Daily Tax Report: State

Tax Increases Go From Taboo to Trendy, Even for Some Republicans

Feb. 8, 2019, 3:05 PM

Roughly a year after Washington rallied around tax cuts, national Democrats and even some moderate Republican governors are openly pushing for new or higher taxes.

Some 2020 presidential contenders like Sens. Bernie Sanders (I-Vt.) and Elizabeth Warren (D-Mass.) are publicly calling for massive tax increases on the rich with seemingly little blow-back from Democrats. Republican governors in Vermont and Massachusetts have proposed tax increases in their budgets, and GOP-controlled Indiana is joining the ranks of many other states mulling new taxes over legalized sports betting and online marketplaces. Seven states are imposing taxes on recreational marijuana sales, yet another relatively new taxpayer venue.

When he became governor of Vermont in 2016, Phil Scott towed the anti-tax line of many of his fellow Republicans. But just over two years later, in his recent budget address, Scott was open to more revenue streams. “I think you all know it’s not my first instinct to add a tax,” he said in proposing an e-cigarette tax, “but with a growing health risk for our kids, I’m proposing to levy the same tax as we do on tobacco products.”

The emerging tax conversation is fueled by backlash over the 2017 federal tax act, polling that shows significant support for higher taxes on the wealthy, and states’ attempts to shore up budgets, tax policy analysts and advocates told Bloomberg Tax. Tax conversation, taboo not that long ago, is even trending on Twitter.

Is This Time Different?

Political scientists say the underlying reasons—wealth disparity, opportunity, or a federal income tax cut backlash—are making taxes sexy. But while proposals are undeniably flying, it’s unclear whether 2019 is the spark of a populist or progressive trend, or a flash in the pan like previous pushes from Democrats.

Recent polls indicate there’s public appetite for raising taxes on the rich. A February Politico/Morning Consult poll found that 63 percent of registered voters surveyed believe the rich are taxed too little. In contrast, only 9 percent of registered voters thought the rich pay too much.

Proposals from Sanders and Warren seek to translate this sentiment into votes. Sanders proposed a 77 percent estate tax on billionaires, while Warren wants to impose an annual 2 percent tax on households with a net worth of $50 million or more, rising to 3 percent for wealth in excess of $1 billion.

The Politico/Morning Consult poll also found 61 percent of voters support Warren’s plan, including 74 percent of Democratic voters and 50 percent of Republican voters.

Still, history indicates soak-the-rich moods generally sputter and die.

The majority of U.S. citizens have believed for decades that the rich pay too little, according to an historical analysis of polling by Gallop going back to 1992. Democrats tend to lose elections when they run on tax increases, longtime anti-tax advocate Grover Norquist told Bloomberg Tax.

“The idea that Americans want higher taxes is a false premise, set up on the Democrats’ sugar high of winning the House in 2018,” said Norquist, who has long pushed for and held politicians to no-tax-increase pledges. “In 2006, 2009, 1993, and 1994, at times when Democrats acted on their self-delusional belief, they lost the House and Senate.”

Factors: Wealth Disparity, Low Unemployment

The recent increased focus on taxes is likely connected to awareness that wealth inequality has spiked, Matthew Green, a politics professor at the Catholic University of America, told Bloomberg Tax.

From the late 1940s to the 1970s, the percentage of income gains were similar across high, middle, and low American earners, according to an analysis of U.S. Census data by the Center on Budget and Policy Priorities. However, since the ‘70s, income gains for the wealthy have greatly outpaced other segments of American earners.

“And that becomes salient to Americans because of the idea that people should be able to move up the economic ladder and their kids should be better off than they are,” Green said. “If it seems like inequality means that your kids will be worse off than you are, or you have no chance of moving up the economic ladder, then that’s a problem.”

The current disparity is growing even at a time when U.S. unemployment is hovering around record lows. This mixture has led some conservative commentators to volley criticisms at the U.S. tax code.

“Under our current system, an American who works for a salary pays about twice the tax rate as someone who’s living off inherited money and doesn’t work at all,” Fox News host Tucker Carlson said during a January monologue that some conservatives have described as evidence of a populist break from the no-new-taxes philosophy. “We tax capital at half of what we tax labor. It’s a sweet deal if you work in finance, as many of our rich people do.”

The increased focus on taxes is driven by a lack of fairness in the tax code, Frank Clemente, executive director of left-leaning Americans for Tax Fairness, told Bloomberg Tax.

“The whole theme, the whole narrative, the whole framing that the public has right now is that the system is not working for average people and it is working for the rich and for corporations,” he said.

The Democrat proposals are, in part, a reaction to passage of the 2017 federal tax law (Pub. L. No. 115-97), which lowered individual and corporate tax rates, among other large changes. Despite getting a break from the law, more Americans disapprove of that tax overhaul than approve of it, according to an October 2018 Gallup poll.

“The tax bill lit a fire of anger and frustration,” Maura Quint, executive director at Tax March, a group that organized protests against the law, told Bloomberg Tax.

States Tinker With Taxes

In the states, pushes for higher taxes are generally linked to specific needs or opportunities.

Scott vetoed the Vermont Democratic legislature’s version of the state state budget in 2018 because he opposed a tax increase in the bill. But now that Scott is facing down a $40 million structural budget deficit for fiscal year 2020, he is advocating for a host of new fees and tax increases, even as he still pushes to cut the state’s estate tax by raising the income threshold.

Likewise, anti-tax advocates have called Massachusetts Gov. Charlie Baker (R) “a victim of Stockholm syndrome” for working with the Democrat-controlled legislature. He’s proposing a property tax increase to provide funding to mitigate effects of climate change on the East Coast state.

More typical of the change in tax attitude is Indiana. The Hoosier corporate income tax is set to decline this year under existing legislation. But the GOP-controlled legislature is one of the many nationwide considering a new tax for online marketplace facilitators like Amazon.com Inc., Etsy Inc., and eBay Inc. Indiana is also one of the roughly 20 states with active bills that would legalize and tax sports betting, according to the Legal Sports Report’s tracker.

Many new state taxes seek to tap into new sources of revenue recently made available by U.S. Supreme Court decisions or a move toward marijuana legalization. For example, Illinois Gov. J.B. Pritzker (D) is pushing to make his state the next to legalize and tax pot, which could raise an estimated $283 million to $566 million in excise taxes and another $66 million to $133 million in sales tax, according to an analysis by the Marijuana Policy Project.

Such individual state proposals miss the larger point that during a “wave” election for Congressional Democrats in 2018, a majority of high-profile tax measures failed to get voter support, Norquist said. Those included a failed carbon fee in Washington and a gas tax in Missouri.

“Where’s the millionaires tax hike in New York, in Connecticut, in New Jersey or Illinois? All of these states are where you’d think a progressive left-of-center governor would want to prove his bona fides, but there’s silence,” Norquist said. “If taxing rich people is a winning political issue, show me the governors that are for that.”

To contact the reporters on this story: Alex Ebert in Columbus, Ohio at aebert@bloomberglaw.com; Allyson Versprille in Washington at aversprille@bloombergtax.com; Aaron Nicodemus in Boston at anicodemus@bloomberglaw.com; Kaustuv Basu in Washington at kbasu@bloombergtax.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.