The car tax has been in the news recently in Connecticut and Virginia, the only two states that levy it. It’s important to distinguish this tax, which is a property tax on actual cars, from a sales tax that affects the purchase of vehicles. Car taxes fall into the category of tangible personal property taxes, which are levies on property that can be touched and moved. This differs from the more familiar tax on real property, which is a tax on land and structures.
Two weeks ago, the Connecticut House passed a bill that would set the car tax rate at 80 mills, which is $80 per $1,000 of value, and plan to eliminate it by 2021. But news broke the following day that the Connecticut senate has removed the car tax provision from the bill, as Donald Williams, the Democratic President of the Senate, told Brendan Starkey, the Democratic Speaker of the House, that he didn’t have enough votes for the proposal. Connecticut governor Dan Malloy previously had floated the idea of eliminating the car tax for vehicles worth less than $28,000. This would increase the progressivity of the car tax.
Virginia also has a car tax, and like Malloy and Starkey, some Virginia politicians have pushed to eliminate the car tax. Former Governor Jim Gilmore ran for office on the pledge to eliminate the car tax, and while he did have some initial success in lowering the car tax, the plan fell apart before too long. Although neither 2013 Republican candidate Ken Cuccinelli nor Democratic candidate Terry McAuliffe have talked about repealing the car tax, Libertarian gubernatorial candidate Robert Sarvis is proposing to end the car tax. The car tax differs from county to county in Virginia. For example, Bedford County charges $2.35 for every $100 of value, whereas Fairfax County charges $4.57 for every $100 of value.
As we note in our latest comprehensive review of tangible personal property taxes, most tangible personal property taxes are only on business property. Out of all the states that levy tangible personal property taxes, only ten states include motor vehicles as a part of the tax base. Connecticut and Virginia differ from these other states in that they have a specific car tax that is not part of a broader tangible personal property tax—and the tax applies to all cars, not just cars used by businesses.
As we make the case in that piece, states should move away from taxes on business tangible personal property because they discourage capital formation and distort the market by preferencing labor over capital. However, if you’re going to start taxing personal property of individuals, there is no reason why you should single out just cars for the tax. It’s totally arbitrary.
More on Virginia and Connecticut.
Follow Noah on Twitter @NoahGlyn.
One point of contention in the North Carolina tax reform debate has been the fate of one particular tax expenditure—the uncapped sales tax refund for nonprofits. The refund applies to "sales of taxable tangible personal property to nonprofit hospitals, nonprofit education institutions, churches, orphanages, other nonprofit charitable or religious institutions and organizations, and homes for the aged, sick or infirm." Eligible institutions can recoup the sales tax they pay since they are not explicitly exempted from paying it. The new Senate plan wouldn’t remove the refund entirely; it would just phase in a cap on the total amount an entity can claim. Since the refund wouldn’t be completely repealed, it would still preserve the refund for small nonprofits. The cap would be structured as follows:
Who stands to lose here? Large nonprofits, particularly hospitals, obtain a disproportionate amount of refund benefits. Table 35B of the Statistical Abstract of North Carolina Taxes outlines the recipient types of high-dollar nonprofit sales tax refunds (those that are $100,001 or more). I’ve reproduced a portion of the table below.
Percentage of Total High-Dollar Refunds Granted by Type of Institution
|
Nonprofit Entity Type |
FY 2006-07 |
FY 2007-08 |
FY 2008-09 |
FY 2009-10 |
FY 2010-11 |
|
Hospitals and medical accommodations |
76.9 |
78.4 |
79.9 |
75.2 |
81.2 |
|
Collegiate institutions |
16.4 |
14.5 |
13.2 |
17.5 |
11.0 |
|
Elementary and secondary institutions |
0.5 |
0.6 |
0.9 |
0.5 |
0.8 |
|
Churches and other religious institutions |
1.4 |
1.7 |
0.9 |
1.4 |
1.2 |
|
Charitable and other related institutions |
2.9 |
2.7 |
3.6 |
4.4 |
4.1 |
|
Retirement and convalescent facilities |
1.8 |
2.1 |
1.5 |
1.0 |
1.8 |
Nonprofit hospitals have been the largest beneficiary for quite some time and in the 2010-11 fiscal year, they received over $309 million in high-dollar sales tax refunds. We also know that the largest proportion of the total refund benefit goes to beneficiaries that claim a refund of $1 million or more, and you can bet that most of those big checks go out to large hospitals.
