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.

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.

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.

Earlier this year, Kansas Governor Sam Brownback proposed another round of personal income tax cuts (on top of those he signed into law last year that are creating a massive hole in the state’s budget). Read ITEP’s analysis of that proposal here.  Now the Kansas House and Senate have each responded with their own tax cut plans, and are expected to reconcile their differences soon.

To date, much attention has been given to the major difference between the House and Senate plans — the Senate bill includes permanently preserving a temporary sales tax rate hike while the House plan would allow the hike to expire. What the two plans have in common, however, is what should be of paramount concern to all Kansans because both plans eventually lead to the elimination of the state’s personal income tax – which would grow the hole in the state’s coffers by another $2.2 billion.  

Policymakers have not proposed a way to pay for this tax cut. Instead they are making an explicit assumption that income tax repeal will at least partially “pay for itself.” Kansas’ balanced-budget requirement means that the state will be forced to offset at least some portion of the revenue loss from income tax repeal, and it’s a sure bet that further increases in the state sales tax will be the primary remaining revenue-raising mechanism lawmakers would look to.

ITEP’s latest analysis runs some scenarios that show the impact on Kansas taxpayers of using a sales tax increase to replace various percentages of the revenue currently raised through the personal income tax.  For example, if 50 percent of the revenues were made up with sales tax hikes, the poorest 40 percent of Kansans would see a net tax increase from this change and the state sales tax rate would have to be raised from 6.3 to 9.11 percent, pushing the statewide average state/local rate up to 10.86 percent.

Read ITEP’s full report here.

Kansas is one of several states contemplating a “tax swap” of some sort, but no state can meet its fiscal needs fairly and sustainably without an income tax -- especially in the absence of extraordinary natural resources (like Alaska’s oil), for example, or out-of-state consumer dollars to tax (like Nevada’s tourism).

Note to Readers: This is the last in a six part series on tax reform in the states. Over the past several weeks CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) has highlighted tax reform proposals and looked at the policy trends that are gaining momentum in states across the country.

Lawmakers in at least six states have proposed effectively cutting taxes for moderate- and low-income working families through expanding, restoring or enacting new state Earned Income Tax Credits (EITC) (PDF). Unfortunately, state EITCs are also under attack in a handful of states where lawmakers are looking to reduce their benefit or even eliminate the credit altogether.

The federal EITC is widely recognized by experts and lawmakers across the political spectrum as an effective anti-poverty strategy. It was introduced in 1975 to provide targeted tax reductions to low-income workers and supplement low wages. Twenty-four states plus the District of Columbia provide EITCs modeled on the federal credit. At the state level, EITCs play an important role in offsetting the regressive effects of state and local tax systems.

Positive Developments

• Last week, the Iowa Senate Ways and Means Committee approved legislation to increase the state’s EITC from 7 to 20 percent. Committee Chairman Joe Bolkcom said, “This bill is what tax relief looks like. The tax relief is going to people who pay more than their fair share.”

• The Honolulu Star-Advertiser recently reported on the push to create an EITC and a poverty tax credit (PDF) in Hawaii. The story cites data from ITEP showing that Hawaii has the fourth highest taxes on the poor in the country and describes the work being done in support of low-income tax relief by the Hawaii Appleseed Center.  The poverty tax credit would help end Hawaii’s distinction as one of just 15 states that taxes its working poor deeper into poverty through the income tax.

• In Michigan, lawmakers are looking to reverse a recent 70 percent cut in the state’s EITC.  That change raised taxes on some 800,000 low-income families in order to pay for a package of business tax cuts.  Lawmakers have introduced legislation to restore the EITC to its previous value of 20 percent of the federal credit, and advocates are supporting the idea through the “Save Michigan’s Earned Income Tax Credit” campaign. 

• Pushing back against New Jersey Governor Christie’s reduction of the EITC from 25 to 20 percent, last month the Senate Budget and Appropriations Committee approved a bill to restore the credit to 25 percent. Senator Shirley Turner, the bill’s sponsor, said there was no reason to delay its passage as some have suggested because low-income New Jersey families need the credit now.  "People would put this money into their pockets immediately. I think they would be able to buy food, clothing and pay their rent and their utility bills. Those are the things people are struggling to do."

• Oregon’s EITC is set to expire at the end of this year, but Governor Kitzhaber views it as a way to help “working families keep more of what they earn and move up the income ladder” so his budget extends and increases the EITC by $22 million. Chuck Sheketoff with the Oregon Center for Public Policy argues in this op-ed, “[t]he Oregon Earned Income Tax credit is a small investment that can make a large difference in the lives of working families. These families have earned the credit through work. Lawmakers should renew and strengthen the credit now, not later.”

• In Utah, a legislator sponsored a bill to introduce a five percent EITC in the state. The bipartisan legislation is unlikely to pass because of funding concerns, but the fact that the EITC is on the radar there is a good development. Rep. Eric Hutchings said that offering a refundable credit to working families “sends the message that if you work and are trying to climb out of that hole, we will drop a ladder in."

Negative Developments

• Last week, North Carolina Governor McCrory signed legislation that reduces the state’s EITC to 4.5 percent. The future looks grim for even this scaled down credit, though, since it is allowed to sunset after 2013 and it’s unlikely the credit will be reintroduced. It’s worth noting that the state just reduced taxes on the wealthiest .2 percent of North Carolinians by eliminating the state’s estate tax, at a cost of more than $60 million a year. Additionally, by cutting the EITC the legislature recently increased taxes on low-income working families, saving a mere $11 million in revenues.

• Just two years after signing legislation introducing an EITC, Connecticut Governor Dannel Malloy is recommending it be temporarily reduced “from the current 30 percent of the federal EITC to 25 percent next year, 27.5 percent the year after that, and then restoring it to 30 percent in 2015.” In an op-ed published in the Hartford Courant, Jim Horan with the Connecticut Association for Human Services asks, “But do we really want to raise taxes on hard-working parents earning only $18,000 a year?”

• Last week in the Kansas Senate, a bill (PDF) was introduced to cut the state’s EITC from 17 to 9 percent of its federal counterpart. This would be on top of the radical changes signed into law last year by Governor Sam Brownback which eliminated two credits targeted to low-income families including the Food Sales Tax Rebate.

• Vermont Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs, a move described as taking from the poor to give to the poor. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute cites ITEP Who Pays data to make the case for maintaining the EITC.  Calling the Governor’s idea a “nonstarter,” House and Senate legislators are exploring their own ideas for funding mechanisms to pay for the EITC at its current level.

The nation is watching Indiana’s tax debate, according to Tim Phillips, national president of the anti-tax group Americans for Prosperity.  But the outcome that Phillips is looking for —a regressive cut in the state’s personal income tax—is facing an uphill battle. The Indiana House, under supermajority Republican control, chose not to include Governor Pence’s proposed tax cut in its budget. Senate leadership has yet to embrace the tax cut either, and the state’s largest newspaper recently editorialized against the plan, explaining: “What holds back faster economic growth now is less about taxes than the lack of a well-educated workforce and higher than average business costs associated with Hoosiers’ poor health.”

But despite all this resistance, Americans for Prosperity is determined to gin up some interest in cutting Indiana’s income tax rate. The Indiana chapter of the group announced that it will spearhead a major TV, radio, online advertising, and door-to-door campaign.  As Phillips explained, “In Washington, it’s gridlock and really that’s not where the action is.” 

There's reason to hope this campaign doesn’t pressure lawmakers into enacting a tax cut against their better judgment, though. In a letter to state GOP officials, House Speaker Brian Bosma recently made a compelling case against the cut and offered a warning about the dire consequences that could arise from following Kansas as it staggers and stumbles down its own tax-cutting path (excerpt below):

“With respect to the Income Tax cut proposal, legislative leaders have expressed caution on this issue for a variety of reasons, which I want you to understand.  First, in 1998, the last time the state had a $2 billion surplus, a series of Income Tax and Property Tax cuts coupled with an unexpected downturn in the economy turned that surplus into a $1.3 billion deficit in a short six year period.  When Republicans regained the majority in 2004, our first order of business was to fill that hole through cuts (and not tax increases), and we did it.  It was painful and difficult, but we knew that the most important job of state government is to be lean, efficient, and most importantly, sustainable in the long run, avoiding wild shifts in one direction or another.  That uncertainty of big shifts leads to uncertainty for business investment and family security.  With pending sequestration, looming federal mandates and an uncertain national economy on the horizon, caution is certainly advisable.

“Finally, the Governor cites the recent experience of Kansas in cutting income taxes last year under the leadership of Governor Sam Brownback.  I would encourage you to get online and see what is going on in Kansas right now, as news reports abound of projected deficits, delays in proposed tax cuts, and lawsuits for underfunding public education.  This is just the type of economic unpredictability and unsustainability that we hope to avoid here in Indiana.”

The Missouri Senate preliminarily approved legislation that would slash the state’s revenues because it is stacked with tax cuts. Though a preliminary legislative step, it’s worth noting that if the law does get implemented, restoring the lost revenues would be nearly impossible given Missouri’s constitutional amendment restricting tax increases. The bill, originating in the state Senate, cuts the top personal income tax rate, reduces corporate income taxes, offers a tax deduction for pass-through business income and increases the personal exemption. The only tax increase is in the sales tax, which is any state’s most regressive revenue source.  

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.”

But the revenue losses -- which are certain -- are not justified. A report from the Missouri Budget Project, Racing to the Bottom: Senate Gives Initial Approval to Extreme Tax Cut Bill Which Would Devastate Missouri Services, Infrastructure, and the State’s Economy, using Institute on Taxation and Economic Policy (ITEP) data helps show that the biggest beneficiaries of this tax package are the wealthiest 1 percent who have an average income of over $1 million, and who will see an average tax cut of $8,253 if the legislation becomes law. Middle income families would generally break even, but lower income Missourians would experience a tax increase.  

The Missouri Budget Project points out the obvious: “To truly compete with Kansas and other states, Missouri must invest in its quality of life and what families and businesses need to thrive: strong schools to educate our children and provide a skilled workforce, quality transportation to get to school and work and bring companies’ products to market, and safe, stable communities.”

Note to Readers: This is the fourth of a six part series on tax reform in the states. Over the coming weeks, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country. Previous posts in this series have provided an overview of current trends and looked in detail at “tax swap” and personal income tax cut proposals.  This post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax reform proposals are not all bad news this year.  There are some good faith efforts underway that would fix the structural problems with state tax codes, rather than simply dismantling or eliminating entire revenue sources and calling it “reform.”  Proposals in Minnesota, Kentucky, Utah, and Massachusetts would improve the fairness, adequacy and sustainability of those states’ tax systems through various combinations of base broadening, tax breaks for low- and moderate-income families, and increases in the share of taxes paid by wealthy households. Other states to watch include Nevada, California, New York and Hawaii, though the specific proposals that will be considered in these states have yet to be fully fleshed out.

Minnesota Governor Mark Dayton recognizes that his state’s tax structure is in need of an overhaul and is looking at long-term solutions that will set the state’s revenues on a sustainable path now and in the future.  As he sees it, the current system is fraught with problems. It does not reflect the modern economy in many ways. It has shifted the responsibility for funding government to those with the least ability to pay. It is out of balance due to its heavy reliance on property taxes.  And, it is riddled with expensive and ineffective tax breaks that make the state’s revenues less sustainable.  Out of all the high-profile state tax reform plans unveiled this year, Governor Dayton has put forth the best example of a comprehensive and progressive tax reform proposal.  It will make Minnesota’s tax code more fair, adequate, and sustainable.  The Governor’s plan includes: broadening the sales tax base to services and using some of the additional revenue to lower the state’s sales tax rate; reducing property taxes; adding a new personal income tax bracket for the state’s wealthiest taxpayers; and closing corporate tax loopholes.  The plan also raises more than $1 billion a year to boost investments in public education and restore structural balance to the state’s budget.

Kentucky Governor Steve Beshear signaled his support for overhauling the Bluegrass State’s tax code in his State of the State address in early February and indicated he would be looking to the recommendations from his appointed Blue Ribbon Tax Commission as a starting point for a proposal.  With a few exceptions, the Commission’s recommendations (released in December) were courageous and forward-looking, including a proposal to expand the sales tax base to services (PDF) while simultaneously adopting an Earned Income Tax Credit (EITC) (PDF) to offset the impact on low-income working families.  The recommendations also included broadening the personal income tax base by limiting itemized deductions for wealthy households, lowering the very large exclusion for pension income (and phasing it out for high wealth retirees), and lowering personal income tax rates.  Like the Minnesota plan, if taken as a whole, the Kentucky Tax Commission’s recommendations would shore up state revenues over the long term and more immediately raise revenue for current needs.

