Forget Congress, some states show how to pass tax reform

August 20, 2013
Sen. Max Baucus (D-MT)
Sen. Max Baucus (D-MT)

Love it or hate it, North Carolina this year achieved something the federal government isn’t expected to do any time soon: tax reform.

While Sen. Max Baucus and Rep. David Camp, the Democratic and Republican heads of Congress’s tax-writing committees, lay the foundation for federal tax reform with their “Max and Dave” national tour, states like North Carolina have already debated and passed tax reform of their own. Chalk it up to whatever you want—an easier time getting the message across, an easier political climate, fewer vested interests or more urgency—but plenty of tax changes are underway at the state level.

“We have definitely seen a number of states attempt to move and in some cases move some very divergent tax policy,” says Nick Johnson, vice president for state fiscal policy at the Center on Budget and Policy Priorities, a Washington D.C. think tank.

Unlike the gridlocked federal legislative and executive branches, many states are under single-party control, making it easier to pass major tax changes. Legislatures in 46 states are controlled by a single party. The last time there were as few truly split states was 1944, according to the National Conference of State Legislatures. Even if you take into account the parties of state governors, there are 38 states with single-party control.

In other words, many states have political climates conducive to getting something done, especially in places like North Carolina where Republicans took control of the legislature for the first time in more than 100 years in 2010.

Just a few weeks ago, North Carolina Gov. Pat McCrory signed into law the kind of simpler, flatter tax reform package that Republicans dream of passing. The law eliminated the state’s three-tiered tax system that ranges from 6 percent to 7.5 percent, replacing it with a flat tax of 5.8 percent next year. A number of exemptions were eliminated, too.

The corporate income tax was reduced from 6.9 percent to 6 percent, with a promise to cut it down to as low as 3 percent if revenue goals are met; the estate tax was eliminated and the sales tax was expanded slightly. And at least one portion of it achieved something that would be politically difficult nationally, even though many economists support some form of it: capping the mortgage interest deduction.

Good or bad, the passage of the reform will have wide-reaching effects. McCrory said the tax package would boost the economy and jobs, and conservatives praised it. Liberals took issue, calling it historically regressive and contending that it would cut taxes for the rich and raise them for the poor.

It may be an experiment in Republican tax reform, but that doesn’t mean there haven’t been Democratic tests, too.

In late May, Minnesota’s governor signed into law a tax bill that raised $2 billion over the next two years, introducing a new upper-income tax bracket and raising taxes for the few who qualify. It imposed a new tax rate of 9.85 percent for married filers earning $250,000 or more, accomplishing something President Obama couldn’t. For months, he insisted that any end-of-2012 “fiscal cliff” deal include a tax hike on exactly those filers, only to compromise on a $450,000 level as the end-of-year deadline approached.

The bill also achieved another of the president’s stated goals: raising tobacco taxes. In his State of the Union address, President Obama suggested using the additional revenues to fund universal preschool education, but as with both parties’ budget plans it hasn’t gone anywhere.

So why are so many states tackling tax reform? It might be the result of the slow emergence from the economic downturn, experts say. Revenues outpaced expectations for the fiscal year that ended on June 30 for 46 states, according to a recent report from the NCSL. That growth is expected to slow down, but it may have emboldened lawmakers.

“Back in 2009 in the states, of course, the roof was on fire and the states that didn’t raise taxes had to engage in an impassioned battle to not raise taxes,” says Scott Drenkard, an economist at the nonprofit Tax Foundation’s Center for State Tax Policy. “Now we have some anemic growth coming out of the economic downturn and many states are looking at ways that they can cut taxes.”

Whatever the reason, the state experiments could provide real-time examples of many of the policy proposals debated at the federal level in the coming months and years.

Niraj Chokshi reports for GovBeat, The Post's state and local policy blog.
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