Classifying nonprofit hospitals as a “nonprofit” is a complete misnomer because most of them earn a hefty sum. The Wall Street Journal reported on the topic a few years ago:
The combined net income of the 50 largest nonprofit hospitals [in the U.S.] jumped nearly eight-fold to $4.27 billion between 2001 and 2006… Nonprofits…are faring even better than their for-profit counterparts: 77% of the 2,033 U.S. nonprofit hospitals are in the black, while just 61% of for-profit hospitals are profitable [emphasis added].
That trend is apparent in North Carolina, too. Most hospitals claim the nonprofit designation. According to the American Hospital Association, of the 4,973 community hospitals in the country, 1,025 were for-profit hospitals (just over 20 percent). It turns out a hospital doesn’t have to do much to obtain this classification, either (again reported by the WSJ):
In return for not paying taxes, nonprofit hospitals are supposed to provide a "community benefit," a loosely defined requirement whose most important component is charity care. But many hospitals include other expenses in their community-benefit accounting to the Internal Revenue Service, including unpaid patient bills…Excluding those other expenses, many hospitals spend less on charity care than they get in tax breaks, studies by various counties and states show [emphasis added].
All this leads me to vehemently argue that these hospitals shouldn’t receive this tax refund. But there’s a complicating matter I can’t ignore: the taxation of business-to-business transactions. In theory, shouldn’t purchases made by medical service providers be exempt from the sales tax to prevent tax pyramiding? In theory, yes.
But remember the ultimate problem in the sales tax pyramiding case—because the product is taxed at multiple points in the production chain, the effective tax rate at the end becomes higher than was originally intended. But medical services are not currently taxed under the sales tax. In fact, no state applies the sales tax to medical services. So while purchases by hospitals are technically a business input, we won’t see much tax pyramiding here.
This portion of the legislation seems like a backhanded way to apply a bit of tax to medical services (and I’d like to see all end consumer services taxed for neutrality purposes) and make some state revenue off a highly profitable industry. It’s far from perfect, but I can see some merits. The moral of the story is that we should apply the sales tax to medical services and exempt business inputs (the purchases of hospitals and other medical providers), not do a halfway-in-between approach where we exempt the end product and tax the intermediary.
This also brings up the broader issue of nonprofit designation. Cash cows that happen to be able to take advantage of the ambiguous federal tax code and call themselves not-for-profit should not be able to reap such generous tax benefits (don’t forget that these hospitals get out of paying a lot of other taxes, too). To me, this just seems like another carve-out that benefits a politically expedient and well-organized industry, and we should seriously consider addressing it not just in North Carolina, but in the U.S. as a whole.
More on North Carolina here.
Follow Liz on Twitter @elizabeth_malm.
For more information on the increasing similarities between nonprofit and for-profit hospitals and a discussion of the historical evolution that led to this convergence, see “The convergence between for-profit and nonprofit hospitals in the United States” by Guy David, published in the International Journal of Health Care Finance Economics in 2009. An older, but similar version, can be found here (Section 2, “The Dynamics of the US Hospital Market," page 3).
Using firm-level financial data from Shackelford and Markle’s “Cross-Country Comparisons of Corporate Income Taxes,” this chart shows the average effective corporate income tax rate for U.S. major NAICS industries from 2000 to 2009.
All rates are statistically significant except for rate for “Real Estate and Rental and Leasing.”
Scott Drenkard was interviewed last night about Gov. Andrew Cuomo's proposal to set up "Tax-Free New York" zones at colleges and universities around the state. Here he is speaking with a local Fox TV affiliate upstate.
