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Is This The Way States Can Sell Tax Hikes For Transportation?

By Elaine S. Povich, Stateline.org (TNS)

WASHINGTON — In a conservative Republican state, how does a governor raise taxes, issue bonds and ask local taxpayers to pay even more for transportation? According to Utah Gov. Gary Herbert, you do it by building a coalition of business, industry, churches and educational groups united on one goal: moving people around the state.

“You have to set the table and then you have to deliver,” Herbert, a Republican, said.

“Setting the table” involved at least two years of forging a coalition of interested parties, all of which rely on transportation, to support raising money to build and rebuild Utah’s multifaceted transportation system.

And this year, everyone was called on to “deliver.” In March, Herbert signed a bill passed by the GOP-controlled Legislature that raises the existing 24.5 cents per gallon state gas tax by about 5 cents to pay for state infrastructure projects, despite complaints from some quarters that, because the state has a surplus, it shouldn’t be raising any taxes. The new tax is structured to rise with inflation.

In addition, voters in 17 of 29 Utah counties will be asked in November to approve a 0.25-cent increase in their counties’ sales tax to fund local transportation projects that the state doesn’t pay for, such as city street repairs and local interchanges.

Although nearly every state is struggling to maintain and rebuild its transportation system, Utah is one of only seven states where the legislature this year approved an increase in gas taxes to do it, according to Citizens for Tax Justice, a left-leaning research and advocacy group that focuses on policy. Georgia, Idaho, Iowa, Nebraska, South Dakota and Washington were the others.

Sean Slone, director of transportation and infrastructure policy at the Council of State Governments, a nonprofit research group, says Utah’s method of selling a tax hike wouldn’t necessarily work in all states, but it is a good model for some.

“Part of it is we have good leadership in the (state) House and the Senate,” Herbert said in explaining how he accomplished his goal during a question-and-answer session at the National Press Club in Washington, D.C., recently.

But that’s only part of it. The leadership needed its courage bolstered to vote for an increase in the gas tax, which hadn’t been raised in 18 years. To help build that courage, Herbert and his allies fanned out across the state, roping in business and industry.

“We have great Chamber of Commerce members who say, ‘For us to be successful in business, we have to have infrastructure that works,'” Herbert said. “We heard loud and clear from the business community that we need to have a transportation infrastructure that gets us from point A to point B with little discomfort and congestion.

“It made it easier politically, for the Legislature to do it with the support of the business community and the Chamber of Commerce, education and others out there who are stakeholders and endorsed a commonsense adjustment in our taxation for transportation.”

Herbert also had the Statewide Transportation Improvement Plan, which sets out what needs to be fixed or built over the next five years to keep up with growth and prioritizes the requirements for transit, highways, bridges and rural roads in the state. The plan also includes transportation projects in national parks, national forests and Indian reservations. These are important in a state where the federal government owns 70 percent of the land.

“They sort of have a unique process in Utah,” Slone said. “They got a lot of different stakeholders to weigh in and produced a document that is guiding their decisions, and their goal to raise these additional funds and commit these dollars to transportation. It was a universal effort, and legislators and other folks really tout this as a founding document.”

Utah’s transportation program isn’t all about repairing what it has.

The state’s population is expected to nearly double by 2050, from 2.9 million to nearly 5 million people, a combination of large, growing Mormon families and an expected influx of new industry and accompanying residents from other states. So accommodating additional traffic from newcomers was important in planning and selling higher taxes in a state that relies on more than 43,000 miles of roads and 5,800 miles of state-maintained highways.

In addition, the Salt Lake City metro system — which is known as TRAX and transports about 68,100 riders daily — is slated for expansion.

Utah couldn’t count on the federal government to solve its transportation needs.

Between 2001 and 2012, federal funds made up 34.6 percent of Utah’s transportation budget — the lowest of any state, according to a study by Transportation for America, an interest group made up of political, business and civic leaders pushing transportation funding.

Congress also has left the federal gas tax, 18.4 cents per gallon, untouched for 21 years, passing stopgap highway funding measures in recent years with no comprehensive plan to keep federal highway funding apace with inflation. The Institute on Taxation and Economic Policy estimates the federal gas tax has lost nearly 40 percent of its value since the last time it was raised.

In a February report, “Funding Challenges in Highway and Transit,” The Pew Charitable Trusts (Pew funds Stateline) said that state gas tax revenue to fund transportation also has declined by 15 percent from 2002 to 2012.

This isn’t the first time Utah has sought to tackle its transportation needs. According to the American Association of State Highway and Transportation Officials, Utah “by almost any measure” has one of the “most successful transportation organizations in the country,” winning praise for how it has helped people move around the state.

As far back as 1997, the state came up with a plan for future transportation funding that did not count on the federal government and its gas-tax-funded Highway Trust Fund. With its eyes on the 2002 Winter Olympics in Salt Lake City, Utah designated 42 highway projects that would not have been completed without more funding and increased the gas tax from 19 cents per gallon to 24.5 cents per gallon, putting the money into a special highway fund. Most of the projects were completed before the Olympic flame was lit.

In 2009, Utah issued $2.2 billion in bonds to pay for projects, including a $1.7 billion reconstruction and expansion of Interstate 15, the major north-south artery between Salt Lake City and the Provo-Orem area in Utah County, one of the fastest growing counties in the nation.

Utah also has led in construction innovation. Consider the Sam White Bridge demolition and reconstruction, which was part of the I-15 project and is considered a model for building bridges quickly so that traffic isn’t disrupted for days, weeks or months.

The old two-span bridge was torn down and a new bridge moved into place in less than 24 hours in 2011. The new bridge was constructed on a “bridge farm” on the east side of I-15. Then, hydraulic jacks on wheels, controlled by a joystick, were used to lift the 3.8 million pound bridge, move it across eight freeway lanes, and lower it into place. It was done overnight and the bridge was bolted down and ready for traffic by 7 a.m.

U.S. Sen. Orrin Hatch, a 38-year Senate veteran, said that the population in his state is growing rapidly and the state is constricted by federal land, giving rise to innovation.

“Utah is way ahead of most states,” the Republican senator said. “We have an electorate that believes we want to have a good state and have things that work.”

Photo: When traffic gets this bad and roads deteriorate, the government needs to step in — even if it’s politically unpopular. REUTERS/Mike Blake 

To Collect Revenue, Some States Put Tax Scofflaws In Virtual ‘Stocks’

By Elaine S. Povich, Stateline.org (TNS)

WASHINGTON — Almost two-thirds of the states are punishing tax delinquents with a digital version of the Colonial practice of locking lawbreakers in stocks set up in the village square.

It turns out publishing the names of tax scofflaws and the amounts they owe on the Internet works spectacularly well, bringing in millions to states eager for the revenue. In many cases, just the threat of being on the list is enough to get delinquent taxpayers to pay.

The technique is the flip side of tax amnesty, in which delinquent taxpayers are offered the chance to come forward voluntarily to escape high interest or penalties. The two processes are similar, however, in that states usually work out a payment plan for taxpayers.

The states that use public lists of delinquent taxpayers range from largely liberal ones such as California and New York to more conservative states such as South Dakota and Alabama.

In Vermont, the latest state to adopt the strategy, the legislature last year approved publishing the names of the top 100 individual and top 100 business tax delinquents. The state estimated it would collect $800,000 of an estimated $175 million in delinquent taxes in fiscal year 2015, which will end June 30.

The program has been even more successful than expected: Since the list was posted in January, Vermont has collected $1.3 million, according to Gregg Mousley, deputy tax commissioner. He predicted a total take of $1.5 million by the end of the fiscal year.

Under its plan, Vermont compiles the two lists, and then notifies the scofflaws by letter that their names are about to be published. According to Mousley, the letter often is incentive enough to prompt payment.

“At least half of the $1.3 million was collected before we put them on the list,” he said. “The threat of being on the list was a very good motivator.” Mousley predicted, however, that the pace of collections will slow and that the state will collect less in subsequent years because some of the buzz about the program will die down.

Mousley noted a quirk that also has been documented by researchers — the more money tax scofflaws owe, the less likely they are to be shamed into paying.

“When you are talking about large debts, you do tend to get some people who just don’t care,” he said. “It’s just not worth playing off their $450,000 or $1.2 million debt. Down on the lower levels, you get more of the Average Joe who is concerned.”

The effectiveness of the shaming tactic has exceeded expectations in other states, too.

Wisconsin officials estimated that publicly naming delinquents would allow them to recoup about $1.5 million annually when they first posted the information in January 2006. Instead, they’ve recovered between $11 million and $31 million annually, according to Stephanie Marquis, communications director at the Department of Revenue. Wisconsin collected $12 million in fiscal 2014 and has garnered $10.8 million so far in fiscal 2015, she said.

In their groundbreaking paper “Shaming Tax Delinquents: Theory and Evidence from a Field Experiment in the United States,” researchers Ugo Troiano and Ricardo Perez-Truglia found that the “optimal policy” for collecting tax debts was shaming. But the price of the shame varied among taxpayers, according to Troiano.

“First, the price of the shame is not fixed,” he said in an interview. “If I am on the list for $200, it’s relatively easy to get off the list and not be shamed. But if the price is $10,000, it costs more to get off the list and it’s harder.

“Secondly, it’s possible that people who have smaller debts are different kinds of people than those who have higher debts, and who may not be responsive to shame. They may respond differently,” he said.

Vermont Rep. Janet Ancel, the Democratic chairwoman of the House Ways and Means Committee, was instrumental in passing the legislation. “Our challenge, which every state shares, is in compliance and collections. We felt it was worth a try,” she said. “It helped maybe a little bit that I’m a former tax commissioner and I appreciate how difficult it is to get people to pay what they owe. It turns out it’s been quite successful.”

Ancel said there was little resistance to the program when the legislature had hearings on it, and she doesn’t remember questions being raised about privacy. Initially, the list did not include the amount each delinquent taxpayer owed. But under pressure from the public and other lawmakers, the amounts were added to the list.

She said other legislatures considering similar bills should make sure the tax departments are careful about what they publish. “If you are going to make this information public, it needs to be correct. It takes time and attention from the department,” she said. “I think it’s a good collection tool. It’s one tool, but it’s a fairly significant one.”

California was one of the first states to publish the names of delinquent taxpayers online, starting in 2007. Since then, the program has collected more than $414 million from taxpayers in arrears, according to Daniel Tahara, spokesman for the California Franchise Tax Board.

People and businesses pay because they “do not want their name published on a delinquent tax list that is publicly available,” Tahara said, adding that publishing the names is not the only tool state officials have. Other motivators include suspending driver’s licenses and other professional licenses for those who don’t pay, and working with other states on reciprocal agreements that can allow California access to taxpayer refunds from other states.

Jerome Horton, chairman of the California Board of Equalization, another tax administration entity, is a former state legislator who authored the state’s original “tax shaming” bill.

“It was a scarlet letter kind of concept,” Horton said. “We wanted to know why they weren’t paying. This was a catalyst to figure out a way to do that.”

He said the state was pleasantly surprised to find that “if we educate folks about their responsibilities, most people will actually comply.” He acknowledged however, that some people aren’t thrilled about the exposure.

“Under public pressure, they accuse us of violating their privacy and a whole bunch of things,” he said. Some of the delinquents threaten to sue the state for invading their privacy, “but as soon as they talk to a lawyer they find out it’s not a violation of their privacy to publish that they owe us taxes. Then they call me and scream at me.”

In most of the states, once a taxpayer pays the money, his or her name comes off the list and another taxpayer is put on, creating a rotating file of scofflaws. In California, the list of the top 500 (half individuals and half businesses) is published twice a year. According to the Franchise Tax Board, 41 percent of those who were about to appear on the list made payment arrangements before their names were published, accounting for 205 individuals or businesses.

Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, a left-leaning think tank, said that while making tax delinquents’ names public may work, a larger question is whether that technique is being used because state tax collection departments are underfunded and under-staffed, making regular collections more difficult.

“A better strategy would be that state agencies have the ability to fairly and efficiently collect taxes in the first place,” he said.

Photo: The digital version of stockades — publishing tax deliquient information online — is spurring those affected to pay up. Doug Kerr via Flickr https://flic.kr/p/7BqqDx

To Balance Budgets, Governors Seek Higher Education Cuts

By Elaine S. Povich, Stateline.org (TNS)

WASHINGTON — Governors in nearly a half-dozen states want to cut state spending on colleges and universities to help close budget shortfalls, often sparking vehement opposition among state lawmakers of both parties.

Republican governors in Arizona, Kansas, Louisiana, and Wisconsin, and Connecticut’s Democratic governor have proposed higher education cuts for the coming fiscal year. Higher education spending traditionally is a juicy target for budget cutters because schools can make up the lost revenue by raising tuition.

But students and their families already are being squeezed by steadily rising college costs. In fiscal year 2013, schools got about 47 percent of their revenue from tuition, up from about 24 percent in fiscal year 1988, according to the State Higher Education Executive Officers Association. Democratic Governor Dannel Malloy of Connecticut has suggested a tuition hike to compensate for the cuts, but the Republican governors are urging the schools in their states to find the necessary savings by trimming bureaucracy and consolidating campuses.

University officials argue that past budget cuts have pushed them to the breaking point, forcing them, for example, to rely heavily on adjunct professors and teaching assistants instead of full professors. During the recession, 48 states cut higher education spending. Alaska and North Dakota didn’t. They are the only two states spending as much or more on higher education than they did before the recession, when the numbers are adjusted for inflation, according to the Center on Budget and Policy Priorities (CBPP), a Washington, D.C.-based research group.

Some critics have urged the Republican governors to roll back recent tax cuts to spare the colleges and universities. But so far the governors have balked, arguing that lower taxes have helped working families and attracted businesses.

Nowhere is the controversy greater than in Louisiana, which has a complicated higher education system and a Republican governor who is considering running for president.

Governor Bobby Jindal proposed a budget that would reduce higher education spending by $141 million in fiscal 2016. In recent weeks, he has proposed offsetting some of the cuts by getting rid of some refundable business tax credits, which have a total value of $526 million. But the business community is strongly opposing that idea. That leaves the Republican-dominated legislature in a bind, forcing members to choose between education and low taxes, two priorities they generally support.

State Senator Conrad Appel, a Republican, said in an interview that if the higher education cuts Jindal proposed all go into effect “it would be really serious” and a big blow to colleges and universities. He said he wants to scale back the proposed cuts, but wasn’t prepared to say exactly how.

