State Rundown 4/5: Education Funding Issues Take Center Stage

This week, Kentucky legislators passed a bill shifting taxes onto low- and middle-income families, Oklahoma legislators reached a deal on education funding, and their counterparts in Kansas proffered multiple proposals for their education funding needs. Meanwhile, tax debates are coming down to the wire in Iowa, Missouri, and Nebraska, and responses to the federal tax-cut bill were settled on in Maryland, New York, and Wisconsin.

— Meg Wiehe, ITEP Deputy Director, @megwiehe

Major State Tax Proposals/Developments:

• On Monday, just hours after the bill was made public, lawmakers in Kentucky passed an overhaul of the state’s tax system along party lines. Described as “tax reform,” the plan shifts toward a heavier reliance on consumption taxes, hikes taxes on most Kentuckians, and provides significant tax cuts for the state’s wealthiest families. The bill is now on the Governor’s desk.
• Oklahoma lawmakers passed an education funding package this week that included an increase in the state’s tobacco, gas, and gross production taxes. While a step in the right direction, there is still work to be done. Oklahoma teachers staged a walk out this week in protest of education funding cuts and to push back against the trend of excessive state tax cuts. Additional funding options are now under consideration, including improved tax enforcement on purchases made over the Internet. Meanwhile, a bill to eliminate the state’s capital gains deduction, a benefit primarily for the wealthy, stalled in the House. The decision was met with displeased “boos” from educators.
• Kansas lawmakers are advancing different proposals to increase education funding to comply with a state Supreme Court ruling. But the plans lack tax increases and may include a constitutional amendment that would make it harder to use the courts to challenge the adequacy of education funding in the future.
• Iowa lawmakers continue to debate tax cuts even while the consequences of underfunding core services stare them in the face. State University students are likely to face tuition hikes in part due to funding cuts planned this year to address the state’s budget shortfall. At the same time, local jurisdictions are already planning property tax increases in response to the state’s plan to end a ‘backfill’ program just created in 2013.
• Competing, but similar, proposals to cut taxes in Missouri continue to advance, as the Senate approved its version and the House moved another step closer to passing its own version. The bills differ primarily in the extent to which they would slash income tax rates and how they would raise revenue for state roads.
• The primary effort to cut taxes in Nebraska this year has stalled after failing to overcome a filibuster. A separate bill that would pay for property tax cuts with sales and cigarette tax increases will be debated soon.

More State Responses to Federal Tax-Cut Bill:

• Wisconsin lawmakers passed a bill conforming to recent federal tax changes, the most significant being a tax break for parents of children in private schools who can now pay tuition with pre-tax dollars. This state-level tax shelter is problematic not only because it creates an unnecessary subsidy for families with means, but also because of its potential to undermine the public education system.
• Maryland legislators have reached a deal to adopt a middle-of-the-road response to the federal bill. The compromise would increase the state’s standard deduction and expand the Earned Income Tax Credit (EITC), among other changes, offsetting about $100 million of a $500 million expected revenue increase.
• New York lawmakers passed a state budget this week. The bill includes two provisions designed as direct responses to the Trump-GOP tax law passed late last year. To circumvent the new federal cap on deductions for state and local tax payments, taxpayers can opt to donate to two new statewide charitable funds rather than paying state income tax (the donations are reimbursed with state tax credits), and businesses can take part in a voluntary payroll tax that, unlike the state’s income tax, should be fully deductible under federal law.
• District of Columbia advocates are pointing out that recapturing some of the federal tax cut could go a long way toward better funding for local services like schools and affordable housing.
• A recent blog post from the Minnesota Budget Project shows that conforming to recent federal changes to the personal and dependent exemptions, itemized deductions, and the standard deduction would result in a tax increase for 70 percent of families with children.

In Other News:

• The Alaska House approved the state budget this week. If adopted, it would use a portion of the state’s permanent fund earnings reserve for public services, in addition to providing the annual permanent fund dividend (or PFD) to Alaska residents. It now moves to the Senate.
• Louisiana lawmakers rejected legislation last week that would have allowed local lawmakers to levy gas taxes.
• State tax policy is a hot topic in the Illinois gubernatorial race, with Gov. Bruce Rauner opposing any gas tax increases for infrastructure funding and Democratic-candidate J.B. Pritzker critiquing the governor’s private school scholarship tax credit and advocating for increasing both the income tax rate and personal exemption while the state works towards instituting a progressive, graduated-rate income tax.
• District of Columbia Mayor Muriel Bowser is proposing taxes on ride-sharing companies like Uber and Lyft to help support needed improvements to the District’s public transportation system.

What We’re Reading…

• In an op-ed, CBPP’s Michael Leachman points to the history of tax cuts in both Arizona and Oklahoma as a driving force for low teacher pay.
• Route Fifty warns states to do everything they can to shore up their Rainy Day Funds, as substantial federal stimulus aid will be far less likely than in the previous recession.
• Coke and Pepsi are borrowing from Big Tobacco’s playbook and acting fast to try to stave off more local initiatives to raise taxes on sugary drinks by banning them at the state level.
• Governing looks into what’s driving personal income growth in the states.
• The Kentucky Center for Economic Policy weighs in on the impact of the tax shift brought about by the state’s recent tax overhaul.
• The TaxProf Blog has the details on a University of Memphis tax symposium featuring topics such as how tax policy contributes to racial inequities.

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