More About Nicholas Johnson

Nicholas Johnson

Johnson serves as Vice President for State Fiscal Policy. You can follow him on twitter @NickCBPP.

Full bio and recent public appearances | Research archive at CBPP.org


In Illinois, a Chance to Fix a Constitutional Flaw

April 23, 2014 at 1:04 pm

Illinois’ constitution has a requirement that is quite unusual among states:  the state must have a single-rate income tax, meaning that middle-income taxpayers pay income tax at the same rate as the state’s wealthiest.  This provision has been a fiscal and economic failure.  Now lawmakers are considering a fix that would benefit the state’s middle-income taxpayers and economy for the long term.

When Illinois enacted the single-rate rule in 1970, the income gap between the wealthy and everyone else nationwide had been falling for several decades.  Since the 1970s, however, the top 5 percent of Illinoisans’ incomes have risen 123 percent — six-and-a-half times the rate for middle-income households (see chart).

In other words, most of the income benefits of the state’s economic growth since 1970 have accrued to the wealthy, and Illinois today has the nation’s ninth-highest level of income inequality.

The single-rate income tax is bad enough for middle-income households.  Other major revenue options, like sales or property tax increases, are even tougher on low- and middle-income families.  Indeed, accounting for all forms of state and local taxation, the Institute on Taxation and Economic Policy reports that Illinois’ tax structure is the nation’s fourth most lopsided in favor of those with high incomes, with the top 1 percent of taxpayers (with average income of $1.5 million) paying less than half as much of their income in taxes than the 80 percent with incomes below $93,000.

In part because of its limited revenue options, Illinois for many years did not raise enough tax dollars to cover its costs.  The state accrued nearly $10 billion in unpaid bills to doctors, child care centers, and other service providers, and it fell far behind on its pension payments. A temporary income tax increase enacted in 2011 has helped the state to slash the backlog of unpaid bills, but the state’s fiscal challenges remain large.

Nor has the flat-rate requirement helped Illinois’ economy.  Unemployment in Illinois remains well above the national average, and much higher than neighbors like Minnesota and Missouri that have multi-rate taxes.  (In fact, Minnesota last year raised taxes on its highest-income residents, with no economic harm, contrary to opponents’ predictions.)  A plethora of academic studies, as well as states’ direct experience, show that personal income tax rates have essentially no relationship to economic growth.

In the coming days, Illinois’ legislature will consider whether to give voters the option of fixing the flawed single-rate mandate.  A proposed constitutional amendment would enable Illinois to impose different rates on different levels of income, an option that all but a handful of other states already have.  This change could allow the state to fully pay its backlog of bills; better fund schools, parks, and roads; or meet other needs without imposing the greatest burden on middle-income Illinoisans.

Brownback Reiterates Faulty Claim to Justify Radical Tax Cuts

February 25, 2014 at 3:30 pm

Kansas Governor Sam Brownback said recently that his radical 2012 income tax cuts — among the largest that any state has ever enacted — generated over 15,000 small businesses in Kansas.  He’s made this claim before, such as to the New York Times last month.  It’s one of his top arguments that the tax cuts have worked.

But it’s misleading, at best.

First, while more than 15,000 new businesses were incorporated in Kansas in 2013, more than 16,000 other businesses were either dissolved by their owners or forfeited for failure to file an annual report and pay the annual fee.  Even adding in the 4,500 businesses that owners reinstated that year (by filing annual reports after letting their status lapse), the net growth in registered businesses was about 3,600 — smaller than in 2012, the year before the tax cuts took effect.

More importantly, proponents of the tax cuts said their goal was to create real jobs.  But, private sector job growth in Kansas since the tax cuts took effect ranks among the lowest of any state — 46th fastest as of the latest data.

Meanwhile, the tax cuts have led to a big drop in revenue for the state, deep cuts in services, and an overall weakening of the state’s economic prospects.

