Cuts, hikes and pot: Your guide to the state tax measures on ballots
Happy Finance Friday! Welcome to all the new Long Story Short subscribers this week and a big ol’ thank you and shoutout to the always uplifting Rebecca Ryan for the promotion this week in California.
This week’s LSS is a rundown of the key issues at stake plus the context for the tax-related statewide ballot measures across the country. It’s a bit longer than usual so hopefully you’ll make it to the end. This full issue is free in honor of Election Day this Tuesday!
The latest on state tax revenues
First, the context. The recovery after the pandemic downturn for states (and for a lot of localities) has been marked by some of the most astounding revenue growth figures in recent memory. The double-digit tax revenue growth in fiscal 2021 and 2022 has been mainly driven by income tax revenue gains but sales tax growth played a big role in fiscal 2021 when we were all spending more on taxable goods instead of (mostly non-taxable) services.
But by all accounts, the party is ending. Inflation is already cutting into state and local tax revenue growth and while it’s still very strong, the Urban Institute’s latest revenue report predicts growth will continue to weaken. Furthermore, about half of states enacted tax cuts during the current or prior fiscal year. “Depending on the size and structure of these tax cuts, state revenues will decline and could leave some states with budget holes in the coming fiscal years as temporary fiscal funds are spent and depending on the strength of the economy,” report author Lucy Dadayan wrote.
Bottom line, state tax revenue growth has been unusually high and lawmakers have understandably wanted to pass down some of the excess to taxpayers who are dealing with a higher cost of living (and who they also hope will vote next week).
However:
Income tax cuts typically benefit higher earners, who on the whole have been least impacted by the pandemic, and
Tax cuts paid for by expected revenue/economic growth are a gamble (see: the Kansas Experiment).
The tax cut measures on state ballots
Colorado’s Proposition 121 would reduce the income tax rate from 4.55% to 4.4%, effective for the current tax year and potentially costing the state $400 million in revenue. Colorado has a Taxpayers Bill of Rights (TABOR) which limits annual state revenue growth to a formula based on population growth and inflation. When the state collects revenue over the cap, taxpayers get a refund. The proposed reduction essentially anticipates what the effective tax rate will be in at least the current year because taxpayers are once again anticipating a refund.
Coloradans just did this a couple years ago with Proposition 116. That cut the income tax rate to 4.55% from 4.63% in 2020 but TABOR refunds the last two years lowered the effective rate even further to 4.5%, according to the Tax Foundation.
West Virginia’s Amendment 2 would give the legislature the authority to exempt business machinery and equipment, business inventory and personal vehicles from property taxation. The legislature has promised to do so and the resulting revenue loss of $515 million has localities across the state worried about the impact to their local budgets. According to a study by the West Virginia Center on Budget and Policy, two-thirds of that revenue currently helps fund school districts, while a little over one-quarter goes to counties and the rest goes to municipal governments.
Arizona’s Proposition 132 and Arkansas’ Issue 2 would require future measures involving tax hikes to get the support of 60% of voters to pass, instead of the current 50% threshold. Both are in response to recent citizen-initiated ballot measures (especially in Arizona) to raise taxes in these low-tax, conservative states. In Arizona, for example, voters have approved with a simple majority five ballot measures that raised money for education and health. All five would have failed had Proposition 132 been in place.
The big take: When these ballot measures were circulating earlier this year, states were awash in revenue. But now with growth slowing, tax cuts without a guaranteed pay-for mechanism are an even bigger gamble than usual. That tends not to matter much at the ballot box though.
In Colorado, there’s no guarantee that TABOR (which turned 30 this week) refunds are in store for taxpayers next year and beyond.
In West Virginia, the business taxes probably made more sense when the state’s coal mining industry was driving the economy and eliminating this drag on the businesses left in the state seems reasonable. Along with their pledge to eliminate this tax, lawmakers have said they’ll make up the lost revenue to local governments. But the state legislature’s track record of favoring spending cuts to balance budgets would give anyone pause (and led to teacher protests in 2018).
