biggest problem is that none of the indexes show any actual economic benefits from their policy prescriptions, GJF also spotlights a slew of methodological problems that in some cases border on comical:

The Tax Foundation’s State Business Tax Climate Index is compiled by “stirring together no less than 118 features of the tax law and producing out of that stew a single, arbitrary index number.” Since the Tax Foundation index gets sidetracked into trivial issues like the number of income tax brackets and the tax rate on beer, it should come as little surprise that their ranking bears no resemblance to more careful measures of the actual level of taxes paid by businesses in each state. GJF concludes that “it is hard to imagine how the [Tax Foundation] could do much worse in terms of measuring the actual amount of taxes businesses pay in one state versus another.”

The index contained in the American Legislative Exchange Council’s (ALEC) Rich States, Poor States report fails an even more fundamental test. After running a series of statistical models to examine how states that have enacted ALEC’s preferred policies have fared, GJF concludes that the index “fails to predict job creation, GDP growth, state and local revenue growth, or rising personal incomes.”

The Beacon Hill Institute’s State Competitiveness Report misses the purpose of these indexes entirely by assuming that things like the creation of new businesses and the existence of state government budget surpluses somehow cause economic growth—rather than being direct result of it. 

Finally, the Small Business and Entrepreneurship Council’s (SBEC) U.S. Business Policy Index has a somewhat more narrow focus: grading states based on policies that the SBEC thinks are important to entrepreneurship and small business development.  But GJF explains that “the authors apparently believe that there are in fact no government programs or policies that are supportable … State spending on infrastructure, the quality of the education system, small business development centers or entrepreneurship programs at public universities, technology transfer or business extension programs, business-university partnerships, small business incubators, state venture capital funding—none of these public activities is included in the [index].”  Unsurprisingly, then, GJF also finds that a state’s ranking on the SBEC index has no relation with how well it actually does in terms of variables like the prevalence of business startups and existence of fast-growing firms.

But while each index has its own problems, GJF also points out that when it comes to tax policy, there’s a much more fundamental flaw with what these organizations have tried to do:

State and local taxes are a very small share of business costs—less than two percent … State and local governments have a great deal of power to affect the other 98+ percent of companies’ cost structures, particularly in the education and skill levels of the workforce, the efficiency of infrastructure, and the quality of public services generally. … The business tax rankings examined here … are worse than meaningless – they distract policy makers from the most important responsibilities of the public sector and help to undermine the long run foundations of state economic growth and prosperity.

Read the report


State News Quick Hits: Pushback on Tax Cuts as Job Creators, and More


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Michigan’s former Treasurer, Robert Kleine, explains in a Detroit Free Press op-ed that “there is no evidence that … [a 2011 tax change] reducing business taxes by $1.7 billion has created new jobs in Michigan.”  Among other things, Kleine observes that “state business taxes are such a small part of a business’ costs that even large changes have a minor impact.”

Gas taxes remain a major topic of debate in the states.  Since publishing our mid-session update on state gas tax debates two weeks ago, Vermont Governor Peter Shumlin signed a gas tax increase into law, Iowa Governor Terry Branstad reiterated that a gas tax hike is still on the table in his state, and The Olympian reports that raising Washington State’s gas tax is “now widely seen as a topic for special session.”

New Jersey Governor Chris Christie has been traveling the state seeking support for his more than $2 billion tax cut proposal (once fully phased-in) ever since using Tax Day 2013 to announce his renewed push for the plan he first championed last year. An op-ed from the Better Choices for New Jersey Campaign says the proposal was “a bad idea then, and it remains one today.”  Why?  Simply put, the state cannot afford even the scaled-back tax cut the governor is proposing for 2013 without reducing spending.

A new report from the North Carolina Budget and Tax Center takes on two common myths about the state’s economy that policymakers often use to justify cutting or eliminating taxes: North Carolina’s economy is uncompetitive compared to neighboring states and high tax rates drive North Carolina’s high unemployment. The report found that North Carolina is actually either leading or in the middle of the pack in every major indicator of economic health except for unemployment.  And, the explanation for high unemployment? A decline in specific industries the state has long relied on – like textiles and furniture – that are highly vulnerable to offshoring, outsourcing and other global pressures, not high tax rates.

