Month: January 2015

Happy New Year and welcome back to the State Rundown, your statehouse insider and source for all things state tax policy related. We’ll provide a preview of the week’s big debates every Monday afternoon, as well as a follow-up post on Thursday afternoons. Eighteen states began their legislative sessions this week, so let’s hit the ground running!

California Gov. Jerry Brown was sworn in Monday to a history-making fourth term, delivering his annual State of the State speech at the state Capitol in Sacramento. Brown touted his success in leading California through the Great Recession, turning a severe budget deficit into surplus and presiding over impressive economic growth. However, budget fights over the state’s high speed rail project and temporarily enacted sales and income tax increases, set to expire in 2018, loom this session.

North Dakota Gov. Jack Dalrymple struck a defiant tone in his State of the State address Tuesday, despite the threat to his spending plans posed by the continuing slide in oil prices. The governor announced plans to increase state support for counties by $1 billion and pledged to make further tax cuts a priority this legislative session. Since 2009, North Dakota has cut taxes by $4.3 billion, and some lawmakers are pushing to eliminate the state income tax. A property tax reform measure has a likelier chance of passage, however.

Lawmakers in the Rhode Island House of Representatives want to pass a major and costly tax cut for Ocean State retirees. Yesterday, a bill was introduced to exempt all state, local and federal retirement income, including Social Security benefits and military pensions, from the state’s personal income tax. An initial ITEP analysis of the bill found that the lion’s share of the benefits would go to well-off elderly taxpayers.  Since some social security income is already exempted from Rhode Island taxes, fixed-income seniors already owe no personal income taxes on those benefits and often have no other retirement income. 

The bad economic news keeps coming for Kansas Gov. Sam Brownback. A recent report from the Bureau of Labor and Statistics on employment growth in metropolitan areas shows that the governor’s tax cuts have failed to produce jobs – in fact, Kansas City, Missouri added jobs at four times the rate of Kansas City, Kansas, right across the state line. Back in 2012, Gov. Brownback promised Johnson County business leaders that steep tax cuts would draw economic activity from Missouri. In another setback for the governor (and victory for Kansas schoolchildren), a state judicial panel ruled that Kansas inadequately funds public schools. The ruling could mean that state leaders need to pony up another $548 million in school funding when they already face a $1.1 billion deficit. Of course, these are self-inflicted wounds that could be reversed through a prudent fiscal policy.

Newly-elected Illinois Gov. Bruce Rauner is on a gloom-and-doom tour, hoping to drive home just how terrible his state’s finances are and prepare voters for the worst. The governor will inherit a budget short by $1.4 billion, and some state agencies are expected to run out of money in a month. The state’s budget deficit is expected to almost double to $12.7 billion. Rauner, who ran on a platform of lower taxes and higher school spending, has his work cut out for him. A temporary income tax increase is slated to expire this month, which will mean $5 billion less in revenue for a state that desperately needs it.

States Starting Session this Week:
California
Connecticut
Indiana
Kentucky
Massachusetts
Minnesota
Mississippi
Missouri
Montana
Nebraska
New Hampshire
New York
North Dakota
Ohio
Pennsylvania
Rhode Island
Vermont
Wisconsin

State of the State Addresses this Week:
California Gov. Jerry Brown (watch here)
North Dakota Gov. Jack Dalrymple (watch here)
Maine Gov. Paul LePage (watch here)
Connecticut Gov. Dannel Malloy (watch here)

Governor’s Budgets released this Week:
California Gov. Jerry Brown (Friday)
Maine Gov. Paul LePage (Friday)

The new budgetary mantra of the House GOP appears to be: if you can’t make the math add up, change the rules of math.

On Tuesday the House did exactly that with its passage of a  new rule requiring the non-partisan Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) to use “dynamic scoring” rather than static scores for official cost estimates on proposed tax changes. Dynamic scoring is a controversial method of assessing the effect of tax cuts. It allows lawmakers to claim that a tax reform proposal is revenue neutral, even if it would lose revenue under a conventional score. House Republicans embrace the method because they can claim tax cuts pay for themselves, rather than increasing the deficit or making it even more difficult to raise enough revenue to fund basic priorities. The ability to obscure the true cost of tax cuts could prove especially appealing to incoming Chairman of the Ways and Means Committee Paul Ryan, who has long proposed steep tax cuts for the rich, while at the same time calling for massive cuts to programs for low- and moderate-income people.

The idea behind dynamic scoring is that, in addition to accounting for the behavioral impacts of a given piece of legislation which is included in a static estimate, budget estimates should include the overall impact on the economy. The problem is that there is just too much uncertainty about the overarching economic impact of individual pieces of legislation, which is why this has not been included historically as part of single-point budget estimates.

The high level of uncertainty in these estimates is demonstrated by the fact that when JCT was asked to do a dynamic score of former Rep. Dave Camp’s tax-reform bill, they estimated that the legislation could increase GDP anywhere from 0.1 percent to 1.6 percent during its first decade, meaning that there was a 16-fold spread between its high and low estimates. What drove this extreme level of variability between JCT’s different estimates were changes in the whole host of assumptions that go into modeling the legislation’s impact. Based on this, one of the biggest potential problems with dynamic scoring is that it could politicize the estimate process by allowing more space for estimators to make politically motivated assumptions in their economic modeling.

Advocates of tax cuts intend to use dynamic scoring to push the thoroughly debunked supply-side economics idea that tax cuts pay for themselves. In reality, even President George W. Bush’s own Treasury Department rejected this idea when it found that his massive tax cut package might make no difference at all on growth over the long term.

Looking forward, it remains to be seen just how JCT and CBO will respond to this new requirement and what kind of assumptions they will use in estimating the dynamic impact of future legislation. Let’s hope that they are allowed to remain a bulwark against fiscally irresponsible tax cuts, rather than being used to lend faux creditably to supply-side claims.