Utah lawmakers are looking at a proposal to raise the sales tax rate applied to groceries and couple that change with two new refundable credits to offset the impact on low- and moderate-income families: a food credit (PDF) and a state EITC (PDF).  While less comprehensive than the proposals under consideration in Minnesota and Kentucky, an ITEP analysis found that the Utah plan would reduce the regressivity of Utah’s tax code (PDF).  In other words, low-income working families would ultimately pay less of their income in taxes while upper-income families would pay slightly more.  Simply exempting food from state sales taxes (or taxing it at a lower rate) is a poorly targeted and costly policy that narrows the tax base and extends the break to wealthier taxpayers who don’t need it. Therefore, refundable credits of the kind Utah is considering are a smart, less costly alternative that can be designed to reduce taxes for specific groups of taxpayers in need of relief.

Massachusetts Governor Deval Patrick’s FY14 budget included a tax package that will boost revenues now and in the future and make slight improvements to the fairness of the state’s tax system. While many governors this year are looking to replace progressive income taxes with regressive sales taxes, Governor Patrick wants the Bay State to do the reverse and rely more on the personal income tax and less on the sales tax.  His plan would raise the state’s flat personal income tax rate from 5.25 to 6.25 percent, double the personal exemption, and eliminate more than 40 personal income tax breaks that tend to benefit the wealthiest families.  The sales tax rate would drop from 6.25 to 4.5 percent and computer software, soda, and candy would be newly subject to the tax.  He also recommends a $1 increase to the cigarette tax. Governor Patrick’s plan would raise close to $2 billion when fully phased in. The Campaign for Our Communities coalition praised the proposal, saying that it “creates growth and opportunity through long-term investments in education, transportation and innovation funded by making our tax system simpler and fairer.”

Last month, Kansas Governor Sam Brownback proposed, for the second straight year, major tax changes during his State of the State speech. These new changes include lowering the state’s two tax bracket rates to 1.9 and 3.5 percent, eliminating itemized deductions for mortgage interest and property taxes paid, and raising the sales tax. The Institute on Taxation and Economic Policy (ITEP) analyzed the impact of the Governor’s proposal on Kansans and found that his plan is quite costly and raises taxes on the poorest Kansans. Read the full analysis here.

The ITEP analysis found that if fully implemented in 2012, Brownback’s latest proposal would have reduced state revenues by close to $340 million and the poorest 20 percent of Kansas taxpayers would pay 0.2 percent more of their income in taxes each year, or an average increase of $22. However, upper-income families would reap the greatest benefit from his plan, with the richest one percent, those with an average income of over a million dollars, saving an average of $6,528 a year, which is about 0.6 percent of their income. Taxpayers in the middle income groups would see a more modest tax cut, up to $200 on average, amounting to roughly 0.3 percent of their income. When combined with the cuts from last year, wealthy Kansans benefit overwhelmingly – to the tune of an average tax cut of nearly $28,000. And the only group who’d pay higher taxes are the lowest earners.

In his Kansas City Star op-ed, ITEP’s director notes that the first rule of tax reform ought to be to first do no harm, but it seems pretty clear Governor Brownback’s plan would harm low-income Kansans. At the same time, it’s a second round of cuts for Kansans who don’t need them, and when the state can’t afford them.

Earlier this week, a district court in Texas ruled for a second time that the state’s system of paying for schools is unconstitutional, both because it fails to provide enough revenue to deliver an adequate education for Texas children and because it creates huge inequities in the quality of education enjoyed by richer versus poorer districts. The lawsuit prompting this decision was brought by hundreds of school districts in the wake of a 2011 decision by the state legislature to dramatically cut state aid to local schools. The state of Texas is expected to appeal, in which case it goes to the Texas Supreme Court.

As the Texas Center for Public Policy Priorities (CPPP) notes (PDF), the 2011 spending cuts came after a misguided decision by the 2006 legislature to replace local property tax revenue with revenues from cigarette taxes (of all things) and a new, untested approach to taxing business income. CPPP finds that the tax hikes in that 2006 “tax swap” have paid for only about a third of the lost property tax revenue, leaving a gaping $10 billion hole in the state’s 2011 budget. This probably also helps account for what the 600 school districts in the lawsuit say is a $43,000 gap between rich and poor classrooms, too.

The choice to pay for the growing cost of education using a flat-lining tax such as the cigarette tax (whose returns are famously diminishing, PDF) reflects the limited options available in a state that refuses to levy a tax on personal income.

Texas is one of only a handful of states with no income tax, and its current Governor has made a big show of his intention to keep it that way. At a time when a number of states’ elected officials are expressing a desire to restructure their tax systems to more closely resemble the Texas tax system (usually by simply repealing their personal income tax), this week’s court decision is a harsh reminder that the short term politics of tax cuts has long term consequences for citizens. Texas, for example, has abysmal numbers on education and its poverty rate continues to rise.

So when someone like Kansas Governor Sam Brownback crows “Look out Texas. Here comes Kansas!” it might be he didn’t read the brochure before planning this particular trip. It’s not the first time he – like other political leaders – has talked up the Texas tax structure.  But given the Lone Star State’s track record, and the budget havoc tax cuts are causing in Kansas, all lawmakers should think twice before embarking on the no-income-tax path.

Photo courtesy Texas Tribune.

Kansas First Lady Mary Brownback has been appointed an unofficial advisor to a task force addressing childhood poverty in the state. The Hays Daily News predicts that this could lead to some uncomfortable conversations between Governor Sam Brownback and his wife, especially regarding the tax package he recently signed into law that raised taxes on low-income families. The editors suggest, “[m]aybe the first lady can ask why the governor and state legislature agreed to an unprecedented reduction in income tax rates while at the same time eliminating various tax credits, such as the food sales tax rebate and breaks for child care and renters.”

Monday was the biggest day ever for online shopping. “Cyber Monday” shoppers spent 30 percent more this year than last. The Illinois Retail Merchants Association and other brick-and-mortar business groups used Monday’s online shopping surge to remind shoppers and policymakers alike that sales taxes should be collected on Internet purchases just as on items purchased in traditional stores: “The tax is supposed to be paid. If someone orders something from an online retailer or a catalog retailer that doesn’t collect the tax, the customer owes the money to the state.”

It appears that the gap between Wisconsin’s rich and poor continues to widen. The bottom two fifths of the state’s residents actually saw their incomes decline while the top fifth – and especially the top one percent – saw theirs climb over the last 25 years. One solution to this problem, identified by the Center on Wisconsin Strategy and the Wisconsin Budget Project, is to reform the state’s regressive tax structure because currently, “state and local taxes in Wisconsin increase income inequality rather than reduce it.”

A recent policy brief from the Washington State Budget and Policy Center identifies eight strategies to rebuilding the state’s economy. One of the goals identified is implementing a “Productive, Equitable Revenue System” through modernizing the tax structure and making it more fair. Washington has the most regressive state tax structure in the country; low income people pay far more of their income in taxes compared to wealthy Washingtonians. If state policymakers want to rebuild their economy, improving their tax structure is a good place to start.

Happy Halloween to our readers!

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

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

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

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

When Kansas Governor Sam Brownback signed into law a $4.5 billion (over six years) tax cut package ealier this year, he told Kansans, “I think we are going to be in good shape.” He promised tens of thousands of new jobs and insisted “[w]e will meet the needs of our schools ... Our roads will be built.”  But after claiming as recently as July that the state was in “an excellent fiscal position,” the Governor is conceding that even across-the-board spending cuts may not be enough to make up for the massive revenue losses (projected to be $2.5 billion over six years) from these tax cuts – that will go disproportionately to the state’s most affluent.  

The Governor received national praise from conservative quarters for the tax package he signed into law in May. The plan included income tax rate reductions, elimination of several low-income credits, completely eliminating taxes on some business income, and was supposed to put the state “on a road to faster growth.” But the reality is that tax cuts cost money and Governor Brownback is now indicating he is open to a sales tax hike to pay for them.

The current 6.3 percent sales tax (a temporary revenue fix from 2010) is scheduled to drop back to 5.7 percent in July.  The Governor’s own original tax package, proposed in January, would have permanently held that sales tax rate steady, and thus cost much less than the tax legislation he eventually signed.  His plan was also seriously flawed: the bottom 80 percent of Kansas taxpayers would have seen a tax hike under the Governor’s plan because it reduced reliance on the state’s income tax in exchange for a higher sales tax. But once again, Governor Brownback finds himself relying on a higher sales tax (even though he ran against it in his 2010 campaign) because of income tax cuts that gut his state’s budget.  He rationalizes the need for a sales tax increase by saying, “There's going to be a two-year dip. That's the nature of these, when you cut taxes. If you cut them right, you get growth on the other side, but there's a dip first."

Unlike a progressive income tax, sales taxes (PDF) require low and middle income taxpayers to pay more of their income in taxes than wealthier taxpayers. This way of handling what Brownback euphemistically calls a “dip” that results from radical tax cuts actually falls hardest on the Kansas families who can least afford it.

The difficulty of enacting real tax reform is on display in Louisiana, where a commission studying the state’s tax breaks just heard from some of the industries and interests seeking to protect their special breaks and loopholes.  For example, a retail group claimed that a sales tax exemption for international tourists doesn’t actually cost the state because it raises $1.80 in revenue for every $1.00 foregone. In the end, though, it did cost the state $1.1 million in sales taxes last year.

Transportation officials in Kansas and Tennessee are in an increasingly common situation: looking for new revenues as their states’ gas taxes dwindle because of rising construction costs and improving vehicle fuel-efficiency.  Officials in both states seem to recognize that a gas tax hike is needed, but in Tennessee at least, the state’s anti-tax governor has reportedly ruled that out.

In November, voters in Kansas will be asked to decide whether their state constitution should be changed to lower taxes on boats and other watercraft. Changing a state’s constitution to reward boat purchases? Seriously? The experts who wrote the ITEP Guide warn that “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.”  Let’s hope Kansas voters don’t start down this slippery slope.

The Savannah Morning News editorial board is urging the state legislature to fix a tax break in the Georgia Tourism Development Act which was intended to encourage development but “apparently is indecipherable” and can’t be implemented. The bureaucratic quagmire the legislation created highlights one of many problems with trying to micromanage economic development through the tax code.

Looks like the “spin room” in Topeka has been busy lately. Read how Kansas Governor Brownback and his staff “fashion[ed] a new budget narrative” in reaction to criticism over massive budget cuts he signed (PDF) earlier this year and possible further reductions. Insisting that revenue lost to his pet tax cuts (which take effect next year) won’t be responsible for budget shortfalls, the governor is saying that somehow the European debt crisis and other things beyond the state’s control are forcing spending cuts.

It’s been a while since we’ve heard much about “marriage penalties” imposed by state tax structures (a so-called marriage penalty is imposed when single filers pay more tax as married couples than if they filed as two single filers). But the issue is rearing its head in Wisconsin and this thoughtful blog post from the Wisconsin Budget Projects helps to put the concept in context.

In order to debunk the absurdity of Mitt Romney’s 47 percent claim, an opinion piece in the Las Vegas Sun reminds Nevadans -- by pointing to research from the Institute on Taxation and Economic Policy -- that low income people are paying more than their fair overall share because of state and local taxes.

Here the Charlotte Observer editorial board decries both gubernatorial candidates’ calls for politically popular rate reductions and their failure to commit to genuine, comprehensive reform for North Carolina. “Today’s tax code is riddled with exemptions, loopholes and preferential treatment that sap the state of needed revenue... [and] it’s time for tax code reform to take a prominent place on the agenda of the state’s chief executive. The public – the voting public – should insist on it.”

In a recent Wichita Eagle op-ed the Kansas Governor defended his harsh, regressive, and costly tax bill saying “our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy.” He is proud that he signed the largest tax cut in state history and claims that the state will still be able to provide for its neediest residents and provide “high-quality” education despite the fact that the tax bill he signed will take more than $760 million a year from state coffers.

The Governor’s op-ed may have been written in response to the heat he’s been getting since calling the bill “a real live experiment.” The conservative group Traditional Republicans for Commonsense writes (PDF) that the “’experiment’ will bankrupt our state and create a $2.7 billion deficit within five years.” In this op-ed, Bernie Koch from the Kansas Economic Progress Council writes that the legislation could actually discourage new businesses from locating to the state because the bill was so hastily written its implications for business are unclear.  He further notes that the bond credit rating organization Moody’s recently predicted “[n]o improvement in economic growth as a result of the tax cuts” in Kansas.

