Cronyism

State tax cuts: the year that was, the year that is to come

This also appeared on PublicSectorInc.Org on December 20, 2013.

Taxpayers had much to be thankful for in 2013. As ALEC’s recent State Tax Cut Roundup outlines, 18 states cut taxes during this year’s legislative session: Alaska, Arkansas, Florida, Idaho, Indiana, Iowa, Kansas, Mississippi, Montana, Nebraska, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Tennessee, Texas, and Wisconsin. The largest share of tax cuts were to the personal income tax. That is welcome news for taxpayers, since many economists consider taxes on capital and income as the most harmful to growth.

Here are some highlights.

North Carolina: Lawmakers in North Carolina enacted some of the most significant, pro-growth tax reforms of the last decade. While the plan was fairly comprehensive in nature, starting on January 1, 2014, every income tax bracket in North Carolina’s three-tiered system will be merged into a single tax bracket. In addition to this major simplification, all income tax payers will also receive an income tax cut, as the rate will be reduced to 5.8 percent (from 7.75 on the highest bracket).

North Carolina lawmakers also voted to completely eliminate the state’s death tax and multiple business taxes. Overall, absent any new policy developments, taxpayers in North Carolina will be some of the biggest winners in 2014.

Kansas: Governor Sam Brownback and free-market policymakers in the Kansas Legislature started what The Wall Street Journal called the “Heartland Tax Rebellion” in 2012. They were able to benefit taxpayers across the board by significantly reducing income taxes and even eliminating the income tax on non-wage income for pass-through businesses like S-corps. This tax relief will continue to be phased in during 2014, and, under current law, the personal income tax rate will fall all the way to 3.9 percent, from 6.45 percent prior to the reform. Some leaders in the legislature, like House Taxation Committee Chairman, Richard Carlson and Speaker Ray Merrick, would like to see the income tax phased out completely, by means of using spending limits and revenue triggers over time.

The recent success of fundamental tax reform in North Carolina and Kansas will continue to influence debates over state tax policy for years to come. In fact, our prediction is that the most active tax debates in 2014 will occur within these two states’ regions.

Oklahoma: Governor Mary Fallin has warned that Oklahoma could soon be caught in a “no income tax sandwich” between Texas and Kansas. With this week’s state Supreme Court ruling that invalidated Oklahoma’s 2013 tax cuts, look for free market boosters within the Oklahoma Legislature to revisit the topic in 2014.

Nebraska: Governor Dave Heineman in Nebraska has called for comprehensive tax reform in the Cornhusker State in 2014. Though Nebraska did repeal its much-despised alternative minimum tax in 2013, the state’s income tax rates now verge on becoming uncompetitive with its neighbors’. In addition to having to compete with the lower rates in Kansas, Nebraska shares boarders with Wyoming and South Dakota, neither of which have an income tax.

Georgia and Tennessee: Lawmakers in southeast states are acutely aware of the courageous reforms in North Carolina. Georgia State Senator Judson Hill, who chairs the Senate Finance Committee, has been conducting hearings on tax reform with the stated intent of not only matching North Carolina, but perhaps creating an even stronger business climate in the Peach state. Lawmakers in neighboring Tennessee are looking to repeal the economically damaging “Hall Tax” on investment income. The Volunteer State is already one of the nine states without a personal income tax on wages, and North Carolina’s actions might provide just the momentum they need.

Broadly speaking, many of the tax cuts states enacted in 2013 are scheduled to be phased in over a multi-year window; some were even made retroactive to January 1, 2013. While we expect some states to enact bold, pro-growth tax and fiscal policy reforms in 2014, unfortunately there may also be taxpayers who will be even worse off in the New Year due to tax increases.

Conventional wisdom suggests that significant policy changes occur mostly in non-election years, because elected officials want to avoid making many difficult decisions during the campaign season. But that wisdom is now being challenged by increasing economic competition between states for human and investment capital. According to Internal Revenue Service statistics compiled by author Travis Brown, more than 43 million Americans and more than $2 trillion in wealth has migrated from one state to another in the past 15 years alone.

In other words, Americans are “voting with their feet”—and checkbooks—at a record pace. States are quickly realizing they must participate in this race to become more competitive. Even with conventional wisdom suggesting a quiet 2014, keep an eye on the 50 laboratories of democracy for pro-growth, pro-taxpayer changes next year.


In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure …

+ Cronyism In Depth