Scott has also been cited on the issue by the Washington Post, City and State, Syracuse.com, the Democrat and Chronicle, and Westfair Online.
This week, our Monday Map illustrates what percentage of a state's general revenue is made up of federal aid. Mississippi relies more heavily on federal assistance than other states, with 49% of its total general revenue coming from federal aid. Close behind are Louisiana at 46.5% and Arizona at 45.7%. On the other end of the spectrum, Alaska relies on federal aid for only 24% of its general revenue, followed closely by Delaware at 25.9% and North Dakota at 26%.
All maps and other graphics may be published an re-posted with credit to the Tax Foundation.
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View previous maps here.
Delaware Governor Jack Markell recently proposed a one cent increase in the state’s gasoline tax. The state currently levies a 23 cent tax on each gallon of gas—one of the lowest in the Northeast region. Governor Markell argues that the increased revenue will help fund road maintenance and improvements at state parks and waterways. He’s half right—Delaware doesn’t have enough revenue to fund its current road system, and gasoline taxes are a way to connect the users of roads to the cost of providing them.
In a perfect world, we’d just charge for the ability to use a road. The best way to prevent overuse and rapid degradation of public roadways is for the people who most use them to also be the ones who bear the cost. Ideally, privately or publicly owned tolls would charge users according to which road they use, how often they use it, and the amount of damage their vehicle causes. This often isn’t feasible, however, so governments traditionally tax gasoline instead because it can serve as a proxy for road use.
Unfortunately, Governor Markell’s Capital Budget proposal also links gasoline taxes to the funding of public parks, railroads, and local buses. . There is no link between the users of roads and the users of public parks. Why should drivers bear the cost of these other government services? And if it’s possible to connect users of roads to their cost, why can’t park, rail, and bus users pay for themselves too?
Unfortunately, Delaware doesn’t have enough transportation revenue to pay for its infrastructure (see table below). The proposed final operating budget for the Department of Transportation this year, including debt services, turns out to be only $339.5 million. That’s easily paid for by the $455 million that Delaware expects to collect in tolls, gas tax, and vehicle registration fees. It would seem that the roads could pay for themselves. But not included in that Operating budget figure is the cost of new capital improvements, for which the Governor has proposed bond issuance of $184.2 million on a proposed $213 million worth of capital improvements. Combining the cost of both the Operating and the Capital budgets leaves $97.5 million which will either be added to the Transportation Trust Fund debt or come from the state general fund revenues.
Delaware Department of Transportation Budget
(in millions)
| Total Transportation Revenue: | $ 455 |
| Operating Budget: | $ (339.5) |
| Capital Budget: | $ (213) |
| Deficit/New Debt | $ (97.5) |
Even after cutting out parks, rail, and bus funds from the 2013 budget, the deficit would still be $82.2 million. That’s better than other states, but Delaware is still simply spending more on roads than it takes in. And since the gasoline tax hasn’t been raised since 1995, inflation has eaten into the effective revenues. The Department of Transportation is essentially operating on a 1995 gas-revenue budget under 2013 prices. The best way to reform the system would be to force users of roads to bear their own costs by increasing the price of tolls, vehicle fees, or the gasoline tax. On Friday, Senator Marshall (D) introduced the actual senate bill which proposes not a once cent, but instead a ten cent fuel-tax increase. Even if fuel consumption remained constant, the additional revenues still result in $47 million in new debt. Such a significant tax proposal so close to the end of this legislative session on June 30th will likely go nowhere.
The moral of the story? Delaware could see a hole in the total transportation budget to the tune of $97.5 million. That hole will have to be plugged with state general funds or with new debt from the Governor’s bond proposal. Bond issuance would increase the debt services cost of the Transportation Trust Fund which already consumes about a quarter of all transportation department revenues. Either way, through bond issuance or a cash injection from the state General Fund, Delaware’s roads aren’t paying for themselves. And although it’s a step in the right direction, a one cent gas tax increase isn’t enough fill that hole.
More on gasoline taxes here.
