Category: TaxJusticeBlog

This is the second installment of our six part series on 2017 state tax trends. The introduction to this series is available here.

State tax policy can be a divisive issue, but no area has generated more agreement among lawmakers across the country than the need to raise new revenues to fund infrastructure improvements. The most common way of accomplishing this goal has been to boost gasoline and diesel tax rates paid by motorists at the pump. Nineteen states have raised or reformed their gas taxes since 2013 and over a dozen states will debate doing so this year.

State and federal gas taxes are the cornerstone of our nation’s transportation finance system. But far too many of these taxes are severely outdated and poorly designed.

The good news is that state lawmakers are becoming increasingly aware of these problems. The governors of states such as Alaska, California, and Minnesota, for example, have already begun advocating for meaningful gas tax increases this year. Legislative leaders in Indiana and South Carolina are also making the case for a higher gas tax in their states.

The bad news is that in other states, such as Tennessee and Wisconsin, lawmakers are using the need for a gas tax update as an excuse to push for cuts in other, unrelated taxes. The final effect of this type of swap would be to boost infrastructure funding, but only at the expense of other core services such as education and public health.

The states where gas tax debates are already taking place this year include:

Alabama lawmakers debated a 6 cent per gallon gas tax increase in 2016 and may return to the issue this year. The Association of County Commissions of Alabama recently endorsed a 3-cent-per-gallon increase and there appears to be some support for the idea in the business community.

Alaska Gov. Bill Walker has proposed tripling fuel tax rates to fund infrastructure at a time when the energy-dependent state’s major revenue streams have been hammered by declines in both the production and price of oil. In a report issued last month, ITEP found that Alaska’s lowest-in-the-nation gas tax rate would remain below average even if the governor’s proposal were enacted.

The chairman of Arizona’s House Committee on Transportation and Infrastructure is seeking to boost the state’s gas tax by 10 cents per gallon. This would mark Arizona’s first gas tax increase in over 26 years. While raising the state’s gas tax would require a two-thirds vote of both legislative chambers, the question could be put on the state’s 2018 ballot by a simple majority vote of the legislature.

California’s gas tax rate is tied to the price of fuel and has fallen dramatically in recent years as that price has dropped. Gov. Jerry Brown has proposed (PDF, page 87) restoring the state’s gasoline tax rate to where it stood in June 2014—effectively raising the rate by 11.7 cents per gallon. The governor has also suggested raising the diesel tax rate by 11 cents and creating a new annual vehicle fee. And to prevent further swings in the state’s fuel tax collections, the linkage to fuel prices would be severed and each tax would instead be indexed to inflation. Notably, Georgia and North Carolina also recently abandoned their price-linked gas taxes in favor of more predictable and sustainable formulas.

Colorado lawmakers appear to agree that the state needs to invest more in its transportation network, though the source of that additional investment has yet to be determined. Gov. John Hickenlooper has suggested asking voters to raise the state’s sales tax rate, while some Republican legislators would prefer to transfer money away from other areas of the state’s budget. Another idea being discussed is to raise the state’s sales tax but to simultaneously cut business property taxes or gas taxes to attract votes in the Republican-controlled Senate.

Hawaii Gov. David Ige proposed a modest, 3-cent-per-gallon gas tax increase in 2016 that ultimately fell short in the state’s legislature. The governor is expected to support a similar increase this year, though House Speaker Joe Souki is reportedly opposed to the idea.

Idaho lawmakers took an important first step toward improving their state’s infrastructure when they approved a 7-cent-per-gallon gas tax increase in 2015. But there is widespread agreement that the increase fell well short of what was needed. Contractors in Idaho have floated the idea of an additional 10-cent-per-gallon gas tax hike to resolve the remaining gap, while Gov. Butch Otter seems to prefer shifting dollars away from other public investments so that money could be spent on transportation instead.

Last year the Indiana House of Representatives approved raising the state’s gas tax by roughly 4 cents per gallon and tying the tax rate to inflation. That proposal ultimately fell short because of opposition in the state Senate and from former Gov. Mike Pence. The likelihood of passage seem to have improved this year, however, as opposition in the Senate has softened and as the state’s new governor, Eric Holcomb, has indicated that he is not vehemently anti-tax. The Indiana House is now debating a proposal to raise the gas tax by 10 cents per gallon and index it to inflation.

Kansas tax collections have taken a major hit in the wake of Gov. Sam Brownback’s tax cuts and the governor is proposing cutting spending on transportation in order to remedy part of the state’s general fund deficit. As an alternative to that plan, the Rise Up Kansas coalition has proposed an 11-cent gas tax increase to fund transportation as well as personal income tax reforms that could remedy the state’s general fund shortfall.

Louisiana lawmakers are likely to debate a sizeable gas tax increase this year. An infrastructure funding task force estimated that an increase of 23 cents per gallon would solve the state’s transportation revenue shortfall. Meanwhile, a separate ITEP study found that a 19-cent increase would be needed simply to restore the purchasing power that the tax has lost since 1990. Moving an increase of that size through the legislature would be a politically heavy lift, though Gov. John Bel Edwards is sending signals that he will pursue some level of increase, noting that “we have significant needs … I hope we can find the will to move forward.”