Brownback’s next public relations effort is a forum he’s hosting at a community college in Overland Park. He’s invited the self-proclaimed father of supply side economics and - his own tax policy advisor - Arthur Laffer, to join him, which is further evidence the governor is making no apologies about signing a law that many of his constituents deem irresponsible, at best.

To celebrate the five year anniversary of the first “Rich States, Poor States,” an Arthur Laffer/ALEC publication that ranks states based on how closely their tax and budget policies adhere to conservative economic principles, the Iowa Policy Project put it to the retrospect test and found it lacking.  They write, “The ALEC Outlook Ranking fails to predict economic performance. In fact, the less a state followed ALEC’s prescriptions, the better it did in terms of job growth, and the better it did on change in poverty rate and median income.”

New York just decided to throw even more taxpayer money at filmmakers, despite ample evidence that these giveaways don’t do much for long-term job growth or economic performance.

This Topeka Capital-Journal letter-to-the-editor from a registered Republican laments that the tax plan signed into law by Governor Brownback “will increase Kansas income tax on the poor and reduce taxes predominately for the wealthy.”

On Tuesday, Tennessee Governor Bill Haslam told the House Judiciary Committee that states need to be able to collect sales taxes on internet purchases. He said plainly, “This discussion isn’t about raising taxes or adding new taxes.” Instead it’s about “collecting taxes already owed.” We couldn’t agree more.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

Months after cutting the state income tax for wealthy taxpayers, Idaho’s budget situation isn’t looking good.  The Associated Press reports that “earlier this year it looked like the state had sufficient revenue to provide a $36 million tax cut, as well as give state employees a 2 percent raise” but that surplus has already evaporated. In fact, there was never real consensus about the state’s revenue projections in the first place.

Kansas Governor Sam Brownback admits his radical tax cut package is a “real live experiment.”

The South Carolina House approved a measure to keep the state running if it doesn’t have a budget by July 1 when the new fiscal year begins.  The Senate and House are currently bickering over how to implement a (regressive) tax cut for so-called "small" business owners.

It’s back! New Jersey Assembly Democrats are once again planning to introduce a millionaire’s tax into the budget debate.  Proponents of the tax on the wealthiest New Jerseyans want to use the $800 million in revenue it would raise to boost funding to the state’s current property tax credit program for low and middle-income homeowners and renters.  Governor Chris Christie has already vetoed a millionaire’s tax twice. 

The clever folks at Together NC, a coalition of more than 120 organizations in North Carolina, held a Backwards Budget 5K race this week to “to shine a spotlight on the legislature’s backwards approach to the state budget.” 

California Governor Jerry Brown’s revenue raising initiative (which temporarily raises income taxes on the state’s wealthiest residents and increases the sales tax ¼ cent) has officially qualified for the state’s November ballot. Two additional tax measures will join Brown’s plan on the ballot: a rival income tax measure pushed by a billionaire lawyer to fund education and early childhood programs; and an initiative to increase business income tax revenues by implementing a mandatory single-sales factor (PDF backgrounder) formula.

The Pittsburgh Post-Gazette editorializes in favor of capping Pennsylvania’s “vendor discount,” a program (PDF) that allows retailers to legally pocket a portion of the sales taxes they collect in order to offset the costs associated with collecting the tax.  The Gazette explains that a handful of big companies are taking in over $1 million per year thanks to this “antiquated” giveaway.  Computerized bookkeeping takes the effort out of tax collecting and a cap would only impact the national chain stores who disproportionately benefit from the program.

• The Institute on Taxation and Economic Policy talks back to the Wall Street Journal about its failure to cover the consequences of the new Kansas tax bill for the state’s working poor.

• Tomorrow Wisconsin Governor Walker will face a recall election. What’s his record on taxes? Taking from the poor and giving to the rich. 

• North Dakota Tax Commissioner Cory Fong comes out against a radical ballot initiative that would do away with the state’s property tax. The Commissioner writes that Measure 2 is risky, and will be destabilizing for North Dakotans. The vote is on June 12.

• Louisiana’s legislature appears to be nearing adjournment now that the House approved a nearly $26 billion budget for the next fiscal year. The budget, now sitting on Governor Jindahl’s desk, includes $270 million in “one-time money” scavenged from various programs to balance the budget.

• Read this op-ed in the Chicago Sun-Times from the CEO of the National Retail Federation calling for fairly taxing Internet sales and pointing out that “modern software, allowing sales taxes to be calculated as quickly and easily as shipping costs, renders” any remaining objections a so-called Amazon Tax obsolete.

• There’s a trend this year of Republican governors striking deals with Amazon.com to begin collecting sales taxes on purchases made by their states’ residents.  New Jersey’s Chris Christie penned a new agreement with the company that can be added to the list of similar deals struck in Indiana, Nevada, South Carolina, Tennessee, Texas, and Virginia.

• When the richest woman in Wisconsin (and the governor’s biggest donor) pays no income tax to the state in 2010, it gets people asking about loopholes in the tax code.

• We aren’t the only think tank taking issue with the Kansas tax bill recently signed into law.  The fiscally conservative Tax Foundation recently issued a report which says that provisions in the bill to exempt “pass through” business income are “problematic” and an invitation to tax avoidance.  

• With summer road tripping underway, it’s bad news for Iowans that the state’s Department of Transportation appears to be more than $200 million short. Governor Branstad was right to say the state gas tax should be increased next year (as should almost every state’s).

Photo of Governor Christie via Bob Jagendorf Creative Commons Attribution License 2.0

Last week Kansas Governor Sam Brownback signed into law Senate Substitute for House Bill 2117, a tax bill that dramatically changes the Kansas income tax structure and makes Kansas a real outlier when it comes to tax fairness. ITEP released a report which finds that the legislation includes a broad tax cut that will cost the state over $760 million a year, and yet will actually increase taxes on some low- and middle-income families – while the wealthiest Kansans will see their taxes reduced by $21,000 on average.

As a result of this legislation, Kansas is now a member of a uniquely regressive tax policy club; it joins Mississippi and Alabama in taxing food, but not offering any targeted tax relief for the poorest families who have to spend a larger portion of their budgets on groceries.  Until last week’s bill signing, Kansas offered a Food Sales Tax Rebate (FSTR) that targeted tax relief to Kansans over 55 and those with children and an income less than $35,400. Families with income of less than $17,700 could claim a flat $91 per family member to offset the sales tax they paid on food.

Even after cutting income tax rates and increasing the standard deduction, a family of four with $17,000 of income will still lose $294 because of the elimination of the food sales tax credit.

For more on the new law and to learn more about the various tax plans that were debated in Kansas this legislative session, check out ITEP’s Kansas Tax Policy Hub.

(Photo courtesy Wikipedia)

• Michigan lawmakers recently slashed income taxes for businesses by about $1.6 billion, and paid for it mostly with income tax hikes on the elderly and poor.  Now lawmakers are debating a gimmicky income tax cut that would take effect about a month before voters head to the polls in November but do little to offset recent tax increases on the state’s working poor.

• Late last week, the Illinois House voted to raise the state’s cigarette tax. This is big news not only because the tax increase will help to fill a nearly $3 billion budget hole in the state’s Medicaid program, but because anti-tax zealot Grover Norquist was resoundingly defeated despite threats from his Illinois staffers that voting for the cigarette tax could “ruin the GOP brand in the state for a generation.”

• Question: Could the popularity of the no-new taxes pledge championed by Grover Norquist be waning? Answer: Yes. Read this.

• To understand how the regressive, multi-billion dollar tax cut bill signed into law last week in Kansas is being received, check out this news round up from the Wichita Eagle.  A lot of people are “horrified.”

Today, Governor Sam Brownback signed into law a radical tax bill that is projected to cost more than $2 billion over the next five years.  It also means the poorest 20 percent of Kansas taxpayers will pay 1.3 percent more of their income in taxes each year, or an average increase of $148, while the wealthiest one percent of Kansans will see their state income taxes drop by about $21,087 on average.  (See ITEP’s analysis of the Senate plan here for more figures.)

In terms of fairness, the legislation is tragic. Kansas is one of a few states that taxes food, but the Food Sales Tax Rebate (FSTR) has, until now, given targeted relief to taxpayers that are hit hardest by this regressive tax. By eliminating the FSTR, this new law makes it that much harder for low-income people to make ends meet.

The legislation also exempts from taxation all business income that companies “pass through” to owners  – something that no other state that taxes business income does. It’s likely that tax avoidance will increase as a result of companies reorganizing their corporate structure to take advantage of this loophole, which was, of course, billed as a tax cut for small businesses. If lawmakers wanted to offer assistance to small business owners, there are more targeted ways to do just that, through credits or limiting exemptions.

Other provisions of the bill include reducing tax rates down to 3.0 and 4.9 percent; increasing the standard deduction for head of household filers and married couples; and eliminating the Homestead Property Tax Refund for renters.

Proponents of the bill and Governor Brownback himself have said that the tax cuts will pay for themselves because of increased economic activity, but these supply side arguments are groundless.  As the Wichita Eagle opines, this “extreme makeover” of the state’s tax system is a “huge gamble,” and the odds are against Kansas recovering any time soon.

Photo of Governor Sam Brownback via King Content Creative Commons Attribution License 2.0

• The Minnesota Vikings will get their new stadium and taxpayers are on the losing team.  In more sports news, the New Orleans Hornets can thank the Louisiana legislature, who recently voted to give the team a tax break that amounts to $37 million over the next ten years. But the Milwaukee Bucks might not be as lucky.  
• Kansas House Speaker Mike O’Neal said  that once the Governor signs the tax bill sitting on his desk, "Everybody's just going to be amazed, and your constituents will be very proud of you."  But in fact it’s more bad news for Kansans.
• Here’s a great opinion piece from the Canton (Ohio) City Council President showing the impact that state budget cuts have had on his community. Budget cuts don’t happen in a vacuum.
• It’s that time again. Louisiana’s hurricane preparedness sales tax holiday is a boondoggle (as is Virginia’s); they are the definition of “poorly targeted” and do little for consumers and local business.

Photo of Vikings Stadium via AFA Gen Creative Commons Attribution License 2.0

• Florida Governor Rick Scott is attending grand openings of 7-Eleven® stores but a columnist at the Orlando Sentinel observes that “if incentives and low corporate tax rates were working, Florida wouldn't rank 43rd in employment.”  It’s a common sense column worth reading.

• As another massive tax cut for Michigan businesses continues to make its way through the legislature, the Michigan League for Human Services chimes in with a report, blog post, and testimony on why localities can’t afford to foot the bill for state lawmakers’ tax-cutting addiction.
• Bad tax ideas abound in Indiana’s gubernatorial race.  Democratic candidate John Gregg wants to blast a $540 million hole in the state sales tax base by exempting gasoline; he claims he can pay for it by cutting unspecified "waste" from the budget. And Gregg’s Republican opponent, Mike Pence, doesn’t seem to have any better ideas.  So far he’s only offered a "vague proposal" to cut state income, corporate, and estate taxes – without a way to pay for those cuts.

• Kansas lawmakers are feverishly working to meld differing House and Senate tax plans into a single piece of legislation. Governor Sam Brownback has endorsed an initial compromise which includes dropping the top income tax rate and eliminating taxes on business profits. Earlier in the week the Legislative Research Department said the plan would cost $161 million in 2018 and new state estimates say the price tag is more like $700 million in 2018.  Senate leaders have said that they aren’t likely to approve a tax plan that creates a shortfall in the long term. Stay tuned....

• Finally, a USA Today article should give pause to lawmakers hoping that drilling and fracking for natural gas leads to a budgetary bonanza.  It explains how the volatile price of natural gas is creating headaches in energy-producing states like New Mexico, Oklahoma, and Wyoming where a dollar drop in the commodity’s price means a budget hit of tens of millions.

• Kansas Governor Brownback’s insistence on steep tax cuts has met more resistance.  A group called Traditional Republicans for Common Sense has come out against  even a watered down version of Brownback’s vision in the legislature. One of the group’s members (a former chair of the state’s GOP) said, “Now is not the time for more government intervention. Topeka needs to stay out of the way and make sure proven economic development tools – like good schools and safe roads – remain strong so that the private sector can thrive.” 

• Stateline writes about the problems with “the spending that isn’t counted” – meaning special breaks that lawmakers have buried in state tax codes.  The article highlights efforts in Oregon and Vermont to develop more rational budget processes where tax breaks can’t simply fly under the radar year after year.  CTJ’s recommendations for reform are in this report.

