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March 4, 2013
State Tax Merry-Go-Round: Do-It-Yourself Tax Reform
by Billy Hamilton

Full Text Published by Tax Analysts®

by Billy Hamilton

Billy Hamilton was the deputy comptroller for the Texas Office of the Comptroller of Public Accounts from 1990 until he retired in 2006. He is now a private consultant.

Congratulations. You are the governor of our greatest state. Or, at least, you are the governor of a state, which is pretty darned good. Your State of the State address is fast approaching, and by now, you realize that governors in other states are proposing sweeping tax reforms. Maybe you should, too.

Your staff is hopeless. Winning an election for governor doesn’t qualify anyone as a tax expert. The hours are ticking by, and you need help. What do you do? Turn to leading university scholars who will make you feel dumb and propose ideas that are political poison? Ask lobbyists or business groups for help, knowing they have their own agendas?

No! Before you make a catastrophic mistake, try State Tax Notes’ "patented" Do-It-Yourself Tax Reform Planner©!

This simple assessment tool is proved in the laboratory of democracy to provide the finest tax reform options custom-tailored to your specific needs. Our instant analysis was developed by actual tax experts during a long lunch at Chili’s and incorporates the latest in tax reform thinking without charts or graphs or boring numbers. No econometric models or PowerPoint presentations were used to develop this tool -- just good old American common sense.

It’s this simple: Your answers to a series of questions will enable you to discover the best approach for your political situation and develop a winning tax reform plan -- or at least a tax plan that won’t get you laughed out of the Capitol.

Our experts have no interest other than your success. And after the third margarita, they also have no special attachment to the cumbersome precepts of sound tax policy, with all their uncomfortable and politically dangerous realities. We don’t charge outlandish consulting fees. We believe in you and your vision, governor. No, seriously. We do.

Try our simple analytical tool. You will be amazed at how soon you’ll be dazzling the legislature and the capital media. Within specific, narrowly defined parameters, we guarantee success!Legal disclaimer: The “narrowly defined parameters” mentioned in the paragraph is a legal way of saying that there actually are no guarantees. This is politics, not a refrigerator warranty. What are you waiting for? What do you have to lose? Let’s start immediately!

Here’s how. Take the test below. Circle the answer that best fits your views. At the end of the self-assessment, you’ll score the results and select the tax plan that’s right for you. It’s that simple. We even supply case studies from other states to show you how it works.

Remember: There are no wrong answers, only wrong policies! Your situation is unique, just like your state. Ready? Here we go.

State Tax Notes’ Do-It-Yourself Tax Reform Self-Assessment Guide©

  1. My political affiliation is:



  2. Before becoming governor, I was:



  3. In my race for governor, I campaigned on:



  4. My priority as governor is:



  5. I would classify myself as:



  6. Our legislature is dominated by:



  7. I completed this assessment while:



  8. I don’t know much about taxes, but I’m certain that:



  9. If I had to listen to one special-interest group above all others, it would be:



  10. Our state’s budget situation is:



Scoring: Add 3 points for each “a” that you circled, 2 for each “b,” and 1 for each “c.”

  • If you scored 25 or more, the Red Tax Plan described below is for you.
  • If you scored between 20 and 25, you should consider the Blue Tax Plan.
  • If you scored between 15 and 20, the Black and Blue Tax Plan is the ticket.
  • If you scored less than 15, your election was a freak accident; stick to photo ops with 4H groups.


Red Tax Plan: Unleashing the Power of the Free Market and Hoping for the Best

Your answers indicate that you are strongly conservative and probably a Republican in a red state. There is only one plan that will work for you: Reduce income taxes as much as possible. Here are the details:
  • Propose reducing or eliminating state income taxes. Release the "makers" to accumulate freely, spend extravagantly, and hope they do it in your state and not the Cayman Islands.
  • Cut spending. You don’t need parks if you’re skiing in Park City.
  • Raise any needed revenue by eliminating sales tax exemptions, which you should call “tax loopholes” and “special-interest tax breaks.”
  • Call the sales tax a “consumption tax.”
  • Call for “enhanced user fees” since no one knows what that means.

Bells and Whistles

  • If you can’t make the plan’s math work, increase the tax rate on “consumption.”
  • Raise the cigarette tax. Either no one cares or else feels too guilty about smoking to complain.
  • If the math still doesn’t work, try phasing in the tax cuts over time -- like a decade, well beyond the end of your administration. Let someone else clean up the mess.

Talking Points

A recent Wall Street Journal article makes the case for you:


    As an economic matter, [swapping income taxes for sales taxes] makes sense. Income taxes generally do more economic harm because they are a direct penalty on saving, investment and labor that create new wealth. Sales taxes, by contrast, hit consumption, which is the result of that wealth creation. [Governors like you] cite the growing evidence that states with low or no income taxes have done better economically in recent decades compared to states with income-tax rates of 10% or more.The Wall Street Journal, “The State Tax Reformers,” Review and Outlook, Jan. 29, 2013, available at http://online.wsj.com/article/SB10001424127887323968304578245720280333676.html.

Repeatedly use the phrase “job creators.” Think about using this line: “We don’t have a revenue problem, we have a spending problem.” And this line: “We need to make our state look more like Texas and less like California.” (Yes, we recognize that your state looks nothing like California or Texas. Just trust the experts and say it.)

Role Models

Sam and Dave. No, not the ’60s soul duo, but rather the governors of two small, square states in the center of the United States -- Kansas Gov. Sam Brownback (R) and Nebraska Gov. Dave Heineman (R). Brownback successfully pushed for income tax cuts last year and is proposing more cuts this year. Heineman announced in January that he wants to eliminate the state income tax and replace it with a broader sales tax. He’ll have to do it over time to avoid bankrupting the state.

Also deserving mention is Louisiana Gov. Bobby Jindal (R). Jindal wants to zero out his state’s income tax, which has a top rate of 6 percent, and the state’s 8 percent corporate tax, and replace them by increasing the state’s current 4 percent sales tax rate. He also proposes eliminating about 150 sales tax exemptions, including those for massage parlors, artwork, and fishing boats. Be careful, though. Louisiana’s example may not work everywhere. Louisiana’s tax code is so littered with tax exemptions, it makes Bourbon Street during a Mardi Gras parade look orderly.

Case Study

During his campaign last year, North Carolina’s newly elected Gov. Pat McCrory (R) said he’d like to see state corporate and individual income tax rates fall to levels competitive with neighboring states Virginia and South Carolina. As of the end of January, he still hadn’t consulted our "patented" Do-It-Yourself Tax Reform Planner© to create a plan to match his promise. As a result, Senate Republicans, who apparently did consult our Do-It-Yourself Tax Reform Planner©, put out a plan ahead of the governor’s. The problem was that the plan went further than McCrory originally envisioned, giving him the choice of following them down a fiscal rabbit hole or looking weak by recommending something short of complete financial Armageddon.

The Senate proposal, which in January was being called a “concept” by GOP leaders, would eliminate the state’s corporate and personal income taxes and replace them with a broader consumption tax, meaning the sales tax would apply to things like auto repairs, lawn care, and professional services. The Republicans also want to raise the sales tax rate from 6.75 percent to 8 percent. And the proposal would extend the sales tax to food. The food tax was eliminated 15 years ago but is still levied by local governments at a 2 percent rate. The corporate tax would be replaced with a license fee, and real estate transactions would be taxed, which would raise an enormous amount of money, assuming legislators might actually vote to tax home sales.

McCrory’s predicament got messier when Budget Director Art Pope, who is working on the governor’s tax plan, told reporters he was worried that the Senate plan could be regressive and essentially double-tax older adults who pay income taxes and save for retirement. “Speaking personally, I have great concerns about that,” Pope told reporters.

McCrory has said that despite Pope’s reservations, he’s still open to eliminating the income tax. “We’re looking at many different plans at this point in time, and then, after reviewing all the different plans, I’m going to try to make the best decision possible,” he said. He will release his two-year budget proposal and tax plan in mid-March, by which time, I hope, he will have consulted our "patented" Do-It-Yourself Tax Reform Planner©.


Blue Tax Plan: The Opportunity Agenda Includes the Opportunity to Pay

Based on your answers, you are a Democrat or moderate Republican governor, both endangered species in modern politics. The 2010 elections weren’t kind to governors like you, and it’s amazing you weren’t defeated at the polls. You probably should be in a museum exhibit instead of the governor’s mansion. You know that although budget austerity is politically correct for the times, cutting budgets and taxes have limits and won’t pay for your state’s long-term needs. Here’s your tax reform plan:

  • Tax “millionaires.” It raises money and they didn’t vote for you anyway.
  • Raise the sales tax rate. It’s fast and simple -- the legislation is usually less than three pages long.
  • One word: gambling. There must be an oceanfront, river, lake, creek, or stock tank that doesn’t have a casino on it somewhere in your state. Find it and put one on it.
  • Raise sin taxes, including dreaming up some new sins -- the straight-laced, do-gooders of your state will thank you. Everyone else will hate your guts.
  • Consider business tax reform. Eliminate tax credits and raise rates. It’s just like the millionaire tax and for the same reason.
  • Pray for a budget crisis. A spoonful of crises -- not sugar -- helps tax reform go down.

Bells and Whistles

  • If you’re feeling queasy about raising taxes, make the increases temporary.
  • If you’re still feeling queasy, put them to a vote of the people.
  • Tie tax reform to public school funding. It’s a tried-and-true recipe for success.

Talking Points

Promise not to blow the additional tax dollars on new programs and to spend more on schools. You can also try lifting parables from the Bible to remind people of the need for sacrifice to achieve glory. Here’s how California Gov. Jerry Brown (D) did it earlier this year:


    Recall the story of Genesis and Pharaoh’s dream of seven cows, fat fleshed and well favored, which came out of the river, followed by seven other cows lean fleshed and ill favored. . . . The Pharaoh could not interpret his dream until Joseph explained to him that the seven fat cows were seven years of great plenty and the seven lean cows were seven years of famine that would immediately follow. The Pharaoh took the advice of Joseph and stored up great quantities of grain during the years of plenty. When famine came, Egypt was ready. The people have given us seven years of extra taxes. Let us follow the wisdom of Joseph, pay down our debts and store up reserves against the leaner times that will surely come.

Amen and hallelujah.

Invoke the “opportunity agenda” to make one thing clear: No bucks, no Buck Rogers. Here’s Massachusetts Gov. Deval Patrick (D) in his stateState of the State address:

      Opportunity is too important to leave to chance. Opportunity requires growth. And growth requires investment. It’s just as true of government as in any business. . . . What we choose to do, and not do, shapes our future. . . . That is why we invest in education, in innovation and in infrastructure.
Subliminal message: Clam chowder costs clams.

Talk about everyone paying his or her “fair share.” Try using this line: “We need to make our state look more like California and less like Texas.” Who knows? It could work. See below.

Role Model

Jerry Brown. The governor, who spans two administrations in two centuries, cut the budget like a Republican in his first year in office, and then asked voters to approve a temporary increase in the sales and income taxes -- the seven years referred to in his parable above -- to pay for basic services like schools. It worked. The voters bought it. Now only a few months later, Brown’s proposed 2014 budget will leave the state with an $851 million surplus, the first in a decade. As a bonus, Standard & Poor’s upgraded the state’s credit rating for the first time since 2006. It may be that the governor should now emulate the noted fictional character Yoda and simply vanish leaving behind only his cloak. Then, like Yoda, he can pop up occasionally as an incorporeal image to offer elliptical observations like this profound insight from the governor’s announcement that the budget isn’t drenched in red ink this year: “This is new.”

Case Study

When he ran for governor in 2010, Minnesota Gov. Mark Dayton of the Democratic-Farmer-Labor Party (DFL) campaigned hard on the issue of taxing the rich. Citing studies by the state’s Revenue Department, he said the highest-earning Minnesotans were paying a smaller percentage of their income in state and local taxes than other taxpayers. He said he wanted them to “pay their fair share.” Clearly, he has consulted our "patented" Do-It-Yourself Tax Reform Planner©.

After taking office in 2011, Dayton proposed creating a new top income tax bracket with a 10.95 percent rate, "stratospherically" higher than the current 7.85 percent top rate. Republicans, who controlled the Legislature, swatted down the plan like an annoying Minnesota mosquito. Now Republicans are in the minority, and Dayton has more room to maneuver. He said in January that he still believes the wealthy should pay more. “For me, that’s not a slogan,” he said. “That’s a conviction.”

It also helps that there’s a budget crisis brewing -- a $1.1 billion gap in the next two-year budget. With that in mind, Dayton unveiled a tax reform plan that is a near-classic version of our Blue Tax Plan. He said his $37.9 billion two-year budget proposal closes the $1 billion budget gap and makes significant new investments in education, funded by the most significant tax changes that Minnesota has seen since 1971.

Dayton proposes creating a new top income tax bracket of 9.85 percent for married filers with taxable incomes exceeding $250,000. His new plan also lifts a recommendation that tax study commissions in the state have made periodically for 30 years -- broaden the sales tax base but lower the rate. Dayton wants to reduce the sales tax rate from 6.875 percent to 5.5 percent beginning January 1, 2014. He also wants to add a long list of items to the tax base, including those the DFL has long fought to avoid taxing, such as clothing sales priced $100 and up. It “goes against my upbringing,” said the governor, a department store heir.

The plan also would provide a property tax rebate of up to $500 to all Minnesota homeowners. Homeowners would apply for the rebate when they file their income taxes in 2014. It would also lower the state’s corporate income tax rate from 9.8 percent to 8.4 percent, as well as end some exemptions, including for foreign royalties and foreign operating corporations. Finally, the plan would tax nonresidents on their income from stocks, bonds, capital gains, and dividends if they spend at least 60 days in Minnesota a year. That apparently is aimed at retirees and vacationers who own a home in Minnesota and live there only during the summer. “There is a snowbird tax -- absolutely,” the governor told reporters.

Predictably, Republican lawmakers were outraged on behalf of the wealthy and the snowbirds. The state’s Republican legislative leaders warned that the governor would chase “job creators” out of the state. Even more fun was a letter from Florida Republican U.S. Rep. Trey Radel that somehow became public on February 1: “Dear Governor Mark Dayton,” Radel wrote. “I’m writing today to thank you. As a Floridian, I am overjoyed to hear about your plan to raise taxes on Minnesotans, most especially the so-called ‘snowbirds.’ Your proposal gives us a chance to shine here in the Sunshine State.” As if anyone wants to be in Florida in the dead of summer, when it’s more miserably swamplike and malarial than Houston. It should be worth a few extra bucks in tax to have an alternative.


Black and Blue Tax Plan: When You’re Handed Lemons, Make Lemonade

Based on your answers, you are the governor of a state with a divided legislature or a legislature dominated by the other party, or you aren’t enthusiastic about tax reform for some reason. Very well. It takes all kinds. However, you can’t have a State of the State speech without at least mentioning taxes, so here’s a plan for you that let’s you mix and match enough ideas to sound like you know what you’re talking about.

  • Propose “streamlining” tax incentives, which is a code word for eliminating them or increasing them -- or whatever works. Don’t specify what to do. Let the legislature figure it out -- and take the grief.
  • Propose a sales tax holiday, which is always popular and not that expensive. Anything bought for kids except violent video games is fair game.
  • Propose a tax idea that appeals to your political base. For example, propose cutting tax rates on “job creators” (that is, the rich) if you’re a Republican or taxing them more heavily if you’re a Democrat. Let the legislature kill it if they dare.
  • Talk about something else. Surely, there’s been some sort natural disaster to fret over or firefighters to thank (see this year’s speech by New Jersey Gov. Chris Christie (R) for examples). Fill the time and just skip over the taxes. See if anyone notices.

Bells and Whistles

  • Propose new tax breaks for companies that are threatening to leave the state.
  • Propose a tax study commission. It’s the best way to do nothing by doing something.

Talking Points

For a governor in your position, it’s always good to kick the can down the road or work on a few mostly trivial issues and declare victory. However, don’t admit that’s the game. Instead, say you’re preparing the way for future change or reaching across the aisle for compromise. For example, Oregon Gov. John Kitzhaber (D) this year described his recommended budget as “transitional,” composed of necessary steps that have to be taken before tax reform or other more consequential efforts can be pursued successfully. The can will be adroitly kicked down the road without actually doing anything but performing a little verbal gymnastics. (See below.)

Role Model

Christie. With the State Legislature controlled by Democrats, the Republican governor has mastered “small ball” tax politics. It took some work. In January 2012 Christie proposed cutting income tax rates by 10 percent across the board over three years. Under the proposal, higher-income taxpayers, who pay more in income taxes, would have benefited more than lower-income taxpayers. The Legislature wasn’t amused, and the governor was forced to retrench. Instead, he endorsed a proposal to cut income taxes only for New Jerseyans below a specific income level and based on their annual property tax bills. The governor unveiled that proposal on July 2, when he conditionally vetoed a bill that would have raised the income tax rate on taxable income exceeding $1 million. Christie suggested turning that legislation into a tax cut plan based on a proposal made by Senate President Stephen Sweeney (D).

Under Christie’s latest proposal, homeowners with taxable income of $400,000 or less would receive an income tax credit based on their property tax bills. The credit would be phased in over four years and ultimately would reach 10 percent of the first $10,000 in property taxes paid. The proposal wouldn’t disproportionately benefit the wealthy, since homeowners earning more than $400,000 would be ineligible and the amount of the tax credit would be based on property tax bills, not income levels. It’s a far cry from the ambitious proposals by Republican governors like Brownback or Jindal, but hey, it’s something.

Case Study

The Oregon Legislative Assembly and governor’s mansion are both occupied by Democrats, and like most states, Oregon faces ongoing spending needs for schools and other critical services. But that doesn’t mean that Kitzhaber, who has served three terms as governor, was in the mood to propose sweeping tax reforms today after the last Democrat-controlled legislature passed tax increases in 2009 and 2010 on wealthy Oregonians and corporations, and citizens' initiatives limiting taxes and spending are a real threat.A real threat. Oregon is the only state with a monument to a man who spent his life promoting citizen initiatives. It clearly was time for a strategic application of our "patented" Do-It-Yourself Tax Reform Planner©.

In November Kitzhaber unveiled his budget proposals for the upcoming two years. They focus on stabilizing schools, taming prison and public pension costs, and building the economy. Basically, he wants to pay for more school spending by cutting spending on prisons and pensions. The governor’s budget doesn’t offer any immediate solutions to education funding or other big issues, and it doesn’t propose any major tax reforms.

The governor said he doesn’t anticipate tackling tax reform before 2014. Before there’s a chance of success with new taxes, Kitzhaber said, “We’ve got to do a better job of convincing people: A. more money will go into the classroom and B. it moves the dial.” Whatever that means. It may not move the dial, but it kicks the can.

In the meantime, the governor said he is willing to consider reducing state tax breaks as a way of raising more revenue, including a possible overall cap on the amount of deductions or tax credits a filer could claim, but he offered nothing more specific. The tax break idea is ironic because Kitzhaber called the legislature into special session in December to give prominent state corporate citizen Nike what amounts to a 30-year deal guaranteeing that it will be taxed based on single-sales-factor apportionment in return for $150 million in investment and 500 new jobs over a five-year period. “This is a huge win for Oregon,” Kitzhaber said in a statement. Sen. Larry George (R) voted against the bill, saying that while he’s all for tax stability, the deal amounted to “crony capitalism.”


See? That Wasn’t Hard!
Don’t Delay. Try It Today!

There’s nothing to tax reform proposals, and governors prove that every year. Tax reform is fun and easy when you use State Tax Notes’ "patented" Do-It-Yourself Tax Reform Planner©. You have nothing to lose but the next election. You have a world of tax possibilities to win!

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