The Road Ahead for State Tax Policy

Tax policy figured prominently during the national election and likely will be high on the agenda of President-elect Donald Trump and Congress.  And while state and local elections didn’t receive as much national media attention as the presidential race, shake-ups in statehouses will pave the way for significant tax policy debates in a number of states. Just as the election results will shape the direction of the nation’s tax policy in the coming year, it also will affect the direction of tax policy debates in a number of states next year. 

In coming weeks, ITEP will provide a comprehensive overview of state tax policy trends to anticipate in 2017 as well as a look at other states where tax policy will be a dominant issue.  For now, here’s a glance at some of the most important states to watch where the election made a mark on potential tax changes:

Kentucky

The recent election shifted the state exclusively to Republican control. The Kentucky GOP now holds the governor’s mansion, the Senate, and a supermajority of the House of Representatives. Gov. Matt Bevin has announced that Kentucky’s new Republican legislature will overhaul the state’s tax code in 2017. Specifics of what such a reform would look like are unclear, but the governor remains open to eliminating the state’s income tax, and supply-side guru Arthur Laffer is helping to shape the plan.

Alaska

After the election, lawmakers in Alaska formed a new 22-member majority caucus comprised of 17 Democrats, two Independents, and three Republicans. This newly formed majority in the House of Representatives has pledged to set aside party labels to address the state’s fiscal challenges, largely the result of declining oil revenue and legislative inaction. Their focus will be on a sustainable budget that will not abandon core state services. ITEP has weighed in on potential revenue options in two recent reports: Distributional Analyses of Revenue Options for Alaska and Income Tax Offers Alaska a Brighter Fiscal Future, both of which make the case for reinstating a personal income tax.

Iowa

Republicans in Iowa now have control of the House and Senate for the first time since 1998, in addition to the governorship. The 2016 session ended without significant tax changes and many of this year’s issues are likely to resurface when the legislature reconvenes in 2017. For example, the state has not resolved its need for water quality improvements, for which a small sales tax increase has been proposed. But the push to cut taxes for the wealthy will likely have more strength than ever. Legislative action may includeproposals to convert the state’s graduated rate structure to a flat tax, and the new legislature may demand regressive income tax cuts in exchange for funding water quality improvements. Such a compromise, of course, would further weaken the state’s historically low levels of school funding, especially if revenues continue to underperform.

Kansas

Gains by moderate Republicans and Democrats in Kansas’s legislature could usher in a new ideological majority more resistant to Gov. Brownback’s tax and economic policies. Though far from the votes needed to override a gubernatorial veto, these shifts could result in a new bipartisan majority coalition that is likely to work together to raise significant revenue to address the state’s continuing revenue problems stemming from the governor’s failed supply-side tax cuts.

Montana

Incumbent Gov. Steve Bullock won re-election in a pricey contest against Republican candidate Greg Gianforte. With the election behind them, lawmakers are now preparing for the 2017 legislative session that starts in January. This week Gov. Bullock released his two-year budget plan, which includes several revenue measures to help plug the state’s revenue gap. Proposed tax cuts include tax incentives for new or expanding businesses touted on the campaign trail, as well as the creation of a state Earned Income Tax Credit (EITC) at 3 percent of the federal EITC. Proposed increases include consumption tax reforms (increased alcohol and taxing medical marijuana) and progressive reforms of adding a new top bracket and rate for income over $500,000 and limiting the tax credit for capital gains to income under $1 million. These proposals face Republican majorities in both the House and Senate.

Missouri

Missouri will go into session with both legislative chambers and the governorship in the hands of Republicans. It is unknown if a major push to cut taxes in Missouri will occur this year, however, as Missouri is one of the states that joined (in 2014) the fiscally irresponsible trend of passing tax cuts that won’t take effect until future years. Those cuts are one reason the state is already looking at revenue shortfalls in coming years, and will also make it all the more difficult to solve issues like the fact that the state’s employees are the lowest-paid in the nation. But some aspects of Missouri’s tax code are woefully out of date, and any reform efforts this year will benefit from the hard work of a special tax study commission that has been meeting all year to identify tax-related issues and options for reform.