The Center's work on 'Tax and Spending Limits' 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.

The Basics of Following the Money, Updated

April 12, 2013 at 5:22 pm

As Tax Day approaches, we’ve updated three backgrounders that explain the sources of federal tax revenues and how we spend both federal and state tax dollars.

Where Do Federal Tax Revenues Come From?

In fiscal year 2012, the federal government spent $3.5 trillion on the services it provides.  Of that $3.5 trillion, federal revenues financed close to $2.5 trillion. The remaining amount (about $1.1 trillion) was financed by borrowing; this deficit will ultimately be paid for by future taxpayers.

The three main sources of federal tax revenue are individual income taxes, payroll taxes, and corporate income taxes; other sources of tax revenue include excise taxes, the estate tax, and other taxes and fees (see chart).

Where Do Our Federal Tax Dollars Go?

In 2012, about three-fifths of federal expenditures went to three areas:  defense and international security assistance, Social Security, and the major health insurance programs (Medicare, Medicaid, and the Children’s Health Insurance Program).  Two other categories together — safety net programs and interest on the federal debt —accounted for another fifth of federal spending.  The remaining fifth of federal spending supported a wide variety of other public services, including providing health care and other benefits to veterans and retirement benefits to retired federal employees, assuring safe food and drugs, protecting the environment, and investing in education, scientific and medical research, and basic infrastructure such as roads, bridges, and airports.

Where Do Our State Tax Dollars Go?

By far the largest areas of state spending, on average, are education (both K-12 and higher education) and health care.  But states also fund a wide variety of other services, including transportation, corrections, pension and health benefits for public employees, care for persons with mental illness and developmental disabilities, assistance to low-income families, economic development, environmental projects, state police, parks and recreation, housing, and aid to local governments.

Click here for the backgrounder on where our federal tax dollars come from, here for the backgrounder on where our federal tax dollars go, and here for the backgrounder on where our state tax dollars go.

States Face Four Big Budget Threats

February 14, 2013 at 2:14 pm

We rely on states and localities to provide public services like education, health care, and infrastructure that lay the groundwork for a prosperous future.  But as we describe in a new paper, four serious challenges threaten their ability to pay for those programs.

  1. The most severe recession in seven decades blasted holes in state budgets from which they have yet to recover. The recession of 2007-09 sharply reduced state revenues, causing budget shortfalls totaling well over half a trillion dollars.  Revenues have improved lately but remain about 6 percent below where they were five years ago, in inflation-adjusted dollars, even as the number of people needing state services has grown.  In addition, states need to replenish reserve funds that states tapped in the recession.  These factors make it very hard for states to reverse past budget cuts — let alone make cost-effective investments in areas like early education, job training, and new business incubation.
  2. States’ antiquated tax systems are ill-suited to raising adequate revenue in a 21st century economy. States haven’t modernized their tax systems to keep pace with trends such the growth of the service sector and of e-commerce (see chart).  Nearly half of total household purchases go for services[v1] , for example, yet only a few states apply their sales taxes to a broad array of services.
  3. The federal government, which provides about one-quarter of state and local revenues, is on track to make deep spending cuts that could hit states hard. The 2011 Budget Control Act has already caused cuts in grant programs to states and will push federal funding for a wide range of state and local services — schools, water treatment, law enforcement, and other areas — to its lowest level in four decades as a share of the economy.  Additionally, automatic cuts (“sequestration”) are scheduled to begin in March, causing over $6 billion in additional cuts in aid to states this year.  Those are just the budget cuts that are already scheduled to occur; future deficit-reduction legislation could impose still more cuts, especially if it doesn’t include substantial new revenues that would partially offset the need for more cuts.
  4. Some state policymakers are pushing for large tax cuts that would further undermine state revenues, with potentially dramatic consequences for public services. In five states, governors and/or leading legislators have proposed complete repeal of the state income tax, which typically provides one-third to one-half of all state revenues.  (No state other than oil-rich Alaska in the 1970s has ever repealed its income tax.)  Less radical — but still harmful — tax cuts are on the table in a number of other states, as are rigid limitations on state revenue growth.

Some states likely will rise to these challenges, protecting their schools, transportation networks, and other public services and modernizing their revenue systems for the long term.  Some other states likely won’t meet the challenges, choosing instead to accept depressed revenues and decaying public services as the “new normal.”  The country’s future prosperity depends to a significant degree on the number of states that choose the first, more fruitful path.

Click here to read the full paper.

ALEC’s Radical Tax and Budget Agenda

February 12, 2013 at 11:37 am

Numerous states are considering — and some have already enacted — sweeping tax and budget proposals that follow recommendations of the American Legislative Exchange Council (ALEC), our new analysis explains, and middle- and lower-income residents could end up paying the price.  These proposals would:

cut taxes deeply for wealthy individuals, investors, and corporations; shift tax burdens substantially from well-to-do to middle- and low-income households; and impose strict constitutional or legal limits on revenues or spending that would severely limit states’ ability to provide adequate funds for education, health care, and other priorities, and impair state economic growth.

