Governors’ Plans for State Taxes in 2017/2018

In advance of the new year, several governors have released tax and budget proposals for their states’ next two fiscal years. Below, proposals from Montana, Washington, Alaska, Arkansas, and Oklahoma are outlined. While these proposals are not necessarily indicative of nationwide trends we expect to see in 2017, some help to set a good example of progressive solutions to raising revenue and improving tax fairness.

Montana

Montana Gov. Steve Bullock (D) released a budget proposal that aims to address a revenue gap while improving tax fairness. As highlighted by the Montana Budget & Policy Center, the governor’s budget would restore a higher tax bracket on top earners (on incomes over $500,000) and limit the preferential treatment of income earned from wealth rather than work by limiting the lower tax rate applied to capital gains income to the first $1 million of income. And it would increase parity for the treatment of income by capping the deduction for federal income tax paid for income from estates and trusts like it currently does for other types of income. Perhaps most notably, Gov. Bullock’s proposal also called for the creation of a refundable Earned Income Tax Credit (EITC).

Gov. Bullock’s plan is not all rosy. The budget includes across-the-board cuts to services and by no means flips Montana’s overall tax structure from regressive to progressive. But it is an example of how states can remedy revenue shortfalls without placing all the responsibility on low-income families.

Washington

In Washington state, Gov. Jay Inslee (D) proposed a host of revenue raising measures, largely to increase state funding for K-12 education. The state is under a court order to increase contributions to teachers’ salaries. The governor’s proposal would raise revenues beyond the court’s requirements by establishing a capital gains and carbon tax, increasing the business tax on services provided by some professionals, and eliminating several tax exemptions.

It would establish a 7.9 percent tax on some capital gains earnings, like stocks and bonds. (Homes, farms, retirement accounts, and forestry would be exempt from the new tax.) About half of the revenue from a new carbon tax of $25 per metric ton of pollution would go to K-12 education. Inslee’s proposal restores a decades-old rate cut to the business and occupation tax on professional and personal services. It would also expand the definition of business and occupation to capture revenue from certain out of state retailers that currently avoid the tax. Eliminating several state tax breaks, such as a sales tax exemption for nonresidents, would also generate significant revenue for the state. And because of the increase in state contributions to school funding, the local tax levy in most of the state’s school districts would be lowered.

As the Washington State Budget & Policy Center noted, the proposal would raise needed revenue in a forward thinking and equitable manner, but there is still more that needs to be done to create a more equitable and adequate tax system overall.

Alaska

The stated goal of the budget proposal from Gov. Bill Walker (I) is to continue cutting the size of government, restructure the state’s Permanent Fund Earnings Reserve (Permanent Fund) to make it more sustainable and provide funding for services, and generate new revenue through broad-based taxes. To that aim, the governor’s proposal re-introduced a version of a bill that passed the Senate earlier this year to restructure the state’s Permanent Fund. It would establish a formula to draw from the fund to provide funding for government services. The proposal also includes an increase to the gas tax to cover transportation expenses. Alaska currently has the lowest gas tax in the country (8 cents per gallon) so the proposed threefold increase would keep the state under the national average. The proposal did not give specific guidance on what broad-based taxes the governor hopes to utilize for new revenue. Walker departed from his strategy in the last budget of proposing to reinstate an income tax for the first time in 35 years and instead left a $890 million revenue gap that he hopes will be addressed with the help of the legislature.

Arkansas

Arkansas Governor Asa Hutchinson (R) called for a $50 million decrease in revenue from income tax cuts. This proposal follows the previous budget which included a $100 million income tax cut which the administration claims the state budget fully absorbed. (The governor has pushed back against calls from legislators for even more aggressive income tax cuts unless they are paid for by reductions in exemptions and loopholes.) While being billed as a tax cut for families earning less than $21,000 per year, an ITEP analysis shows that the proposal would only give a cut to 45 percent of taxpayers in the bottom two quintiles, with 75 percent of the tax cut going to taxpayers in the top 60 percent. To provide tax relief for low-income families, the governor would be better off proposing a targeted tax cut like a state EITC.

The governor’s budget proposal has been appropriately praised for its increased funding for critical services, such as the state’s foster care and mental health services, but it missed an opportunity to use sensible tax reform as a source for the needed revenue. Arkansas’s tax structure already suffers from a fundamental mismatch – it’s a low-tax state that’s high-tax for many low-income families – and further cutting the state income tax will not help.

Oklahoma

Oklahoma is expected to face a shortfall of more than $800 million. Gov. Mary Fallin (R) has not released a formal budget, but she has hinted at a few proposals. The first is wishful thinking that the price of oil and gas will rebound by February so the state can cash in on its oil and natural gas production tax. Another includes ideas to generate new revenue – including a cigarette tax, expanding the sales tax to services, and eliminating $8 billion in sales tax exemptions. Since Oklahoma has not met revenue projections it will not reduce its top income tax rate – yet another example contrary to the idea that tax cuts always increase revenue.