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

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 (?)

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.

Landscape: Economy

Landscape: Employment

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

….It hurt

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

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;

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

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 2014-16 Hawaii 2010-2013 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)

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.

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.

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)

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.

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.

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

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%

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%

What happened?

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?

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

Resources: AYSPS Center for State and Local Finance http://cslf.gsu.edu/ AYSPS Fiscal Research Center http://frc.gsu.edu/ Pew Trusts http://www.pewtrusts.org/en/multimedia/data- visualizations/2014/fiscal-50#ind5 Pathak and Wallace, Fiscal Architecture of Georgia http://frc.gsu.edu/files/2017/01/Fiscal-Architecture-Georgia_January- 2017.pdf?wpdmdl=4827 Pathak, Bourdeaux, Wallace and Larson, State Tax Reform Efforts: 2010-2015 http://cslf.gsu.edu/publications/tax-policy-reform/ Census of Governments: https://www.census.gov/govs/ BEA: https://www.bea.gov/newsreleases/regional/spi/sqpi_newsrelease.htm Tax Policy Center Data Query System: http://slfdqs.taxpolicycenter.org/