As the National Governors Association meets in Washington, D.C., this week, there’s plenty of dire news for taxpayers around the country. President Obama’s budget deal earlier this year hiked marginal rates on higher-income payers and raised taxes on most American workers by eliminating the payroll tax holiday. Even after these tax hikes the president says “There is no doubt we need additional revenue,” indicating his appetite for extracting ever-larger “fair shares” from taxpayers is not sated.
Things are even worse at the state level. California Gov. Jerry Brown sought and won a referendum raising income taxes in the country’s most populous state. A brief drop in the state sales tax rate was also kyboshed. In Michigan, 400,000 households are being hit by the elimination last year of middle-income and child tax credits. Illinois more than doubled its income tax rate in 2011.
Yet while the outlook is grim in many states, a handful of governors, all Republicans, are pushing for tax reforms, reductions and even a few radical changes.
Some of these efforts are fairly modest. Few are guaranteed, and most are facing serious opposition from Democrats and, in some cases, legislative Republicans. Democrats are also taking aim at the reformers themselves. Gov. Rick Perry’s long tenure as chief executive has brought prosperity to Texas and allowed Perry to engage in a (sort of) friendly rivalry with Jerry Brown to attract California’s businesses and residents to the Lone Star State. But it has also made Texas a tempting target for Democrats. Jeremy Bird, national field director for Obama’s re-election campaign, last month formed the group “Battleground Texas” with an eye toward returning the state to its post-Civil War status as a Democratic stronghold.
More important, a few of the most ambitious reforms have already run out of gas. Nebraska Gov. Dave Heineman recently floated a plan to eliminate the state’s income tax entirely and replace it with a sales tax. But he gave up the effort in the face of relentless opposition from farmers. Indiana’s newly minted Gov. Mike Pence moved to reduce the Hoosier State’s income tax by 10 percent over the next two years but was blocked by his own party. In Iowa, Gov. Terry Branstad also talked about getting rid of corporate and personal income taxes but has chosen to focus instead on property taxes.
But interstate competition for people and business is heating up. Although Texas and California are the most notable competitors, there are many examples – including Missouri/Kansas, New Jersey/New York, and Virginia/Maryland – of Republican governors working to draw economic energy away from Democratic-controlled neighboring states. And as states lose their appetites for targeted business incentives (such as film production tax credits, a popular fad of the last decade that states like Michigan and New Mexico are now scrambling to eliminate), that leaves tax-rate competitiveness as one of the few tools in the state government shed. Presently nine states – Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming – either have no income tax or only tax interest and dividends. Two more may soon follow suit, and there are increasing calls for all states to phase out corporate taxes, personal income taxes, or both.
Gov. Scott Walker is best known for his seesaw war with government employee unions, but he is also trying to make the Badger State more competitive in tax policy.
That’s a tall order. With a top rate personal income tax rate of 7.75 percent and a flat corporate rate of 7.9 percent, Wisconsin is consistently among the 10 lowest-ranking states in the Tax Foundation’s State Business Tax Climate Index.
But Walker, now in his third year as governor, is trying to change that, and he has some advantages. The state budget has a $484 million surplus this year. Walker’s party also controls both houses of the state legislature. In conjunction with Assembly Speaker Robin Vos, Walker is pushing for an income tax cut that would total between $300 million and $350 million in 2013 and 2014. Wisconsin State Journal says that could come to $200 in savings per family, and while Democrats are complaining about Walker’s spending cuts, the proposal has a strong likelihood of passing.
Last year Gov. Butch Otter got legislative backing for a $36 million income tax cut. Now he’s planning to eliminate a particularly goofy burden on Idaho businesses: The “personal property tax” that gets assessed on a wide range of business equipment, including furniture, libraries, uniforms, tools, display racks, medical instruments and many other items.
