Author: tarek

Maryland Gov. Larry Hogan fleshed out his plans to cut taxes in his state of the state address this Wednesday, vowing to seek reductions for small businesses, some retirees, motorists and the repeal of the so-called “rain tax,” a contentious stormwater management fee. Faced with a significant budget deficit, Hogan was forced to pursue more piecemeal tax cuts than he suggested during the campaign, though the measures face stiff opposition from the Democratic-controlled legislature. Two of the measures particularly rankle environmentalists; Hogan wants to repeal a law indexing the state’s gas tax to inflation, and his attack on the stormwater fee will shortchange efforts to clean up the Chesapeake Bay. Democrats say the governor’s plans will cost $30 million a year in lost revenue, while the governor’s staff says the cost will be closer to $27 million. Additionally, Hogan proposed legislation to make it easier to open charter schools in Maryland, as well as a tax break for people who donate to private and religious schools. ITEP has argued that such tax breaks, also known as “neovouchers,” unfairly divert public money to private education. New York Gov. Andrew Cuomo recently proposed a similar tax credit in his budget.

North Carolina Gov. Pat McCrory used his state of the state speech to tout his “North Carolina plan,” which would expand Medicaid in North Carolina but seek a waiver for some of the Affordable Care Act’s provisions. The governor made sparing references to taxes in his speech, despite the fact that revenues in the Tarheel state have fallen under projection thanks to tax cuts he signed in 2013. Also left unmentioned was the push by some lawmakers to repeal the state’s capital gains tax, a measure that McCrory has partially supported as a way to lure “innovation-related companies” to the state. Some advocates criticized the governor for failing to push for reenactment of the state’s EITC, which expired in 2013.

Wisconsin Gov. Scott Walker further cemented his conservative-warrior persona in his state of the state speech, slashing higher education budgets by $300 million to help solve a $650 million budget deficit over the biennium (which will inevitably mean higher tuition bills). Walker’s budget also includes a property tax cut of $5 per year for the average taxpayer (according the governors’ office) to the tune of $280 million for the state, to be enacted by sending more state aid to local districts but earmarking that aid for tax cuts. K-12 spending, meanwhile, would remain flat. Walker’s budget has earned the governor steep opposition; faculty and students at the University of Wisconsin decried the governor for proposing the deepest higher education cuts in state history while also giving $220 million in state money to the NBA for a new stadium. Some lawmakers point out that many of the cuts would be unnecessary if Walker and his legislative allies had not squandered last year’s $1 billion surplus on property and income tax cuts. Even some conservative lawmakers are worried that Walker’s cuts to higher education will lead to huge tuition spikes, despite the two-year tuition freeze included in the governor’s budget proposal.

Illinois Gov. Bruce Rauner pushed for a property-tax freeze in his state of the state address, arguing that local governments need to cut expenses and waste or consolidate services in order to make it happen. The governor previously called for expanding the sales tax base to include services in order to bring in more revenue and make the state more competitive. Given that the state faces a projected $11 billion shortfall over the next two years, it has left us head scratching as to why the governor avoided talking directly about how to resolve the state’s revenue crisis.

Following Up:

Some lawmakers and advocates in Idaho have been pushing a tax swap under which Idaho’s $100 per person Grocery Credit Refund would be eliminated in favor of exempting all grocery purchases from the sales tax. But a new ITEP report shows that the biggest winners under such a plan would be high-income households.

Members of Idaho’s top 1 percent would receive an average tax cut of $234 per year under such a swap.  Low-income families, by contrast, would typically see a cut of $15 or less, and some would actually see their taxes increase.

The impact of this change is so lopsided in part because the state’s existing Grocery Credit Refund can cover most, or sometimes all, of the grocery taxes paid by a low- or moderate-income household.  For a high-income household purchasing premium brands and other high-end foods, however, a blanket exemption for all grocery purchases can be much more lucrative than the current flat credit of $100 per person.

If cutting grocery taxes is on lawmakers’ minds, ITEP’s report suggests expanding the existing Grocery Credit Refund—a move that could provide larger benefits to most households than the alternative plan to create a grocery tax exemption.

For more on sales tax exemptions and credits, check out ITEP’s policy brief on the subject.

Lotteries have been with us since the early years of the Republic. They were corrupt and a poor way to raise revenue then, and today they’re not much better.