“If we vote to replenish, some of the cuts will be mitigated to some extent,” he said. But, he noted that the Louisiana public university system has “structural inefficiencies” that will mean more budget cuts in the future. He said he told college administrators last week that they should take steps to cut their budgets, whether that means consolidation of campuses or other methods.

“What I don’t recommend is for higher education to ignore the opportunity to fix the problem,” he said. “Either they are going to fix it or we are going to fix it for them and they won’t like it.”

Robert Scott, president of the Public Affairs Research Council of Louisiana, said that since Jindal became governor in 2008, the number of full-time employees at state colleges and universities has decreased 23 percent due to budget cuts, and that schools have been raising tuition along the way. But now, he said, “they are about to price themselves out of the market.” He said the flagship school, Louisiana State University, “still has some headroom” to continue tuition increases, but most of the small schools in the state system don’t have that luxury.

John Griswold, a fine arts professor at McNeese State University in Lake Charles, said his state is a test case for cuts to higher education.

“The conditions in Louisiana were perfect for testing an assault on state-funded higher education,” Griswold said. He noted the state has a conservative governor, legislative rules that preclude cuts in most spending except for higher education and health care, and an economic downturn prompted by the drop in oil prices.

“Similar conditions exist in other states, so conservative politicians elsewhere can also demand deep cuts to higher ed, based on populist appeals to ‘good business’ and an end to ‘welfare mentality,'” he said.

Republican Wisconsin Governor Scott Walker, a potential presidential candidate who has cut state income and property taxes by $541 million during his tenure, has proposed cutting $300 million from the University of Wisconsin system.

According to Walker, that amounts to a 2.5 percent cut, but other analysts have put the figure as high as 13 percent. The fact-checking service PolitiFact split the difference, assessing the reduction at about 6 percent. The cut would be exacerbated by the fact that there is a tuition freeze in place.

“Through flexibility and empowering current leaders from across the system, (University of Wisconsin) System and campus leadership will have the tools necessary to deliver a high quality education in a strategic manner while saving taxpayers $150 million a year,” Walker’s spokeswoman, Laurel Patrick, said.

Meanwhile, two Republican state lawmakers have called for changes in the governor’s budget that would lessen the cut, including raising out-of-state tuition and requiring the university to spend down reserve funds.

“We will work toward a smaller, more manageable cut instead of the $300 million cut proposed in the governor’s budget,” the two, Reps. Dean Knudson and John Nygren, said in a press release last week.

In Illinois, Republican Governor Bruce Rauner recommended a reduction of nearly 6 percent in direct spending on state colleges and universities. Despite the cut, Rauner argues that “this budget proposal continues to offer state support to our public universities” through contributions to the universities’ retirement system and insurance benefits for university employees.

But Rauner faces strong opposition from the Democratic-controlled legislature and from the state’s universities.

Senate President John Cullerton said on his Facebook page that the governor’s budget cuts will “undermine access to health services, child care, affordable college and retirement security for working- and middle-class families” and vowed that the legislature will amend it. While Rauner has proposed cuts in a range of areas, the education chunk is drawing the most attention.

In Arizona, the Republican-led legislature went further than Republican Governor Doug Ducey in cutting higher education, agreeing to a $99 million cut, down from an earlier legislative proposal of $104 million. Ducey had proposed a $75 million reduction as a way to pay for business tax cuts. Universities and proponents of higher education fought the governor’s cuts so doggedly that they prompted a backlash in the legislature, which upped them.

Arizona State University President Michael Crow called the action a “drastic remedy to the state’s budget troubles” and one that will come back to haunt the state when it has fewer college graduates contributing to the state’s economy.

In Connecticut, Democratic Governor Dannel Malloy proposed cutting $10.6 million from the University of Connecticut system and an additional $20.6 million from the state’s regional universities. Malloy has expressed support for tuition hikes, after several years of urging that tuition merely keep pace with inflation.

In Kansas, Republican Governor Sam Brownback since 2011 has pushed through a 25 percent reduction in the state’s top income tax rate, lowered sales taxes and eliminated a tax on small-business income. As a result, state revenue has declined by $685 million. Brownback now is looking to make cuts in education and elsewhere in an effort to balance the books.

Walter McMahon, professor emeritus of economics and education at the University of Illinois said cutting higher education to close budget gaps is “very, very shortsighted.”

“Spending on education is really an investment,” McMahon said. “As money is invested in human capital formation, each graduate is in the labor force for over 45 years and contributes increased earnings and tax revenue to state coffers.”

He added that statistics show that more educated people live longer, healthier lives and commit fewer crimes, allowing states to spend less on health care and prison costs.

Photo: Gage Skidmore via Flickr

In Some States, Tax Cut Promises Collide With Budget Realities

By Elaine S. Povich, Stateline.org (TNS)

WASHINGTON — Many newly elected and re-elected Republican governors stormed into office pledging to cut taxes. Now, in the face of lower-than-expected revenues, some are in a predicament that might remind movie buffs of the 1972 film The Candidate, in which Robert Redford’s character won a U.S. Senate seat only to ask, “What do we do now?”

Some governors are being forced to reconsider their tax cut promises, while others are contemplating budget cuts to bring state balance sheets into equilibrium. Most states are in better fiscal shape this year than in the recent past, but in 20 of them, revenues for the current fiscal year are coming in under projections, according to the National Association of State Budget Officers (NASBO).

Overall, state revenues are projected to be $748.3 billion in fiscal 2015, a roughly 3 percent increase over the $726.1 billion states collected in fiscal 2014. But when those numbers are adjusted for inflation, state revenues still are 2 percent below the pre-recession peak, according to NASBO Executive Director Scott Pattison.

“There’s stability, growth, but overall a lackluster picture,” Pattison said. “We are not seeing significant growth.”

There are now 31 Republican governors, up from 29. Seven of them are new: Asa Hutchinson in Arkansas, Doug Ducey in Arizona, Bruce Rauner in Illinois, Charlie Baker in Massachusetts, Larry Hogan in Maryland, Pete Ricketts in Nebraska, and Greg Abbott in Texas. Hutchinson, Hogan, Rauner and Baker seized governors’ offices previously held by Democrats.

During their campaigns, all of the new Republican governors made some kind of “no taxes” pledge, either promising to freeze taxes or cut them. But those promises are bumping up against budget realities, including looming deficits and unmet needs stemming from the recession. When adjusted for inflation, states’ fiscal 2015 spending will be about 2.7 percent lower than it was in fiscal 2008, according to NASBO.

Education spending, which is a large chunk of state budgets, is a vivid example. Per student, at least 30 states are spending less in inflation-adjusted dollars than they did before the recession hit, according to the Center on Budget and Policy Priorities, a left-leaning think tank. CBPP said most states are spending more per student than they did a year ago, but not enough to make up for the cuts in past years. Many governors, including some who have promised lower taxes, are proposing increases to education spending.

“It makes it difficult to contemplate additional tax cuts when your state is struggling to pay for past ones,” said Michael Leachman, director of state fiscal research at CBPP. “In a state like Arizona, they cut the heck out of their educational system. If they are going to compete in the future, they need to invest. It’s a very difficult situation.”

Ducey, Arizona’s new Republican governor, swept to victory on a platform of tax cuts, economic growth and an overhaul of education funding. But the former CEO of Cold Stone Creamery now faces a possible $520 million deficit this fiscal year and a $1 billion shortfall in the coming year. The state’s fiscal 2015 budget totals $9.2 billion.

