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Tax Law

State Net Capitol Journal – June 10, 2013

Budget & Taxes

KS TAX PLAN SPURS POLITICAL POSTURING: The Kansas Legislature passed a new tax plan last week that will gradually lower income taxes over the next five years but keep in place part of a sales tax increase approved in 2010 to get the state through the recession. That 6.3 percent levy was supposed to return to 5.3 percent this summer, but it will drop to only 6.15 percent instead, generating $777 million between 2014 and 2018 to help fill the budget hole created by the income tax cuts enacted by the state last year.

The Legislature's Democratic minority, undoubtedly with an eye toward next year when the governor's office and all 125 of the state's House seats will be up for election, insisted the plan was a tax hike.

"It's going to be characterized as a $777 million tax increase because it is a $777 million tax increase. Make no mistake about that," said Rep. Julie Menghini (D), one of the lead negotiators on the plan. "If you promised not to raise taxes, make no mistake you will be."

House Minority Leader Paul Davis (D) said the plan was particularly problematic for the Republican freshmen who voted for it.

"The dilemma that a lot of these freshman members have is that the only tax vote that they have on their record is a $777 million tax increase," he said.

Gov. Sam Brownback (R) and his fellow Republicans countered that the new tax plan had to be viewed in conjunction with last year's tax cuts, which together will provide Kansans about $3.8 billion in tax relief over the next five years.

"When you put the entire package together, this is an absolute tax cut of a substantial nature," said Brownback. "It puts Kansas on the radar screen for a lot of people that are looking for places that are progrowth in their orientation."

But that argument didn't seem entirely convincing to the conservative group Americans for Prosperity, which is usually supportive of Brownback's initiatives.

"While the Legislature showed respect for taxpayers by lowering the overly burdensome sales tax rate, it was only a partial victory for Kansans' pocketbooks because the rate did not return to the previously promised level of 5.7 percent," said Jeff Glendening, the group's Kansas director.

Republican Rep. John Rubin of Shawnee said politically the tax plan was a no-win situation.

"You vote against the tax proposals, then you're against lowering the income tax. You vote for them, then you're voting for keeping the sales tax increase permanent," he said. "Whatever you do, they're going to say that you voted to raise taxes. You've to got to do what you think is best." (KANSAS CITY STAR, STATE NET)

CIGARETTE TAX HIKES FOSTER SMUGGLING: Over the past decade every state but California, Missouri and North Dakota has raised its cigarette tax, sometimes multiple times. Although the tax hikes may have been a boon to public health they've also encouraged crime.

"In the past few years, as taxes have gone up, you do notice [the increase in smuggling]," said Charles Mulham, a special agent and public information officer in the New York office of the Bureau of Alcohol Tobacco Firearms and Explosives.

Most of the illicit trade is between low-cigarette tax states and high-cigarette tax states. Mulham said a common practice for smugglers is to drive down the eastern seaboard to Virginia, which has the nation's second lowest cigarette tax at 30 cents a pack and where a carton can be had for $15 to $20. There they load up a U-Haul and then drive back to New York City, which imposes a $1.50-per-pack tax on top of the state's highest-in-the-nation $4.35-per-pack tax and where, consequently, cartons go for $120 apiece.

A study by the Michigan-based Mackinac Center for Public Policy estimated that 60 percent of the cigarettes consumed in New York are smuggled into the state. The center calculated that on that basis the state lost as much as $1.8 billion in 2011. And the ATF estimates that smuggling cost states with high tobacco taxes about $5 billion in revenue in 2010.

Cigarette smuggling has become so profitable that it is apparently being used to fund terrorists. Last month 16 Palestinian men were arrested in what authorities said was a $55 million cigarette smuggling operation that spanned several states. New York City Police Commissioner Ray Kelly said the ring was discovered because the men were under surveillance for alleged ties to terrorists.

"We discovered that individuals who were on our radar for links to known terrorists were engaged in a massive raid on the New York Treasury in the form of cigarette tax avoidance," he said. (STATELINE.ORG)

LA HOUSE APPROVES HOTEL TAX: The Louisiana Legislature passed a bill last week that would allow hotels to vote to add a 1.75 percent charge to their customers' bills to fund stepped up marketing by the New Orleans Convention and Visitors Bureau. A portion of the fee would also go toward public safety and infrastructure improvements in the French Quarter of New Orleans. Supporters say the split would be 1.5 percent for marketing and .25 percent for the city, although that division is not mandated by the bill. SB 242 now goes to Gov. Bobby Jindal (R). (TIMES-PICAYUNE [NEW ORLEANS], STATE NET)

BUDGETS IN BRIEF: Officials in Jefferson County, MISSOURI said last week they've reached a deal to come out of bankruptcy. The county filed for Chapter 9 bankruptcy, the largest in U.S. history, in 2011 (AL.COM). • CONNECTICUT'S Democrat-controlled Legislature approved a two-year $37.6 billion budget that restores aid to cities and towns while cutting hospital funding and altering the way the state accounts for Medicaid spending. Gov. Dannel Malloy (D) has said he will sign the spending plan (WALL STREET JOURNAL, STATE NET). • Fitch Ratings and Moody's Investor Services each cut ILLINOIS' bond rating from A to A- last week, citing the state's failure to restructure its nearly $100 billion in unfunded pension liabilities, which are growing at the rate of $17 million per day. The downgrades spurred Gov. Pat Quinn (D) to call lawmakers into a special session "to finish their job" after adjourning the spring session last week without a resolution to the shortfall (QUAD-CITY TIMES [DAVENPORT], (BLOOMBERG). • On the one-year anniversary of turning over its liquor business to private retailers, WASHINGTON is projecting liquor taxes and fees will generate $425 million in revenue for the state and local governments in FY 2013, considerably more than the $309 million the liquor business generated in FY 2011 (NEWS TRIBUNE [TACOMA]). • CALIFORNIA's Department of Toxic Substances Control failed to bill the polluters liable for $100 million in cleanups of contaminated property it oversaw over the past 26 years (SACRAMENTO BEE

- Compiled by KOREY CLARK

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