• In this thoughtful column, South Carolina Senator Phil Leventis writes, "I have been guided by the principle that government should invest in meeting the needs and aspirations of its citizens. This principle has been undermined by an ideology claiming that government is the cause of our problems and, accordingly, must be starved.” He praises tax study commissions and says being “business friendly” cannot be the only measure of state policy.

• An op-ed from the Pennsylvania Budget and Policy Center (PBPC) calls on lawmakers to address the issue of rampant corporate tax avoidance, and to do so responsibly. It raises concerns that legislation currently under consideration to close corporate loopholes could be a “cure worse than the disease.”  The legislation takes some good steps but is paired with business tax cuts that could cost as much as $1 billion over the next several years.  PBPC argues for a stronger and more effective approach to making corporations pay their fair share such as combined reporting, which makes it harder for companies to move profits around among subsidiaries in different states.

• Just four days after Amazon agreed to begin collecting sales taxes in Nevada in 2014, the company announced a similar agreement with Texas that will take effect much sooner – on July 1st.  As The Wall Street Journal reports, “With the deal, the Seattle-based company is on track to collect sales taxes in 12 states, which make up about 40% of the U.S. population, by 2016.”
  
  

Picture from Flickr Creative Commons.

Arthur Laffer recently teamed up with Stephen Moore, his friend on The Wall Street Journal’s editorial board, to pen yet another opinion piece on the benefits of shunning progressive personal income taxes.  Most of the article’s so-called “analysis” is ripped from Laffer reports that we’ve already written about, but there was one new claim that stands out.  According to Laffer and Moore, “Georgia, Kansas, Missouri and Oklahoma are now racing to become America's 10th state without an income tax.”  If this is true, it’s news to us.  So let’s take a look at the most recent reporting on these states’ tax policy debates.

In Georgia, the state’s legislative session ended almost a month ago with the passage of a modest tax package.  Last year, Georgia lawmakers debated levying a flat-rate income tax, but that effort (which should have been easy compared to outright income tax repeal) failed and left lawmakers with little interest in returning to the issue.

The debate over the income tax debate in Kansas isn’t quite done yet, but the most recent news from The Kansas City Star is that “lawmakers say the tax reform package they'll consider next week almost certainly will fall far short of the no-income-tax goal.”

In Missouri, a number of media outlets are reporting that the push to get income tax repeal on the November ballot is all but over because a judge ruled that the ballot initiative summary that proponents of repeal proposed to put before voters was “insufficient and unfair.”

And in Oklahoma, what started as an enthusiastic push for big cuts or even outright repeal of the income tax has since been watered down into something less ambitious.  The most likely outcome is a cut in the top rate of no more than one percent, although lawmakers are still toying with the idea of tacking on a provision would repeal the income tax slowly over time (so the hard decisions about what services to cut won’t have to be made for a number of years).  But in any case, budget realities have left lawmakers in a position where they’re hardly “racing” to scrap this vital revenue source.

Photo of Art Laffer via  Republican Conference Creative Commons Attribution License 2.0

• The Maryland Budget and Tax Policy Institute just unveiled a “Doomsday Clock” on their website.  The countdown shows how many days are left until massive budget cuts take effect on July 1.  The Institute explains that these cuts can be avoided if Governor O’Malley calls a special session and lawmakers pass the progressive income tax package agreed to in conference committee.

• Former Mississippi Governor Haley Barbour continues to lobby for taxing internet sales even after leaving the Governor’s mansion. In fact, in his farewell address to Mississippians the Governor said, “It is time for the federal government to allow Mississippi and every other state to choose to enforce our laws and to collect these taxes. They are owed us today, and there is no longer any public policy reason to keep us from collecting. Indeed, good public policy says it is past time that our brick-and-mortar merchants on Main Street and in our shopping centers get a level playing field with Amazon and the Internet. That they get fair treatment for paying our taxes.”

• Thanks to an obscure tax loophole which offers Iowans the ability to write off all of their federal income taxes paid, Governor Terry Branstad had a 2011 tax bill of just $52. One state senator is pondering whether or not the state needs a “Branstad rule” to ensure that upper income Iowans pay more in state taxes. The Governor’s lack of a tax bill illustrates just how preposterous the loophole is – and why there are only six states that allow it.

• Now that the rush to make sure our taxes are filed on time is over, here’s a downright beautiful essay from a priest in Kansas reminding us the good that comes from all the frenzy.

• Here’s a thoughtful editorial from the St. Cloud Times describing Minnesota’s need to fund important transportation projects. Lawmakers there are looking into toll roads because the political will to raise gas taxes doesn’t exist – yet the editors rightly conclude, “It’s not that we oppose building this bridge or expanding roads. It’s just that the fairest revenue stream to do so is the gas tax. Legislators just need the courage to adjust it as needed.” To see how Minnesota’s gas tax has effectively shrunk over time, check out this chart from the Institute on Taxation and Economic Policy (ITEP).

Last week Florida Governor Rick Scott signed into law legislation implementing a state sales tax holiday from August 3^rd to the 5^th even though these sales tax holidays are a real boondoggle for consumers (mostly PR for policymakers) and cost state treasuries needed revenues.

Will Missouri give tax credits to Ford for rehiring previously laid off employees? Read more about it in the Missouri Journal, which promises to follow up the story.

We’ve been closely following developments in the Kansas tax reform debate and here’s the latest update.  Last week, the conference committee began meeting to try to reconcile the differences between the House and Senate bill.  But compromise will have to wait until after spring break. The legislature adjourned and lawmakers won’t be meeting again until April 25. Read ITEP’s analysis of the Governor, House, and Senate plans.

Read here about an effort to end the Missouri – Kansas tax credit border wars (a.k.a. race to the bottom).  Hoping to create jobs within their borders, both states have been “willing to pay for it with tax credits and other deal sweeteners” that businesses have exploited – without necessarily delivering on the jobs.

Photo of FL Governor Rick Scott via Gage Skidmore Creative Commons Attribution License 2.0

Kansas Governor Sam Brownback laid down a legislative marker at the beginning of year, promising to cut and eventually eliminate the state’s personal income tax. Since then, state lawmakers have debated a number of approaches to changing the state’s tax laws that have been, to varying degrees, in line with the Governor’s own deeply flawed plan. The House and Senate each recently passed their own tax plans, and a conference committee began meeting this week in effort to reconcile them into legislation the Governor would sign. 

The Institute on Taxation and Economic Policy (ITEP) has analyzed both plans and finds that both would give gradually larger tax cuts, as a percentage of income, to Kansans higher up the income ladder while actually raising taxes on filers further down.

Each also creates a massive gap in the state’s revenues. The full analysis is here.

Nevada Governor Brian Sandoval campaigned on a promise of no-new-taxes but is breaking that promise (for a second time!) with his plan to balance the Silver State budget.  In an effort to avoid deep cuts in education, Sandoval is once again supporting an extension of temporary sales, payroll, and car taxes originally enacted in 2009.  Grover Norquist calls Sandoval the poster boy for why candidates can’t just promise no-new-taxes, they have to sign his pledge; in fact, Sandoval is a good example of why they shouldn’t.

We’ve already written that Arthur Laffer’s claims about economic growth and income tax repeal are fundamentally flawed and that in fact “high rate” income tax states are outperforming no-tax states. Now, three respected Oklahoma economists have come out in agreement, and are offering their own critique of Laffer’s findings. This is great news given that Laffer’s work has been so central to lawmakers’ efforts to eliminate the state income tax – the most progressive feature of any state’s tax system.

This week the Maryland Senate voted to raise personal income taxes in order to offset the anticipated "doomsday cuts" in public services that would otherwise have to occur.  An analysis from the Institute on Taxation and Economic Policy (ITEP) showed that the bill would be generally progressive.  And in yet another bit of good news, a late amendment to the bill would enhance its progressivity even more, as Marylanders earning more than a half-a-million dollars will no longer be able to take advantage of the state’s lower marginal rate brackets.

The Wichita Eagle editorial board is watching the Kansas House and Senate take up tax reform, and they are worried. While they’re glad some lawmakers are dubious about “the suspect advice of Reagan economist Arthur Laffer,” the governor’s advisor, they don’t like a House plan that “makes permanent the punishing budget cuts of the past few years to education, social services and other programs.” They opine that “tax reform needs to make fiscal sense and broadly benefit Kansans,” and conclude that with the various and competing proposals right now, it’s anybody’s guess if that will be the outcome.

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

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

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

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

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

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

Here we go again: another governor who thinks it’s okay to cut taxes for the rich and raise them on everyone else.  Kansas Governor Sam Brownback last week unveiled his long anticipated tax plan. Sweeping changes to reduce the state’s reliance on a progressive, personal income tax are at the core of the proposal, but the question of whose taxes will be cut is dogging the governor.  His plan, already dubbed “Robin Hood in reverse,” may cut income tax rates across the board, but because it also eliminates a variety of income tax deductions and credits, and permanently raises the sales tax, in the end, it’s actually a tax hike on the majority of Kansans – especially the poorest.

Here is how that works. For most middle- and low-income Kansans, the tax break from the income tax rate cuts would be completely offset by the loss of income tax credits and itemized deductions, as well as a higher sales tax rate. A new analysis from the Institute on Taxation and Economic Policy (ITEP) found that the bottom 80 percent of the state’s income distribution would collectively see a tax hike under the Brownback plan, while the best off 20 percent of Kansans would see substantial tax cuts.

In fact, ITEP found that under Governor Brownback’s proposal, the poorest 20 percent of Kansas taxpayers would pay 2.2 percent more of their income in taxes each year, or an average increase of $242.  Upper-income families, by contrast, reap the greatest benefit with the richest one percent of Kansans, those with an average income of over a million dollars, saving an average of $16,933 a year. Read ITEP’s two-page analysis here.

Photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country. This week, we’re taking a closer look at proposals which would lessen a state’s reliance on progressive income taxes, often by shifting to a heavier reliance on regressive sales taxes. 

Georgia – A legislative proposal gaining traction in Atlanta would undercut the state’s reliance on the personal income tax – its only major progressive revenue source.  It would make up those revenues by raising the sales tax – every state’s most regressive source of revenue.  The plan also includes two other components that hit the poorest Georgians the hardest: taxing groceries and adding a dollar to the cigarette tax.  A sensible, comprehensive proposal from the Georgia Budget and Policy Institute is the template lawmakers should be following. It starts with fairness, ends with increased revenues and is all about modernization and reform. 

Kansas – If the expectations about Governor Sam Brownback’s proposed income tax changes are right, Kansas could have a hard time balancing its books. Tonight, the Governor, (who has received technical assistance from supply side guru Arthur Laffer), is expected to propose drastic reductions to state income tax rates.  Details on how the governor plans to make up the lost revenue haven’t been revealed, but his sidekick Laffer was recently quoted as saying, “It’s a revolution in a cornfield. Brownback and his whole group there, it’s an amazing thing they’re doing. Truly revolutionary.”

Kentucky –  Fresh off his reelection to the Governor’s office, Steve Beshear is expected to propose his own tax reform plan, but Representative Bill Farmer, who’s been itching to change Kentucky’s tax code for years, has already pre-filed his own tax overhaul bill, which would slash the state income tax, expand the sales tax base to include more services and lower the sales tax rate.  ITEP conducted an in depth analysis of an earlier Farmer proposal and found that his proposal would cost the state hundreds of millions of dollars and raise taxes on the poorest 20 percent of Kentuckians by an average of $138. We expect that his current proposal won’t do much to fix the state’s regressive tax structure either.

Missouri – Perhaps the most destructive proposal of this type gaining traction is Missouri’s mega-tax proposal, so called because it amounts to a massive consumption tax hike for ordinary Missourians. Proponents of the related ballot initiative that would eliminate the state’s personal income tax and replace that revenue by adding goods and services to the sales tax base are currently collecting signatures in an attempt to place the initiative on the ballot this November. Show-Me-Staters would be unwise to provide their signatures for this kind of campaign, however, because its passage would result in higher overall taxes for working families. Click here to see ITEP testimony on a similar proposal.

