State Net Capitol Journal – August 4, 2014; States Backing IRA-Style Plans For Workers Without Retirement Accounts

Budget & Taxes

STATES BACKING IRA-STYLE PLANS FOR WORKERS WITHOUT RETIREMENT ACCOUNTS: Inspired by his Aunt Francisca — who spent much of her 74-plus years cleaning houses for people whose retirements were well-provided for but who had only Social Security to count on herself — California Senate President Pro Tem-elect Kevin de Leon (D) pushed for a retirement program for about 6.3 million residents who didn't have access to one through their employers. His plan, the Secure Choice Retirement Savings Program, which was signed into law in 2012, mandates that businesses with five or more employees that offer no other retirement plan deduct 3 percent of their employees' wages and deposit the money into IRA-style accounts supervised by the state.

The state is still awaiting approval from the U.S. Labor Department for an exemption from Employee Retirement Income Security Act (ERISA) rules making it and participating businesses liable for financial losses associated with the plan. And De Leon acknowledges it won't solve all of retirees' problems. But he said it could give the average retiree who receives just $1,261-a-month in Social Security benefits a "modicum of dignity," as well as reduce the number of retirees who have to "be subsidized by taxpayers in what's supposed to be their golden years."

With what Forbes contributor Edward Siedle described as "the greatest retirement crisis in the history of the world" looming in the coming decades, when "millions of elderly Americans, the Baby Boomers and others" will slip into poverty, "Too frail to work, too poor to retire," other states are working on state-sponsored savings plans of their own. In April, Illinois' Senate approved such a plan. In May, Connecticut lawmakers set aside $400,000 for one, and Maryland Gov. Martin O'Malley (D) created a task force to look into the idea as well. And in the fall, a task force in Oregon is expected to issue recommendations on ways to encourage retirement savings there.

The various state efforts coincide with the rollout of President Barack Obama's "myRA," or my Retirement Account, on a pilot basis later this year. That plan will allow participating businesses to set up optional payroll deductions for a Roth-style IRA.

John Mangan, regional vice president of the American Council of Life Insurers, which represents 300 insurance companies in the U.S. and abroad, said the president's plan seemed to be a better solution than the state accounts. But De Leon stressed that there were differences between the two, most importantly in the case of California, that the plan is mandatory rather than voluntary like the myRA.

"That's the game-changer here," he said. (STATELINE.ORG, FORBES)

CORPORATE 'TAX INVERSIONS' COSTING STATES: Lately, American companies have been buying up foreign competitors and then shifting their "parent" status to the location of the foreign acquisition. The maneuver, known as a "tax inversion," is particularly popular in the health care industry.

One recent, high-profile example is Minneapolis-based medical device manufacturer Medtronic's decision to buy rival Covidien PLC, headquartered in Massachusetts but "domiciled" in Ireland, for $42.9 billion.

The Emerald Isle has one of the world's lowest corporate tax rates, at 12.5 percent, while the United States has one of the highest, at 35 percent. The Minneapolis Star-Tribune estimated the merger could save Medtronic between $3.5 billion and $4.2 billion.

"When you invert, it makes it easy to strip income out of the U.S. and put it into a tax haven," said Martin Sullivan, chief economist for Tax Analysts, which analyzes tax laws and current events for tax professionals and businesses.

Sullivan said the inversions ultimately hurt states too "because when income is stripped out of the U.S. federal tax base, it is also being stripped out of the state tax base."

But some say tax inversions are just the latest form of corporate tax avoidance. The liberal-leaning tax study group Citizens for Tax Justice reported earlier this year that between 2008 and 2012, 269 Fortune 500 companies paid state income taxes amounting to 3.1 percent of their U.S. profits, less than half the average rate of 6.25 percent. That difference amounted to $73.1 billion over the five-year period.

Robert McIntyre, director of Citizens for Tax Justice, said the number of inversions is on the rise and Congress needs to do something about it.

"Once somebody looks like they are getting away with it, the floodgates open," he said. "If Congress sits on its hands they are a bunch of hypocrites. Patriotism seems to stop at the corporate edge." (STATELINE.ORG)

AK STATE REVENUES MOST VOLATILE IN NATION: Alaska's revenues are more volatile than any other state's by a wide margin, according to a new study by the Pew Charitable Trusts. The standard deviation of year-over-year change in total tax revenue from 1994 to 2012 for Alaska was 34.2 percent. The next highest rate, North Dakota's, was 14.2 percent, with Wyoming's considerably less far behind, at 12.2 percent.

The volatility of Alaska's revenues is no great surprise, given the state's general fund is almost totally reliant on oil tax revenues, which have swung from producing billion-dollar surpluses to billion-dollar deficits in recent years.

The Pew study recommended states build up their cash reserves to prepare for such eventualities, hence the study's title, "Building State Rainy Day Funds." Alaska actually has two such budget reserve funds, with a combined total of $17.6 billion in them. But $3 billion of that will be transferred to retirement trust funds this year, and years of projected budget deficits will likely eat up more.

But there may be a silver lining for the state. Over the past few years there's been a good deal of discussion about, but little agreement on, a fiscal plan to guide the state's response to both surpluses and deficits. The state's current predicament could provide the motivation to finally get that done.

"We've shown a history of being willing to talk about the specific subject of fiscal planning when we do face harder times," said Rep. Mike Hawker (R). (ALASKA DISPATCH NEWS)

BUDGETS IN BRIEF: Since uncovering a major unemployment fraud case in 2010, NEW JERSEY has identified over 300,000 people who tried to obtain unemployment benefits either through intentionally fraudulent schemes or honest mistakes and blocked nearly $450 million in improper payments (STATELINE.ORG). • Also in NEW JERSEY, the chief state economist, Charles Steindel, resigned last month. Steindel underestimated revenues in four of the past five years by a combined net total of $3.5 billion (BLOOMBERG).* VERMONT Gov. Peter Shumlin (D) is calling for a 2 percent cut in state government spending with revenues expected to increase only 3 percent this year instead of the 4.8 percent previously projected (BURLINGTON FREE PRESS, STATE NET). • Seven WYOMING school districts are claiming the state owes them $151 million for failing to adjust school funding for inflation the last three years (WYOMING PUBLIC MEDIA). • ILLINOIS Gov. Pat Quinn (D) signed legislation last month allowing the state to borrow $1.1 billion to extend a statewide construction program that was about to end. The four-year extension of the program will be funded by revenue from the legalization of video gambling at bars and truck stops in 2009 and higher drivers' fees and taxes on candy, liquor, sodas and beauty products (CHICAGO TRIBUNE). • Online sales-tax collections have increased 68 percent in OHIO over the past five years, hitting a record $45 million in the budget year that ended June 30. The state officially joined the multistate effort to streamline online sales taxes in January (COLUMBUS DISPATCH). • NORTH CAROLINA House and Senate budget negotiators reached agreement last week on a $21.3 billion state budget that includes teacher pay raises but no Medicaid overhaul (NEWS & OBSERVER [RALEIGH]).

- Compiled by KOREY CLARK

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