Minnesota News



State News Quick Hits: State Lawmakers Not Getting the Message



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

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

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

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

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



State News Quick Hits: Corporations Across the States Push for Tax Breaks and More



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

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

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

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

 



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



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Throughout most of its existence, online retailer Amazon.com aggressively avoided having to collect state sales taxes from its customers.  Its 5 to 10 percent price advantage relative to local retailers who have to collect the tax wasn’t something that Amazon was willing to give up.

More recently, however, Amazon’s business strategy seems to have shifted.  In order to provide faster delivery times to more of its customers, Amazon has opened up warehouses and distribution centers in a growing number of states (Florida being the most recent example), even though doing so means the company will be subject to the same sales tax collection requirements as Wal-Mart, Home Depot, mom-and-pop bookstores and every other brick and mortar retailer.

But recent events in Minnesota confirm that while sales tax dodging is less central to Amazon’s business strategy than in years past, the company still thinks that not collecting the tax is an advantage.  A new law just passed by Minnesota’s legislature redefines what constitutes a “physical presence” in the state, and it means that Amazon has enough affiliates in Minnesota to have to begin collecting the state’s sales tax this month. So in order to save some nickels and dimes, Amazon has decided to cut its ties with businesses based in the Gopher State so it can keep selling to Minnesotans tax-free.

This development points toward a need for Congressional action for lots of reasons, including these two:

First, it reinforces the point that local retailers are being harmed by their online competitors’ ability to dodge sales tax collection requirements. Why would Amazon bother cutting ties with Minnesota businesses if it didn’t think its market share would suffer from having to play by the same rules as companies with actual stores and employees in Minnesota?

Second, it highlights the degree to which online shopping sales tax laws have become an indefensible patchwork. In geographically large and heavily populated states like Florida and Texas, Amazon has little choice but to have a “physical presence” in the state (and collect sales tax) if it wants to offer reasonably fast delivery times. In other states, however, shipping products from outside the state’s borders is much less of a logistical problem.

There’s no question that Amazon is capable of collecting sales taxes in Minnesota, particularly since the state has already taken steps to simplify its sales tax system by adhering to the Streamlined Sales Tax Agreement.  In fact, Amazon said it plans to begin collecting Minnesota sales taxes as soon as the federal Marketplace Fairness Act (which it supports and which has passed the U.S. Senate) is enacted into law.  In the meantime, however, Minnesota is out of options for getting Amazon to play by the same rules as other businesses selling to its residents.  Amazon’s recent actions make clear that just because the company can do what’s right, that doesn’t mean it will do so voluntarily.



Congratulations to Minnesota for Crossing the Finish Line



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At 2:00am on Monday morning, Minnesota House members passed groundbreaking tax legislation that raises $2.1 billion over two years. The Senate then approved the legislation and Governor Dayton, long a champion of progressive tax reform, signed it yesterday. The bill increases income taxes on the top two percent of earners, raises the cigarette tax to $1.60, closes some corporate tax loopholes, and extends the sales tax to a handful of services primarily used by businesses, including warehouse storage and telecommunications equipment. Wayne Cox, with Minnesota Citizens for Tax Justice expects much from the legislation: “Shifting taxes from the middle class to those with highest incomes will help the economy.”

A helpful summary of the compromise legislation is available here from the Minnesota Budget Project. Revenues from the cigarette tax will be used to help pay for a new Vikings stadium. This is round two for stadium funding because gaming revenues that were supposed to pay the state’s share of the stadium came in below revenue projections (not surprisingly, PDF). Of course, cigarette taxes (PDF) aren’t very stable revenue sources either, and are likely to decline overtime.

Nan Madden, Director of the Minnesota Budget Project, said of the legislature’s work, “In past years, the response to budget shortfalls has been deep cuts to services and use of timing shifts to kick the problem down the road. This year’s tax bill and budget take a better approach, raising the revenues needed to balance the budget and invest in the future; and reforming our tax system so that we share the responsibility for funding public services more equally.”

So, kudos to Minnesota’s elected leaders for making some difficult decisions and finding a way to balance the state’s books and still provide for quality services into the future. It’s a model other states can learn from.



State News Quick Hits: Pushback on Tax Cuts as Job Creators, and More



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Michigan’s former Treasurer, Robert Kleine, explains in a Detroit Free Press op-ed that “there is no evidence that … [a 2011 tax change] reducing business taxes by $1.7 billion has created new jobs in Michigan.”  Among other things, Kleine observes that “state business taxes are such a small part of a business’ costs that even large changes have a minor impact.”

Gas taxes remain a major topic of debate in the states.  Since publishing our mid-session update on state gas tax debates two weeks ago, Vermont Governor Peter Shumlin signed a gas tax increase into law, Iowa Governor Terry Branstad reiterated that a gas tax hike is still on the table in his state, and The Olympian reports that raising Washington State’s gas tax is “now widely seen as a topic for special session.”

New Jersey Governor Chris Christie has been traveling the state seeking support for his more than $2 billion tax cut proposal (once fully phased-in) ever since using Tax Day 2013 to announce his renewed push for the plan he first championed last year. An op-ed from the Better Choices for New Jersey Campaign says the proposal was “a bad idea then, and it remains one today.”  Why?  Simply put, the state cannot afford even the scaled-back tax cut the governor is proposing for 2013 without reducing spending.

A new report from the North Carolina Budget and Tax Center takes on two common myths about the state’s economy that policymakers often use to justify cutting or eliminating taxes: North Carolina’s economy is uncompetitive compared to neighboring states and high tax rates drive North Carolina’s high unemployment. The report found that North Carolina is actually either leading or in the middle of the pack in every major indicator of economic health except for unemployment.  And, the explanation for high unemployment? A decline in specific industries the state has long relied on – like textiles and furniture – that are highly vulnerable to offshoring, outsourcing and other global pressures, not high tax rates.

Anti-Taxer-in-Chief Grover Norquist recently travelled to Minnesota where he met up with Congresswoman Michele Bachmann to rally against taxes. Minnesota is actually one of the bright lights this year for tax justice advocates who are supporting House and Senate plans there that would raise taxes on the wealthiest Minnesotans.



State News Quick Hits: Ohio and Minnesota On Opposite Income Tax Tracks, and More



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

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

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

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

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



Mid-Session Update on State Gas Tax Debates



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In a stark departure from the last few years, one of the most debated state tax policy issues in 2013 has been the gasoline tax (PDF).  Until this February, it had been almost three years since any state’s lawmakers approved an increase or reform of their gasoline tax.  That changed when Wyoming Governor Matt Mead signed into law a 10 cent gas tax hike passed by his state’s legislature.  Since then, Virginia has reformed its gas tax to grow over time alongside gas prices, and Maryland has both increased and reformed its gas tax.  By the time states’ 2013 legislative sessions come to a close, the list of states having improved their gas taxes is likely to be even longer.

Massachusetts appears to be the most likely candidate for gas tax reform.  Both the House and Senate have passed bills immediately raising the state gas tax by 3 cents per gallon, and reforming the tax so that its flat per-gallon amount keeps pace with inflation in the future (see chart here).  In late 2011, the Institute on Taxation and Economic Policy (ITEP) found that Massachusetts is among the states where inflation has been most damaging to the state transportation budget—costing some $451 million in revenue per year relative to where the gas tax stood in 1991 when it was last raised.  Governor Deval Patrick has expressed frustration that legislators passed plans lacking more revenue for education—in sharp contrast to his own plan to increase the income tax—but he has also signaled that there may be room for compromise.

Vermont lawmakers are also giving very serious consideration to gas tax reform.  At the Governor’s urging, the House passed a bill increasing the portion of Vermont’s gas tax that already grows alongside gas prices.  The bill also reforms the flat-rate portion of Vermont’s gas tax to grow with inflation.  The Senate is now debating the idea, and early reports indicate that the package may be tweaked to rely slightly more on diesel taxes in order to reduce the size of the increase on gasoline.

Pennsylvania Governor Tom Corbett has also proposed raising and reforming his state’s gasoline tax.  While Pennsylvania’s tax is technically supposed to grow alongside gas prices, an obsolete tax cap limits the rate from rising when gas prices exceed $1.25 per gallon.  Corbett would like to remove that cap in order to improve the sustainability of the state’s revenues, and members of his administration have been traveling the state to explain how doing so would benefit Pennsylvanians.  While the legislature has yet to act on his plan, the fact that it has the backing of the state’s Chamber of Business and Industry is likely to help its chances.

In New Hampshire, the Governor has said she is open to raising the state gas tax and the House has passed a bill doing exactly that.  But there are indications that lawmakers in the state Senate might continue procrastinating on raising the tax, as the state has done for over two decades.

Nevada lawmakers are discussing a gas tax increase following the release of a report showing that the state’s outdated transportation system is costing drivers $1,500 per year.  ITEP analyzed a gas tax proposal receiving consideration in the Nevada House and found that even with the increase, the state’s gas tax rate (adjusted for inflation) would still remain low relative to its levels in years past.

Iowa lawmakers have been debating a gas tax increase for a number of years, and there may be enough support in the legislature to finally see one enacted into law.  The major stumbling block is that Governor Branstad will only agree to raise the gas tax if it’s part of a larger package that cuts revenue overall—particularly revenues from the property tax.  As we’ve explained in the past, such a move would effectively benefit the state’s roads at the expense of its schools.

Earlier this year, Washington State House lawmakers unveiled a plan raising the state’s gas tax by 10 cents per gallon and increasing vehicle registration fees.  Senate leaders are reportedly less excited about the idea of a gasoline tax hike, though there are indications they would consider such an increase if it were to pass the House.  While talk of a 10 cent increase has since quieted down, there are rumors that a smaller increase could be enacted.

Unfortunately, some states where the chances of gas tax reform once appeared promising have since begun to move away from the idea.  In Michigan, while the Governor and the state Chamber of Commerce have voiced strong support for generating additional revenue through the gas tax, neither the House nor the Senate appears likely to vote in favor of such a reform this year.  Meanwhile, the chances for a gas tax increase in Minnesota seem to have faded after the Governor came out against an increase and the House subsequently unveiled a tax plan that leaves the gas tax untouched.

Overall, 2013 has already been a significant year for state gas tax reform.  Both Maryland and Virginia have abandoned their unsustainable flat gas taxes in favor of a better gas tax that grows over time, just like construction costs inevitably will.  Hopefully, within the next few months, more states will have followed their lead.



State News Quick Hits: Tech Company Heads to "Hi Tax" California, Arkansas is Opposite World, and More



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Here’s some happy news: a recent poll finds that just 27 percent of Louisianans support Governor Bobby Jindal’s tax swap, and that’s before the Institute on Taxation and Economic Policy (ITEP) released its latest analysis showing that the poorest 60 percent of taxpayers in Louisiana would see a tax hike as a result of the Governor’s plan.

A robotics company based in Nevada recently decided to abandon the state’s allegedly “business friendly” environment in favor of Silicon Valley in California, where there are better trained employees and plenty of deep pocketed investors. Nevada does not levy a personal or corporate income tax, but as Romotive founder Keller Rinaudo explains: "It was not a short-term economic decision ... We have to find experienced roboticists, and that really only exists in a few places in the world, and California is one of them."

Maryland’s gas tax will be increased and reformed starting July 1 under a bill just sent to Governor Martin O’Malley by the state’s legislature.  This year’s increase will be something less than 4 cents per gallon, but the tax will now rise each year alongside inflation and gas prices, as recommended by ITEP. ITEP showed that even with the increase, Maryland’s gas tax rate will still remain below its historical average and be less than the state probably needs.

