The Center's work on 'Federal-State Issues' Issues

The Top 5 (Okay, 6) State Tax Charts

April 14, 2014 at 1:51 pm

As we approach Tax Day, here are six charts focusing on state taxes.

More than half of state tax dollars go to fund education (K-12 and higher education) and health care, as the chart below shows.  State tax dollars also fund other critical services such as transportation, corrections, public assistance, care for residents with disabilities, police, state parks, and general aid to local governments.

State revenue losses from the Great Recession were both deeper and longer lasting than in previous recessions, as the chart below shows.  Not until the end of 2013 did revenues finally return to pre-recession (2007) levels, after adjusting for inflation.  But, the steady revenue increases of recent years offer states an opportunity to reinvest in education and other services that sustained unprecedented cuts during the recession.

While revenues have slowly recovered in most states, Kansas has moved in the opposite direction, as the chart below shows.  Kansas slashed income taxes, especially for businesses and wealthy Kansans, even as needs — like the number of K-12 students — have grown.  Revenues fell by more than 9 percent in Kansas in 2013.  Meanwhile, there is no evidence that the tax cuts have boosted the Kansas economy.

Five of the seven states that have made the deepest cuts to K-12 education since the beginning of the recession have also enacted major income tax cuts, as the chart below shows.  These tax cuts eliminated revenue that could have helped states reverse the deep funding cuts from the recession and invest in promising education reforms.

As the chart below shows, low-income families pay significantly more of their income in state and local taxes than very wealthy families.  State and local taxes push many families into — or deeper into — poverty.

A state Earned Income Tax Credit (EITC) is one powerful tool to prevent state and local taxes from pushing low-income working families deeper into poverty.  Twenty-five states and Washington, DC, have their own EITCs, as the map below shows.  A state credit builds on the federal EITC’s proven effectiveness in helping low-income working families make ends meet.  States looking to encourage work and reduce poverty, especially among children (the federal EITC lifts more children out of poverty than any other program), should considering enacting or expanding an EITC.

Supreme Court Opens Door Wider for Collecting Internet Sales Taxes

December 3, 2013 at 11:48 am

By declining to hear a challenge to New York State’s “Amazon law,” the U.S. Supreme Court has now helped pave the way for states and localities to collect more of the roughly $13 billion that they’re owed each year in uncollected sales taxes on Internet purchases.  That should encourage other states to pass similar laws, though only federal policymakers can solve the problem comprehensively.

First, some background.  Previous Court decisions held that a merchant must have a “physical presence” — generally, employees or facilities — in a state before that state could require the company to charge sales taxes to its customers there.  Although buyers are legally obligated to pay directly to their states any applicable taxes that the merchants don’t charge, very few do.

But the Court has also said that people who aren’t employed by the merchant but help market its goods constitute a “physical presence.”  So, New York enacted a law requiring Internet merchants with in-state “affiliates” to charge sales taxes on all taxable sales to New York customers.  “Affiliates” are companies and individuals that link to an Internet retailer from their own site and receive a commission when someone clicks on the link and buys something on the merchant’s site.

Amazon and Overstock, two of the many large retailers that operate affiliate programs, challenged New York’s law.  But New York’s high court upheld the law, and yesterday the U.S. Supreme Court let that decision stand.

More than a dozen states (including New York) have enacted laws requiring Internet retailers with in-state affiliates to charge tax on all taxable sales in the state (see map).  Now that New York’s law has withstood all legal challenges, other states may follow its lead.  Amazon laws can chip away at the problem even if they don’t represent a full solution, I’ve explained.

A federal law that empowered states to require all sellers to collect sales tax would:

  • Help states and localities maintain public services and possibly reinvest in services they cut during the recession — rehiring teachers, freezing college tuition increases, and boosting road and bridge maintenance, for example.
  • Create a more level playing field for local store-based retailers, which do collect sales taxes.
  • End the unfair sales tax treatment of consumers who don’t shop online, including low-income people who lack computers, Internet access, or credit cards.

The federal Marketplace Fairness Act, which represents a fair and comprehensive solution to the problem of uncollected tax on Internet and other interstate sales, passed the Senate in April but is stalled in the House.  Until it moves, states need to do what they can to address the problem themselves.  The Supreme Court has now cleared a big obstacle in their paths.

For Some States, Education Cuts and Tax Cuts Go Hand in Hand

November 11, 2013 at 3:09 pm

Not only have many states imposed deep funding cuts for K-12 schools since the recession hit, as our recent report explained, but most of the states that cut the deepest also cut income tax rates, reducing revenue that might have gone to schools.

Five of the seven states that have cut general school aid per student by more than 15 percent since 2008 also cut personal or corporate income tax rates during this period (see chart):

  • Kansas slashed its personal income tax rates in 2012, with the top rate dropping from 6.45 to 4.9 percent, while cutting other taxes.  In 2013, the state cut its top rate again. All these tax cuts will cost an estimated $3.8 billion over the next five years.
  • Idaho cut its top personal income tax rate from 7.8 to 7.4 percent and its corporate income tax rate from 7.6 percent to 7.4 percent, reducing revenues this year by an estimated $35 million.
  • Oklahoma cut its top personal income tax rate from 5.5 to 5.25 percent, at a cost this year of $120 million.
  • Wisconsin cut personal income tax rates across the board at a cost of about $650 million over the next two years.
  • Arizona cut its corporate income tax rate, phased in over several years, to 4.9 percent from 6.98 percent.  This rate cut, along with other business tax cuts, cost the state about $38 million in 2012 and will cost a projected $538 million by 2018, when the cuts are fully implemented.

