Tag: TaxJusticeBlog

In recent weeks, the Republican congressional leadership’s effort to introduce a comprehensive tax reform bill has increasingly faced opposition from major business groups and skeptical lawmakers from across the aisle. The primary source of dissent thus far is that the most prominent tax framework, the House GOP’s “Better Way” tax blueprint, contains a radical provision to apply a border adjustment to pay for a cut in the rate from 35 to 20 percent.  

A new report from the Institute on Taxation and Economic Policy (ITEP) released today finds that this border adjustment tax would be regressive and loophole-ridden and would likely violate international trade agreements.

Under the proposed border adjustment, companies doing business in the United States would no longer pay corporate income tax on revenue earned from exports and would no longer be able to deduct the cost of imports from their corporate income tax liability. Because the United States currently runs a significant trade deficit, applying the tax at a 20-percent rate on imports and exempting exports could raise about $1.2 trillion over the next ten years.

It is important to note from the outset that even assuming the U.S. could raise a substantial amount of revenue from the border adjustment, the House GOP plan would still decimate federal revenue. An ITEP analysis finds that without the border adjustment provision, the House GOP plan would lose $2.5 trillion on the corporate side, and $4 trillion as a whole, over 10 years. In other words, even with the border adjustment the House GOP plan would fall $2.8 trillion short of its goal of revenue neutrality overall and would result in a $1.3 trillion revenue loss from the highly progressive corporate income tax.

The problems with the primary component of the House GOP’s corporate tax proposal go well beyond its revenue effects however. To start, the border adjustment likely would make the corporate income tax substantially more regressive. The inability of companies to deduct the cost of imports could substantially raise the tax rates paid by import-dependent industries such as retailers. To maintain profitability, import dependent industries would be forced to raise prices and pass on the cost of the tax to whatever extent possible. This means that a significant portion of the border adjustment tax would be paid in the form of a regressive tax on consumers. One recent estimate found that the bottom 10 percent of taxpayers may see their taxes go up by 5 percent of their pretax income, while the top 10 percent of taxpayers would only see their taxes go up by about 1.5 percent of their pretax income.

One of the major arguments that proponents of the border adjustment tax make is that it would stop corporate tax avoidance. It is certainly true that the border adjustment would remove companies’ incentive to use certain existing loopholes in our current system, but it would create numerous new opportunities for tax avoidance through the shifting around of sales. For example, Microsoft could avoid the tax by selling its software to consumers in the United States directly from servers in Ireland or another tax haven. At this point there is no reason to believe that following a tumultuous transition to a border adjusted tax that our tax system would end up less prone to tax avoidance than our current system.

And the transition to a border adjustment tax would certainly be tumultuous. Legal experts agree that it would likely be in violation of international agreements. Most importantly, the border adjustment is likely to be ruled illegal by the World Trade Organization (WTO) as an export subsidy. This is because the tax would favor domestic products over imported ones by allowing domestic producers to deduct compensation expenses, but would not allow the same deductions for imported products. A negative ruling by the WTO would mean that the U.S. would have to change the border adjustment tax into a proper tax on consumption, repeal the tax entirely or face retaliatory tariffs.

Given the myriad of problems that it creates, lawmakers should reject the border adjustment tax in favor of fixing the corporate income tax system that we have. The most effective way to accomplish this would be to end the ability of companies to defer paying taxes on their offshore income. While this approach has received less attention from the media, it has gotten a fair amount of high profile bipartisan support from lawmakers in the past. Both Democratic Senator Bernie Sanders and President Donald Trump called for ending deferral as part of their tax reform plans during the 2016 presidential primaries. On the Senate Finance Committee, Democratic Senator Ron Wyden and former Republican Senator Dan Coats introduced a bipartisan tax reform bill that would also have ended deferral. Taking this approach would have the benefits of raising a substantial amount of revenue and curbing tax avoidance without the daunting fairness and legal problems posed by a border adjustment.

Read the full report: “Regressive and Loophole-Ridden: Issues with the House GOP Border Adjustment Tax Proposal”

This week we are following a number of significant proposals being debated or introduced including reinstating the income tax in Alaska and eliminating the tax in West Virginia, establishing a regressive tax-cut trigger in Nebraska, restructuring the Illinois sales tax, moving New Mexico to a flat income tax and broader gross receipts tax, and updating gas taxes in Indiana and Tennessee.

— Meg Wiehe, ITEP State Policy Director, @megwiehe 

• Introduced last week, Alaska HB 115 would reinstate an income tax for the first time since 1980, setting the income tax rate at 15 percent of federal tax liability. It would also draw from the state’s Permanent Fund and change the structure of the yearly dividends provided to Alaskans.
• West Virginia Gov. Jim Justice echoed the sentiment of the state’s Senate President, who is leading a select committee to examine taxes, to eliminate the state’s personal income tax. The governor said his goal is to “… be the eighth state in the country to have no income tax.” However, given the state has a revenue shortfall, the governor’s budget proposes to use spending cuts and tax increases to close the gap this year, potentially putting the income tax elimination plan on hold for now. Tax increases in his budget proposal include a sales tax increase and base broadening, a gasoline tax increase, and the creation of a commercial activities tax.
• Nebraska lawmakers sent $137 million in budget cuts to the governor’s desk in an effort to help close the state’s $900 million budget gap. Also this week, the state’s Revenue Committee will hear testimony on a trigger-based tax cut for wealthy Nebraskans that would worsen the budget gap in future years.
• The latest tax plan out of the Illinois Senate would reduce the general sales tax rate from 6.25 percent to 5.75 percent while taxing food, drugs, and medical supplies at a higher rate and newly taxing services including repair and maintenance, laundry, landscaping, cable, and satellite.
  
• Proposals to increase fuel taxes to better fund infrastructure improvement are dead in Idaho but still under consideration in Indiana and Tennessee. In Tennessee, variations on Gov. Haslam’s attempt to combine the needed gas tax update with other tax cuts are proliferating, including one that would divert sales tax revenues from their intended purposes rather than update the gas tax, and a more responsible alternative that would update the gas tax and other fees without slashing other taxes.
  
