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PSN 2013 Tax Fairness Roundup: State Budgets Reflect Divergent Priorities: Austerity vs. Economic Sustainability

With 2013 legislative sessions largely adjourned in statehouses across the nation, this is the fourth in a series of issue-specific session roundups from Progressive States Network highlighting trends in different policy areas across the fifty states.

Earlier this year, the conservative theory of austerity was thoroughly debunked, with leading economic experts concluding that there is not “even a shred of evidence” that austerity promotes growth and that it instead worsens economic downturns. Despite the conclusions of empirical research, state policymakers have proposed widely divergent ideas about how best to collect and invest taxpayer dollars in 2013. Some states raised revenue to help stimulate a robust economy over the long term by investing in education and other infrastructure. Other states bought the conservative snake oil and refused to fund critical programs and services that contribute to a prosperous and sustainable economy. Below are some highlights and significant trends we saw in state tax policy over 2013 legislative sessions.

 

States Move to Raise Revenue by Increasing Rates, Investing in a Prosperous Future

After years of cuts and austerity during the Great Recession and its aftermath, 2013 marked a turning point in some states, where progressives won significant victories on pro-growth tax and budget policies and debates over surpluses slowly began to replace debates over deficits.

Tax reform was long overdue in Minnesota where Gov. Mark Dayton won his seat campaigning on progressive tax reform and kept his promise.  He proposed, and the legislature passed, a higher marginal tax rate for the richest 2% of Minnesotans. The two-year budget, which also raises cigarette taxes and eliminates several corporate subsidies, is expected to raise more than $2 billion in new revenue while increasing funding for public education, providing property tax relief, and erasing the state’s $657 million projected budget deficit. Overall, the Minnesota state budget was a win for progressives.

After raising revenue by nearly $2 billion in 2011, the largest increase in state history, this year Connecticut did the work of outlining the state’s priorities. Connecticut approved a budget that closes a $1.5 billion gap with a mix of tax extensions, spending cuts, and other measures like the large expansion of computer gambling. While this budget successfully holds the line on income, sales, and property taxes, the nonpartisan Office of Fiscal Analysis estimates that the budget raises about $315 million in new revenue which will be put toward funding pensions, expanding education reforms, and investing in science and technology programs are the University of Connecticut.

After Californians voted to raise taxes last November, much of the budget debate this year in California centered on whether to use revenue projections generated by the nonpartisan legislative analyst or the Governor’s more conservative projections. Ultimately, Gov. Jerry Brown prevailed and rejected legislative Democrats’ suggestion that the state add an additional $2 billion in spending. The final agreement will increase funding for mental health services, college student aid, and California’s welfare-to-work program, CalWORKs. In education alone, the budget does the work of outlining how the state will distribute funds generated by the passage of propositions 30 and 39 in November, both which contribute to the state’s expected $4.5 billion surplus. Gov. Brown is also poised to implement a major funding formula overhaul, shifting more resources to students with the greatest need.

Finally, neighboring Nevada committed to restoring $120 million of the $700 million cut from school funding since 2009 in an effort to reduce class sizes and hire more teachers. In response to Gov. Brian Sandoval’s promised to veto any tax hikes, the Nevada State Education Association organized a petition which put an initiative on the 2014 ballot to impose a two percent margins tax on businesses grossing more than $1 million a year. This additional revenue would allow the state to invest more general funds into restoring public education.

Fig. 1: Tax Cuts and Job Growth

 

Regressive Proposals: Radical Right Wing Personal Income Tax Cuts Meet Different Fates

Sixteen states debated some kind of change to their personal income tax in 2013. Most states, including Arkansas, Indiana, KansasLouisianaNorth CarolinaOhio, and Wisconsin, ignored empirical data proving that personal income tax cuts are a poor strategy for economic growth and attempted to cut or eliminate one of the most stable forms of taxation. Despite many of these radical and misguided plans running into heavy opposition, some did make their way through the legislative process:

  • In Oklahoma, Gov. Mary Fallin signed a budget that cuts personal income taxes by $237 million over the next three years.
  • To address their $800 million budget gap, Kansasbudget bill makes changes that are revenue positive while still cutting taxes. The bill made their tax system more regressive by lowering income taxes and, in effect, raising sales taxes, though it also restored the low-income food tax credit.
  • In Indiana, Gov. Mike Pence proposed a 10 percent cut to personal income taxes which the conservative-dominated legislature compromised down to 5 percent that will be phased in starting in 2015. The budget also includes small increases in school and transportation funding, although still well below pre-recession levels.
  • In Wisconsin, Gov. Scott Walker signed the state’s two-year budget into law, but not before vetoing 57 measures. Ultimately the budget reduces personal income taxes, caps property tax growth, freezes university tuition for two years, and rejects Medicaid expansion. This budget underfunds education and rejects federal aid that would provide health care coverage to hundreds of thousands of Wisconsinites while stimulating significant economic activity and creating new health care jobs.
  • In Ohio, Gov. John Kasichfollowed suit and passed a budget that cuts the income tax rate by 10 percent, provides huge deductions for businesses, increases the regressive sales tax, and sets up a nonrefundable Earned Income Tax Credit — an empty promise to Ohio’s working poor.