More on Delaware here.
After raising the ire of California’s Governor Jerry Brown in California for his comments about the state’s tax and regulatory environment, Texas Governor Rick Perry’s next stop is New York. While there, he’ll continue to market Texas as an ideal destination for businesses seeking to escape high-tax and strict regulatory environments. Specifically, he will speak to gun manufacturers hit by new gun control regulations.
The Lone Star State’s appeal for companies is obvious. The lack of a personal or corporate income tax, in addition to a generally friendly regulatory environment, combine to create the ninth friendliest business tax climate in the U.S., according to our 2013 State Business Tax Climate Index. New York, meanwhile, has the seventh highest top individual income tax rate and a relatively high corporate tax rate (ringing in at 7.1 percent). It’s the worst-ranked state on our Index.
This fact has not been lost on New Yorkers, as Governor Cuomo has proposed creating “Tax-Free NY” areas for startups in select industries, a distortive practice we recently criticized. Although it will lower the tax liability for certain firms, it is poor tax policy. What it does do, however, is acknowledge that taxes matter to business.
The Texas tax code has problems of its own—namely, their pesky Margin Tax. It is excessively complex and non-neutral, and creates major compliance burdens on the firms that pay it. The tax combines the worst elements of different types of taxes, and has an idiosyncratic terminology as well as numerous exclusions, all of which have led to taxpayer confusion, lower-than-expected revenue, and major compliance costs. Recently, Governor Perry proposed that the margin tax be reformed—an idea we’ve discussed several times before (see here and here). Subsequently, the margin tax has been lowered, which is a good start. If Governor Perry wants to brand Texas as competitive and as a powerhouse business location, the Texas tax environment gives him a strong position from which to speak. The recent reform of the margin tax helps his argument, but full repeal would remove one of the state’s major stumbling blocks.
More on Texas here.
UPDATE: An earlier version of this post failed to note that Texas has already passed a reduction and partial reform of the margin tax. It has now been corrected.
Today, June 17, is the 83rd anniversary of one of America's most infamous tariffs: the Smoot-Hawley Tariff, or Tariff Act of 1930. This act, despite being widely opposed by 1,028 prominent economists, some business executives, and much of the public, was signed into law by President Herbert Hoover. Historians generally believe the tariff was responsible for a two-thirds decline in international trade and for transforming a bad recession into a global depression. For much of America's history, tariffs were the key public policy issue; one particular Tariff of 1828 was nicknamed the "Tariff of Abominations." Protective tariffs gave way to free trade after World War II, although sadly, protectionism and tax favoritism in trade policy seem increasingly bipartisan today.
Usually at the Tax Foundation, we focus simply on domestic taxes: like property, income, and sales taxes. However, in an increasingly globalized world, international taxes matter more and more. We've written extensively about the corporate tax rate and territorial tax policy, noting how much American companies pay in international taxes, the terrible uniqueness of the United States' current corporate tax policy, and much, much more.
As far as consumers are concerned, tariffs are essentially just extra sales taxes on certain products: so, provided they are equally-applied across goods, they shouldn't be distortive. However, this is easier said than done. Some countries make different things that the US no longer makes, so there is no "equally-applied tax." Furthermore, a tax on imports will favor some industries over others: rail and automotive over shipbuilding, for example, or truckers over longshoremen. Of course, in general, the US' tariffs are very low: on average only 1.6% according to the World Bank.
The same problems of non-neutrality that bedevil other taxes, however, apply to taxes on trade. Subtle and distortionary import taxes, like the recently-expired tariff on imported Chinese tires, are on the rise. These taxes distort purchasing and investment decisions by American citizens and businesses, and raise concerns about the power of industry- and union-lobby groups in trade policy. Carve-outs in the tax code, whether domestically or internationally, whether in tax breaks or tax penalties on competitors, are bad for the economy and for the American people.
Read more about international taxes here.
Read more about the history of tariffs in the US here.
