A Look at Potential Tax Reform in 2020

Election years are not typically known for large tax reforms. However, several states and the city of Chicago are preparing to consider significant changes in 2020, according to CLA legislative analyst MultiState Associates.

From a tax policy perspective, 2019 was an historic year, with lawmakers tackling sales tax collection and continuing to grapple with federal tax reform conformity. And, despite a coming election year, several states are pointing toward consideration of significant tax reforms in 2020.

“The reflex is to discount the chances of any major tax reform being enacted next year, but for those who lived through reforms in Michigan, Nevada, Ohio, Texas, etc., when reform happens, it usually happens very quickly,” explained MultiState’s Ryan Maness.

Here is a recap of recent state action on potential tax reform:

In Alabama, Rep. Mike Holmes has just pre-filed HB 3 and HB 4 for the 2020 legislative session, which would together repeal most of the state’s current taxes and replace them with a new broad-based consumption tax. These “Fair Tax” proposals may fizzle out as similar efforts have in other states over the years, but the idea of replacing income taxes with consumption taxes continues to garner significant interest among Republicans.

In Nebraska, the Revenue Committee has been discussing ways to reform property taxes and has recently released a list of services that, if taxed, could generate $224.5 million in new revenue for property tax reform. The list includes laundry services, as well as personal accounting, investment counseling, residential appraisals and remote access to hosted software. Discussions are ongoing and likely will continue into the 2020 legislative session. 

In Utah, the Tax Restructuring and Equalization Task Force – formed in the wake of the governor’s failed push to apply the sales tax to most services – has held a series of public town halls and follow-up meetings to discuss potential policy recommendations to make to the legislature. Thus far, the task force has focused on general topics – such as whether or not to decouple the income tax from the education fund, if groceries or SNAP benefits should be taxable, and the state’s overall revenue volatility – rather than on specific policy proposals. It isn’t certain whether they will have recommendations finalized for a 2019 special session. If not, tax reform will be on the agenda in 2020.

And, in Chicago, Mayor Lori Lightfoot’s forthcoming budget will address a $838 million budget deficit and billions more in unfunded pension liabilities. The mayor has repeatedly called for a new tax on “high-end services” (defined as including at least accountancy and legal services, but likely others as well) and could ask the state legislature during this fall’s veto session to grant her the authority to levy such a tax. However, the mayor is not the only one with ideas about how to fix the city’s financial woes – Brian Hamer, formerly of both the state and city Departments of Revenue and current counsel for the Multistate Tax Commission, has suggested municipal leaders consider levying a gross receipts tax, akin to the version in Ohio. The city council is required to pass a final budget by December 31.

The states highlighted above are by no means the only ones where tax reform may be considered in 2020. Instead, they are states where recent concrete steps have been taken. In addition to these states, California is almost certain to have a grand debate about property taxes and Proposition 13 that is expected to spill over into other areas of its tax code.

In addition, New York’s new progressive majority was relatively quiet on taxes in 2019, but may turn more focus on the topic in 2020, particularly if revenues start to dip. In Montana, the Interim Revenue Committee has been meeting to discuss whether they want to take another run at the aggressive slate of tax bills that they introduced earlier this year. And, South Carolina will be reviewing a sales tax base expansion and income tax reduction plan put forward near the end of the 2019 legislative session.

Maness added that, as we head further into fall, he expects to see tax reform proposals emerge in additional states as well.

California City Bans Natural Gas in New Buildings

In California, the Berkeley City Council unanimously voted to ban natural gas infrastructure in new low-rise residential buildings, beginning January 1. 2020. The legislation also requires that all new buildings in Berkeley be “electric-ready,” with proper panels and wiring conduits to support electric infrastructure.

The natural gas ban does not apply to new industrial or commercial buildings, as the California Energy Commission has not yet proven that it is cost-effective or plausible to make such buildings all-electric.

“We’re doing this on a rolling basis as the CEC finds these things to be effective,” said Councilwoman Kate Harrison, who sponsored the bill.

The law also does not apply to renovations.

Harrison assured costs of electrification will be favorable for the city in the long-term. In a 2018 report, the Rocky Mountain Institute found, “electrification of space and water heating and air conditioning reduces the homeowner’s costs over the lifetime of the appliances when compared with performing the same functions with fossil fuels.”

While phasing out natural gas will not be a reality for every building, the mandated preparation for electrification will be significant as more electric vehicles come online. California is increasingly looking at ways to incentivize EV purchases, which will in-turn require cities to have proper charging infrastructure, particularly in their buildings. While Berkeley is currently home to a number of EV charging stations, the city will need to install more to keep up with demand.

The Natural Resources Defense Council notes that more than 50 other California cities are exploring similar building measures, which are being encouraged by groups, such as the Building Decarbonization Coalition. Although Berkeley is the first U.S. city to take this step toward all-electric buildings, it likely will create a ripple effect toward more green building standards.

New York’s Natural Gas Standoff

A standoff between a gas company and state government has caused a moratorium on new natural gas hookups in Brooklyn.

On one side, there’s National Grid – which provides gas to 1.8 million customers in Brooklyn, Queens, Staten Island and Long Island – wants a new pipeline that would increase gas supply in downstate New York, explained a report in the Brooklyn Daily Eagle.

On the other side, there are state politicians, who have twice denied approval for the pipeline over environmental concerns.

And small-business owners and residents all across the southern tip of New York are caught in the middle.

