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Policy: Economy

Tax cuts are big for states languishing in economic doldrums, report says

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These 18 states cut taxes last year

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Source: American Legislative Exchange Council; U.S. Bureau of Economic Analysis Mark Tapscott,Watchdog,Taxes,2008 Financial Crisis,Economy,EXography,Budgets and Deficits,MinusRelatedPhoto

Eighteen states approved measures last year to cut taxes in efforts to improve their economic competitiveness and spark new growth, according to a report by the American Legislative Exchange Council.

More than a dozen of the tax-cutting states are still suffering from the effects of the Great Recession of 2009, with estimated annual real state growth rates under one percent in 2013.

ALEC is a Right-leaning think tank that provides research and model legislative proposals for state legislators.

North Carolina officials approved the most comprehensive slate of tax cuts and reforms among the 18, including:

• Replacing the state’s multitiered personal income tax system with a modified flat rate of 5.8 percent this year and 5.75 percent beginning in 2015. Previously, the state’s top personal income tax rate was 7.75 percent.

• Lowered the corporate income tax rate in annual changes from 6.9 percent to 3 percent by 2017.

• Killed the state’s death tax on estates, as well as business levies like the multiple gross receipts franchise tax, privilege taxes and preferential sales tax rates.

Other significant states include Ohio, which “has room to claim the largest year-to-year tax cut of the 2013 legislative session with a cut of $2.7 billion over three years,” the ALEC report said.

The Ohio measures provide a 10 percent across-the-board reduction in personal income tax rates phased in over three years.

ALEC was less enthusiastic about other parts of the Ohio tax reforms in 2013.

“On the other hand, businesses with more than $1 million taxable gross receipts will bear more of the state’s commercial activities tax burden,” the ALEC report said. “The sales tax rate was also raised to 5.75 percent, and expanded to additional services.”

In New Mexico, officials lowered the state's corporate income tax rate from 7.6 percent to 5.9 percent.

“For years, New Mexico levied the highest corporate income tax rate in the Southwest region (except for California) and struggled to remain economically competitive with its neighbors,” the ALEC report said.

Most of the tax-cutting states are in the middle quintiles of states in ALEC's "Rich States, Poor States" 2013 economic outlook ranking that measures prospects for growth based on 15 separate factors.

Eight of the "Rich States, Poor States" factors are tax-related, but the other seven are not, according to ALEC. An ALEC official cautioned that tax measures adopted in 2013 won't be reflected until the 2014 edition is published.

Two big exceptions to that pattern, however, are North Dakota and Texas, which ranked first and second in state gross domestic product growth, according to the U.S. Bureau of Economic Analysis.

North Dakota, which is in the midst of an energy-fueled economic explosion with an 8.2 percent estimated annual real state growth rate, slashed property taxes by $850 million as part of a $1.1 billion tax reduction package.

Texas is second with a 2.3 percent estimated annual real state growth rate. Officials there approved a package of business tax cuts worth an estimated $1 billion.

Fifteen of the 18 states have Republican legislatures, New Mexico has a Democratic legislature and Iowa's legislature is split between the two major parties. Nebraska has a unicameral, nonpartisan legislature.

Thirteen of the tax-cutting states have right-to-work laws on the books.

At least one state has seen its new tax reductions rejected by the courts. Oklahoma officials voted to cut their state's personal income tax rate from 5.25 percent to 5 percent beginning Jan. 1, 2015. The measure was prompted by Gov. Mary Fallin's concern that the Sooner state was becoming “an income-tax sandwich” between Kansas and Texas, both of which have enacted significant tax reductions and have rapidly growing economies.

But on Dec. 17, the Oklahoma Supreme Court struck down the measure. Legislators have since filed new tax cut proposals.

ALEC’s Ben Wilterdink, one of the report authors, told the Washington Examiner that “since the original tax cut package was not scheduled to take effect until 2015, it is possible that Oklahomans won’t miss out on tax cuts if the new tax cut package (also starting in 2015) is passed and signed into law this session.”

The new legislative proposals provide bigger tax cuts than were provided in the law that was rejected by the court.

Mark Tapscott is executive editor of the Washington Examiner.
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