• Kansas revenue committees in both chambers are seeing their share of tax reform proposals. A House bill that increases income taxes, eliminates the LLC exemption, and restores itemized deductions for medical expenses advanced by a wide margin today, and could receive a final vote on Thursday. The latest in the Senate—eliminating the exemption for LLC income and restoring pre-Brownback standard and itemized deductions and a third income tax bracket at 6.45 percent–is expected to go to a vote to the full floor tomorrow.
  
• A major tax bill has been introduced in the New Mexico House. House Bill 412 would restructure the state’s gross receipts tax and proposes a flat personal income tax.
  
• Despite higher energy prices, Wyoming’s economy remains flat while job and revenue growth continue to lag.
  
• In Oklahoma, the House Appropriations and Budget Committee passed a bill that would increase the tax on a pack of cigarettes by $1.50/pack. The bill now heads to the full House for consideration.
  
• Pennsylvania’s state supreme court refused to hear the Philadelphia soda tax appeal, arguing that the pending litigation is stopping the tax from funding programs it was created to fund.
  
• An Arkansas bill to collect taxes from online retailers passed the Senate but stalled in House committee. However, Amazon will start collecting and remitting sales taxes in the state this March. A bill to require tax collections for online sales from large retailers is still under consideration in Idaho.
• Another poll shows Iowa voters support paying more in sales taxes in exchange for investments in the state’s water quality and parks system.
  
• Efforts to help fill some of the state’s $1.8 billion budget deficit with increased revenue contributions from corporations are underway in Oregon.
  
• Nevada lawmakers heard a detailed presentation from an economic consultant explaining issues caused by the state’s property tax cap that has held property taxes down but undermined funding for schools and other local services.

Budget Watch 

• Illinois Gov. Bruce Rauner will be delivering his third budget address today. The state has not had a regular budget since FY 2015 due to an ongoing impasse between the governor and a democratic majority legislature.
  
• Wisconsin Gov. Scott Walker’s budget proposal includes a proposed $600 million in additional tax cuts—including elimination of the state’s property tax levy, reducing income tax rates, and restoring the EITC for families with one child. Senate leadership has suggested the more realistic target for tax cuts this session is $100 million.
  
• Connecticut Gov. Dannel Malloy’s budget proposal, released last week, includes a mix of budget cuts, new revenue and shifts of state pension obligations onto municipalities. Elimination of the state’s property tax credit and a cut to the state EITC are among the new revenue sources.

Governors’ State of the State Addresses 

• In the past week, Governors Bevin of Kentucky, Sununu of New Hampshire, and Justice of West Virginia delivered their State of the State addresses.
  
• There are no states with addresses scheduled through the end of next week.

What We’re Reading…

• A new paper out of the Wharton Business School looks at the relationship between “sin taxes” and consumer behavior, as well as ways to offset the more regressive impacts of these consumption taxes on low-income taxpayers.
  
• A study on government pension funds shows combined costs for most jurisdictions appear manageable. Concern is for those outlier states with highest pension burdens—Illinois, New Jersey, Connecticut, Hawaii, Kentucky, Massachusetts, Rhode Island, and Delaware.
• The West Virginia Center on Budget & Policy issued a brief showing that shifting from income taxes to sales taxes is a poor strategy for growing the state’s economy.

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 Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

This is the fourth installment of our six-part series on 2017 state tax trends. The introduction to this series is available here.

State lawmakers often find themselves looking for ways to raise revenue to fund vital public services, fill budget gaps, or pay for the elimination or weakening of progressive taxes. Lately, that search has led many states to consider reforming or expanding their sales taxes.

Sales taxes fall heaviest on lower-income people, but they are an important component of states’ revenue streams. Making sure sales taxes keep up with the changing economy and new technologies is essential for states’ fiscal stability. The legislative areas we’re watching include taxing personal services, online shopping, streaming services, the sharing economy, and taxes designed to “nudge” consumer behavior.

Services

Purchases of haircuts, lawn care, massages, and other services aren’t taxed in many states even though services make up a larger share of consumption than tangible goods. Proposals to expand sales tax bases to some services have come from Louisiana, Maine, and Nebraska this year, among other states. Oklahoma‘s governor recently proposed extending the state sales tax to an exhaustive list of services while eliminating the tax on groceries. Ohio Gov. John Kasich has proposed increasing the sales tax rate and expanding it to more services while also cutting income taxes. The latest plan in the Illinois Senate would lower the existing sales tax rate and apply the tax to a broader range of goods and services including laundry, lawn care, cable, and satellite services. West Virginia’s governor also included a small service expansion in his budget proposal.

Expanding the sales tax to some services would create a more sustainable tax base, but the motivations behind most of the proposals introduced so far this year has been either to raise revenue to plug budget gaps (IL, LA, OK, and WV) or to help pay for top-heavy income tax cuts, shifting responsibility for funding state investments even further onto low- and moderate-income families (OH, ME and NE).

Online shopping

Goods sold online have been caught in a sales tax loophole. Businesses have no obligation to collect sales tax if they are not physically located in a state. Consumers are required to pay sales tax for purchases made online, but most consumers don’t know this and don’t pay it. State revenue agencies have a hard time collecting these unpaid taxes because they don’t know what residents are buying online. States have had some success with large online retailers voluntarily collecting sales tax. In fact, 95 percent of the population currently lives in states where Amazon, the country’s largest online retailer, collects sales tax.

A permanent fix to this confusion would require an act of Congress. In the meantime, many cash-strapped states are losing out on hundreds of millions of dollars of sales tax revenue they are legally owed. While they wait for Congress to act, states are taking various measures to attempt to recoup some of the missing revenue.

The most audacious states, such as Arkansas, Indiana, Mississippi, New Mexico, South Carolina, and Wyoming, are moving bills that would require large out-of-state retailers to collect and remit sales tax. These bills are almost identical to a South Dakota law that is currently embroiled in a legal case, and if passed would likely also face legal challenges from online retailers that do not have a physical presence in the state. The best hope for these bills is that they will draw the attention of Congress and encourage action.