Otter is introducing a plan to phase out the personal property tax over a period of years. That is expected to save Idahoans $141 million a year. Opponents have complained that local governments depend on the tax to fuel their own spending, and local leaders want to make sure the assessment on business equipment gets “replaced” (a sentiment Otter has echoed). Minority Democrats meanwhile, object to shifting the burden to increased property or sales taxes.
But supporters of the reform suggest Otter himself is not moving fast enough. A partial repeal of the personal property tax was approved in 2008 but never implemented. Business leaders have been urging a total repeal for years.
8. North Carolina
Gov. Pat McCrory’s progressive opponents are right about one thing: He needs to get specific about his tax plans. “Government must work with business as partners – not against them as adversaries – to identify and eliminate burdensome taxes, rules and regulations that stifle economic growth,” McCrory said in his first state of the state address last week. And that was his only mention of tax policy. In the past, McCrory expressed his desire to make the Tar Heel State’s personal, corporate and estate tax rates “competitive” with those of neighboring states. (That’s not actually saying much: South Carolina’s top personal income tax rate, at 7 percent, is among the highest in the nation.) He has also signaled his openness to eliminating the income tax entirely.
But in an increasingly purple state that Mitt Romney barely won in November, McCrory has been frustratingly shy about specifics. The Raleigh News & Observer says the “price tag” for McCrory’s proposal could be anywhere between $2 billion and $11 billion in savings for North Carolina taxpayers. That could be a big boost to the rapidly growing state, if McCrory is willing to go ahead with it.
7. New Mexico
Like Wisconsin’s Walker, Gov. Susana Martinez has the advantage of a budget surplus. The Land of Enchantment was in the black by $250 million last year and is projected to run another surplus this year. Now the New Mexico governor, a Democrat-turned-Republican, wants to use that leverage to push through an assortment of tax changes, most notably a reduction in the corporate tax rate from 7.6 percent to 4.9 percent.
The Democratic-majority legislature objects that the proposed cut could “cost” the state $130 million in lost tax revenue. But Martinez has the more credible argument. The last two years of budget surpluses have come despite a gross receipts tax cut that had been projected to reduce general fund revenues by $50 million. She also has an argument from necessity. New Mexico is gradually losing the federal defense and research funding to which it has long been accustomed, and it’s also becoming a destination for fleeing Californians, underscoring Martinez’ case for a “diversified” economy stronger.
While Martinez merely calls on politicians to “spend surplus dollars wisely,” Gov. Rick Perry has a more radical plan: amend the state constitution to ensure that budget surpluses are returned to the citizens. “Today, I’m calling for a mechanism to be put in place so when we do bring in more than we need, we’ll have the option of returning tax money directly to the people who paid it,” Perry said in his state of the state address last month.
This is another area in which the Lone Star State draws a sharp distinction with California, where governors for many years have been urging a bigger “rainy day fund” to guard against future revenue drops. Perry prefers to do that by holding down spending, and the state now has a $9 billion surplus. Already the longest-serving governor in Texas history, Perry is coming off an embarrassingly bad performance in last year’s presidential primary. But his competition with California continues to show results in the form of a 6.1 percent unemployment rate, compared with California’s rate of 9.8 percent. With no income tax, Texas wouldn’t seem to have much room left to enhance competitiveness, but Perry is determined to find it.
Gov. John Kasich has disappointed fiscal conservatives in many areas, notably his implementation of a state Medicaid exchange and his creation of the “JobsOhio” development boondoggle. Kasich’s plan for a “frack tax” could be seen as a continuation of that trend: Hydraulic natural gas fracturing is expanding in eastern Ohio, and Kasich would like to increase the now-nominal “severance tax” on energy from less than one percent to 2.7 percent.
Not surprisingly, legislative Republicans, the Tea Party and the energy industry are opposed to the plan, arguing that it’s an attempt to cash in on the fracking boom that will kill the golden goose. But Kasich’s plan, which he introduced last year and has renewed this year, has one intriguing element: The governor plans to take the $459 million and $547 million raised by the frack tax and apply it to a 5 percent across-the-board income tax cut.
