The Leaflet – States to Tackle Income Taxes

Published January 25, 2013

States To Tackle Income Taxes

While Congress and the president recently hiked taxes for 77 percent of the nation’s taxpayers, proposals for sweeping tax cuts continue to gain momentum at the state level. In the new year governors and influential state lawmakers from Indiana, Louisiana, Nebraska, North Carolina, Ohio, Oklahoma, and Wisconsin have announced they are making income tax cuts one of the top issues for their states in 2013.

In a recent op-ed in the Orange County-Register I wrote, “The boldest proposal so far is from Louisiana Gov. Bobby Jindal: getting rid of the state’s income tax, corporate income tax, and franchise tax in one fell swoop. In exchange, the state would broaden its sales tax base. According to the Tax Foundation, Jindal’s proposed changes w ould take Louisiana’s business tax climate from 32nd to 4th overall among the 50 states. California is currently 48th on that index.”

Unfortunately, some governors are choosing to take the opposite approach. One of those moving in the wrong direction is Minnesota Gov. Mark Dayton, who is pushing for a package of tax increases on high-income-earners, car rentals, and cigarettes in addition to expanding the sales tax base. Likewise, Massachusetts Gov. Deval Patrick has announced a similar package of tax hikes.

Nine states currently operate without a personal income tax. According to the fourth edition of Rich States, Poor States by the American Legislative Exchange Council, over the past decade these nine states “have, on average, seen gross state product increase by 61.23 percent, job growth increase by 7.78 percent, and population increase by 13.75 percent.”

As Heartland Senior Fellow Peter Ferrara points out, “With the burden of state income taxes lifted, economic growth in the states would soar, new jobs would be created, and wages and incomes would rise.”

This week’s edition of The Leaflet features research and commentary addressing Minnesota’s millionaires tax, Medicaid expansion, retransmission fees, Massachusetts’ public pensions problem, why wind power shouldn’t be banned, and the Common Core education standards.


John Nothdurft
Director of Government Relations
The Heartland Institute



Research & Commentary: Minnesota Millionaire Tax Hikes
Budget & Tax

Minnesota Gov. Mark Dayton has proposed a new top marginal tax rate for high-income-earners several times. The proposals are designed to target a group Dayton says is not paying its fair share of taxes. Several states, including Hawaii, Maryland, and New York, have implemented taxes on high-income-earners in recent years.

In his 2011 general fund budget plan, Dayton proposed a new top marginal rate of 10.95 percent for those making more than $85,000 in annual income. The proposal, which failed to pass, included a temporary three-year surcharge of 3 percent on income over $500,000. Now, with the state facing a $1.1 billion budget deficit, Dayton is calling for significant tax reforms including a new high-income tax bracket.

According to the Tax Foundation’s State and Local Tax Burden Rankings, Minnesota had the seventh-highest tax burden among U.S. states and ranked in the top ten of highest individual income taxes. The report also found Minnesota’s current rate for its highest tax bracket, 7.85 percent on individual income over $77,730 or $137,430 for couples, is already higher than most other top tax brackets in the country.

The revenue-generating results of millionaire taxes have been mixed; many states that increased taxes on the upper brackets, including New York and New Jersey, have allowed their tax hikes to expire. In a Research & Commentary, Heartland Institute Director of Government Relations John Nothdurft outlined four reasons why millionaire taxes backfire on state governments:

1. High taxes encourage the wealthy to move to lower-taxed states, bringing much of their income, capital, and tax revenues with them.

2. High taxes discourage capital from flowing into a state, thereby reducing job-creation.

3. High taxes make it more difficult to attract high-income people.

4. Relying on a small number of taxpayers for a large portion of tax revenue can lead to larger budget deficits than with broader and flatter tax systems.

Instead of increasing taxes on higher earners, a source of revenue that fluctuates greatly with the changing economy, Minnesota lawmakers should develop spending and tax policies that cut both spending and tax rates. Minnesota’s tax rates are already higher than most states’; increasing them any further risks greater harm to the state’s economic competitiveness.




Policy Tip Sheet: Medicaid Expansion
Health Care

In this Policy Tip Sheet, Manager of External Relations Kendall Antekeier explains why “free” Medicaid money from the federal government is not truly free, and why states may want to avoid expanding their Medicaid programs. She writes, “The federal matching rate starts at 100 percent for newly eligible enrollees, but it declines over time, leaving states to find other ways to pay for the newly eligible population. Moreover, the new federal matching rate applies only to newly eligible enrollees. But due to the individual mandate, res idents who are currently eligible for Medicaid but not enrolled will be forced to enroll. Those enrollees will be subject to the regular matching rate, so state costs for Medicaid will be increasing dramatically even without expanding the program.”

Research & Commentary: Retransmission Fee Update

Increasing broadcast retransmission fees have caused much tension between multichannel video programming distributors (MVPDs) and broadcasters. This has led to blackouts, often of major television events, when the two sides cannot reach agreement. These disputes are not normal market realities but instead a product of the FCC regulatory atmosphere, which introduces a host of major biases into the market.

This Research & Commentary examines retransmission issues and argues that instead of issuing a new set of rules regulating retransmission negotiations, the FCC should eliminate its outdated regulations, which hamper competition and harm consumers.

Research & Commentary: Massachusetts Public Penisons and the Assumed Rate of Return
Finance, Insurance, and Real Estate

According to Jim Lamenzo, actuary for the state’s Public Employee Retirement Association Commission, Massachusetts’s unfunded pension liability has almost doubled over the past five years to approximately $24 billion. The situation is further complicated by the fact that regulators controlling the pension funds have in many cases overestimated the value of future investments and the rate of return they can expect from the investments held by the pension fund.

In this Research & Commentary, Senior Policy Analyst Matthew Glans examines state and local pension funds and assumed rates of return and argues that to protect taxpayers and pension beneficiaries in the short term, per-year pension payouts should be capped at a sensible level, the retirement age should be raised, double-dipping should be eliminated, and pension rate of return assumptions should be changed.

Blog: Banning Wind Power Is Wrong Approach

A bipartisan pair of Vermont state senators want to place a three-year moratorium on wind power projects in their state, allowing time to review its environmental impacts. For context, Vermont already has placed a permanent (although entirely symbolic) ban on hydraulic fracturing. Although environmental concerns about wind power are very real and the overall low power density means wind will never be more than a marginal contributor to the electric grid, that doesn’t mean a moratorium is good or even excusable policy.

Policy Analyst Taylor Smith says, “Moratoriums infringe on local property rights and zoning laws. This prevents local communities from determining what level of development they are willing to accept.”

The Common Core: A Poor Choice For States

In 2010, every state but Alaska, Nebraska, Texas, and Virginia adopted one set of requirements for what K-12 children should know in each grade in math and English language arts (ELA). Approximately 80 percent of the public does not know about the Common Core education standards, which comprise one of the most comprehensive K-12 reform efforts in the nation.

Research Fellow Joy Pullmann examines some of the weaknesses of the Common Core, a subject that has received less attention than it should because most people involved to this point have been supporters of the initiative.