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Significant US State Tax Reforms Expected In 2013

by Leroy Baker, Tax-News.com, New York

24 December 2012


In its latest study, the Institute on Taxation and Economic Policy (ITEP) has found that 2013 is likely to be a watershed year for tax reform, as lawmakers in states across the United States are poised to enact a major overhaul in the way their states collect revenue to pay for public investments.

ITEP noted that "the scrutiny lawmakers will be giving to their state and local tax systems presents an extraordinary opportunity to assess and address structural flaws and ensure states have the necessary revenue to provide vital public services now and in the future."

The report gives a brief description of the tax debates ahead in more than 30 states and highlights the 15 key states, with potential for major tax reform, particularly moves in sales tax and personal income tax, to watch in 2013.

ITEP said that a series of tax reform packages, ranging from an extension of the sales tax in Kansas to elimination of some personal income taxes in North Carolina to a rise in taxes for the wealthy in Minnesota, are likely to be taken up in next year's state legislative sessions.

For example, it was said that, in Kansas, while Governor Brownback signed into law in 2012 a tax cut package that reduces state revenues by USD3.7bn over five years, the legislation increased taxes on low income families and cut taxes on business income. In 2013, the Governor has said he may not allow a temporary sales tax hike to expire because the state will need the revenue generated from it to help the state balance its budget.

However, the State’s Budget Director has said that the Governor supports more reductions in state income tax rates and property tax limits, but ITEP is concerned that "more tax cuts on top of already unaffordable income tax reductions means that the Kansas tax structure is likely to become more regressive and less able to meet the needs of taxpayers."

In like manner, North Carolina’s newly elected governor, Pat McCrory, ran on a promise to overhaul the state’s tax code and its House of Representatives and Senate lawmakers have also signaled that tax reform will be their top legislative priority in 2013.

McCrory suggested he would like to work towards cutting or eliminating the personal income, corporate income, and estate tax, and legislators have been floating a more specific plan to replace some of the lost revenue by expanding the sales tax base to groceries and many services, paired with a rate increase.

While ITEP welcomed the fact that lawmakers in North Carolina are discussing the need for tax reform in state for years and are finally poised to act, expanding the sales tax base has proven to be politically challenging in other states. It is therefore "likely that the state’s lawmakers could pass significant personal income tax cuts, but not be able to agree on the revenue to make up the difference forcing large spending cuts (what happened in Kansas in 2012).”

In New York, a year after its Governor Andrew Cuomo convinced lawmakers to pass a temporary revenue raising package with the promise of overhauling the state’s tax code, the Governor finally appointed ten members to his Tax Reform and Fairness Commission to “undertake a broader review of the state’s complex tax code to find ways to make it simpler, and more fair, and help reduce the tax burden faced by New Yorkers and businesses.”

However, ITEP was concerned that, with no reporting deadline, there is some concern that the Commission will not present any meaningful recommendations.

Finally, in California, ITEP noted that Democrats gained a supermajority in both the state’s House and Senate this November and, according to some lawmakers, they may use this new power to push for tax reform in the next two years, although a concrete plan has yet to emerge.

In November, Californian voters approved a temporary increase in personal income tax rates for those earning over USD250,000 annually and a 0.25% increase in the sales tax - which will bring much needed revenue to the state for its education budget. However, ITEP concluded that "lawmakers could use this opportunity to permanently address structural flaws with the state’s tax system rather than offering temporary patches."

TAGS: tax | business | sales tax | property tax | law | budget | corporation tax | legislation | tax rates | United States | tax reform | individual income tax

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