Cohens v. Virgina, an 1821 Supreme Court case, concerns the sordid tale of the National Lottery, passed by Congress to raise funds for the beautification of DC and conducted by the city’s municipal government. The court was forced to intervene when unscrupulous agents sold tickets in Virginia contrary to state law. Even worse, the lottery never paid out after one of the agents absconded with the winnings.

In a depressing reminder that nothing ever changes, a recent article in Stateline reports that a statistically impossible number of convenience store owners and clerks have hit lottery jackpots. In New Jersey, half of the 20 most frequent lottery winners since 2009 are either retailers or their family members. Store clerks commonly cash winning tickets for a commission for those who owe back taxes or other debts, and some defraud customers (often elderly or unsophisticated) by shortchanging them on their winnings. As Richard Lustig explains in Stateline, “(The clerk) sees a $500 winning ticket, but says you won $20…He gives you $20 and then goes and cashes the ticket.”

It isn’t just retailers getting in on the fraud. In states that have turned to private contractors to administer their lotteries, the companies have failed to deliver on wildly exaggerated claims of revenue growth. Last year, former Illinois Gov. Pat Quinn was forced to fire Northstar, the firm operating the state lottery after it failed to deliver $400 million in promised profit over three years. Despite that abysmal track record, New Jersey Gov. Chris Christie hired the same firm to take over New Jersey’s lottery; unsurprisingly, Northstar New Jersey missed it’s income target by $55 million, and revenues were 7.9 percent lower compared to the same period the previous fiscal year (under state management).

Lotteries hang on because state officials claim that the proceeds go to worthy causes, such as schoolchildren, the elderly, or other feel-good state spending categories, never mind that it’s a bad bet for states to depend on the meager dollars of their most vulnerable citizens to fund crucial services like schools. And often, the money never goes to its intended purpose; one study found that states with lotteries increase education budgets initially but then decrease them later on by shifting general fund dollars previously earmarked to education to other purposes. Meanwhile, “states without lotteries increase their spending over time and end up spending 10 percent more of their budgets, on average, on education compared to lottery states.”

The combination of unscrupulous vendors and firms, waning public interest in lotteries, competition from casinos and other forms of gambling, and declining revenues have made many states desperate. State lotteries have boosted advertising budgets in the hopes of squeezing more dollars out of the 20 percent of customers who constitute 80 percent of lottery sales. They’ve tried publicity stunts like bacon-scented scratch-off tickets and mobile apps to reel in younger players. Apparently, it has occurred to no one that needed revenues can be raised in traditional ways, such as through progressive taxation that asks the well-off to pay their fair share, rather than relying on the destitute to shore up state coffers.

Unscrupulous agents may not be running away to an undisclosed location with state lottery proceeds as some did in one of the earliest state lotteries, but they are still an ill-advised way to raise reliable revenue.

As ITEP state policy director Meg Wiehe said in a recent MSNBC interview, “lotteries are highly unstable; they’re unsustainable, unpredictable, and frankly an unfair way to pay for public services.” It’s time our legislators found the courage to raise revenues in a responsible way, rather than resorting to gimmicks. 

In the run-up to the State of the Union, President Barack Obama proposed a slew of new tax reform ideas designed to benefit low- and middle-income families. One of his proposed reforms is to consolidate and simplify higher education tax breaks to make the credits more accessible.

Right now a handful of overlapping education benefits often cause confusion for those applying. Roughly 14 percent of those who could have filed for education benefits did not, resulting in a loss of about $466 per filer. Obama’s proposals would simplify this process by consolidating the Lifetime Learning Credit into the American Opportunity Tax Credit (AOTC), while adding new and more generous provisions to the credit.

The AOTC, first enacted in 2009 as a part of the stimulus bill, is an expansion of the Hope tax credit but is set to expire in 2017, which means that these breaks will revert to the less generous tax credit. The President proposes to make the AOTC permanent and adjust it annually to keep pace with inflation. Currently the AOTC provides tax credits to offset up to $2,500 of college expenses per year for up to four years. New modifications to the AOTC would increase the maximum refund from the current $1,000 to the proposed $1,500 and increase accessibility by mandating that higher education institutions provide students with the proper information necessary to claim credits.  