Other methods are also being pursued to ensure that merchants collect the sales taxes owed under current. Bills in Arkansas and Kansas would require online sellers to notify customers that they owe sales tax and provide a list of consumers to the state revenue department, presumably to ease enforcement. New York’s Gov. Andrew Cuomo is urging legislators to expand the state’s online sales tax to online marketplaces such as  Amazon marketplace, Etsy, or eBay (Amazon is not required to collect sales tax for third-party sellers using the Amazon marketplace).  A Missouri bill would add the state to a group of 24 others that could begin collecting online sales tax once federal legislation is passed.

One aspect of tax fairness is treating all consumers similarly. Allowing an online shopper to skip out on sales tax when the same purchase would be taxed in a “brick-and-mortar” store is unfair. But sales taxes fall heaviest on low-income families. It would be nice if there was this much enthusiasm in statehouses for raising revenue in more progressive ways, say by cracking down on corporate tax avoidance.

Streaming services

Streaming services for video and audio content, like Netflix and Spotify, have also grabbed the attention of legislators looking for new sources of revenue. If enacted, Maine would follow the lead of places like Pennsylvania and Chicago in taxing streaming services. And while Pasadena, Calif. officials weigh extending the cable TV tax to streaming services, state legislators have proposed a bill that would prohibit such a tax.

On-demand economy

The emergence of the on-demand economy, with platforms like Airbnb and Uber, presents a host of regulatory questions, and taxation is just piece of that. Airbnb seems to have taken a page from the Amazon playbook and began voluntarily collecting and remitting various state and local hotel taxes,though sometimes as a means of encouraging states and localities to forgo meaningful regulation of the company. So far this year the company has agreed to collect and remit taxes in Arizona, Arkansas, and Colorado.

“Nudge” taxes

Using taxes to discourage perceived bad behavior are nothing new. So-called “sin taxes” on alcohol and cigarettes are the most well known. But evidence from the field of behavioral economics has recently led public health and environmental officials to advocate for excise taxes as a way to nudge consumers away from other potentially hazardous buying habits. Excise, or per unit, taxes on sugary drinks and plastic bags have gained traction, despite criticism of their regressive and paternalistic nature. Illinois lawmakers briefly floated a statewide soda tax as part of an effort to reach a “Grand Bargain” on the state’s budget. Montana legislators want to tax newly legalized medical marijuana, which would treat it more like alcohol and tobacco than a prescription drug. And a Maryland bill to legalize recreational marijuana includes an excise tax much like taxes included in other states’ legalization plans. While these taxes have the potential to change some behavior, most law-makers are introducing them as a way to raise revenue rather than improve well-being.

Tennessee Gov. Bill Haslam’s proposal (dubbed the IMPROVE Act) to raise the state’s gas tax while cutting three other taxes would essentially be a tax cut for the state’s wealthiest residents and a tax increase for the lowest-income Tennesseans.

While the gas tax is badly in need of an update to fund maintenance and investment in the state’s roads and bridges, slashing other taxes by an equivalent amount would essentially plug the hole in transportation funding with money devoted to other vital needs like K-12 schools, higher education, and public safety. And because the gas tax increase predominantly impacts lower-income Tennesseans and many of the tax cuts are tilted in favor of the highest-income Tennesseans, the net effect of the proposal would be a shift in responsibility for funding state investments away from high-income individuals and onto low- and middle-income families (Figure 1).

Raising the gas tax in Tennessee is long overdue and gas taxes are widely regarded as an appropriate means for funding transportation infrastructure because they are paid by the people who use that infrastructure the most. Importantly, this includes visitors passing through Tennessee as well as businesses that may not be headquartered in Tennessee but ship goods into, out of, or within the state.

However, increasing the gas tax has a bigger effect on low- and middle-income family budgets than it does on those with higher incomes. While it is desirable to seek ways to offset the gas tax increase for those families least able to afford the tax, lawmakers should seek to do so without sacrificing revenues needed to fund other public services. The IMPROVE Act fails mightily in this regard, slashing other taxes to such an extent that the state will end up with no more revenue than it has today, and focusing many of those tax cuts on wealthy individuals and corporations.

As shown in Figure 2, only the token grocery tax reduction (from the current 5 percent rate to 4.5 percent) is targeted to the Tennessee families most affected by the gas tax increase. On the other hand, the Hall Tax cut for investors (from the current 5 percent rate to 2 percent over two years) and corporate tax cut (allowing businesses to choose “single sales factor” apportionment) predominantly benefit the state’s wealthiest residents. The Hall Tax is slated for full elimination in 2022.

In the Tax Justice Digest we recap the latest reports, blog posts, and analyses from Citizens for Tax Justice and the Institute on Taxation and Economic Policy. Here’s a rundown of what we’ve been working on lately. 

What to Watch in the States in 2017
State and federal gas taxes are the cornerstone of our nation’s transportation finance system. But far too many of these taxes are severely outdated and poorly designed. The good news is that state lawmakers are becoming increasingly aware of these problems. Nineteen states have raised or reformed their gas taxes since 2013 and more than a dozen states will debate doing so this year. Read What to Watch in the States: Gas Tax Hikes and Swaps

Or read an updated ITEP policy brief that explains why state gas tax revenues are falling short of the levels needed to build and maintain the nation’s infrastructure.

More than 30 states face budget gaps this year. In spite of this, lawmakers in many states are pursuing tax policies that will drain critical revenues from state coffers. Common sense, however, is prevailing in a smaller number of states where lawmakers are exploring meaningful income tax reforms that could improve the fairness and sustainability of their tax systems. Read What to Watch in the States: Further Attempts to Weaken or Eliminate Progressive Taxes

The Supply-Side Myth Debunked in Two Minutes
Here we go again … and again, and again. Members of Congress and the Trump Administration have signaled corporate and individual tax cuts are on the table this year. Lawmakers in several states, in spite of budget problems, are considering tax cuts.  In most instances, when analysts model the effect of these plans, they find that the wealthy receive a disproportionately large share of the benefit. Meanwhile, these supply-side economic policies eventually force cuts to vital programs and services while working people wait for the financial benefits to trickle down. If you haven’t already, watch ITEP’s two-minute video that debunks the supply-side myth.