Not all the states that cut income tax rates also imposed big cuts in school funding.  (By the same token, two states that cut school funding by more than 15 percent — Alabama and South Carolina — didn’t cut broad income tax rates, though South Carolina did cut rates on business income at a cost of $20 million last year.)  But there’s no question that tax cuts leave less revenue for schools and make school cuts more likely.  Most serious studies find that state tax cuts produce little if any additional economic growth, let alone enough growth to offset fully the decline in state revenues.

Moreover, as the economy improves, states that cut school funding deeply will find it harder to restore that funding if they’ve permanently reduced their revenue by cutting income tax rates. And no state wants to face the future with underfunded schools.

Local and Federal Government Funds Don’t Compensate for State Cuts to K-12 Education

November 4, 2013 at 12:15 pm

As our recent paper found, 34 states are providing less funding — often much less — to K-12 schools than they did before the recession (see chart).  Some have argued that federal and local governments stepped up to offset the state-level cuts.  But, that’s not the case.

The most recent comprehensive data for total education funding through 2011, from the Census Bureau, show that total per-student school funding (federal, state, and local) declined between 2008 and 2011 in most of the states that we reported had cut general state aid.

That’s remarkable because school districts received big funding boosts during that time from the 2009 Recovery Act and a later, smaller supplemental bill.  Also, local property tax collections had yet to feel the full brunt of the bursting of the housing bubble.  As it turns out, the federal aid plus pre-bubble local funding fully compensated for lost state aid in only 14 of those states between 2008 and 2011.  (The stimulus funding was nonetheless important; without it, total spending would have increased in only five of the states that have cut state aid.)

The Recovery Act’s funding has since ended.  And more recently, the federal government has cut ongoing federal education support.  Federal funding for high-poverty schools — the Title I program — is down 12 percent since 2010, and funding for educating children with disabilities is down 11 percent, as we’ve explained.  In other words, while federal funding helped compensate for some state funding cuts in the first years after the recession hit, federal changes are now a drag on total funding for schools.

Local governments generally can’t make up for deep cuts in state aid, either, since property tax revenues — the main source of local funding for schools — remain depressed by the housing bubble’s implosion, now fully accounted for in local property tax collections.  Nationwide, property tax revenues in the 12 months ending in June 2013 were 2.6 percent below 2011 levels, adjusted for inflation.

With federal aid declining and local funding hobbled, schools in states that have slashed state support have nowhere to turn.  As a result, they’ve been forced to lay off teachers, librarians, nurses, and other school workers; increase class sizes; reduce the length of the school year; and make other cuts that make it harder for them to educate the nation’s children.

Cuts in Federal Aid to States Dragging Down School Funding

September 27, 2013 at 12:12 pm

About two-thirds of states are providing less funding per student for the current 2013-14 school year than they did before the recession, as we explained in our recent analysis of state school funding.  Among the reasons why:  the federal government cut its own aid to states, leaving them with fewer dollars to pay for growing school costs.

States used emergency fiscal relief from the federal government (including education aid and other forms of state fiscal relief) to cover a significant share of their shortfalls through fiscal year 2011.  The federal government then largely allowed this aid to expire, even though states continued to face very large shortfalls in 2012 and beyond.  That’s a key reason why state education funding dropped so sharply in 2012 and remains at such low levels.

Adding to states’ struggles, federal policymakers have cut ongoing federal funding for states and localities through sequestration and the cuts required by the 2011 Budget Control Act, worsening state fiscal conditions.  For example, since 2010, federal spending for Title I — the major federal assistance program for high-poverty schools — is down 12 percent after adjusting for inflation, and federal spending on special education is down 11 percent (see chart).

If local school districts could easily raise the money needed to replace lost state aid, then the damage wouldn’t be so great.  But that’s not the case.  Many of the nation’s real estate markets are still weak, making it tough for many school districts to raise more money from the property tax — the primary source of local school funding — as property values rise.  Local governments could raise property tax rates, but that’s often politically very difficult, especially with the economy still so weak.

So, local governments generally aren’t making up for state and federal funding cuts. When states cut funding, local school districts end up with less.  The short-term results: shorter school years, less summer school, and layoffs that slow the economy’s recovery from the recession.

The long-term savings from today’s cuts may cost much more in diminished economic growth.  To prosper, businesses need a well-educated workforce.  These deep education spending cuts will weaken that future workforce by diminishing the quality of elementary and high schools.  At a time when the nation needs to produce workers with the skills to master new technologies and adapt to the growing complexities of a global economy, large cuts in funding for basic education undermine a crucial building block for future prosperity.