Holding lawmakers in check with a supermajority requirement is one thing (and a very tall order at that). Asking for it from voters is Herculean. Limits on taxation tend to pass in conservative states. But, rather hypocritically, they only require a simple majority to pass while raising the stakes for any future countermeasures. For example, Florida voters in 2006 approved a constitutional amendment requiring all future amendments to pass with at least 60% of the vote. It passed with 58% of the vote.
Tax hikes on the ballot
Colorado’s Proposition FF would reduce both standard and itemized state income tax deductions for households earning $300,000 or more to raise revenue for a universal school meals program. It basically slightly raises the state tax liability for the wealthy, but the ballot language is confusing which usually hurts the odds of something passing.
Speaking of taxes on the rich…
California Proposition 30, would create a 1.75 percentage point surtax on income above $2 million, bringing the top marginal rate on wage income to 16.15%. (It’s currently 13.3% on incomes of at least $1 million.) Prop 30 is projected to raise up to $4.5 billion annually, with most of the revenue earmarked for zero-emission vehicle infrastructure and purchasing incentives. (See last week’s LSS for more info on financing EV infrastructure.)
Massachusetts Question 1 would almost double the state tax rate for millionaires. It would move the state from a flat income tax rate of 5% to a graduated rate by creating an additional 4% tax on the portion of income above $1 million. The initiative is a re-do of the Income Tax for Education and Transportation Initiative in 2018 that was blocked by the Massachusetts Supreme Court from appearing on that year’s ballot.
The big take: Tax hikes are always harder to pass but ones that target the wealthy tend to have better odds in blue states like California and Massachusetts. However higher taxes on the rich make income tax revenue more volatile and states should have mechanisms in place to manage against that volatility. Both California and Massachusetts are well positioned in that they have policies that automatically place excess revenue in reserves or somewhere other than the general fund.
However in Massachusetts’ case, the 4% surtax on millionaires would create a volatile revenue source for transportation and education that policymakers would also need to manage against.
And in California, the higher tax rate for the uber-rich makes it even more of a high-tax standout than it already is. Even the Tax Foundation acknowledges that “the state has enough going for it that its economy can withstand higher tax burdens than would be viable” anywhere else. “But there’s always a tipping point,” Jared Walczak adds. “The growing exodus of businesses and individuals from California to more taxpayer-friendly climes should be an encouragement to pump the breaks, not hit the accelerator.”
Study up State Tax Revenue Volatility and Its Impact on State Governments (Pew Charitable Trusts)
Sin Tax-related proposals in six states
Or, depending on who you’re talking to, they’re the Just Having Fun Taxes.
California has two dueling measures legalizing sports betting on the ballot that appear destined to fail.
Voters in Arkansas, Maryland, Missouri, North Dakota, and South Dakota will consider measures to legalize marijuana.
The gist: Proposals to legalize sports betting or marijuana have been slam dunks in recent years and lawmakers like balancing the karma by (almost always) earmarking the revenue for feel-good things like education or social services. But when you have competing proposals, like in California, that’s almost a guarantee neither will pass.
Budget forecasters also know that sin tax revenue growth tends to wane after an initial bump. So while it’s a nice help, it’s not a windfall.
What else to watch
Alabama: Amendments 6 and 7 would give localities more budget autonomy.
Colorado Prop 123 creates a state revenue set-aside for affordable housing.
Florida: Amendment 1 could raise assessed values even more while Amendment 3 would then lower it for public service workers.
Louisiana: Four property tax related proposals. Two seek to limit property tax increases while two make it easier for veterans to receive a tax exemption.
New Mexico: Three separate bond issue questions totaling $260 million in spending, mostly on higher education.
Rhode Island: Three bond questions totaling $400 million
Texas: Two proposals for property tax relief.
Thanks for reading to the end! If you know someone who could benefit from this issue please forward it to them (along with a note encouraging them to sign up).