Memo: Iowa GOP Looking to Expand State Sales Tax in 2018
Iowa Republicans apparently are taking a run at tax reform next year, according to a leaked memo that outlines an overall plan to pare down the income tax by beefing up the sales tax.
Specifically, it proposes phasing down the corporate income tax rates, eliminating the alternative minimum tax, reducing the number of individual income tax brackets from nine to four, and eliminating the inheritance tax.
To pay for these changes, the plan calls for a number of changes to the sales tax, including extending the sales tax to a number of previously exempt consumer goods, requiring certain remote sellers to collect the sales tax, and taxing new services.
Although there are still few details available about the specifics of these policies, there is one that specifies what services could be subject to taxation – these include self-service laundry, as well as delivery charges on consumer purchases, architectural/engineering services used by consumers, software support, accounting services, and tax preparation services.
The full memo is available at: https://s3.amazonaws.com/pdfs.taxnotes.com/2017/2017-101137_SupportDoc_IA_AnalysisofProposedGOPTaxPlan2018.pdf
Proposed Missouri Amendment Would Grow Sales Tax
A newly proposed amendment to the Missouri Constitution (SJR 30) seeks to expand the sales tax to pay for an elimination of the income tax.
Under the amendment’s language, only about 30 sales tax exemptions would remain, including:
- Real property
- Services rendered by employees to employers
- Agricultural transactions
- Construction, warehousing, computer system, software design, employment, call center, and payroll processing services
- Insurance products
- Gaming sales and wagers
- Sales made using food stamps
“In 2016, Missouri voters approved a measure forbidding the expansion of the sales tax beyond its base at the time,” said Ryan Maness, senior policy analyst and tax counsel for MultiState Associates Inc., the Coin Laundry Association’s legislative watchdog. “As such, amendments like SJR 30 are the only way lawmakers can proceed if they want to pursue this kind of policy. Interestingly, this amendment also provides that two-thirds of state lawmakers could vote to establish a new exemption to the sales tax, essentially creating an end run around the 2016 policy.”
According to Maness, this is further evidence of the fact that “2018 is primed to be a year of more and more states considering moves like this.” Driven by still slow – and often volatile – revenue growth and federal tax reform, states seem to be increasingly interested in moving away from an income-based model of taxation toward a consumption-based one.
What’s in Store for State Tax Codes in 2018?
Although it’s too soon to tell how the dynamics of the new $1.5 trillion federal tax overhaul will shake out at the state level, politicians in several states have already indicated their fiscal policy goals for the 2018 session, according to the Coin Laundry Association’s legislative analyst, MultiState Associates:
Connecticut Department of Revenue Services Commissioner Kevin B. Sullivan announced late in November that the state will follow Massachusetts in establishing so-called “cookie nexus” rules, or sales tax nexus based on the use of in-state internet cookies. He says that this new policy will allow the state’s sales tax to keep pace with the modern state of e-commerce without worrying about running afoul of the Supreme Court’s current physical presence jurisprudence as laid out in Quill Corp v. North Dakota.
Governor Rick Scott has laid out his policy priorities for the upcoming legislative session, which include establishing a 10-day back-to-school tax holiday and exempting clothes and school supplies from the sales tax. Given that he is widely expected to run for the Senate after leaving the governor’s mansion, it’s unlikely that Scott will want to tackle more controversial tax legislation.
Governor Matt Bevin has talked repeatedly this year about the need to reform the state’s finances, with a particular focus on moving Kentucky toward a consumption-based model of taxation. This fall, he opted to delay his tax reform plans to focus on the state’s yawning pension problems, but his pension reform proposal hit heavy opposition immediately. Legislators are now saying they are close to a deal on pensions. If they fail, it could complicate the rest of the governor’s fiscal agenda.
In a two-minute Facebook video, Minnesota Senate Taxes Committee Chair Roger Chamberlain called for repealing the income tax and replacing it with a more robust consumption tax. Calling the income tax burdensome, abusive, and antiquated, he said a consumption tax would not only yield more stable revenue but also attract business to the state. While Chamberlain did not provide any policy specifics, any replacement for the income tax would have to massively expand the sales tax base.
