Putting a Bow on 2015 State Tax Debates: Our Favorite Tax Policy Trends

As is often the case, 2015 was a year in which states enacted a mix of tax policy changes—some good and some bad.  Regressive income tax cuts in Ohio and North Carolina, and an irresponsible tax “trigger” in Michigan, were some of this year’s low points.  But despite those steps backward, there were also more than a few bright spots.  Here are five tax policy trends from 2015 that we hope will keep on giving into the new year.

1.      Tax Breaks for Working Families

Lawmakers from both sides of the aisle came together in five states this year to champion state Earned Income Tax Credits (EITCs), an important tax fairness and poverty alleviation tool for working families.  These actions were a huge victory for anti-poverty advocates who have largely been fighting proposals to weaken or eliminate the credit in recent years. Other states enacted or enhanced other credits that benefit lower-income families.

• California enacted the state’s first refundable EITC.  The new credit is targeted to working families and individuals who are living in deep poverty.
• Colorado’s 10 percent refundable state EITC is now funded, allowing families to file for the credit on their 2015 state tax returns.
• Hawaii temporarily expanded the state’s food sales tax rebate.  Most notably, the maximum credit increases from $85 to $110.
• Maine converted the state’s nonrefundable 5 percent EITC to a fully refundable credit. Lawmakers also created a new targeted, and refundable, sales tax credit to offset the impact of increased sales taxes on low- and middle-income residents.
• Massachusetts’ state EITC was increased from 15 to 23 percent of the federal credit.
• Michigan expanded eligibility for the state’s property tax homestead credit and increased the maximum value of the benefit.
• New York enacted a permanent refundable income-based property tax credit for homeowners.
• New Jersey’s state EITC was increased from 20 to 30 percent of the federal credit.
• Rhode Island’s state EITC was increased from 10 to 12.5 percent of the federal credit

2.      Equitable Income Tax Reform

Washington Gov. Jay Inslee shone a bright light on tax fairness issues this year by proposing that his state’s tax system (ranked worst in the country for its regressivity by ITEP) should be reformed by adding a tax on capital gains income.  Ultimately, Inslee’s proposal wasn’t enacted during the 2015 session.  But at least three states did manage to enact meaningful, fairness-enhancing reforms to their income taxes.

• 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.  Among the most significant changes are an increase in the tax rate paid by high-income households from 6.7 to 6.99 percent.  Lawmakers also enacted combined reporting—a vital tool for combatting corporate tax avoidance—though the implementation of that reform has since been delayed in an effort to appease General Electric. 
• Maine legislators significantly improved upon a “tax shift” package proposed by Gov. Paul LePage earlier this year.  While the package included a mix of progressive and regressive features, the overall plan actually lessens the unfairness of Maine’s tax system in part with stricter limits on itemized deductions and the gradual phase-out of both standard and itemized deductions for high-income taxpayers.
• 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.  Lawmakers also eliminated a bizarre, circular tax break that allowed Vermont residents to deduct their Vermont income taxes from their Vermont income taxes.

3.      Sales Tax Modernization

State and local sales tax laws have grown increasingly outdated as the nation’s economy has become more digital and service-oriented.  While most tangible goods sold at traditional stores have always been taxed, too often other transactions are exempt by default.  This year, however, several states took action to expand their shrinking sales tax bases to include transactions such as personal services, e-retail, and some tangible goods while other states embraced taxing the emerging ‘shared economy’ services including Airbnb and Uber rentals.

