“Levy swap” proposals surface

The Seattle Times has a story about three legislative proposals to reduce reliance on local school property tax levies that emerged on Wednesday:

State lawmakers Wednesday put forth three competing proposals to address part of a court mandate for K-12 education that would reduce schools’ reliance on local tax levies.

The three tax-levy proposals introduced Wednesday … differ, ranging from a new capital-gains tax, to a levy swap between local and state property taxes, and a plan to do more research and determine a way forward next year.

Introduced by Sen. Bruce Dammeier, R-Puyallup, the GOP plan would use a state task force’s recommendations on teacher compensation to set salary levels. It would lower local property-tax levies going to schools while raising the state’s property-tax share devoted to schools by the same dollar amount.

Democratic senators proposed a version of a tax on capital gains that would raise $1.7 billion through 2019 for K-12 basic education. That money would go toward a plan sponsored by Sen. Christine Rolfes, D-Bainbridge Island, to increase teacher compensation — which, like the GOP proposal, comes from task-force recommendations. Those proposals combined would allow for a plan sponsored by Sen. Jim Hargrove, D-Hoquiam, to lower local property-tax levies for most districts.

A third proposal came Wednesday from House Democrats in the form of House Bill 2239, which would create a council to recommend to lawmakers how to implement teacher compensation and funding reforms. The council would issue a report to lawmakers and the governor by Dec. 1, studying how the state’s 295 school districts now use local bargaining agreements and levies to fund teachers.

The proposal, from Rep. Ross Hunter, D-Medina, sets 2016 and 2017 deadlines for lawmakers to implement changes to the levy system and teacher compensation.

On his blog, Rep. Hunter describes how a property tax levy swap might work.

 

Washington’s forecasted revenue growth is better than that of the average state

A recent post at TaxVox (the blog of the Urban Institute/Brookings Institution Tax Policy Center) examines state government revenue forecasts fore fiscal years 2015, 2016 and 2017.

State forecasters expect revenue growth to remain sluggish through fiscal year (FY) 2016 according to an Urban Institute analysis of agency reports. In FY17, states project revenue growth will return to its average post-2000 rate but remain significantly below its long term average.
Urban
The chart below shows revenue growth for these five years for Washington’s general fund-state account, as reported in today’s update to the state revenue forecast:
WA
Washington’s revenue growth exceeds the nationwide average in each of the five years. Who’d a thunk our creaky old tax system would stack up so well?
Here’s a link to the TaxVox post: State Revenue Growth Will Remain Sluggish

 

New policy brief: Gov. Inslee’s Capital Gains Tax Proposal

Our new brief on Governor Inslee’s Capital Gains Tax Proposal is available through this link.

Podcast: Capital Gains Tax

 

The latest episode of our podcast is above. The discussion is about Gov. Inslee’s capital gains tax proposal. A policy brief on the topic is coming soon.

For earlier episodes, go here. You may also subscribe via SoundCloud here.

Update: The capital gains policy brief is available here.

President drops 529 tax proposal; GET program dodges a bullet

This week President Obama decided to drop his State of the Union proposal to tax earnings from 529 plans. These plans are a tax advantaged way to save for college — distributions from the accounts are not taxed when used for educational purposes. (Washington’s GET program is one of them; we wrote about the program as part of our policy brief on the higher education system earlier this week.) The administration had proposed the tax change in order to help pay for its “free” community college proposal.

According to Forbes,

When 529 plans were created in 1996, earnings were tax deferred–taxed to the beneficiary at their tax rate at the time of distribution. In 2001, Congress instituted the current tax advantages and made them “permanent” in the Pension Protection Act of 2006. Savings in 529 plans spiked after those two tax events, says [Betty] Lochner.

529 expert Joseph Hurley says the proposed tax would cause 529 contributions to “dry up.” Yet he notes that in the meantime the proposal could cause another spike in contributions, as parents and grandparent rush to increase their 529 college savings and receive grandfathered tax-free status.

The Seattle Times reported on the potential impact to the GET program:

A proposal by the Obama administration to eliminate the tax benefits of college savings accounts would be “devastating” for Washington’s program, called Guaranteed Education Tuition (GET) as well as those run by other states, the GET program’s director said.

“We want to encourage families to save more for college, not less,” said Betty Lochner. Along with running GET, Lochner is also chair of a national College Savings Plans Network, an industry group. . . .

It’s unclear how a change in the tax law might affect GET’s financial solvency. At one point in 2012, GET’s unfunded liability — the gap between the value of all units sold and the market value of all its assets — was $631 million. GET was underfunded in large part because the state raised state tuition much faster than the fund’s managers had predicted, even as the stock market plunged during the recession. It has since recovered and is now fully funded, with its assets valued at about $2.93 billion.

GET’s solvency depends on three factors, Lochner said: a predictable increase in tuition, solid investment returns and ongoing purchases by investors. Lochner said she didn’t know how the loss of tax-exempt status might affect the fund, “but I do think it messes with that third assumption” — purchaser behavior.

(Emphasis mine.)

The GET program began in fiscal year 1998. As shown in the charts below, new enrollments and total contributions increased dramatically in FY 2001 (July 1, 2000 to June 30, 2001). The 529 plan tax changes were first enacted in June 2001 and became effective in January 2002, so they don’t account for what’s going on here — except that they probably increased people’s interest in and knowledge of the program and could conceivably have led to some new activity before the end of that June. A 2002 Seattle Times article noted that enrollments had increased due to “a sour stock market combined with the tax-law changes and increased exposure through television ads.”

GET’s enrollments and contributions have been declining; it’s easy to imagine that trend continuing in spades if changes to the tax status of 529 plans were changed.

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States looking for money in e-cigarettes

Stateline has an article today about e-cigarette taxes:

With the popularity of e-cigarettes growing, more states are more likely to look to the new devices for revenue. . . .

“This is going to be one of the most introduced and debated topics in state legislatures this year, especially the tax issue,” said Max Behlke, analyst for the National Conference of State Legislatures. Behlke noted with fewer people smoking traditional cigarettes, a revenue stream that states depend on is decreasing. Taxing electronic cigarettes is a way to recoup some of that money. . . .

In some states, lawmakers are making the distinction between imposing new taxes and simply extending an existing tax, such as on the tax on cigarettes, to e-cigarettes.

In Washington state, Democratic Gov. Jay Inslee has proposed raising the $3-a-pack cigarette tax by 50-cents a pack as well as levying a tax—he didn’t say how much—on e-cigarettes and vapor products. He said the taxes would raise $56 million.

Actually he has said how much: 95 percent of the taxable sales price (the same tax rate as that for “other tobacco products”). This proposed excise tax on vapor products (including e-cigarettes) would bring in an estimated $18.1 million for the 2015-17 biennium.

(For more on the tax changes the governor has proposed as part of his 2015-17 budget, see here.)

Pew finds that state tax revenue in Washington is less volatile than in the majority of other states

The Pew Charitable Trusts have posted an analysis comparing the volatility of the tax systems of the fifty states. The index Pew uses for volatility is the standard deviation of year-over-year percent change of each state’s total tax revenue from 1994 to 2013, adjusted for all known tax changes.

Alaska has the highest volatility score, 34.4 percent; South Dakota has the lowest score, 2.6 percent. Washington volatility score, 4.2 percent, was lower than those of 37 other states.

Pew Tax Volatility(Click on the chart to go to the Pew website.)

The key points from Pew’s analysis:

 

  • Overall, 50-state tax revenue had a volatility score of 5.0 percent. Compared with this national benchmark, 29 states had higher volatility and 21 had lower.
  • Three of the four states with the greatest overall volatility received a substantial share of their tax dollars from severance taxes, which are affected by global energy prices. In 2013, severance taxes made up 78.3 percent of tax revenue in Alaska, 39.7 percent in Wyoming, and 46.4 percent in North Dakota.
  • Among the states with low overall scores, Kentucky collected the bulk of its tax dollars from some of the least volatile personal income and sales tax streams in the country, and South Dakota relied primarily on one of the most stable streams of sales tax revenue.
  • Corporate income tax revenue seesawed more than any other tax source in 24 of the 29 states where it was a major tax, and it was more volatile than personal income tax in all 25 states that collected both as a major tax. Its volatility score ranged from 59.0 percent in Alaska to 9.3 percent in New Hampshire.
  • Severance tax was the most volatile revenue source in six of the nine states where it was a major tax, with volatility scores ranging from 39.7 percent in Alaska to 15.3 percent in West Virginia.
  • Personal income tax fluctuated more than any other type of tax in nine of the 41 states that levy it. Volatility scores ranged from 13.4 percent in North Dakota to 3.5 percent in West Virginia.
  • Sales tax was the most volatile major tax in only three of the 45 states that impose it: Nevada and Washington, which have no personal income tax, and Colorado, the only state where sales tax was more volatile than personal income tax among 38 states that collect both. Volatility scores for sales tax ranged from a high of 14.9 percent in Wyoming to a low of 2.8 percent in Kentucky.

The volatility score for Washington’s sales tax is 5.2 percent, which ranks 21st among the 45 states with a sales tax.

 

Boston Fed paper on the increasing volatility of state taxes on capital gains

Governor Inslee has proposed that the state institute a 7 percent tax on capital gains. The first $25,000 of gains for an individual ($50,000 for a couple) would be exempt, as would all gains on a principle residence that had been owned for 20 years or longer.  (For a few more details on the proposal see this fact sheet.)

As Dick noted last week, capital gains taxes are extremely volatile. A recent paper Yolanda Kodrzcyki, an economist at the Federal Reserve Bank of Boston, documents that the volatility of state personal income tax receipts increased dramatically in the 2000s compared to the 1980s and 1990s and that this was caused by increased volatility of capital gains:

[The] cyclical variability of personal income tax revenues increased markedly during [the 2000s]. This increase occurred because taxable capital gains became more cyclical and accounted for a higher share of overall adjusted gross income (AGI) on tax returns than in previous decades.

During the 1980s and 1990s Kodrzcyki estimates that a 1 percent increase in personal income was associated with a 2.21 percent increase in capital gains, while during the 2000s a 1 percent increase in personal income was associated with a 4.03 percent increase in capital gains.

 

 

The Department of Revenue has posted its annual Revenue Alternatives list

Before each legislative session, the state Department of Revenue produces a list showing the state revenue impact of various possible tax rate increases. Here is the new version, based on the November 2014 revenue forecast:

Revenue Alternatives

Governor’s proposed capital gains tax: Considering possible negative consequences

Capital-Gains-States-2014-(large)2

As Kriss wrote yesterday, the governor’s budget includes a new capital gains tax  (link to detail on governor’s web page is currently down). The essence:

The Governor proposes a new capital gains tax on the sale of stocks, bonds and other assets to increase the share of state taxes paid by our state’s wealthiest taxpayers. The state would apply a 7 percent tax to capital gains earnings above $25,000 for individuals and $50,000 for joint filers, starting in the second year of the biennium.

…After exemptions are provided to remove any capital gains tax on retirement accounts, homes, farms and forestry, the proposal will raise an estimated $798 million in fiscal year 2017.

As Jason Mercier of the Washington Policy Center was quick to point out, the idea isn’t totally new. HB 2563 was introduced in the House in 2012, with a fiscal note speculating the proposed 5 percent capital gains tax would raise more than $1.4 billion in the 2013-15 biennium. The measure never came to a vote. From the fiscal note:

Capital gains are extremely volatile from year to year.
Revenue from this proposal will depend entirely on fluctuations in the financial markets and can be expected to vary greatly
from the amounts presented here.