The pipeline, called the Williams Pipeline, would be an expansion of the 10,000-mile, interstate natural gas pipeline that stretches from Texas to New York City. It’s set to be built by Williams – an energy infrastructure company based in Oklahoma that operates an existing pipeline serving New York – and would cost $1 billion. The utility company hopes to complete the pipeline by the beginning of winter 2020.

The case for the pipeline is simple – National Grid needs the project to provide gas to its customers, according to gas provider. The company noted that the demand for gas will rise by 10 percent over the next decade, and without the pipeline, it will be unable to keep up with the growing demand.

However, critics of the pipeline say it would further the region’s reliance on fossil fuels and adversely affect the immediate environment surrounding it.

The state’s Department of Environmental Conservation said in a May statement that “construction of the proposed project would result in significant water-quality impacts from the resuspension of sediments and other contaminants, including mercury and copper. In addition, the proposed project would cause impacts to habitats due to the disturbance of shellfish beds and other benthic resources.”

The vast majority of state Democratic officials are on board with the state body’s decision and allege that the company is inducing an unnecessary moratorium to curry favor for the project.

New York Governor Andrew Cuomo directed the Department of Public Service to investigate National Grid’s refusal to provide new hookups.

Mayor Bill de Blasio opposes the pipeline, favoring a shift away from reliance on fossil fuels.

“I think we have to be moving away steadily from fossil fuel infrastructure and focus on conservation and focus on renewable resources,” he said, in a recent radio interview.

By contrast, if the Williams Pipeline project is delayed, “customers will have fewer options to heat their homes and run their businesses,” a spokesperson for the company recently told the Wall Street Journal.

Since May, National Grid has denied about 2,600 requests for services.

California Bill Would Impact App-Based Services

California legislators have approved a landmark bill that requires companies like Uber and Lyft to treat contract workers as employees, a move that could reshape the “gig economy” and that adds fuel to a years-long debate over whether the nature of work has become too insecure.

The bill passed in a 29-to-11 vote in the State Senate and will apply to app-based companies, despite their efforts to negotiate an exemption. Under the measure, which would go into effect on January 1, workers must be designated as employees instead of contractors if a company exerts control over how they perform their tasks or if their work is part of a company’s regular business.

In addition, the bill may influence other states. A coalition of labor groups is pushing similar legislation in New York, and bills in Washington and Oregon that were similar to California’s but failed to advance could see renewed momentum. New York City passed a minimum wage for ride-hailing drivers last year but did not try to classify them as employees.

In California, the legislation will impact at least one million workers who have been on the receiving end of a decades-long trend of outsourcing and franchising work, making employer-worker relationships more arm’s-length. Many people have been pushed into contractor status with no access to basic protections like a minimum wage and unemployment insurance. Ride-hailing drivers, food-delivery couriers, janitors, nail salon workers, construction workers and franchise owners could now all be reclassified as employees.

But the bill’s passage, which codifies and extends a 2018 California Supreme Court ruling, threatens gig economy companies like Uber and Lyft. The ride-hailing firms – along with app-based services that offer food delivery, home repairs and dog-walking services – have built their businesses on inexpensive, independent labor. Uber and Lyft, which have hundreds of thousands of drivers in California, have said contract work provides people with flexibility. They have warned that recognizing drivers as employees could destroy their businesses.

“It will have major reverberations around the country,” said David Weil, a top Labor Department official during the Obama administration and the author of a book on the so-called fissuring of the workplace. He argued that the bill could set a new bar for worker protections and force business owners to rethink their reliance on contractors.

California legislators said the bill, known as Assembly Bill 5 and proposed by State Assemblywoman Lorena Gonzalez, would set the tone for the future of work.

“Today the so-called gig companies present themselves as the innovative future of tomorrow, a future where companies don’t pay Social Security or Medicare,” said State Senator Maria Elena Durazo.

“Let’s be clear: there is nothing innovative about underpaying someone for their labor,” she noted, in a Wall Street Journal interview. “Today, we are determining the future of the California economy.”

House Passes Minimum Wage Bill

The House of Representatives has passed a bill to hike the federal minimum wage to $15 per hour.

The House passed the plan in a 231-199 vote.

The measure would gradually hike the U.S. pay floor to $15 by 2025, then index further hikes to median wage growth. It would also phase out lower minimum wage paid to tipped workers.

House Democrats view the legislation as a core piece of their agenda to boost pay and economic growth. As President Donald Trump runs for reelection in 2020, the party argues strong economic growth and a roaring stock market have not done enough to lift the workers who most need relief.

Congress last raised the federal minimum wage to $7.25 per hour about a decade ago. Today, 29 states and Washington D.C., have higher pay floors than the U.S., while seven states have approved $15 per hour minimum wages.

The bill has little chance of becoming law before next November’s election, as Senate Majority Leader Mitch McConnell has explained that he has no plans to bring the legislation up in his chamber.

The White House also warned that President Trump would veto the measure if it got to his desk.

Here are the key elements of the Raise the Wage Act:

  • It would increase the federal pay floor to $15 per hour by 2025, then index future increase to median wage gains.
  • The minimum wage hikes would take effect on the following schedule: $8.40 in 2019, $9.50 in 2020, $10.60 in 2021, $11.70 in 2022, $12.80 in 2023, $13.90 in 2024 and $15 in 2025.
  • It would eventually abolish the lower minimum wage for tipped workers.
  • The bill would eliminate a seldom-used pay floor for teen workers that pays them less than the minimum wage.
  • It would eliminate sub-minimum wages for workers with disabilities.

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