State Rundown 4/21: Scraping the Bottom of the Revenue Barrel

Thanks for reading the State Rundown. Here’s a sneak peek: Illinois lawmakers push to change state’s income tax structure to a graduated one, could ask voters to change state constitution. Kansas lawmakers have had it with Brownback, and refuse to cut services anymore unless tax increases are on the table. Strong majority of Oklahoma voters favor tax increases over further budget cuts to solve revenue crisis. Mississippi lawmakers pile new tax cuts on top of old ones.

— Carl Davis, ITEP Research Director 

Facing a never-ending revenue crisis, Illinois lawmakers have finally suggested the logical solution of adopting a progressive income tax. House Speaker Mike Madigan and top Democratic representatives have offered a bill, approved by the House Revenue Committee, that would replace the state’s current flat income tax with a graduated system. Under the new plan, the income tax rate for married/joint filers with income of $200,000 and lower would fall from the current 3.75 percent rate to 3.5 percent. Joint income between $200,000 and $750,000 would be taxed at 3.75 percent, while an 8.75 percent rate would apply to joint income between $750,000 and $1.5 million. Joint income over $1.5 million would be taxed at 9.75 percent. Proponents of the bill say it would raise $1.9 billion in revenue, which would help significantly with the state’s $10 billion in outstanding unpaid bills. Unfortunately, Gov. Bruce Rauner has already rebuffed the measure.

The graduated income tax measure is coupled with a proposed constitutional amendment resolution that would ask voters to decide if the state should move to a graduated income tax (the current flat income tax rate is mandated by the state constitution). Previous legislative efforts to implement a graduated income tax in 2014, or to create a new millionaire’s tax, fell short. Voices for Illinois Children has come out strongly in favor of the progressive income tax, saying “This will allow the tools we need to not rely on low- and middle-income families. We truly believe this is one of the best ways to move our state forward.”

Kansas officials have lost patience with Gov. Sam Brownback’s ruinous tax cuts, and many lawmakers who helped him pass those cuts now refuse to cut spending any further. Tax collections were short of projections in 11 out of 12 months last year, and even conservative lawmakers argue that Brownback should scale back his tax cuts to balance the budget. Following the advice of supply-side Svengali Art Laffer, Brownback promised that economic growth would make up the revenue shortfall caused by his cuts, but the rapid growth never materialized. To make up the deficit this year, the governor has cut higher education by $17 million and shortchanged educators’ pensions by $93 million. Additionally, $750 million has been transferred from road projects to other areas of the budget, setting the state up for ballooning maintenance and infrastructure costs down the line. Facing an election year, many lawmakers say they will cut no further and plan to leave Brownback holding the bag.

A new poll of Oklahoma voters shows a large majority favor income tax increases over budget cuts in the face of the state’s ongoing revenue crisis. The poll, commissioned by the Oklahoma Policy Institute, found that 56 percent of voters “favor increasing state revenues by raising taxes and reducing tax breaks,” while just 15 percent want to cut money for education, health care and public safety. At the same time, 59 percent of voters want to maintain broad-based tax credits for working families, like the state Earned Income Tax Credit and the state Child Tax Credit. Two-thirds of voters would support increasing the top income tax rate on incomes above $150,000 and 62 percent say that the income tax cut that went into effect in January of this year should be delayed.

Mississippi lawmakers passed a $415 million tax cut deal this week despite facing a revenue shortfall caused by previous tax cuts. The package would phase out the corporate franchise tax, which brings in $260 million in revenue each year, and would cut the state’s bottom income tax rate from 3 to 0 percent. The income tax cut will cost $145 million annually, and while many lower-income families will not benefit from the cut, upper-income families will receive tax cuts averaging $220 or more per year. Legislators also lowered taxes on income from self-employment by $10.2 million over three years. The cuts will begin phasing-in in 2017 but most of the revenue impact is delayed until later years, not taking full effect until 2028.

At the same time, Mississippi is dealing with a large drop in revenue following tax cuts of roughly $350 million that Gov. Phil Bryant initiated in his first term. Those cuts included $150 million in sales tax rebates to developers of retail centers, another $100 million in limits on the taxing of multi-state corporations, and an additional $100 million in cuts to the business inventory tax. One recent editorial called out legislators who “have chosen to pass legislation pandering to different constituencies while ignoring serious issues like crumbling roads and infrastructure needs.”

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 Sebastian Johnson at sdpjohnson@itep.org. Click here to sign up to receive the Rundown via email.