State Rundown 12/31/9999: IRS Glitch and Legislative Impasses Extend Tax Season

This week the IRS website asked some would-be tax filers to return after December 31, 9999. State legislators don’t have quite that much time, but are struggling to wrap up their tax debates on schedule as well. Iowa legislators, for example, are ironically still debating tax cuts despite having run out of money to cover their daily expenses for the year. Nebraska‘s session wrapped up, but its tax debate continues in the form of a call for a special session and the threat of an unfunded tax cut going before voters in November. Mississippi‘s tax debate has been revived by emergency bridge closings. Kentucky‘s session went down to the wire as lawmakers overrode vetoes to push through a tax increase to help fund teacher salaries that raises taxes on most taxpayers while cutting them for the richest 5 percent tax. And lawmakers in Arizona and Colorado may need to stay after school to resolve teacher pay issues.

— Meg Wiehe, ITEP Deputy Director, @megwiehe

Major State Tax Proposals/Developments:

• Kentucky legislators overrode Matt Bevin’s vetoes this weekend. After a few tweaks the state is moving forward with a massive tax shift to fund teacher salaries that will benefit the state’s wealthiest. An ITEP analysis found that the average taxpayer in the bottom 95 percent of the income distribution will pay more under the plan while most of the richest 5 percent will get a tax cut. The updated legislation moves back to the governor’s desk for his signature or veto.
• Having missed their initial Tuesday adjournment goal, Iowa legislators are now hoping to iron out a final tax plan this week and vote on it next week. The latest proposal from House Republicans retains the state’s deduction for federal income taxes and includes smaller rate cuts than originally proposed by Gov. Kim Reynolds, while their counterparts in the Senate are seeking even more expensive and regressive cuts. Leaders appear dead-set on slashing taxes this year, but at least some in the state are questioning why the state would do so when recurring shortfalls have already caused mid-year funding cuts for two straight years and the state is poised to renege on its own promise to “backfill” local budgets after imposing a property tax cut on them just a few years ago.
• Nebraska‘s legislative session concluded Wednesday with no major action on property taxes, increasing the likelihood of a successful ballot initiative that would create an income tax credit for half of school property taxes paid, and blowing a $1 billion hole in the budget in the process. The legislature did enact a response to the federal tax-cut bill and some helpful tax subsidy transparency legislation.
• The Louisiana House passed a budget yesterday with stark cuts, essentially shutting off funding for the state’s safety-net hospitals and only funding the college tuition support program TOPS by 80%. Lawmakers contend that this is only the first step in a longer process and that it was important to show where the gaps were.
• Arizona teachers voted this week to begin striking on April 26^th. Doug Ducey’s proposal for teacher raises did not go far enough. Funding for the governor’s plan, which is expected to cost $648 million, includes rosy (read, unrealistic) state revenue forecasts, fund sweeps of other state programs, lottery revenues and spending reductions. And teachers in Colorado took personal days to rally and march at the state capitol, calling for lawmakers to protect public pensions and increase funding for K-12 education.
• Tax cut debates recommenced in Missouri this week against a backdrop of sexual assault accusations against Gov. Eric Greitens, but it is unclear if anything will pass. The proposal working its way through the Senate stalled, largely due to its $126 million price tag, and the plan passed by the House would cost even more.
• Mississippi House Speaker Philip Gunn is using the state’s infrastructure emergency – more than 100 bridges closed due to safety concerns – to push for an income tax cut by tying it to the needed gas tax increase. His plan would also divert use taxes away from the Rainy Day Fund, essentially trading crumbling roads and bridges for crumbling schools and savings.

More State Responses to Federal Tax-Cut Bill:

• In their final week of session, Maine lawmakers are leaving key issues unresolved. Up until the final minutes of regular session, legislators considered action on Medicaid expansion and weighed their response to federal conformity. Competing proposals on conformity have been floated by both the state’s Democrats and GOP. Next steps remain unclear. With many issues left unsettled, lawmakers may be called back in the coming weeks.
• GOP lawmakers in Minnesota are critiquing Gov. Mark Dayton’s proposed tax plan in response to federal changes, while the governor calls on lawmakers to release their own plan. Details are expected next week. There are six weeks remaining in the legislative session.

In Other News:

• New Jersey Phil Murphy told Texas Gov. Greg Abbot to “back off” in an editorial making the case for thoughtful investments in state residents and businesses over the trickle-down tax cutting approach advocated by Abbot.
• Maryland lawmakers passed a corporate tax cut known as “single sales factor apportionment” just before their session ended, a policy that research has shown undermines state revenues without significantly improving employment or economic growth.
• A new study in Rhode Island found that the state is losing an average of $1.8 million a year as a result of the tax credit for movies and television productions.
• Delaware lawmakers are considering exempting first-time homebuyers from an increase in the state’s realty transfer tax passed to raise revenue last summer.
• Florida voters will see a long list of constitutional amendments on the ballot this year, including an expansion of the homestead exemption, a permanent 10-percent limit on non-homestead property tax assessments, and a supermajority requirement for tax increases, the last of which has shown to cause unnecessary problems in other states.
• A health coalition in Indiana is renewing its push for a cigarette tax increase, holding a series of town hall meetings to drum up local interest and support. And in Montana, a petition to raise the cigarette tax by $2 a pack to fund Medicaid expansion has been approved for signature gathering to be placed on the Nov. 6 ballot.
• Wisconsin Scott Walker uses his veto pen to extend the state’s sales tax holiday from 2 to 5 days, costing the state an addition $3 million in lost revenue on in ineffective strategy for reducing the regressivity of sales taxes.

What We’re Reading…

• The Oklahoma Policy Institute draws attention to a 2016 law that may stand in the way of the Sooner State’s ability to meet its funding commitments, including increased spending for teachers.
• A new documentary explores how Kansans feel about Brownback’s experimental tax policy in the state. Check out reviews and clips from Salon, The Atlantic, and The Kansas City Star.
• Pew’s comprehensive update on state pension funding shows a cumulative gap of $1.4 trillion and an average funding ratio of only 66 percent, and outlines options for states to close their pension gaps.
• The New York Times, The Hill, and Governing have excellent coverage of South Dakota v. Wayfair, the U.S. Supreme Court case that could overturn a 1992 decision and grant states the ability to collect sales taxes on cross-state online purchases, though Route Fifty warns that states should not expect a big short-term revenue gain if the decision is indeed reversed.
• The Rockefeller Institute’s latest report highlights the difficulties states face in projecting revenues in the wake of the federal tax-cut law.

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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