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This is the second installment of our three part series on 2015 state tax trends. The first article focused on tax shifts and tax cuts, and the final article will discuss transportation funding initiatives.
July 1 marked the end of most states’ fiscal years, the traditional deadline for states to enact new spending plans and revenue changes. The 2015 legislative sessions delivered lots of tax policy changes, both big and small. Some states finished early or on time, while others straggled across the finish line after knockdown budget battles. Still others are not yet done racing, operating on continuing resolutions until an agreement is reached. As of now, four states still do not have spending plans in place for the fiscal year that started July 1 (Illinois, New Hampshire, North Carolina, and Pennsylvania. Alabama has until October to reach a budget agreement).
While every state’s tax system is regressive, some states chipped away at this problem by enacting new tax policies to support working families. Most commonly, states adopted or strengthened their Earned Income Tax Credits (EITCs). But a number of proposals to enact or improve tax credits for working families stalled, including bills in Mississippi, Louisiana and Nebraska. There is still a chance that Illinois could improve its state EITC before the end of its legislative session.
In addition to policies supporting working families, a number of states, facing deep budget deficits, discussed or enacted revenue-raising plans this year. These plans will also help the public by supporting crucial services.
Check out the detailed lists after the jump to see which states created new tax policies to support working families and which states increased taxes to raise needed revenue.
Wins for Working Families
California (Enacted): Lawmakers reached a deal with Gov. Jerry Brown, passing a $115.4 billion budget that includes a new EITC for working families. This new EITC is worth approximately $380 million and is expected to help 2 million Californians.
Hawaii (Still Active): Assuming Gov. David Ige signs a bill approved by the state’s legislature, most low-income families receiving the state’s refundable food tax credit will see their credit grow somewhat starting in 2016. The credit is designed to offset highly regressive sales taxes on food in a state that ITEP has ranked as having higher taxes on the poor than anywhere except Washington State.
Massachusetts (Enacted): Massachusetts lawmakers included an increase in the state’s refundable EITC from 15 to 23 percent of the federal credit in their final budget agreement.
New Jersey (Enacted): The legislature increased the state EITC to 30 percent of the federal credit after a surprise endorsement from Gov. Chris Christie. As New Jersey Policy Perspective notes, the increase will help more than 500,000 working families and boost the state economy: “It’s been estimated…that the EITC has a multiplier effect of 1.5 to 2 in local economies – in other words, every dollar of tax credit paid ends up generating $1.50 to $2 in local economic activity.”
Rhode Island (Enacted): As part of the budget deal, Rhode Island lawmakers approved an increase in the state’s refundable EITC from 10 to 12.5 percent of the federal credit.
Maine (Enacted): The final budget package approved by lawmakers converted the state’s nonrefundable 5 percent EITC to a refundable credit and introduced a new refundable sales tax fairness rebate, which will help to offset the impact of higher sales tax rates also included with the budget.
New York (Enacted): Gov. Andrew Cuomo, the Assembly, and the Senate all proposed separate versions of a refundable property tax credit this session – some more targeted than others. In the closing days of the session, lawmakers agreed to a compromise credit that is a sliding scale percentage of homeowners’ STAR property tax exemption, with benefits targeted to low- and moderate-income homeowners. The credit is unavailable to homeowners with income above $275,000, and those residing in New York City or other jurisdictions that do not comply with the state’s property tax cap. Unfortunately, the final agreement did not include any support for renters.
Significant Revenue Raising:
Alabama (Still Active): Lawmakers left their regular legislative session without a budget—or a needed revenue raising plan—in place (their fiscal year starts Oct. 1, so they are working on borrowed time). Gov. Robert Bentley proposed a $541 million revenue package earlier in the year, including a higher cigarette tax, higher sales taxes on car purchases, and enacting combined reporting under the corporate income tax. Unable to reach agreement on which taxes to raise and by how much to raise them, lawmakers sent the governor a budget with no new revenues, which he swiftly vetoed. Lawmakers reconvened briefly on July 13 to receive Gov. Bentley’s latest revenue raising proposal that would raise more than $300 million: eliminating a state deduction for social security payroll taxes (only taken by lawmakers), a 25-cent cigarette tax increase, and a few small business tax changes. His proclamation also suggested lawmakers could consider a soda tax as an alternative to eliminating the payroll deduction. Lawmakers are expected to review the revenue changes over the next three weeks and will meet again on August 3 to vote on the proposal.
Connecticut (Partially Enacted): Connecticut lawmakers passed a budget with more than $1 billion in new revenue to plug a budget gap and ensure the state has resources to make needed investments in education, transportation, and health care. In late June, lawmakers were called back to the capital for a special session after Gov. Dannel Malloy caved to the behest of corporate lobbyists. At issue was an increase in the state’s sales tax on computer and data processing services from 1 to 3 percent, as well as new combined reporting rules for businesses operating in Connecticut. The legislature backed down on those changes after corporations decried the measures and leaned heavily on the governor. The new deal maintains the sales tax rate on computer and data processing and delays the start of combined reporting by one year. The close to $1 billion revenue package also includes higher personal income taxes for very wealthy households, the elimination of an exemption on clothing under $50, cuts to a property tax credit, and a cap on car taxes paid in some districts.
Illinois (Still Active): Gov. Bruce Rauner and lawmakers face a reckoning of their own making; the state could be headed toward a shutdown without a resolution. Rauner wants to address the state’s $6.1 billion budget gap with massive spending cuts to healthcare, education and other public services in a budget proposal denounced as “morally reprehensible” by critics in the state. The legislature and the Governor are at a standstill.
Louisiana (Enacted): State leaders grappled with how to close a $1.6 billion budget gap all session long. Eventually, they passed a package of eleven bills that will raise about $660 million in revenue. The package increases the state cigarette tax by 32 cents per pack, scales back business subsidies, and decreases many of the state’s existing tax breaks through a 20 percent across-the-board cut. Most of the new revenue raised by the package of bills will go toward preventing deep cuts to higher education and healthcare programs. To win approval from Gov. Bobby Jindal, lawmakers were forced to adopt a convoluted plan with a fake fee and fake tax credit as a smokescreen for raising revenue so that the governor could keep his promise to Grover Norquist not to raise taxes.
Vermont (Enacted): In order to address a revenue shortfall, Vermont lawmakers enacted a handful of tax increases this year. Most notably, they broadened the income tax base by capping itemized deductions (mostly used by upper-income taxpayers) at just 2.5 times the value of the state’s standard deduction. Sensibly, lawmakers also eliminated the ability to deduct Vermont state income tax from, well, Vermont state income tax. They also expanded the state’s sales tax base to include all purchases of soda beverages.