In most states, both the governor and a nonpartisan legislative analysis office provide revenue forecasts for the coming year. In New Jersey, this process has become a bit contentious. Though the two groups analyze the same data, they’ve come to varying conclusions and the difference could determine whether state residents will see a tax cut or not.
In its February budget message, Governor Christie’s administration predicted total revenues for fiscal year 2013 to be $31.326 billion. The Office of Legislative Services (OLS), led by Chief Budget Officer David Rosen, estimated in April that revenues would be over $300 million less, at $31.024 billion. For 2014, revenue estimations differ by $335 million.
These discrepancies could have serious repercussions, since Governor Christie is running for re-election this year, in part, on a pledge to slash taxes. His proposed tax cut would expand the state Earned Income Tax Credit and provide property tax breaks for households earning up to $400,000. Senate President Stephen Sweeney had expressed mild support for Christie’s tax cuts, but hedged, “If the revenues work out, we’ll do a tax cut. If they don’t, we won’t.” $335 million might not seem significant considering New Jersey’s total revenue annual revenue of $30 billion, but it could put Governor Christie’s beloved tax cuts on the chopping block.
Billy Hamilton of State Tax Notes (subscription required) recently reported on the topic, noting that “[a]t a hearing on May 20, David Rosen…told the Senate budget committee that New Jersey may miss the Christie-administration’s revenue targets by as much as $937 million over the next 13 months.” Mr. Hamilton posits that it won’t just create difficulties for the Governor, but may “complicate finishing the 2014 state budget by the Legislature’s June 30 deadline.”
Governor Christie doesn’t seem to appreciate OLS efforts—he referred to Rosen as “Dr. Kevorkian of the numbers” last year. The State Treasurer (a Christie appointee) told reporters that Rosen’s “forced pessimism is exhausting.” But even he revised revenue estimations downward in May. Rosen’s pessimism was confirmed by the credit-rating agency Standard & Poor, who said that Christie’s budget was “structurally imbalanced,” and “based on revenue goals that may not be met even after recent revisions.” None of this bodes well for the Governor’s tax reduction plans.
Why might revenue estimations differ? Revenue projections are the product of complex economic models. Those models rely on multiple assumptions—assumptions, for example, about how much the overall economy will grow during that time, what type of people will be earning income, and consumption patterns of taxpayers within the state, just to name a few. Different assumptions yield differing results. Even though it is completely reasonable that two models would come to slightly different conclusions, different revenue results do have the potential to drive state tax and spending policy.
The discrepancy in revenue projections could just be due to simple inconsistencies between projection models, or they could be an attempt by the administration to make the revenue picture look rosier than it is. Mr. Hamilton makes this point quite eloquently:
The temptation is always there for the people involved in trying to make a budget work to engage in a little magical thinking when it comes to the revenue outlook. After all, predictions about the future are just that-- prediction --and predictions can be optimistic or pessimistic, depending on how the tea leaves are read. Independent forecasters have no stake in the results other than being as accurate as possible, while governors and legislatures are susceptible to the temptation to fudge the future just a bit to tidy up the budget math. Not that anyone wants to be grossly wrong, but the temptation is there, and the future is murky enough to permit a range of plausible guesses.
Who’s correct? Only time will tell.
More on New Jersey here. Follow Noah or Liz on Twitter @NoahGlyn or @elizabeth_malm.
Using firm-level data from the study: “Cross-Country Comparisons of Corporate Income Taxes” this chart shows the average effective tax rate each industry (by two digit NAICS code) faced throughout the OECD from 2000-2009.
Since this data set did not randomly sample industries from each country or year, these number are the average rate, controlling for year and the home country of the parent corporation (this does not control for corporations' asset sizes). All values are statistically significant (.001 level).
The common theme of a broken tax system laced its way through today’s Ways and Means full committee hearing on Tax Havens, Base Erosion and Profit Shifting. Chairman Dave Camp (R-MI) made clear from the onset of the hearing that there is no perfect tax code, but that our current code has proved to be a hindrance to economic growth and global competitiveness.
