State Rundown 5/26: Bad Ideas, Worse Budgets

Thanks for reading the State Rundown! Here’s a sneak peek: Kansas marks tax cut anniversary with budget cuts. New York governor expected to sign tampon tax repeal. Minnesota legislators pass tax cuts amid chaos. Tennessee repeals its Hall Tax. Massachusetts legislators give initial approval to millionaire tax.

— Meg Wiehe, ITEP State Policy Director, @megwiehe

This week marks the fourth anniversary of Kansas Gov. Sam Brownback’s tax cut “experiment,” and the governor recently celebrated by signing another austerity budget. Brownback’s mid-biennium budget adjustment includes $97 million in cuts for most state agencies. The budget cut by 4 percent all agencies except for public safety and K-12 education, with higher education being hit worst. More than $30 million of the cuts were to the higher education system; the University of Kansas (KU) has already proposed a 4 percent tuition increase for next year. Meanwhile, a recent report found that the state’s highest paid public employee – KU basketball coach Bill Self – pays virtually no state income tax thanks to Brownback’s derided exemption of business pass-through income. Self receives the bulk of his $2.75 million in annual compensation through a limited liability corporation. Not quite the outcomes Brownback claimed would come from his income tax cuts.

New York Gov. Andrew Cuomo is expected to sign a bill that would eliminate the state’s sales tax levy on female hygiene products. Right now, the sales tax adds approximately 88 cents to an $11 pack of 50 tampons. The so-called “tampon tax” has come under fire in some circles for being regressive and an unfair imposition of the sales tax on a product that should be considered a necessity. Others, however, have noted that exempting products from the general sales tax base erodes the base over time, necessitating higher rates on other purchases. They also note that targeted sales tax credits for working families would be a better solution to sales tax regressivity.

Minnesota‘s legislative session ended in chaos this week, with lawmakers scrambling to pass a series of major deals but falling short. The legislature managed to pass a $260 million package of tax cuts before the Sunday night deadline but fell short on bills for transportation funding and public works. The tax cuts include property tax cuts for farmers and businesses, a new tax credit for Minnesotans with student loan debt, and credits to help Minnesota families with childcare costs. Interestingly enough, lawmakers also passed a $3 million sales tax exemption for the purchase of suites at sports stadiums, but not an exemption for ordinary game tickets. Gov. Mark Dayton has suggested he could call a special session in June to give lawmakers another shot at passing the transportation and public works bills. EDIT: The package of tax cuts also includes a strong expansion of the Working Family Credit, Minnesota’s version of the EITC. Under the changes, the size of the credit would expand for most families and individuals, and the income cutoff for eligibility will be raised for some families and individuals. Moreover, the age requirement for childless workers to qualify for the credit will be lowered from 25 years old to 21 years old. Minnesota is the first state (after Washington, DC) to expand the state EITC to childless workers. About 386,000 Minnesota families and individuals will benefit from the credit expansion, which will reduce taxes by $49 million.

Anti-tax advocates in Tennessee succeeded in their years-long push to eliminate the state’s Hall income tax on investment income. Gov. Bill Haslam signed a bill that cuts the tax rate from 6 to 5 percent this year, and that eliminates the tax entirely in 2022. The bill also says that its “intent” is for future legislators to enact additional, gradual rate cuts in the years before full repeal takes effect. The Hall income tax is levied on some dividend and interest income, and was expected to generate $341 million in revenue in FY 2017. ITEP data show that eliminating the tax would give the top 1 percent of Tennessee taxpayers an average $5,000 tax break while doing nothing for the vast majority of Tennesseans. As senior analyst Dylan Grundman notes, “The Hall Tax plays an important role in offsetting the otherwise regressive impact of Tennessee’s tax system. Overall, the state’s tax system captures a greater share of income from low- and middle-income people than from the wealthy but the Hall tax is one of the few taxes that runs counter to that trend.” Municipalities could struggle to make up lost Hall tax revenue, which delivers more than $100 million to the state’s cities and counties each year.

In a bit of good tax policy news, a proposed “millionaire tax” ballot initiative gained initial approval in Massachusetts. Lawmakers  voted 133-57 to advance a 4 percent surtax on income over $1 million. Massachusetts currently has a flat tax rate of 5.1 percent on all income, and the uniform rate is constitutionally mandated. To change this, the millionaire tax ballot initiative must be approved by at least 25 percent of lawmakers in a joint session during two successive legislative sessions. If lawmakers vote again to advance the measure next year then voters will have the chance to weigh in. If enacted, the millionaire tax would generate an additional $1.9 billion in revenue for transportation and education.

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.