David Burton, an economic policy fellow at the conservative Heritage Foundation, said lower taxes usually mean lower spending — a good thing, in his estimation. “Can spending hypothetically go so low that essential services aren’t being provided? Sure, but we’re nowhere near that in any state I’m aware of,” Burton said.

In traditionally “blue” states, combining tax cuts with spending cuts will be a tough sell for newly elected Republican governors.

During his successful campaign, Maryland Gov. Hogan pledged to cut taxes, particularly income taxes, and to get rid of what Republicans call the “rain tax,” a wildly unpopular tax on runoff and wastewater to fund the Chesapeake Bay cleanup. But those promises will be difficult to keep in light of new budget projections showing a deficit of about $1.2 billion in fiscal 2015, out of about a $16 billion general fund budget.

Hogan got an assist from outgoing Democratic Gov. Martin O’Malley. Shortly before leaving office, O’Malley required state agencies to absorb a 2 percent cut over the next six months, part of a plan to cut $400 million from this year’s budget to bring it into balance. However, Hogan will still have to deal with the projected fiscal 2015 deficit. He said he is still planning tax cuts, but did not provide details in his first news conference as governor.

Hogan “always said that we need to get spending under control first, before we begin trying to roll back taxes,” said spokeswoman Erin Montgomery. “He acknowledges that the current budget deficit is a huge factor in accomplishing this goal, but he stands by his promise to make Maryland more affordable for people to live, work and retire. And that still means cutting taxes as soon as he possibly can.”

State Sen. Richard Madaleno, Jr. is skeptical. “While I think there’s a desire to cut taxes, I don’t think there is room to cut taxes and I think the new governor knows that,” the Democrat said. A fight in the Democratic-controlled legislature is looming.

In Massachusetts, new Republican Gov. Baker rode into office on a pledge to lure more businesses to the state by lowering corporate income taxes. But after the election, outgoing Democratic Gov. Deval Patrick identified a $329 million gap in the state’s $36.5 billion budget, though some analysts pegged the figure higher.

Baker has not said where he will find the money to plug that hole. During his campaign, Baker promised not to cut aid to cities and localities and not to raise taxes. He continued this theme in his inaugural address, but did not provide specifics.

“We will hold the line on taxes — we’re already demanding enough from hard-working people. And we will protect cities and towns and fulfill our promise to end the cuts to local aid. Otherwise, every line item will be looked at,” Baker said.

The situation in Illinois, where there is a deficit of about $5 billion in the state’s $36 billion budget, is particularly complicated and dire. Former Democratic Gov. Pat Quinn late last year proposed making permanent a “temporary” income tax increase, but the legislature refused to go along, so the tax reverted to 3.75 percent on Jan 1.

During the campaign, Rauner hammered Quinn over the tax increase. More recently, Rauner has said he would “work with” the 3.75 percent rate, but refused to be specific about what he might cut or how he might redraw to the state’s tax system to balance the roughly $36 billion budget. He also did not rule out hiking taxes in the future.

The budget trouble is especially stark in Kansas, but Republican Gov. Sam Brownback, who has pushed through $1 billion in tax cuts since 2011, is not backing away from his tax-cutting philosophy. In November, Brownback defeated Democrat Paul Davis by 3 percentage points in an election widely viewed as a referendum on his fiscal policies.

Last month, Brownback was forced to cut funding for most state agencies by 4 percent and take $95 million from the state’s highway fund and $40 million from the public employees’ retirement fund to address a projected $279 million shortfall in the budget for the fiscal year that began in July. State revenue is expected to decline by another $436 million next fiscal year. Kansas’ total budget is about $5.9 billion.

“I think that Gov. Brownback does consider that … he has the approval of the voters to push ahead here,” said Burdett Loomis, a political science professor at the University of Kansas. “More tax cuts will go into place in January and there will certainly be substantial cuts in spending.”

Loomis said exit polls showed that by a 53 percent to 41 percent margin, Kansas voters thought that Brownback’s tax cuts were harmful to the state, but they re-elected him anyway. “Tax cuts were not popular but Obama was less popular,” Loomis said. The latest deficit numbers were released a few days after the election.

GOP successes in November suggest voters around the country want lower taxes, Loomis said. “Kansas is distinctive but not alone,” he said. “Kansas may be a slightly cautionary tale, with voters saying ‘we don’t want to go that far that quick,’ but everyone is looking at it. We have a potential train wreck here.”

In some states, however, it will be far easier for GOP governors to keep their tax-cut promises.

Arkansas, for example, had a nearly $300 million surplus in the last fiscal year. Democrats would like to spend more money on education, but Hutchinson wants to lower the income tax rate for “middle-class” Arkansans (defined as those earning between $34,000 and $75,000 annually) from 7 percent to 6 percent. Hutchinson wants to take the rate for those making between $20,400 and $34,000 even lower, to 5 percent.

In Oklahoma, where Republican Gov. Mary Fallin was easily re-elected to a second term, most taxpayers will see a cut in their state income taxes in 2016, because revenues have hit a preset target. State Secretary of Finance Preston Doerflinger said the tax will drop to 5 percent, while most agencies will see small cuts in appropriations.

And in Florida, GOP Gov. Rick Scott’s pledge to cut taxes and fees got easier when state economists said in December that the budget has a surplus of $958 million. Scott narrowly won re-election in November. “I look forward to working with the Legislature to cut taxes by $1 billion over the next two years and increase K-12 per-pupil funding to the highest level in our state’s history this coming year,” Scott said in a statement.

On Jan. 12, he set that figure at $7,176 per student in 2015-16, the highest amount ever.

Photo: Secretary Arne Duncan meets with Governor Sam Brownback at the Capitol Building in Topeka, Kansas. (Official White House Photo by Chuck Kennedy)

 

Cheap Gas, Crumbling Infrastructure Spark Fuel Tax Talk

By Elaine S. Povich, Stateline.org (TNS)

WASHINGTON — While consumers rejoice at lower gasoline prices, states with fuel taxes that increase or decrease with the wholesale price of gasoline or the inflation rate are struggling to deal with declining revenues.

Even in states with a per-gallon tax, fuel-efficient cars and reduced driving have combined to lower revenues from gas taxes, which are often dedicated to road maintenance and construction. With infrastructure crumbling across the country, even some tax-averse Republicans are considering raising gas taxes. Cheap gasoline makes such levies more politically palatable, since consumers are less likely to notice the extra burden when they are filling up.

Florida, Maryland and New Hampshire allow gas taxes at the pump to rise or fall with inflation based on the Consumer Price Index. Massachusetts was set to do so this year, but voters last month scrapped that idea. Maine used to adjust for inflation, but that was repealed in 2012. Kentucky, North Carolina, Virginia, West Virginia and the District of Columbia adjust for inflation on the wholesale price of gasoline.

Most states have a separate gasoline tax, so they don’t apply regular sales taxes to gasoline. But Hawaii, Illinois, Indiana and Michigan collect some or all of their gasoline tax revenue with a sales tax on purchases. California applies a partial sales tax on gasoline on the wholesale price and most counties in the state also impose a separate transportation sales tax. In New York, the state collects local sales taxes on gasoline.