“Nearly all have offered a universal observation,” Chairman Camp said. “Having the highest corporate rate in the developed world along with an outdated international tax system is a barrier to success that leaves our country falling further behind our foreign competitors.”
The hearing presented little new or revolutionary information, but clarified the need for comprehensive reform instead. The Apple hearing from a couple weeks ago began the conversation on profit shifting that this hearing continued. But these hearings do more to shed light on a flawed system that creates the incentives to create elaborate tax planning processes, instead of the companies that operate within that system.
“These activities are the consequence of bad laws, not bad companies,” Chairman Camp said in his prepared statement.
The witnesses offered a broad consensus that this is the case. The weakness in the structure of the system is due to two main components: the highest corporate tax rate in the developed world and the U.S. system of worldwide taxation.
Professor Kleinbard of USC Law School proposed cutting the rate to 25 percent to place it in the middle of the pack. But Paul Oosterhuis suggested that a 25 percent rate might not be low enough, stating that a 25 percent rate would risk the competitiveness of U.S. companies over time.
But with the issue of international taxation, the rate is not all that matters.
“We live in a global economy, and that is not going to change,” Ranking Member Sandy Levin (D-MI) said in his opening remarks.
Pascal Saint-Amans, the Director at the OECD’s Centre for Tax Policy and Administration, made the point that 10 more countries have transitioned to territorial taxation over the last decade, which brings the total to 28 of 34 member countries.
As globalization continues, a fair playing field among U.S. companies and their competitors becomes ever more important – Apple competes with Samsung, Ford and Chevrolet compete with Toyota and Land Rover. The current tax system puts these American companies at a disadvantage on the international basis.
It also prevents U.S. companies from reinvesting $2 trillion of foreign earnings back in the U.S. Here’s how this works: if a U.S. company operating in the U.K. earned $100 in profit, they would pay $23 in taxes to the British to cover their 23 percent corporate tax rate. If that company wants to bring that profit back home, they have to pay an additional $12 tax to cover the difference between the British rate and the U.S. rate; OR they can reinvest that money anywhere else in the world at no additional cost. With over 95% percent of the world’s population outside the U.S., it’s not worth the addition 12 percent tax, so the money stays out of the country.
If Congress wants a reform that limits companies use of tax havens and profit shifting, it needs to create a simpler system with a lower rate that encourages companies to invest and reinvest in America. It goes back to what Congressman Levin said, we live in a global economy, and that’s not going to change. This means the U.S. tax code needs to change instead.
Either Edward Snowden has a fantastic imagination or the CIA has completely overstepped international norms to get at U.S. citizens’ Swiss bank accounts. As reported from tax-news:
Swiss Foreign Minister Didier Burkhalter has underlined his astonishment at allegations that US secret agents used underhand means to recruit a Swiss banker, to gain access to secret banking information for the purposes of tracking down cases of tax evasion by US citizens.
According to whistleblower Edward Snowden, US CIA officials plied the Swiss employee with drink before persuading the banker to drive home. Once apprehended and arrested for drink driving, the undercover agents offered assistance in return for tax data from the Swiss bank.
Burkhalter revealed on SRF radio that Switzerland has already submitted a request for further information and clarification on the issue to the US embassy. The Swiss Foreign Minister made clear that Switzerland would not take action until the Confederation is in full possession of the facts. He nevertheless emphasized his surprise at the shocking allegations, warning that, if confirmed, they would constitute a breach of the Vienna Convention on diplomatic relations.
Follow William McBride on Twitter @EconoWill
A new tax package in Iowa has been signed into law, constituting, according to Governor Branstad (R), Iowa’s biggest tax cut ever. SF 295 has three major components: reduction in business property taxes, limitations on increases of residential property taxes, and credit expansions in individual income taxes. These changes are expected to reduce taxes by over $4 billion over the course of the next decade.
As much as Iowans may like their tax break, the reform itself includes provisions that raise some concern. While we have speculated before about why taxpayers so dislike the property tax, the tax itself has many positive features. Property taxes fulfill many of the principles of sound tax policy: they are usually relatively simple, easy to understand and transparent, can readily be made economically neutral, and provide reasonably stable revenue flows: all positive features.