Oklahoma – Two seriously bad proposals that would increase the unfairness of Oklahoma’s tax system are currently under consideration. Working with (the aforementioned supply side guru) Arthur Laffer, the free-market Oklahoma Council of Public Affairs is proposing to eliminate the state income tax altogether. An ITEP analysis found that the bottom one-fifth of Oklahoma taxpayers -- those earning less than $16,600 per year -- would be paying on average $250 a year more in taxes, or about 2.5 percent more of their income. Similarly, the Tax Force on Comprehensive Tax Reform (dominated by business interests) suggests lowering the state’s top income tax rate and eliminating a variety of tax credits, many of which are designed to help low and middle income families. David Blatt, director of the non partisan Oklahoma Policy Institute recently said of the proposal, "This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy.”

Photo of Governor Steve Beshear via Gage Skidmore and photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0

Reforming a state’s tax structure and the planning, meetings, and discussions that go into such a monumental and consequential project shouldn’t happen behind closed doors.  After all, taxes are fundamental to government and its activities and they impact everyone.

But apparently Kansas Governor Sam Brownback’s administration sees it differently.

The media has been reporting that the Governor will come out with a new tax reform proposal before the end of the year. We know that he’s enlisted the help of mega-supply sider Arthur Laffer to assist him and that Laffer is getting paid about $75,000. But that’s where the information stops. We can assume a task force or committee of some type is meeting, but that’s really all anyone knows.

The Lawrence Journal-World recently sent an email to the Brownback administration to attempt to gain “access or copies of minutes, agendas and policy papers of the task force.” But the governor’s people are throwing up bureaucratic excuses and indicated they might need seven weeks to comply. At which point the task force might be disbanded and Governor Brownback’s plan already complete.

Governor Brownback, his administration and his task force group should abandon this secrecy strategy.  The Wichita Eagle points out that given the political climate in Kansas, transparency is of paramount concern: “With the 2010 election having left the Legislature rich with conservatives ready to implement Brownback’s sweeping agenda without much second-guessing, transparency and scrutiny are needed now.”

State Senate President Steve Morris, R-Hugoton, agrees. “Right now,” he said, “there are a lot of ideas being floated around, but what they all seem to be missing is citizen input.”

You know what they say about sunlight – it’s time for Governor Brownback to let it shine on this important policy-making process.

Photo of Art Laffer via Republican Conference and photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0

This week Kansas Revenue Secretary, Nick Jordan, said that by the end of the year Governor Sam Brownback will have recommendations for how to reform the state’s tax structure. He said, “We're looking at tax policy in a very comprehensive way. We're not just focusing on business or individual incomes, I don't know that we are targeting numbers. We're targeting what is the best economic growth policy for the state." This statement, combined with other media reports that the governor is working with supply side guru, Arthur Laffer, and that the governor seeks to reduce and eventually eliminate income tax rates, should cause grave concern for Kansas taxpayers.

In anticipation of the governor’s tax proposals, the Institute on Taxation and Economic Policy (ITEP) recently issued a memo to media outlets in Kansas. ITEP’s analysis shows the impact of repealing the Kansas income tax and replacing part or all of the revenue with increased sales taxes.  For example, if every dime of an income tax repeal were ultimately paid for by increases in state sales taxes, the poorest 80 percent of Kansans would, as a group, see a tax hike overall and require a statewide average sales tax rate of a whopping13.5 percent.

Governor Brownback recently told the Kansas Chamber of Commerce that in terms of low taxes and regulation, “We’ve got to look more like Texas and a lot less like California.”

But Kansas shouldn’t want to look more like Texas! The Texas tax structure doesn’t have an income tax, making it the fifth most regressive in the country and chronically unable to fund public investments. Texas ranks 45th in SAT Scores and 50th in terms of the percent of the population with a high school diploma. Texas has the highest percentage of uninsured citizens, and the second highest percentage of the population experiencing food insecurity in the nation.

We will keep an eye on the governor’s plans for Kansas, but if he’s looking for a state on which to model his tax reforms, he should take a look at Connecticut.

Photo of Sam Brownback via KDOTHQ Creative Commons Attribution License 2.0

Anti-tax lawmakers and activists in Kansas and Missouri continue to promote ideas to repeal their state income taxes and replace some of the revenue with a huge consumption tax. As ITEP’s Meg Wiehe explained in a recent Kansas City Star article, “A lot of education needs to happen around this issue. If you move to a consumption-based tax, the vast majority of taxpayers would likely pay more in taxes than they are under the income tax, except for the wealthiest.”

ITEP’s written testimony on one such proposal in Missouri  explains that only the richest 5 percent of Missourians would see a tax cut if the state’s personal income tax was replaced with a broad based sales tax, leaving the other 95 percent to pay higher taxes.

The corporate-controlled, anti-government American Legislative Exchange Council (ALEC) says approvingly that “Kansas and Missouri are at the top of the list” of states considering such proposals. To ALEC, ITEP’s estimates aren’t devastating at all. They recently claimed that “the downside of the tax swap appears to be minimal, if not non-existent.”

As a recent Kansas City Star editorial, warns, “The blessing of the council, known as ALEC, raises a red flag.”

In Kansas, Governor Sam Brownback has long been a proponent of eliminating, or at the very least, drastically reducing the state’s income tax. The Governor’s budget director anticipates that his budget for the new fiscal year will show “some significant (income tax) cuts”.

Missouri lawmakers have tried for the past couple of years to pass legislation that would eliminate the income tax entirely, but the legislation has not successfully passed both houses of the legislature.

Since cooler heads prevailed in the legislature, mega-rich troublemaker Rex Sinquefield has filed 11 ballot initiatives with the Secretary of State’s office that all do basically the same thing — eliminate state income taxes and replace the revenue with a broader sales tax. 

It’s expected that Sinquefield will eventually fund signature-collection for one of these ballot questions. If enough signatures are gathered, Missouri voters would likely be asked to decide about this radical shift in November 2012.

The proposals in Kansas and Missouri threaten those states’ ability to provide core and critical services because they would result in permanently lower revenue, while also tilting each state’s tax system even more heavily in favor of the well-off.

Photos via KDOTHQ Creative Commons Attribution License 2.0

Kansas Governor Sam Brownback’s budget chief, Steve Anderson, has announced that a new tax study committee will be formed to recommend ways to reduce or even eliminate the state’s income tax, according to an article in the Wichita Eagle. 

Legislation to phase out individual income taxes and lower corporate tax rates died in the legislature this past session, but evidently the Brownback administration isn’t giving up on its regressive agenda. State representative Jim Ward was being generous when he called this proposal “shameful.”

The graduated income tax is Kansas’s only major progressive tax levied; reducing or eliminating the income tax would ensure that regressive property and sales tax rates would have be raised, or services would have to be cut.  If the Brownback administration gets its way, the state’s most vulnerable will suffer the most. Ironically, Brownback came out against an effort to reduce the sales tax just this last November, citing the budget deficit and insisting the state couldn’t afford it.

In a recent speech to a local Republican club, budget chief Anderson fell just short of admitting that corporate leaders are writing the administration’s economic plan.  He told his audience the story of a CEO friend who threatened the state of Oklahoma that he would move his company to Texas because it has no income taxes. Anderson said it “drove home to me how important it is to get [income tax] down to that point that you’re at the lowest rate you can be, hopefully zero.”

States too often fall for, and suffer the consequences of, a race to the bottom with other states over taxes.  Corporations regularly lead states down this path, and unfortunately, the leadership in Kansas is apparently all too willing to follow their corporate pals.

Representative Ward is right to point out that numerous studies have shown taxes are just one of many factors -- alongside education and other government services -- that corporations consider when making their relocation decisions.  A tax code that adequately funds the communications, transportation, power and public safety that support the state’s economy is good for Kansas – both its businesses and its residents.

Photo via KDOTHQ Creative Commons Attribution License 2.0

Republican Governor Sam Brownback and many conservative Republicans in Kansas are attempting to use the term "tax reform" to describe their efforts to reduce the equity and sustainability of Kansas’s tax system.  

Brownback has begun studying tax proposals with the ultimate goal of putting out a plan for a large tax overhaul. Brownback has stated that the goal of "reform" should be reducing income taxes.

This would mean cutting the only progressive tax in Kansas, which would further exacerbate Kansas’s already regressive tax system.

Brownback’s emphasis on income tax reductions comes after the Kansas State House of Representatives passed legislation which would have gradually repealed the state's personal income tax and cut the corporate income tax in half. That effort stalled in the Kansas Senate, as even Republican lawmakers balked at its $739.4 million price tag over the next 2 years, before the reductions would even be fully in effect.

As has been widely noted, Kansas Republicans are divided on whether to take such a regressive and revenue-hemorrhaging approach. Republican State Senator Pete Brungardt, for instance, argued that the income tax is not the problem at all and that the state should consider reforming its sales tax.

Instead of focusing singularly on the income tax as Brownback desires, the Kansas Economic Progress Council argues that lawmakers should carefully evaluate the entire system of state and local business taxes with a special emphasis on the sales tax, which is frequently ignored in such discussions.

Late last week, the Kansas Legislature adjourned a dramatic session that ended at 3 a.m. Friday morning, when a controversial budget that slashed spending for schools, social services, and the arts was finally approved. In total, 2,000 state positions were eliminated. And the cuts could have been even worse.

Early in the session, conservative groups like Americans for Prosperity Kansas urged the legislature to repeal last year’s temporary sales tax increase, which raised the state sales tax from 5.3 to 6.3 percent. Thankfully this extreme policy didn’t receive the votes necessary to pass out of the House. In fact, repealing the sales tax hike was dismissed by moderate Republicans and even Republican Governor Sam Brownback.

Shortly after he was elected Governor, he understood that the state’s dire fiscal situation meant that the temporary sales tax hike would need to stay. When asked whether the sales tax increase should be repealed he said, “We're short of resources for the state, and I don't think it's something that we should be doing at this time. Our fiscal situation is not stable.”

One key sticking point for the Senate and House during the budget negotiations was whether or not the state should beef up its cash reserves. Conservatives in the House wanted to put money aside for a rainy day while the Republican-controlled Senate wanted to use that reserve money to curb some of the dramatic spending cuts.

The $14 billion budget cuts overall spending between 5 and 6 percent. But the cutting spree isn’t enough for some conservatives, who say that the budget as passed isn’t one that the state can afford. Conservative Representative John Rubin said, “I'm a fiscal conservative. I encourage our governor to liberally use his line-item veto.”

Elected officials in California and Florida face unprecedented fiscal challenges at both the state and local levels. Yet rather than working to reduce their budget shortfalls, policymakers in each state are doing their best to dig their budget holes deeper by offering new company-specific tax breaks to keep footloose corporations from moving their operations elsewhere.

A front-page article in today's New York Times offers some insights into this seemingly irrational behavior. Focusing on the battle between Kansas and Missouri lawmakers over the future headquarters of movie-theater chain AMC Entertainment, the article describes a system of extorting tax breaks that is viewed by everyone involved — from lawmakers to the beneficiaries of the tax breaks — as a pointless zero-sum game.

AMC's chief executive officer, poised to receive lavish tax handouts from the two states, wonders aloud "whether this is an appropriate role for government to be playing," and a lawyer whose job involves seeking out tax breaks for corporate clients describes it as "horrible public policy."

This situation won't be news to anyone who's followed the work of Greg LeRoy and the folks at Good Jobs First over the years. LeRoy's "Great American Jobs Scam" provides an excellent summary of the cottage industry of site location consultants that has emerged to facilitate the "economic war between the states" that the Times article describes. But the battle over AMC is only one example of egregious tax giveaways from the past week.

In Florida, Darden Restaurants (parent company of the Red Lobster and Olive Garden restaurant franchises) is pushing for new tax breaks. The Orlando Sentinel reports that this Fortune 500 company, which generated $7.1 billion in global sales during its most recent fiscal year, is pushing for legislation that would allow the millions in corporate income tax credits it already receives in Florida to be applied to its sales tax liability. This would save the company as much as $5 million.

Fortunately, the tax legislation has stalled as its key sponsor, Republican State Representative Chris Dorworth, read the ‘revelation’ in the Orlando Sentinel that his own tax break legislation would only apply to Darden Restaurants. He then decided he could not support his own legislation as written.  

Meanwhile, San-Franciso-based Twitter has played tax break hardball with city officials for months, threatening to move to Brisbane if it does not receive substantial tax breaks. Despite facing a tough $350 million deficit and dramatic cuts to health services, the San Francisco Board of Supervisors capitulated to Twitter’s demands this week, passing a $22 million payroll tax break for the company on Tuesday. Roxanne Sanchez, the president of Service Employees International Union Local 1021, opposed the measure, saying, “It’s a taxpayer handout to a $10 billion company at a time we’re cutting basic city services.”