Governor-elect Phil Murphy has already indicated that he will be setting a very different course than his predecessor, Governor Chris Christie. Focusing on ensuring that the state’s highest earners “pay their fair share,” Murphy has called for a new tax on millionaires and hinted that he is open to imposing mandatory combined reporting.
Lawmakers rejected a gross receipts tax bill earlier this year and voters rejected a similar policy at the polls in 2016, but there are those in the state who are hoping to take another run at it. A coalition of unions and progressive groups had backed a new ballot measure, but they withdrew a month after collecting the first round of signatures. Although Multi-State Associates expects a GRT proposal on the ballot next November, it’s currently unclear where it will come from or what it will look like.
In a move that sponsors say is meant to modernize the state’s tax code, Utah lawmakers have introduced a draft of a tax omnibus bill that would have wide-ranging implications on the state tax code. The draft’s provisions include levying new taxes on downloadable (but not streaming) media, adopting market sourcing for sales under the corporate income tax, eliminating carryback for the net operating loss deduction, and changing the optional apportionment formula for business income. The full legislature will take up the bill when it convenes in January.
Democratic leaders, including Governor Jay Inslee, have made it clear that, since the Democratic takeover of the Washington legislature, they intend to renew their push for a robust carbon tax. A carbon tax proposal failed by 19 points on the 2016 ballot, but progressives and environmental activists are eager to give the effort another try. It remains to be seen whether the Democratic majorities will be sufficient to enact such a novel policy.
There are early indications that Wisconsin legislators are planning on taking a deep dive into tax reform in the near future. Information is still very preliminary at this point, but Wisconsin Assembly Committee on Ways and Means Chair John Macco says he wants to usher in a “new era of economic growth” by in part moving away from the current income and property tax models, which he described as “out of whack.” As evidence that he’s serious, his committee has created four new subcommittees dedicated to tax minutiae.
Although Governor Matt Mead has expressed cautious optimism that the “economic storm” that beset his state is over, the Wyoming legislature may be ready to consider at least one drastic change to the state tax code in an attempt to diversify the state’s revenue streams. During an interim revenue committee meeting in November, members discussed a draft bill that would expand the sales tax base to a host of new services, including personal care, agricultural, legal, engineering, and other business services. It is unclear whether lawmakers will introduce formal legislation in this vein, but it is something to keep an eye on.
State Budget Briefs: What to Expect in 2018
This year was a difficult time for state finances, but there are at least modest signs that 2018 will be a little easier. In its most recent report, the Rockefeller Institute of Government found that state revenue growth has been relatively strong compared to the recent past, though revenues were down in 12 states. Furthermore, the report’s authors argue that there is evidence to suggest that 2016 revenues were depressed as taxpayers moved returns to 2017 to take advantage of tax reform.
But there is still trouble on the horizon. Economists are debating how federal tax reform may impact state finances. Additionally, oil-producing states could continue to struggle because the Organization of the Petroleum Exporting Countries has decided to extend production limits, at least temporarily.
Although revenue updates are still trickling in, several high-profile states are already expected to face significant fiscal trouble next year. Considering that all of these states experienced tumultuous budget debates in 2017, we should expect further drama next year:
The Connecticut Department of Revenue released a projection showing that the state is facing a $202.8 million deficit, which would be enough to require a mid-year adjustment. Lawmakers could be short on options if they are forced to rehash the budget arguments that stymied them for months this summer and which the governor agreed to under extreme protest. Making matters worse, Moody’s Investor Services is taking a hard look at Connecticut’s credit rating, saying that, “We expect economic weakness to be an ongoing challenge for Connecticut that will push against its initiatives to place state finances on sounder footing.”