The essence of Obama’s proposal is shifting from high-income deductions to middle-income credits. Some of the funding for the expansion of the AOTC would come from phasing out student loan interest deductions so that they would only apply to those who started their education receiving them, but it would not apply to new enrollees. According to the White House, eliminating student loan interest deductions would cost the average student or graduate roughly $100 a year, but this would be mitigated by the relief from the AOTC. In general deductions tend to benefit those who have higher tax liability (i.e. the wealthy), so the reallocated money would be better targeted toward low-income and middle-income families.

As Obama originally proposed it, part of the funding for the expansion of the AOTC would have come from ending 529 savings plans benefits. Though 529 savings plans encourage investment in future higher education, the deductions associated with them tend to benefit wealthier families. Less than 3% of families even participate in 529 saving plans and those that do have a median income of $142,400.

Unfortunately, the misguided backlash against Obama’s proposal to cut 529 savings benefits in the name of defending “middle-class” families, led by House Speaker John Boehner (R-OH) but also supported by House Minority Leader Nancy Pelosi (D-CA) and House Budget Committee member Chris Van Hollen (D-MD), has culminated in the White House nixing the 529 proposal to focus on the larger issue of education tax relief. Even without this additional funding, the White House notes that the tax changes to capital gains and inherited wealth would provide more than enough funding for the AOTC expansion.   

As lauded as tax breaks for higher education are, the reality is that this money still is not going to those most in need – low-income students and families – and even Obama’s proposals would still benefit those that have the money to begin. The most effective way to financially assist low-income students is to invest more money in Pell Grants, which are substantially better targeted toward low- and middle- income families than any of the current higher education tax breaks. The President’s 2009 budget proposal increased Pell Grant funding from $16 billion for the 2008-2009 school year to $25 billion for the 2009-2010 school year and steadily increases funding over the next ten years. The President’s newest proposal would increase the value of Pell Grants by allowing them to be exempted from the income tax.

While expanding Pell Grants would be the best approach to expanding access to higher education, Obama’s proposal to consolidate and simplify our education credits is still a significant step in the right direction compared to the absolute mess of poorly targeted education tax breaks we have now.    

Maine Gov. Paul LePage plans to borrow from the Sam Brownback playbook, announcing his intention to eliminate his state’s income tax in three steps (we saw how that worked out for Kansas) at tomorrow’s state of the state address. The governor’s current budget proposal would reduce the current top income tax rate from 7.95 to 5.75 percent, and would also slash corporate tax rates and eliminate the state’s estate tax altogether. The governor proposes to pay for these tax cuts by broadening the sales tax base and increasing sales tax rates and reducing state aid for municipalities. Eliminating the state income tax would result in the loss of half of the state’s $3 billion in annual revenue, necessitating deep cuts or major tax shifts to more recessive revenue sources. 

Ohio Gov. John Kasich’s budget proposal would lower income tax rates, eliminate the income tax for about one million business owners and increase the personal exemption allowed for Ohioans making under $80,000 a year. The plan would wipe out income taxes for 98 percent of business owners who report their profits as personal income, as businesses with annual gross receipts of less than $2 million would be eligible. Taken as a whole, the governor’s plan is a revenue loser despite several proposed regressive tax increases. The governor proposes increasing the state sales tax, increasing the state’s cigarette tax, increasing the tax on business activity, broadening the sales tax base and increasing the severance tax. Republicans and Democrats in the legislature are both likely to oppose the governor’s proposal as a tax shift, though for different reasons: Republicans want to reduce overall revenue, while Democrats oppose the governor’s plan on fairness grounds.

The budget proposed by the Texas Senate includes over $4 billion in tax cuts, with $3 billion going to school property tax relief and the other $1 billion going to tax breaks for businesses via a cut in the franchise tax. Lt. Gov. Dan Patrick, who presides over the Senate and is the rare example of a powerful lieutenant governor, used the Senate’s proposal to make good on his campaign pledges to cut taxes. Opponents of the Senate plan point out that, with oil prices declining, the state’s current surplus should be invested in needed services or saved for rainier days. “Just because this session they have a $7.5 billion cash balance and a projected increase in revenue doesn’t mean that two years from now they won’t be scraping for money just to keep up the current level of services,” argued Dick Lavine of the Center for Public Policy Priorities. State lawmakers have still not fully restored $5.4 billion in education spending cuts enacted in 2011, and more than 600 school districts have sued the state over inadequate funding.

