The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.
By Jonathan Williams and Joe Horvath
Jonathan Williams is the Vice President of the American Legislative Exchange Council (ALEC) Center for State Fiscal Reform. Joe Horvath is a Research Analyst for ALEC. Learn more about ALEC at alec.org.
The Center for State Fiscal Reform at the American Legislative Exchange Council (ALEC) recently released the third annual State Tax Cut Roundup, which highlights the trend of state legislatures passing reforms to make their states more business and commerce-friendly. Seventeen states substantially cut taxes during their 2015 legislative sessions, and their taxpayers are enjoying the benefits.1 The results from the 2015 session are also not anomalous; 14 states qualified in 20142 and 17 states qualified in 2013.3 Special credit goes to four states—Florida, Indiana, Ohio and Wisconsin—that made all three editions of the ALEC State Tax Cut Roundup. Twenty-one states have yet to qualify for the report.
The report aggregates tax cuts passed during the 2015 legislative session and notes continued implementation of previously passed reforms. To qualify for the State Tax Cut Roundup, a state must:
The ALEC Principles of Taxation help determine whether a tax reform is truly pro-growth and provides widespread economic benefit. The principles provide guidance for a neutral and effective tax system, one that raises needed revenue for core functions of government while minimizing the economic burden on citizens.4
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Applying these principles and eliminating narrow tax preferences, or “carve-outs,” parses out the legislative actions that, according to their state fiscal notes, substantially reduce tax burdens on a state's residents. As Figure 1 illustrates and as stated above, 17 states qualified as tax-cutting states for the 2015 legislative sessions. These states are highly diverse, with wide ranges in demographics, political leanings, geography and economic performance. Tax cutting in 2015 was a bipartisan effort. Only 10 of the 17 qualifying states have legislative and executive branches completely controlled by Republicans. Some deep blue states joined the pro-growth tax reform movement in 2015. In fact, Rhode Island and New York have both qualified for the State Tax Cut Roundup in two of the past three years. Another trend is that of the 17 qualifying states, 13 had governors who were vocal proponents of at least some tax reform and included relevant policy ideas in their state of the state addresses in 2015.5
Regarding the economic outlook and standing tax policies of the qualifying states, the diversity persists. Comparing the report to the Tax Foundation's combined state and local tax burden rankings, it becomes clear that 2015 taxes were not just cut by states that typically value lower tax burdens. Six of the 17 qualifying states (California, New York, New Jersey, Rhode Island, Maryland and Wisconsin) fall within the highest 10 tax burden states, and merely three states (Texas, New Hampshire and Mississippi) were among the nation's 10 lowest burdened.6 Compared to the economic outlook rankings found in the eighth edition of the Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, the broad-based profile of tax-cutting states continues. Seen in Figure 2, four states that rank in the bottom 10 for economic outlook (New York, New Jersey, California and Maine) took steps to reduce tax burdens, while four qualifying states that ranked in the Rich States, Poor States top 10 (North Dakota, Indiana, North Carolina and Arizona) opted to maintain or enhance their competitive edge by passing pro-growth tax reforms.7
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Of course, while all taxes are damaging to private sector activity and economic growth, not all taxes impact an economy equally. As the Organization for Economic Cooperation and Development (OECD) asserts, taxes on capital and income are the most economically damaging.8 Consumption and property taxes, while damaging, are less harmful than, for example, personal income taxes. During the 2015 legislative session, the 17 qualifying states made considerable progress reforming the economically damaging personal and corporate income taxes. Ten reduced their state's personal income tax burden, and eight reduced their corporate income or business franchise taxes. Six reduced property taxes. Figure 3 illustrates the types of taxes cut by qualifying states. Note that some states cut multiple forms of taxes.
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In addition to the states that cut taxes during the 2015 legislative session, the report notes many states continue to phase in previously passed tax cuts. While these states did not qualify under the objective methodology applied to produce the State Tax Cut Roundup results, their previous efforts did, in 2015, allow their taxpayers to keep more of their money overall. Fifteen states were counted in this category, and narratives for each can be found in the report. Among those 15, five also qualified for the current report because of additional tax relief passed during the 2015 session. North Carolina, Indiana, New York, Maryland and Mississippi formed this group of states.
One of the benefits of operating primarily on a state level is that the increased levels of accountability placed on state and local lawmakers mean sound policy changes are always possible. In Washington, D.C., the current political gridlock often times stymies comprehensive tax reform. However, on the state level, lawmakers can more reliably be counted on to respond to signals sent by their constituents. Sound policy analysis and good information can translate into improved state policy environments. The ALEC State Tax Cut Roundup shows that there is a national appetite for pro-growth, business-friendly policies that respect hardworking taxpayers. It is almost certain that, as the years pass, this trend will persist, grow and hopefully continue to permeate even the most unlikely of states.
With such sustained momentum for pro-growth tax reform, the pressure for states to continue to innovate and compete continues to grow. States can fall behind in this competition just by standing still. Fortunately for hardworking taxpayers in 17 states, 2015 provided welcome tax relief.
6 Scott Drenkard, State-Local Tax Burden Rankings, Tax Foundation, at http://taxfoundation.org/article/state-local-tax-burden-rankings-fy-2012, Jan. 20, 2016.
8 Jens Arnold, Bert Brys, Christopher Heady, Asa Johansson, Cyrille Schwellnus, & Laura Vartia. Tax Policy For Economic Recovery and Growth, 121 Economic Journal F59-F80. 2011. http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2010.02415.x/abstract.
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