As today's Times article reminds us, corporate tax breaks all too often create benefits for one jurisdiction at the direct expense of another, with no net benefit for the US economy overall. And tax breaks targeted to a specific company set an especially dangerous precedent. As an editorial in the San Francisco Guardian put it, “once you go down the path of caving in to corporate blackmail, it never ends.”

The Iowa Fiscal Partnership has issued a policy brief about the destructive tax cuts that are being proposed in the state legislature. The cuts being debated carry a hefty price tag, $1.6 billion, most of which is from a proposal to cut income tax rates by 20 percent across the board.

As we’ve previously noted, these income tax cuts are very regressive. ITEP found that the wealthiest 1 percent of Iowans would receive an average of $6,822, while those in the bottom quintile would enjoy a break of just $18 on average.

According to IFP, the revenue picture in Iowa is improving and the budget can be balanced without drastic cuts to spending and without raising taxes. But it’s mind boggling that legislators would want to cut taxes as they're just barely crawling out of a fiscal crisis.

Charles Bruner, Executive Director of the Child and Family Policy Center, recently said, "Nobody is saying we're flush with revenues, but the picture has improved and we can get through without major cuts. But that assumes we don't dig a bigger hole with unnecessary and unwise cuts in revenues." For more on the tax cut proposals and why they are shortsighted, read IFP’s report.

In more disturbing tax cut news, the Kansas House has passed legislation that would link the state’s personal and corporate income tax rates to changes in revenue. If revenues increase, the rates for the state’s two major progressive taxes will decrease. Eventually the income tax could even be phased out altogether. 

Supporters of the legislation say that this proposal will increase the likelihood that businesses will locate in the state. But a more thoughtful critique was offered by two state Representatives in explaining their vote against the proposal. "When it (the income tax) is gone, our three-legged stool is cut to two — and the worst two we can choose. [The] sales tax is a regressive tax that impacts low-wage earners most.” The legislation now goes to the state Senate.

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

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

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

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

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

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

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

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

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

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

Lawmakers in a handful of states are pushing tax cuts for corporations and other businesses under the guise of spurring economic growth.  Florida, Kansas, Iowa, Missouri, and Arizona all made headlines this week for proposed tax cuts of this sort.

In Florida, Governor Scott’s proposed budget plan was released on Monday, and as expected, it included enormous cuts to both corporate income taxes and property taxes.  Under Scott’s plan, which he unveiled before a crowd of tea party activists, the state’s already low corporate tax rate would fall from 5 percent to 3.5 percent.  At the same time, state spending would plummet by $4.6 billion, with pre-K through university education making up $3.1 billion of that total.  Fortunately, even the state’s conservative legislators don’t seem the least bit interested in Scott’s ultra-conservative (and exceedingly vague) ideas.

Kansas lawmakers generated similar headlines this week as bills were introduced in both the House and Senate to phase out the state’s corporate income tax.  According to the Wichita Eagle, proponents of the measure are actually claiming that phasing out this major tax would somehow increase tax revenue.  We seriously doubt it.

In Iowa, Governor Branstad’s proposal to slash the corporate income tax in half and cut business property taxes by 40 percent received renewed attention this week as the Des Moines Register attempted to summarize the absolutely massive number of tax cuts being proposed by Iowa lawmakers. 

Fortunately, Senate Majority Leader Michael Gronstal isn’t impressed, saying, “Taken as a whole, the Republican budget basically says we're going to squander the opportunities for the next generation of kids in this state — in terms of education, in terms of access to community college and training programs — we're going to push that aside and say the most important thing is to make sure corporations have tax cuts.”

Missouri lawmakers also garnered some attention this week when the state Senate endorsed legislation to repeal the state’s franchise tax on businesses over the course of the next five years.  Currently, a business must have more than $10 million in assets to be subject to the franchise tax.  The St. Louis Post-Dispatch ran an excellent editorial this week in response to the plan, noting: “Businesses were given tax breaks, tax credits, tax incentives, low corporate taxes and tort reform. So where are the jobs? Or did they just pocket the savings? … Business-friendly is one thing. Business-promiscuous is quite another.”

It probably wouldn’t change anything, but it sure would be nice if Arizona lawmakers gave the Post-Dispatch’s editorial a read before beginning debate on the business tax cut package that Governor Brewer plans to release on Monday.

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

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

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

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

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

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

Good Jobs First (GJF) released three new resources this week explaining how your state is doing when it comes to letting taxpayers know about the plethora of subsidies being given to private companies.  These resources couldn’t be more timely.  As GJF’s Executive Director Greg LeRoy explained, “with states being forced to make painful budget decisions, taxpayers expect economic development spending to be fair and transparent.”

The first of these three resources, Show Us The Subsidies, grades each state based on its subsidy disclosure practices.  GJF finds that while many states are making real improvements in subsidy disclosure, many others still lag far behind.  Illinois, Wisconsin, North Carolina, and Ohio did the best in the country according to GJF, while thirteen states plus DC lack any disclosure at all and therefore earned an “F.”  Eighteen additional states earned a “D” or “D-minus.”

While the study includes cash grants, worker training programs, and loan guarantees, much of its focus is on tax code spending, or “tax expenditures.”  Interestingly, disclosure of company-specific information appears to be quite common for state-level tax breaks.  Despite claims from business lobbyists that tax subsidies must be kept anonymous in order to protect trade secrets, GJF was able to find about 50 examples of tax credits, across about two dozen states, where company-specific information is released.  In response to the business lobby, GJF notes that “the sky has not fallen” in these states.

The second tool released by GJF this week, called Subsidy Tracker, is the first national search engine for state economic development subsidies.  By pulling together information from online sources, offline sources, and Freedom of Information Act requests, GJF has managed to create a searchable database covering more than 43,000 subsidy awards from 124 programs in 27 states.  Subsidy Tracker puts information that used to be difficult to find, nearly impossible to search through, or even previously unavailable, on the Internet all in one convenient location.  Tax credits, property tax abatements, cash grants, and numerous other types of subsidies are included in the Subsidy Tracker database.

Finally, GJF also released Accountable USA, a series of webpages for all 50 states, plus DC, that examines each state’s track record when it comes to subsidies.  Major “scams,” transparency ratings for key economic development programs, and profiles of a few significant economic development deals are included for each state.  Accountable USA also provides a detailed look at state-specific subsidies received by Wal-Mart.

These three resources from Good Jobs First will no doubt prove to be an invaluable resource for state lawmakers, advocates, media, and the general public as states continue their steady march toward improved subsidy disclosure.

Last week’s elections saw Republicans in Kansas take control of the state legislature with a 92-33 majority in the House and a 31-9 majority in the Senate. This newfound power has allowed Governor-elect Sam Brownback to speculate about revising the state's tax structure.  One of the items on his agenda will be reviewing a one percent sales tax rate increase passed earlier this year.  Brownback, while criticizing the tax hike, has not explicitly proposed repealing it.  Instead, Brownback has said he wants to evaluate and modify the current levels of income, property, and sales taxes.  Specifically, Brownback said he wanted to lower the state's individual income tax, a tax he sees as hindering growth.

If Brownback wants to keep taxes low and balance the state budget, he would be wise to listen to the proposals coming out of the Kansas Advisory Council on Intergovernmental Relations (KACIR).  KACIR’s recommendation included a three-year moratorium on creating new sales tax exemptions and an examination of the effects of current sales tax exemptions. The report also suggests a three-year moratorium and examination of property tax exemptions. If enacted, these proposals would go a long way toward both modernizing the state's tax structure and making it more stable. 

These proposals should not sound new to returning Kansas legislators.  Secretary of Revenue Joan Wagnon has been advocating these proposals since the legislature began debating the sales tax last year.  Hopefully Brownback’s new administration will be open to reconsidering these sound proposals.

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

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

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

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

ITEP’s new report, Credit Where Credit is (Over) Due, examines four proven state tax reforms that can assist families living in poverty. They include refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits. The report also takes stock of current anti-poverty policies in each of the states and offers suggested policy reforms.

Earlier this month, the US Census Bureau released new data showing that the national poverty rate increased from 13.2 percent to 14.3 percent in 2009.  Faced with a slow and unresponsive economy, low-income families are finding it increasingly difficult to find decent jobs that can adequately provide for their families.

Most states have regressive tax systems which exacerbate this situation by imposing higher effective tax rates on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. Although state tax policy has so far created an uneven playing field for low-income families, state governments can respond to rising poverty by alleviating some of the economic hardship on low-income families through targeted anti-poverty tax reforms.

One important policy available to lawmakers is the Earned Income Tax Credit (EITC). The credit is widely recognized as an effective anti-poverty strategy, lifting roughly five million people each year above the federal poverty line.  Twenty-four states plus the District of Columbia provide state EITCs, modeled on the federal credit, which help to offset the impact of regressive state and local taxes.  The report recommends that states with EITCs consider expanding the credit and that other states consider introducing a refundable EITC to help alleviate poverty.

The second policy ITEP describes is property tax "circuit breakers." These programs offer tax credits to homeowners and renters who pay more than a certain percentage of their income in property tax.  But the credits are often only available to the elderly or disabled.  The report suggests expanding the availability of the credit to include all low-income families.

Next ITEP describes refundable low-income credits, which are a good compliment to state EITCs in part because the EITC is not adequate for older adults and adults without children.  Some states have structured their low-income credits to ensure income earners below a certain threshold do not owe income taxes. Other states have designed low-income tax credits to assist in offsetting the impact of general sales taxes or specifically the sales tax on food.  The report recommends that lawmakers expand (or create if they don’t already exist) refundable low-income tax credits.

The final anti-poverty strategy that ITEP discusses are child-related tax credits.  The new US Census numbers show that one in five children are currently living in poverty. The report recommends consideration of these tax credits, which can be used to offset child care and other expenses for parents.

The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.

Following Governor Mark Parkinson’s lead, the Kansas legislature voted Tuesday to increase the state’s sales tax rate from 5.3% to 6.3%.  Beginning in July of 2013, the increase will be scaled back to 5.7%.  While this outcome is a disappointment relative to the sales tax base broadening discussed prior to the start of the session, the legislature should be applauded for including two progressive offsets aimed at mitigating the impact of the sales tax hike on the state’s most vulnerable families.

Over the Fiscal Year 2011-2015 period, the legislature’s plan returns about 5% of the revenue gained from the sales tax hike to the state’s lower-income families via a modest expansion of the state’s food sales tax rebate program and an increase in the state’s Earned Income Tax Credit (EITC) from 17% to 18% of the federal credit. 

Unfortunately, while the increases in the sales tax rate and sales tax rebate are permanent, the EITC expansion will lapse in December of 2012.  Given that low-income Kansans pay a larger percentage of their income in tax than anyone else in the state, lawmakers should consider making the EITC expansion permanent when the time comes to revisit this issue.

At least two points bear mentioning in reference to Kansas’ approach to its budget deficit.  First, while the state should be applauded for taking a balanced approach that relies on both revenue increases and spending cuts, the state could have filled its budget gap by enhancing the progressivity of its income tax, which would have fewer consequences for low- and middle-income families.  States without income taxes can be at least partially forgiven for relying on regressive taxes to raise revenue quickly during a recession, but Kansas already has an income tax in place and should have used this tool more directly to raise revenue in an equitable manner.

Second, if Kansas lawmakers were (unwisely) committed to avoiding an income tax increase, revenue could have been generated from the sales tax more efficiently by eliminating unwise exemptions, rather than raising the rate.  A recent survey by the Federation of Tax Administrators focusing on 168 potentially taxable services found that less than half of these services are taxed within Kansas’ borders.  Lawmakers should have taken the advice of the state’s Secretary of Revenue, as well as some of their own colleagues, and reformed the sales tax base, rather than simply raising the rate of a very imperfect tax.

State lawmakers in Kansas, Florida, Georgia, South Carolina, and at least ten other states have attempted to advance tax cuts — frequently targeted at businesses — as a means of stimulating their economies.  In response to these types of proposals, this week the Center on Budget and Policy Priorities (CBPP) released a short report pointing out the futility of attempting to stimulate state economies by cutting taxes. The report explains:

“State balanced-budget requirements prevent states from stimulating their economies by cutting taxes. If a state cuts a tax, it generally has to make an offsetting cut to expenditures for a program or service in order to maintain balance. This spending cut is likely to reduce demand in the state just as much as the reduction in taxes may stimulate demand.  It is at best a zero-sum game, where the gains in one area are offset by the losses in another.”

Against this backdrop, there is little question that the proposals described below (as well as the proposal described in the Minnesota story from a couple weeks back) are doomed to fail, despite their political popularity among some groups.