• Connecticut lawmakers expanded the state’s sales tax base to include various car wash services as well as clothing (previously, clothing items priced under $50 were exempt from sales tax).
• Florida tax collectors reached an agreement with Airbnb to begin collecting local hotel taxes.
• In Illinois, a sales tax measure passed in 2014 spurred Amazon.com—the nation’s largest e-retailer—to begin collecting sales taxes when it took effect early this year.
• Michigan lawmakers enacted reforms expanding the state’s ability to require that e-retailers collect and remit sales taxes.  That change caused Amazon.com to begin collecting sales taxes on October 1.
• North Carolina expanded its sales tax base to include repair, maintenance, and installation services for motor vehicles and other items.  Tax collectors in the state also reached an agreement with Airbnb to begin collecting sales taxes and hotel taxes.
• Rhode Island expanded its sales tax and hotel tax bases to include short-term private rentals (such as Airbnb) as well as room resellers (such as Expedia).
• Tennessee lawmakers added cloud computing and video game services to the state’s sales tax base.
• Vermont lawmakers added soda and other sugary drinks to the state’s sales tax base.
• Washington lawmakers raised around $160 million through eliminating four sales tax exemptions including a break on machinery and equipment for large software manufacturers.  Additionally, Washington expanded its ability to collect sales taxes from e-retailers with the enactment of a “click-through” nexus law, and reached an agreement with Airbnb for the company to begin collecting sales and hotel taxes.

4.      Moving Away from Film Tax Credits 

Of all the tax incentives that states have enacted in an effort to grow their economies, film tax credits are among the least effective.  While local caterers and movie “extras” may benefit when a filmmaker comes to town, most of the high-paid and high-skilled positions involved in a film shoot are inevitably filled by out-of-state residents.  Combine that fact with the temporary nature of filmmaking and the high cost associated with offering a film tax credit generous enough to be competitive with other states, and it’s understandable that many lawmakers have soured on these giveaways.  In 2015, two states eliminated their film tax credits and one state decided to limit film tax credit spending.

• Alaska repealed its film tax credit as a way to dealing with the state’s ongoing revenue shortfall.
• Louisiana capped its film tax credit due to its high cost and linkage to multiple scandals.
• Michigan repealed its film tax credit because of concerns about its low economic impact.

5.      Raising Gas Tax Revenue for Transportation Investments

No state tax trend was more pronounced this year than the movement to raise revenue for transportation infrastructure projects.  Some of these revenues took the form of increased fees on drivers, but the most significant revenue gains came from increasing the gasoline tax.  Eight states either increased or reformed their gas taxes and two states (Kentucky and North Carolina) took action to prevent significant gas tax cuts from taking effect.  These increases come on the heels of gas tax actions already taken by eight other states in 2013 and 2014.

• Georgia implemented a 6.7 cent per gallon increase on July 1, 2015.  Future increases will occur alongside growth in inflation and statewide vehicle fuel-efficiency.
• Idaho enacted a 7 cent increase that took effect July 1, 2015.
• Iowa increased its gas tax by 10 cents on March 1, 2015.
• In Kentucky, falling gas prices nearly resulted in a 5.1 cent gas tax cut this year, but lawmakers scaled that cut down to just 1.6 cents.  The net result was a 3.5 cent increase relative to previous law.
• Michigan Gov. Rick Snyder signed legislation raising the state’s gasoline tax by 7.3 cents, effective January 1, 2017.  These tax rates will also grow alongside inflation in the years ahead.
• In Nebraska, a 6 cent increase was enacted over Gov. Pete Ricketts’ veto.  The gas tax rate will rise in 1.5 cent increments over four years, starting on January 1, 2016.
• In North Carolina, falling gas prices were scheduled to result in a 7.9 cent gas tax cut in the years ahead, but lawmakers scaled that cut down to just 3.5 cents.  The eventual net result will be a 4.4 cent increase relative to previous law.  Additionally, a reformed gas tax formula that takes population and energy prices into account will result in further gas tax increases in the years ahead.
• South Dakota implemented a 6 cent increase on April 1, 2015.
• In Utah a 4.9 cent increase will take effect January 1, 2016, and future increases will occur as a result of a new formula that considers both fuel prices and inflation.  This reform made Utah the nineteenth state to adopt a variable-rate gas tax.
• Washington Gov. Jay Inslee signed legislation raising the state’s gas taxes by 11.9 cents.  The increase takes effect in two stages: 7 cents on August 1, 2015 and 4.9 cents on July 1, 2016.