With the governor making capital gains a centerpiece of his revenue legislation, expect more discussion of the tax in the coming year. While it faces tough sledding, particularly in the Republican state Senate, it also has its proponents. So we should spend some time assessing the tax.

The Tax Foundation’s recently published Business in America report offers an in-depth look at the way America taxes businesses, placing the U.S. tax structure in a global context. A very accessible chartbook, the report deserves the RTWT tag. We’ll just note that the U.S. imposes an internationally high capital gains burden.

If a corporation retains its earnings, it can boost the value of its stock. As a result, shareholders can realize a capital gain. The United States also places a high tax burden on capital gains income. The U.S. average top marginal tax rate on capital gains of 28.7 percent is the 6th highest rate in the OECD and is more than 10 percentage points higher than the simple average of 18 percent across the 34 countries. Nine countries don’t tax capital gains.

Last February, the Tax Foundation published “How High are Capital Gains in Your State?” from which the map at the top of this page is taken.

Taking into account the state deductibility of federal taxes, local income taxes, the phase-out of itemized deduction, and any special treatment of capital gains income, this map shows the combined federal, state and local top marginal tax rate on capital gains by state.

The state with the highest top marginal capital gains tax rate is California (33 percent), followed by New York (31.5 percent), Oregon (31 percent) and Minnesota (30.9 percent).

The governor’s proposed 7 percent rate would be the 11th highest state capital gains tax rate in the nation, tied with South Carolina, according to the Tax Foundation’s February report, The High Burden of State and Federal Capital Gains Tax Rates.  The report examines also the economic impact of capital gains taxes. For example,

The United States’ high tax burden on capital gains has long-term negative implications for the economy. This non-neutral tax creates a bias against savings, slows economic growth, and harms U.S.’s competitiveness.

Capital Gains Tax is One of Many Taxes on the Same Dollar

Capital gains taxes represent an additional tax on a dollar of income that has already been taxed multiple times. For example, take an individual who earns a wage and decides to save by purchasing stock. First, when he earns his wage, it is taxed once by the federal and state individual income tax. He then purchases stock and lets his investment grow. However, that growth is smaller than it otherwise would have been due to the corporate income tax on the profits of the corporation in which he invested. After ten years, he decides to sell the stock and realize his capital gains. At this point, the gains (the difference between the value of the stock at purchase and the value at sale) are taxed once more by the capital gains tax. Even more, the effective capital gains tax rate could be even higher on your gains due to the fact that a significant difference in the value of the stock is due to inflation and not real gains.

There’s more, which we’ll surely get into in the coming months. But for an interesting take on the tax from the leading newspaper in an adjacent state with the nation’s second highest capital gains tax rate, consider this 2012 editorial from the Oregonian.

To be sure, the people affected most by capital gains taxes probably don’t buy ramen noodles by the case. That doesn’t mean, however, that all – or even most – people use their capital gains to buy boats, champagne, poodles or whatever it is rich people are supposed to enjoy.

In many cases, capital gains go right back to work, which is to say they’re poured into businesses, property or anything else investors consider potentially lucrative – emphasis on potentially. An investment that promises to be lucrative can turn out to be disastrous because, you know, investing involves risk. That’s one reason why capital gains are often taxed at a lower rate than regular income.

Why should those who don’t have money to invest value such tax-code incentives? Because other people’s investments allow companies to grow, allowing those businesses to hire more people, who, in turn, buy stuff and pay taxes. The more heavily you tax capital gains, the more expensive private capital becomes for the small businesses so many Oregonians support.

Noting outmigration from Oregon to Washington’s Clark County, the editorial says,

The rates imposed by individual states matter because people may move freely, and taxpayers can time their capital gains.

The editorial was part of a series suggesting the need to reform Oregon’s highly progressive tax structure. Read the whole thing. The conclusion bears repeating.

It’s a lot harder to explain the benefits of lower rates on capital gains and income than it is to say, “No tax breaks for the rich.” But no one said improving Oregon’s tax code would be easy.

Tax policy is complicated. And potentially getting more so here.