Minnesota Gov. Mark Dayton recently proposed (PDF) levying a 6.5 percent sales tax on gasoline and raising vehicle registration fees. The gas tax increase is expected to raise approximately $600 million, though legislative leaders say they are opposed to tax increases of any kind. Minnesota’s corn growers reportedly support a 10-cent increase in the state’s gas tax.

The influential Mississippi Economic Council voiced support for a gas tax increase last year and the idea is being considered by Lt. Gov. Tate Reeves and House Speaker Philip Gunn. Mississippi has waited over 28 years since last increasing its gas tax—longer than any state except Oklahoma and Alaska. Last year, Mississippi lawmakers considered pairing a gas tax increase with general fund tax cuts but eventually decided to enact the tax cuts without changing the state’s gas tax rate.

Missouri’s Transportation Department Director said that an update to the state’s two-decade old gas tax rate is a “good area to look” when attempting to address Missouri’s infrastructure revenue shortfall. Whether that recommendation will be taken to heart by the state’s new governor, Eric Greitens, has yet to be seen. Lawmakers have already floated the idea of hiking the state’s gas and diesel tax rates by 1.5 and 3.5 cents per gallon, respectively, though the proposal would need to be approved by Missouri voters because it takes the form of a constitutional amendment.

A broad coalition of Montana businesses, unions, contractors, and local governments is urging state lawmakers to raise the state’s gas tax rate by 10 cents per gallon. Montana’s gas tax rate has been allowed to stagnate for more than 22 years. The push to raise the tax has been receiving significant attention in newspapers around the state.

New Mexico legislators are mulling a 10 cent increase in their two-decade-old gas tax rate as well as an alternative proposal to give localities the option to levy their own gas taxes of up to 5 cents per gallon. Gov. Susana Martinez’s opposition to tax increases will be a major obstacle to passage, but the state’s dire budget situation means that lawmakers will likely engage in a serious tax policy debate this year.

Oklahoma lawmakers are facing a deep budget hole, largely because of income tax cuts and underperforming oil tax revenues. Adding to the problem is the fact that Oklahoma’s nearly 30-year-old gas tax rate has seen its purchasing power fall dramatically, and that lawmakers responded by transferring a large and growing share of general fund dollars into the state’s transportation budget. The state legislature is expected to finally debate a gas tax increase this year. Early supporters include the Oklahoma Policy Institute and the editorial board of the state’s largest newspaper.

Oregon Gov. Kate Brown urged lawmakers to pass a significant transportation funding package in her inaugural address. While she has yet to propose a specific funding source, discussions of a gas tax increase are already underway. The League of Oregon Cities is among the groups backing an increase in Oregon’s gas tax. Republican legislators, however, are indicating that they may not support a gas tax increase unless it is paired with cuts in taxes that fund other areas of government.

South Carolina’s House leadership recently proposed raising the state’s gas tax by 10 cents over five years, increasing the vehicle sales tax, and enacting higher registration fees for hybrid ($60) and electric ($120) vehicles. While former Gov. Nikki Haley insisted that any gas tax increase needed to be paired with an income tax cut, the state’s new governor, Henry McMaster, has yet to weigh in on the issue. South Carolina’s gas tax has not been raised in 28 years and an increase is supported by the South Carolina Chamber of Commerce and at least one member the state’s DOT Commission.

Tennessee Gov. Bill Haslam recently unveiled a plan to boost the state’s gasoline tax by 7 cents and its diesel tax by 12 cents. Tennessee would also join the growing group of states that index their gas tax rates to inflation. The governor would also like to raise vehicle registration fees across the board, with larger fees for electric vehicles. Unfortunately, Gov. Haslam has paired these changes with tax cuts for businesses and successful investors, and a reduction in the state’s sales tax rate on groceries. The net result would be a boost in funding for infrastructure and a reduction in funding for education and other public priorities. Some legislators are discussing an alternative plan that would have a similar overall effect: transferring sales tax dollars out of the general fund to be spent on transportation instead.

Virginia localities in some parts of the state are seeing the revenues raised by their regional gas taxes fall millions of dollars short of projections. Regional gas taxes in Virginia are linked to the price of fuel, so low fuel prices have resulted in low tax collections. Some state lawmakers would like to remedy what they call a legislative “oversight” by establishing a minimum regional gas tax rate, or “floor,” that would be collected even when fuel prices are low. Virginia’s state-level gas tax already contains just such a floor, as do the price-based gas taxes levied in many other states.

Wisconsin Gov. Scott Walker firmly opposes any net tax increase, though he may agree to a boost in the state’s gas tax rate if it is accompanied with tax cuts of equal or greater size. The state Assembly tentatively embraced the idea but its leader, Assembly Speaker Robin Vos, has also said that “I don’t necessarily favor taking money from income and sales tax dollars that could go to fund schools or the university or somewhere else and transferring that into the transportation fund when we know we have needs there.” Because Gov. Walker is unlikely to sign a gas tax increase unless it includes exactly this type of swap, Speaker Vos is reportedly growing more pessimistic about the chances of reaching an agreement in 2017.

For more information on state gas taxes, read:

How Long Has It Been Since Your State Raised Its Gas Tax? (updated January 2017)

Most Americans Live in States with Variable-Rate Gas Taxes (updated January 2017)

This week’s Rundown brings news of tax cuts passed in Arkansas and advanced in Idaho, proposals to exempt feminine hygiene products from sales taxes in Nevada and Michigan, revenue shortfalls forcing tough choices in Louisiana and Maine, and more governors’ state of the state addresses and budget proposals setting the stage for yet more tax and budget debates to come.

