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PSN 2012 Tax and Budget Session Roundup: Austerity Impedes Economic Recovery; Expanded State Spending Leads to Growth

With 2012 legislative sessions largely adjourned in statehouses across the nation, this is the first in a series of issue-specific session roundups from Progressive States Network highlighting trends in different policy areas across the fifty states.

Like several countries in the European Union, conservatives in the U.S. promised that slashing state government spending would fuel economic growth. Thirty states have responded to budget deficits by doing just that.1 At the same time, 20 U.S. states and a number of other European countries have taken the opposite approach, generating revenue and focusing additional spending on economic recovery.2

States cutting spending picked wrong economic track
(Chart from Austerity Is Hammering State Economies, Center for American Progress, June 2012.)

Just like in Europe, the states that chose austerity have been outpaced in job growth and economic recovery by the states that raised revenue to expand government spending. According to an analysis by the Center for American Progress, the states that cut spending have experienced the following economic outcomes:

  • Their unemployment rates are 4.1% higher;
  • There are 6% fewer private-sector jobs; and
  • Their economies are growing 2.7% slower than before the recession.

Meanwhile, the states that expanded spending experienced the following economic results:

  • Unemployment is only 3.5% higher than pre-recession levels; and
  • Compared to states that cut spending, there are 1/3 fewer lost private-sector jobs.

States made progress in 2012 toward raising revenue, defeating regressive tax breaks, and improving transparency:

Raising Revenue

Moving into 2013, it is clear that expanding government spending is an effective method to accelerate much needed economic recovery and job growth. To do that, states must find ways to raise revenue and defeat conservative efforts to cripple state budgets indefinitely through permanent and regressive tax cuts. Some states made progress on this in 2012.

  • MARYLAND: Facing a $1 billion budget gap for the remainder of the decade, Maryland prevented further cuts to education by raising revenue through progressive tax reform. The state’s FY2013 budget (SB 1301/HB 1801) increases the personal income tax for single six-figure earners and married couples earning $150,000 or more. The tax change will close half of the projected budget gap. The increase is graduated, with the lower end of the six figure earners paying an additional 0.25 percent, up to the highest earners paying up to an additional 0.5 percent. Maryland joins ten other states (California, Connecticut, Delaware, Hawaii, Illinois, Maine, New Jersey, North Carolina, Oregon, and Wisconsin) that have used a balanced approach of cuts and revenue increases since the recession began.
  • CALIFORNIA: Voters will decide this November whether to prevent as much as $10 billion of further education cuts and fund green energy programs through tax reform. There are three proposed tax measures on the ballot.
    • Proposition 30 is a graduated increase of the income tax — from 0.4 percent for the lowest earners to 2.2 percent for those with incomes above $2.5 million — for twelve years. The revenue would be dedicated mostly to early and K-12 education funding.
    • Proposition 38 is two-fold: a temporary and graduated increase of 1-3 percent on earnings over $250,000 (1 percent for $250,000-300,000, 2 percent for $300,000-500,000, and 3 percent for incomes above $500,000) for seven years, and a 0.25 percent increase in the sales tax for four years. The revenue collected would be directed mostly to K-12 and community colleges.
    • Proposition 39 would change California’s existing combined reporting law to require multistate corporations to calculate their taxable revenue based on the percentage of their sales in the state, and would direct a portion of the revenue to green energy programs.
    • A ballot measure to increase tobacco taxation — for the purpose of decreasing tobacco use, not to raise revenue — failed in June after tobacco companies spent $66 million to defeat it.
  • ILLINOIS: Faced with a choice between cutting Medicaid and raising tobacco taxes, Illinois chose the latter. Illinois’ cigarette tax was $0.98 per pack, which was lower than average. The increase (HB 5007) that prevented deeper cuts to Medicaid brought the rate to $1.98. In addition to raising revenue, tobacco taxation also decreases the smoking rate; it is anticipated that cigarette sales in Illinois will decrease by 20% after the tax goes into effect. In FY2013, Illinois estimates that it will save $50 million from having fewer smoking-related illnesses to treat.
  • NEW JERSEY: For the third consecutive year, New Jersey’s legislature passed a millionaire's tax, and each time Governor Chris Christie has vetoed it. ACR130 and SCR31 would have increased the personal income ysc rate on income above $1 million by 1.78%. The revenue raised would have offset a decrease in property taxes for the middle class.
  • RHODE ISLAND: The legislature considered an innovative idea. Though it didn’t pass this year, it is an interesting model for other states to consider. In response to the argument that corporations need lower tax rates to create jobs, the Jobs Development Act (RIGL 42-64.5-1) would provide an incremental reduction of the corporate tax rate to companies that create new employment in the state over a three year period. The reduction would be one quarter of one percent for each 10-50 new jobs created (depending on the size of the corporation, with the lower threshold for smaller businesses). The jobs created must pay at least 250% of the state minimum wage (currently $7.40/hour). The current corporate income tax rate is 9% and the reduction can bring that down to as low as 3% for job creating businesses. As long as the employers maintain the increased level of employment, they can keep paying the reduced rate.