Dodging Tough Fiscal Decisions with State Tax Cut Triggers and Phase-ins
State lawmakers are increasingly turning to tax cut phase-ins and triggers as ways to take credit for cutting taxes without having to face the full consequences for years, decades, or in the case of term-limited lawmakers, maybe never. Read more

The State Rundown
For a comprehensive rundown of state tax news, check out the weekly State Rundown. This week’s rundown looks at policy debates in states facing budget challenges. Read more

If you have any feedback on the Digest or tax stories you’re watching that we should check out too please email me rphillips@itep.org

For frequent updates find us on Twitter, Facebook, and at the Tax Justice blog.

This week we bring news of Kansas lawmakers attempting to fix ill-advised tax cuts that have wreaked havoc on the state’s budget and schools, while their counterparts in Nebraska and Idaho debate bills that would create similar problems for their own states, as well as tax cuts in Arkansas that were proven unaffordable within one day of being signed into law. Meanwhile, debates over online sales taxes, Earned Income Tax Credits, and gas tax updates to fund transportation needs continue around the country.

— Meg Wiehe, ITEP State Policy Director, @megwiehe 

• Kansas lawmakers in both chambers are considering bills this week to roll back Gov. Sam Brownback’s tax cuts primarily via reforming the personal income tax, including repealing the exemption for business pass-through income and raising personal income tax rates in the Senate and a more comprehensive tax reform plan in the House.
• Nebraska‘s Revenue Committee will conduct a hearing on Gov. Rickett’s proposal to use a trigger mechanism to cut income taxes for the state’s wealthiest residents this week. Last week, the committee was presented with two alternatives to slashing taxes on the rich by instead increasing the state’s Earned Income Tax Credit.
• Idaho lawmakers in the House passed bills cutting the corporate and top personal income tax rates and raising the exemption levels for the business personal property tax. The bill faces an uncertain future in the Senate.
• Alabama lawmakers joined the list of states looking to cut income taxes this year.   
• Arkansas Gov. Asa Hutchinson signed his $50.5 million tax cut  into law last Wednesday. The following day, the governor told several agencies to prepare contingency plans for budget cuts as the latest revenue reports came in $57 million behind forecast.
• The Mississippi House has advanced a bill to enforce sales tax collection on online sales and divvy up the revenue with 70 percent going to state roads and other needs, 15 percent to counties, and 15 percent to cities. The need for such a fix is highlighted by the fact that even though Amazon is now collecting sales taxes on its own transactions in the state, many transactions hosted by the site are still not covered. Meanwhile, Tennessee‘s rule to require such collections has been challenged, adding to the pressure for a new court ruling on the matter.
• Michigan lawmakers are considering bills to eliminate the sales tax on feminine hygiene products.
• Wisconsin Gov. Scott Walker has proposed increasing the state’s Earned Income Tax Credit for families with one child. Walker decreased the credit six years ago.
• Wyoming lawmakers are faced with the need to diversify their tax base. Some have already begun considering revenue options: the House recently passed a cigarette tax increase that would increase a pack of cigarettes from $0.60/pack to $0.90/pack.
• State legislators in both New York and Pennsylvania are pushing back against recent local tax initiatives: the New York City bag tax and the Philadelphia soda tax.
• A proposal to update the South Carolina gas tax, raising $600 million per year for the state’s transportation needs through a 10-cent per gallon increase and other fee changes, has advanced from the House Ways and Means Committee.
• Tennessee Gov. Haslam’s proposal to raise the state’s gas tax while slashing other taxes has received criticism lately, as has an alternative plan to divert sales tax revenues away from general fund needs to plug the hole in the transportation fund.
• Missouri private school advocates are pushing a bill to circumvent the state’s prohibition on state money funding religious schools by creating a tax credit for donations to private schools. Read about how these programs are costly and frequently abused in our report here.

Governors’ Budget Watch

• Faced with an $868 million shortfall, Oklahoma‘s Gov. Mary Fallin delivered her state of the state address this week. Proposed tax changes include replacing the state corporate income tax with increases in fuel, tobacco, and sales taxes. While details of the sales tax base broadening have not been released, Fallin has called for elimination of the state sales tax on groceries.
• Pennsylvania Gov. Tom Wolf released his budget proposal this week. As he promised, it was void of any broad-based tax increases. Rather, state spending cuts and a proposal to tax natural-gas drilling are among the ways in which he plans to fill the state’s $3 billion shortfall.
• Today Connecticut Gov. Dannel Malloy is scheduled to unveil his two-year budget proposal. Faced with a $1.7 billion deficit, the plan will likely include a call to eliminate the state’s $200 property tax credit and a requirement for cities and towns to pay a third of the annual cost for teacher pensions.
• Alabama Gov. Bentley proposed studying and ultimately eliminating the state sales tax on groceries, increasing prison construction to deal with overcrowding, and increasing the state’s investment in pre-K education in his address this week.

Governors’ State of the State Addresses

• In the past week, Governors Bentley of Alabama, LePage of Maine, Fallin of Oklahoma, and Wolf of Pennsylvania delivered their State of the State addresses.
• States with addresses scheduled through the end of next week are: Kentucky and West Virginia, both scheduled for today.

What We’re Reading…

• As the Center on Budget and Policy Priorities (CBPP) details in two new reports, state lawmakers are increasingly turning to tax cut phase-ins and triggers as ways to take credit for cutting taxes without having to face the full consequences for years, decades, or in the case of term-limited lawmakers, maybe never.
• A new report by Ohio Policy Matters uses ITEP research to dig into Gov. John Kasich’s tax plan, finding that it would, once again, shift taxes and worsen inequality.
• Pew Trusts explores the various reasons behind declining state populations in recent years.
• The Kentucky Center for Economic Policy released a report that provides an overview on how refugees and immigrants are important to the state’s economy.
• The Georgia Budget and Policy Center released two reports showing the importance of immigrants to Georgia’s state and local economies and budgets.

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 Meg Wiehe at meg@itep.org. Click here to sign up to receive the Rundown via email.

For more than four decades, supply-side ideologues have promoted the myth that tax cuts for the wealthy are self-financing and the benefits eventually trickle down to everyone else, despite real-life evidence that tax cuts for the rich benefit the rich.