— Meg Wiehe, ITEP State Policy Director, @megwiehe 

• Arkansas lawmakers passed Gov. Hutchinson’s $50 million tax cut bill. While sold as a tax cut for workers earning less than $21,000 per year, ITEP analysis found that just under half of the value of the tax cut would benefit taxpayers in the top 40 percent (with the other half going to the bottom 60 percent as advertised). Lawmakers also passed a tax cut for military veterans, exempting retirement benefits—along with a tax break for the soda industry paid for by expanding the sales tax to manufactured housing, some digital goods, soft drinks, and candy.
• Louisiana lawmakers will meet in special session Feb. 13 to 23 to address a midyear deficit of more than $314 million. With tax increases off the table, expect cuts, rainy day fund spending, shifting costs to next year, and possible fee increases to balance the budget. Lawmakers will debate tax measures, such as those recommended in the recently released final report of The Task Force on Structural Changes in Budget and Tax Policy, during the regular legislative session starting in April.
• Nevada‘s ongoing debate over its property tax cap demonstrates how unhelpful and shortsighted such caps can be. To reduce property tax increases during the mid-2000s housing boom, the state installed property tax caps that now are now causing major problems for schools and other local governments, whose funding “won’t reach pre-recession levels for a generation” if something isn’t done.
• Nevada lawmakers will also consider proposals to create sales tax exemptions for feminine hygiene products and diapers. Lawmakers in Michigan also have introduced similar legislation.
• Idaho lawmakers are advancing two tax cut proposals—cutting the top personal income tax and corporate income tax rates, as well as increasing the exemption on the businesses personal property tax. An ITEP analysis of the bills found that the top 5 percent of taxpayers would receive two-thirds of the benefit.
• Nebraska lawmakers have a proposal to require online retailers to collect sales taxes due on purchases in the state, though one legislator is hoping to co-opt the idea by using the revenue to fund a tax cut for the wealthy.
• Efforts to enforce tax collection for online sales are also advancing in South Carolina, Minnesota, and Indiana. Utah lawmakers will take up the issue again this year, with the threat of competing tax initiatives to fund public education creating higher pressure for action.
• Several legislators in Maryland are attempting to make it the next state to legalize and tax marijuana.
• Oregon lawmakers face stark choices with a $1.8 billion deficit demanding drastic cuts or significant tax increases. The latter faces an uphill battle given supermajority legislative requirements, Republican demands for cutting public employee retirement benefits, and potential challenge via referendum.
• Florida Gov. Scott’s tax cut package this year includes an expansion of the state’s back-to-school sales tax holiday, which, as we’ve written here, is a nice-sounding but not-very-effective way of helping working families.

Budget Watch

• Ohio‘s Gov. John Kasich released his final two-year budget this week, which includes a proposal to shift a significant amount of tax revenue away from personal income taxes and onto consumption taxes.  His personal income tax plan would flatten the personal income tax (reducing the number of brackets), cut rates, and increase the personal exemption for low- and moderate-income taxpayers at a full cost of well more than $1 billion annually.  But, he would raise almost an equivalent amount in revenue from sales, cigarette, alcohol, and severance taxes. Ohio Policy Matters take is that the proposed budget focuses on a tax shift, shortchanging key programs. 
• Tennessee Gov. Haslam released the final budget proposal of his term Monday. With revenues performing strongly but infrastructure needs growing, the budget includes funding increases for basic education, teacher and state employee pay increases, higher education building maintenance and construction, and a proposal to raise the state’s outdated gas tax but offset the increase with tax cuts for wealthy Tennesseans.
• Florida Gov. Scott unveiled details of his budget proposal Tuesday. His spending plan includes public-safety pay increases but budget cuts to public defenders, and relies on expected property value increases to improve school funding. It includes a tax-cut package, similar to a failed proposal last year, composed mostly of business tax cuts and sales tax holidays.

Governors’ State of the State Addresses

• In the past week, Governors Rauner of Illinois, Hogan of Maryland, Haslam of Tennessee, Abbott of Texas, and Herbert of Utah delivered their State of the State addresses.
• States with addresses scheduled through the end of next week are: Oklahoma on Monday; Alabama, Maine, and Pennsylvania on Tuesday; and Kentucky on Wednesday.

What We’re Reading…

• Governing reviews the fiscal pros and cons of self-driving cars, which are expected to be a net benefit to state and local budgets once accounting for reduced spending on things like road maintenance and traffic stops, increased property tax revenue thanks to less need for parking garages, and reduced revenues from fuel taxes, registration and license fees, and parking and speeding fines — not to mention reduced traffic injuries and deaths.
• The troubled “Kansas experiment” goes to Washington.
• Governors and legislatures are attempting to nullify voter-approved referenda on a host of issues from ethics reforms in South Dakota to minimum wage increases in Arizona and Maine.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

UPDATE: After this post was published, Amazon announced that it will begin collecting sales tax in Oklahoma on March 1. This post has been updated to reflect this development.