While Louisiana won’t formally convene its legislature until March, state lawmakers will have to reconvene before that, to resolve the billion dollar budget gap caused by the expiration of 2016’s temporary sales tax expansion. Those meetings are expected to take place in February.
The governor hasn’t yet announced his preference for filling in that hole, but he has said he’s in favor of allowing the sales tax rate to revert back to 4 percent and that base expansion should be part of the long-term solution. For their part, Republicans are adamant that the solution should center on spending cuts and avoid tax increases.
After an unprecedented legal dispute, Governor Mark Dayton has agreed to fund the legislature, putting an end to a months-long feud over the state budget. While the governor says he continues to oppose many of the tax cuts enacted this year, he is now prepared to move onto his other legislative priorities, including expanding access to pre-K and pushing infrastructure spending.
New York Comptroller Thomas DiNapoli says that sagging revenues and possible cutbacks to federal programs portend serious fiscal challenges for his state. While he didn’t provide a specific deficit figure, E.J. McMahon of the Empire Center has estimated that the state is facing a $6.8 billion shortfall. Governor Andrew Cuomo has not challenged these findings to date.
After repeated statements indicating she would reject any deal that did not establish a long-term solution (including tax increases) to Oklahoma’s declining revenues, Governor Mary Fallin vetoed the legislature’s so-called “cash and cuts” budget deal, effectively sending the legislature back to square one. She has called on legislators to reconsider taxes on natural resource extraction and tobacco products, which earlier this year failed to meet the super majority required in the House.
After the Pennsylvania House stonewalled any attempts to raise new revenues, policymakers reluctantly accepted a budget that closed the state’’ budget gap primarily through a gaming expansion, borrowing, and a series of fund transfers. The budget is now imperiled by a lawsuit from the Pennsylvania Professional Liability Joint Underwriting Association, which argues that one of these fund transfers is unconstitutional. If they prevail it would pull $200 million away from the budget. While these conditions could mean trouble in the short-term, over the long-run things are looking even worse: The Independent Fiscal Office is now projecting that Pennsylvania is facing a $1 billion deficit in the coming fiscal year and $2.8 billion in the year after that. While not as bad as the $2 billion hole lawmakers faced last January, these shortfalls will bedevil a legislature prone to utilizing one-time fiscal solutions for recurring problems.
Maryland’s Montgomery County Announces $15 Minimum Wage for All Businesses by 2024
Montgomery County (Maryland) Executive Isiah Leggett ended a year-long legislative battle recently by signing an ordinance into law that will require all businesses within the county to pay a $15 minimum wage by 2024.
Passed unanimously by the city council, the ordinance implements a wage increase schedule that would require large employers (50 or more employees) to pay their employees a $15 minimum wage by July 1, 2021. Additionally, it would require mid-sized employers (11-50 employees) and small employers (less than 11 employees) to pay their employees a $15 minimum wage by July 1 of 2023 and 2024, respectively. The new law would apply to all employees over the age of 20. For younger workers, the law offers “opportunity wages” that amount to “85 percent of the county minimum wage for the first six months that the employee is employed.”
Opponents predicted that the minimum wage increase would make it harder for the county to attract and retain businesses. Gigi Godwin, president and CEO of the Montgomery County Chamber of Commerce, pointed to how technology will intersect with a mandated higher wage.
“What kinds of policies are we putting in place that will attract and retain the employer of the future, who in turn is going to attract and retain the employee of the future?” she said.
Maryland’s current statewide minimum wage is $9.25 per hour, though an increase to $10.10 is scheduled for July 2018.
State Legislature Preempts Local Authority on Sugary Beverage Tax in Michigan
The Michigan State Senate recently passed a bill that prohibits local governments from “imposing a tax or fee on the manufacture, distribution, wholesale sale, or retail sale of food for immediate consumption or non-immediate consumption.”
While not mentioned by name in the bill text, the rationale behind the new law stems from the legislature’s desire to prevent localities from enacting soda taxes. These measures typically target sodas and sugary snacks to try to combat poor dietary health within communities.