Here’s an interesting story in the Minnesota Star Tribune about how Governor Dayton’s tax plan would impact the wealthiest Minnesotans. While opponents resort to the usual tax-hikes-kill-jobs refrain, Wayne Cox of Minnesotans for Tax Justice notes, “Economists believe keeping teachers and firefighters on the payroll is at least three times more helpful to the economy than keeping income tax rates at the top the same.”

Tax cuts for opposite ends of the income spectrum are getting opposite treatment in Maine and Arkansas. This week, Maine lawmakers rejected a bill that would cut taxes on capital gains (which heavily benefits wealthy taxpayers) and approved an increase in the state’s Earned Income Tax Credit (EITC) (PDF), which amounts to a tax cut to low- and moderate-income families. But last week in Arkansas, a House panel approved a cut in taxes on capital gains while passing up an opportunity to enact a state EITC.



State News Quick Hits: No Tax Break for Girls Scouts, The Virtue of the Gas Tax and More



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

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

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

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

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



State Tax Proposals Worthy of the Word "Reform"



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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.”

 

 



State News Quick Hits: Seeing the Writing on the Kindle, Praise for ITEP's Research, and More



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

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

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

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

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



Quick Hits in State News: Raise Taxes to Avoid Doomsday in Maryland, and More



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Maryland Governor Martin O’Malley announced that he will call a special legislative session to start next week.  Lawmakers are widely expected to pass a progressive income tax package in order to avoid massive “doomsday” budget cuts.

Tennessee’s inheritance tax will be eliminated beginning in 2016.  Legislators recently sent Governor Haslam a bill repealing the tax, seduced by bogus claims about the economic benefits of repeal.  Lawmakers also passed two other notable tax cuts: one repealing the gift tax (which The Commercial Appeal says will benefit Gov. Haslam himself, along with other wealthy taxpayers), and another cutting the state sales tax on groceries by a quarter of a percent.

The gubernatorial race in Washington State is heating up and costly tax expenditures are getting long overdue attention from the candidates. But as this piece in the Seattle Times highlights, eliminating spending programs embedded in the tax code is easier said than done.  Read CTJ’s advice for how to do it here.

Finally, check out this timely column describing why Minnesota Governor Mark Dayton should veto a bill passed by the legislature under the guise of job creation. (Hint - it’s really a massive tax cut for business.)



Stadium Subsidies: Playing Games With Taxpayer Dollars



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The history of states subsidizing professional sports stadiums with taxpayer dollars is long and, increasingly, controversial. Maryland provided nearly one hundred percent of the financing for the Orioles’ and Ravens’ shiny new facilities in the 1990s. In 2006, the District of Columbia subsidized the Washington Nationals’ new stadium at a cost to taxpayers of about $700 million.  And even though most stadiums are, in the long run, economic washes at best, losers at worst, there are still politicians willing to throw money at them.

Minnesota legislators, for example, are currently grappling with how to fund a new stadium for the Vikings in response to threats that the franchise may leave the state.  But before the legislature gives away nearly a billion dollars, State Senator John Marty raises some excellent points about the math, and morals, behind the proposed taxpayer subsidies for the stadium:

“The legislation would provide public money in an amount equivalent to a $77.30 per ticket subsidy for each of the 65,000 seats at every Vikings home game. That's $77 in taxpayer funds for each ticket, at every game, including preseason ones, for the next 30 years.… Public funds can create construction jobs, but those projects should serve a public purpose, constructing public facilities, not subsidizing private business investors. The need to employ construction workers is not an excuse to subsidize wealthy business owners, especially when there is such great need for public infrastructure work.” 

In  Louisiana, the House of Representatives has gone ahead and approved a ten-year, $36 million tax subsidy  to keep the state’s NBA team, the Hornets, in New Orleans until 2024. Some are asking if the state can really afford it given a $211 million budget gap.  Representative Sam Jones noted that while the state has cut health and education spending, it still found a way to come up with millions of dollars to help out the ”wealthiest man in the state.” That would be Tom Benson, owner of not only the Hornets but the legendary New Orleans Saints football team, whose net worth is $1.1 billion dollars.

In California, however, a different scenario is unfolding. Sacramento Mayor Kevin Johnson just abandoned negotiations with owners of the city’s NBA team, the Kings.  The Kings organization was unwilling to put up any collateral, share any pre-development costs, or commit to a more than a 15 year contract; this would have left the city shouldering all the costs – and all the risks – for developing the $391 million downtown facility.  Mayor Johnson said he’d offered everything he could to the team and it still wasn’t enough, so he pulled the plug. 

Given the high cost and low return (including in terms of jobs) that sports facilities generate, more leaders should follow Minnesota’s Marty and Sacramento’s Johnson and stand up for the taxpayers who pay their salaries.

(Thanks to Field of Schemes and Good Jobs First for keeping tabs on these subsidies!)

 

 



Quick Hits in State News: Doomsday Clock in Maryland, Branstad Loophole in Iowa, and More!



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  • 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).


Quick Hits in State News: Good Riddance to Missouri's Radical Tax Plan, and More



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Calling it “a far-out idea that would force Missourians to pay much more for groceries, homes and everything in between, while sparing wealthy citizens the need to pay income taxes,” the Kansas City Star editorial board bids good riddance to an income tax repeal proposal in Missouri.

Apparently not content with the massive business tax cut enacted last year, Michigan lawmakers are continuing to push to repeal the property tax on business equipment – a vital revenue source for local governments who can expect a net, permanent 19 percent revenue loss.

Instead of an immediate income tax cut that will cost significant revenue (that the state can’t afford),  Oklahoma lawmakers are contemplating a “trigger” plan tying cuts to year-over-year revenue growth that would eventually eliminate the tax altogether.  The Oklahoma Policy Institute explains that triggers are sold as a “responsible” way to cut taxes, "but it’s the opposite. It’s an attempt to avoid responsibility by putting the tax system on auto-pilot.“

An important study from the Pew Center on the States showing the lack of accountability in tax giveaways to business keeps getting good press. Here’s a piece from Illinois describing how, despite some very public giveaways to companies like Sears and the CME Group, the state lags in holding companies accountable for the tax breaks they receive.

This great article explains who actually pays Minnesota taxes. It cites data from Minnesota’s own tax incidence analysis report – a report that only a handful of states have the technology to develop, but is vital to understanding how taxes impact people of different income levels.

 



Quick Hits In State News: A Good Bill With a Dim Future in New Mexico, and More



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Naughty States, Nice States: The Institute on Taxation and Economic Policy's 2011 List



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Naughty

Michigan’s legislature and Governor Snyder top the naughty list by giving away more than $1.6 billion in tax cuts for business and paying for it with tax increases on low-and middle-income working and retired families.

Florida continued to dole out more corporate pork this year, including a property tax break that happens to benefit huge commercial land owners, like Disney World and Florida Power and Light, and other corporations (that also happen to be major donors to the state’s Republican governor and legislative majority party).

Minnesota’s legislature missed an opportunity to do the right thing when it rejected a tax increase on the state’s wealthiest residents. The plan was proposed by Governor Dayton and supported by 63 percent of Minnesotans over the alternative, which was cuts to spending on education, health care and other vital public services.

Anti-tax activists in Missouri were hard at work again. This year they were collecting signatures for a ballot initiative that would eliminate the state’s personal income tax and replace it with a broadened and increased sales tax.

Nice

Connecticut’s Governor Malloy and the legislature adopted a $1.4 billion tax increase that improved tax fairness in the state and protected public investments like education and health care.  Most notably, the state added an Earned Income Tax Credit, a significant tax break for low-income working families.

District of Columbia lawmakers greatly reduced the ability of corporations to dodge their fair share of taxes by adopting combined reporting (which makes it harder to hide profits in other states) and a higher corporate minimum tax. The Council also temporarily increased taxes for individuals making more than $350,000 a year and limited itemized deductions, which are most often taken by high income filers.

Hawaii lawmakers also limited upside-down tax giveaways (itemized deductions) for their state’s richest residents and passed other tax changes to raise much needed revenue.

A Little Bit Naughty and Nice

New York’s Governor Andrew Cuomo reversed his campaign vow not to raise taxes and supported a tax increase on residents earning more than $2 million a year.   The plan, passed by the legislature, also included a tax break for those with income under $300,000.

However, New York lawmakers passed the governor’s cap on property taxes this summer, which is predictably creating crises and forcing dramatic cuts in local education, medical, and public safety services.

Illinois raised significant revenue earlier in the year through temporary personal and corporate income tax rate increases, all designed to stave off harsh spending cuts, but then turned right around and gave away hundreds of millions of dollars to Sears and CME, allegedly to keep them in the state.



"Trickle Down" Budgeting in Minnesota Sends Schools and Localities Scrambling for Funds



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Minnesota lawmakers balanced the state’s budget earlier this year (after an historic government shutdown) by cutting vital programs, delaying payments to schools and issuing bonds against future tobacco settlement monies.  Of course, they have been boasting that they balanced the budget without raising taxes, but in reality all they did was pass the buck to localities.  Literally.  Their cowardice and unwillingness to consider Governor Dayton’s proposal to ask the wealthiest Minnesotans to pay a little more in income taxes is astounding and is resulting in a new kind of “trickle down” economics that we’re seeing in more and more states. 

This week the Star Tribune reported that in November a record number of  Minnesota school districts – 133 to be precise – will be asking taxpayers to support referendums to help “ward off cuts that have condensed class schedules, provoked higher pay-to-play fees and forced schools to resort to in-school advertising to make ends meet.”  Some school districts are accepting ads on student lockers and in mailings to parents. Other still have invited businesses to parent-teacher conferences to hawk their wares, and many have increased parking fees for students.  All at a time when 40 percent of school aged children in Minnesota are eligible for reduced cost meals because their parents are already facing their own hard times.  

In the St. Cloud area, some local officials are reeling from the impact of the state budget, which reduced the property tax base for some localities and cut local aid.  As St. Cloud Mayor (and former state senator) Dave Kleis put it, “There’s certainly a tendency to shift that burden onto those local communities.”

With the multiple fiscal pressures cities face, state legislators who balance their budgets by cutting local funds are putting short-term political gains over the long term economic health of their citizens.



Some Minnesota Lawmakers Support Having Fewer Tools Available to Help Them Do Their Job



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Given the recent and unprecedented government shutdown, you’d like to think that lawmakers in Minnesota would want to make it easier, not harder, for the state to balance its budget. But some lawmakers haven’t learned their lesson and are, in fact, proposing to use the state constitution to ban any tax increase that does not receive a supermajority of votes in both chambers. 

Folks at the Minnesota Budget Project (MBP) argue, “The amendment would guarantee gridlock by creating extra hurdles for passing a responsible budget, leading to more budget gimmicks as policymakers seek to fund critical state services.” MBP also points out that surveys show that a majority of Minnesota residents want lawmakers to use both spending cuts and revenue increases to deal with deficits.

In these difficult economic times, lawmakers need more, rather than fewer, tools and options to address budget shortfalls and rising needs. In a state that just survived a horrific budget battle, it should be clear that the more options on the table, the better — for all Minnesotans.



Minnesota Government Shutdown Over, But at What Cost?



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From Duluth to Edgerton the wheels of Minnesota government will start turning soon.  Wednesday morning Governor Mark Dayton signed into law legislation that will end the nation’s longest state shutdown in a decade. The compromise legislation was passed during a marathon legislative session that started Tuesday and ended early Wednesday morning. 

Governor Dayton and the legislature finally came together in a compromise that balances the budget by delaying payments to schools and issuing bonds against future tobacco settlement monies. Despite wide voter approval, the progressive tax policy proposals that the Governor pushed during his campaign and during the budget fight never came to fruition.