Earlier this year, presidential hopeful and Louisiana Gov. Bobby Jindal campaigned for his tax plan that would have eliminated the state’s income and corporate taxes. Business groups, progressive advocates, analysts, and lawmakers agreed — Gov. Jindal’s plan, and subsequent versions of his proposal, didn’t adequately replace the revenue lost and the plan failed to receive a hearing. Ultimately Louisiana resisted the Governor's ill-conceived plan because it would have severely eroded needed tax revenues.
 

Transportation: Raising Revenue by Increasing Gas Taxes

After almost three years of silence on the issue, lawmakers in nine states either seriously considered or succeeded in raising their gas tax: Iowa, Maryland, Massachusetts, Michigan, New Hampshire, Pennsylvania, Vermont, Washington, and Wyoming.

  • In Wyoming, Gov. Matt Mead signed a bill into law which will boost gas taxes by 10 cents per gallon in order to avoid dipping into general funds to repair roads each year.
  • In Virginia, Gov. Bob McDonnell signed a complex piece of legislation that cuts the gas tax for consumers in the short term and asks wholesale buyers to pay a new 3.5 percent tax. The bill also raises the sales tax, forcing Virginia’s poor to pay more than the wealthy, privileged few.
  • In Maryland, Gov. Martin O’Malley signed a bill that raises taxes on gas in order to pay for overdue repairs to crumbling bridges and roads.
  • In Massachusetts, the budget relies on the $500 million in new revenue brought in by increases in gas and cigarette taxes.
  • In Vermont, Gov. Peter Shumlin signed a bill that increased the state’s 19-cents per gallon gas tax by 5.9 cents and the diesel tax by 2 percent initially.

In Washington, after the collapse of a bridge highlighted the need to invest in transportation infrastructure, conservatives in the Senate refused to allow a vote on a $10 billion transportation package that was funded in part through a gas tax, delaying the matter until 2014.

Fig. 2: Gasoline Tax Changes

 

Raising Revenue without Raising Rates: Closing Loopoles, Encouraging Transparency

There are many creative ways that lawmakers can raise vital revenue without raising effective rates. Washington considered over $1 billion in revenue solutions but failed to close a long list of tax exemptions and loopholes that were on the table at the beginning of session. Instead of eliminating

loopholes for oil refineries, insurance agents, and prescription drug warehouses, the final budget cut housing and essential needs for people with disabilities by $20 million. Conservatives also cut job training and retention programs by $162 million in order to give large corporations with high-paid lobbyists a special tax break for activities like buying or refurbishing a private jet. The revenue conservatives dedicated toward their corporate buddies would have been better spent on adequately funding education and preventing cuts to programs that help residents find and keep jobs.

Another strategy that states have used to raise revenue is to encourage transparency through the tax collection system. Illinois, through corporate tax disclosure, and Michigan, through requiring procedural transparency, found different ways to open access to information allowing lawmakers and the general public to more clearly understand and influence taxation. Transparency and accountability are central tenets of every well-functioning tax system. States should pass policies that bridge the gap of understanding between collection offices and the residents they serve.

Fig. 3: Tax Breaks

 

Looking Forward: Mitigating the Painful Cuts in Sequestration

Just as states are realizing the damage that can be done by austerity policies that have proved economically disastrous in Europe, the federally imposed across-the-board spending cuts known as sequestration will make it more difficult to adequately fund critical programs and services. On March 1st, Congress ignored the warnings of legislators from 46 states as well as advocates and other experts about the disastrous effect sequestration would have on economic recovery and job creation. Under sequestration, states will have to raise enough revenue to dig out of the hole left by the Great Recession and make up for the more than $100 billion in cuts to federal spending including a 10 percent cut in federal grants to states and localities.

Next session, while states try to continue on the path toward full recovery, they will have to do so while accounting for depleted federal grants and increased competition for limited resources.

Fig. 4: Federal Spending As A Percent Of State GDP

 

Additional Resources:

Center on Budget and Policy Priorities - State Personal Income Tax Cuts: A Poor Strategy for Economic Growth
Progressive States Network - State-by-State: How the Sequester is Set to Hammer the Economy