Although no city or county in Michigan has attempted to institute such a tax, legislators based their decision to act, in part, on other cities’ experiences. Their analysis cited examples where soda taxes have hurt businesses, low-income shoppers, and even contributed to the problem of food deserts.
The bill also seeks to resolve the constitutional question of whether a locality could impose such a tax. The Michigan Constitution “prohibits a tax from being charged or collected on the sale or use of food for human consumption, except in the case of food prepared for immediate consumption.” Rather than leave the ambiguity of this clause open to local interpretation, the legislature felt it was necessary to preemptively cap local authority on the issue.
Chicago Considers Banning Cashless Business Model
Chicago Alderman Ed Burke has introduced an ordinance aimed at curbing the emerging trend of so-called “no-cash” policies at local retail and restaurant businesses.
The ordinance claims that while such policies allow businesses to “lessen staff training, security measures, and bookkeeping processes,” they can be inherently discriminatory to those who are “low or fixed income, homeless, undocumented, young, or victims of identity theft.”
The ordinance further said that by going cashless, businesses would be forced to drive up prices to compensate for the increase in credit card transaction fees – “a business cost typically passed on to consumers.”
The ordinance is modeled on the principle outlined by a Massachusetts state law from 1978, which states that “no retail establishment offering goods and services for sale shall discriminate against a cash buyer by requiring the use of credit by a buyer in order to purchase such goods and services. Retail establishments must accept legal tender when offered as payment by the buyer.”
The ordinance was introduced at a Chicago City Council meeting and was referred to the Committee on License and Consumer Protection.
Paid Sick Leave Laws Continue to Spread
Rhode Island recently became the eighth state to enact a law mandating that employers provide employees with paid sick leave. Under the new law, effective July 1, 2018, employers are required to provide employees with three paid sick days per year in 2018, four in 2019, and five paid sick days per year in 2020 and thereafter.
Under the Healthy and Safe Families and Workplaces Act, employees in Rhode Island will be able to use the leave for:
- Their own mental or physical illness or health condition
- To care for a family member’s mental or physical illness or health condition
- During a public emergency that closes their place of business or to care for a child whose school or childcare has closed during a public emergency
- When the employee or a member of the employee’s family is a victim of domestic violence, sexual assault, or stalking.
Once the law is fully implemented, leave will accrue at a rate of one hour per every 40 hours worked, though employers may choose to provide all leave at the beginning of the year. Employers are also able to implement a 90-day waiting period for new employees to use sick or safe leave, but they will still accrue leave beginning with their first shift.
Rhode Island is the first state to enact a mandate in 2017, after Governors Larry Hogan and Brian Sandoval vetoed legislation in Maryland and Nevada, respectively. Legislators in Nevada failed to override Sandoval’s veto, but legislators in Maryland passed their bill with a veto-proof margin. Although Hogan supports paid sick leave, he called the bill “jobs-killing,” convened a study committee, and encouraged legislators to revisit the issue in 2018 by introducing a compromise measure as an emergency bill to avoid delaying the effective date. Despite Hogan’s plea, the legislature remains likely to override his veto when it returns in January.
Additionally, paid sick leave legislation in Hawaii and Illinois passed both houses of their legislatures. In Hawaii, the bill, which mandates five paid sick days for employees who work more than 680 hours per year, was left in conference committee at the end of the legislative session. Legislators will return in 2018 to iron out their differences. With large Democratic majorities in both the House and Senate, lawmakers appear likely to enact the bill in the new year. Legislators in Illinois are also resolving differences in their legislation, which requires employers to provide five paid sick days per year to employees who have been employed for at least six months.
Last year, three states – Arizona, Vermont, and Washington – enacted paid sick leave mandates. In Arizona and Washington, voters passed mandates via ballot initiatives that also increased the minimum wage in both states. Next year, paid sick leave legislation will likely appear on the ballot again, and combined with almost guaranteed legislative activity in Hawaii and Maryland, 2018 will likely see a further expansion of this mandate.