Iowa’s new tax law, however, has a mixed record on these principles. As of 2012, commercial property in Iowa was taxed at about 2.25 times the rate of residential property: ranked 40th out of the 50 states. Thus, a relative reduction in business property taxes could, theoretically, make the tax code more neutral. While SF 295 does offer such a relative reduction, it is hard to say how large it will be: the relationship between exempting a share of commercial property’s value from and reducing assessment growth for residential properties is complicated. A better proposal would have been to simply move away from separate tax categories for residential versus commercial property, such as the system established under Proposition 13 in California, which has one of the most neutral property taxation systems in the nation.
However, the large reduction in property taxes coupled with a smaller reduction in income taxes will shift the burden of taxation more heavily onto income: a less stable and more distortionary tax. Furthermore, SF 295 creates or expands several new credits, funds, and preferential treatments in the tax code, exacerbating the problem of non-neutrality, and its distortionary effects.
In sum, the law is a mixed bag. The Governor has indicated another look will be taken at the income tax later this year: hopefully the problem of excessive and distortionary credits can be resolved then. And, if not, then Iowa may have to sit tight at 42nd on our State Business Tax Climate Index, maintaining the 4th highest top income tax in the nation, and the highest corporate tax rate.
In an interesting twist in the North Carolina tax reform debate, Senator Bob Rucho (R), announced his resignation as Co-Chairman of the Senate Finance Committee today. According to an Associated Press story from this morning,
Sen. Bob Rucho of Mecklenburg County wrote Thursday to Senate leader Phil Berger saying he had submitted his resignation as chairman effective earlier this week…The Associated Press obtained a copy of the letter, in which Rucho says he and Berger have a “fundamental disagreement” on the most effective model of tax reform and how to manage the legislation.
Senator Rucho proposed a comprehensive overhaul of the state’s tax code (the “NC Fair Tax Act,” one of multiple competing plans), which would have lowered income taxes, reformed the franchise tax, and expanded the sales tax to included services. However, the Senate ultimately went with a proposed committee substitute for HB 998. This new Senate plan was introduced late last week and is scheduled for Senate floor debate today.
Yesterday, when the new Senate legislation was being debated in Senate Finance, Senator Rucho said he could not support the new proposal because it didn’t constitute comprehensive reform.
Update (12:11pm EST): The plot thickens. Senator Berger replied to Senator Rucho with his own letter: "I hereby respectfully decline to accept your resignation as Co-Chair of the Senate Finance Committee." You can see Senator Rucho's original resignation letter here.
Two Indiana counties (Jackson County and Pulaski County) had adopted local income taxes to fund the construction of new county jails, which would automatically sunset when the needed funds for the projects were raised. The Pulaski County local income tax expired in 2006 and the Jackson County local income tax expired in 2011, but due to poor oversight by officials and outside auditors, no one realized this and the taxes continued to be collected. The counties never sought an extension but taxpayers in these counties have paid $6 million in non-existent taxes.
A proposal to retroactively authorize the two expired taxes was attached to a bill providing tax benefits to surviving spouses of veterans, and approved unanimously by the Senate and with only one nay in the House. Governor Mike Pence (R) responded by vetoing the measure, saying retroactively approving the taxes was inappropriate and that the money should be refunded. Yesterday, however, the House voted 68-23 and the Senate voted 34-12 to override the veto.
The news articles indicate some level of confusion about what had happened, and a lack of understanding that refunding excess tax collections is a fairly routine process for state officials. One legislator aptly compared it to wages being garnished for a debt you don't owe -- the proper remedy is to return the money.
Kudos to Pence, who stood up to it even after they attached it to tax relief for perhaps the most sympathetic constituency imaginable. (In a ninth season episode of The Simpsons, Lisa cons her way on to television by signing up to be the sole opponent to Proposition 305, which she learns provides discount bus passes to war widows.)
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