Tax Reform Brings out the Good and Bad in Key States

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Posted by Americans for Tax Reform on Thursday, June 22nd, 2017, 10:47 AM PERMALINK

With 50 laboratories of democracy in the U.S., some state legislatures provide examples of smart pro-growth policies that other states would be wise to emulate, while others serve as bad examples by enacting policies that other states should avoid.

Taxachusetts Lawmakers Help The Commonwealth Earns Its Nickname

The past week has underscored this dynamic, in particular when it comes to income tax reform. In Massachusetts, state lawmakers referred a measure to the 2018 ballot that, if enacted, would move the state from having a flat income tax, to a progressive structure with income over $1,000,000 subject to a 4% surtax on top of the commonwealth’s existing 5.10% flat income tax rate. Meanwhile, in North Carolina, Republicans who run the state senate and assembly announced a budget deal that will reduce personal and corporate income tax rates.

Maryland, which enacted a similar millionaires’ tax when Gov. Martin O’Malley was governor, provides a cautionary tale highlighting why Massachusetts voters should reject the surtax that will appear on their 2018 statewide ballot. A year after Maryland’s millionaire’s tax took effect, one-third of the state’s millionaires fled the state. A 2011 study, of migration patterns across the 50 states concluded that millionaires tend to leave states with high income tax rates for states with relatively lower income taxes. Enactment of a millionaires’ tax would be bad news for Massachusetts, but great news for neighboring New Hampshire, one the nine states that does not levy and income tax*.

19,600 Massachusetts tax filers would be affected by the tax increase, 900 of whom are projected to make $10 million annually and would contribute 53 percent of the revenues from the new tax. If just one-third of these 900 tax-filers left, the tax revenue lost would be about $750 million. It is not just the wealthy who would be hit by this tax hike. According to IRS data, over 10,000 Massachusetts small businesses would also be hit by this tax hike, since the majority of small businesses file under the individual income tax system.

The Beacon Hill Institute found that the surtax could cost the state more than 9,000 private sector jobs and $405 million in disposable income. While income tax hikes on the wealthy are often popular with voters, the fact is that the millionaires’ tax will hit small businesses with a 78% income tax rate hike, greatly reducing their job-creating capacity.  

In addition to making the Bay State less attractive to investment and job creators, Increased reliance on upper-income households will make Massachusetts’ revenues less stable, and budgeting more difficult. This is because increasing the progressivity of the tax code leads to greater volatility in revenue collections. One of the worst parts of this proposal is that, if it’s enacted by voters in 2018, there will be no way to amend it until the year 2023. So, if the tax ends up damaging the economy and chasing individuals, families, and employers out of state, like such tax hikes have in other states, lawmakers and voters will have to wait half a decade before they are able to rectify the problem.  

Tax Reform Train Rolls on in the Tar Heel State

Days after Massachusetts lawmakers voted to advance a massive income tax hike, North Carolina legislators announced a budget agreement that will take the Tar Heel State in the other direction by enacting another round of cuts to the personal and corporate income tax rates. Though the house and the senate rolled out similar plans with a $22.9 billion budget, there are some key differences between the proposals and how the budget is spent.

The budget deal announced by legislative leaders makes the following tax changes, which would take effect January 1, 2019:

  • Cuts the state’s flat personal income tax rate from 5.499% to 5.25%
  • Reduces the corporate tax rate from 3% to 2.5%
  • Increased the standard deduction for married couples filing jointly from $17,500 to $20,000

The budget with these reforms will pass both chambers of the legislature this week. Though the budget includes many of Gov. Roy Cooper’s (D) priorities, it is unlikely he will sign this budget into law. Fortunately for North Carolina taxpayers, Republicans hold veto-proof majorities in both chambers of the legislature, and can enact this budget over Gov. Cooper’s objection.

In a year where 31 states are facing revenue shortfalls, North Carolina has a half a billion dollar surplus. In fact, this marks the third straight year that the state has realized a budget surplus.

These surpluses have occurred at the same time North Carolina lawmakers have approved multiple rounds of personal and corporate income tax rate cuts. In addition to the pro-growth tax changes enacted, the key to North Carolina’s fiscal and economic success has been spending restraint. Every year since Republicans took control of the state legislature, spending growth has been held before the rate of population growth and inflation. When it comes to models for pro-growth tax reform and spending restraint, other states and federal officials should look to the Tar Heel State for inspiration, and Massachusetts as an example of what not to do.    

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