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2018 Outstanding Achievement in State Tax Reform

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Across the country, state policymakers took strides to improve taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. codes. In recognition of these efforts, the Tax Foundation honors state legislators, governors, and other individuals with our Outstanding Achievement in State Tax Reform award.

As the name suggests, the honoree’s accomplishments must (1) be outstanding, (2) represent an achievement (not merely a proposal), and (3) reform taxes to make them simpler, more neutral, more transparent, more stable, and more pro-growth. Prior to this year’s awards, 31 individuals from nineteen states and the District of Columbia—and representing both political parties—had received an award, including five governors. This year, our awards reflect achievements in 2017 and 2018. (You can view prior years’ winners here: 2016, 2015, 2014, 2013)

Working for better tax policy is not easy and a piece of glass hardly compares to the efforts the recipients put in, but we do this because some recognition is important for what they achieved for the taxpayers of their states.

This year, we honor twenty-three individuals from nine states and the District of Columbia with our award for Outstanding Achievement in State Tax Reform in 2018:

Arkansas Senator Lance Eads (R) and Representative Andy Davis (R) for championing the repeal of the state’s InvestArk program, replacing it with better treatment of business purchases under the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. code. InvestArk, formerly the state’s largest business tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , distorted the tax code by favoring some businesses and activities over others. Revenue saved by the repeal of this nonneutral provision of the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. was put toward the exemption of repair parts from the sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , reducing the “tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. ” associated with taxing business inputs and improving the state’s overall treatment of business investment.

California Governor Jerry Brown (D) for colorful vetoes of targeted tax breaks which have helped California maintain some semblance of a broad tax base and improved its fiscal position. Governor Brown consistently vetoed popular proposed tax breaks, saying legislators should instead work through the annual budget process and balance those wants with other priorities. California has more work to do on fiscal solvency and tax climate, but Governor Brown’s demand for thoughtfulness and process in creating new tax breaks should be emulated by his successors.

Colorado Representative Tracy Kraft-Tharp (D) for creating and chairing the Sales and Use Tax Simplification Task Force, with the mission of identifying ways to simplify Colorado’s exceedingly complex state and local sales tax administration and to reduce compliance costs. The Task Force has already seen results, facilitating voluntary local reforms, and it takes on even greater importance in the wake of the Wayfair v. South Dakota decision regarding the taxation of remote sales.

Delaware Representative Michael Ramone (R) for sponsoring successful legislation to repeal the state’s short-lived estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , which had raised little revenue and was widely seen as driving wealthy retirees out of state. The bill, which was based on a tax commission recommendation, passed with bipartisan support.

Cook County, Illinois Commissioner Sean Morrison (R) for spearheading the effort to repeal the county’s highly unpopular sweetened beverage tax. Thanks to Morrison’s efforts, the tax was only in effect for four months prior to its repeal.

Iowa Governor Kim Reynolds (R) and Senator Randy Feenstra (R) for championing and securing passage of legislation beginning a multiyear overhaul of the state’s tax code, which will ultimately include both individual and corporate income tax rate reductions and simplification, along with modest sales tax base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. . The tax package consolidates individual income tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s, eliminates an outmoded policy of federal deductibility, repeals the alternative minimum tax for individual taxpayers, and repeals or reforms several corporate tax credits while reducing the rate. These reforms, which increase the competitiveness of the state tax code, are the culmination of several years of legislative efforts.

Kansas Representatives Steven Johnson (R) and Tom Sawyer (D) for, as chairman and ranking member of the House Taxation Committee, deftly handling difficult negotiations on solutions for closing the state’s recurring budget shortfalls and secured the repeal of the state’s decidedly nonneutral pass-through exemption. That exemption, which excluded all pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income from the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , improperly distinguished between sources of income and created unnecessary arbitrage opportunities. Its repeal represented the best way for the state to address its revenue shortfall.

Missouri Senators Bill Eigel (R) and Andrew Koenig (R) for shepherding through individual and corporate income tax reform, which could reduce the top individual income tax rate to 5.1 percent (while eliminating a bracket) and adopts the second-lowest corporate income tax rate in the nation, at 4.0 percent. These rate reductions are to be secured through the reduction of tax preferences and the utilization of revenue triggers, and will result in the simplification of Missouri’s tax code.

Rhode Island Governor Gina Raimondo (D) and Speaker Nicholas Mattiello (D) for championing reforms which make the state less of an outlier in state taxation. Governor Raimondo successfully advanced reforms to the state’s unemployment insurance taxes which will save Rhode Island businesses an estimated $30 million. Previously, the state ranked worst in the nation on unemployment insurance taxes on the Tax Foundation’s State Business Tax Climate Index. Governor Raimondo’s reforms improved the state to 29th on that measure. Speaker Mattiello secured the enactment of a budget that will gradually phase out the motor vehicle excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. over a period of seven years, eliminating a tax which is among the most onerous of its kind in the country.

Nine Members of the District of Columbia Council for voting to fully phase in the District’s successful 2014 tax package, defending it against efforts to suspend the final year’s reforms. The package included corporate and individual income tax reductions, sales tax base broadening, and estate tax reform. These councilmembers are:

  • Chairman Phil Mendelson (D)
  • At-Large Councilmember Anita Bonds (D)
  • At-Large Councilmember Robert White (D)
  • Ward 2 Councilmember Jack Evans (D)
  • Ward 3 Councilmember Mary Cheh (D)
  • Ward 4 Councilmember Brandon Todd (D)
  • Ward 5 Councilmember Kenyan McDuffie (D)
  • Ward 6 Councilmember Charles Allen (D)
  • Ward 7 Councilmember Vincent C. Gray (D)

“Working for better tax policy is not easy,” said Tax Foundation Executive Vice President Joseph Bishop-Henchman. “A piece of glass hardly compares to the efforts the recipients put in, but we do this because some recognition is important for what they achieved for the taxpayers of their states.”