Defeating Regressive Proposals

A number of states considered regressive tax measures, many of which would ensure future budget crises. Many states rejected those proposals.

  • NORTH DAKOTA: Voters overwhelmingly rejected Measure 2, a ballot measure that would have placed a constitutional ban on property taxes. Rather than paying for schools through property taxes, the measure would have relied on oil production. Though North Dakota is experiencing an oil boom now, its future is uncertain and would leave the future of school funding equally uncertain. Over three quarters of voters rejected the measure.
  • OHIO: Governor John Kasich’s proposed income tax cut, embedded in the budget, failed to get support even from members of his party in the legislature. In other news from Ohio, a proposed bank tax (HB 510) is under consideration.
  • OKLAHOMA: In an epic bait and switch, bills (SB1571 and HB 3038) that initially eliminated tax loopholes for corporations failed because — as the Oklahoma Policy Institute publicized — their language was replaced with language that would eliminate and reduce tax credits for working families.

Improving Transparency

One way to build momentum for fair tax reform is to improve the transparency of the current system. Transparency can be improved unilaterally by the executive branch, but when the executive is unwilling, legislation can require transparency. Progress was made toward improving transparency in 2012.

  • IOWA: Iowa adopted HF 2460, which requires more accountability and transparency and limits tax increment financing — an inefficient “economic development” program that typically amounts to wasteful corporate subsidies.
  • ALASKA: Under consideration is the Tax Break Transparency Act (SB 29), which would permit scrutiny of tax expenditures — that is, the various tax credits, deductions, exemptions and other breaks that reduce tax revenue. It requires the creation of a tax expenditure report that details a list of the tax breaks along with the cost of each. Forty-five states already produce these reports and five make them mandatory (including Colorado, Georgia, Idaho, New Jersey, and New Mexico).

Several states adopted regressive tax cuts in 2012, ensuring budget crises for years to come:

Many states' budgets are just beginning to come out of the recession, with no gap or small surpluses. Conservatives remain intent on tax cuts, in spite of the fact that such cuts undermine the ability of state budgets to return to pre-recession revenue levels. Without additional revenue, states cannot accelerate the economic recovery. Conservative attempts at tax cuts have primarily focused on the most progressive components of state tax codes – income and estate taxes.

  • IDAHO: Idaho eliminated its top income tax bracket (HB 563), which greatly reduces the taxes of a small fraction of the wealthy, while 80% of Idaho families pay the same rate as before. Further, it makes Idaho’s tax system much more regressive: while middle and low-income Idahoans typically pay 8.2-8.7% in state taxes, Idaho’s wealthiest residents will now pay only 6.3%.
  • ILLINOIS: Many states have “circuit-breaker” property tax credits, which help low-income seniors keep their homes when they have trouble paying property taxes by refunding them the share of those taxes that are an excessive amount of their income. In an attempt to close its budget deficit, Illinois repealed its circuit breaker property tax credit, saving the state only $24 million annually. Another $500 million property tax credit was kept, even though it is not sensitive to income and therefore is extended to homeowners who do not struggle to stay in their homes.
  • KANSAS: Kansas adopted the most regressive income tax in the nation with a new tax cut. HB 2117 will cost the state $760 million a year, decreases income taxes for the wealthy, and increases taxes for some working families. The law decreases the top income tax rate from 6.45% to 4.9%, reduces the bottom rate from 3.5% to 3%, exempts all “pass through” income (a type of income that typically only the wealthy have), and eliminates the Child and Dependent Care Credit, the Homestead Property Tax Refund for renters, and the Food Sales Tax Rebate for seniors and low-income families. All in all, the poorest 20% of Kansas will pay an additional 2% of their income in taxes while the wealthiest 20% of Kansans will pay $21,087 less in taxes.
  • MICHIGAN: Michigan adopted a tax cut that gradually reduces the state’s income tax to 3.9% by 2018. HB 5729 will cost the state $3.2 billion in its first five years, and the cost will accelerate once the cut is fully in place. Many liken this tax cut to a similar one in the 1990s that the legislature was forced to reverse due to the budget crisis it created during difficult economic times.
  • NEW HAMPSHIRE: It took the legislature overriding Governor John Lynch’s veto, but New Hampshire adopted a law (HB 1607) that give businesses an 85% tax credit for donating to private school scholarship funds. Governor Lynch pointed out that it diverts money from public schools and that many of the scholarships are awarded to families that are economically well-off, defeating the argument that this helps low-income kids attend private schools.
  • TENNESSEE: Governor Bill Haslams proposed and the legislature adopted a law (HB 3760 and SB 3762) that will eliminate the estate tax gradually, with the entire estate tax being eliminated by 2016. This proposal was inspired by the now debunked Laffer/Winegarden report which erroneously claiming that Tennessee’s estate tax costs the state 220,000 jobs.

