States Looking To Make Some Taxes Less Inevitable

States Looking To Make Some Taxes Less Inevitable
by Alan Greenblatt
May 3, 2012

North Dakota may be about to go where no state has gone before. On June 12, voters will decide the fate of a ballot measure that would eliminate all property taxes in the state.

"We think it's a horse race," says Bob Harms, spokesman for a coalition of business, local government and farm groups that are opposed to the measure. "It has a real possibility of passing."

Even 10 years ago, if you said we're going to abolish the income tax, you'd have been laughed out of the room. That's no longer the case.

- Sujit CanagaRetna, a senior fiscal analyst with the Council of State Governments

North Dakota is experiencing an oil boom that has filled government coffers and allowed the state to subsidize a share of residents' local property tax bills. If voters choose to eliminate property taxes, supporters of the idea believe it will touch off a wave of similar measures around the country — just as California's property-tax-limiting Proposition 13 did in the 1970s.

Even in states that haven't experienced oil and gas windfalls, the idea of not just cutting taxes but eliminating certain types of them altogether has been picking up steam. Governors, legislators and activists in states such as Kansas, Oklahoma and Missouri have been pushing to eliminate state income taxes.

"I think the recession and the effect that that had on state budgets has led lawmakers to look at more substantial changes rather than cutting a rate here or there," says Mark Robyn, an economist with the conservative Tax Foundation.

Reward Vs. Risk

It's been decades since any state eliminated a broad-based tax. Alaska did away with its state income tax in 1980, with the completion of the Trans-Alaska Pipeline System. Several of the eight other states with no income tax, like Texas, also have extensive oil revenues or, like Florida and Nevada, are able to collect a hefty amount of sales tax revenues from non-residents thanks to tourism. Five states don't collect sales taxes but typically have high income taxes, such as in Oregon.

Where Things Stand

Kansas: State House and Senate negotiators are hammering out details for a package that would cut sales and personal income taxes while phasing out taxes on certain types of businesses. Legislators and Gov. Sam Brownback have not reached agreement on what the package would cost.

Missouri: A ballot measure sponsored by conservative activist Rex Sinquefield that would eliminate the state income tax and replace it with sales taxes appeared to run aground last month. A judge ruled April 13 that the ballot descriptions failed to inform voters "of the true fiscal impact of the measure."

Oklahoma: Legislators are working on a compromise proposal to lower tax rates, reduce the number of brackets and eliminate a number of tax credits and exemptions.

North Dakota: Voters will go to the polls June 12 to decide the fate of Measure 2, which would eliminate local property taxes and call on the state to make good on funding for programs currently paid for with property taxes, such as schools.

(Thirteen states officially have no state property taxes, though such taxes are collected in every state, generally by local governments.)

But the idea of abolishing entire categories of taxes now makes some state legislators, local officials and public sector unions nervous. They warn that states just starting to emerge from the recession can't afford it. If a major source of revenue is taken away, it will be difficult to replace when times are bad.

That's a risk many lawmakers seem willing to take. Politically, big tax cuts are a gift.

"Even 10 years ago, if you said we're going to abolish the income tax, you'd have been laughed out of the room," says Sujit CanagaRetna, a senior fiscal analyst with the Council of State Governments. "That's no longer the case."

Proposals to eliminate income taxes in Louisiana made it through committees in both legislative chambers last year, while the Georgia Legislature came close to abolishing property taxes in 2010.

In those instances, however, the repeal efforts fell short. Lawmakers ultimately grew wary about how they were going to replace all the lost revenue.

The fact that it's difficult to conceive of getting rid of a tax all at once is one reason Mary Fallin, the Republican governor of Oklahoma, wanted to push the idea. Her original proposal would have slashed state income tax rates this year and eventually phased it out.

"That was intentionally as bold a plan as we could put out there," says Alex Weintz, Fallin's communications director. "It was something we knew all along was a starting point for negotiations with legislators, some of whom do support large tax cuts and some who don't."

In other words, once you've put the idea of eliminating income taxes on the table, even a substantial tax cut begins to look like a compromise position.

Oklahoma House and Senate negotiators are currently hammering out a plan that could cut taxes in the state by nearly $1 billion by 2014.

Kansas state Rep. Joe Patton, a Topeka Republican, talked about proposals to eliminate the state's income tax during a November news conference.

Stimulus Or Giveaway?

The notion that tax cuts of such magnitude could do a lot to stimulate the economy is one of the reasons Republican Gov. Sam Brownback has jump-started a similar debate in Kansas.

"Two of his prime goals were increasing net income for families and increasing private sector employment, and this program proves to do both," says Kansas Secretary of Revenue Nick Jordan.

Brownback would like to eliminate income taxes in his state. That isn't going to happen this year, but legislators in Topeka are putting the finishing touches on a plan that would cut personal income taxes substantially, while reducing the number of rates and eliminating some deductions.

It would also phase out income taxes for limited liability companies, sole proprietorships and related types of business. Touted as a way to boost small business, the tax package is more like a giveaway to Koch Industries, the Wichita-based oil company, says Joan Wagnon, a former revenue secretary who is chairwoman of the Kansas Democratic Party.

Charles and David Koch, the brothers who own the company, are major donors to Brownback and other Republicans around the country. They also control a long list of subsidiaries that are set up as LLCs in Kansas.

"There is a huge financial stake in this particular company and others that are similarly situated in seeing that income taxes at the state level are reduced," Wagnon says. "It's large, extremely rich corporations that are going to benefit from it."

Oklahoma Gov. Mary Fallin proposed slashing state income tax rates this year and eventually phasing out the tax.

Jordan calls that argument a canard, noting that more than 80 percent of the businesses in the state have less than $100,000 in annual income. If some larger companies are also able to get a break, he says, that will similarly help out the economy.

"If they use that money to grow, great," Jordan says. "It doesn't matter who they're affiliated with."

More Cuts To Come

Aside from the political debate of who would gain the most from particular tax cuts, there's also the question of whether a state can afford to lose the revenue.

CanagaRetna, the CSG analyst, points out that states have collectively cut spending by more than $550 billion since 2008. Aside from cutting services, many states are facing enormous bills in areas such as education and health care.

"The reality is that you have these huge holes in state budgets, even though revenue numbers have increased," he says.

Still, many governors and legislators believe they can cut even more.

"We're sitting in a good place right now, but taxes are going up too high, spending is going into the stratosphere and it's time for us to reprioritize," says Charlene Johnson, who leads the group that sponsored North Dakota's property tax measure.

That measure would cost North Dakota $812 million a year in lost revenue, according to the state tax commissioner.

Given the current good times, North Dakota could afford to replace $300 million annually "without batting an eye," says Joe Miller, a Republican who is vice chairman of the North Dakota Senate's Finance and Taxation Committee.

But more than $800 million would be too much to make up, he says.

"This would fundamentally change government and it won't look the same as it does now," Miller says. "If the commodity markets turn around in a major way, we can really be in a hurt bag."