The nation’s largest Internet retailer has made an about-face on its sales tax policy, making consumers’ ability to evade sales tax on online purchases a little less common. By March 1, the number of states where Amazon.com collects sales tax will have leapt from 29 to 40 in a span of just two months.

On Jan. 1, the company began collecting tax in Iowa, Louisiana, Nebraska, and Utah. Starting Feb. 1, the company began collecting sales tax in Mississippi, Missouri, Rhode Island, South Dakota, and Vermont, and on March 1 it will do the same in Oklahoma and Wyoming.

Five states don’t levy state-level sales taxes, so this means there are only five states left where Amazon will still refuse to collect the taxes owed by its customers: Arkansas, Hawaii, Idaho, Maine, and New Mexico.

This is a dramatic reversal in the company’s tax collection practices. As our animated map shows, as recently as 2011 Amazon was only collecting sales tax in five states.

Many of the changes in Amazon’s sales tax collection practices are rooted in its opening of distribution centers around the country. When Amazon, or any retailer, establishes a “physical presence” in a state it unquestionably falls within reach of that state’s sales tax collection laws.

In other cases, it appears that Amazon’s decision to collect sales tax might be related to state-level laws seeking to expand the scope of state sales tax collection statutes. But in Mississippi and Vermont, for example, those laws were not scheduled to go into effect until July and Amazon did not respond to journalists’ questions regarding why the company is beginning tax collection five months early.

Amazon is the nation’s largest e-retailer and its decision to collect, or not collect, sales tax has a meaningful impact on states’ sales tax revenues. But it is worth remembering that Amazon is just one of many e-retailers. As our policy brief on this topic concludes: “Until either Congress or the Supreme Court acts to allow states to require that all Internet retailers collect sales taxes … there is no doubt that the preferential treatment of e-commerce will continue, and that ‘brick and mortar’ retailers, law-abiding taxpayers, and state tax collections will suffer.”

Over the next few weeks we will be blogging about what we’re watching in state tax policy during 2017 legislative sessions. In this “What to Watch in the States” series, we will look at the following:

1. State responses to short- and long-term revenue deficits
2. Boosting funding for infrastructure, though sometimes at the expense of other public services
3. Proposed measures that weaken or eliminate income taxes
4. Efforts to modernize sales taxes to reflect 21st century economy
5. State anticipation of and reaction to potential federal tax policy changes
6. Tax breaks for working families

We start the series by contextualizing the current fiscal and budgetary climates in the states.

Deficits Abound: Why All This Trouble?

More than 30 states are facing short- or long-term revenue deficits, putting pressure on legislatures across the country to find ways to plug budget holes.

The last time this many states faced deficits was during the Great Recession. In 2017, shortfalls are being caused by a number of different issues with variable impact across states. These include: cyclical issues such as the decline in oil prices and stock market weakness in 2016; structural imbalances years in the making in large part due to prior year tax cuts; court decisions ordering states to more adequately fund public education; and uncertainty regarding tax changes under a new president and Congress.

For example, Alaska, Louisiana, North Dakota, Oklahoma, and West Virginia face budget deficits due to their heavier reliance on revenues from the slumping energy industry. Connecticut and Illinois are grappling with structural deficits independent of the business cycle. States such as Kansas continue to grapple with budget deficits exacerbated by significant post-recession tax cuts. Washington and Oregon are staring down multi-billion dollar deficits due to inadequate funding for public education. And California anticipates a deficit in the coming year, driven in part by the uncertainty of federal tax changes and the hope among high-income taxpayers for more favorable tax treatment of capital gains income.

After the last recession, about 30 states raised taxes to help address the shortfall they faced. States also drew down their rainy day funds, cut spending, and used one-time measures such as fund transfers to achieve balanced budgets.

Like then, current budget pressures may spur substantive tax policy reforms or simply encourage lawmakers to engage in budget gimmicks and other one-time measures that reach the accounting balance needed in the moment but that save the real work of achieving balance for another day. What are we seeing and how do we anticipate states to respond to these various pressures this legislative session?

Long-Term Problems Seeking Long-Term Solutions 

Lawmakers in several states recognize that there are long-term revenue problems behind their problematic deficits and are working to advance sustainable solutions. Keep an eye on the following states where true tax reforms are being debated:

Faced with a shortfall exceeding $3 billion, Alaska is again confronting a monumental budget challenge. Gov. Bill Walker has renewed his call for revenue. He has proposed increasing the state’s fuel tax and, in hopes of working with the legislature to fill the gap, continues to push a broad-based tax solution. That could take the form of a personal income tax or a statewide sales tax. If lawmakers choose to punt on a solution and pin their hopes on a rise in oil prices, they risk spending all of the state’s savings in a matter of years.

Illinois faces an $8 billion hole with no clear end in sight to the ongoing political standoff between Republican Gov. Bruce Rauner and Democratic lawmakers. While the Senate has advanced a comprehensive tax reform plan that includes raising the personal income tax rate, increasing the state’s Earned Income Tax Credit, and levying a statewide tax on sugary beverages, without larger concessions relating to redistricting, term-limits, or bargaining rights, a “grand bargain” is unlikely to advance.

Kansas has dealt with years of budget crises in the aftermath of Gov. Sam Brownback’s “real life experiment” in tax policy. While the Gov.’s proposed budget plan takes a “business as usual” approach to balance budgeting (i.e., one-time revenue measures such as funding sweeping, budget cuts, and regressive tax increases), a new coalition in the legislature may successfully push for at least a partial rollback of the LLC exemption whereby 330,000 owners of small business owe no income taxes.  

