Tax and Budget

On November 2, House Republican lawmakers released their plan to retool the U.S. tax code, the biggest adjustment in over 30 years. This far-reaching bill, titled the Tax Cuts and Jobs Act, seeks to streamline the existing code and lower the corporate rate to a level closer to that of other nations. The legislation also eliminates or changes some popular deductions and makes adjustments to the use of so-called pass through entities.

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The State and Local Legal Center (SLLC) has filed an amicus brief asking the Supreme Court to agree to hear South Dakota’s petition in South Dakota v. Wayfair. In this case South Dakota is asking the Supreme Court to hold that states may require out-of-state retailers to collect sales tax.

In Quill Corp. v. North Dakota (1992), the Supreme Court held that states cannot require retailers with no in-state physical presence to collect sales tax.

The State and Local Tax Deduction, or SALT, recently came under scrutiny amidst the debate over tax reform. Implemented in 1913, SALT allows taxpayers to deduct money paid towards state and local taxes from their taxable federal income. The deduction costs the federal government about $96 billion each year, but state and local governments argue that it is crucial for local development.

“Sin taxes” are often viewed as budget savers, despite their rather small role in the state budgets. In fiscal year 2016, states raised $25 billion in tax revenues from the two most commonly taxed so called “sins,” like tobacco and alcohol, which represented slightly over 2.7 percent of total state tax revenues. States are more likely to raise taxes on tobacco products than on alcohol, even though both pose a significant public health threat. Since 2000, 48 states increased cigarette tax rates about 130 times, while very few states increased tax rates on alcohol. Despite the increases in tax rates on tobacco, inflation-adjusted tobacco tax revenues declined by 0.8 percent between fiscal years 2008 and 2016. The opposite is true for alcohol taxes. Despite the relatively stable tax rates on alcoholic beverages, inflation-adjusted alcohol tax revenues grew by 12.2 percent over the same period. Tobacco tax revenues declined because declines in consumption more than made up for higher tax rates. The growth in alcohol tax revenues is largely attributable to growth in alcohol consumption.

How do states develop and manage their budgets, and how does this process vary across states? The latest edition of NASBO’s Budget Processes in the States report provides self-reported data from all 50 states and the District of Columbia on many aspects of state budget practices, such as: the budget calendar, revenue forecasting, gubernatorial budget authority, balanced budget requirements, tax and expenditure limitations, debt restrictions, approaches to budget development, rainy day funds, tools to monitor and control expenditures, and the use of performance measures.

Overall, state fiscal conditions weakened in fiscal year 2016 compared to the prior year. Both revenue growth and total state spending experienced a slowdown due to numerous factors. In addition, the number of states making mid-year budget cuts was historically high outside of a recessionary period. In fiscal 2017, it is projected that both state general fund spending and revenue will grow moderately. However, since the start of the fiscal year, over half the states have had to revise their revenue projections downward due to weaker-than-anticipated tax collections. Looking forward, states are not only contending with slow revenue growth and constrained spending, but also federal uncertainty in a number of areas.

Chapter 7 of The Book of the States 2017 contains the following articles and tables:

According to data from the U.S. Travel Association, travel – both domestic and international – has a big impact on economic growth and job creation in the states. In 2015, domestic travelers took almost 2.2 billion trips and 77.5 million international visitors traveled to the U.S. These travelers combined generated $2.1 trillion in output for the U.S. economy and provided jobs for 15.1 million Americans, or one in nine private sector jobs. In addition, travel generated a total of $67 billion in state and local tax revenue.

CSG Midwest
Eight years have now passed since the Great Recession rocked state finances, and since that time, state policymakers have had to settle for a modest recovery and still deal with a difficult fiscal environment. In a July presentation to state legislators, John Hicks, executive director of the National Association of State Budget Officers, detailed just how different — and more challenging — this period has been compared to other post-recession eras.
Since 2011, year-to-year revenue growth in the states has never reached the historic annual average of 5.5 percent, and for fiscal year 2018, the nation’s governors were recommending an increase of only 1.0 percent (and just 0.17 percent in the 11-state Midwest).
“That’s a notable item eight years into a recovery, and it isn’t because we’re cutting taxes and having to balance our budget as a result,” Hicks said during his presentation at the Midwestern Legislative Conference Annual Meeting’s Fiscal Leaders Roundtable. Instead, this slow rise in state spending reflects a “new normal” in tax collections, the result of only moderate increases in gross domestic product and, on top of that, a gap between changes in U.S. gross domestic product and the taxes being collected by states.

According to new data released today by the U.S. Census Bureau, per student spending on public elementary and secondary school systems increased for every state in 2015, except for Arizona where spending decreased by 0.5 percent. Alaska and New York lead the pack, with both increasing spending by more than nine percent. Nationally, per student spending was $11,392 in 2015 – a 3.5 percent increase over the previous year – representing the largest year-over-year increase in per student spending since 2008.

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