The Minnesota Budget Project (MBP) reminds us that the compromise reached comes at a huge cost. For example, in the budget agreement higher education was cut by $351 million.  The compromise budget also includes a $54 million cut to transportation. Obviously, it’s a good thing that Minnesota will be up and functioning shortly, but in terms of spending and taxes, the budget is a real disappointment after Governor Dayton’s promising start.  MBP puts it best, “the compromise agreement means Minnesota will fail to maintain the investments we need to create the workforce of the future.”

Photo via Governor Dayton Creative Commons Attribution License 2.0



Wall Street Journal Begins Rewrite of Minnesota History



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TaxTheRich1.jpg

Twice in a span of just three days, the Wall Street Journal has run articles suggesting that anti-tax Minnesota lawmakers got their way because the voters were on their side.  This couldn’t be further from the truth.

Last week, in an effort to end an increasingly costly shutdown of the Minnesota government, Governor Dayton ended his push for a much needed tax increase on the state’s wealthiest residents.  As the Governor explained, “continuing the state government shutdown would be … destructive for too many Minnesotans.”  A budget, without the tax increase, will likely be enacted some time this week.

While it’s disappointing that the Governor was unable to secure the enactment of one his most significant campaign promises, this may have been the best outcome possible given the level of stubbornness exhibited by anti-tax Republicans.  It was not, however, the outcome that Minnesota voters wanted.

Polling from just before the shutdown made clear that a full 63% of Minnesotans wanted their elected officials to enact a tax increase on the richest 2% of taxpayers.  The same poll also showed that voters viewed Gov. Dayton much more favorably than the state legislature’s Republican majority.

With this in mind, the level of spin contained in a pair of recent Wall Street Journal opinion pieces is nothing short of astounding.

In a bizarre July 16 article that railed against “socialist holdouts,” “the welfare state,” and “perhaps the most liberal governor in the country,” one op-ed writer claimed that Republicans succeeded because they “reflected more accurately the electorate’s mood.”

Just two days later, Stephen Moore wrote in the Journal that Gov. Dayton “blinked” because “Minnesota voters seemed to understand that the state would only make its economic troubles worse” by raising taxes.

It’s true that Minnesota’s forthcoming “compromise” budget will be heavily tilted in favor of Republican legislators’ priorities, even though most Minnesotans do not share those same priorities. 

The Wall Street Journal’s opinion pages are famous for this kind of journalistic fiction.  A more interesting question is whether other news outlets will do any better in representing the opinions of ordinary Minnesotans.  The fact is, raising taxes on the richest of the rich is widely popular across the country yet strangely invisible from most media coverage of budgets and taxes.



Minnesota Governor Dayton Surrenders on Tax Issue to End State's Shutdown



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“Relieved, but not celebrating” is one of the headlines in Friday’s StarTribune. Governor Dayton and the state legislature finally reached a compromise that would balance the budget and reopen the state by delaying payments to schools and issuing bonds against future tobacco settlement monies.

In his statement to lawmakers Governor Dayton said, “despite my serious reservations about your plan, I have concluded that continuing the state government shutdown would be even more destructive for too many Minnesotans. Therefore, I am willing to agree to something I do not agree with -- your proposal -- in order to spare our citizens and our state from further damage.”  In his statement the Governor listed three conditions:

1) The removal of social policy issues from further consideration this year (like requiring voters to bring identification to the polls or ending taxpayer funding for abortions).

2) Dropping a provision which would have required a 15 percent across the board reduction in the number of state employees.

3) Support for a $500 million bonding bill to “put people back to work throughout Minnesota.”

The details of the budget are still being worked out, but the state will likely be up and running in just a few days.

Obviously this compromise is a huge blow to tax fairness advocates. Dayton had previously campaigned on and proposed raising taxes in a progressive way to avoid making radical cuts. Delaying payments and issuing bonds is not a fiscally responsible way to solve Minnesota’s budget problems over the long term.

Dayton closed his statement this way: “I urge the members of both of your caucuses to consider carefully the advisability of supporting alternative sources of revenue, which would provide better, long-term financial stability for Minnesota than the two sources in your offer.” It’s a real shame that his words are falling on deaf ears; by all accounts, substantial, beneficial tax reform is going to be shelved for the time being.

Photo via Governor Dayton Creative Commons Attribution License 2.0



Minnesota Shutdown Standoff Continues Into Second Week



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Government functions in Minnesota shut down July 1 and that shutdown continues, nearly two weeks later, as a result of a stand off between Governor Mark Dayton and conservatives in the state’s legislature.

The Governor is using this week to talk directly with Minnesotans and share his message of taking a balanced approach to the crisis. He says, “I'm asking the wealthiest Minnesotans to pay a little more in taxes so that children with special needs don't have to be denied services ... and that's a Minnesota value.”

The Governor has recently offered an olive branch to conservative lawmakers saying he’d be willing to compromise. He’s even offered  to make his proposed tax on millionaires temporary, increase cigarette taxes, increase surcharges on hospitals and health plans and even delay payments to schools.  Yet legislators rejected these ideas and have yet to offer any alternative budget proposal of their own.

Dayton is clearly willing to negotiate (though we question the wisdom of a cigarette tax), but the uncompromising negotiation technique of the legislature leaves Minnesotans to deal with the consequences of this avoidable standoff.

Make no mistake, each day that the shutdown is allowed to continue Minnesotans and their state’s economy are harmed. Paul Anton in a recent MinnPost piece notes that “Layoffs of state workers drain about $23 million a week in purchasing power from the state’s economy. Estimates are that the state loses $1 million a week in revenue while the state parks are closed and another $1.25 million a week while the state lottery is not operating.” Of course there are tremendous incalculable impacts too.  Background checks and license renewals for health care professionals simply aren’t happening. Let’s not forgot the impact to local governments, schools districts may actually end up having to pay higher interest costs because they may need to borrow more money to balance their own budgets because of delays in state payments.

The St. Cloud Times recently opined, “We don’t support Gov. Mark Dayton traveling the state to talk about his efforts to solve the state’s budget problem. History shows these efforts tend to preach to the choir, no matter the political faith. Then again, we can’t really blame Dayton because the people he needs to talk with — Republican legislative leaders — are clearly not willing to do anything remotely constructive to end this shutdown.”

Dayton has shown he’s willing to negotiate and he’s got the right idea to raise taxes in a progressive way to ensure vital services aren’t cut. Let’s hope for the sake of Minnesota that it doesn’t take the Legislature too much longer to come to a similar conclusion.

Photo via Governor Dayton Creative Commons Attribution License 2.0



In Minnesota Budget Standoff, Gov. Dayton Fights the Good Fight



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Minnesota state government is on the brink of shutting down.  Despite months of intense negotiations between the state’s Democratic governor, Mark Dayton, and the Republican controlled legislature, neither party seems prepared to budge from their preferred positions on balancing the budget. 

Their positions were staked out in last year’s campaign season and both sides are looking to deliver on their promises.  Governor Dayton wants to address the state’s budget shortfall with a combination of sensible spending reductions and increased taxes on Minnesota’s wealthiest households.  Republican lawmakers aim to block all tax increases and prefer to slash state spending to damaging levels.

An Institute on Taxation and Economic Policy opinion editorial on the budget predicament explains that the legislature’s approach disproportionately burdens Minnesota’s low- and moderate-income working families.  The piece goes on to say that Governor Dayton’s proposed tax increases on the richest two percent of Minnesotans is entirely reasonable.  “Asking the wealthiest to pay more simply means that the state will have more revenue to invest in the public structures and services provided now and over the long term.”

Update: The Government of Minnesota is now shutdown.



Minnesota Governor Dayton Vetoes Budget Bills that Would Harm Working Families



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Early last week, Governor Mark Dayton vetoed nine budget bills passed by the Republican-led legislature and lawmakers adjourned with no spending plan for the upcoming fiscal year. Since releasing his initial budget plan in February, the Governor has called for a balanced approach to handle the state’s $5 billion shortfall.

Many Republicans in the legislature believe that the only way to fix the state’s books is to cut spending, including tax credits for low-income families.

“I chose a balanced approach to our budget," Governor Dayton said, "one that included both significant cuts, but asked the top two percent of Minnesotans to pay more to ensure our quality of life and the services millions of Minnesotans depend on.  My approach chooses not to balance the budget on the backs of the other ninety-eight percent of Minnesotans.”

The budget presented to the Governor, by contrast, included proposals that would slash aid to local governments and the state’s renters' credit, which is an important anti-poverty tool.

Dayton sent a letter, along with his veto, to the Speaker of the House stating, “Your tax proposal would require most Minnesota property owners and renters to pay higher property taxes," because the massive cuts to local governments “would result in significant property tax increases.” 

Dayton’s veto letter goes on to say, “...your bill then directs over $200 million from those cuts to expanded tax expenditures for corporations and others.”

Since the legislature adjourned without a budget, it will need to meet in a special session. What is not at all clear is how the Governor and legislature will come to some sort of compromise. The Governor has said, “I’m in the middle, and they haven’t moved.” Read more about what to expect from the Minnesota Budget Project.



Missouri and Minnesota: Attacking Anti-Poverty Tax Breaks



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In Missouri and Minnesota, property tax “circuit breakers” ensure that property taxes do not take more than a limited percentage of income from taxpayers of modest means. As ITEP has explained, it is widely accepted that property taxes are passed on by landlords to renters in the form of higher rents, which is why these circuit breakers are usually available to renters, as well as homeowners. However, lawmakers in these two states have tried to change that.

Effort to Take Credit from Renters Fails in Missouri

In Missouri, a victory for tax fairness came in the form of inaction. The Missouri legislature ended its session on May 13th without passing legislation that would have eliminated the property tax credit for renters. Making the property tax “circuit breaker” unavailable for renters would have left thousands of low-income families and individuals unable to claim the credit.

The measure would have cut off $57 million in critical tax relief for individuals making less than $27,500 a year, in the name of budget austerity.

Supporters of the circuit breaker tax credit questioned the legislature’s priorities, as it sought to end this benefit for low-income individuals while showering a single air freight facility with as much as $33.4 million annually in tax credits.

New Proposal in Minnesota

Even as a temporary victory was won in Missouri, the Minnesota’s legislative tax conference committee is proposing to cut the state’s renter’s credit by a proposed $186 million next year.

According to the Minnesota Budget Project, under the proposal, seniors and people with disabilities would face an average reduction in their credit of $190, while all other families would face an average reduction of $335. In fact, about 72,500 households would lose their refund entirely.

The move to eliminate the renter’s credit will be especially harmful in Minnesota, which already ranks dead last in rental affordability among low-wage workers.

Circuit breaker property tax credits are one of the most effective ways to use the tax system to reduce poverty. During a recession, states should be considering ways to enact or expand these credits, rather than scaling them back.



Minnesota: This is What Effective Incidence Analysis Looks Like



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A recent Republican proposal in the Minnesota Legislature would cut the state’s bottom two income tax rates over three years. Thanks to Minnesota’s ability to provide tax incidence analysis (an examination of how different income groups are impacted by policy changes) the public can be informed about the real consequences of this proposal.

After analyzing the plan, the state's Revenue Department and the House Research Department reached the same conclusion: these tax reductions would be regressive and benefit upper income families disproportionately.

Governor Dayton’s response to the Republican’s plan will warm the heart of any tax justice advocate. "It bothers me," he said, "the Republicans would present this as a tax cut targeted for lower and middle-income families when the facts are the opposite. The greatest benefit goes to upper-income Minnesota families. Once again they just have shown their values, their priorities are to benefit the richest Minnesotans at the expense of the rest of Minnesota."

