1. TRENDS IN STATE TAX REFORM AND WHAT COMES NEXT?
Sally Wallace Department of Economics and Fiscal Research Center/Center for State and Local Finance
Presentation at the Midwest Public Finance Conference
Wichita Kansas, April 21, 2017

2. Overview Landscape for state tax reform
National view of tax reform efforts over the last decade
Evidence of impact
Deeper dive: Georgia, North Carolina, Kansas, and Colorado
Lessons learned (?)

3. Landscape for tax reform: we are all in this together
Federal government is about 50% of expenditures (total expenditures) and states and locals almost an equal share (direct expenditures); similar on revenue side, federal is total receipts and state and local is tax revenue plus insurance, utilities, etc.

4. Landscape: Economy

5. Landscape: Employment

6. Additional Landscape Items
Aging of the population
Growth in consumption of services
Growth of internet sales
Increased global competition
Great Recession: …….

7. ….It hurt

8. Why do tax reform at the state level?
Deal with the changing landscape
Increase competitiveness
Concern over equity
Couple more/less to feds

9. State reforms What have states been up to?
Dealing with the recession has made state tax reforms tough
Personal income tax – typical part of reform packages
Sales and use tax – new favorite tax?
Corporate taxes – out with the old?
Revenue triggers, administrative simplification, estate tax, school finance
States have continued to discuss major tax reforms but the hard-hitting recession made that difficult; lots of discussion to modernize PIT—reduce rates, reduce importance (Kansas, NC, others); Sales tax broaden base and worry about services (Kentucky, NY, Washington); CIT still a favorite to get rid; NC, Kansas triggers for revenue targets, Georgia has discussed;

10. Pre-Recession Fiscal Stress (FY07-08) and Subsequent State Tax Response (FY09-FY11)

11. Illustrative Reform Efforts
State
Tax Reform Effort
Arizona
Transaction Privilege Tax Simplification Taskforce (2012); Taskforce for Income Tax Reform (2013)
Washington D.C.
D.C. Tax Revision Commission (2014)
Georgia
The Special Council on Tax Reform and Fairness for Georgians (2011); Legislative changes
Hawaii
Tax Review Commission (2012)
Indiana
Tax Competitiveness and Simplification Conference (2014)
Kansas
House Bill 2117 (2012); House Bill 2059 (2013)
Kentucky
Blue Ribbon Commission on Tax Reform (2012)
Massachusetts
Tax Fairness Commission (2014); Tax Expenditure Commission (2012)
New York
New York State Tax Reform and Fairness Commission (2013)
North Carolina
House Bill 998 (2013)
Oklahoma
Taskforce on Comprehensive Tax Reform (2011)
South Carolina
South Carolina Taxation Realignment Commission (2010)

12. Common Themes: Income Tax
Income  Consumption
Reduction in the number of tax brackets, and tax rates.
Reducing the reliance on income tax (or eliminating it).
North Carolina adopted flat tax rate.
Kansas collapsed the three rate brackets into two.
Georgia, Oklahoma, D.C., Ohio proposed reduction in the top tax rate.

13. Common Themes: Income Tax
Elimination of different exemptions and tax credits.
Georgia council recommended elimination of all itemized deductions, standard deductions and personal exemptions.
The legislation in Kansas repealed several credits (for example: childcare expense tax credits).
NC repealed several deductions--for example: retirement income, severance wages, 529-plan contributions and several others.
Fairness vs. Efficiency
Reform in NC and KS was largely undertaken with efficiency considerations.
Tax Fairness was one of the important mandates of the commissions in MA, NY and DC.
Massachusetts recommended establishing a graduate income tax.
Modification in Earned Income Tax Credit in MA, DC, KY.

14. Common Themes: Consumption Taxes
Increasing importance of consumption taxes
KY, NY, SC, D.C. proposed broadening the sales and use tax base. AZ and NC introduced legislations.
Including new goods and services. Growing importance of e-commerce and online sales.
Georgia and South Carolina recommended eliminating various exemptions (for example: Groceries)

15. Corporate and Business Taxes
A general focus on decreasing reliance on corporate income taxes.
MA GA, OK, NC discussed or enacted a reduction in CIT.
Simplification, more transparency and better regulatory environment.
NY, IN, NC have taken several steps towards simplification.
Combined reporting requirements for preventing tax avoidance (SC, OK).
Avoid compounding.
Increasing demand for rigorous evaluation of tax incentives and credits.
Job credits, R&D, Investment credits, Films.
SC, HI, NY, GA, OK.

16. Common themes: Other
Improving the administration of property taxes focusing on:
Simplification of assessments.
Better intergovernmental coordination.
Online transactions
Rate reduction subject to revenue triggers.
Examples: NC & KS enacted rate reduction subject to revenue triggers.
Improving and simplifying tax administration.
Technological upgrades
Better forecasts
Standardizing administrative procedures
Improving audit and enforcement.

17. Key takeaways: REFORM PROPOSALS
A General Shift:
From income and business taxes to consumption based taxes
Rate Cuts; Eliminating of exemption, deductions, credits
Efficiency vs. Equity Debate:
Lower the tax rate, broaden the base (Example: Tax on Groceries)
Enhancing vertical equity
Institutional Changes and Simplification:
More transparency and better regulation
Simplifying the tax administration

18. Focus on a handful of states:
Diving a bit deeper
Focus on a handful of states:
Georgia:
discussions around flattening the income tax revenue neutral; current top rate 6%
Tax credit expansion
Exemption expansion (sales tax)
Kansas:
reduced individual income tax rates to 4.6%
eliminated flow through income
increased standard deduction
adjustments in sales tax rate to a current rate of 6.5%
reduced income tax deductions
Kansas CIT = 7% top rate out of two rates
GA 6%

19. Diving a bit deeper Colorado: Nebraska North Carolina
Income tax: flat rate system with no significant changes (4.63%)
Excise tax: increase
Relatively low state sales tax
Nebraska
No major changes to date
2017 reform to flatten the income tax (from top rate of 6.84%) and reduce CIT from current rate of 7.81%
North Carolina
Reduce CIT rate to 3%
Flat rate income tax to 5.499%; reduced exemptions
Single factor apportionment
Expanded sales tax of services
NC CIT = 6%

20. What happened?

23. Lessons?
LOTS of moving parts: economy, demographics, federal changes, Medicaid, education financing
Expenditures are important
State and local are players
Isolating impacts of reform is tough
Empirical results remind us that both sides of the budget matter
Pick winners?

24. Quick word on federal reform
Not clear what may come
Some ideas:
Reduce the corporate income tax rate and allow expensing for certain types of business investment
Flatten the individual income tax rate structure and simplify income taxes by increasing the standard deduction and eliminating a host of itemized deductions—among other items.
Impact for states:
Increase the “price” of state (and local) taxes via reduced deductibility
Expand the individual income tax base
Reduce the corporate tax base

25. Resources:
AYSPS Center for State and Local Finance
AYSPS Fiscal Research Center
Pew Trusts visualizations/2014/fiscal-50#ind5
Pathak and Wallace, Fiscal Architecture of Georgia pdf?wpdmdl=4827
Pathak, Bourdeaux, Wallace and Larson, State Tax Reform Efforts:
Census of Governments:
BEA:
Tax Policy Center Data Query System: