States Strengthening Tax Systems and Working-Family Tax Credits

More than a dozen states enacted major revenue increases and/or rejected tax cuts in the 2017 legislative year. States’ desire to strengthen their revenue systems is wise, given that two-thirds of the states are facing or have addressed revenue shortfalls for this fiscal year and/or next year, many states’ funding for core investments in education and other areas still have not recovered from the last recession, and the federal government may sharply reduce aid for state priorities. In other positive developments, eight states created or improved Earned Income Tax Credits (EITCs), which help families struggling to get by on low wages make ends meet and provide basic necessities for their children.

• Seven states enacted tax increases totaling around $10.7 billion annually. Georgia extended a fee on Medicaid providers and ended a back-to-school sales tax holiday. Hawaii reinstated tax increases on high earners that expired in 2015. Illinois raised its individual and corporate income tax rates. Kansas partially reversed income tax rate cuts that it enacted in 2012, repealed additional rate cuts scheduled for the future, and repealed a costly exemption for “pass-through” business income that largely helps hedge fund managers, lawyers, and other high-income individuals. New York extended an income tax rate increase for people with incomes over $1 million. Oregon raised taxes on certain health care providers to shore up the state’s Medicaid program. South Carolina raised its gas tax to improve its transportation infrastructure.
• Seven states prevented about $2.2 billion in tax cuts. Georgia rejected a bill to implement a flat income tax and cut the top tax rate. Maryland rejected a corporate rate cut. Michigan rejected a phase-out of the individual income tax. Nebraska rejected cuts in corporate and individual income tax rates. Oklahoma repealed a tax-cut trigger that would have cut the individual income tax rate next year. Washington’s governor vetoed a bill to cut the business and occupation tax for manufacturers. West Virginia rejected various proposed tax cuts (and increases).
• Eight states created or improved EITCs. Hawaii created a non-refundable EITC worth 20 percent of the federal EITC. Montana created an EITC worth 3 percent of the federal credit and made it refundable — meaning that individuals can claim the credit even if they don’t owe income taxes. South Carolina created a credit that will rise to 125 percent of the federal EITC over six years but is non-refundable. California raised the income limit for its EITC. Illinois increased its refundable credit from 10 percent of the federal credit to 18 percent. Minnesota lowered the qualifying age for its EITC for taxpayers without children from 25 to 21. Oregon passed legislation requiring employers to notify employees about the state and federal EITCs when distributing W-2s. And in Massachusetts, domestic violence survivors can now claim the EITC without filing taxes with their spouse.