Florida’s Boost to K-12 Education Welcome, But a Gap Remains

December 9, 2013 at 10:41 am

In a letter to state school superintendents encouraging them to raise teacher pay, Florida Gov. Rick Scott boasted that the state’s budget this year includes “the most state funding for education ever,” and that Florida’s increase in per-student spending this year — $263 — ranked second among states for annual increases in our report on K-12 school spending.

That’s welcome news for a state that slashed spending on education and other public services as its revenues plummeted during and after the recession, including at the start of Gov. Scott’s administration.  But, the renewed investments haven’t been enough to recover fully from such steep cuts.  In fact, Florida’s per-student spending remains below its 2007-08 level, adjusting for inflation (see chart).

Meanwhile, the state’s school-age population has continued to grow; there are 11,000 more K-12 students in Florida this year than in 2007-08.

Florida isn’t alone in digging out of a school funding hole.  As our recent report shows, at least 34 states are providing less funding per student for the 2013-14 school year than they did before the recession, and where funding has risen — as in Florida — it has generally not fully offset cuts in past years.

Florida will need to continue to commit state funds to schools to make additional progress in reversing such deep cuts.  Federal aid to schools is declining, and local governments generally can’t make up for the deep cuts in state aid, since property tax revenues — the main source of local funding for schools — remain depressed by the housing bubble’s implosion, which is now fully accounted for in local property tax collections.

Missouri Lawmakers Wisely Push Back Against Plan to Shift, Cut Taxes

September 12, 2013 at 4:30 pm

A bipartisan group of Missouri legislators this week rejected a plan to slash income taxes for the wealthy and corporations, raise sales taxes largely on middle- and low-income consumers, and cut funding for education and other services.  Their vote sustained Gov. Jay Nixon’s veto of the plan, which originally passed the legislature in June.

Missouri thus joined Louisiana, Nebraska, and Oklahoma as states where high-profile tax-shifting plans, heavily promoted by anti-tax activists and organizations, failed to make it into law in 2013.  Those three states have — so far — rejected the approach to taxation promoted by the American Legislative Exchange Council (ALEC), which calls for lower taxes for the wealthy, higher taxes for the poor, and less funding overall for health care, K-12 schools, higher education, public safety, and the other services that state taxes pay for.

Such tax shifts are likely to prove exceedingly damaging.  Already, states like Kansas, North Carolina, and Ohio — all of which have embraced ALEC’s formula over the last two years — are cutting funding for schools, early education, and other investments in their states’ long-term ability to compete.  Nor is there good reason to think those tax cuts might help their state economies; both academic research and states’ own experiences over the last two decades suggest that tax cuts don’t create jobs.

Advocates of this state fiscal model will likely continue to press their claims.  Policymakers across the country should look to Missouri’s example when they face decisions on such misguided proposals.

Busting the Myths Around Swapping Sales Taxes for Income Taxes

September 5, 2013 at 2:54 pm

GovBeat, the Washington Post’s must-read new blog, earlier this week described the goal of North Carolina’s Senate Finance Committee Chairman Bob Rucho and House Speaker Thom Tillis to repeal the state income tax and enact a new, higher sales tax on both goods and services in 2015.  In explaining the plan, Rucho and Tillis repeated the three main myths that tax-cut proponents are using to justify swapping out state income taxes for sales taxes.

Let’s explode those myths, one by one.

Myth:  Replacing a state’s personal income tax with a sales tax would solve the problem of tax instability.

Reality:  A sales-for-income tax swap would reduce revenue without eliminating volatility. State tax volatility is a real problem, but much better, and more affordable, solutions exist.

Myth:  Repealing the income tax would result in lower taxes.

Reality:  Higher sales taxes mean higher taxes overall for middle-class and poor families. Rucho’s proposed tax swap would benefit only the wealthy.

Myth:  Repealing the income tax will boost state economic growth.

Reality:  States with the biggest income tax cuts in the 1990s grew fewer jobs in the next economic cycle than other states. Most careful economic studies show that income tax cuts are a lousy strategy for economic growth.

As states slowly emerge from the Great Recession, they can ill afford to change their tax systems based on such hollow myths.  That’s especially true in North Carolina, where lawmakers have already adopted policies that may hurt the state’s future prosperity.