The stage is set for tax reform in Louisiana if the politics can align. Gov. John Bel Edwards’s key priority is ending the need for constant mid-year budget adjustments and the continued cuts to higher education and health care that have plagued the state in the years following Bobby Jindal’s administration. After another special session to be held in February 2017 to address the budget gap facing lawmakers this fiscal year, the primary task of lawmakers will be to take on familiar recommendations for structural tax reform. 

Washington state currently faces a half-billion dollar shortfall that could quickly increase to $4 billion depending on how the state’s highest court rules regarding the adequate funding of public education. With the scope of this liability on the horizon, Gov. Inslee has put forward a proposal that would raise an additional $4 billion for public education by raising business and occupation taxes on services, expanding the sales tax base, and levying new taxes on carbon and capital gains. This ambitious proposal faces an uphill battle in the legislature.

Long-Term Problems Seeking Short-Term Solutions

The “kick the can” strategy is always a favorite, with budgets balanced on paper through spending cuts, temporary consumption tax hikes, and other budgeting gimmicks while underlying problems go unsolved. Unfortunately we expect to see this approach taken in many states, particularly in those with “no new tax” majorities.

Colorado faces a $600 million deficit. While proposing an increased tax on recreational marijuana to increase funding for public education, Gov. Hickenlooper’s budget plan primarily depends on fund transfers, budget cuts, and delayed payments to achieve balance. The state has limited options for balancing its budgets due to TABOR, which limits revenue options without voter approval.

With declining oil and gas revenues, New Mexico faces another budget deficit. Long needed structural reforms such as broadening the state’s eroding Gross Receipts Tax face the challenge of a popular governor who views tax increases as “an easy way out” of the state’s ongoing fiscal challenges.

New York, faced with a $3.5 billion projected deficit, has been piecing together a mish-mash of temporary tax fixes for years. Continuing that trend, the Governor’s executive budget proposal includes a three-year extension of the state’s income tax surcharge, also referred to as the millionaires’ tax. While an important, and progressive, source of revenue, many remain disappointed that lawmakers are not tackling a permanent solution.

Oklahoma‘s budget shortfall nears $900 million this year as both weak oil and natural gas prices weigh on the state’s finances. But low energy prices are not the only culprit. Generous corporate tax breaks and repeated, unaffordable, incomes tax cuts over the past decade have also taken their toll. The most recent income tax rate reduction was triggered despite an official “revenue failure.” Reasonably, legislators have questioned maintaining the trigger and have floated a range of revenue-raising proposals, including eliminating some exemptions to broaden the state’s sales tax base.

Oregon faces an almost $2 billion deficit, half of which Gov. Kate Brown proposes to fill with new revenue from raising taxes on tobacco, liquor, hospitals, insurers, and some corporation owner’s incomes. Even if some new revenue measures pass in the wake of the failure of Measure 97, deep cuts and delayed payments to social services and higher education are expected.

Pennsylvania continues to struggle with a growing structural deficit. The shortfall of up to $1.7 billion in fiscal year 2017 is expected to grow to $3 billion per year by 2021. While specifics of a budget proposal are yet to be released, Gov. Tom Wolf has stated that he will not seek major broad-based tax increases.  

With the governor’s office and entire Virginia legislature facing elections later this year, lawmakers seem wary of risking controversial tax overhauls. As a result, most proposals so far to address the state’s $1 billion shortfall have been focused on funding cuts, withdrawals from the state’s Rainy Day Fund, and one-time revenue measures like a tax amnesty period. There remains hope that longer-term perspectives will prevail, but perhaps not until after the November elections.

Faced with low energy prices and a struggling coal industry, West Virginia‘s projected budget deficit nears $500 million. As in many other energy-dependent states, previous decisions to slash taxes have also eroded the state’s revenue base. Over several years West Virginia has eliminated its business franchise tax and reduced its corporate income tax. Lawmakers are now faced with tough decisions on how to raise much-needed revenue.   

Digging A Hole Deeper

Despite revenues being under forecast the first 6 months of this fiscal year, Arkansas lawmakers plan to move forward with the Gov. Hutchinson’s plan to cut $50 million in taxes for those with taxable incomes under $21,000. To achieve balance, the governor’s budget proposal includes very optimistic revenue projections, relying on a robust 4.4% growth in general revenue funds absent any tax increases.

Nebraska Gov. Pete Ricketts, whose state faces a $900 million shortfall in the budget it is crafting now and a projected $1.2 billion shortfall in the following budget, has nonetheless proposed to cut taxes for high-income Nebraskans. To do so while still balancing the short-term budget, his proposal uses a “trigger” to delay the harm of the tax cut until 2020 and then begin forcing down the top income tax rate whenever revenue growth meets an arbitrary 3.5 percent benchmark.

Lagging revenue collections will make the budget session tighter than anticipated in Texas, though these fiscal pressures don’t seem to be dissuading some very enthusiastic lawmakers from pursuing legislation to further reduce or eliminate the state’s franchise tax.  

Stay tuned for the next post in our series, “Further Attempts to Weaken or Eliminate Progressive Taxes.”