On Tuesday, Florida Governor Charlie Crist used his State of the State address to voice his support for a 10-day sales tax holiday and a sizeable cut in corporate taxes.  The corporate tax cut Crist is seeking could include a one percent reduction in the state’s corporate tax rate.  Both of these proposals would force a reduction in state spending at the worst possible time.  And sales tax holidays, of course, have long been recognized by serious observers as little more than political gimmicks.

In Kansas, the state House of Representatives has passed an expansion of a tax break aimed at boosting employment in the state.  Of course, the revenue loss associated with expanding this break, were it to become law, would only make the legislature’s job of producing a balanced budget even more difficult.  And, as the CBPP explains quite well, the larger cuts in government services that would be needed to finance this cut would effectively cancel out any purported economic gains.

In Georgia, an op-ed by Sarah Beth Gehl of the Georgia Budget and Policy Institute (GBPI) points out the folly of another proposal that claims to offer help for the state’s economy.  Specifically, the proposal would eliminate the state’s corporate net worth tax.  As Gehl points out, “there is no evidence that ending this tax will incite businesses to come to Georgia.”

Some South Carolina lawmakers are making use of a similar logic, though their focus is on a somewhat longer-term initiative.  Their plan would phase-out the corporate income tax over the course of 20 years, with the hope of improving the state’s “economic competitiveness.”  An editorial published in The State this week points out the flaw in this plan:

“The theory is that the tax breaks will entice people to start and expand businesses and move jobs to South Carolina. ... But there's a limit to how much difference a lower tax can make when there's no market for a company's products or services. And the stimulative value is particularly questionable when the tax is relatively low to start with. That's why we never have been convinced that supply-side economics can work at the state level.”

On Monday, Kansas Governor Mark Parkinson gave his State of the State speech, which included a proposal to temporarily increase the state sales tax by 1 percent to help fill a nearly $400 million budget shortfall. Governor Parkinson said, "I can't find $400 million that we can responsibly cut. If you can find responsible cuts, I'm open to looking at them. Let me repeat, as a person who is fiscally responsible, a person that has cut more money out of the Kansan budget than any Kansan in history, there isn't $400 million that we can responsibly cut."

Of course, lawmakers shouldn't forget the very good ideas floated by Secretary of Revenue Joan Wagnon. She has suggested a three-year moratorium on creating new sales tax exemptions and an examination of the effects of current sales tax exemptions. If enacted, her proposals would go a long way to both modernizing the state's tax structure and making it more stable. 

In Washington State there are fewer buttons to press when it comes to revenue raisers (because the state lacks a broad-based income tax), but one option that is available to lawmakers is to increase and modernize the state's sales tax.

This week the Washington Budget and Policy Center released a report on this very topic. It includes a proposal to temporarily increase the sales tax rate, enlarge the base to include consumer services, and include candy, gum, and bakery products in the sales tax base.

Governor Christine Gregoire's budget proposals are frankly disappointing compared to the proposal put forward by the Budget and Policy Center. The Governor's proposal includes offering tax incentives to businesses, closing tax loopholes, service cuts and using federal dollars to help balance the state's budget.

It’s a problem that’s common across many states. Too many exceptions are carved into state sales taxes, which consequently apply to far too narrow a range of purchases.  In large part, this is the predictable result of lawmakers’ desire to enact policies that allow them to claim they’ve cut taxes, while also being able to redirect resources toward their favorite activities or groups.

In Kansas, Secretary of Revenue Joan Wagnon has been leading the charge in encouraging more systematic thinking about the multitude of exemptions from the state’s sales tax.  Specifically, Wagnon has suggested a three-year moratorium on creating new sales tax exemptions, and an examination of the effects of current sales tax exemptions.  The idea has received notable support.  State Rep. Jim Ward, for example, has concurred with the proposal to more closely scrutinize these programs: "Without some criteria to balance the public good, it is very difficult [to ensure tax exemptions are warranted], and we haven't done a great job of it.”  One way to inject such criteria into the policy process in Kansas, and other states, would be to enact a “performance review” system of the type proposed in a recent CTJ report.

Sales tax exemptions can also come about as a result of historical accident.  Minnesota, like most states, exempts a huge number of personal services from taxation, largely because the state’s sales tax was created before the economy shifted to its current, more service-oriented nature.  Fortunately, recent press coverage from Minnesota shows a lot of interest among lawmakers, including gubernatorial candidates, in correcting this flaw in the state’s tax code.  For more on the folly of exempting services from the sales tax base, be sure to read this ITEP Policy Brief.

This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

Kansas Secretary of Revenue Joan Wagnon gave a keynote speech last week at Wichita State University where she said that her staff calculated that without the tax cuts and exemptions passed by the legislature since 1995, Kansas would have $1 billion more in revenue this year. And that, interestingly is the amount of the state's expected shortfall for fiscal year 2010. Wagnon went on to say, "It's hard to get that lesson across that you can't keep doing tax cuts and waiting for it to produce more revenue, because at this point, it's producing less revenue."

Wagnon hopes that this staggering figure will be at the forefront of legislators' minds as they are approached to pass various tax exemptions this coming session. Her office has prepared a 21 question piece designed to help legislators evaluate exemptions. State officials across the country could learn from Wagnon when she says, "It just seems so obvious to me that in a time of crisis, you don't give away your revenues."

It's one thing for the federal government to allow a one-time amnesty for Americans who've hid their income from the IRS in offshore accounts. (See related story.) The "stick" is effective (prison) and the "carrot" is not overly generous (since these Americans will pay taxes, interest, and penalties).

But lately several states are providing their own tax amnesties that are very different and very misguided. According to a recent article in State Tax Notes (subscription required), the thirteen state tax amnesties already conducted or promised this year ties the 2002 record for most amnesties offered in one year.  Assuming that DC Mayor Adrian Fenty signs the budget (which contains a tax amnesty) that was recently passed by the DC Council, that record will be broken.  Pennsylvania and Michigan, however, still have a chance to avoid adding to the list of states enacting these short-sighted measures. Amnesties have been proposed within each state's legislature.

As we've argued before, allowing delinquent taxpayers to pay the taxes they owe with little or no penalty is unfair to those diligent taxpayers who paid their taxes on time.

This unfairness is compounded greatly if the interest owed on the late tax bill is reduced, or even waived entirely, as was done this year in Delaware.  Waiving the interest owed on late tax bills essentially means that delinquent taxpayers are granted an interest-free loan by the state, for no reason other than the fact that the state is now desperately in need of money. Had all taxpayers been aware of the possibility of this interest-free loan, the rate of noncompliance would undoubtedly have skyrocketed. 

Repeatedly offering amnesties, as is increasingly becoming the norm, harms the ability of states to enforce their tax laws.  With record numbers of tax amnesties having been offered in the last seven years, delinquent taxpayers can usually assume that they'll be offered an easy way out eventually -- if only they're patient enough.  As one revenue official from Kansas recently put it, "if you have amnesties too often, you're literally training taxpayers not to pay."

On January 9th, Congressman Earl Pomeroy (D-ND) introduced a bill (H.R. 436) to retain the estate tax with a per-spouse exemption of $3.5 million, essentially freezing in place the estate tax rules in effect this year. The Obama campaign has favored a similar approach to dealing with the estate tax.

Under the first tax cut enacted by President Bush in 2001, the estate tax is being phased out gradually. Under current law, if a wealthy person dies in 2009, the first $3.5 million of their estate is not subject to the tax. That exemption was scheduled to increase gradually under the 2001 law, until 2010 when the estate tax is scheduled to disappear completely. Like almost all of the Bush tax cuts, these rules expire at the end of 2010, meaning that the estate tax will return in 2011 and the pre-Bush rules will apply (including a $1 million per-spouse exemption). Congressman Pomeroy's bill would therefore prevent the estate tax from disappearing in 2010, but would constitute a significant tax cut for millionaires in years after that.

In December, Citizens for Tax Justice issued a report using the latest estate tax data from the IRS showing why the Obama/Pomeroy approach would be a huge and unnecessary tax cut for extremely wealthy families. The report found that only 0.7 percent of deaths that occurred in the United States in 2006 resulted in estate tax liability. The per-spouse exemption that year was only $2 million, which means that the estate tax will affect even fewer families with the $3.5 million per-spouse exemption in place.

Rep. Pomeroy's bill would also repeal new "carryover basis" rules scheduled to be effective next year. Under current law, when you inherit property from an estate, the "basis" of that asset for income tax purposes is stepped up to its fair market value (FMV) on the date of death. When the estate tax is fully repealed in 2010, the stepped-up basis rules are also scheduled to be repealed. The new general rule will be that the basis of the property will carry over from the decedent. (An exception to this rule allows $1.3 million of property to be stepped up to FMV, and an additional $3 million is stepped up if the property is left to a surviving spouse.) H.R. 436 would repeal the new rules prior to their effective date.

It's true that the new carryover basis rules scheduled to come into effect in 2010 under current law are difficult for taxpayers and administrators. How can we figure out what Aunt Sarah paid for her G.E. stock that she's had for at least 30 years when we don't even know when she bought it (or if she received it as a gift or inheritance)? And what if she's been reinvesting dividends all these years (which increase the basis)? A similar rule was enacted by the Tax Reform Act of 1976, but was repealed before its effective date in 1980 because of the outcry from taxpayers and practitioners about the impossibility of complying with the statute.

The phase-out of the federal estate tax also continues to hurt state treasuries. Most states base their state inheritance tax on the federal system and many have lost significant revenues because of the federal changes, including the loss of the credit for state estate taxes. In his budget proposal last week, Gov. Baldacci of Maine included changes to Maine law that would impose a Maine estate tax computed under the pre-2001 federal and state rules. Gov. Sibelius of Kansas has proposed delaying the state's scheduled elimination of estate taxes.

Repeating the familiar mantra that "now is not the time for tax increases", far too many state policymakers have completely dismissed the idea of raising additional revenue to fill their looming budget shortfalls. Other lawmakers, however, have at least left some modest revenue raising ideas on the table. In this piece, we highlight just a few of the ways to boost revenues that have sprung up in states such as Kansas, Oregon, and Massachusetts.

Kansas should be in a somewhat better position than many states, at least politically, when it comes to raising additional revenue. Before Kansas' budget fell into such disarray, legislators passed a variety of unwise business tax cuts that have yet to be completely phased in. Now, with the economy having made a turn for the worst, vulnerable Kansas families are in need of state assistance to weather the storm. At least one Kansas lawmaker has pointed to freezing the phase-in of these business tax cuts as one possibility for protecting state revenues and the families that rely on them. Other states in the process of phasing-in tax breaks may want to re-think their priorities before allowing the phase-in to occur.

Oregon's governor has taken things a step further by proposing three concrete, though not terribly progressive or innovative, ways to boost revenue during these desperate times. First, the Governor would like to raise the state's cigarette tax, a move that many other states have also identified as one of the most politically palatable options available (e.g. Arkansas, Florida, Georgia, Kentucky, Mississippi, South Carolina, Utah, and Virginia). We've written about the connection between the cigarette tax and budget shortfalls before here.

Second, the Governor is seeking some very minor increases in the gas tax, vehicle registration fees, and title fees in order to pay for transportation. Though the two cent gas tax increase he's pondering (and some hikes in various vehicle fees) won't fix Oregon's transportation woes, such a move is certainly preferable to pretending there isn't a need for additional revenue.

Finally, the Governor recommends increasing the state's corporate minimum tax. As was pointed out in the Governor's release, Oregon's corporate minimum tax has not been raised since 1929. As a result, the minimum tax has ceased to be an effective protection against companies who seek to manipulate the tax code to escape taxation. But while the Governor's increase in the minimum tax would generate approximately $40 million per year, this would ultimately be only a very minor step toward a better system of corporate taxation. Fortunately, the Oregon Center for Public Policy has played a leading role in advocating much more meaningful tax solutions in the state, especially in their recent report titled," Rolling Up Our Sleeves: Building an Oregon that Works for Working Families".

And lastly, a valuable reminder regarding the potential revenue to be had from taxing internet sales surfaced in Massachusetts this week, where the Governor proposed (and significant legislative support has formed around) an idea to tax companies that have agreed to participate in the streamlined sales tax initiative. Since participation is currently voluntary, such a move is estimated to produce only $15 million per year for the state -- not a huge sum, but it certainly doesn't hurt. Should a comprehensive internet sales tax plan be passed by the federal government, however, the state could enjoy as much as $545 million in additional annual revenue. Continuing the forward momentum of the streamlined sales tax initiative could ultimately prove quite valuable in enhancing the sustainability of state revenue systems

Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans. This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.