Not even the reality of 40 years of widening income inequality or the current economic expansion in which the benefits primarily flowed to wealthy households have stopped anti-tax proponents from peddling the erroneous idea that top-heavy tax cuts will eventually benefit ordinary working people.

As a new ITEP video shows, this supply-side thinking, also known as trickle-down economics, is a school of thought that claims tax cuts for the rich will trickle down to everyone else and supercharge the nation’s economy in the process. Some adherents to this worldview use the Laffer curve or the easily manipulable “dynamic scoring” technique to claim that economic growth will be so explosive that lower tax rates would actually lead to more tax revenue.

We’ve seen this trickle-down experiment conducted in the past, and it hasn’t worked.  Consider President George W. Bush’s 2001 and 2003 tax cuts. Thirty-eight percent went to the top 1 percent of Americans. But the wealth didn’t trickle down. Low job growth, increased poverty, and a growing income gap persisted throughout most of Bush’s tenure. The end of the Bush era also ushered in the worst economic recession since the Great Depression; shattered the myth of a broad, prosperous middle-class, and exposed the fact that a substantial percentage of Americans across the country are one or two paychecks from financial ruin.

Instead of taking this lesson about the majority of Americans’  livelihoods (or lack thereof) and applying it to public policies that promote shared economic prosperity, the nation’s policymakers are back at supply-side square one. Speaker Paul Ryan’s most recent budget plan doubles down on trickle-down, proposing to give a whopping 60 percent of its tax cut to the top 1 percent of earners. On the campaign trail, President Trump touted a tax cut plan that would bestow 44 percent of its benefits to the 1 percent. Either Trump or Ryan’s plan, or even a combination of the two, would transfer more of the nation’s wealth to the rich and force working people to pick up the slack in the form of cuts to vital programs and increased annual deficits. This drive to cut taxes ignores polling that reveals nearly two-thirds of voters think wealthy individuals and corporations pay too little in federal taxes, not too much.

Some state lawmakers have also favored cutting taxes for the rich over investments in broader prosperity. Supply-side-driven tax cuts are particularly dangerous for state budgets because unlike the federal government, most states can’t run deficits. As a result, state-level tax cuts tend to bring about a rapid, unavoidable reduction in vital public services.

Kansas is perhaps the most infamous recent example. Gov. Sam Brownback slashed top tax rates in 2012, but the job growth he promised didn’t materialize, and the state has faced massive budget shortfalls every fiscal year since.

North Carolina eschewed most of those lessons and followed Kansas over the proverbial supply-side cliff. The Tarheel state’s cuts began in 2013 and are set to phase in through 2020—a tactic that delays and masks, but does not eliminate, much of the budgetary consequences. Already cuts of more than $2 billion annually, or 10 percent of the general fund, have resulted in severe reductions to key services such as K-12 and higher education.

The evidence of supply-side economics’ failures is abundant. The promise of broad economic prosperity is too often broken. Instead, ordinary working people have to endure concessions that matter little to the super wealthy who enjoy the tax cuts. At the federal level, lawmakers focus on which vital programs to cut in exchange for maintaining tax cuts for the wealthy. And at the state level, residents endure underfunded schools and crumbling roads. The time for our policy makers to look out for ordinary working people and ensure our local, state, and federal governments have the resources necessary to invest in our communities is long over due.

Watch the video

The most challenging problem that tax-cutting state lawmakers face is dealing with the budgetary tradeoffs that tax cuts require. Should education spending be reduced? Should investments in infrastructure be halted? Should the state cut back on transfers to local governments and require them to pick up the slack? Or should other taxes and fees be raised to make up for the lost revenue?  Unpleasant answers to these questions have stopped many tax cut proposals dead in their tracks.

Recently, however, determined tax-cutters have figured out that it’s easier to simply sidestep these questions, at least until after the tax cut is signed into law. As the Center on Budget and Policy Priorities (CBPP) details in two new reports, state lawmakers are increasingly turning to tax cut phase-ins and triggers as ways to take credit for cutting taxes without having to face the full consequences for years, decades, or in the case of term-limited lawmakers, maybe never. These policy tools push the implementation of tax cuts outside the current budget window with a predetermined phase-in schedule or a mathematical formula tied to state revenue trends.

Lawmakers in search of a principled defense for triggers and phase-ins often couch their arguments in the language of “fiscal responsibility.” But as CBPP explains, designing a truly responsible tax cut would require a careful analysis of whether current revenues will be able to sustain state services in the long-term—something that never occurs in practice. In support of its conclusion that these tools provide only the “illusion” of fiscal responsibility, CBPP details that:

• “None of the ten states that have enacted triggered income tax cuts in recent years estimated the cost of providing existing services over the full period over which tax cuts might take effect, leaving policymakers in the dark as to whether the tax cuts will force cuts in services.”
• “Only three of the nine states with multiple triggered tax cuts in successive years estimated the combined revenue loss in the first fiscal year in which all of them take full effect.”
• “In at least five of the seven states with triggers based on attaining a certain revenue level or revenue gain, the targets are almost completely arbitrary; they were not based on any systematic analysis of the revenue needed to allow for recent inflation and growth in population and caseloads.”

Trigger formulas and phase-in schedules are no substitute for careful deliberation by lawmakers with access to up-to-date information. Locking-in tax cuts before all the facts are known is irresponsible budgeting.

This is the third installment of our six-part series on 2017 state tax trends. The introduction to this series is available here.

As we described last week, many states are gearing up for challenging budget debates this year. But the need to address revenue shortfalls has not stopped lawmakers in many states from pursuing harmful tax policies that will drain critical revenues from state coffers and make upside-down state and local tax systems more regressive, leaving low- and middle-income earners paying more to finance tax cuts for the wealthy. At the same time, however, lawmakers in a handful of states are exploring meaningful income tax reforms that could improve the fairness and sustainability of their tax systems.

Efforts to Eliminate State Personal Income Taxes 

Debates over personal income tax elimination are gearing up in both Michigan and West Virginia this year. Repealing this vital revenue source would impede these states’ ability to balance their budgets in the long run, and would make their tax systems more regressive. This is particularly problematic because both states already have upside-down tax systems under which the highest effective tax rates are levied on the lowest-income taxpayers.