Anti-Taxer-in-Chief Grover Norquist recently travelled to Minnesota where he met up with Congresswoman Michele Bachmann to rally against taxes. Minnesota is actually one of the bright lights this year for tax justice advocates who are supporting House and Senate plans there that would raise taxes on the wealthiest Minnesotans.


Missouri's Kansas-Envy is Self-Destructive


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The Missouri House and Senate have each passed their own versions of a “race to the bottom” tax plan in a misguided effort to keep up with neighboring Kansas, where a radical tax plan that is eviscerating the state’s budget might actually be followed up by another round of tax cuts (currently being debated by the legislature).

Both the Missouri Senate and House plans would reduce income tax rates, introduce a 50 percent exclusion for “pass-through” business income, reduce corporate income tax rates, and increase the sales tax. The Senate plan is summed up in this St. Louis Post-Dispatch editorial, Missouri Senate Declares Class War Against Citizens.

The poorest 20 percent of Missourians, those earning $18,000 a year or less, will pay $63 a year more in taxes. Those earning between $18,000 and $33,000 a year will pay $129 more. The middle quintile — those earning between $33,000 and $53,000 a year — will pay $150 a year more. The fourth quintile ($53,000 to $85,000 a year) will pay $149 a year more. That’s a grand total of 80 percent of Missourians who will pay more and get less: crummier schools, higher college tuitions (because state aid will continue to fall) and less access to worse state services. The poor are used to this. It remains to be seen whether the middle class will put up with it.”


Despite the fact that similarly reckless tax proposals in other states have failed (Louisiana and Nebraska) or been scaled back (Ohio), it seems the proposals are moving forward in Missouri, thanks in large part to Americans for Prosperity. This national group uses state chapters to throw money at anti-tax, anti-government agendas its corporate funders like, and it has launched a “Bold Ideas Tour” to travel Missouri advocating for deep tax cuts as the state’s legislature approaches its closing date of May 17.

Governor Jay Nixon has vowed he will veto a tax cut bill of this magnitude, rightly saying, "Making a veteran with aches and pains pay more for an aspirin so that an S Corporation can get a tax cut does not reflect our values or our priorities. I have long opposed schemes like this one that would shift costs onto families because they reflect the wrong priorities and do not work.”

The Governor’s position is supported by multiple experts, including the Institute on Taxation and Economic Policy (ITEP), and it looks like Missouri could be a state where good information comes between the national anti-tax movement and their legislative agenda.


FACT: Online Sales Tax Does Not Violate Grover's "No Tax Pledge"


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There’s been some confusion in recent days about whether the 258 members of Congress who have signed Grover Norquist’s “Taxpayer Protection Pledge” are allowed to vote in favor a bill that lets states collect sales taxes owed on purchases made over the Internet.  There is no reason for any confusion on this point.  Anybody with 15 seconds of free time and the ability to read the one sentence promise contained in the national pledge can see it’s completely irrelevant to the debate over online sales taxes:

I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.

Since federal income tax rates, deductions, and credits are altered exactly zero times in the online sales tax legislation set to be voted on by the Senate, Grover’s federal affairs manager is being less than truthful when she says that “there’s really not any way an elected official [who signed the pledge] can vote for this.”

There’s no doubt that Grover would be tickled pink to have gotten 258 of our elected officials to pledge opposition to improving states’ ability to limit sales tax evasion over the Internet.  For that matter, he would probably be even more excited to have gotten those officials to promise to vote against any increase in the estate tax, gasoline tax, or cigarette tax, as well as the creation of a carbon tax or a VAT.  But none of these things fall within the scope of the pledge, either, and it’s a shame that Grover and his spokespeople have shown no interest in being truthful on this point.

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.”


