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Daily Tax Report: State

State of the States: Tax Relief Leads Governors’ 2020 Agendas

Feb. 10, 2020, 9:45 AM

Both Democratic and Republican governors are calling for tax relief this year.

And as they mull ways to pay for their tax cuts, which could involve shifting tax burdens in some cases, they’re careful to avoid any talk of raising taxes as they approach the 2020 elections.

A year ago, governors across the country were pushing to tax online marketplaces, streaming services, marijuana, and sports betting. New laws brought a bundle of new taxes and a $25.1 billion uptick in revenue collected across states in the first six months of fiscal year 2020, according to data from the Urban-Brookings Tax Policy Center. Now, governors in states like Iowa and Colorado are pursuing larger tax cuts as the fruit of that bounty, while the rest of the country’s lawmakers are zeroing in on targeted relief.

“It’s not surprising to see some of those public investments on the agenda this year for governors since state revenues continue to be in a pretty stable place,” said Erica Williams, senior director of state policy initiatives at the Center on Budget and Policy Priorities, alluding to last year’s broad push to tax new industries.

Consider Iowa, where Gov. Kim Reynolds (R), in her state-of-the-state address, outlined a plan to cut income tax rates for most Iowans by broadening the base of taxpayers who pay the highest rate. She also proposed increasing the state sales tax by one percentage point, to 7%, which she said would allow an average 10% cut in income taxes.

Iowa has already enlarged its tax base, particularly with respect to corporations, said Tom Sands, president and CEO of the Iowa Taxpayers Association, which advocates on behalf of businesses in the state. That helped the state to increase revenue substantially over the past few years, he said.

In Colorado, Gov. Jared Polis (D) has expressed interest in that approach, calling for the creation of a bipartisan group to examine how cuts could be paid for with an expansion of the state’s tax base. Colorado also began taxing marketplace facilitators such as Amazon and Etsy in 2019 and passed legislation to legalize and tax sports gambling. And the state, the first to legalize marijuana back in 2014, last year collected more than $300 million in cannabis tax revenue

Only one governor, New Jersey’s Phil Murphy (D), braved the subject of higher income taxes in his state-of-the-state speech, saying he won’t be “giving up the fight” to increase rates by nearly 20% on those making more than $1 million a year.

“You do see governors who are seeing good revenue reports, but are also wary of the instability out there—national politics, the threat of a recession, and a host of other issues,"said Richard Auxier, a researcher at the Tax Policy Center. “They’re probably more excited to put money in the rainy day fund and look at targeted tax relief, whether that’s through property taxes or the earned-income tax credit, which is slightly less ambitious but politically exciting.”

Targeted Relief

Gov. Andrew Cuomo (D-N.Y.) said he wants to cut the income tax rate in half for New York’s small businesses. In his state of the state speech he also proposed light income tax cuts for the middle class—as well as raising the age for children covered by the poverty credit to include more low-income families with infants and newborns.

California Gov. Gavin Newsom (D) also proposed expanding credits—like the earned income tax credit, which gives tax breaks to low-income Americans.

While the trend is the same nationwide, the local details vary considerably. In West Virginia, Gov. Jim Justice (R) announced in his state-of-the-state speech that he was calling for an amendment to the state constitution to eliminate property tax on business inventory. He said the state’s current tax makes it an unattractive place for investment.

Of the five states that border West Virginia, only Kentucky and handful of localities in Maryland impose similar taxes on inventory.

Property-tax relief is picking up steam in the Midwest, as governors look to deliver targeted measures. Since many constituents pay some sort of property tax on their real estate, lowering it for one targeted group or another can be more politically feasible than pursuing overarching cuts.

Nebraska Gov. Pete Ricketts (R) has made property tax relief for homeowners a priority since 2015, when he took office. In his state-of-the-state speech he unveiled a proposal that would expand the state’s property tax credit and lower the ceiling on local rates.

The average effective property tax rate in Nebraska is 1.8%, which ranks among the 10 most burdensome in the country, and well above the national average of about 1.1%, according to smartasset.com.

Ricketts called it the “number one priority Nebraskans want,” noting that property taxes make up about 40% of taxes the state collects.

Kansas Gov. Laura Kelly (D) is also seeking funds to cut property taxes, with a budget that calls for pumping $54 million of federal funds into a relief program. She also proposed allocating $53 million to expand the state’s credit for the sales taxes low-income families pay on food. She called for making the credits refundable, meaning that if the credit exceeds income taxes families owe—they can still reap monetary relief.

How does she plan to pay for the increase in spending?

Although more than 30 states have passed marketplace-facilitator laws, since the landmark South Dakota v. Wayfair ruling, Kansas has yet to do so. She says “requiring marketplace facilitators to start collecting sales taxes” would offer a way to offset new spending.

To contact the reporter on this story: Sam McQuillan in Washington at smcquillan@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; David Jolly at djolly@bloombergtax.com

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