State Net Capitol Journal – April 23, 2012

State Net Capitol Journal – April 23, 2012

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Budget & Taxes

A TALE OF TWO TAX STRUCTURES AND ONE CITY: Which is worse: high income taxes or high sales taxes? That's a question residents of the metropolitan area of Portland, Oregon ponder fairly regularly.

Oregon has no sales tax, but it has one of the nation's highest income taxes, at 9.9 percent. Meanwhile, just across the Columbia River, lies the state of Washington, which has no income tax but an average state and local sales tax rate of 8.8 percent, higher than every other state but Tennessee, Arizona and Louisiana.

And yet about 60,000 Washingtonians cross the Columbia's bridges every weekday to go to work in Oregon, making them subject to that state's income tax. Many of them also routinely shop in their home state, incurring its sales tax.

"Tax-wise, it's the worst of all possible worlds and yet they still choose to do it," said the president of the Metro Council, Portland's regional government, Tom Hughes, who added that one of the reasons they do so is simply because homes are cheaper in Washington.

"My experience, quite frankly, is that the tax structures of both states have not been a big issue."

The experience of Michael Powell, the founder of Powell's Books, one of Portland's best-known retailers, is similar. He said he rarely hears customers say they shop at his stores - which include the 68,000 square-foot flagship City of Books, which occupies a full city block - to avoid sales taxes. They come to shop at what is frequently described as the world's biggest bookstore.

"It might even be true," Powell said.

Although like Powell and Hughes, most locals say taxes are only one item on the list of factors that determines where they live, shop and work, some see both state's systems as seriously flawed. Washington's, they say, is extremely regressive, because the poor and middle class spend more of their income than the wealthy. And Oregon's is subject to boom-and-bust cycles.

But the prospect of changing either seems unlikely. The last time Oregon's voters considered a sales tax - in 1993 - only 25 percent supported it. And only 36 percent of Washington voters supported an income tax proposal in that state two years ago, even though it was limited to incomes over $200,000.

"Enlightened people here all feel the same: We need a sales tax," said Randy Miller, an Oregon business leader. "Enlightened people in Washington feel the same: They need an income tax. The general public? Forget it." (STATELINE.ORG)

HIGHER ED FACING NEW FISCAL CHALLENGE: Already reeling from years of recession-induced funding cuts, the nation's colleges and universities are facing a new fiscal challenge from policymakers. It's called performance funding and the way it works is simple: if schools want more money from the state, they have to prove they deserve it.

Missouri became the latest state to embrace the concept when it accepted the recommendations of a task force this month. Gov. Jay Nixon (D) and lawmakers still have to weigh in, but under the proposed system, each school would be graded in various categories, including the number of degrees it awards, graduation rates and freshman-to-sophomore retention, with a tenth-of-a-percent improvement in a particular category worth 20 percent of each institution's individual performance funding budget.

Illinois' approach is considerably different. It is setting aside a single pot of performance money - $6.5 million for the 2013 fiscal year - and letting the schools compete for it on the basis of a similar set of categories.

Performance funding was actually tried before in the 1990s when states were flush with revenue surpluses. But the movement died when recession hit in the early 2000s. This time around it's tight budgets that are driving the movement, but it may end up being just as short-lived.

Kevin Dougherty, a researcher at the Teachers College at Columbia University, said there is little evidence performance funding actually improves education, although he points out that previous efforts have typically involved only small portions of higher education budgets. It doesn't appear the programs in Illinois or Missouri will be much different. The Missouri plan, for instance, recommends that the performance-based portion of a school's budget not exceed 3 percent.

George Wasson, president of St. Louis Community College's Meramec campus, however, cautioned that focusing too much on performance could lead schools to sacrifice things that don't necessarily boost their performance ratings, such as community service activities.

"If these were the only things that were important to colleges, maybe it would work," he said. "But there are other things that are important." (ST. LOUIS POST-DISPATCH)

BUDGETS IN BRIEF: An impending TEXAS court ruling classifying oil and gas drilling as a manufacturing process would cost the state as much as $4.4 billion in sales tax revenue, the state's comptroller warned last week. During a hearing earlier this month, Travis County District Judge John Dietz said he would side with Southwest Royalties Inc. in its legal dispute with Comptroller Susan Combs over whether metal pipes and other equipment used in drilling oil and gas wells should be exempt from the state sales tax (WALL STREET JOURNAL). • Total tax revenues increased in every state in fiscal year 2011, the U.S. Census Bureau reported this month. Overall tax collections for states rose 8.9 percent to nearly $764 billion (STATELINE.ORG). • COLORADO's narrowly Republican-controlled House approved a $19 billion state budget on a 64-1 vote, with the only dissent coming from Rep. Chris Holbert (R), who said he didn't think the spending plan was fiscally prudent enough. The budget moved on to the Democrat-controlled Senate, where it was expected to be amended, ultimately sending it to a conference committee (DENVER POST, STATE NET). • States are targeting computer programs that allow businesses - especially those that are predominantly cash based - to underreport taxable sales by keeping two sets of books with the aid of a flash drive that plugs into their cash registers. Five states - FLORIDA, GEORGIA, MAINE, UTAH and WEST VIRGINIA - have passed laws cracking down on the so-called tax-zapper software, and about a dozen others are considering similar proposals (ASSOCIATED PRESS). • The FLORIDA law passed last year requiring drug tests for people seeking welfare benefits produced no direct savings and had no effect on the number of applications in the four months it was in effect before a federal judge issued a temporary injunction against it in October. At any rate, Federal District Court Judge Mary S. Scriven said the law appeared "likely to be deemed a constitutional infringement" (NEW YORK TIMES).

- Compiled by KOREY CLARK

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For insightful analysis and practical guidance on state and local taxation, explore Bender's State Taxation: Principles and Practice.

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