In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately. 

New! A Visual Tour of Who Pays State and Local Taxes
To help inform 2017 statehouse debates, ITEP today released a chart book that examines how families at different income levels are affected by state and local tax codes. A few findings: all state tax systems are regressive; states without a personal income tax tend to tax lower-income people at higher rates, and flat taxes are beneficial for the wealthy. Read ITEP Research Director Carl Davis’s blog or view Fairness Matters: A Chart Book on Who Pays State and Local Taxes

More Regressive or Less Regressive? 2017 State Tax Policy Trends
While federal lawmakers have signaled individual and corporate tax changes are imminent, less publicized are upcoming state legislative actions on issues as varied as major revenue shortfalls, modernizing decades-old sales and gas tax policies, and flattening or even eliminating revenue sources as vital as the personal income tax. Read an overview of 2017 trends in state tax policy by Meg Wiehe, ITEP’s director of programs.

Playing Catch up with the Motor Fuel Tax
Alaska Gov. Bill Walker has proposed tripling the state’s gas tax. In any other state, this might seem drastic. But Alaska hasn’t increased its gas tax in 47 years, and even if it triples its tax, it would remain below the 50-state average. ITEP released a new brief this week that examines how Alaska’s motor fuel tax is an outlier among states. Read ITEP Analyst Carl Davis’s blog or read the full brief, Alaska’s Motor Fuel Tax: A National and Historical Outlier.  

The State Rundown: Revenue Shortfalls and How to Avoid Them
This week’s rundown of state tax happenings brings more news of states facing budget crunches, a new state considering eliminating its income tax, and states that plan to raise gas taxes to fund transportation projects. Read the State Rundown.

The ITEP Inequality Index
One of the charts in ITEP’s new Fairness Matters chart book ranks the states by the most unequal to the least. Essentially, the inequality index examines whether the gap in families’ shares of income is wider or narrower after state and local taxes are applied.

If you have any feedback on the Digest or tax stories you’re watching that we should check out too please email me rphillips@itep.org

For frequent updates find us on Twitter, Facebook, and at the Tax Justice blog.

Since the 2007-2009 economic crisis, rising income inequality and the role our public policies play in aiding or easing this trend have been an ongoing part of the public discourse. In spite of what we know about the growing gap between the rich and the rest of us, federal and state policymakers continue to sell tax cuts that disproportionately benefit the rich as a panacea that stimulates economic growth and creates jobs. Such tax cuts almost always are touted as a way to put more money into the pockets of middle-income families, in spite of clear evidence that many tax cut proposals are top heavy with benefits that flow primarily to the wealthy. 

While federal lawmakers have signaled individual and corporate tax changes are imminent, less publicized are upcoming state legislative actions on issues as varied as major revenue shortfalls, modernizing decades-old sales and gas tax policies, and flattening or even eliminating revenue sources as vital as the personal income tax.

States’ actions can either make their tax systems fairer or ask more from those who have the least. To help inform statehouse debates, the Institute on Taxation and Economic Policy (ITEP) released a new chart book today that examines how families at different income levels are affected by state and local tax codes. The book, based on ITEP’s Who Pays? study, concludes that states should consider the most sustainable, least regressive tax reforms.

Over the coming weeks, ITEP will publish in-depth blog posts detailing key trends in state tax policy. Below is a broad overview of what we know.

Key Trends in State Tax Policy

Across the nation, more than 30 states face revenue shortfalls this year, including New York, Missouri, Oklahoma, West Virginia, Kansas and Louisiana. The outstanding question is whether lawmakers will tackle budget gaps with comprehensive revenue-raising reform or, instead, continue to kick the can down the road with one-time fixes. 

Lawmakers in Michigan and West Virginia will debate eliminating their personal income taxes, a move that not only would make their tax systems more regressive, but also would impede their ability to balance their budgets in the long run. Meanwhile, lawmakers in Maine, Ohio, Kentucky, Iowa, Georgia, Arizona, South Carolina and other states will consider converting their graduated income taxes to a flat rate. This move would negate the chief advantages of the income tax: its ability to improve tax fairness and adequacy by requiring people with higher incomes to pay higher rates and those with less income to pay lower rates.

Few trends in state tax policy have been as pronounced as the move to generate new revenues to fund vital infrastructure maintenance and expansion. Since 2013, nineteen states have raised or reformed their gas taxes and more than a dozen states will debate doing the same this year. Unfortunately, lawmakers in states such as Tennessee and Wisconsin are only contemplating gas tax increases as part of broader packages that would slash other taxes responsible for funding schools, public safety, and other services. 

While our economy is changing all the time, state and local sales tax laws are often slow to catch up. Recent debates over how best to collect sales tax on e-retail, the gig economy, and the growing personal service industry are certain to continue in 2017. 

Federal, state, and local fiscal policies are highly intertwined. Expansions to the federal income tax base could widen some state tax bases and revenues as well. On the other hand, new federal giveaways could flow through to the states in much the same manner. And changes in the federal tax treatment of income taxes, property taxes, sales taxes, and municipal bonds are always closely watched by state and local lawmakers.

Tax Reform the Right Way

Each of the 50 states has unique challenges and there is no singular right way to approach tax reform. But there are better practices as ITEP’s Fairness Matters chart book reveals: “Given the detrimental impact that regressive tax policies have on economic opportunity, income inequality, revenue adequacy, and long-run revenue sustainability, tax reform proponents should look to the least regressive states in crafting their proposals.”

