Gov. Reynolds is proposing a bold tax reform that would increase the incentives to work and invest in the Hawkeye State. Her proposal unveiled last week would reshape the state income tax, gradually consolidating brackets en route to a flat 4% rate by 2026. “When the bill’s fully implemented,” she said, “an average Iowa family will pay more than $1,300 less in taxes.”
The flat 4% levy would drop the state’s top rate by more than a third. Under current law Iowans are set to pay 6.5% on earnings above about $80,000, a threshold that catches much of the middle class. That and three other income-tax brackets would be swept away by Gov. Reynolds’s reform.
The plan would also slash the state’s corporate tax, which is even more punishing. Iowa-based companies pay 9.8% of their earnings above $250,000 in state tax. Ms. Reynolds’s reform would gradually reduce the top rate to 5.5%, capping corporate-tax revenue at $700 million a year and using excess revenue to offset annual rate cuts. An immediate rate cut would be better economically, providing more clarity for corporate investment decisions. But the revenue target should be met if the economy continues to grow.
Nationally, the U.S. population only grew by 0.1 percent between July 2020 and July 2021, the lowest rate since the nation’s founding. Pandemic-induced excess deaths, virtually nonexistent international in-migration, and an already-declining birth rate yielded an almost flat population trend nationwide. This, however, belies state-level and regional differences. Whereas the District of Columbia’s population shrunk by 2.8 percent between April 2020 (roughly the start of the pandemic) to July 2021, New York lost 1.8 percent of its population, and Illinois, Hawaii, and California rounded out the top five jurisdictions for population loss, Idaho was gaining 3.4 percent, while Utah, Montana, Arizona, South Carolina, Delaware, Texas, Nevada, Florida, and North Carolina all saw population gains of 1 percent or more.
The picture painted by this population shift is a clear one of people leaving high-tax, high-cost states for lower-tax, lower-cost alternatives. The individual income tax is only one component of overall tax burdens, but it is often highly salient, and is illustrative here. If we include the District of Columbia, then in the top one-third of states for population growth since the start of the pandemic (April 2020 to July 2021 data), the average combined top marginal state and local income tax rate is 3.5 percent, while in the bottom third of states, it is about 7.3 percent.
It’s hard to say which of these is the “worst,” but the 2.3 percent gross receipts tax sticks out. That gross receipts taxes are an awful way to structure a business tax is one of the few things that tax policy experts across the political spectrum almost universally agree on. That’s because they make no allowance for the large variance in profit margins that different types of businesses make—whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues.
That’s a problem with any gross receipts tax, but California’s proposed tax would exacerbate this inherent problem with a rate that is three times the level of the nation’s current highest. The higher the gross receipts tax rate, the more low-margin businesses that could be put in a position where operating in California would lose them money.
Almost as bad is the proposal to institute a payroll tax on businesses with 50 or more employees. Not only are payroll taxes a regressive tax (even if the tax is imposed on the employer, it would be passed on to employees in the form of lower wages), but the 50-employee threshold would create an obvious disincentive for businesses to hire their 50th employee.
SALT deductibility does create serious issues, however. SALT was the largest itemized deduction, allowing itemizers to export a substantial portion of their burdens onto other Americans through the federal tax code. If I faced a 30percent federal marginal tax rate, paying $100 more in SALT lowers my federal tax bill by $30. It only costs me $70. Because that subsidy rises the more property is owned and the higher the income of the owner, the distortion overwhelmingly favors the richest, with the middle-class (who own less property, earn less, and face lower marginal tax rates) getting far smaller benefits, and non-itemizers getting no subsidy at all. In the process, it also subsidizes high state and local tax states at others’ expense.
Even when citizens do not feel they get their money’s worth from SALT-financed services, federal deductibility still subsidizes those governments, increasing their incentives to act in ways contrary to citizens’ interests. No wonder Democrats in high budget/high tax states are so strident in supporting deductibility. In the example above, federal income tax deductibility means that as long as a local citizen believes such spending provides more than 70 cents of value per dollar of spending, and they don’t take into account the added federal burdens they must bear from those similarly subsidized elsewhere, they think they gain. That encourages those governments to do more of what they should not do and more of what they do badly, not more of what their citizens find worth doing.
NJ’s revenue is being produced by higher rates on a smaller tax base: New Jersey needs to ensure that the outmigration of high-income residents does not continue. Between 2008 and 2017, New Jersey experienced growth in the number of tax filers of 4.2%; however, growth in those making $500,000 or more annually was only 2.5% during the same time.
NJ’s public spending is growing faster than inflation, our population or job creation: Our state will continue to see specific needs increase, especially in public health, health insurance, and public safety. New Jersey already taxes residents and businesses more than most other states. The problem is not too little revenue; rather, it is that the state’s spending is growing at a faster pace than inflation and the state’s population
The cost of NJ’s public workforce retirement and healthcare is the key driver of escalating spending and taxes: What New Jersey owes employees and retirees is growing significantly faster than the underlying economy that must support this liability. This is not sustainable. Pension liabilities are growing faster than assets
I am no billionaire. But like Mr. Buffett, I am willing to take one for the team. So as Democrats in Congress come under pressure to roll back the $10,000 cap on the federal tax deduction for state and local taxes, or SALT, this long-suffering resident of New Jersey offers his own Buffett-like message:
Don’t do it. Make me and people like me — those who choose to live in high-tax states — pay our full, fair share of federal taxes.
Such an approach accords well with what Mr. Biden has been saying about taxes and the wealthy. In his most recent remarks about his Build Back Better plan, the president said he’s “tired” of the rich not paying their “fair share.” And he attacked the 2017 tax cuts passed under Donald Trump as a “giant giveaway to the largest corporations and the top 1%.”
