State Net Capitol Journal – April 22, 2013

State Net Capitol Journal – April 22, 2013

Budget & Taxes

KS TAX REFORM WORST IN NATION: Joe Henchman of the conservative Tax Foundation and Nick Johnson of the left-leaning Center on Budget and Policy Priorities rarely agree on anything having to do with taxes. But when Governing magazine recently asked the two tax policy experts to identify the best and worst tax reform efforts in the nation, both agreed the worst was the tax law passed last year in Kansas.

The two analysts were particularly critical of the centerpiece of the plan: elimination of the state income tax on sole proprietorships and other "pass through" businesses, so called because their income is not taxed and passes through to the owners who pay taxes on it as individual income.

"That's an incentive to game the tax system without doing anything productive for the economy," Henchman told Governing. "They think things like the pass-through exemption will encourage small business, and to be fair, it might. But they are doing it in a way that violates the tax principle of neutrality," the widely accepted principle that tax systems should be structured so decisions are made on their economic merits rather than their tax consequences.

Johnson said the tax plan "fails almost every test of good tax policy."

"Vertically, it's beneficial to high-income taxpayers and harmful to low," he said. "It doesn't do much for the middle either. Horizontally, its exemption of pass-through entities creates inequities and tax avoidance, which of course then goes back to sustainability because it balloons cost."

What's more, neither of the two analysts thought the plan would do much to jump start the state's economy or create jobs.

"Evidence suggests that there's no goose to the economy from this or, if there is one, it will be small," said Johnson. "The real big problem here is that because it costs so much money, it will make it harder for Kansas to make other kinds of investments that are important to a strong economy like education and infrastructure."

The analysts did disagree on which state had the best tax reform plan. Henchman said Rhode Island, which cut tax rates, reduced credits, eliminated itemized deductions and increased the standard deduction for most taxpayers, while Johnson said Massachusetts, which is considering increasing income tax rates and lowering sales taxes, actions he said would make the state's tax code more progressive. (WICHITA EAGLE, GOVERNING)

CONGRESSIONAL DEM BLASTS SEQUESTER IN WAKE OF BOSTON BOMBING: While some members of Congress saw the Boston Marathon bombing as a wake-up call that the nation has become too complacent about terrorism in the years since Sept. 11, 2001 (see "CONGRESS TALKS ABOUT TERRORISM" in Politics & leadership), U.S. House Minority Whip Steny Hoyer (D) also viewed the incident as a clear demonstration of why Congress should have stopped the automatic, across-the-board spending cuts known as sequestration from taking effect in March.

"I think there are multiple reasons for ensuring that we invest in our security, both domestic and international security. That we invest in the education of our children, that we invest in growing jobs in America and don't pursue any irrational policy of cutting the highest priorities and the lowest priorities by essentially the same percentage." (POLITICO)

OH'S $500 OIL RESOURCE FRUSTRATING DRILLERS: The Utica Shale formation in eastern Ohio grabbed the national spotlight two years ago when the state's Department of Natural Resources estimated it held 5.5 billion barrels of recoverable oil, more than twice Yemen's oil resource and worth nearly $500 billion. But U.S. drillers that set up rigs on the region's rolling farmland are now selling off their acreage because production is not meeting up with the initial predictions.

"The results were somewhat disappointing," said Philip Weiss, an analyst with Argus Research. Early data, he said, is showing "it's not as good as we thought it was going to be."

"We have a lot to learn about producing from these shales," said Jeff Daniels, who runs Ohio State University's Subsurface Energy Resource Center. (BLOOMBERG.COM)

BUDGETS IN BRIEF: On the last day of its session, ALASKA's Legislature passed a multibillion-dollar oil tax cut in the hopes of boosting production, which has been declining since the late 1980s. The Senate's approval of House changes to SB 21 came despite concerns that the potential impacts of the measure weren't completely understood and might send the state's budget deep into the red (ASSOCIATED PRESS, JUNEAU EMPIRE, STATE NET). • FLORIDA's House and Senate have voted unanimously to ease the rules on discharging treated sewage into the ocean. If signed by Gov. Rick Scott (R), the measure could save counties in South Florida $1.6 billion (MIAMI HERALD).

2013 BILLED AS YEAR OF TAX REFORM: Last year the Institute on Taxation and Public Policy identified 15 states "with potential for major tax reform in 2013." Those states included Louisiana, Nebraska and North Carolina, whose governors have vowed to completely repeal their states' corporate and individual income taxes; Kansas, which has been working on an extension of its sales tax to plug the budget gap created by the major tax cuts it enacted last year; and Minnesota, which is considering an income tax hike on its highest earners. ITEP said that with more states having gained one-party control of state government in the November elections, tax reform issues were likely to dominate this year's legislative sessions

- Compiled by KOREY CLARK

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