While it can be hard to look away from the important federal policy debates occurring right now in Washington D.C., state lawmakers across the country will also be debating consequential fiscal policy changes in 2017 that will deserve close scrutiny. The context of those debates will vary by state: from coping with major revenue shortfalls, to modernizing decades-old sales and gas tax policies, to flattening or even eliminating revenue sources as vital as the personal income tax. Despite the varying details, key questions about the fairness and adequacy of state tax systems will be raised in all those discussions.

To help inform 2017 statehouse debates, ITEP released a new chart book today that examines how families at different income levels are affected by state and local tax codes. The book, based on ITEP’s Who Pays? study, concludes that:

When states shy away from personal income taxes in favor of higher sales and excise taxes, high-income taxpayers benefit at the expense of low- and moderate-income families who often face above-average tax rates to pick up the slack. Given the detrimental impact that regressive tax policies have on economic opportunity, income inequality, revenue adequacy, and long-run revenue sustainability, tax reform proponents should look to the least regressive, rather than most regressive, states in crafting their proposals.

The book contains 19 charts and focuses largely on how state tax systems differ between states that chose to rely heavily on sales and excise taxes, or on income taxes, to fund public services. Some of the book’s highlights include:

Chart 4 and Chart 5: The notion that states without income taxes are automatically “low tax” is a myth. Low- and moderate-income families often face above-average tax rates in these states.

Chart 6: Wealthy people fare extraordinarily well when states refuse to levy personal income taxes. The nine lowest-tax states for the wealthy are the nine states without income taxes.

Chart 8 and Chart 9: Flat taxes are beneficial for the wealthy, but at the expense of everyone else. Both low-income and middle-income families tend to pay more in flat tax states than in states with more progressive, graduated-rate income taxes.

Chart 10 and Chart 11: When lawmakers choose to rely heavily on sales and excise taxes to fund government, the typical result is higher taxes for low- and moderate-income families.

Chart 15: The design of a state’s income tax matters hugely in determining the overall fairness of each state’s tax system. Of the 15 most regressive state and local tax systems in the nation, 10 exist in states levying either a flat income tax or no personal income tax at all. By contrast, the 15 least regressive states all utilize a graduated-rate personal income tax.

Chart 19: The large degree of income inequality in our nation is made measurably worse by state and local tax policies. Low-income families’ already meager share of total income actually shrinks after state and local taxes are taken into account.

View the chart book

Alaska Gov. Bill Walker recently proposed tripling the gasoline and diesel tax rates paid by Alaska motorists to generate funding for the state’s infrastructure. In a different state, tripling the motor fuel tax might be a radical policy change. But Alaska’s tax has not been updated since 1970 and because of those 47 years of procrastination, it now lags far behind the taxes levied in most other states. In fact, as ITEP explains in a new brief, Alaska’s motor fuel tax would remain below average even if Gov. Walker’s proposal to raise the base rate from 8 to 24 cents per gallon were enacted.

ITEP’s brief discusses four ways in which Alaska’s fuel tax is an outlier both compared to the taxes levied in other states, and compared to Alaska’s own history. Specifically, it finds that:

• Alaska’s tax rate on highway fuel (gasoline and diesel) is the lowest in the nation.
• Alaska has waited longer than any state since last updating its highway fuel tax rate.
• Adjusted for inflation, Alaska’s tax rate on gasoline and diesel fuel has reached its lowest level in history.
• Alaska households are spending a smaller share of their earnings on state highway fuel taxes than at almost any time since Alaska became a state.

Read the brief

This week brings more news of states facing budget crunches, a new state looking to eliminate income taxes, and plans to raise gas taxes to fund transportation projects.  Be sure to check out the What We’re Reading section for a look at how repealing federal health reform could add to those crunches and a review of what’s going right in the few states that are on sound fiscal footing (spoiler alert: they resisted tax-cut efforts and put money aside for rainy days).

— Meg Wiehe, ITEP State Policy Director, @megwiehe  

• This week, the West Virginia Senate created a select committee to examine state taxes. According to the committee’s chairman, elimination of the state’s personal income tax is under serious consideration. With a projected deficit nearing $500 million, reductions in revenue are a curious course of action.
• Tennessee Gov. Haslam has proposed the latest in a troubling trend of states using their need for a gas tax increase as an excuse to cut other taxes to benefit wealthier families, in this case calling for increases in fuel taxes and vehicle fees combined with cuts to the state’s progressive Hall Tax on investment income and a small reduction in the grocery tax.
• In South Carolina, in contrast to Tennessee, legislators have put forward a straightforward gas tax increase that raises the state’s second-lowest-in-the-nation gas tax 10 cents over 5 years and raises the maximum tax on vehicle purchases from $300 to $500, without giving in to pressure to combine it with tax cuts for the wealthy. The proposal may have a better chance at succeeding now that Gov. Haley, who had opposed this approach in the past, is moving into the Trump administration.
• Iowa‘s $110 million shortfall in its current budget is largely due to a 2013 tax cut for commercial buildings and other properties that costs the state $300 – $400 million each year.
• Wyoming lawmakers are again discussing spending cuts as the only means of addressing the state’s revenue woes. The state’s Senate president announced that he will oppose any new taxes this session despite a $400 million annual school funding shortfall and proposals by House members to fill the gap with new revenue.
• Massachusetts Gov. Baker voiced his opposition to a broad-based tax increase to address the state’s revenue shortfall.
• Another year, another massive tax-cut proposal from Florida Gov. Scott, despite $1 to $2 billion in budget cuts anticipated. This year’s version is similar to last year’s failed proposal — predominantly business tax cuts and sales tax holidays.
• North Dakota lawmakers considering a property tax levy cap might want to take a look at the trouble such a cap is causing in Nevada, as we reported in this space last week.