Trends in 2012 likely to continue in 2013:

In 2013, raising revenue to stimulate a slow economic recovery and create job growth sufficient to fund future state budgets is critical. Making personal income taxation more progressive enjoys popular support. There are other ways to raise revenue and stimulate job growth. Two especially timely policies are combined reporting and state development banks.

Combined Reporting

Combined reporting requires multi-state corporations to report profits from all entities, including subsidiaries, for tax purposes. This restricts tax avoidance strategies and nullifies certain tax shelters, preventing multi-state corporations from avoiding paying the taxes they owe.

In 2012, eight states considered combined reporting legislation: Alabama (HB 199), Florida (SB 1590), Kentucky (HB162), Maryland (HB 941), Missouri (HB 1727), New Mexico (SB 9), Oklahoma (SB 1562), and Virginia (HB 1267). The legislation passed both houses in New Mexico but was vetoed by Governor Susana Martinez. Because combined reporting levels the playing field between small, local and multistate businesses and can raise hundreds of millions in needed revenue, it is likely to be a hot topic in 2013 legislative sessions as well.

State Banks

State banks team up with local banks — plus credit unions and community development financial institutions — to keep public money inside the state where it will create new jobs, lower financial services costs, and strengthen local banks. State banks also generate revenue; the Bank of North Dakota returned $62 million in profit to North Dakota’s general fund in 2010.

The momentum on state banks picked up in 2011 and accelerated in 2012. State bank legislation was introduced in 14 states which represent significant political diversity: Arizona, California, Hawaii, Idaho, Illinois, Maryland, Massachusetts, Mississippi, New Hampshire, New York, South Carolina, Vermont, Virginia, and Washington). Due to the hard work of the Center for Working Families, legislators in New York plan to take up state banking legislation in the fall of this year. The momentum is likely to continue in 2013.

Introduction of state banking legislation, based on research by the Center for State Innovation, in Oregon and Maryland resulted in alternative policy solutions passing by wide margins. Oregon’s state bank legislation brought stakeholders to the table. The result was an alternative bill, the Oregon Investment Act (HB 4040). The legislation creates an infrastructure that will perform some of the economic development functions of a state bank and has the potential to be expanded. It passed the House 59-1 and the Senate 23-4. Oregon’s Working Families Party worked with local banks, a key constituency in getting the bill passed.

Similarly, in Maryland, the introduction of a state banking bill brought stakeholders to the table and resulting in the alternative, the Lend Local Act (HB 571). This act moves hundreds of millions of dollars in state deposits from too-big-to-fail banks to local banks. The Lend Local Act passed the House 141-6 and the Senate 36-0.

 

Full Resources from this Article

PSN 2012 Tax and Budget Session Roundup:

Center for State Innovation - State Banks Initiative
Institute on Taxation and Economic Policy - Corporate Tax Dodging in the 50 States, 2008-2010 (see page 11 for Corporate Tax Loopholes by State)
Center on Budget and Policy Priorities - Tax Flight Is a Myth: Higher State Taxes Bring More Revenue, Not More Migration
Center on Budget and Policy Priorities - Promoting State Budget Accountability Through Tax Expenditure Reporting
Center on Budget and Policy Priorities - Budget Cuts or Tax Increases at the State Level: Which Is Preferable When the Economy Is Weak?
Good Jobs First - Smart Growth for Working Families
Good Jobs First - Subsidy Tracker: Discover Where Corporations are Getting Taxpayer Handouts Across the United States
Good Jobs First - Green Jobs

 

Notes:

[1] Alabama, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Indiana, Kentucky, Maine, Michigan, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, and Washington.

[2] Alaska, Arizona, Arkansas, Idaho, Illinois, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New York, North Carolina, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming.