States to Tackle Tax Reform in 2015

Tax Breaks

States to Tackle Tax Reform in 2015

Voter backlash over a rash of tax hikes prompts lawmakers to act.

Simon Bruty

Economist Scott Drenkard is a state tax expert for the Tax Foundation, a policy research group in Washington, D.C.

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Last November, Republican governors were elected in Maryland, Illinois and Massachusetts, which are traditionally Democratic strongholds. What role did taxes play?

Taxes were one of the biggest issues, if not the biggest. In Illinois, Republican candidate Bruce Rauner campaigned on phasing out large personal income and corporate income tax hikes that were put in place in 2011. In Maryland, a lot of people complained about the “rain tax” [a fee charged to owners of driveways, parking lots and other hard surfaces to pay for reducing storm-water pollution in the Chesapeake Bay]. It’s not the biggest levy in Maryland, but it illustrates the idea a lot of people in Maryland have that they’re overtaxed compared with the rest of the country.

What does the election mean for state tax reform nationwide?

I’m predicting 2015 will be the biggest year for state tax reform in a decade, if not longer. We’re coming out of a recession, albeit slowly, and revenues are a little more healthy than they have been. With the revenue uncertainty gone, lots of policymakers will be looking to make changes, big and small, to make their tax codes simpler and more sensible. For instance, North Carolina scrapped its tax code in 2013 and started over with a single-bracket income tax with a generous standard deduction. The state’s corporate tax rate, which used to be 6.9%, will be 5% next year and has the potential to be as low as 3% by 2017.

Kansas Gov. Sam Brownback narrowly won re-election, but critics blame a widening budget gap on his deep tax cuts. Can other states learn from the Kansas experience?

Kansas isn’t a model for tax reform. Compare it with North Carolina, which broadened its tax base and lowered rates. Kansas narrowed the base and lowered rates. Kansas also came back the following year and increased spending. You can’t cut taxes and increase spending and not expect a shortfall.

What are the prospects for federal tax reform?

The message next year is going to be that tax reform is accomplished across the aisle. We saw positive action in blue states such as New York and in Washington, D.C. We also saw red states, including Indiana and Nebraska, make structural improvements in corporate and individual tax codes. This really demonstrates that tax reform is possible under a variety of colors of leadership. It’s time for the federal government to step up because tax reform is possible, and voting shows it’s popular.