Individual Income Tax Insights: Reaching Across The Aisle


 Congress

In a previous blog post, Illinois, Pennsylvania, and Alaska were highlighted as states with significant fiscal issues.  Since May, these states have made significant progress addressing their fiscal concerns. Illinois passed a budget and comprehensive tax package, Pennsylvania passed a budget, and Alaska passed a budget while a bill reforming oil and gas tax credits was approved by both houses. The accomplishments present a step forward for each state’s future, but much work still needs to be done. As these states know all too well, bridge-building in the era of the partisan divide can be a slow and often frustrating process. 

The Illinois Override

On July 6, the Illinois legislature overrode Gov. Bruce Rauner’s (R) veto of a bipartisan comprehensive tax reform package. S.B. 42 gives Illinois the ability to fund the 2017–2018 fiscal year budget, the first true budget the state has had in two years. Residents and businesses of Illinois will feel the bill’s effects the most, with an individual income rate jumping from 3.75 percent to 4.95 percent and a corporate rate jumping from 5.25 percent to 7 percent. The bill passed with exactly the 71 votes needed in the House, representing a coalition of Republicans and Democrats who sought to end the state’s two-year impasse. 

Significant issues, however, still loom on the horizon. Rauner listed numerous complaints including education funding, tax increases, and long-term fiscal sustainability as the main reasons for vetoing the bill. Illinois has avoided a credit downgrade to junk status by credit ratings agencies S&P and Moody’s, according to Bloomberg’s Elizabeth Campbell, despite $15 billion in unpaid bills and an estimated $119 billion in unfunded pension liabilities. Previous attempts to reform the pension system were passed into law but were subsequently struck down as a violation of the state constitution. Although lawmakers may celebrate the passage of a new budget, the solvency of Illinois is still very much in doubt. 

Budget Passes, but Who Pays?

Pennsylvania Gov. Tom Wolf (D) took the unusual step on July 11 to allow Pennsylvania’s budget to go into effect without a companion revenue bill to pay for it for the second year in a row. Pennsylvania legislators voted overwhelmingly in favor of H.B. 218, passed earlier this month with only a handful of Democrats and Republicans opposing its passage. The bill authorizes $31.4 billion in spending for the 2017–2018 fiscal year, $2 billion above what the state plans to collect in revenue. Spending for public schools, pre-kindergarten programs, and services for the intellectually disabled was increased, partially offset by the merger of the Department of Corrections and the Board of Probation and Parole, as well as a merger of the Departments of Health and Human Services. 

In order to close the budget gap, several ideas have been floated, including tax increases, liquor sales reform, an expansion of gambling, and further bureaucratic consolidation. So far, none of the proposals have been adopted, and legislators will have to continue working to get a deal done. Credit rating agencies continue to apply pressure to the lawmakers, which may help ease the gridlock. Persistent budget deficits and one-time revenues have weakened Pennsylvania’s fiscal health, impacting the state’s ability to cover current expenses and invest for the future. 

Overreliance on Oil

Alaska Gov. Bill Walker (I) signed H.B. 57, Alaska’s full-year fiscal budget, on July 1 preventing a looming shutdown of the state government. The bill cuts spending by $145 million, and set the Permanent Fund dividend, Alaska’s annual payout to every Alaskan resident, at $1,100 instead of using the statutory formula. Despite the reduction in spending, Alaska still faces an $890 million budget gap

One major step in solving Alaska’s chronic budget gaps is H.B. 111, which was passed by both houses of Alaska’s legislature and sent to Walker, who is expected to sign it. The bill eliminates the availability of a transferable and cashable credit for losses sustained by oil producers, and instead requires the losses be carried forward until a tax liability is generated. The issue came to the forefront after several large discoveries were made in the North Slope, Alaska’s northernmost region. After an examination of the accounting, legislators realized that should the finds be developed, Alaska may have to pay out billions for cashable credits without sufficient revenue to support the payments. Carrying the losses forward matches the incentive to a revenue used to sustain it. 

Legislators in Illinois, Pennsylvania, and Alaska have found success in addressing their state’s serious fiscal woes.  Lingering issues, including unpaid bills, pension liabilities, and possible federal tax reform, will keep members of both parties busy well into the future.  Difficult decisions will need to be made in order to create a sound fiscal policy that truly reflects the changing economic landscape. 

Continue the discussion on the BBNA State Tax Group on LinkedIn: Should state legislators compromise with their opponents or stand firmly to campaign promises? 

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