Senior Vice President for State Fiscal Policy
Governors who proposed major radical and unsound tax proposals this year, including Louisiana’s Bobby Jindal, Ohio’s John Kasich, Oklahoma’s Mary Fallin, and Nebraska’s Dave Heineman, are running into significant resistance from some surprising sources: their own states’ business communities and Republican legislative leadership.
These governors produced proposals straight out of the American Legislative Exchange Council (ALEC) fiscal policy playbook. In slightly different ways, all four governors sought to provide huge boons to upper-income taxpayers and profitable corporations, and they (wrongly) touted their proposals as surefire paths to economic growth.
Regressivity wasn’t the only problem for these proposals. Each had significant practical, economic, and political flaws. Governors Jindal and Heineman proposed large tax increases on business-to-business sales, which tax experts across the political spectrum view as deeply problematic and which local business organizations opposed. Gov. Kasich proposed cutting income taxes by 20 percent and treating income from “pass-through entities” like S corporations and partnerships differently from other forms of income — a move that would create huge inequities and opportunities for tax avoidance. And after a failed attempt to eliminate the state income tax last year, Gov. Fallin asked this year for a cut to the state’s top marginal income tax rate — a move Oklahoma has already made multiple times over the last decade.
Perhaps most importantly, states still aren’t out of the woods from the last recession, so these tax cuts cost more than what the states could realistically afford without putting funding for education, health, public safety and other state-funded services even deeper into the hole.
All four proposals now have been abandoned or have run into heavy opposition. Jindal withdrew his plan earlier this week, and Heineman backed away from his in February. A key legislative committee rejected Kasich’s proposal on pass-through income, and Fallin’s plan is faltering in the legislature because of disagreement over whether the cut is affordable now or should be delayed a year.
Unfortunately, this mini-trend doesn’t signal the end for radical, flawed state tax proposals. Jindal is now calling for his state legislature to put forward a 10-year plan to phase out the personal income tax, something no state other than oil-rich Alaska has ever done — and which would probably be even more regressive and unaffordable than his original plan. Heineman’s tax-cut proposals likely will be taken up by a tax study commission in Nebraska that is expected to recommend tax changes before the 2014 session. Kasich’s and Fallin’s plans, though wounded, remain alive.
Moreover, damaging tax proposals in North Carolina, Missouri, Kansas, and other states are moving full steam ahead.
But the hurdles that Governors Jindal, Kasich, Fallin, and Heineman encountered in their own states and with their own allies do suggest that there may be a bit less appetite for radical tax change in the states than it seemed a month or two ago.