Tax Analysts Blog

Tax Reform Laboratories

Posted on May 20, 2015

Inaction may be the right word to describe what’s going on with tax reform at the federal level, but not so with the states. In preparing for a presentation, I did some research on tax reform at the state level. At Tax Analysts, we cover events as they happen and we’ve covered a lot, but putting it all together was quite astonishing. It has been a particularly active couple of years for state tax reform.

Here are some of the highlights:

Maine Gov. Paul LePage (R) was among the first to propose a comprehensive tax reform plan back in January, and he started 2015 off right. His plan was solid. It would phase down the individual and corporate income tax rates. To partially pay for the tax cuts, he would increase the state sales tax by 1 percentage point to 6.5 percent and broaden the base to include some services. Theoretically, it’s a good plan, but the taxation of services can be contentious, particularly if professional services come into the picture.

Since January, both Republicans and Democrats in Maine have introduced tax reform plans, giving the state a lot to talk about.

In Idaho, a major tax reform plan was proposed by House Majority Rep. Mike Moyle. The plan would have included a 7-cent increase in the gasoline tax, the elimination of the grocery tax credit, and a reduction in the top personal income tax rate. But talk of that plan was short-lived, as there was no chance the state Senate would approve it and Republican Gov. Butch Otter has already indicated he would prefer a reduction in the state’s corporate income tax and top personal income tax rate.

Mississippi has seen some tax reform action this year. In February the House voted 83 to 32 to phase out the individual income tax over 15 years. Not surprisingly, the bill has been amended and is now more aligned with a plan promoted by Lt. Gov. Tate Reeves (R). After some additional amendments, the Senate passed a bill that included a phaseout of the corporate franchise tax for business property investments and elimination of the 3 percent tax on the first $5,000 of individual and corporate income and the 4 percent tax on the second $5,000 of individual and corporate income. The plan would also have retained the provisions on self-employment deductions.

But when the bill was sent back to the House, House Democrats blocked its passage. In Mississippi, a supermajority is needed to pass tax legislation. The bill failed on a vote of 67 to 52.

Nebraska has recently seen several different types of tax proposals. Some have focused on reducing property taxes, a known priority of Republican Gov. Pete Ricketts, but state business leaders are pushing for income tax cuts. The governor has indicated he is open to the idea, but no firm proposals have yet come out.

North Carolina is continuing with its tax reform momentum. Senate Republicans have proposed reductions to individual and corporate income taxes, and there has been some discussion about reducing taxes on capital gains. North Carolina was a leader in tax reform two short years ago, and at least some in the state are ready to press on.

In North Dakota, Gov. Jack Dalrymple (R) signed a bill that cuts corporate income taxes by 5 percent and personal income taxes by 10 percent. It’s not quite the elimination or reduction of the state’s personal income tax (an idea that was batted around for some time), but it’s another example of a state taking a hard look at tax reform.

In what’s becoming something of a tradition in Tennessee, lawmakers once again proposed the repeal of the “Hall tax,” a 6 percent income tax on interest, dividends, and capital gains income. Gov. Bill Haslam (R) indicated the state couldn’t afford to repeal the tax this year, and there was little support for the bill among lawmakers. Still, I suspect the tradition will continue next year.

There were more proposals in Arkansas, Montana, and Texas (please note I didn’t do an exhaustive search), and of course there is Kansas, which has been at the forefront of most discussions about state tax reform.

States truly are laboratories for tax reform. Ideas are proposed, debated, discarded, and occasionally enacted. Federal lawmakers could learn a lot from an examination of what has worked and what hasn’t across the nation.

Read Comments (1)

Annette NellenMay 21, 2015

Sounds like the states are moving to more regressive structures - greater
reliance on the sales tax and less on the income tax. Regarding state income
taxes, the states may want to wait (or push) the feds to broaden the base and
lower rates as that would work better for the states (rather than states
keeping a low base and lowering rates). I think some OECD countries used the
state proposals you mention to lower their corporate rates - do it along with a
VAT increase.
Thanks for listing the various proposals.

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