While we are giving kudos to Minnesota and that state’s ability to conduct timely analyses, we should note that the Department of Revenue recently released their 2011 Minnesota Tax Incidence Study. Other states interested in improving their analytical capacity should look to Minnesota.



Are Amazon.com's Sales Tax Avoidance Days Coming to an End?



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

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

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

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

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

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

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



Glimmers of Hope on Taxes in the States



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It seems that each week brings another round of regressive tax proposals from the states, but there are a few bright spots. As previously reported, the governors in Connecticut, Hawaii and Minnesota have been strong proponents for taking a balanced approach to their state’s budget gaps and have unabashedly supported raising revenue in mostly reform-minded and progressive ways.  More details emerged this week on the Connecticut and Minnesota governors’ revenue-raising proposals.   Also, Illinois Governor Pat Quinn, who recently backed a successful initiative to increase the state’s flat personal income tax rate, started sending positive messages this week about the need to make his state’s tax system fairer.

On Wednesday, Connecticut Governor Dan Malloy released his plan to deal a budget gap exceeding $3 billion. As promised, his plan would not to rely solely on spending cuts to close the gap. He offered a $1.5 billion package of new revenues including reforms to the personal income tax, sales tax, business taxes, and estate tax.
  
Under his plan, the state’s personal income tax would expand from 3 to 8 brackets, the top marginal rate would increase from 6.5 to 6.7 percent, and the bottom marginal rate of 3 percent would phase out for high-income earners.  The plan also eliminates an existing property tax credit which is most beneficial to middle-income families. 

Perhaps most significantly, Governor Malloy would buck a recent trend by adding a refundable state Earned Income Tax Credit (EITC) set at 30 percent of the federal program.  If enacted, Connecticut would become the 26th state to have an EITC.
 
Governor Malloy also proposed expanding the sales tax base by taxing several services, including pet grooming, boat repairs and hair cuts, eliminating the exemption on clothing under $50, and imposing an additional 3 percent sales tax on “luxury items.  The state sales tax rate would increase from 6 to 6.25 percent. 

Governor Malloy also supports positive changes to business taxation including adopting what is known as the "throwback rule," which mandates that sales into other states or to the federal government that are not taxable will be “thrown back” into the state of origin for tax purposes.  His plan would improve the estate tax by lowering the taxable estate threshold from $3.5 million to $2 million.

Minnesota Governor Mark Dayton ran on a pro-tax platform, promising to increase taxes on his state’s wealthiest households in order to stave off massive spending reductions.  Governor Dayton released a plan this week to raise $4.1 billion in new revenues over the next two years to help solve a $6.2 billion budget shortfall.   Sticking to his campaign pledge, the majority of the new revenue would be raised from the wealthiest 5 percent of taxpayers in the state. The plan would add a new top income tax bracket, charge a 3 percent surtax on filers with taxable income above $500,000, and add a new statewide property tax on homes valued at more than $1 million.

The Minnesota Budget Project had the following to say about Governor Dayton’s proposal: “The Governor’s tax proposal seeks to add balance to the state’s tax system. Over time, the state has cut progressive taxes (like the income tax) during good times and increased regressive taxes (like property taxes) during the bad times. These policy changes, combined with economic trends, have led to a tax system that has shifted more of the responsibility for funding state and local services on to low- and moderate-income Minnesotans. People at the highest income levels pay a smaller share of their income in state and local taxes (8.9 percent) than the average for all Minnesotans (11.2 percent).”

Illinois lawmakers should be applauded for temporarily raising the state’s flat income tax rate from 3 to 5 percent in January to help fill a $15 billion budget gap. However, they missed an opportunity to fix the state’s broken, outdated, and unfair tax system rather than just raise rates.  But the opportunity may still be available.  This week, Governor Pat Quinn asked state lawmakers to consider modernizing the tax system and making it fairer.  He did not offer specific suggestions on how to achieve this goal, but explained that Illinois’ tax system is regressive, requiring more from its poorest residents than from the rich. 

In response to his call for reform, some Democratic lawmakers offered a few suggestions, including moving the state to a graduated income tax, expanding the sales tax base to include services, and relying less on property taxes to pay for schools.



Bad and Less Bad: Business Tax Cuts vs. Grocery Tax Cuts



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Some politicians in state capitals across the U.S. seem convinced that tax cuts for businesses and the wealthy are the best way to accelerate economic recovery. In two states, governors are proposing instead to cut taxes on groceries, which is a more effective, though not exactly flawless, way to help ordinary families. The tradeoff to any tax cut, of course, is unaffordable cuts to essential services including education, public safety, and health care.

In Wisconsin, state lawmakers agreed on a business tax cut that would add about $50 million to the budget deficit.  The Republican controlled legislature and newly elected Governor Scott Walker believe that the tax cuts will leave everybody with more money and leave the state with an improved economy.  Incredibly, Walker’s proposal rests on the assumption that the tax cuts will lure businesses away from Illinois, which recently saw an increase in its income tax, rather than fostering young, developing businesses. 

In Iowa, where a similar $300 million business tax cut is being discussed, critics of Governor Terry Branstad point out that essential social services are being axed in favor of pro-business policies.

In Arizona, Governor Jan Brewer is proposing to cut taxes on high-wage industries while further reducing funding for Medicaid, universities, community colleges, and K-12 education.  

Similar tax cuts are being proposed in New York, Washington, Michigan, Minnesota, and South Carolina. All of these plans prioritize tax breaks for business over providing essential services to those most affected by the economic downturn.  

The Governors of West Virginia and Arkansas have arrived at an entirely different tax-cutting proposal: reducing the sales tax on groceries.  Like lawmakers who support business tax cuts, Governors Tomblin and Beebe believe their brand of tax cuts will circulate quickly throughout the economy, providing necessary relief to the taxpaying public while stimulating the economy. 

Governor Mike Beebe of Arkansas wants to cut the sales tax on groceries by a half-cent and has said it is the only tax cut he will consider this year.  In West Virginia, Governor Earl Ray Tomblin wants to reduce the grocery sales tax from 3 to 2 cents and would ultimately like to see it eliminated entirely.

While the proposals to cut the sales tax on groceries are a welcome development compared to proposed tax cuts for businesses and the wealthy, there are still two problems with them. 

First and foremost, states are in dire need of revenue this year as they face the most significant budget challenge yet since the start of the recession.  Every dollar lost to a tax cut will have to be made up by an even deeper cut in spending. 

Second, reducing the sales tax on groceries is not the most targeted approach available to state leaders looking to support working families.  The poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. 

Enacting or increasing a refundable state Earned Income Tax Credit (EITC) or other low-income refundable credit would be a more affordable and better targeted alternative to ensure that tax cuts reach low- and middle-income working families.  Tax cuts that directly benefit low-wage workers are especially beneficial to the general economy because low-wage workers immediately spend their refunds out of necessity.  By pumping the money back into the economy, the tax cut goes further in stimulating the economy than tax cuts for the wealthy or businesses.

Instead of pursuing tax cuts for businesses and wealthy individuals, state lawmakers should be working to alleviate hardship on the most vulnerable.  Indeed, the governors in West Virginia and Arkansas may end up being much more efficient at helping their state economies rebound than the “business friendly" governors in Wisconsin and Iowa.



Flood of Bad Tax Ideas Coming from the States



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

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

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

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

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

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

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

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

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

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



Minnesota Gets a Pro-Tax Justice Governor



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After a long campaign and recount battle, Minnesota will have a new governor who is a champion of tax fairness.

Former Senator Mark Dayton ran a hard-fought race against Republican Tom Emmer.  Earlier this month (after a nearly finished recount), Emmer conceded. Governor-elect Dayton won the election by under 10,000 votes. During his campaign, Dayton emphasized tax policies that would help fill the state’s multibillion dollar budget gap, including the addition of a fourth income tax bracket targeting the richest Minnesotans and a third property tax bracket for homes valued over $1 million.  Having Dayton in the Governor’s mansion is a victory for tax justice advocates.

But the victory party isn’t likely to last long, because the new Governor will be working with a House and Senate that have Republican majorities hostile to many of Dayton's proposals. Dayton admits that it will be "very difficult" to enact his reforms. But now he has the position and the opportunity to win Minnesota residents over to the cause of progressive tax reform.



New Report from ITEP: The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes



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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.



State Transparency Report Card and Other Resources Released



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

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

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

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

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

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



Looming Minnesota Recount Has Sinister Implications for Tax Policy



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First, the good news: It looks all but certain that Democratic-Farmer-Labor party candidate Mark Dayton, who ran on a progressive tax platform, will be Minnesota’s next governor once a vote recount is completed.  But here's the bad news: It also looks likely that Dayton’s Republican opponent will attempt to delay or contest the recount just long enough to give current GOP governor Tim Pawlenty a few additional weeks in office, giving him the opportunity to lead his state with a newly elected GOP-controlled legislature (something he did not enjoy under his eight years as governor) and shepherd in a conservative lame duck agenda. 
 
Speculation has already begun on what a full GOP reign (however brief) could mean for the state.  Massive spending cuts in response to the state’s budget shortfall and tax cuts for corporations will likely be on the list, along with passing a so-called "taxpayer bill of rights," popularly known as TABOR, which would limit spending and revenues and stifle the state’s ability to provide core services such as education and public safety.

In response to the Republican victories in Minnesota’s legislature, Pawlenty wrote in a press release on the website for his Freedom First PAC, “The historic nature of this victory cannot be overstated…This is a great validation of our work over the last eight years to cut spending and keep a lid on taxes.”  However, voters also elected a new governor who has unabashedly supported progressive tax increases to mitigate disastrous cuts in state spending.  Mark Dayton’s recount manager, Ken Martin correctly described a potential GOP effort to delay swearing in Dayton as governor as a “strategy designed to hijack the will of Minnesota voters.”



Gubernatorial Candidates with Progressive Positions on Taxes Who Won



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

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

Candidates Who Campaigned on Raising Taxes

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

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

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

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

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

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

Incumbents Re-elected After Raising Taxes

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

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

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

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

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



Tax News in Gubernatorial Races Across the Country



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Many gubernatorial candidates campaign on a platform of tax cuts, and few, outside of Minnesota Gubernatorial Candidate Mark Dayton, promote tax increases.  In such a political climate, perhaps the best that voters can hope for are candidates that promise to maintain progressive tax structures. 

California

One such candidate, California gubernatorial candidate Jerry Brown, recently hammered his opponent, Meg Whitman, for supporting a regressive tax cut that would benefit only taxpayers who have capital gains income.

In 2008, 93% of taxpayers who paid capital gains taxes in California earned over $200,000.  While other gubernatorial candidates fight over who will cut taxes more, it is refreshing to see a candidate like Brown refuse to endanger the state's budget by cutting taxes for the wealthiest.

Illinois

Illinois current Governor Pat Quinn is having it out against Republican Bill Brady to see who will move into the Governor's Mansion next year. Brady proposes to eliminate the state's estate tax and the sales tax on gasoline, saying that this will send a message to business that  "Illinois is open again for business and we're here to stay for the long term." Quinn, on the other hand, supports an increase in the state's income tax to help solve the state's enormous fiscal woes.

Maryland

While fiscal prudence may call for hard decisions, campaigning calls for easy sound bites.  Former Governor and current Republican candidate for Maryland Governor Robert Ehrlich wants to repeal Governor O’Malley’s 2007 sales tax increase.  Ehrlich’s proposal would cost the state treasury over $600 million. While Ehrlich himself raised taxes during his tenure, the former Governor is trying to re-brand himself as the anti-tax candidate

Like Ehrlich, current Governor O’Malley is also seeking to distance himself from his past constructive and successful tax policies.  However, O’Malley refuses to rule out future tax increases, signaling that he has not forgotten how he expanded health coverage and increased education funding these last four years.

