State Rundown 9/3: Back to School, Back to the Drawing Board

The Texas Supreme Court this heard oral arguments in a school finance case regarding recession-era education budget cuts. In 2011, the Texas Legislature cut K-12 education spending by $5.4 billion and per-pupil spending declined by more than 8 percent. More than 600 school districts sued the state, arguing that the cuts make it impossible to meet minimum education standards and that funding is inadequate and unfairly apportioned. Over the past four years, the state has restored about $5 billion in funding, but District Judge John Dietz still sided with the plaintiffs, declaring that the funding system is unconstitutional. The state then appealed the case. Texas, which has no income tax, relies on local property taxes to fund its public schools. In 1993 the legislature passed the “Robin Hood” plan, which mandated some revenue sharing between wealthy and poor school districts.

The latest group to be fed up with the interminable budget impasse in Illinois is credit rating agency Moody’s, which said that the stalemate is a sign of “weak governance.” Moody’s warned Gov. Bruce Rauner and lawmakers that failure to reach an agreement by late September would turn a projected deficit of $5.14 billion into an actual one. Moody’s suggested that raising the income tax would be the most logical solution, as the state “has the economic capacity to absorb higher income tax rates. It is one of only eight states that levy a flat individual income tax. Among those states, Illinois’ current rate is comparatively low: the average among these states is 4.4%, compared with 3.75% in Illinois.” Increasing the personal income tax by 1 percent and the corporate income tax by 1.5 percentage points would generate approximately $2.4 billion in additional revenue.

Michigan group Citizens for Fair Taxes is fighting for a ballot initiative that would increase the state corporate income tax rate from 6 percent to 11 percent, a change they say would bring in $900 million annually for public roads and reverse the tax shift from businesses to working families begun under Gov. Rick Snyder in 2011. About one-third of Michigan businesses are subject to the corporate income tax. If the group collects 253,000 signatures, the proposal would go before the legislature. If the legislature fails to act or votes down the proposal, it will be put to the voters on the November 2016 ballot.

Connecticut Gov. Dannel Malloy is fighting to keep GE headquarters in the state after the company threatened to move. Some state leaders want to repeal the combined reporting requirement just enacted as part of the tax package supporting the two-year budget in June. Malloy is working with officials to create a sweetheart package of tax incentives to keep GE in the state. The move comes after GE used its political clout to force the legislature into special session this June, after the tax package narrowly won legislative approval despite business objections. Numerous studies have shown that taxes are not the primary driver behind business relocation decisions, but GE and other business still use the threat of relocation to wring concessions out of state and local governments.

Speaking of dubious tax claims, Art Laffer urged West Virginia leaders to slash income taxes to stimulate economic growth, weeks after the state’s commerce secretary said taxes were a non-issue in business relocation decisions. The secretary stated that West Virginia’s uneducated workforce was a larger factor in attracting new companies to the state. Unmoved by facts, Laffer told the West Virginia Chamber of Commerce that lower taxes and a reduced social safety net would result in more growth: “If you tax rich people and give money to poor people, you’re going to get lots and lots of poor people and no rich people.” Laffer’s remarks were praised by Senate President Bill Cole, who said, “There’s no question in my mind that, by itself, it could be the single biggest and largest economic driver that this state has ever seen. I think he’s spot on. I think, virtually, everything he’s said has proven itself out in history.” Clearly Sen. Cole has never been to Kansas.

A recent op-ed in The Huntsville Times outlines how Alabama legislators could reform the state’s tax system without constitutional amendments. The four proposals outlined would reform the state’s business privilege tax by reducing rates for small businesses and increasing them on large multinational businesses, require combined reporting on corporate income tax forms, increase the cigarette excise tax, and transfer use tax revenues to the General Fund. Author Carol Gundlach of Arise Citizen’s Policy Project says these reforms would avoid harmful cuts to Medicaid, prisons and mental health being considered by legislators.

Do you have a hot state tax tip? Send it to sdpjohnson@itep.org for the next State Rundown!