State personal income taxes are a powerful counterbalance to the regressive nature of most other state and local taxes. As revealed in our Fairness Matters chart book, states without personal income taxes tend to be “high tax” for poor people despite their reputations as being “low tax” states.

Two bills to eliminate Michigan‘s personal income tax may be at play this legislative session. In the House, a bill has been filed that would reduce the current income tax rate from 4.25 percent to 3.9 percent in 2018 and then phase down the rate by 0.1 percentage point each year over the next 40 years, well after all of the state’s current elected officials have left office (Michigan prevents any individual from serving more than 14 years in the legislature). A state senator has also indicated that he will introduce a bill that eliminates the personal income tax within a five-year period. Neither proposal is coupled with tax increases to replace the $9 billion (more than one third of the state’s total tax revenue) currently generated through the personal income tax.

West Virginia‘s Senate created a select committee to examine state taxes and explore comprehensive tax reform. According to the committee’s chairman, the legislature is exploring steps to eliminate West Virginians state personal income tax. The committee announced this despite a projected deficit of nearly $500 million that is expected to grow to $700 million by 2019.

A Push Toward Flat Rate Personal Income Taxes

Graduated-rate income taxes allow states to collect more revenues from high-income taxpayers that often face the lowest overall state and local tax rates. The revenue these taxes generate from the wealthy also typically allow states to levy lower rates on low- and moderate-income families less able to afford a higher tax bill, as ITEP’s chart book shows. Yet despite these benefits, lawmakers in Alabama, Arizona, Iowa, Kentucky, Maine, Maryland, Ohio, and South Carolina are considering converting their graduated income taxes to a single flat rate under the guise of tax fairness. In reality, there’s nothing fair about a flat tax.

The Task Force on Budget Reform in Alabama has not released its findings and may not do so for another year, but it has reportedly discussed flattening or even eliminating the state’s income tax. Arizona lawmakers, heeding recommendations from the state’s Joint Task Force on Income Tax Reform, continue to strive toward condensing their moderately progressive, five bracket income tax to a flat rate tax. In Georgia, it remains to be seen whether an attempt to flatten or eliminate the state’s income tax will resurface this year after advocates defeated two such proposals last year. Tax reform is also a topic likely to be broached by lawmakers in Kentucky this year, with efforts to flatten or otherwise reduce the personal income tax playing a central role in that discussion. And in South Carolina, a House Tax Policy Review Committee has been looking into a potential 5 percent flat tax.

The main proposals under consideration range from outright tax cuts to revenue neutral swaps or shifts that would change what most income groups pay in taxes. In most cases, “tax shifts” are designed to transfer revenues away from progressive forms of taxation and toward more regressive options, leaving low- and middle-income earners paying more to finance tax cuts for the wealthy.

Maine’s Gov. Paul LePage has proposed shifting the state to a flat rate personal income tax of 5.75 percent by 2020.  Moving to a flat rate is an egregious move on its own, but the governor’s plan also effectively eliminates the 3 percent surcharge on taxable income above $200,000 voters approved at the ballot box just months ago. How? His plan first calls for a flat rate of 2.75 percent and then redesigns that 3 percent surcharge to apply to all taxable income, for a combined overall rate of 5.75 percent. The biggest beneficiaries, by far, of his flat tax plan are the state’s wealthiest residents. In fact, the average lower-income taxpayer will pay more in taxes under this plan because it also increases the sales tax.

In Ohio, a joint committee of the Ohio General Assembly has been tasked with recommending how the state can transition to a flat personal income tax rate of 3.5 or 3.75 percent. Policy Matters Ohio recently released a report using ITEP data, Flat tax would mean more taxes for most, that finds that three-quarters of Ohioans would pay more under a flat tax while the affluent would receive the resulting windfall. Gov. John Kasich’s recently released budget proposal does not go quite this far, but it does condense the state’s personal income tax brackets and reduces rates across the board. Ultimately, the plan flattens the state’s income tax and results in a tax shift away from income taxes and toward the sales tax.

Cutting Taxes at All Costs 

Many states are taking steps to cut their personal income taxes despite revenue deficiencies. Arkansas lawmakers, for example, recently passed Gov. Asa Hutchinson’s plan to cut $50 million in taxes for those with taxable incomes under $21,000 despite the fact that revenues are under forecast for the first 6 months of this fiscal year. To achieve balance, the governor’s budget proposal includes very optimistic revenue projections, relying on assumptions of robust 4.4 percent growth in general revenues absent any tax increases.

Iowa is another state where income tax cuts are at the top of the agenda for many in the state’s new Republican majority despite a budget shortfall caused largely by prior tax cuts and warnings from the nation’s longest-serving governor that the state cannot afford them.

But cutting taxes when revenues are already down is often unappealing since doing so would exacerbate painful budget cuts. Recently, however, some lawmakers have developed a slick workaround. Instead of proposing cuts that would result in an immediate revenue loss and require offsetting reduction in public services, they instead offer up proposals with triggers or phase-ins – delaying the need to identify what services will be eliminated to fund the tax cut until some later date (perhaps even a date when the lawmakers voting for that tax cut have already left office).

Oklahoma may be the poster child of tax triggers gone awry. Just last year an income tax rate reduction was triggered despite the presence of a budget shortfall and an official “revenue failure.” Reasonably, lawmakers have since questioned the merits of maintaining the trigger.

In Nebraska, despite projected shortfalls of $900 million and $1.2 billion in the state’s next two budget cycles, Gov. Pete Ricketts has proposed to slash taxes for the state’s wealthiest, but delay implementation and slowly phase them in each time the state hits arguably arbitrary revenue targets.

And as mentioned above, Michigan lawmakers – lacking for ideas on how to fund income tax repeal – are hoping that adopting a very slow phase-in schedule may allow them to repeal the tax anyway.

Some Progressive Revenue Ideas Shine Through

While there seems to be an endless stream of proposals to chip away at state personal income taxes, proposals to strengthen the tax, or even create one from scratch, have also surfaced, along with proposals to generate meaningful revenues through other means.

For instance, last year Alaska Gov. Bill Walker proposed reinstating a personal income tax for the first time in more than 35 years to deal with a downturn in oil tax and royalty revenues. While the governor has yet to officially rerelease an income tax plan this year, he recently voiced support for an income tax yet again and there are indications that this year’s fiscal debate will include meaningful discussion of the idea.

In Kansas, advocates have filed a bill to undo many of the harmful changes enacted since Gov. Sam Brownback took office in 2012. Additional tax reforms will also be under consideration by a new coalition in the legislature. The stage is set for tax reform in Louisiana as well, if the political stars can align. The Task Force on Structural Changes in Budget and Tax Policy released its final report last week, including recommendations that the state eliminate regressive exemptions, broaden the sales tax base, and lower the rate.

Governors in Montana, New York, and Washington have introduced progressive revenue-raising ideas to address their lean budgets. In Montana, Gov. Steve Bullock has proposed adding a new top bracket for taxpayers with more than $500,000 in taxable income and limiting a capital gains credit to those with incomes under $1 million. In New York, Gov. Andrew Cuomo’s budget proposal includes a 3-year extension of the state’s millionaires’ tax. New York’s Assembly Speaker Carl Heastie has taken the revenue raising potential of the tax even further, proposing to increase the rates on those earning over $5 million and $10 million annually. Gov. Jay Inslee in Washington has put forward a proposal that would generate an additional $4 billion for public education by raising business and occupation taxes on services, expanding the sales tax base, and levying new taxes on carbon and capital gains, though this ambitious proposal faces an uphill battle in the legislature.

Gearing up for 2018, advocates in Massachusetts are backing a constitutional amendment to create a 4 percent tax surcharge on incomes over $1 million. Receiving strong support in public polling, the millionaires’ tax, also known as the fair share amendment, could go before voters on the state’s 2018 ballot.

This is the second installment of our six part series on 2017 state tax trends. The introduction to this series is available here.

State tax policy can be a divisive issue, but no area has generated more agreement among lawmakers across the country than the need to raise new revenues to fund infrastructure improvements. The most common way of accomplishing this goal has been to boost gasoline and diesel tax rates paid by motorists at the pump. Nineteen states have raised or reformed their gas taxes since 2013 and over a dozen states will debate doing so this year.

State and federal gas taxes are the cornerstone of our nation’s transportation finance system. But far too many of these taxes are severely outdated and poorly designed.

The good news is that state lawmakers are becoming increasingly aware of these problems. The governors of states such as Alaska, California, and Minnesota, for example, have already begun advocating for meaningful gas tax increases this year. Legislative leaders in Indiana and South Carolina are also making the case for a higher gas tax in their states.

The bad news is that in other states, such as Tennessee and Wisconsin, lawmakers are using the need for a gas tax update as an excuse to push for cuts in other, unrelated taxes. The final effect of this type of swap would be to boost infrastructure funding, but only at the expense of other core services such as education and public health.

The states where gas tax debates are already taking place this year include:

Alabama lawmakers debated a 6 cent per gallon gas tax increase in 2016 and may return to the issue this year. The Association of County Commissions of Alabama recently endorsed a 3-cent-per-gallon increase and there appears to be some support for the idea in the business community.

Alaska Gov. Bill Walker has proposed tripling fuel tax rates to fund infrastructure at a time when the energy-dependent state’s major revenue streams have been hammered by declines in both the production and price of oil. In a report issued last month, ITEP found that Alaska’s lowest-in-the-nation gas tax rate would remain below average even if the governor’s proposal were enacted.

The chairman of Arizona’s House Committee on Transportation and Infrastructure is seeking to boost the state’s gas tax by 10 cents per gallon. This would mark Arizona’s first gas tax increase in over 26 years. While raising the state’s gas tax would require a two-thirds vote of both legislative chambers, the question could be put on the state’s 2018 ballot by a simple majority vote of the legislature.

California’s gas tax rate is tied to the price of fuel and has fallen dramatically in recent years as that price has dropped. Gov. Jerry Brown has proposed (PDF, page 87) restoring the state’s gasoline tax rate to where it stood in June 2014—effectively raising the rate by 11.7 cents per gallon. The governor has also suggested raising the diesel tax rate by 11 cents and creating a new annual vehicle fee. And to prevent further swings in the state’s fuel tax collections, the linkage to fuel prices would be severed and each tax would instead be indexed to inflation. Notably, Georgia and North Carolina also recently abandoned their price-linked gas taxes in favor of more predictable and sustainable formulas.

Colorado lawmakers appear to agree that the state needs to invest more in its transportation network, though the source of that additional investment has yet to be determined. Gov. John Hickenlooper has suggested asking voters to raise the state’s sales tax rate, while some Republican legislators would prefer to transfer money away from other areas of the state’s budget. Another idea being discussed is to raise the state’s sales tax but to simultaneously cut business property taxes or gas taxes to attract votes in the Republican-controlled Senate.

Hawaii Gov. David Ige proposed a modest, 3-cent-per-gallon gas tax increase in 2016 that ultimately fell short in the state’s legislature. The governor is expected to support a similar increase this year, though House Speaker Joe Souki is reportedly opposed to the idea.

Idaho lawmakers took an important first step toward improving their state’s infrastructure when they approved a 7-cent-per-gallon gas tax increase in 2015. But there is widespread agreement that the increase fell well short of what was needed. Contractors in Idaho have floated the idea of an additional 10-cent-per-gallon gas tax hike to resolve the remaining gap, while Gov. Butch Otter seems to prefer shifting dollars away from other public investments so that money could be spent on transportation instead.

Last year the Indiana House of Representatives approved raising the state’s gas tax by roughly 4 cents per gallon and tying the tax rate to inflation. That proposal ultimately fell short because of opposition in the state Senate and from former Gov. Mike Pence. The likelihood of passage seem to have improved this year, however, as opposition in the Senate has softened and as the state’s new governor, Eric Holcomb, has indicated that he is not vehemently anti-tax. The Indiana House is now debating a proposal to raise the gas tax by 10 cents per gallon and index it to inflation.

Kansas tax collections have taken a major hit in the wake of Gov. Sam Brownback’s tax cuts and the governor is proposing cutting spending on transportation in order to remedy part of the state’s general fund deficit. As an alternative to that plan, the Rise Up Kansas coalition has proposed an 11-cent gas tax increase to fund transportation as well as personal income tax reforms that could remedy the state’s general fund shortfall.

Louisiana lawmakers are likely to debate a sizeable gas tax increase this year. An infrastructure funding task force estimated that an increase of 23 cents per gallon would solve the state’s transportation revenue shortfall. Meanwhile, a separate ITEP study found that a 19-cent increase would be needed simply to restore the purchasing power that the tax has lost since 1990. Moving an increase of that size through the legislature would be a politically heavy lift, though Gov. John Bel Edwards is sending signals that he will pursue some level of increase, noting that “we have significant needs … I hope we can find the will to move forward.”

Minnesota Gov. Mark Dayton recently proposed (PDF) levying a 6.5 percent sales tax on gasoline and raising vehicle registration fees. The gas tax increase is expected to raise approximately $600 million, though legislative leaders say they are opposed to tax increases of any kind. Minnesota’s corn growers reportedly support a 10-cent increase in the state’s gas tax.

The influential Mississippi Economic Council voiced support for a gas tax increase last year and the idea is being considered by Lt. Gov. Tate Reeves and House Speaker Philip Gunn. Mississippi has waited over 28 years since last increasing its gas tax—longer than any state except Oklahoma and Alaska. Last year, Mississippi lawmakers considered pairing a gas tax increase with general fund tax cuts but eventually decided to enact the tax cuts without changing the state’s gas tax rate.

Missouri’s Transportation Department Director said that an update to the state’s two-decade old gas tax rate is a “good area to look” when attempting to address Missouri’s infrastructure revenue shortfall. Whether that recommendation will be taken to heart by the state’s new governor, Eric Greitens, has yet to be seen. Lawmakers have already floated the idea of hiking the state’s gas and diesel tax rates by 1.5 and 3.5 cents per gallon, respectively, though the proposal would need to be approved by Missouri voters because it takes the form of a constitutional amendment.

A broad coalition of Montana businesses, unions, contractors, and local governments is urging state lawmakers to raise the state’s gas tax rate by 10 cents per gallon. Montana’s gas tax rate has been allowed to stagnate for more than 22 years. The push to raise the tax has been receiving significant attention in newspapers around the state.

New Mexico legislators are mulling a 10 cent increase in their two-decade-old gas tax rate as well as an alternative proposal to give localities the option to levy their own gas taxes of up to 5 cents per gallon. Gov. Susana Martinez’s opposition to tax increases will be a major obstacle to passage, but the state’s dire budget situation means that lawmakers will likely engage in a serious tax policy debate this year.

Oklahoma lawmakers are facing a deep budget hole, largely because of income tax cuts and underperforming oil tax revenues. Adding to the problem is the fact that Oklahoma’s nearly 30-year-old gas tax rate has seen its purchasing power fall dramatically, and that lawmakers responded by transferring a large and growing share of general fund dollars into the state’s transportation budget. The state legislature is expected to finally debate a gas tax increase this year. Early supporters include the Oklahoma Policy Institute and the editorial board of the state’s largest newspaper.

Oregon Gov. Kate Brown urged lawmakers to pass a significant transportation funding package in her inaugural address. While she has yet to propose a specific funding source, discussions of a gas tax increase are already underway. The League of Oregon Cities is among the groups backing an increase in Oregon’s gas tax. Republican legislators, however, are indicating that they may not support a gas tax increase unless it is paired with cuts in taxes that fund other areas of government.

South Carolina’s House leadership recently proposed raising the state’s gas tax by 10 cents over five years, increasing the vehicle sales tax, and enacting higher registration fees for hybrid ($60) and electric ($120) vehicles. While former Gov. Nikki Haley insisted that any gas tax increase needed to be paired with an income tax cut, the state’s new governor, Henry McMaster, has yet to weigh in on the issue. South Carolina’s gas tax has not been raised in 28 years and an increase is supported by the South Carolina Chamber of Commerce and at least one member the state’s DOT Commission.

Tennessee Gov. Bill Haslam recently unveiled a plan to boost the state’s gasoline tax by 7 cents and its diesel tax by 12 cents. Tennessee would also join the growing group of states that index their gas tax rates to inflation. The governor would also like to raise vehicle registration fees across the board, with larger fees for electric vehicles. Unfortunately, Gov. Haslam has paired these changes with tax cuts for businesses and successful investors, and a reduction in the state’s sales tax rate on groceries. The net result would be a boost in funding for infrastructure and a reduction in funding for education and other public priorities. Some legislators are discussing an alternative plan that would have a similar overall effect: transferring sales tax dollars out of the general fund to be spent on transportation instead.

Virginia localities in some parts of the state are seeing the revenues raised by their regional gas taxes fall millions of dollars short of projections. Regional gas taxes in Virginia are linked to the price of fuel, so low fuel prices have resulted in low tax collections. Some state lawmakers would like to remedy what they call a legislative “oversight” by establishing a minimum regional gas tax rate, or “floor,” that would be collected even when fuel prices are low. Virginia’s state-level gas tax already contains just such a floor, as do the price-based gas taxes levied in many other states.

Wisconsin Gov. Scott Walker firmly opposes any net tax increase, though he may agree to a boost in the state’s gas tax rate if it is accompanied with tax cuts of equal or greater size. The state Assembly tentatively embraced the idea but its leader, Assembly Speaker Robin Vos, has also said that “I don’t necessarily favor taking money from income and sales tax dollars that could go to fund schools or the university or somewhere else and transferring that into the transportation fund when we know we have needs there.” Because Gov. Walker is unlikely to sign a gas tax increase unless it includes exactly this type of swap, Speaker Vos is reportedly growing more pessimistic about the chances of reaching an agreement in 2017.

For more information on state gas taxes, read:

How Long Has It Been Since Your State Raised Its Gas Tax? (updated January 2017)

Most Americans Live in States with Variable-Rate Gas Taxes (updated January 2017)