Most states and the federal government tax gas by the gallon. But even under that system, inflation erodes the value of the revenue. For example, the federal motor fuels tax, 18.4 cents per gallon, generates one-third fewer dollars in real purchasing terms than when it was last increased in 1993, according to an estimate by the Tax Foundation, a nonpartisan research organization.

“At the state and local levels, gas taxes cover less than half of state and local transportation spending,” said Tax Foundation economist Joseph Henchman. He said proposals to cut mass transit funding or relax federal salary standards for laborers on public works projects won’t solve the underlying problem, which is that “every year we’re spending a little more and taking in a little less.”

Indexing the tax to inflation was supposed to help ease that problem. And it did, almost every year of the past 20, as gas prices rose. But this year, gasoline prices have dropped precipitously. With that decline, revenues also have gone down in the states where the tax is indexed.

Nowhere is that more apparent than in Kentucky, where fuel tax revenues have declined in four of the last five quarters, according to Chuck Wolfe, public affairs director for the state’s Transportation Cabinet.

The biggest single decline was in the first quarter of this year, when the excise tax dropped 1.5 cents per gallon, Wolfe said. But in the quarter that begins New Year’s Day it will go down 4.3 cents a gallon.

In December 2013, the excise tax portion of the levy was 25.9 cents a gallon, plus a “supplemental” tax of a nickel a gallon for gasoline and 2 cents a gallon for diesel. With the latest drop in the price of gas, the variable excise tax will go to 21.2 cents a gallon in January.

With the nickel a gallon supplemental tax and an “underground petroleum tank fee” of 1.4 cents a gallon, the total state tax paid by motorists for gasoline will be 27.6 cents a gallon in January, down from the current total of 31.9 cents a gallon.

Last year, Gov. Steve Beshear, a Democrat, proposed that the legislature restore some of that year’s drop in the tax and set a floor, below which the tax could not fall. The Democratically-controlled House approved the bill, but the GOP-led Senate did not.

The issue surfaced in the recent election campaign, with Republican House incumbents touting the fact that they “voted against the $60 million gas tax,” adding up what they thought the restoration of the 1.5 cents would mean to motorists. While the ad was powerful, the split in the legislature remained, with Democrats retaining a slim majority in the House.

Despite the current problems, Wolfe said Kentucky transportation officials have considered themselves fortunate to have a motor fuel tax that is indexed. “We’re envied by other states for having that,” he said. “But when you do have an indexed tax, you do have this other side of the coin, which is something that will have to be dealt with.”

Kentucky Senate Transportation Committee Chairman Ernie Harris, a Republican, said the tax decrease will subtract $24 million from the state’s transportation fund between now and the end of June. He said there are two ways to fix the problem. Currently, state law says the tax can only rise by a maximum of 10 percent a year, regardless of what the price of gas does. One suggestion is to limit the drop in taxes to 10 percent annually as well, which would ease the problem but not fix it. The other idea is to establish a floor below which the tax can never fall.

“I think we have to stabilize the gas tax by one method or the other,” he said. But he was not sure whether either idea could muster enough support to pass. “For the long term, it would be good to establish a floor … but some view that as a tax increase, so we may not have the votes for that.”

According to David Brunori of Tax Analysts, a nonprofit provider of tax news and analysis, inflation-adjusted gas taxes are viewed as an alternative to the “politically messy” idea of raising taxes. “But they result in rates going up without political accountability,” Brunori said. “That is not good; indeed, it is bad government. We should expect leaders to make the case for higher taxes when necessary.”

In Michigan, Republican Gov. Rick Snyder is making that case, with some success. The state Senate voted last month to increase gas taxes by 20 cents a gallon in steps over the next four years, in an effort to raise more than $1 billion to fix crumbling roads and bridges. The tax is based on the wholesale price of gasoline. The wholesale tax would begin at 9.5 percent on April 1, and gradually increase to 15.5 percent on Jan. 1, 2018. The House still has to vote on the measure and it could be altered at any step in the process. The Legislature hopes to finish it by the end of the year.

Dave Murray, Snyder’s deputy press secretary, said the governor is backing the tax hike because he believes the state needs to invest in its infrastructure. “It’s long overdue and it’s been neglected for decades,” he said. Murray noted Snyder worked earlier in his term to cut the budget, and now is concentrating on getting $1 billion for road and bridge maintenance. Cheap gas may make the job of raising the tax easier, Murray said. But he emphasized that Snyder is well aware that it’s only a matter of time before gas prices increase again.

The situation is different in New Jersey, which is also grappling with dwindling gas tax revenues and crumbling infrastructure. In that state, Republican Gov. Chris Christie is caught between a possible run for president — and possibly being tarred with a “tax raiser” brush in GOP primaries — and New Jersey’s infrastructure needs.

At a town hall meeting this summer in New Jersey, Christie highlighted his opposition to a proposed gas tax increase advanced by some Democrats in the legislature (though not very hard). “They wanted to raise the gas tax by $2.4 billion. We said no to that,” said Christie.

Now, with the state’s transportation fund running out of money, the issue has come to a head again. The gas tax and a dedicated portion of the state sales tax generated about $1.2 billion for the fund in the current fiscal year, but that’s only about enough to service the fund’s debt. Without new revenues, New Jersey officials say, the debt payments will consume the entire fund by the time the new fiscal year starts in July.

Patrick Murray, director of the Polling Institute at Monmouth University in New Jersey, said there is a consensus, particularly among industry representatives, that the state’s infrastructure is in dire need of repair. “New Jersey would be fine with a tax and I think he could sell it because every industry rep across the board is behind it,” he said.

To avoid paying a heavy political price, Murray said Christie and state lawmakers are considering raising additional revenue by “extending” the sales tax, or by pursuing some other strategy other than creating a new tax. “You can’t run for president and have a bridge collapse in your state when you are doing it,” Murray said. “But you can’t sign anything that’s called a tax.”

AFP Photo/Phillippe Huguen

Voters To Weigh Tax Caps, Increases

By Elaine S. Povich, Stateline.org

WASHINGTON — Capping or outlawing state income taxes by referendum is either wise or foolish, depending on whom you ask. Voters in Tennessee and Georgia will decide for themselves on Tuesday when they consider two of the most interesting fiscal measures topping state ballots this election year.

Of the 146 referendums that are on state ballots this midterm election year, 21 involve tax or budget decisions, according to Ballotpedia, a nonpartisan tracker of ballot issues. Overall, there has been a downward trend in the number of referendums over the past few election cycles, as several states have made it more difficult to get an issue on the ballot. There were 184 in 2010, the last midterm election. There were 40 fiscal measures on the ballot in 2010.

The revenue measures range from the income tax proposals in Tennessee and Georgia, to an increase in income taxes for Illinois millionaires to the repeal of a Massachusetts law that ties gasoline tax increases to inflation.

Political consultants and academics who study referendums say voters often support tax hikes that state legislatures won’t, such as raising taxes for specific education or transportation projects. But they also note that voters lack the overall view of state spending that legislators have.

It’s highly likely that the Tennessee and Georgia voters will side with those who want to keep income taxes low or eliminate them from the discussion, according to polling in those states and tax analysts.

In Tennessee, voters will decide whether to enshrine into the state constitution a law barring a broad-based income tax. The state taxes income from dividends and interest but not earned income. Proponents, including Republican state Sen. Brian Kelsey, who sponsored the measure that sent the issue to the ballot and who chairs the “Yes on Three” campaign, said the measure encourages fiscal responsibility.