But that’s exactly who would benefit most from any expansion of the SALT deduction. According to the Tax Policy Center, 57% of the benefits of eliminating the cap on the SALT deduction would go to the top 1% of filers. The same researchers likewise reckon that the top 1% would get an average tax cut of more than $35,000 — against just $37 for middle-class taxpayers.
House Democrats continue to search for a way to satisfy lawmakers who want to scrap the deduction limit on state and local taxes without losing progressives wary of a tax cut that would overwhelmingly benefit the wealthy.
The budget blueprint Democrats passed this summer instructs lawmakers to include some form of SALT cap relief in a tax-and-spend plan of up to $3.5 trillion.
A full repeal would be costly and politically difficult to pass with razor-thin margins in both chambers. But a coalition of lawmakers from New York, New Jersey, and other states with high tax rates continue to insist that is what it will take for them to back the legislation.
Suozzi is one of the leaders of the “SALT Caucus”, an alliance of more than 30 lawmakers who want to roll back the $10,000 deduction limit established in the Republican-led 2017 tax law. While they argue that the cap unfairly targets Democrat-dominated states and encourages people to move to Florida and other low-tax states, progressives counter that expanding the deduction shouldn’t be a priority in a social spending bill because the lion’s share of the benefit would go to the wealthy.
That  bill passed the House, but 16 Democrats voted against it, including New York Representative Alexandria Ocasio-Cortez, who has described a full repeal as a “gift to billionaires.” Democratic leadership is dealing with a much narrower majority this Congress and can’t afford to lose that many votes with no Republicans expected to support the reconciliation package.
Sales tax revenue for local governments in New York state rose by 49.2% in the second quarter (April to June 2021) compared to the same period last year, a dramatic increase from last year’s weak collections during the first wave of the COVID-19 pandemic, according to State Comptroller Thomas P. DiNapoli. Sales tax collections during this period grew by just over $1.6 billion and even surpassed collections reported during the second quarter of 2019, before the onset of the pandemic.
The size of the increase largely reflects extremely weak collections in the April to June period of 2020. However, even compared to pre-pandemic collections for the same period in 2019, statewide collections in 2021 were up 8.7% or $396 million. Every region outside of New York City experienced two-year growth over 18%. The Mid-Hudson and North Country regions both reported increases of more than 29%.
Even though the state’s coffers, for now, are awash in money, a huge fiscal cliff looms two years from now, when billions of dollars in federal stimulus grants expire.
Despite a record-setting rainy day fund and a new biennial state budget free of major tax hikes, unprecedented unemployment and deep pockets of urban poverty could easily shift Connecticut’s tax fairness debate — which accelerated this past spring — into high gear in 2024.
“We came out of a year from hell, and I think it was really important we came together in terms of our budget,” Gov. Ned Lamont said last Thursday, one day after lawmakers had adjourned a session that adopted a $46.4 billion, two-year state budget that makes big investments in municipal aid, education, health care, social services and economic development — all without major tax hikes.
But about 4% of that plan, nearly $1.8 billion, was propped up by one-time federal coronavirus relief, most of which will have expired after the coming biennium, which starts July 1.
Question: When was the last time a Connecticut legislature was poised to adopt a state budget with a $2.3 billion surplus built into it?
Answer: Never, until now.
Democrats and Republicans alike were expected to vote for the $46.4 billion, two-year package when it goes before the House of Representatives on Tuesday. But even though about 5% of the funds appears to be left unspent, the anticipated surplus would become a payment into the state’s pension accounts.
That’s because the budget, which boosts spending 2.6% in the fiscal year beginning July 1 and by 3.9% in 2022-23, really is the first of its kind under a new system designed to bring stability to state finances.
Connecticut is four years into a savings program that limits spending of income tax receipts tied to capital gains and other investment earnings, but this is the first time since 2017 that analysts are projecting big revenues from Wall Street before legislators actually approve a budget.
However, the SALT cap didn’t so much go after “Democrats” as “affluent Democrats.” It only applied to people who itemize their taxes, which meant the 90% of Americans who take the standard deduction were unaffected. The deduction raised over $70 billion in just the first year, and roughly 56% of that money came just from the top 1% of taxpayers, living in a few states in particular.
The tax nastygram seemed directed at Trump’s hometown delegation. Congresswoman Carolyn Maloney in April of 2017 complained about the cost of protecting “Trump and his family here in NYC”; the SALT cap affected 19% of Maloney’s constituents in Brooklyn and on the Upper East Side, and taxpayers in that 19% each lost an average of $100,405 in breaks. Chuck Schumer, one of Trump’s fiercest critics, personally took over $58,000 in SALT deductions just in 2016.
Overall, 39 of the 40 districts most affected by the SALT cap were represented by Democrats. Of those, 28 came from New York, New Jersey, and Connecticut. Also affected: Nancy Pelosi’s San Francisco district, where residents lost an average of $53,471 of write-offs. Trump’s campaign promises to take on “elites” proved phony, except when he was able to effect this targeted partisan strike at the people he knew and hated the most: rich, socially liberal Democrats, especially ones from the tri-state area.
Mayors in blue states are lining up with Democrats in Congress to pressure the White House into restoring a tax break that was significantly reduced by former President Trump’s tax reform.
On Wednesday, Rep. Thomas Suozzi (N.Y.) joined officials from Albany; Columbia, S.C.; Philadelphia and San Diego to call for a repeal of the rule that limits state and local tax (SALT) deductions. They are calling for President Biden’s $3 trillion infrastructure proposal to include the repeal.
“No SALT, no deal,” Suozzi said on a conference call hosted by the U.S. Conference of Mayors.