State Rundown 1/12: Tax Cut Tunnel Vision Threatens to Bore State Budget Holes Even Deeper

As states continue to sift through wreckage of the federal tax cut bill to try to determine how they will be affected, two things should be clear to everyone: the richest people in every state just got a massive federal tax cut, and federal funding for shared priorities like education and health care is certain to continue to decline. State leaders who care about those priorities should consider asking those wealthy beneficiaries of the federal cuts to pay more to the state in order to minimize the damage of the looming federal funding cuts, but so far policymakers in Idaho, Iowa, Michigan, Missouri, Nebraska, South Carolina, and elsewhere are choosing instead to sing their same old tax-cutting tune. As the facts come into better focus, hopefully these leaders will change that tune.

— Meg Wiehe, ITEP Deputy Director, @megwiehe

• Nebraska legislators will debate major tax cuts yet again this year despite a $200 million revenue shortfall. One proposal to create an income tax credit for half of school property taxes has been submitted to the legislature as a regular bill and will also be circulated as a ballot initiative if it does not succeed there, though neither version includes a way to pay for the estimated $1.1 billion cost of the program.
• Another Nebraska proposal backed by Gov. Pete Ricketts would fill the revenue shortfall by draining the Rainy Day Fund to its lowest level since 2006 and institute across-the-board funding cuts for most agencies, all on top of cuts made to close a $1 billion shortfall just last year. Gov. Ricketts’s tax plan would reshuffle existing property tax credits, cut individual and corporate income tax rates, and use an arbitrary “trigger” to cut property taxes further in future years, an approach that received mixed reviews within the state and was even cautioned against by an Oklahoma legislator who helped design a similar bill.
• South Carolina Henry McMaster is clearly not a reader of the Rundown, or he would be familiar with the disastrous effects of tax cuts in Kansas (see below) and the striking evidence against trickle-down economics, and would know better than to promote his $2.2 billion regressive income tax cut proposal by claiming that “when you cut taxes, economic growth goes up…Just like night follows day, if you cut taxes…The result will be a more vibrant economy.”
• Missouri Eric Greitens also announced plans this week to slash taxes and reduce funding for state priorities, despite federal funding cuts coming Missouri’s way and the fact that a “triggered” tax cut enacted in 2014 is just taking effect this year, all while the Greitens administration is also being accused of obstructing a state audit that shows the state is paying tax refunds late and not paying required interest on those late payments in order to pay other debts.
• Iowa Kim Reynolds has proposed tax cuts as well, but has not yet released details. One detail that has been publicized, ending the state’s deduction for federal income taxes, is sound policy in a vacuum. But if the rest of her plan focuses on cutting income taxes primarily for the highest-income Iowans who just got a massive tax gift from Congress, the progressive benefit of ending the federal tax deduction will be squandered. Meanwhile new polling data show that Iowans (like most Americans) prefer well-funded public services like schools and clean water over tax cuts.
• Tax cuts are top of mind for Idaho’s Otter, who proposed rolling back the state’s unemployment tax and cutting personal income tax rates by 0.45 percentage points, billed as a counter to the tax increase some larger families will experience under federal tax reform.
• Michigan‘s legislative session started this week with lawmakers angling to use the impacts of federal tax reform to angle for more personal income tax cuts. Gov. Snyder is calling on lawmakers to act swiftly to restore the state’s personal exemptions, with lawmakers calling it “a start.”
• Arizona’s Doug Ducey, in this state-of-the-state address, proposed increasing the level of the state’s military retirement pay exemption from $2,500 to $10,000 over the next two years, costing the state around $15 million.
• In West Virginia, lawmakers are moving past their failed efforts to lower, or eliminate, personal income taxes. Legislative leadership and the Governor are instead considering cuts to the state’s business inventory tax and will weigh the merits of the state’s film tax credit, which the state Legislative Auditor has recommended for elimination.
• California Brown released his budget proposal yesterday, including accelerated funding for his education law, almost $5 billion in new transportation projects, and—most notably—adding $5 billion to the state’s rainy day fund.
• A House bill in Oklahoma would amend the state constitution to lower the state’s revenue-raising threshold to a vote of three-fifths of the Legislature. The measure, currently requiring a three-fourths supermajority, played a role in lawmaker’s inability to raise needed revenue last session.
• Lawmakers in Alabama, which hasn’t updated its gas tax since 1992, and Missouri, which hasn’t updated its since 1996, both may consider finally doing so this year.
• The Vermont Senate voted this week to legalize the use of recreational marijuana in the state. The bill now moves to Gov. Phil Scott who is expected to sign, making Vermont the first state to do so through the legislative process rather than a ballot initiative. Tax and regulation issues remain in the hands of a commission created to study and evaluate the experience of other states.
• Kansas lawmakers are hoping to buy some more time—and some higher monthly revenue collections—before needing to come up with hundreds of millions of new dollars for public education. Expectations that they can cut or grow what’s needed are optimistic, but lawmakers aren’t putting a high probability on support for another tax increase.
• Minnesota could see close to $850 million in increased state revenues over the next two-year budget period if it conforms to personal income tax changes enacted at the federal level. Tax conformity bills are usually passed fairly early during the legislative session and without much ado, but it’s expected to take a more prominent role this session.
• Washington Inslee has introduced a carbon tax proposal in an effort to help reduce climate change. The tax would be $20 per ton of carbon emissions, levied on producers of fuel and electricity but with consumers expected to pay higher prices at the pump and through their utility bills..

What We’re Reading…

• A new study from the University of California, Irvine shows that beyond its important short-term benefits, a more substantial boost to the Earned Income Tax Credit could have the positive long-term benefits of also boosting the earnings of women throughout the course of their working lives.
• States aren’t the only jurisdictions worried about the impacts of the federal tax bill. According to Governing, cities are concerned that home values and property tax revenues could plummet as a result of the bill, making it harder to fund crucial local services like schools, roads, and public safety.
• Lawmakers thinking that small state revenue bumps from the federal tax cut are cause for also cutting state taxes should keep an eye squarely on the federal funding cuts coming down the pipe as a result of the $1.5 trillion federal cuts. For example, Route Fifty reports that temporary federal funding for the still-unfunded Childrens’ Health Insurance Program (CHIP) could run out soon, forcing states to either revoke kids’ insurance or raise the revenue to fund it themselves; states can expect similar scenarios to play out repeatedly thanks to the federal tax cut.

If you like what you are seeing in the Rundown (or even if you don’t) please send any feedback or tips for future posts to Meg Wiehe at [email protected]. Click here to sign up to receive the Rundown via email.

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