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State Tax Policy: All About That Base

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Jason Juffras
October 8, 2017

Politicians and pundits across the political spectrum have expressed support for broadening the tax base to promote fairness and efficiency while keeping tax rates low. That approach underpinned the federal Tax Reform Act of 1986, which cut individual and corporate income tax rates in a revenue-neutral fashion by curtailing tax preferences and is hailed as a model for bipartisan cooperation on tax policy. Nevertheless, broadening the tax base is not only a means to lower tax rates; but also a way to ensure government at all levels can generate enough revenue to meet the demand for public goods and pay off debt and other obligations.

The need to broaden the tax base is particularly acute for states because their two largest sources of tax revenue—the individual income tax and the general sales tax—are constrained by social and economic changes. An aging population contributes less per capita to state tax coffers because the elderly have lower incomes, and much of that income—Social Security and other pension payments—Is excluded from state income taxes. A growing service sector and soaring online commerce largely escape sales taxes originally designed for goods sold by firms that are physically present in the state. An eroding tax base may be one reason why 35 states revised their revenue forecasts downward by an average of two percent during FY 2017, even as the economy continued to grow.

Now that states have concluded their 2017 legislative sessions, we can review what policymakers did this year to strengthen their tax bases and maintain their ability to fund education, health care, transportation and other services. The short answer: not much.

A summary of states’ FY 2018 enacted budgets issued by the National Association of State Budget Officers show state officials made only sporadic, halting efforts to broaden their tax bases. Actions by state lawmakers (or the lack thereof) in Oregon, Minnesota and Utah, illustrate the broader pattern.

In Oregon, Governor Kate Brown (D) proposed closing a projected $1.7 billion budget gap for the next two fiscal years—largely caused by rising health-care costs—by cutting spending, increasing tobacco and health-care provider taxes and eliminating two income tax breaks. The legislature did not adopt either of her proposals to close income tax loopholes, the most important of which was projected to yield $177 million during the biennium by ending preferential tax rates for non-passive business partnership income. The legislature did not renew several tax credits, including those for research and development, residential energy and e-commerce zones. Still, Oregon’s biennial omnibus tax credit bill was estimated to increase revenue by only $1 million for the next biennium and to reduce revenue by $2.7 million in the subsequent two years.

In Minnesota, lawmakers focused on measures to chip away at the tax base. While warning against “a feast of tax giveaways to a handful of wealthy individuals,” Governor Mark Dayton (D) proposed increasing the state’s working family credit (like an earned income tax credit), expanding the child care tax credit, creating a tax credit for owners of farmland, and broadening the sales tax exemption for charities, while partially offsetting the cost through several provisions to close corporate tax loopholes. Nevertheless, Minnesota’s legislators outbid the governor by enacting (over Dayton’s objections) a $650 million tax-cut package that not only increases the child care credit and provides a tax credit for farmers, but also phases out state income taxation of Social Security benefits, raises the estate tax threshold and creates a new tax credit for student loan payments.

In Utah, Governor Gary Herbert (R) took a rhetorical approach to broadening his state’s tax base. In his 2017 State of the State Address, Herbert expressed concern about Utah’s proliferating tax preferences, including 89 sales tax exemptions and 38 income tax credits, and called for “a thorough legislative review of each and every tax exemption and tax credit.” Herbert also decried a “mismatch between economic growth and tax base growth,” and urged the state “move toward” taxing goods and services uniformly. Not surprisingly, this generic call for reform did not move the Utah legislature, which enacted at least six new tax credits during its 2017 session, while phasing out a single tax credit..

To modernize their tax systems and generate enough revenue to support education, health care, transportation and public safety, state policymakers will have to develop detailed reform proposals and expend the political capital necessary to enact them; rhetoric will not suffice. Base broadening is only one element of state tax reform, but a strong tax base can further other goals such as fairness, economic growth, transparency and ease of administration by subjecting taxpayers with similar resource levels to the same rules and spreading the tax burden more evenly.

Author: Jason Juffras has 20 years of experience in state and local budgeting, policymaking, and program evaluation. He earned a doctorate in public policy and administration from The George Washington University in 2015, with a concentration in public budgeting and finance. He can be reached at [email protected].   

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