“Being a low income tax has brought more economic development to the state,” Kelsey said.

But opponents argue the measure is shortsighted, and eventually may require the state to increase other taxes.

Michael Leachman, director of state fiscal research at the progressive Center on Budget and Policy Priorities in Washington, D.C., described the referendum as “a wild overreaction to a problem that doesn’t exist.”

“Here you put something into the state’s constitution, to foreclose the possibility that in the future you might want to — even temporarily — increase the state’s income tax to go through a very severe recession, for example,” Leachman said. “It is really wrong-headed. You don’t know what the future is going to bring.”

A ballot measure to amend the Tennessee constitution must first get a majority vote from the House and Senate during one two-year period. Then it must win a two-thirds majority vote from both chambers in the next two-year period.

The measure must appear on the ballot during a gubernatorial election year. In order to pass, the question must not only get more “yes” votes than “no” votes, it must receive a majority of the votes cast in the governor’s race. If a voter casts a vote in the governor’s race, but then leaves the ballot question box blank, that essentially counts as a “no” vote on the referendum. Kelsey said that occurred in 2002 when the constitutional amendment to institute a lottery cleared the bar, but another constitutional amendment did not.

In Georgia, voters will decide whether to cap the state’s top income rate at 6 percent in the state’s constitution. The measure is likely to pass, despite similar arguments against it that it would put the state in a fiscal “straitjacket.”

Republican Senate President Pro Tempore David Shafer and other proponents insist the referendum will reinforce Georgia’s status as a low-tax state. The actual wording of the referendum is: “Shall the Constitution of Georgia be amended to prohibit the General Assembly from increasing the maximum state income tax rate.” The Assembly decided by a two-thirds vote in the recent session to send that issue to the voters.

Wesley Tharpe, tax and economic policy analyst for the Georgia Budget and Policy Institute, said locking in a low tax rate might be bad for the state in the future. “Today, the state has embraced having low taxes, some of the lowest in the country, but we have congested roads, an underfunded health care and education system. Georgians of the future might decide differently on funding education,” he said.

The Georgia legislature is one of many that sent contentious issues to the voters this year. Lawmakers in 36 states have put at least 86 measures — both fiscal and non-fiscal — on the November ballot, according to Ballotpedia, the rest came from citizen initiatives.

One way to entice voters to increase taxes by referendum is to earmark the extra revenue for a specific area, like education. Both Illinois and Nevada have measures on the ballot involving schools. Illinois will decide whether to impose a surtax of 3 percent on incomes over $1 million earmarked for schools, while in Nevada, voters will decide whether to adopt a 2 percent margin tax on businesses that make more than $1 million, with the revenue going to support schools.

In Illinois, the measure is advisory and won’t commit legislators to following through, but Democratic Gov. Pat Quinn, assuming he gets re-elected, might persuade the legislature to enact it. The Illinois Legislature failed to approve referendum ballot measure to amend the state constitution to impose the tax, so it went with the advisory referendum.

“If this measure is approved, it may make it easier for (Quinn) to get the constitutional amendment,” said Brittany Clingen, ballot measures project director for Ballotpedia. That assumes that Quinn, who is locked in a tight race with Republican Bruce Rauner, survives the election.

The Nevada measure is complicated because it can be calculated several ways, and is the subject of an intense political fight, pitting the Nevada Education Association against the AFL-CIO, which initially supported the measure. Opponents argue it would dampen business in the state. Supporters say it would be good for teachers and schools.

Clingen says earmarking the money does make it easier for states to sell tax increases. “People like to support schools and children,” she said, citing the Nevada vote. “But there’s a real world effect on business.” She said the issue has attracted plenty of money, with opponents outspending the support side.

Jennie Bowser, an independent political consultant and an expert of referendums, says taking fiscal issues to the voters can be a “good way to make fiscal policy,” especially if state legislatures are reluctant to raise taxes. “You can achieve a policy goal that everyone’s in favor of but which is hard to finance.”

But, she noted, voters don’t have the “bird’s-eye view” of the state’s fiscal situation overall. “They are picking and choosing the pieces they like, and they don’t necessarily fit together in a coherent way,” she said.

Bowser said some ballot issues are attracting big money from opponents and supporters. Oregon, for example, has a measure on genetically modified organism (GMO) food labeling which has attracted more than $23 million in contributions — about $16 million from opponents and $7 million from backers. An Oregonian poll showed the measure trailing by six points just a week before the election. All of the attention to the ballot issue is likely to drive up voter turnout, according to Bowser, who lives in Portland.

“There’s a whole lot of academic research that says having a ballot issue on the ballot increases turnout by 3 percent,” she said, noting that the GMO issue does “pump up voter attention and increase turnout.”

The issue is attracting big money from out of state, according to the Oregonian, including donations from corporate food giants like Monsanto and DuPont Pioneer. Each has given more than $4 million. On the other side, California-based Dr. Bronner’s Magic Soaps and the Center for Food Safety Action Fund in Washington, D.C., have each given more than $1 million.

Massachusetts voters will get to decide whether to repeal a provision that automatically raises the state gasoline tax with inflation. According to the nonpartisan Institute on Taxation and Economic Policy, 14 states have a “variable rate” gas tax, while 32 states have fixed taxes (the others didn’t supply data).

A recent Boston Globe poll showed the state evenly divided on whether to repeal the inflation adjustment, with each side garnering 42 percent and the rest undecided. Massachusetts also has a referendum on whether to repeal casino gambling, and voters polled favored keeping the gambling, which backers say would raise millions for the state, by 53 percent.

Photo: Casey Konstantín via Flickr

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Eyeing Revenue, States Try To Predict Billionaires’ Moves

By Elaine S. Povich, Stateline.org

WASHINGTON — The wealthiest Americans can move markets at home and abroad with their business decisions. When they sell massive quantities of stock, receive huge bonuses, or suffer crushing
losses, those events also can have a significant impact on state finances, especially in small states that collect taxes on income or capital gains.

The problem is that billionaires don’t typically telegraph their financial moves, let alone to state officials. That leaves revenue estimators guessing whether they can count on a windfall in the upcoming fiscal year, or whether they have to figure out how to plug a gaping hole.

To eliminate some of the uncertainty, revenue estimators in many states interview financial planners and economists to help them predict what billionaires might do, and what the tax consequences of those moves might be for their states. Financial planners can’t divulge what they will advise individual clients to do, but they can give state revenue forecasters some idea about the type of general advice they will be providing.

Lyman Stone, economist at the tax policy research organization Tax Foundation, said it’s prudent for states to take into account all aspects of anticipated revenue, even if the income taxes of high earners, especially capital gains taxes, are hard to predict. “Smaller or mid-sized states with one or two billionaires — that’s not something you can ignore. States with income taxes would have an interest in tracking that,” he said.

Take Arkansas, where a handful of wealthy taxpayers “can make a huge difference” in state revenues, said Richard Weiss, director of the Arkansas Department of Finance and Administration.

Arkansas is home to Jim Walton, an heir to the Wal-Mart company fortune. While Weiss said his department can’t “go to the extent of getting specific information” from individual taxpayers or their financial advisers on what they plan to do in a given year, the agency does make it a priority to cultivate warm relationships with the state’s heaviest hitters.

“We don’t do anything that is proprietary, I don’t think we try to meddle in their business either,” he said. “There’s a fine line there. All the folks we have in the revenue department and our economic analysts are very cautious of that. We look at lots of trends to get some idea of what’s going on.”