States Starting Session This Week:
Nevada
Oklahoma
Oregon

State of the State Addresses This Week:
Oklahoma Gov. Mary Fallin (read here)
Maine Gov. Paul LePage (Tuesday)
Wisconsin Gov. Scott Walker (Tuesday)
Illinois Gov. Bruce Rauner (Wednesday)

Governor’s Budgets Released This Week:
Ohio Gov. John Kasich (Monday)
Oklahoma Gov. Mary Fallin (Monday)

Investors were jubilant last week as Yahoo CEO Marissa Mayer announced the company is moving forward with a plan to unload its $40 billion stake in Chinese company Alibaba without paying the $16 billion it would otherwise owe in federal and state corporate taxes.

While such a transfer would normally trigger corporate income liability, Yahoo is exploiting Section 355 of the tax code (which includes the cash-rich split-off loophole) to avoid paying this tax.

Congress originally created Section 355 to allow companies to spin off part of their business into a separate company still owned by its current shareholders. For example, the drug company Merck used to own the online pharmacy Medco. Merck spun off  Medco to its shareholders in a tax-free transaction. This was okay, because Medco was an active business.

But in Yahoo’s case, the new company, SpinCo, is not actively engaging in business, rather it is a phantom company that is simply made up of Alibaba-owned stock with a tiny active business attached. Unfortunately, Section 355 lacks a provision requiring that active business activities constitute a significant portion of the spinoff company, meaning that Yahoo and other companies can create a spinoff company that is made up almost entirely of stocks or other investments.

To be sure, SpinCo would be liable for the tax on the Alibaba stock if it distributed it to its shareholders. But apparently, the plan is for SpinCo to be taken over by Alibaba, in exchange for giving Spinco’s shareholders Alibaba stock that they would own directly. Such a transaction would apparently also be tax-free at both the corporate and shareholder levels. In contrast, when Yahoo sold $10 billion of its Alibaba stock last year, it paid a $3 billion in taxes, a tax bill that activist stockholders are pushing the company to avoid this time around.

It’s hard to imagine that Congress intended Section 355 to exempt Yahoo from paying tax on the huge gain in its Alibaba stock. Yet savvy tax lawyers have crafted a way for Yahoo to get away with this tax dodge.

A straightforward way for Congress to close this loophole would be to require that at least 90 percent of the spinoff company’s assets be used in an active business. Such a reform would stop companies from making a mockery of the corporate capital gains.

While Yahoo’s plan is unique in terms of the sheer scale of its tax avoidance, it is certainly not the first time a large multinational corporation has used variations on the cash-rich split-off loophole. Last year, Berkshire Hathaway, the investment company owned by Warren Buffet, announced a deal that would allow it to avoid $400 million that it would have otherwise owed while essentially selling its $1.1 billion in Washington Post stock to Graham Holdings.

Congress should not allow Yahoo to dodge as much as $16 billion in taxes, enough money to pay for one year of universal pre-k across the country. Congress should amend the law and stop future corporations from following Yahoo’s lead.

Facebook reduced its federal and state taxes by a record-breaking $1.87 billion in 2014 by granting lavish stock options to its executives.

The company has used this tax break in the past to zero out its federal and state income-tax bills. But this year it set a record, claiming hundreds of millions more than any other Fortune 500 company has previously disclosed receiving from this tax break.

In 2014, Facebook enjoyed U.S. pretax profits of $4.9 billion and paid federal income taxes of just $260 million, for a federal income tax rate of just 5.3 percent. The stock option tax break explains basically all of the difference between the company’s single-digit tax rate and the 35 percent statutory tax rate.

As we have previously documented, Facebook is hardly alone in using this tax giveaway. Between 2010 and 2012, 280 companies in the Fortune 500 disclosed reducing their tax rates using this dubious loophole. More than 20 companies, including Facebook, managed to cut their taxes by a quarter billion dollars or more during this period.

But none of these corporations enjoyed tax breaks even approaching what Facebook’s newest report discloses.  Even Apple, the previous king of the stock option tax break, has never received more than $1.1 billion a year in stock option tax cuts.

Stock options are rights to buy stock at a set price. Corporations sometimes compensate employees (particularly top executives) with these options. The employee can wait to exercise the option until the value of the stock has increased beyond that price, thus enjoying a substantial benefit.

The problem is that poorly designed tax rules allow corporations to deduct the difference between the market value of the stock and the amount paid when the stock option is exercised. For example if a company gives an employee the option to purchase stock at $10 a share but it’s actually worth $18 a share when the employee buys the shares, the corporation can deduct the $8 difference.

In practice, corporations are often able to deduct more for tax purposes for stock options than they report to shareholders as their cost.

Lawmakers on both sides of the aisle have opposed this loophole. 2013 Legislation sponsored by Democratic Sen. Sheldon Whitehouse would have pared back the stock option tax break. The Cut Loopholes Act would address situations in which corporations take tax deductions for stock options that exceed the cost they report to their shareholders. It would also remove the loophole that exempts compensation paid in stock options from the existing rule capping companies’ deductions for compensation at $1 million per executive. And retired Republican Sen. Tom Coburn called for closing this loophole.

The defenders of this tax break sometimes argue that when companies pay their employees, it shouldn’t matter whether the pay takes the form of salaries and wages or stock options. But this argument glosses over the fact that while paying salaries imposes a dollar-for-dollar cost on employers, issuing stock options simply does not. As we have argued elsewhere, a sensible analogy is airlines giving employees the opportunity to fly free on flights that aren’t full, which costs the airlines nothing. It would be ludicrous to argue that airlines should be able to deduct the retail value of these tickets.

Allowing high-profile tech companies to zero out or substantially lower their taxes to single-digit rates their taxes using phantom costs erodes the public’s faith in the tax system; any meaningful attempt to reform our corporate tax should remedy this situation.

The year was 1975, when bellbottoms were king, everyone’s favorite pet was a small rock, and no one would go to the beach thanks to Stephen Spielberg. But the most momentous occasion that year – outshining even the birth of the Kool-Aid man, an American icon and hero to hyperactive children everywhere – was the passage of The Tax Reduction Act of 1975 and, with it, the Earned Income Tax Credit (EITC).

Signed into law by President Gerald Ford, the EITC is the one of the largest and most successful anti-poverty programs ever enacted in the United States; in 2013 the program lifted 6.2 million people out of poverty, and was more effective that both welfare reform and a strong economy in encouraging work during the 1990s. The EITC doesn’t just boost income for working families; according to Professor Kathryn Edin, co-author of It’s Not Like I’m Poor, the credit helps families “pay off old debts, repair their credit, put away savings, and make investments in assets like education, vehicles for work, and even first home down payments.”

The EITC is a refundable income tax credit equal to a percentage of earnings (which varies by family composition) up to a maximum amount, and it is phased out at higher income levels. The federal EITC is refundable, which means that if it exceeds a worker’s tax liability then the IRS will refund the balance to that worker. As of today, 25 states and the District of Columbia have enacted their own EITCs to help struggling families get ahead.

Sadly, the EITC is undergoing a midlife crisis as it turns 40, because many misguided policymakers want to cut the EITC in order to pay for tax cuts for the well-off. There have been a few positive developments – last year, the District of Columbia expanded their EITC to include childless workers, the governor of Mississippi has proposed a new (non-refundable) EITC for his state, and many states are trying to expand their existing credits. But today, more than ever, we need to fight to keep this crucial anti-poverty measure intact at the federal and state level.

To celebrate EITC Awareness Day, follow the links below to learn more about the credit, and follow our work here at ITEP to help states implement or strengthen the EITC for their residents:

Multi-State: “Improving Tax Fairness with a State Earned Income Tax Credit,” May 2014 (read here)

Multi-State: “State Tax Codes as Poverty Fighting Tools,” September 2014 (read here)

Multi-State: “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” January 2015 (read here)

California: “A State EITC: Making California’s Tax System Work Better for Working Families,” December 2014 (read here)

Indiana: “The Status of Working Families in Indiana: 2015 Report,” January 2015 (read here)

Mississippi: “Policy Brief: A State Earned Income Tax Credit: A Boost for Mississippi Families,” January 2015 (read here)

New Jersey: “Tax Increase to Fund Transportation Should Be Combined With Credit to Help Low-Income Families,” January 2015 (read here)

New Mexico: “Expanding New Mexico’s Working Families Tax Credit Would Generate Economic Activity and Help Hardworking Families,” October 2014 (read here)

Ohio: “Out of Step: More Needed to Make Ohio EITC a Credit That Counts,” August 2014 (read here)

Rhode Island: “Making Work Pay for Working Families: Increasing the State’s Earned Income Tax Credit,” January 2015 (read here)

ITEP is also working with partner organizations in Colorado, Georgia, Illinois, Iowa, Louisiana, Michigan, Pennsylvania, Virginia and Washington, among others, on EITC proposals.

In the latest twist out of Arkansas, a House committee stripped Gov. Asa Hutchinson’s proposed middle-class tax cut of a capital gains tax measure added just last week in the Senate. The governor’s proposal as passed by the Senate would have reduced the exemption on capital gains from the 50 percent exclusion passed in 2013 to the 30 percent exclusion in effect previously. The House bill would restore the 50 percent exclusion for one year, and then allow the exclusion to fall to 40 percent after that. The House version of the governor’s bill will cost $9 million more each year than the Senate bill. The move is likely to further alienate progressive groups in Arkansas, who previously offered tepid support for the governor’s plan while criticizing its omission of the working poor. Progressives were further angered by the governor’s budget proposal, which did not include promised increases in funding for pre-kindergarten. Arkansas Advocates for Children and Families notes that “Even before the 2013 capital gains tax cut, Arkansas already had one of the most generous capital gains structures in the nation.”

While many politicians and businesspeople decry inverted companies as unpatriotic for avoiding their US tax liability while taking advantage of all our country has to offer, a legislator in Virginia has other ideas. Sen. Ryan McDougle recently introduced a bill that would create a $5 million corporate income tax exemption for companies that have used an inversion to lower their US tax liability. Qualifying companies would need to make a $5 million capital investment in Virginia to open a facility or other business operation, and would be eligible for the exemption each year for five years. It’s just the latest move in the depressing race to the bottom on corporate taxes.

A Maryland state senator has offered a bill that would repeal a stormwater fee he once supported. Sen. James Brochin wants to get rid of the so-called “rain tax,” a hot issue in the last gubernatorial campaign, because he claims local jurisdictions have applied the fee unevenly and put businesses at a competitive disadvantage (this aspect of the law was a part of the bill at the time the senator voted for it). Brochin also regrets supporting a bill that indexed the state’s gas tax to the Consumer Price Index (CPI), saying, “If you took the CPI idea and you had passed it in 1993, 21 years later the gas tax would be $1.86 [per gallon].” His math is a little fuzzy. Indexing MD’s gas tax to inflation (CPI) since 1993 would mean the base rate would go from 23.5 cents to 38.5 cents.  On top of that, there’s a 5 percent sales tax on gas phasing-in that would add about 12 cents a gallon to the gas tax at today’s prices, for a total gas tax of 50.5 cents, not $1.86.  For the tax rate to hit $1.86, gas prices would have to be $29.50 per gallon – which won’t happen anytime soon.

Maine Gov. Paul LePage is expected to push his tax cut package in next week’s state of the state address. Under the governor’s proposed budget, individual and corporate income tax rates would be cut, the estate tax would be eliminated, and the sales tax would be broadened and increased. The governor described his plan as a way to move the state from an income-based tax system to a “pay-as-you-go” consumption-based tax system. In other words, the state would shift the way it funds public investments from relying on a progressive personal income tax to a broad- based sales tax which falls disproportionately on low- and middle-income families.

A bill to enact a property tax circuit breaker credit in Nebraska received a hearing in the state legislature today. The proposal, offered by Sen. Kate Bolz, would offer property tax rebates up to $1,200 to couples who make under $116,000 a year or individuals making under $58,000.  It is designed to target relief to residents whose property taxes or rents are high relative to their incomes. ITEP analyzed the bill and found that two-thirds of the benefits of the property tax circuit breaker credit would go to the bottom 40 percent of Nebraskan taxpayers.

Following Up:

• North Carolina: NC Policy Watch drew attention to a new Berkeley study that shows the federal capital gains tax cuts under President George W. Bush failed to stimulate the economy. State leaders are pushing to eliminate North Carolina’s capital gains tax to increase investment.
• Minnesota: A Senate committee voted to consider proposals to phase out the state’s tax on Social Security benefits as part of a larger tax package yesterday. Seniors and the Minnesota AARP voiced support for the measures, while some legislators balked at the price tag.
• Mississippi: Gov. Phil Bryant’s plan to cut taxes drew more opposition, most recently in a Clarion-Ledger op-ed: “Bryant exuded optimism that the state’s economy was in the best financial condition ever. He didn’t dare mention that the primary source of income for Mississippians is transfer funds–namely federal funds.”

Things We Missed:

• Florida Gov. Rick Scott released his budget proposal yesterday
• Washington Gov. Jay Inslee wrote an op-ed in The Seattle Stranger using ITEP numbers to offer a full-throated argument for making Washington’s tax system fairer.

When it comes to paying for infrastructure, the gasoline tax is the single most important source of revenue collected at both the state and federal levels.  As a result, funding large scale improvements, or maintenance, to transportation networks usually means that the gas tax rate has to go up.  In 2013, six states enacted gas tax increases or reforms (Maryland, Massachusetts, Pennsylvania, Vermont, Virginia, and Wyoming).  In 2014, two more states followed suit (New Hampshire and Rhode Island).  Now, with lower gas prices freeing up some room in drivers’ budgets, there are 12 states seriously considering  gas tax increases in 2015: Georgia, Idaho, Iowa, Michigan, Minnesota, Missouri, New Jersey, South Carolina, South Dakota, Tennessee, Utah, and Washington State.

Georgia: Georgia House Speaker David Ralston says that a gas tax increase is possible this year and lawmakers in his chamber recently introduced a bill that would do exactly that by allowing the tax rate to growth alongside improvements in vehicle fuel-efficiency.  Gov. Nathan Deal has been dropping hints that he’s open to the idea and even went so far as to call the bill a “positive step forward.”  Business leaders in the state are strong supporters of boosting funding for infrastructure and the governor has been adamant that he intends to find a way to secure that funding.

Idaho: Gov. Butch Otter has yet to propose a gas tax increase this year, but he has supported increases in the past, and there is rampant speculation that a gas tax hike could be floated soon.  Encouragingly, the governor made very clear in his State of the State address that he is not interested in taking money away from education to fund the state’s infrastructure, so it appears that additional revenues will have to be raised to satisfy the governor’s call for larger investments in transportation.

Iowa: Gov. Terry Branstad has been open to a gas tax increase for the last few years, but he has shown increased urgency this year on the need for additional infrastructure funding.  Now, even early in the legislative session, the governor is already in serious talks with legislative leaders aimed at hammering out the specifics of how a gas tax hike could be structured—including possibly allowing local governments to raise the tax.  Legislation raising the tax could be introduced within days.  Such an increase is clearly needed since, after adjusting for inflation, Iowa’s current gas tax rate is at its lowest level in the state’s history.

Michigan: This May, Michiganders will vote on a package of tax changes that would raise roughly $1.3 billion in new revenue for transportation and $300 million for education each year.  Most of the revenue would come through a 1 percentage point increase in the sales tax, though gasoline and diesel taxes would also be reformed in a way that would initially raise their rates by approximately 12 cents per gallon.  Under the reforms, vehicle registration fees would also rise.  But the package also includes an important tax cut as low-income families would see some of the gas, sales, and registration tax hikes offset by an expansion in the state’s Earned Income Tax Credit (EITC) from 6 to 20 percent of the federal credit.  Michigan legislators approved this package of changes in December and Gov. Rick Snyder signed them earlier this month, saying, “Most of you know, I’m a fairly frugal CPA. This is a smart investment to make by the citizens of the state of Michigan to invest more in the roads, schools and local government.”

Minnesota: Gov. Mark Dayton and state Senate leaders have proposed applying a 6.5 percent tax to the wholesale price of gasoline.  That reform would initially raise the gas tax rate by about 16 cents per gallon, and would put revenues on a more sustainable path by allowing for further increases in the future once gas prices begin to rise.  Opponents of the plan criticized the fact that it will “disproportionately impact poor and middle class families.”  But lawmakers don’t need to look very far for a solution to this problem.  Following the deadly I-35W bridge collapse, Minnesota lawmakers enacted a gas tax increase in 2008 that included a “low-income motor fuels tax credit” dealing with this exact issue.  Unfortunately, that credit was repealed after being in effect for only one year in order to help close a budget gap arising from the Great Recession.  But if concerns about regressivity have returned to lawmakers’ minds, a similar credit could be implemented again—ideally on a permanent basis this time.

Missouri: Gov. Jay Nixon used part of his State of the State speech to argue that a gas tax hike “is worth a very close look.”  Nixon said that “Missourians believe it’s only fair that folks who use the roads also pay for them” but explained that the state has unwisely moved away from this model as “Missouri’s gas tax hasn’t gone up a penny in nearly 20 years. It’s the fifth-lowest in the nation.”   

New Jersey: State Transportation Commissioner Jamie Fox announced that he is ramping up inspections of the state’s aging bridges as they continue to deteriorate in the face of inadequate funding.  New Jersey’s gas tax rate is the second lowest in the country and hasn’t been raised in almost a quarter century.  Legislators in both chambers have proposed raising the tax, and Gov. Chris Christie is less hostile to the idea than might be expected, saying that “I’ve made it very clear that everything is on the table.”  If a gas tax hike passes in the Garden State, there’s talk of offsetting it (in full or in part) with cuts in a different tax.  One sensible option comes from New Jersey Policy Perspective, which proposed that the state’s Earned Income Tax Credit (EITC) be expanded to offset the impact of gas taxes on low-income families.  A much less sensible alternative would involve eliminating the state’s estate tax, presumably to make it a little easier for heirs to large fortunes to afford the gas tax.

South Carolina: Gov. Nikki Haley surprised many people when she recently proposed a 10 cent increase in the gas tax after having repeatedly threatened to veto any such increase.  Unfortunately, her proposal comes with a major condition: cutting the state’s top income tax rate from 7 to 5 percent.  That change would make South Carolina’s already lopsided tax system significantly more unfair, and has been called unaffordable by The State’s editorial board.  Nonetheless, talk of raising South Carolina’s historically low gas tax rate seems to be reaching a critical mass as House lawmakers debate a plan to tax gasoline based on its price, and even the South Carolina Chamber of Commerce is backing a higher gas tax.

South Dakota: Gov. Dennis Daugaard recently proposed raising the state’s gas tax by 2 cents per gallon, per year, in order to put revenues on a more sustainable path that could keep pace with the growing cost of infrastructure maintenance and construction.  Gas taxes are on legislators’ minds as well, as the first bill filed in the South Dakota Senate this year would hike the tax by roughly 6 cents per gallon.

Tennessee: Gov. Bill Haslam is giving serious thought to proposing what would be Tennessee’s first gas tax hike in over a quarter century.  While the governor hasn’t come out with a plan yet, he seems to understand that twenty five years of gas tax procrastination have put the state on an unsustainable course, noting that “There’s no way the state can continue on the path we’re on now. The math just doesn’t work.”  State legislative leaders and local governments are reportedly interested in the idea of a gas tax hike and the Farm Bureau has softened its long-running opposition to an increase.  Add to that a new report from the comptroller outlining the benefits of the gas tax, and it appears a gas tax hike is a real possibility in the Volunteer State.

Utah: Gov. Gary Herbert says that “now is the time” to raise Utah’s gas tax, and leaders in the state House and Senate are reportedly in agreement.  Now the debate has shifted to whether the state should simply increase its fixed-rate gas tax (stuck at 24.5 cents since 1997 and currently at its lowest level ever, adjusted for inflation), or whether a long-term reform should be enacted with a more sustainable, variable-rate gas tax.  The latter option is better policy, but either could generate significant revenues for infrastructure and allow for the roll-back of raids on education money enacted in recent years.  Encouragingly, Governor Herbert supports both of these goals.

Washington State: The legislature has been debating a gas tax increase in Washington State for at least two years.  The House passed a 10.5 cent increase in 2013 and the Senate seriously considered an 11.5 cent increase in 2014, but neither of those plans ever made it to the governor’s desk.  This year, Senate transportation leaders say that a gas tax hike is still on the table, and House leaders say that bills debated over the last two years are a good starting point for further negotiations.  Gov. Jay Inslee, for his part, is well aware that more revenues are needed.

Other States: The twelve states listed above are hardly the only ones with gas taxes in need of reform.  We’re also hearing gas tax talk from legislators in Montana and Nebraska, task forces in Louisiana, research groups in Oklahoma, and media in states such as Colorado and Wisconsin.  Of course, there’s plenty of bipartisan chatter about raising the federal gas tax as well.  We’ll be following all of these stories closely as they develop, but for the moment, the twelve states listed above seem the most likely to act.