Michigan

The “Michigan Business Tax” has fallen out of grace with Michigan’s gubernatorial candidates.  Both Democrat Virg Bernero and Republican Rick Snyder favor eliminating the business tax and replacing it with some other revenue source. Synder’s plan would partially offset the revenue loss from the business tax cuts by instituting a flat 6% corporate income tax.  Still, Synder recognized the plan would remove $1.5 billion from the state’s coffers. 

Bernero’s plan does little more to make up for the lost revenue.  His proposal includes collecting taxes on internet sales, although he refuses to commit to any gas or service tax increase. Instead, Bernero also seeks to cut state programs and lower costs.  While it is disappointing to see both candidates propose tax and funding cuts, Bernero has pledged to support state funding for anti-poverty and unemployment programs.

Pennsylvania

Despite massive state budget shortfalls in Pennsylvania, both gubernatorial candidates, Republican Tom Corbett and Democrat Dan Onorato pledged, abstractly, not to raise taxes. Neither candidate seems to be sticking to such a pledge. Onorato was gutsy enough to suggest imposing a new tax on shale severance.  Onorato’s proposed tax would allow the state to remain competitive with neighboring states.  Onorato’s Republican counterpart, Tom Corbett, has maintained that he will not raise taxes, but he is reportedly open to increasing payroll taxes. So apparently, Corbett’s pledge only applies to big business.

South Carolina

South Carolina voters are guaranteed to see a new Governor in Columbia that is going to slash budgets instead of raising revenue. Both the major candidates, Democrat Vincent Sheheen and Republican Nikki Haley, are saying that they won't raise taxes despite the fact that the budget is in disarray (falling to mid-1990's levels) and the federal government can't be relied on for more stimulus money to help prop the state up. Sheheen has said, "We can't keep funding everything at the levels of two or three years ago. We can't keep funding everything, period."

Perhaps it comes as no surprise, but Haley does have some pet projects she'd like to see improved despite claiming that South Carolina must live within its means. She says, "When your revenues are down, the last thing you cut is your advertising, so we need to make sure the Commerce Department is strong. We need to strengthen our technical colleges." No matter who wins this election, it's going to be difficult to improve technical colleges and the Commerce Department when money is so tight and lawmakers aren't leaving many options.

Tennessee

Tennessee politicians realize the state has serious budget shortfalls.  Unfortunately, the only question facing Tennessee voters this November will be how much to cut state programs and who to reward with tax cuts.

Last week, the current Democratic Governor Phil Bredesen announced plans to cut next year’s state budget by up to $160 million.  Democratic gubernatorial candidate Mike McWherter lauded the plan, while Republican gubernatorial candidate Bill Haslam criticized the cuts for not being large enough

However, the candidates do have differing ideas about creating jobs through tax cuts.  McWherter proposed a $50 million state tax break for small businesses that would reward qualifying companies for creating the next 20,000 jobs.  In contrast, Haslam proposed creating regional economic development centers.  McWherter’s plan is based on a similar program in Illinois, which Democratic Governor Pat Quinn instituted and Republican gubernatorial candidate Bill Brady would like to expand.



New 50 State ITEP Report Released: State Tax Policies CAN Help Reduce Poverty



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

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

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

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

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

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

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



Gubernatorial Candidates in Idaho, Minnesota, and Alaska Are Talking Taxes



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Candidates for governor in Idaho have been debating the appropriate scope of the state sales tax base, while the debate in Minnesota has focused more on issues of progressivity.  In Alaska, the bandwagon in favor of cutting taxes to “create jobs” continues to gain speed.

Idaho: Recent polling shows that 48 percent of Idahoans would support raising taxes to avoid cuts in education spending, while only 38 percent would oppose taking that route.  With this new information in hand, both Democratic gubernatorial candidate Keith Allred and Republican incumbent Butch Otter may want to rethink their positions on sales tax reform. 

Governor Otter insists that Idaho’s plethora of sales tax exemptions are vital to businesses in the state and should be left intact, while candidate Allred claims that a huge number of these breaks are politically motivated giveaways that should be eliminated to pay for a reduction in the sales tax rate.  While Allred’s opposition to sales tax exemptions is encouraging, his insistence that every dollar raised be used to lower the sales tax rate (as opposed to using some of it to boost education spending) is more than a little disappointing.

Minnesota: Minnesota’s legislature has known for some of the time that the state is in need of progressive tax changes.  Unfortunately, the veto pen of Governor Tim Pawlenty has so far been able to prevent any progress on this issue.  With Pawlenty finally on his way out of office, Democratic-Farmer-Labor (DFL) candidate Mark Dayton has made clear that he would take Minnesota in a different direction, if elected, by vigorously supporting progressive tax reform.  More specifically, in a debate last week Dayton reemphasized his support for a higher tax bracket on the state’s wealthiest residents. 

Republican candidate Tom Emmer, in contrast, repeated the same tired line about using tax cuts to boost economic growth.  But as Dayton pointed out during the debate, the League of Minnesota Cities actually found that candidate Emmer’s proposal to cut both taxes and spending would result in higher local property taxes.

Alaska: When it comes to taxes, there aren’t many choices on the Alaska ballot.  Democratic candidate Ethan Berkowitz recently proposed an almost $40 million cut in the state’s corporate income tax, which according to the Anchorage Daily News, Berkowitz claims he would pay for by doling out even more corporate welfare through tax credits that could allegedly boost the state’s economy.  Rather than criticize Berkowitz’s proposal or offer an alternative, Republican Sean Parnell’s campaign has taken the position that Berkowitz is lying, and that if elected Berkowitz would in fact do everything within his power to raise both taxes and spending.



New ITEP Report Examines Five Options for Reforming State Itemized Deductions



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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.



Showdown Over Taxes in Minnesota



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A dramatic showdown over taxes has been building in the gubernatorial election in Minnesota. The candidates running in the Democratic-Farmer-Labor Party (DFL) primary said they would support tax increases, especially bold stances in a state where the current governor is Tim Pawlenty. After all, presidential hopeful Pawlenty has repeatedly refused to raise taxes.

The victor in the DFL primary is former United States Senator Mark Dayton with 41 percent of the vote. Dayton doesn't mince words when it comes to his views on how to raise necessary funds for the state: "Read my lips, tax the rich. Minnesota’s wealthiest citizens pay only two-thirds of their fair share of state and local taxes. That’s wrong. As Governor, I will raise taxes on the rich of Minnesota, NOT on the rest of Minnesota." In a recent Star Tribune op-ed, Richard Miller, a retired Wells Fargo executive, commented, "Three governors have let what was a very fair tax system become grossly distorted in favor of those among us who are most able to fund the common good. Dayton is the only candidate telling us that the emperor has no clothes. We ought to listen to him before it gets even more embarrassing."

Dayton will face Republican candidate Tom Emmer, a former Representative in the Minnesota House, who strongly supports regressive tax policies. Emmer says "We need to reform our tax structure so it is based on what people consume and not on the wealth they generate." In November Minnesota voters will be offered a rare chance to vote for who they think should contribute more — the wealthy or the poor.



Gubernatorial Race Heats Up in the Land of 10,000 Lakes



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The three candidates vying to be the Democratic candidate for Minnesota Governor are former Senator Mark Dayton, former Congressman Matt Entenza, and current House Speaker Margaret Anderson Kelliher. The candidates aren't likely to go negative during the primary, but the myriad of fiscal issues facing the state are anything but positive.

As the Minnesota Budget Project (MBP) reports in an analysis released just last week, the 2010 legislative session ended with "many opportunities lost." Elected officials didn't use a balanced approach to solving the state's budget shortfall, instead relying on spending cuts and various stop-gap measures that did not include revenue-raisers. They certainly did no favors for future lawmakers. MBP writes, "Because of heavy reliance on one-time spending cuts and timing shifts, these budget decisions did not make progress on reducing the future budget shortfall, leaving a profoundly difficult problem for the next legislature and governor to tackle next year. "

Voters will go to the polls on August 10 and it appears that all three of the Democratic candidates believe that new revenue will be necessary in order to deal with the state's budget. This is, of course, welcome news for Minnesotans compared to the "no new taxes" rhetoric of current Governor Tim Pawlenty.

If Dayton, Kelliher, or Entenza are elected in November they will be forced to address many issues. But the one that perhaps looms largest is the state's fiscal future. All three candidates have their own proposals.

Dayton has said, "I would raise $4 billion by making the richest Minnesotans, the [top] 10 percent, pay their fair share of taxes." Kelliher also wants to raise taxes on the wealthy, but is looking to only raise about $600 million from taxing the best off. Entenza critiques Dayton's tax increase by saying that the proposal is too strong, "I think some of the business consequences of that are something we don't want to look at." However, he does hint at supporting some type of temporary tax surcharge and taxing internet sales.



Pawlenty: Taxes on the Rich Kill Jobs, So Lets Raise Taxes on the Poor Instead



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Minnesota Governor Tim Pawlenty is at it again.  Like most states, Minnesota continues to face a sizeable budget gap as a result of the economic recession.  In response, for the second year in a row, the state’s legislature passed a progressive tax increase aimed at mitigating the need to cut the state’s vital services.  Also for the second year in a row, however, Governor Pawlenty has decided to veto that package.

The plan put forth by the Minnesota legislature would have created a new top income tax rate on incomes over $200,000 for married couples, and over $113,100 for single filers.  The bracket, had it been enacted, would have expired in 2013 if the state’s budgetary situation had improved to the extent specified in the legislation.  Overall, a mere 15% of the state’s budget gap would have been filled via the income tax hike, with most of the remainder being handled through spending cuts pushed by the Governor. 

Despite the targeted, temporary, and modest nature of the hike, Governor Pawlenty repeated the same tired line regarding the “job-killing” aspects of the tax. 

Unfortunately, Pawlenty demonstrated no such hesitation to tax hikes when he very recently agreed to raise taxes on low-income families via a reduction in the renter’s credit and the elimination of the state’s gas tax credit.

Despite the conservative mantra that all tax hikes harm the economy, current economic theory suggests that reductions in state spending are actually likely to do more harm to a state’s economy than targeted tax hikes. 

Wayne Cox, director of the Minnesota Citizens for Tax Justice, recently explained this point in the context of the Governor’s veto: “Last year state economist Tom Stinson described Pawlenty’s cuts-only solution as the one that would reduce jobs the most. Pawlenty appears to be the one with the hearing problem. … Governor Pawlenty has taken his nine-iron to Minnesota’s jobs again.”



Revenue Raising in Minnesota



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The Minnesota Budget Project (MBP) recently updated their policy brief, Revenue-Raising Options to Help Solve Minnesota's Budget Deficit. According to MBP, "Minnesota faces a weak economy, daunting state deficits and some very tough choices." The state's February economic forecasts show an expected budget deficit for the fiscal year 2012-13 biennium of $7 billion.  

However, this grim news doesn't mean that policymakers are without options. In fact, the policy brief explains that their options include enacting a 10 percent income tax surcharge, creating new income tax brackets, modernizing the sales tax, and eliminating various business tax preferences. Minnesota lawmakers should follow in the footsteps of other states facing tough economic times and use a balanced approach of spending cuts and tax increases to fill the state's shortfall, rather than relying entirely on cuts in public services.

 



Minnesota: Gov Pawlenty's Budget Slashes Health Care and Education, Doles Out Millions in Corporate Tax Breaks



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Minnesota Governor Tim Pawlenty released the details of his budget proposal this week.  If enacted, it would cut both health care and education funding by hundreds of millions of dollars, while actually reducing taxes for corporations and other businesses.

Among the tax cuts being pursued by Gov. Pawlenty are a 20% cut in corporate income taxes, a 20% tax exclusion for small businesses, a new investment tax credit, an expansion of the research tax credit, capital gains tax breaks for small business investments, and a slew of other tax incentives.  As the Minnesota Budget Project (MBP) has pointed out, the precise costs of these tax breaks are still unclear, and are likely to grow significantly over time.  The Governor has framed his proposal as a type of job-growth plan, though the massive cuts in state services needed to finance his unbalanced approach will inevitably result in additional layoffs.  

For more detailed analyses of the Governor’s proposal, be sure to follow the good work being done at the MBP’s blog: Minnesota Budget Bites.



Pawlenty Collects Brownie Points with Anti-Taxers by Pushing Deeply Flawed Proposals



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By all accounts, Minnesota Governor Tim Pawlenty is more focused on his next career move than anything happening in Saint Paul. As his political ambitions rise, so does the state's budget deficit, which is now tallied at $1.2 billion for the current two-year budget period and $5.4 billion for the next biennium. The Governor has called the state's budget situation "significant but solvable" and once again vowed to fill the state's shortfall without raising taxes. At a time when Minnesotans are as dependent on government services as ever, it seems negligent to once again reduce the number of options that are available to lawmakers working to dig the state out of its budget hole.

And it gets worse.

Apparently, renewing one's "no new taxes pledge" doesn't win you enough brownie points with anti-taxers, so Pawlenty has also recently proposed a deeply flawed constitutional amendment which would limit state spending.

As the Minnesota Budget Project so aptly states, "his Spending Limit Amendment is an extreme and inflexible tool that takes decision-making power out of the hands of the people and their representatives." Where they've been enacted, these sorts of spending limits have had disastrous impacts on a state's ability to educate children and even repair roads.

In most states where proposals like this have been put before voters or legislative bodies, they have failed to actually pass. Let's hope that happens in Minnesota.



Kansas and Minnesota Discuss Cleaning Up their Sales Tax Bases



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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.



ITEP's "Who Pays?" Report Renews Focus on Tax Fairness Across the Nation



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

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

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

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

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

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

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



Progressive Income Tax Hikes Meet Reckless Opposition from Two Governors



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In unusually difficult times like these, one of the most responsible decisions a policymaker can make is to keep all revenue options on the table. Unfortunately for residents of Minnesota and Hawaii, their governors have approached the current crisis with exactly the opposite mentality. Governor Tim Pawlenty of Minnesota and Governor Linda Lingle of Hawaii have clung to the "no new taxes" mantra in recent months, despite the passage of responsible revenue-raising packages by the legislature of each state. Prominent in each of those packages were progressive income tax hikes.

In Hawaii, despite the Governor's veto, as well as her repeated assertions that any tax increase would be economically damaging for the state, the legislature managed to pass the revenue package over the Governor's stubborn opposition. The bill raises income taxes on single Hawaii residents earning over $150,000 per year, and married couples earning over $300,000.

Minnesota thus far has not been so lucky. Less than a week ago, Governor Pawlenty vetoed a tax package (based on the House and Senate bills we described last week) containing progressive income tax increases. So far that veto has held up, as proponents of the bill appear to be just a few votes shy of an override. Deeper cuts in public services or increased borrowing (the preferred solution of the Governor) may be turned to next in order to win wider support for the package.



Minnesota House and Senate Each Pass Bills Containing Progressive Tax Reforms



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Staring down a $6.4 billion deficit, Minnesota legislators last week decided that tax increases would have to be included in any plan to balance the budget.

In the Senate, SF 2074 increases income tax rates across the board, but also adds a new top rate on income over $250,000 per year for married couples. On top of that, the Senate bill also prevents those owning multiple homes from taking the mortgage interest deduction for interest paid on their second home.

The House plan, HF 2323 is a bit more ambitious in its pursuit of true tax reform. Like the Senate plan, the House adds a new top rate as well -- in this case on income over $300,000 for married couples. In addition, the House converts costly and poorly targeted deductions for mortgage interest and charitable giving into tax credits that should be accessible to a wider range of Minnesota families. The bill also repeals the credit for child/dependent care costs, but does add a refundable per-child tax credit. Furthermore, the House bill ends the exclusion for interest received from state/local bonds, eliminates the deduction for real and personal property taxes, and ends a variety of education tax preferences. From a tax simplification standpoint, the bill earns high marks. As the Minnesota Budget Project put it, "the House bill wipes the tax expenditure slate mostly clean."

Unlike the Senate plan, the House does include a variety of significant tax increases on cigarettes and alcohol in its bill. While such increases are usually among the easiest to enact politically, it's important to remember that they are also among the most regressive. Progressive offsets, such as an enhanced EITC, could help temper this regressivity.

For the Minnesota Budget Project's roundup of the House bill, click here. For the Senate bill, click here.



With Tax Regressivity Worsening, Chair of Minnesota's House Tax Committee Proposes Progressive, Simplifying Changes



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P>Minnesota's Department of Revenue released a study last week showing that the regressivity of the state's tax system has grown significantly in recent years. On the heels of this study comes a proposal from the Chairwoman of the House Tax Committee seeking to clean up the tax code by eliminating a slew of tax expenditures in order to fund more progressive changes to the state's tax system.

You can find more details on the Minnesota Budget Project's blog, but the general idea is to replace a variety of tax breaks that are either regressive or too narrowly targeted with three simplifying tax credits, including credits for mortgage interest, charitable contributions, and lower-income families with children. Tax rates on the lower two income tax brackets would also be reduced.

On the business side, the proposal seeks to end a variety of ill-conceived business tax breaks, though unfortunately it does seek to replace them with other ill-advised measures, such as single sales factor and equipment expensing.



The Economic Development Tax Credit Addiction



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It's hard to believe, but there may actually be a trend in state tax policy more prominent than increasing cigarette taxes. Business tax credits aimed at spurring economic development have been among the most popular ideas in statehouses scrambling for ways to reduce unemployment. Just last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.

In Iowa, Republican lawmakers have suggested paying (via tax credit) half the salary of each new job created by private businesses. Oddly, because this payment would be administered through the tax code rather than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".

An excellent op-ed out of Kentucky helps clear things up a bit, noting that Gov. Beshear's proposed expansion of business tax incentives would be a costly, nontransparent, and likely ineffective way of encouraging job growth. The op-ed goes on to argue that a "broader" approach, including better targeted and more closely scrutinized spending programs, could do far more good than creating more tax credits.

Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission of at least one legislator that he is a "recovering tax credit addict" helped to shine some light on the unfortunate politics behind these types of tax credits. These programs can cost a state enormously, and are rarely defensible on principled tax policy grounds. Instead, they constitute a type of spending done through the tax code -- commonly referred to as "tax expenditures" -- which add complexity, shrink the tax base, require higher marginal rates, and offer little if anything in terms of making the system more responsive to individuals' and businesses' ability to pay.



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



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

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

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

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

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



Tax Isn't a Dirty Word



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In too many states facing terrible budget shortfalls, proposals to cut vital services and even poorly targeted tax cuts are receiving a lot of attention from lawmakers. Progressive research groups are pointing out that states cannot escape their fiscal morass simply by cutting public services. This week, the Washington Budget and Policy Center released a letter to Governor Gregoire, the Speaker of the House and the Senate Majority Leader, which was signed by twenty economists urging them to consider all options when trying to balance the budget, including tax increases. The economists agree that, "Implementing deep cuts in government spending and declining to raise revenue through tax increases is not an effective strategy to guide Washington State out of this recession. The best strategy is to continue our long-term investments in education, health care, community vitality, and economic security."

Speaking of putting all the options on the table, the Minnesota Budget and Policy Project recently released their report Revenue-Raising Options to Help Close Minnesota's Budget Deficit. In a state where the Governor has repeatedly taken tax increases off the table, it's important that policymakers and the public realize that there are progressive revenue-raising options available. Read about the menu of options presented in the paper, including sales tax base-broadening, enacting an income tax surcharge, and the creation of new income tax brackets.



Minnesota: Worst Stimulus Ever?



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At the federal level, one of the key controversies in the stimulus debate has been over how much of the stimulus should come in the form of tax cuts. Fortunately, a consensus seems to have formed that tax cuts should play a less important role than spending increases (though there are still a variety of tax cuts in the federal proposal that we could certainly do without). In Minnesota, however, the Governor recently made a number of proposals in direct contradiction to this sentiment. He proposes to cut business taxes with the alleged goal of reducing unemployment in the state.

Among the Governor's proposals:
- Slashing the tax rate on business income in half
- Allowing companies to deduct the entire cost of their equipment purchases up-front, rather than doing so gradually over time as the equipment depreciates
- A variety of tax credits for business investors within the state
- A capital gains exemption for those who invest in small business within Minnesota

The Minnesota Budget Project quickly issued some sharp criticisms of the Governor's stimulus plan. Those criticisms rely heavily on the well-publicized figures produced by Mark Zandi demonstrating the relative effectiveness of various kinds of stimulus measures. Unsurprisingly, business tax cuts ranked among the least effective stimulus options available.

Unfortunately, however, the Governor is not alone in attempting to chart a course down this ill-conceived path. House Republicans have recently begun touting what is perhaps an even more radical measure: a five year suspension of the corporate income tax for any company that relocates to Minnesota, or expands its business within the state.

As the Budget Project points out, though, Minnesota can expect to have even less success with business tax cuts than the federal government could, since the requirement that the state balance its budget (coupled with the already dire budgetary situation in Minnesota) means that every dollar in business tax revenue lost through these cuts will result in economically harmful spending cuts.

Ultimately, stimulus is a matter best left up to the federal government, which can borrow to pay for temporary injections into the economy. The states, including Minnesota, would be much better off focusing their energies on maintaining the valuable state services that Minnesotans are depending on to weather the current economic storm.



How to Budget for a Recession: Don't Slash Taxes in the Good Times, Tap a Rainy Day Fund in the Bad Times



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For state lawmakers facing a balanced-budget requirement, the problem of revenue volatility can be a serious one. Since one of the more important goals states pursue is to provide a consistent level of services each year, it only makes sense that a correspondingly consistent level of revenue be available. In California, the Governor, together with state legislators, has appointed a commission specifically tasked with providing recommendations on how to reduce volatility. Minnesota recently formed one such commission as well, which actually released its findings just this week. Some of the commission's findings include (as summarized by the Minnesota Budget Project):

- "Shifting to more stable revenue sources would lead to a more regressive system with slower growth rates. Instead of attempting to rebalance the tax system, they recommend establishing a much larger budget reserve ($2.1 billion for now) to help carry the state through economic downturns."
- "Using one-time surpluses strictly for one-time purposes (like rebuilding the reserves)"
- "Avoiding permanent tax cuts or spending increases unless reserves are filled and shifts have been bought back."
- Ensuring "that policymakers and the public have access to more information to improve the decision-making process. That includes releasing a demographic forecast every biennium and adding inflation back to the expenditure side of the state's budget forecasts."

As these recommendations should make clear, revenue volatility is only a problem if it is not planned for in the budget. Restructuring an entire tax system just to smooth out revenue collections is an extreme example of trying to 'throw the baby out with the bath water'. In fact, as we've pointed out in our policy brief on progressive income taxation, restructuring a tax system with this aim in mind is likely to create even more revenue problems in the long-run.

But while there's much to be excited about in the wisdom behind the Minnesota Commission's recommendations, those ideas have yet to take root everywhere. In Indiana, for example, just this week the Governor called for automatically refunding any tax collections above some pre-determined level, during good economic times. Such a change would directly restrict the flexibility policymakers need to plan for rough budgetary times when things are going well.



Numerous Other States Decide on Tax/Revenue Proposals



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Arizona voters wisely rejected Proposition 105, a proposal that would have placed a nearly insurmountable obstacle in the way of Arizona residents seeking to raise their own taxes through the referendum process.

Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.

Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it's certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.

Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.

Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.

Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.

Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.



ITEP Submits Comments to Minnesota Tax Reform Commission



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This summer we brought you word of Minnesota Governor Tim Pawlenty's plan to create a "21st Century Tax Reform Commission." The 15 member Commission is meeting throughout the fall and is charged with "providing advice and recommendations to the Governor on options for revenue-neutral tax reform." The Governor said that "this Commission will specifically focus on improving our job climate by reforming Minnesota's tax laws."

The Commission seems bent on discussing ways to attract businesses solely by changing tax policy, apparently assuming this is the only factor that affects a state's economy. ITEP responded to a posting by the Commission asking for public comments. We took the opportunity to remind the Commissioners that taxes actually account for a small portion of business expenses, that businesses thrive when public investment thrives, and that low business taxes don't guarantee a company's loyalty. For example, in Minnesota, "despite receiving millions of dollars in tax breaks and incentives from federal, state, and local governments, Northwest Airlines has repeatedly reduced employees and threatened to close local Minnesota facilities." Click here to see our comments in full. To stay updated on the Commission's activities check out the Minnesota Budget Project's Minnesota Budget Bites blog.



Ballot Update: Dilemma in Minnesota Pits Fairness Against Conservation



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This November Minnesota voters will be asked to approve a change to the state's constitution. If the Clean Water, Land and Legacy Amendment is approved, Minnesota's constitution will be changed to increase the state sales tax by three-eighths of one-percent (from 6.5 to 6.875 percent). The new rate will begin on July 1, 2009 and expire in 2034. The sales tax rate increase will bring in an estimated $290 million a year for the next 25 years. Revenues generated will be divided among a variety of programs including: water quality, wildlife habitat, arts and culture, and parks and trails. Advocates of tax fairness may be torn about how to vote on this amendment given that sales taxes are regressive and take a larger share of income from low income folks than from the wealthy. It will be up to the voters to decide if clean lakes, conservation efforts, and environmental protection trump tax fairness in this particular situation



Latest ITEP Policy Briefs Address Minnesota's Tax Debate



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Earlier this year in his State of the State Address, Minnesota Governor Tim Pawlenty announced his plan to create a 21st Century Tax Reform Commission. The 15 member Commission was charged with "providing advice and recommendations to the Governor" on options for revenue-neutral tax reform. The Governor said that "this Commission will specifically focus on improving our job climate by reforming Minnesota's tax laws."

Ensuring that a state's tax structure is able to sustain the challenges of the 21st century goes far beyond a state's business climate. In fact, there's been a lot of talk in Minnesota about how the Governor's Commission is too narrowly focused on corporate concerns. Given this obvious slant, perhaps it's not surprising that in their deliberations members were asked to take into consideration various tax policy principles, including simplicity, competitiveness, efficiency, and stability, but tax fairness didn't make the list!

The Commission is heavily stacked with representatives from the business community. The Minnesota Budget Project's Budget Bites Blog tells us of one especially egregious exchange, "when one member asked what percentage of the state's total revenues come from the corporate income tax... so how much money would the state lose if we eliminated it? 'Seven percent,' was the reply. 'So, if it's just 7 percent, we could live with that,' said the member." Let's hope the Commission moves away from eliminating the corporate income tax, which is projected to bring in $1.9 billion in revenue for FY 08-09.

In slightly more hopeful news, testimony heard earlier this month by the Commission included a discussion of broadening the sales tax base to include more services and applying the sales tax to items purchased online. If enacted, both of these changes would modernize the state's tax structure. For more see ITEP's latest policy briefs on sales tax base expansion and taxing internet sales.



State Transportation Woes Have Common Thread



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North Carolina is suffering from an increase in the cost of asphalt. Asphalt is made of petroleum derivatives, and its cost has increased 25% since the end of 2006. This is causing the state to cut back on road repaving projects which are likely to cost more money to accomplish the longer they go unrepaired.

In Missouri, the state has a projected $1 billion transportation fund deficit. It is only expected to be able to meet 40% of obligations starting July 2009. In spite of this, all three major candidates for Missouri Governor pledge not to raise the state motor fuels tax. The two Republican gubernatorial contenders, Sarah Steelman and Kenny Hulshof suggest dedicating general funds revenue to transportation and privatizing some state roadways respectively.

Virginia is currently confronting a "growing bridge and road maintenance shortfall" which is depriving money from road construction. Governor Tim Kaine has recently released a proposal to raise vehicle registration fees and sales taxes on vehicles, while keeping the state fuel tax unchanged.

These states have in common a tendency to tinker around the edges of transportation funding policy while failing to address the taboo topic of gas taxes. The root cause of these transportation troubles is that the gas tax has been kept too low to finance the transportation needs in all these states.

Most states have a "per gallon" gas tax that leaves them unable to cope with rising costs of transportation as inflation erodes the value of the tax collected on each gallon. North Carolina's gas tax has been capped at 29.9 cents since 2006 due to pressure from anti-tax activist Bill Graham, although it was formerly readjusted to reflect price changes twice a year. Missouri has not raised its gasoline tax since 1996 and Virginia's gasoline tax has stayed constant since 1992. None of these states index their gasoline tax either to transportation costs or the general inflation rate.

Sometimes even a major crisis is not enough to get politicians to consider gas tax adjustments. Due to Iowa's recent flooding, Iowa's legislature is likely to convene an emergency session to confront their newly pressing infrastructure needs and find sources of funds for disaster recovery. Legislators rejected efforts to raise the gasoline tax earlier in the year to fill the $200 million highway maintenance deficit, opting instead to tinker around the edges and simply raise vehicle registration fees. But even now, the Iowa House Majority Leader considers a hike in the gasoline tax "an absolute, absolute last resort," with gas selling for $4/gallon.

Even a spectacular tragedy is sometimes not enough to get politicians to wake up. Before the August 2007 Minnesota I-35W bridge collapse, Governor Tim Pawlenty vetoed a bill raising the gasoline tax 7.5 cents per gallon, calling it "an unnecessary and onerous burden" as consumers were paying $3 per gallon for gasoline in May 2007. This was in a state that hadn't adjusted its gasoline tax in 19 years. Not even a bridge collapse and transportation funding shortfall of nearly $2 billion were enough to change the governor's position that gas taxes are anathema. Needed road and bridge repairs were being neglected, with obviously dire consequences. Fortunately, Minnesota lawmakers were finally able to override Governor Pawlenty's veto in February, raising the gas tax by 8.5 cents.

For many, there will never be a "right time" to raise the gas tax. It wasn't the right time at $2 per gallon in 2005 when Gov. Pawlenty first vetoed a gas tax increase, nor at $3 per gallon in 2007, nor now at $4 per gallon. In fact, it's never the "right time" to raise any kind of tax... no one wants to pay more than they have to. But sometimes in order fund vital services policymakers need to come together and bite the bullet as they did in Minnesota, even if it is politically difficult.

Opponents have sometimes successfully argued that raising the gasoline tax would be regressive and particularly damaging to the economy in such a car-dependent nation. But gas tax increases can be done in conjunction with progressive measures, such as raising the Earned Income Tax Credit and creating a refundable gas tax credit as was done in Minnesota and proposed in Virginia.



Numerous States Wrestle with Competing Visions of Property Tax Reform



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The Minnesota legislature approved a property tax bill this week (discussed here by the Minnesota Budget Project) that should be studied very closely by New York, Massachusetts, and any other state looking to improve the fairness of its property tax. The Minnesota bill makes use of what is primarily a two-pronged approach to providing tax relief. However, one of those prongs, the property tax circuit-breaker, is noticeably more effective than the other.

The first prong of the Minnesota plan is an expansion of the state's property tax circuit-breaker credit that provides refunds to households who spend more than a given percentage of their income on property taxes (for information on the fairness gains to be had from circuit-breakers, refer to this ITEP Policy Brief). For other states interested in enacting or expanding similar programs, a recent report from the Massachusetts Budget and Policy Center proposes a variety of targeted expansions to the Massachusetts circuit-breaker (which, as in many states, is currently available only to low-income seniors) that would greatly improve the fairness of the property tax.

The second prong of Minnesota's approach to property tax relief was a late addition at the request of Governor Pawlenty: a 3.9% cap on increases in local property taxes. A Center on Budget and Policy Priorities report released this week explains why such caps are a bad idea. The most obvious problem is that caps constrain local government revenues without regard to the cost of providing public services. Tax caps also force localities to become more dependent on state aid, which becomes problematic during an economic downturn when that aid decreases but the cost of providing goods such as education and law enforcement remains the same or even increases. Fortunately, Minnesota's cap is slightly less stringent than some states. It has a higher ceiling on revenue increases, numerous conditions under which a locality can avoid the cap, and a provision to expire after three years.

This discussion is especially relevant in New York, where a state property tax panel is expected to propose both a circuit breaker and a cap on annual revenue increases sometime in the next two weeks. Thankfully, the influential Working Families Party in New York, as well as teachers' organizations and over thirty state legislators have voiced support for the circuit-breaker idea. The Working Families proposal would pay for this relief by raising income taxes on people earning more than $500,000 annually. Fortunately, the tax cap idea appears slightly less popular, though it is far too early too tell if that proposal will pick up steam as well. To keep up with the debate, which is sure to quickly gain steam, see the New York Fiscal Policy Institute.



Minnesota Is Miles Ahead of Most States When It Comes to Property Tax Reform



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At a time when it seems like only the worst kinds of property tax reform have any chance of gaining steam, the Minnesota House recently came through with a reform bill that completely bucks the trend.

Expecting that property tax bills in Minnesota may soon grow a bit too high for comfort for some families, legislators avoided the temptation that we've seen take hold elsewhere to carelessly slash property taxes without regard for how those cuts will affect families of varying income levels. Instead, the House has proposed expanding the state's "circuit-breaker" credit to include many more families than are currently eligible, and to provide many families already benefiting from the credit with even more relief.

Just as appealing as the expansion of the state "circuit-breaker", however, is the means by which Minnesota plans to pay for that expansion. The House has proposed ending the state income tax deduction for property taxes paid. This deduction overwhelmingly benefits better off taxpayers who are more likely to itemize, and for whom deductions are more valuable since they pay income taxes at a higher rate.

The combination of these changes is a significant step toward making less unfair a starkly regressive property tax in Minnesota. Scaling back the state's existing homestead credit will also provide funds with which to pay for this better-targeted relief. Finally, the bill would also eliminate what is estimated to be a $186 million loophole for foreign operating corporations.

Unfortunately, there are serious obstacles to the bill's passage. First, the Senate has been contemplating a different approach in which state money would simply be given to local governments, in the hope that an influx of funds would encourage localities to cut taxes. Fortunately, Governor Pawlenty is not on board with this plan, preferring relief be given directly to taxpayers. But the Governor is also not yet on board with the House's plan. Pawlenty continues to insist that a firm cap on increases in local property tax collections must be the "linchpin" of any reform. The House added a levy limit on local governments to its bill in an attempt to accommodate the Governor, though that limit is not as strict as he has requested. Hopefully the Minnesota legislature will be able to push this bill through without too strict a limit on local government revenues. Such limits generally tend to leave local governments hurting for funds as the rising cost of providing government services outpaces the allowed limits.