Revenue estimators employ a similar technique in Oregon, where the biggest billionaire is Phil Knight, founder of Nike, who is worth an estimated $18.4 billion. “Our economic advisers maintain good relationships with the big accounting and law firms, and while they can’t talk about individual taxpayers, they get an idea how those tax advisers will generally advise their clients,” said Oregon Budget Director George Naughton.

“With personal income taxes, the decisions that certain individuals make could certainly have an impact on your revenue forecast. It depends on how big the move is. If they are selling a billion dollars worth of stock, that can be significant enough to notice in the revenue,” Naughton said.

Ken Heaghney, state fiscal economist for Georgia, said his state convenes a panel of advisers, including a bank economist and the head of a local wealth management group, to get a sense of what the state’s wealthiest residents are likely to do.

Heaghney said the impact of wealthy taxpayers in Georgia is blunted by the fact that the state has a relatively low tax on capital gains and a flatter income tax structure than most other states. However, he said one person could make a difference in state revenues if the decision involves enough money and is Georgia-based. “We don’t generally have that kind of taxpayer here, unfortunately,” he said. “As for the Chambers family (Anne Cox Chambers is the richest resident in the state) most of their wealth is in trust funds and sheltered in various ways,” he said.

Nebraska, home to Warren Buffett, who is worth about $40 billion, also scans the financial landscape with economists and financial advisers before doing its revenue forecasts, according to Gerry Oligmueller, state budget administrator. But state officials don’t ask about any one individual, even the so-called “Oracle of Omaha.”

Oligmueller noted that states with capital gains taxes were affected by the decision by many high-income taxpayers to take their capital gains in 2013 to avoid increased federal capital gains taxes in 2014. Those moves provided a boost to state revenue for 2014, and a subsequent dip this year.

“The implications of what any single corporation will do, what’s going on with federal tax policy, all have to be rolled together to be considered in determining what’s the best forecast for tax receipts for the next fiscal year,” Oligmueller said.

In California, which has 111 billionaires, more than any other state, revenue estimators were keenly interested in Facebook’s initial public offering of stock in 2012. With thousands of Facebook employees in the state in line to receive valuable stock options, it was a safe assumption that the IPO would have a revenue effect.

“We generally do not base our forecasting on individual wealthy individuals,” said California Budget Director Michael Cohen. “California’s economy and taxpayers are too diverse. One exception is with the Facebook IPO — there was enough public information and the one-time event was large enough for us to try to capture the IPO’s effect on revenues separately.”

A state study of the anticipated effect of the IPO estimated that nearly 1 percent of all personal income in the state in 2012 would be related to Facebook. While original estimates of revenue to the state were in the $1.6 billion range, Cohen said that was later revised over the following six months to $1.25 billion.

Cohen said the extra revenue anticipated from Facebook IPO was designated as a one-time event and placed into the overall revenue estimate rather than, for example, a rainy day fund.

Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, said windfalls such as the Facebook IPO are a challenge for estimators. “For California policymakers, it was like walking down the street and finding a $20 bill,” Gardner said. “For every good year you have, there’s going to be a less good year down the road.”

AFP Photo/Joe Raedle

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As E-Filing Spreads, Tax Seasons Speeds Up

By Elaine S. Povich, Stateline.org

You can’t blame Minnesota taxpayers for being confused this tax season. The eleventh-hour addition of 10 new tax credits has flummoxed many of them, even as most other states report routine filings with a significant uptick in electronic submissions.

The Minnesota situation is an anomaly in a tax season that is breaking records in many states for the swiftness of electronic filings and refunds. As the last two weeks of tax filing got underway, states were taking in record numbers of electronic forms and, as a result, getting refunds out faster, according to a sampling of state officials and the Federation of Tax Administrators.

So far, 93 percent of state individual income tax returns have been electronic, according to Ronald Alt, a researcher at the federation. Overall, Alt said, the number of electronic returns is up 4 percent over last year as of mid-March. The total number of returns processed up to this point also is up 3 percent. People who wait until the last two weeks to file tend to do so on paper.

The state filings largely correspond to the federal filings, because most taxpayers prepare state and federal returns at the same time. The Internal Revenue Service reported that as of March 28, 91 percent of the 82.4 million federal returns filed were electronic, up nearly 2 percent from the same point last year. The IRS expects to receive about 148 million individual income tax returns this year and projects that 23 million returns will be on paper, down from last year’s total of 25 million paper returns.

Surveying a representative sample of states, the Federation of Tax Administrators found a “stable filing season that is following last year’s pattern. Nothing is popping out as being different, other than the small but inexorable drop in paper returns,” said spokeswoman Verenda Smith.

For example, the survey showed that in California, electronic filing is up 6 percent from this time last year, while paper returns are up 2 percent. Maryland showed a 4 percent decline in paper returns and a 2 percent uptick in electronic filing. New Jersey’s paper returns are down 21 percent and electronic returns are up 4 percent from the same time last year. The dramatic decline in paper returns in New Jersey is partly attributable to a small sample size, Smith said.

New York’s e-filing is up 5 percent compared to last year, according to Geoffrey Gloak, spokesman for the New York Department of Revenue, and the number of refunds is up 25 percent compared to this time last year, he said. The state issued 3.9 million refunds totaling about $3.5 billion as of Monday. The average refund is $879.

Gloak also pointed out that 85 percent of New York taxpayers are eligible to file their state returns for free, using the state’s “Free File” website. All but half a dozen states allow taxpayers to file electronically, either on free state-supported websites or through partnerships with commercial tax preparation software companies, according to the FTA. Many of the commercial sites provide advice to filers, but the state sites do not.

In March, Minnesota Gov. Mark Dayton and the state legislature threw a monkey wrench into the tax filing machine by passing 10 new 2013 tax credits. Now tax preparers, tax officials and ordinary Minnesotans are scrambling to reconcile returns with the new laws, which will affect about 300,000 filers.

Dayton, a Democrat, signed the bill March 21. State officials contacted the tax software vendors and preparers within 24 hours. The department wrote new software by March 28 and got it to the software vendors, who updated their software that weekend. The programs were tested March 31 and April 1. “By Tuesday afternoon (April 2) we had everything in place,” said Myron Frans, the state’s commissioner of revenue. “At 11 a.m., the governor and I said, ‘Go ahead and file now.'”

Frans, who has been in his post for three years, said the scramble to update the tax system was unprecedented. “I have talked to a number of people who have been around the department a long time,” he said. “No one can recall making changes to the filing system this late.”

Fortunately, Frans said, the changes essentially align Minnesota’s tax credits with federal credits, which made his job easier. For example, a schoolteacher who qualifies for a federal tax credit for school supplies she bought for her students now qualifies for a state tax credit of the same amount.

States Pursue Tax Cuts As Recovery Takes Hold

By Elaine S. Povich, Stateline.org

WASHINGTON — Maybe New York Gov. Andrew Cuomo should borrow a pair of crutches. They might have helped Minnesota Gov. Mark Dayton’s cause.

Dayton, a Democrat, hobbled into the state Capitol five weeks after major hip surgery and blasted lawmakers for holding up the tax cuts he wanted. After quarrelling over his spending proposal, including a spat over funding for a new legislative office building, the Democratic-controlled legislature approved a $443 million tax cut, without the office building rider. Dayton pushed hard for the cuts, in part, because some are retroactive to 2013, meaning tax filers who are preparing returns now could take advantage of them and see refunds soon.