For example:

  • ALEC proposes that states repeal state personal and corporate income taxes, which provide one-third to one-half of a typical state’s funding for schools, health care, and other key services.  No state other than oil-rich Alaska has ever repealed its state income tax, but in 2012 there were major efforts in Oklahoma, Kansas, and Missouri to do so, and so far in 2013 governors and/or leading legislators in four additional states — Louisiana, Nebraska, North Carolina, and South Carolina — have proposed (or voiced plans to propose) full repeal of personal or corporate income taxes or both.
  • ALEC and its allies are working to ensure that states that now lack income taxes can never enact them.  New Hampshire voters defeated an ALEC-supported constitutional amendment on the 2012 ballot that would have banned the state from ever putting an income tax in place.  Tennessee is expected to place a similar measure on its ballot in 2014.
  • ALEC and its allies have begun promoting legislation that exempts “pass-through income” — business profits that are taxed as the owners’ personal income rather than as corporate income — from taxation.  Though ALEC advances the idea as a way to help small businesses create jobs, it mostly would benefit large, profitable companies organized as Subchapter S-corporations and limited liability corporations, as well as investment funds and private consultancies that do not create many jobs.

    In 2011, North Carolina enacted the nation’s first-ever exemption of pass-through income up to $50,000 per taxpayer.  A year later, Kansas eliminated such taxes entirely, at an estimated cost at least $245 million per year when fully phased in.  South Carolina enacted a rate cut specifically for pass-through income in 2012.

  • ALEC offers states model legislation for a constitutional requirement that state legislatures approve all new taxes and fees or any increases in existing taxes and fees by two-thirds votes.  Proponents argue that supermajority requirements are designed to control spending but, in reality, they allow a small minority of legislators to hold the budget process hostage to narrow concerns and make it difficult for lawmakers to pass reasonable tax increases that have public support.

    Proponents have pushed supermajority legislation in a number of states in recent years, including Arizona, Hawaii, Idaho, Maine, Michigan, Minnesota, New Hampshire, and Texas.  In 2011, Wisconsin adopted a supermajority statute.

As our report explains, ALEC’s studies and reports claim that its agenda would boost economic growth and create jobs, but they are disconnected from a wide body of peer-reviewed academic research on public finance.  Our report outlines a better way forward for states to meet their balanced budget requirements while also creating the conditions for economic growth and a higher quality of life.

Voters Refuse to Tie Their Hands on State Revenues

November 8, 2012 at 2:01 pm

Voters on Tuesday considered a host of ballot measures on tax and budget issues, but the most important from a long-term perspective may have been those in Florida, Michigan and New Hampshire.  All three states rejected major constitutional amendments that would have handcuffed their ability to fund education, health care, and other services that are key to strong state economies.

  • Florida voters rejected, by a decisive 58-42 margin, a formula-based revenue limit based on Colorado’s “TABOR,” which has led to deep cuts in education and health care over time.  By nearly as wide a margin, voters also rejected a cap on property taxes for corporations and other nonresidential property owners.
  • New Hampshire voters rejected an amendment barring the state from enacting a broad-based income tax.  New Hampshire has neither a broad-based income tax nor a general sales tax, relying heavily on property and excise taxes.  Its narrow tax base causes low-income families to pay much more in taxes than higher-income families, relative to their incomes, and makes it harder for the state to finance good schools and other infrastructure and services.  The proposal would have created a major barrier to updating the tax code for changes in the economy and making the tax code fairer, and more adequate for funding services, as the New Hampshire Fiscal Policy Institute has explained.
  • Michigan voters rejected, by a more than 2-1 margin, an amendment requiring a two-thirds vote in both houses of the legislature to pass any tax increase.  This would have empowered a small minority of lawmakers to protect special-interest tax breaks and block new funds for schools, roads, health care, or other services, as the Michigan League for Public Policy has explained.

Voters in other states approved several measures that will have a more immediate impact on states’ ability to finance public services, as states still face major budget challenges in the wake of the Great Recession.  The biggest, a California measure to raise income and sales taxes, will raise $6 billion annually over the next several years to help fund schools, health care, and other services.  California chronically has collected less revenue than it needs to bring its budget into long-term balance, the California Budget Project points out.

California voters also closed a corporate tax loophole that costs over $1 billion annually, and Oregon voted to eliminate a special tax rebate for profitable corporations.

Other efforts to raise new revenue fell short, such as proposed sales tax increases in Arizona and South Dakota.  But on the whole, voters showed this week some important appreciation for the public services that their states provide.