That might seem modest, but considering that the Buckeye State already has an unwieldy nine income tax brackets, any relief would be welcome.
Gov. Rick Scott’s initiative for a manufacturing tax cut won’t take your breath away. It’s essentially a business tax incentive of the type states need to get away from if they want to leave their command-economy errors behind. But Florida has been among the hardest-hit states during the recession and needs as much tax relief as it can get.
An idea that dates back to Scott’s predecessor Charlie Crist, the manufacturing tax cut could save Florida businesses between $140 and $200 million per year. That’s if Scott can get it through the legislature. Democrats gained seats in the last election, and Republicans no longer have the supermajority needed to enact the change. Obama’s example has Democrats all over the country ravenous for higher taxes. Minority leader Rep. Perry Thurston told the Miami Herald recently that Perry is unlikely to pick up the two Democrats needed to pass the cut.
In a solidly Democratic state that is becoming more liberal, Gov. Paul LePage has been on a roll. In 2011 he signed legislation eliminating the state’s alternative minimum tax for individual filers. Last year LePage reduced the number of Maine’s income tax brackets from four to two and cut the top rate. The changes got positive attention from the Tax Foundation, which moved the Pine Tree State from 37th to 30th place in its Business Tax Climate Index.
They also got LePage opposition from local and national Democrats. Maine horrormeister Stephen King derided the governor as a “stone brain,” while MSNBC personality Rachel Maddow scoffed at LePage’s plan to pursue further cuts in a “broke” state. She’s not wrong about that: Unlike New Mexico and Wisconsin, Maine is in the hole to the tune of $756 million. Democratic majorities in both houses of the legislature oppose any new cuts, but LePage is pressing on with classic New England modesty, telling the Bangor Daily News recently that he aims to get Maine into the “middle of the pack” in terms of overall tax burden.
Bayou State Gov. Bobby Jindal in January proposed eliminating all income and corporate taxes and hiking Louisiana’s sales tax. While that plan might not have the straightforward appeal of eliminating the income tax and replacing it with nothing, it is in line with the goals of “Fair Tax” advocates and others who want to broaden the tax base by moving to consumption taxes.
The details of Jindal’s plan won’t be known until the legislative session starts in April, but the radical change to the tax regime would save Louisianans $3 billion a year and move the state from 32nd to fourth place in the Tax Foundation’s index. “Louisiana’s workers and small businesses have suffered from having a state tax structure that is too complex and that holds back economic prosperity,” said Jindal, who has acknowledged Texas as a model and aims to keep the sales tax “as low and flat as possible.” Independent observers have said replacing income tax revenue would require a hike in the sales tax from 4 percent to seven percent. Jindal enjoys a Republican-controlled legislature and posted a $180 surplus last year, but the state could be looking at a $963 million shortfall in 2013.
Gov. Sam Brownback wants to put the Jayhawk State on a “glide path to zero” income tax. Last year Kansas eliminated its state income tax for about 190,000 small businesses while making a steep cut to the rate for high-income individuals. In his state of the state address last month, Brownback urged the Republican supermajorities in both houses of the legislature to get rid of the state’s income tax entirely.
“We’re going from the highest-tax state in the region, to the lowest-tax state in the region,” Brownback told NPR recently. The state is already seeing the advantages. The cuts are expected to save Kansans $850 million a year, and Brownback points to businesses that have already started relocated from Missouri. Democrats, the media, and even a few of the state’s traditional Rockefeller-style Republicans have called the tax changes “Robin Hood in reverse” and accuse Brownback of threatening to “crater the budget.” But the state was in the black by $502 million in 2012, and is projected to post half-billion-dollar surpluses through 2019. Brownback has proposed offsetting the lost income tax revenue by eliminating some deductions and temporarily extending a sales tax that’s set to expire. Over the longer haul, Brownback’s goal is to provide “a red-state model.”
Tim Cavanaugh is a screenwriter, journalist and communications consultant in Alexandria, Va.