Meanwhile, Cuomo is locked in a battle with the legislature and New York City Mayor Bill de Blasio over whether to increase taxes to fund prekindergarten education in the city and state. The mayor wants to raise the surcharge on city earners making more than $500,000 annually, from 4.25 percent to 4.45 percent. The state has to approve city tax increases.

Fellow Democrat Cuomo said finding money for pre-K can be accomplished without a surcharge on the wealthy. Instead, he wants tax cuts, including a property tax reduction that he said would save the average homeowner about $350 a year. The legislature is struggling with the tax increase proposal and has not acted, but the Republican-controlled Senate is not inclined to give de Blasio what he wants. Both Dayton and Cuomo are running for re-election.

At least 30 states are considering some kind of tax change this year, mostly tax cuts, as the economic recovery takes hold. In states where revenues have failed to keep up with estimates, some lawmakers are considering raising taxes.

In Delaware, where revenue projections are down from earlier estimates, there is talk of corporate tax increases. The Delaware Economic and Financial Advisory Council projected that revenues in the current fiscal year that ends in June will fall $107 million short of a previous projection in December, due mostly to lower revenues from corporate income taxes. That has led Democratic Gov. Jack Markell to propose an increase in corporate taxes — ironic for a state that is viewed as the most corporate-friendly in the U.S.

In New Jersey, however, where revenues are estimated to be lagging as much as $400 million behind projections, Republican Gov. Chris Christie has not proposed new taxes in his fiscal year 2015 budget.

A trial balloon by Democratic Sen. Raymond Lesniak to increase the state’s gasoline tax to fund infrastructure repair has stirred up a firestorm, causing him to lower the proposed increase from an extra 24 cents a gallon to 15 cents.

A recent poll by Fairleigh Dickinson University showed 72 percent of those surveyed opposed increasing the gas tax, while 63 percent called for a higher tax on millionaires instead.

Republican governors are having an easier time with tax cuts, particularly in states where the GOP also dominates the legislatures, but squabbles remain in many states in the thick of legislative sessions this spring.

A survey of state lawmakers by the National Conference of State Legislatures found tax policy topping the agenda in about a dozen states this year and being a significant part of the discussion in many more. At the same time, states still worry about the economy.

“We still have high unemployment, and there are a lot of unknowns about when the next downturn will occur,” Democratic Sen. Richard Devlin, chair of Oregon’s Joint Committee on Ways and Means, said in the NCSL survey. “We are better off than a few years ago, but we are reluctant to use the word ‘stable.’ There is nothing to celebrate.”

Still, tax cuts are on the table. Cuomo traveled around New York this week pressing for his property tax reduction. “Homeowners get it. Taxpayers get it. The politicians don’t get it,” Cuomo said in a press conference in DeWitt.

He is urging local jurisdictions to make up for the lost property tax revenue by finding ways to combine services to save money. “The easy answer for government is raise taxes. If the choice is change how you are doing things, find economies of scale, get creative, work with local governments in a way you’ve never done before,” he said. “Raising taxes is always the easy answer. That’s why we have the highest taxes in the nation. That’s why people are leaving upstate New York.”

In Minnesota, the tax cuts provide $57 million in retroactive tax relief on returns filed for 2013, meaning that up to 270,000 state taxpayers will get some of the $49 million in income tax cuts in their tax refunds this year, according to the state Department of Revenue. About $8 million of the cuts go to businesses. The cuts partially make up for a $2.1 billion tax increase passed in Minnesota last year.

Indiana Gov. Mike Pence, a Republican, has also been battling local governments over cutting taxes. Pence signed a bill this week that reduces the corporate income tax from 6.5 percent to 4.9 percent in steps by 2021. He signed the bill despite opposition from local governments, which get $1 billion annually in corporate tax revenue.

Pence said the law “does not unduly burden our local governments. It gives our local governments the ability to make decisions for themselves about what would enhance their ability to attract investment.”

Republican Gov. Scott Walker of Wisconsin also inked a tax cut bill this week that will give state residents an average income tax cut of $46 each in April 2015, and homeowners an average cut of $131 each on December 2014 property tax bills, according to the legislature’s nonpartisan budget office.

Farmers and factory owners would also get a total $36.8 million in cuts. Walker and the Republicans see this reduction as an incentive for businesses to stay or locate in Wisconsin. Democrats in the divided legislature considered it a giveaway to the state’s wealthiest residents.

In Arkansas, Democratic Gov. Mike Beebe had his veto of a sales tax break for sand used in oil and natural gas drilling overridden by the Republican-dominated legislature. The state Department of Finance and Administration had removed the exemption, and the legislature decided to put it back. The governor supported his agency’s decision, but the legislature had other ideas.

Arkansas state Sen. Jonathan Dismang, who chairs the committee that drove the override, said, “I’m not sure it really increases how much we’re competitive (with other drilling states). It does reflect our willingness to want to have industry in the state.” Dismang stressed that the tax exemption is not new and had been on the books since the 1960s, before the department decided to scrap it.

In Oklahoma, the Republican-controlled House and Senate have passed dueling tax cut bills, both triggered only when state revenues rise to certain levels. In the Senate bill, the highest income tax rate would be cut from 5.25 percent to 5 percent, if projections for the state’s general fund revenue reach a level high enough to offset the revenue loss. The rate could drop again, to 4.85 percent, if revenue growth continues enough to make up for the additional cut.

The House bill does not have the second tier in it, but includes a corporate income tax rate cut from 6 percent to 5 percent, and also includes revenue growth triggers. The earliest the reductions could take place is 2016. The chambers are attempting to reconcile differences in their bills before the session ends in May.

“There’s a 50-50 chance we will have an income tax reduction,” Republican Rep. Earl Sears, vice chair of the appropriations and budget committee, said this week, noting that the bills are quite similar. Last year, the Oklahoma legislature tried a similar tax cut, but it was tied to repair and restoration of the state Capitol and was thrown out by the state Supreme Court, which ruled it was “logrolling,” or trading of favors, Sears said.

This year, there’s no mention of the Capitol repairs. Democrats would like to reallocate any surplus to other programs, but Sears said he is treating the taxpayers “like a state agency. Just like we fund any other agency, we’re funding back to our citizens.”

In Illinois, Democratic Gov. Pat Quinn called for making the “temporary” income tax hike instituted three years ago permanent. Besides opposition from the legislature, Republican Bruce Rauner, Quinn’s opponent in his re-election bid, is against the measure. Without action, the personal income tax rate is scheduled to drop back to 3.75 percent from the current 5 percent, costing the state treasury an estimated $4 billion.

Tax cuts are easier to accomplish when states are seeing higher revenues. An analysis by The Pew Charitable Trusts (which funds Stateline) found that, after adjusting for inflation, total tax revenue for the 50 states combined finally recovered from its plunge in the recession in the middle of last year. But recovery varied widely. Only 20 states were back to their peak levels by the second quarter of 2013.

According to data released this week by the U.S. Census Bureau, state tax revenue has continued to rebound, showing growth for 16 straight quarters through the end of 2013, which is midway through most states’ current fiscal year. Tax revenue in each quarter was higher than the same quarter of the previous year.

Photo: Pat Arnow via Flickr