Online Sales Tax: Norquist vs. Laffer and Other Bedfellow Battles


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By now you've probably heard that the U.S. Senate is close to approving a bill that would allow the states to collect the sales taxes already owed by shoppers who make purchases over the Internet.  Currently, sales tax enforcement as it relates to online shopping is a messy patchwork, with retailers only collecting the tax when they have a store, warehouse, headquarters, or other “physical presence” located in the same state as the shopper.  In all other cases, shoppers are required to pay the tax directly to the state, but few do so in practice.  The result of this arrangement is both unfair (since the same item is taxed differently depending on the type of merchant selling it) and inefficient (since shoppers are given an incentive to shop online rather than locally).

Unsurprisingly, two of the strongest proponents of a federal solution to this problem have been traditional “brick and mortar” retailers that compete with online merchants and state lawmakers struggling to balance their states’ budgets even as sales tax revenues are eroded by online shopping.  But this issue has also turned anti-tax advocates, states without sales taxes, and even online retailers against one another in surprising ways, for reasons of ideology and self interest. 

Ideological Frenemies, Norquist and Laffer

Supply-side economist Arthur Laffer recently argued in the pages of the Wall Street Journal that states should be allowed to enforce their sales taxes on online shopping as a basic matter of fairness, so that “all retailers would be treated equally under state law.”  We completely agree with this point, but Laffer makes clear that his larger aim is to shore up state sales taxes in order to make cuts to his least favorite tax—the personal income tax. It’s no secret that Laffer wants states to shift toward a tax system that leans heavily on regressive sales taxes, but it’s harder to advocate for such a shift if the tax can be easily avoided by shopping online.

Grover Norquist of Americans for Tax Reform stands in direct opposition to Laffer on this issue.  Norquist has been “making the case on the House side of either seriously amending it or even stopping” federal efforts to allow for online sales tax enforcement.  But Norquist reveals his fundamental misunderstanding of the issue when he argues that out-of-state retailers should be free from having to collect sales taxes because “you should only be taxing people who can vote for you or against you.”  In reality, retailers aren’t being taxed at all—they’re simply being required to do their part in making sure their customers are paying the sales taxes already owed on their purchases.

Delaware vs. The Other No-Sales-Tax States

Four states levy no broad-based sales tax at either the state or local level: Delaware, Montana, New Hampshire, and Oregon and Senators from these last three states are generally not interested to helping other states enforce their sales tax laws. After all, why vote for a “new tax” if there’s no direct benefit to their own states’ coffers?

But Delaware’s senators see the issue differently, as both Sen. Carper and Sen. Coons voted in favor of the bill.  In fact, Carper introduced his own bill for collecting tax on e-purchases years ago, explaining it this way: “The Internet is undermining Delaware's unique status” because “part of Delaware's attraction to tourists is that people can come and shop until they drop and never have to pay a dime of sales tax.”

Amazon vs. Other Internet Retailers

It shouldn’t come as a surprise that online retailers as a group have opposed legal requirements that their customers pay sales taxes on their purchases since it means these e-retailers would have to charge and collect that tax.  Some companies, however, like Netflix, have long collected (PDF) those sales taxes, even without a legal requirement to do so. But most have clung to online sales tax evasion as a way to undercut traditional retailers by up to 10 percent (or more, depending on the sales tax rate levied where the buyer is located).

One recent exception is eBay, which appears to have seen the writing on the wall and has pivoted from opposing the bill to watering it down – and it’s deploying its 40 million users as an army of online lobbyists to that end.

But it is Amazon that stands apart from other online retailers in fully supporting a federal solution to the patchwork of state laws and the growing number of deals it has finally had to strike with states. The company’s reason is likely two-fold.

First, Amazon has a “physical presence” in a growing number of states and plans to continue its expansion in order to make next-day-delivery a reality for more of its customers. As a result, Amazon will be legally required to remit sales taxes in more states in the future and will find itself at a competitive disadvantage if other online retailers remain free from sales tax collection requirements.  Second, Amazon processes a large number of sales for other merchants through its website and collects sales taxes on behalf of some of them – for a fee.  Amazon’s sales tax collection services could become much more lucrative in the future if more of the merchants it partners with are required to collect sales taxes.

 


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.


Mid-Session Update on State Gas Tax Debates


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