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State Tax Reforms Are More Than Just Revenue Changes

3 min readBy: Joseph Bishop-Henchman, Lyman Stone

A recent report by the National Conference of State Legislatures (NCSL) examining state 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. actions in 2013 found that “collective revenue actions taken by the 50 states resulted in a slight net tax cut of less than $1 billion, representing 0.1 percent of the prior year’s state tax collections.” The report finds that seven states (Alaska, Arizona, Iowa, Maine, North Dakota, Ohio, and Wisconsin) had tax reductions, while seven had tax increases (Georgia Massachusetts, Minnesota, Oregon, Vermont, Virginia, and Wyoming). The study is based on expected changes to Fiscal Year 2014 collections as a percent of 2012 collections, so, put precisely, what it measures is the aggregate effect of past tax cuts in a given year (in this case fiscal year 2014).

The study notes that “Given all the tax reform, the net tax reduction of 0.01 percent is a bit misleading­—there was more activity in 2013 than what is reflected by the aggregate total. Tax measures dominated 2013 legislative agendas in several states.”

We agree with that assessment, and would add that a major part of tax reform isn’t about how much revenue states raise, but how they raise it. This type of structural reform is absolutely vital, but doesn’t always show up in revenues. An analysis of such structural elements, like our State Business Tax Climate Index, is an important complement to a revenue-based study like this report.

The study appropriately assesses just one year of changes in revenues (FY 2014) against one year of collections (2012). However, many tax plans change revenues over several years. For example, in North Carolina, which made major changes to its tax code, fully $600 million of its tax cuts will land in FY 2015, not FY 2014. This means that a state that lowers its taxes gradually could show up as never having significantly lowered its taxes. The report explains this issue well in its introduction, but it’s worth reiterating, as many tax cuts are gradual, especially if they contain revenue-triggers.

But more to the point, we consider 2013 one of the most successful years for tax reform we’ve seen in a while. We saw North Carolina cut its taxes but, more importantly, massively restructure them to become flatter, simpler, and more competitive. The real improvement in North Carolina wasn’t just the amount of taxes (though they did cut taxes, as noted above), but the structure of the tax code.

Beyond North Carolina’s landmark reform, Indiana under Governor Mike Pence (R) also moved to cut its personal income taxes and abolish its death tax. Wisconsin also made significant income tax cuts accompanied by positive structural changes authored by Representative Dale Kooyenga. Even in states that couldn’t achieve such sweeping reforms, valuable progress was made. Arizona implemented an important simplification of its 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. Governor Martinez of New Mexico worked with her legislature to cut her state’s corporate tax. Texas made some positive reforms to its damaging gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. , the margin tax.

It’s true that some states made negative changes as well. Minnesota, most notably, passed a major tax increase. Ohio’s tax cut included serious structural problems. Massachusetts passed a damaging tech tax, which was repealed before the end of the year. But these negative changes far from outweigh the monumental accomplishments in the other states listed above.

Many states accomplished meaningful reform in 2013, with some, like North Carolina, putting in place landmark reforms that can inspire positive changes elsewhere as well. This new report from NCSL serves as a valuable benchmark to show that there remains a long way to go, but it also shows the importance of the tax debate in the states. At least 41 states saw their tax code change in 2013, and 24 of them reduced taxes. With 2013 behind us, we’re looking forward to seeing that last number rise, and think 2014 could be another banner year for tax reform as more states take the necessary steps to make their tax codes simple, transparent, stable, and neutral.