Budget Watch

• Maryland Gov. Hogan claimed his plan to close the state’s $750 million revenue shortfall included “no serious cuts,” but the proposed budget includes a slew of funding cuts and freezes to crucial services such as after-school programs, scholarships, parks, adult education, hospitals, care for the developmentally disabled, and pension funding. A state budget analyst has shown these cuts don’t solve the recurring structural issues in the budget, saying deficits will continue unless leaders “make harder choices.” 

Governors’ State of the State Addresses

• In the past week, Governors Walker of Alaska, Brown of California, Ige of Hawaii, Baker of Massachusetts, Dayton of Minnesota, and Bullock of Montana delivered their State of the State addresses.
• States with addresses scheduled through the end of next week are: Illinois and Utah today; Tennessee Monday; Texas Tuesday; and Maryland Wednesday. 

What We’re Reading…

• With so many states facing budget shortfalls right now, Pew asks what do the few states with surpluses have in common? The answer: policymakers in these states “have put themselves on a solid fiscal footing by avoiding deep tax cuts, enacting targeted tax increases, and diverting some surplus money into ‘rainy day’ funds to be tapped in leaner times.”
• The Sycamore Institute, a new data-based budget and tax organization in Tennessee, put out an infographic on roads funding in the state as background for the gas tax debates sure to take center stage there this year.
• Governing reports that local public employment is still below pre-recession levels in most states and down 3.5% nationwide, with non-sworn public safety employees, highways, and health among the largest cuts.
• Governing also comments on the state-level ramifications of potential repeal of the Affordable Care Act, a major but uncertain contingency that states have not been budgeting for.
• Support for raising taxes on Massachusetts’s millionaires is strong in a new poll by WBUR/MassINC Polling Group. Seventy-seven percent support increasing the state’s tax on incomes over $1 million.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately. 

Trickle-down policies did not and will not work
In December, Kansas Gov. Sam Brownback told the Wall Street Journal that Donald Trump should take a page from his book and dramatically cut taxes. The problem with this recommendation is that for the last few years, his state has been the poster child for tax cuts gone awry. In a recent blog, ITEP Senior Analyst Lisa Christensen Gee outlines how Kansas’s regressive tax policies have led to a projected two-year, $1.1 billion budget shortfall. The state’s chronic fiscal mismanagement is not a model for other states, much less the federal government. Read more

There’s ‘gold in them there hills’
Lawmakers on both sides of the aisle are eyeing the $2.5 trillion corporations have stashed offshore as a potential source of revenue to fund the nation’s critical priorities. But there are problems with existing proposals.

President-elect Trump has proposed a 10 percent transition tax that would give multinational corporations a $514 billion tax break. Corporations owe more than $700 billion on their offshore profits. Trump’s plan would forego 70 percent of that revenue. In laymen’s terms, this means his plan would give away the store to corporations in exchange for a short-term revenue gain. Read ITEP’s new brief to learn more about Trump’s proposal and for a list of the 10 companies that stand to benefit most. Hint: Think tech and banking sectors.

In case you missed it, late last year ITEP published a comprehensive guide to repatriation proposals. Instead of giving corporations a tax break on their offshore cash, the piece concludes the best policy would be closing the loophole that allows corporations to indefinitely defer taxes on their offshore cash.

Public Says “No” to Tax Cuts, But Congress Says, “Yes”
A new blog by Richard Phillips, an ITEP senior policy analyst, argues that plans floated by Congress and the incoming Trump Administration would dramatically cut taxes for the wealthy and corporations and eliminate revenue necessary to meet the nation’s most basic priorities. In other words, if either blueprint for Ryan or Trump’s plans (or some combination of both) becomes law, the outcome will likely be the furthest thing from true “reform” of our tax system. Oh, and recent public opinion polling finds regardless of party affiliation, voters do not want tax cuts for the wealthy and corporations. Read more.

Or, if you’re into the vagaries of political wrangling, read Phillips’s piece on the state of play regarding federal tax policy.

State Rundown: Revenue Woes Piling up Faster than Solutions
There most certainly will be a lot of focus on federal tax policy this year, but various states will have to make critical tax and budget decisions this year as well. This week’s ITEP State Rundown highlights: states where there are revenue shortfalls, governors’ budget proposals, and other tax news around the country. So far, most state legislative proposals are focused on slashing taxes and reducing public investments, despite public opinion and economic research showing the benefits of well-funded state services and progressive tax policies. Read more

If you have any feedback on the Digest or tax stories you’re watching that we should check out too please email me  rphillips@itep.org

For frequent updates find us on Twitter, Facebook, and at the Tax Justice blog.