Minnesota Governor Misses the Memo on Property Tax Fairness



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Over the past few months, there's been a movement in Missouri to expand the circuit breaker program that benefits low-income property taxpayers. In addition, Indiana Governor Mitch Daniels recently signed legislation increasing his state's renter deduction. Clearly Minnesota Governor Tim Pawlenty didn't get the memo about the trend to help ease property tax burdens in targeted ways. Instead, Governor Pawlenty is proposing to reduce his state's renters' credit by 21 percent. The Minnesota Budget Project rightly points out that approving the Governor's proposal "would not only have a significant impact on ... low-income households, but also increase the regressivity of the property tax." As ITEP notes in its policy brief describing circuit breaker credits, whether such credits are designed to aid renters as well as homeowners is a critical consideration, since it's widely understood that some portion of the rent people pay consists of property taxes.

To read more about benefits of the Minnesota renters' credit, check out the Minnesota Budget Project's report here.



Gas Tax Changes Pick Up Speed



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Earlier this week, legislators in Minnesota overrode Governor Tim Pawlenty's veto and enacted a $6.6 billion transportation plan, one of the key elements of which is a 8.5 cent per gallon increase in the state's gas tax. While higher gas taxes tend to fall harder on low-income individuals and families, the plan does include a refundable low-income tax credit of up to $25 per family to help mitigate the regressive impact of the larger levy. Other states considering proposals to raise their gas taxes to meet transportation funding shortfalls would do well to follow Minnesota's lead and provide similar credits.

A gas tax increase that will soon be before the Nebraska Legislature may also be worth emulating in some respects. A bill there would effectively increase the state's gas tax by 3 cents per gallon. But it is the means by which that increase would be accomplished that is notable. The bill would reduce the existing gas tax by 8 cents per gallon and instead impose a tax equal to 5 percent of the wholesale price of gas. Using what amounts to a sales tax on gasoline rather than an excise tax is preferable since it ensures that state revenues are more responsive to economic growth.

Lastly, raising the gas tax wasn't envisioned in New Jersey Governor Jon Corzine's transportation or budget plans, but, in a new report, New Jersey Policy Perspective (NJPP) argues that it ought to be part of any comprehensive approach to improving state finances. In observing that the New Jersey gas tax has been raised just once since 1972, the NJPP highlights one of the key flaws with excise taxes like the gas tax... they fail to grow with inflation, the economy, or personal income. NJPP points out that a 20 cent increase in the Garden State gas tax would mean $1 billion in new state revenue, a portion of which could be used to lessen the impact of such a change on low-income residents or to support mass transit improvements for all.



Minnesota Businesses Say Raise Taxes to Pay for Transportation



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Minnesota transportation and infrastructure needs have long been discussed and debated, especially in the wake of last year's tragic Minneapolis bridge collapse. As explained in a common sense editorial in the Hutchinson Leader, polling by theMinnesota Chamber of Commerce shows businesses know they need better infrastructure and that taxes are needed to pay for it. "Businesses rely on the transportation system to move freight efficiently and to get employees to work in a timely and safe manner. Growing congestion in the Twin Cities area as well as safety issues on Greater Minnesota roads (70 percent of highway deaths happen in rural areas) has created a significant problem for Minnesota businesses. The editorial also discusses the Chamber's plan for a tax increase to fund infrastructure . For too long business lobbyists have been the enemy of tax hikes, yet clearly some businesses in the North Star state understand the role that taxes play in their ability to meet the needs of their customers and employees.



Budget Shortfall Projected in Minnesota



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Late week few in Minnesota were surprised to learn of the state's forecasted $373 million shortfall for the FY08-09 biennium. Policymakers must find a way to fill this gap by the end of the 2009 fiscal year. The Minnesota Budget Project says, "These forecast results are further evidence that Minnesota's experiment in this decade to respond to fiscal troubles with budget gimmicks, short-term fixes and reduced investments in the state's physical and human capital has failed. The promised benefits -- a stronger economy and continued high quality of life -- have not materialized." In a November 30 press release Governor Tim Pawlenty said, "that state government should hold the line on spending and not raise taxes on Minnesotans." The Governor's release says that he "will propose tax cuts for individuals" that would be paid for by eliminating corporate tax loopholes which relate to how business income is defined.



Fallout Continues from Minnesota Bridge Collapse



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Fight Over Federal Gas Tax Brewing

According to the U.S. Department of Transportation, an eighth of bridges in America are "structurally deficient" which is the same designation that had been given to the Minnesota bridge over the Mississippi that collapsed on August 1. This designation does not necessarily mean that a bridge is unsafe, but the Department has stated that $65 billion could be spent immediately in cost-effective ways to address these deficiencies.

So it might seem reasonable that one effect of the August 1 tragedy would be to wake the nation up to pressing infrastructure needs. And in fact, Rep. James Oberstar (D-MN), chairman of the House Transportation and Infrastructure Committee, has introduced a bill to temporarily raise the federal gas tax by five cents to fund bridge repairs.

But anti-tax advocates are having none of it. A coalition of 56 right-wing organizations has sent a letter to the President and Congress opposing the proposed gas tax increase. It's not clear which side will win this argument. There is some support on the Republican side of the aisle for raising revenue to address the issue. Rep. Don Young (R-AK), the former chair of Oberstar's committee, caused a stir when he said that hundreds of bridges are "potential death traps," which would justify a tax increase to fund repairs.

Food Fights in State Legislatures?

Meanwhile, the situation on the state level doesn't look any less cantankerous. Minnesota Governor Tim Pawlenty and legislative leaders have not yet agreed on the parameters of a special session that weeks earlier seemed the likely result of the horrific tragedy. Recently Governor Pawlenty said on a local radio program "I'm not going to call a special session if there's going to be a food fight. Not everybody's on the same page." But if he fears a food fight, he's strangely ready to throw the first pie. The Governor said he may add property tax relief to the session's agenda, which would be oddly placed in a session that is supposed to address the bridge collapse. The session isn't likely to start until after Labor Day.

Other states are also taking transportation funding more seriously. Maryland Governor Martin O'Malley is expected to call for a gas tax increase that would adjust automatically for increases in the cost of construction. A thoughtful Baltimore Sun article describes the crisis that is created when gas taxes are low, but infrastructure costs are rising. There's no such thing as a free lunch, and certainly no such thing as a free bridge.



Legislative Session Ends With Disappointment in Minnesota



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Despite evidence that a majority of Minnesotans supported an income tax increase on better off Minnesotans in exchange for property tax cuts, the legislative session ended without the creation of a new top income tax bracket. The bill sent to Governor Tim Pawlenty would have created a new 9 percent top income tax rate for married couples with taxable income above $400,000 ($226,000 for singles), but Governor Pawlenty vetoed the legislation and the battle for progressive taxes will have to wait for another year. In the meantime, the Star-Tribune is right when it says that the Governor's veto, "keeps Minnesota on a road toward more regressive taxation."



Gas Tax Gimmicks



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It's the start of the summer driving season, and gas taxes are back in the news again across the nation. Gas taxes have long been the main method used by states to fund their transportation system, but recent high gas prices have made gas taxes a hot political issue. Since most states' gas taxes are fixed dollar values, inflation decreases their value every year, forcing lawmakers to pass new laws raising the gas tax every few years. However, this time around, many states just can't seem to find the political will to do so. Nebraska's governor Heineman is threatening to veto the paltry 1.8 cents per gallon gas tax increase passed by the state's legislature. Minnesota's Governor Pawlenty waited less than twenty-four hours to veto an equally modest five cent per gallon gas tax increase. Even worse, some lawmakers in Connecticut and Minnesota have proposed completely suspending their state's gas taxes, for the summer and for one year respectively. While in the short term these gas tax gimmicks may pay political dividends, in the not-so-long term these states cannot afford to play politics with transportation funding.



Progress on Progressivity



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Minnesota's legislature has taken an important step towards a fairer tax system. The state House and Senate both passed legislation that would introduce a fourth income tax tax tier which would be targeted to upper income taxpayers. The Senate proposal would add a new 9.7 percent tax rate for those with taxable income over $250,000 for married couples ($141,250 for singles). The House proposal would introduce a 9 percent rate on taxable income above $400,000 for married couples ($226,000 for singles). The editorial board at the Minnesota Star Tribune eloquently expresses its support for the legislature's plan. Governor Tim Pawlenty has threatened to veto any tax hike - but as one commentator points out, Pawlenty's "no new tax" stance could really just mean Minnesota will continue to increase its reliance on regressive user fees to fund public investments.



Two Very Different Approaches to Property Tax Reductions: Florida vs. Minnesota



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The prospects for passage of new property tax reduction legislation are looking dim in Florida, as the House and Senate must now reach a compromise between two competing measures. The House version compensates for the revenue lost from lower property taxes by raising the sales tax by as much as 2.5 cents. This tax swap idea is proving quite controversial, due to the regressive nature of the sales tax. Senate Republican leader Daniel Webster lead the charge against the House proposal, saying: "The sales tax is a regressive tax. And the more you raise it, the more regressive it becomes. The poor are going to get poorer, and the rich are going to get richer." The Senate proposal features a smaller property tax reduction, with no tax increase to offset the revenue loss.

One idea not under consideration in Florida is paying for a cut in property taxes by increasing income taxes. Just such a measure is being discussed in the Minnesota House. A few weeks ago, both the House and Senate passed legislation creating a fourth income tax bracket, although the rate differed slightly between the two bills. Now a new House proposal would pay for a property tax reduction and expanded tax credits for homeowners and renters with a 9.0 percent income tax rate for single taxpayers with incomes in excess of $250,000 or married couples with incomes above $400,000. This property-tax-for-income-tax swap would create a more progressive state tax system. By contrast, Florida lawmakers continue to refuse to debate instituting a state income tax, depriving themselves of a powerful tool for creating a more just and equitable tax structure.



Should Driving Cost Less or More?



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Several states are grappling with how and whether gasoline should be taxed. In Indiana, House Democrats campaigned on a proposal to eliminate the state's sales tax on gasoline entirely, but this plan was cast aside because it was entirely too expensive to carry out. Instead, the House has passed a rather complicated bill this week that would remove the sales tax from gasoline only when the price rose to $2.25 a gallon or higher. This bill, which is certainly not efficiently targeted to those who might need help the most, is expected to cost the state $45 million a year and perhaps more in later years.

Some environmentalists argue that the total cost of fuel consumption needs to be increased, not lessened, by government policy. But even states that attempt to move in that direction are not necessarily going about it in a rational or efficient manner. Oregon is in the midst of a pilot mileage tax program where cars are equipped with mileage readers and a tax is calculated based on miles driven. Governor Tim Pawlenty in Minnesota has included money to study a similar initiative in his budget. This proposal creates privacy concerns and does not seem particularly helpful from an environmental perspective. It would treat both gas-guzzling SUVs and fuel-efficient hybrids the same, so long as they drove the same number of miles.



Short Term Gain, Long Term Pain



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At first glance, it looks like the holy grail of state governance: a way to raise more revenue without raising taxes.The idea of selling off or leasing state assets, such as the state lottery, is now under discussion in Illinois, Indiana, Minnesota, New Jersey, and Texas. It is easy to see the idea's appeal: Texas Governor Perry predicts that the sale of his state's lottery would generate at least $15 billion, for example, while Indiana Governor Daniels expects that state's lottery to carry a price tag of over $1 billion, all without a single tax increase. However, there is a catch. While the boost to revenue is substantial, it is a one-time gain, and it comes at the cost of the yearly revenue contributions these assets would provide far into the future. While the seemingly painless financial gain offered by this privatization schemes is tempting, in the long run these sales would only diminish state coffers.

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