The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority. But it's the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.

Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system. South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.

In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time. South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.

Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas. This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.

With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown. A recent study by Howard Chernick entitled "Cigarette Tax Rates and Revenue" found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%. Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling. The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).

As was discussed in last week's Digest, adequate transportation funding has been hard to come by for many states as a result of stagnant gas tax revenues and rising transportation infrastructure costs. This past week, a couple of interesting developments in the transportation finance debate arose out of this nationwide problem.

The first of those developments was a summit held with the cooperation of the National Governor's Association and the U.S. Department of Transportation. Though no formal recommendations were made, among the more intriguing revenue-raising ideas to come out of that meeting were an expansion of tolling on new and existing roads, implementing congestion pricing during high-traffic times, and creating a tax on the number of "vehicle miles" one travels. Each of these provisions would be regressive, requiring low- and middle-income people to pay more of their incomes than their wealthier counterparts, but this could be offset with increases in the overall progressivity of state and federal tax systems. What makes each of these options most appealing is that they can serve two purposes simultaneously -- providing needed funding for roads while at the same time reducing traffic congestion by placing a "price" on driving.

Slightly less encouraging was the insistence by U.S. Transportation Secretary Mary Peters that the gas tax is essentially outdated and broken and should not be increased to keep up with inflation-driven increases in transportation costs. Peters' criticism was that as people consume less fuel by either driving less, switching to mass transit, or purchasing more fuel-efficient vehicles, the gas tax will become increasingly unsustainable. But with states facing immediate transportation shortfalls that need to be addressed in a matter of weeks and months, not years, such a firm opposition to a gas tax increase seems unwarranted.

The transportation funding debate in many states has recently turned to a competition between increasing the gas tax and increasing the sales tax. The gas tax, like Peters' other ideas, asks the most of those people who drive the most, and potentially has some effect on decreasing traffic congestion by adding to the price of driving. If the gas tax is indexed to inflation, as it is to some extent in Florida and Maine, it can also be a sustainable funding source. The sales tax, on the other hand, is just as regressive as the gas tax but isn't at all based on one's driving habits -- it therefore also has no role in reducing congestion. It would seem that until her more long-term goals could be enacted, Peters' should be a staunch supporter of the gas tax as the next best solution.

By contrast, the other big transportation development of the week was a report released by the Kansas Department of Transportation that recommended "protecting [gas tax] revenues from inflation" by continuously adjusting the tax rate. That report also recommended adding additional tolling as a method for addressing the state's transportation woes. But with Kansas facing an immediate transportation funding shortfall estimated at $30 billion over the next 2 decades, an easily implemented solution like a gas tax hike seems like an absolute necessity to any transportation funding package. Other states that lack the luxury of time would do well to listen to the recommendations out of Kansas and consider adjusting their gas tax rates so that the widening gap between revenues and costs may begin to be bridged.

In Kansas, several school districts are fighting to lure casinos into their boundaries. As the Kansas City Kansan notes, "Each of the five casino proposals on the table would bring different levels of funding to each of the local school districts." These local school districts are lobbying hard for casinos that would add to their their district's property tax base. Millions of dollars in new tax revenue -- as well as millions of dollars in social costs -- could result for the school district "lucky" enough to be the recipient of a new casino.

Meanwhile, Illinois lawmakers continue to grapple with funding education, construction, and Chicago area public transportation. Some are predicting a financial "doomsday" next year for the state if new revenues aren't created in a hurry. House Speaker Michael Madigan has come out in favor of a plan to increase state gambling to forestall the doomsday. His plan "would put a casino in Chicago, auction off two other licenses, expand existing riverboats and put thousands of slot machines and video poker at horse tracks." Illinois House members are expected back in Springfield on Monday to consider increased gambling.

Policymakers in both Kansas and Illinois have the opportunity to meet the needs of their residents through progressive and stable means, like income tax reforms. Unfortunately, gambling revenue is not stable over the long term and is certainly a regressive revenue source. Residents in both states lose when gambling proposals like these are on the table.

The Monty Python character expressed something that all politicians aspire to when he said, "To boost the British economy I'd tax all foreigners living abroad." Every elected official would prefer that any taxes be paid by someone who can't vote them out of office. It's not any different in Missouri, which recently triggered a war of words with its neighbor, Kansas.

Kansas Governor Kathleen Sebelius is becoming irritated about a seemingly arcane provision in a recent tax bill signed by Missouri Governor Matt Blunt. The provision does what all states would love to do: It raises taxes on people who work in the state but live and vote somewhere else. And for the Kansas residents who work in Kansas City, Missouri, that means their taxes have been raised by people unaccountable to them.

Earlier this year, Governor Blunt signed into law H.B. 444, an ill-advised bill that created a tax break for better off seniors who receive Social Security benefits. Included in this legislation is a provision ensuring that anyone who works in Missouri, but lives out of state will no longer be allowed to write off their out-of-state property taxes if they itemize on their Missouri income tax forms. This means that many workers who live outside of Missouri will pay higher Missouri income taxes. This is a good thing for Missouri, which is struggling to provide adequate health care and education.

But if you're a policymaker in neighboring Kansas you'd quickly understand that workers who live in Kansas will actually pay less Kansas income tax because they can claim credits for taxes paid to other states. Governor Sebelius asked Governor Blunt to repeal this provision, which she says amounts to a tax increase on nonresidents.

Seeing that shots were being fired at him from the other side of the border, Governor Blunt relented partially and said that he'll support the provision's repeal in the 2008 legislative session. But it's really not clear that the Missouri legislature would relent at all. "What obligation do we have to Kansas people? Why would we want to give them a break on Missouri taxes?" one Missouri legislator said publicly. Kansas Rep. Kenny Wilk, chairman of the House Taxation Committee, is vowing to retaliate unless Missouri acts soon. He said, "Missouri just needs to decide whether they want to do this the hard way or the easy way. We will respond to make sure we recoup all "and plus a bit more... of what we're losing."

Property tax reform continues to make headlines in several states. Some Indiana property taxpayers are revolting against what they perceive to be an unfair system. Recently more than 3,000 Hoosiers signed post cards addressed to their state policymakers urging them to fix the state's property tax mess permanently. In fact, a legislative commission began hearings last month and Governor Mitch Daniels' appointed blue ribbon commission started work this week. The problems are that taxes are not based on a homeowner's ability to pay and that assessments are executed poorly.

One thought-provoking solution described in the Indianapolis Star is to closely study the property in the state that is not being taxed. Indiana, like most states, exempts nonprofit organizations and religious institutions from paying the property tax. In Marion County alone millions of property tax dollars could be collected if religious institutions paid property taxes. Estimates show there is $2.7 billion in property that goes untaxed in Marion County. Should churches and nonprofit organizations pay property taxes? It's probably the case that no politician in Indiana would seriously propose to tax churches, but the fact that some are contemplating such a move could startle legislators enough to enact real reform.

Are Rebates the Answer?

Indianans will receive locally-funded property tax rebates this winter, but those rebates aren't being greeted with much enthusiasm. Many question the motives of the legislators who approved these rebates. The Post-Tribune writes that instead of offering credits that would be applied to a homeowner's property tax bill directly, "The General Assembly instead decided property owners should receive checks in the mail, so they can see what their elected officials did for them this year."

This week Montana homeowners can begin to apply for a $400 state-funded property tax rebate. The rebates were a highly contested issue in the legislative session as Republicans pushed for permanent property tax cuts instead of the one-time rebates supported by Governor Brian Schweitzer. The Montana rebates shed light on a problematic aspect of property tax rebates and circuit breakers. Because states don't often know how much property tax a homeowner paid, it becomes the homeowner's responsibility to know about and apply for the credit.

Itemized Deductions on State Tax Are No Better

Another misconceived approach to property tax reform is the itemized exemption for property taxes, which is allowed for most states' income taxes. One problem with this is that in the low- and middle-income families hit hardest by property taxes typically don't itemize. Also, income tax deductions are an "upside-down" tax break, since deductions are worth more to the wealthy taxpayers who typically pay higher income tax rates. If property taxes are problematic for some families, offering a deduction that is largest for the wealthiest and not available at all to many middle-income families is certainly not the solution.

In the current skirmish between Missouri and Kansas discussed above, some Missouri legislators have asked why people should be granted such an itemized deduction for property taxes paid in another state (which certainly angers those who pay Missouri income taxes because they work in Missouri, even though they live in and pay property taxes in Kansas). But the better question is why should Missouri allow an itemized deduction for property even if its located in Missouri. The deduction probably does little to help those who could actually use some help.

In Kansas two state senators are championing a new amendment to the state constitution that would freeze the assessed value of a home upon the homeowner's sixty-fifth birthday. The intent behind the proposal is a popular one: to help fixed-income seniors struggling with their property tax payments. However, the bill is poorly-targeted. It would help all seniors, including the wealthiest, and not just those struggling to pay their bills. Critics of the measure are starting to line up. Notably, AARP came out against the bill, saying, "It's not that we aren't concerned about older Kansans and their ability to pay property taxes, we just believe property tax relief should be more targeted". Some have suggested that the measure should be tied to the value of the home, so that, for example, only houses valued at less than $200,000 would have their assessed value frozen. Such a move would make the amendment much less expensive to the state, while still helping elderly homeowners.

However, an even better solution would be to expand the current Kansas property tax "circuit breaker" to include people of all ages. A circuit breaker kicks in when property taxes exceed a given percentage of the taxpayer's income, providing targeted relief only to those who need it. Circuit breakers are a cost-efficient way to provide targeted relief to those who need it most. For more information check out the latest report from the Center on Budget and Policies which takes a hard look at circuit breaker programs across the country.

Legislators in Missouri, Kansas, and Georgia are debating reducing taxes on seniors in their state. Lawmakers in Missouri and Kansas introduced legislation that would eliminate income taxes on Social Security benefits. On the surface, eliminating taxes on Social Security sounds like a wonderful idea. However, only a handful of states levy a tax on Social Security benefits and the Social Security Administration estimates that nationally about a third of current beneficiaries pay federal taxes on their benefits. Those who stand to gain the most from these proposals are better off seniors.

An ITEP analysis of the Missouri bill found that 72 percent of Missourians would receive no benefit from the proposal. Also, the bill carries a price tag of $100 million and the cost is likely to increase as Missourians age. For more on the Missouri proposal read the testimony presented by ITEP staff to the Missouri House of Representatives' Tax Reform Committee.

The Peach State already exempts Social Security benefits from their income tax and offers generous retirement income exclusions (totaling $35,000 of retirement income in 2009). But recently Governor Purdue introduced legislation that would completely eliminate tax on retirement income for Georgians 65 and over. Instead of turning to these poorly targeted tax cuts, legislators would do better to provide tax relief to those state residents with the least ability to pay - regardless of age considerations.

Advocates of tax breaks for business typically argue that such tax breaks will benefit workers as companies are more able to expand and invest. The latest study to call this into question comes from the University of Kentucky, which finds that tax breaks don't create as many jobs as previously hoped. The report concludes, "Based on our evidence showing that training incentives are positively related to economic activity in an area, and given that relatively little is spent on this program, the Legislature may want to consider increasing the amount spent on training incentives" rather than more tax breaks.

It's also doubtful that tax breaks are very important to the success of businesses themselves. Despite the fact that Kansas business owners named excessive taxation as their biggest concern for the fourth year in a row, nearly half of the businesses surveyed by the Kansas Chamber of Commerce weren't even aware that the Legislature had enacted a six-year, $632 million business tax cut last year. The bill eliminated the state's property tax on new capital investment in business equipment and machinery and went into effect last July. It's difficult to believe that tax breaks could be vital to economic expansion if they're not even noticed by the corporations that benefit most from them.

The Kansas legislature's Joint Tax Committee is considering a proposal to create a series of gas tax "buffer zones" around the state's perimeter. Of the four states that share a border with Kansas, only Nebraska currently has a lower gas tax, allegedly prompting some motorists to cross state lines to fill up. The proposed buffer zones would allow any gas station in a "border town" to lower their gas tax to within one cent of that of the neighboring state. These areas are being promoted as a way to capture gas tax revenue that is currently lost to cross-border trade. However, it is likely that these zones will not eliminate the border problem, but instead simply move the lower gas border further inside Kansas. If these buffer zones become reality, instead of crossing the border to get cheaper gas, Kansans will be able to simply drive into a border town.