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Fiscal Affairs
North Dakota joins states with performance-based model for funding higher education
by Tim Anderson ~ June 2013 ~ Stateline Midwest »
Ever since he joined the legislature more than a decade ago, North Dakota Sen. Tim Flakoll says, lawmakers have been looking to change how the state funds its higher-education system. This year, he says, “We were finally able to crack the code.” The result: Two-year colleges, regional campuses and research universities will no longer receive dollars based on enrollment or historical funding levels, but instead on the credit hours earned by students. More »
Do states in the Midwest provide property tax exemptions or credits to disabled veterans?
by Tim Anderson ~ June 2013 ~ Question of the Month »
Every Midwestern state offers property tax breaks to certain disabled veterans, though the scope and amount of these credits and exemptions vary. More »
States’ ability to tax remote sales closer to becoming a reality
by Tim Anderson ~ May 2013 ~ Stateline Midwest »
Twenty-one years ago, the state of North Dakota’s attempt to collect a use tax from Quill Corp. for its catalog sales ended in legal defeat. Much has changed since that U.S. Supreme Court decision — the rise of online commerce, for example, and a multistate effort to streamline sales and use tax systems. But only a political victory will undo the 1992 court ruling, which requires congressional action before any state can compel sellers without a “physical presence” within its borders to collect and remit taxes on sales made to in-state customers. Could this be the year that the U.S. Congress gives states this taxing authority? More »
Indiana gives its inheritance tax an early end, leaving 4 states in Midwest with inheritance or
estate taxes
by Tim Anderson ~ May 2013 ~ Stateline Midwest »
Indiana lawmakers have decided to hasten the demise of the state’s inheritance tax. A year after passing legislation to phase out the tax over the next decade, the state General Assembly agreed at the end of its 2013 session to a full, immediate repeal. The tax, imposed on the beneficiaries of an estate, brought in about $150 million a year, the Evansville Courier & Press reports.
According to The Tax Foundation, Iowa and Nebraska are now the only two Midwestern states with an inheritance tax. Iowa’s applies to the inheritors of an estate with a net value of more than $25,000; surviving spouses, parents and grandparents, and children and grandchildren are exempt from the tax. In Nebraska, the tax is levied at the county level. The first $40,000 of the inheritance is exempt for close relatives, who then must pay 1 percent of the market value. The exemption is lower and rates are higher for more-distant relatives and others.
Two other Midwestern states, Illinois and Minnesota, impose estate taxes, which is levied on the estate of a deceased individual. The first $4 million of the estate is exempt under Illinois law, and the first $1 million is not taxed in Minnesota. Ohio’s estate tax ended this year.
Illinois becomes early user of new financing model —social impact bonds
by Tim Anderson ~ May 2013 ~ Stateline Midwest »
Illinois has become only the second U.S. state to enter into a unique kind of bond market — one in which “social impact bonds” are bought and sold. If it works, this financing model has the potential to be a win-win for taxpayers and private investors: The state can begin tackling a complex social problem without the need for up-front public dollars, and the investor gets money if the program launched via the social impact bonds is successful.
An article in the March/April edition of CSG’s Capitol Ideas magazine notes that New York City has been a national leader in pursuing the use of social impact bonds. Under a project financed by the firm Goldman Sachs, a behavioral-therapy program has been launched for young people in the city’s prison system. A reduction in recidivism rates would result in Goldman Sachs getting rewarded for the investment and the city reducing its incarceration costs.
Social impact bonds are also known as “pay for success contracts.” Targets are agreed upon by both sides to determine the program’s success, and the state and investor settle on the amount owed to the investor if the targets are reached. A $275,000 grant from the Dunham Fund will be used to launch the bond program in Illinois, where ideas for the use of social impact bonds include increasing graduation rates, lowering hospital readmission rates and reducing recidivism rates.
Tax talk in Midwest's state capitols: Restructuring plans in 2013 include expanding sales tax base, raising severance tax, cutting income taxes and adding tax brackets
by Tim Anderson ~ April 2013 ~ PDF of Stateline Midwest article »
With severe fiscal crises largely behind them, state lawmakers have turned their attention to tax policy, as evidenced by the major tax-restructuring plans proposed in 2013. Most prevalant are proposals to cut income taxes. But other ideas are being floated as well, including raising more revenue from severance taxes, expanding sales-tax bases to capture activity in the service economy, and adding higher-rate income-tax brackets. More »
Minnesota goes from paper to plastic with tax refunds on debit cards
by Kate Tormey ~ March 2013 ~ Stateline Midwest »
Starting next year, Minnesota will begin issuing individual income-tax refunds via debit cards instead of paper checks. While most refunds are deposited directly into checking accounts, the state has still been printing 1 million paper checks each year, according to the Minneapolis Star Tribune.
Money on the new debit cards can be spent at stores or withdrawn at banks.
State officials say the transition to plastic will save about $400,000, reduce check fraud, and deliver refunds to taxpayers a month earlier (paper checks have had to pass through three state agencies). The change in state policy is also expected to help individuals who don’t use banks and, as a result, have had to incur check-cashing fees.
Minnesota is the first state in the Midwest to move from paper to plastic, according to the Federation of Tax Administrators. Georgia was the first state to issue debit cards, in 2011, and five other states followed suit last year. The FTA reports that states have seen savings when issuing banks take on the cost of printing and mailing the cards.
Critics point out, however, that debit cards can include fees. And some people, such as the elderly, are not accustomed to the technology.
Budget conditions improving, but effects of recession still felt
by Tim Anderson ~ January 2013 ~ Stateline Midwest »
The fiscal storm that rocked states late in the last decade has passed, but lawmakers will continue to feel its effects as they begin crafting new annual and biennial budgets. More »
Video gaming spreads in Illinois, yielding revenue for state
by Tim Anderson ~ January 2013 ~ Stateline Midwest »
The start of video gaming in Illinois netted the state $1 million in November, and those figures could climb much higher in the months and years ahead. Under a law passed in 2009, up to five video gaming terminals are allowed at truck stops and at Illinois businesses with licenses to sell alcohol onsite, the Quad-Cities Times reports. The rollout of video poker, blackjack and other games began in October. In November, wagering activity on the more than 1,400 terminals in the state totaled $50.2 million.
Income from the video gaming terminals is taxed at a rate of 30 percent — with that revenue divided between the state (which gets most of it) and the municipality where the video gaming activity takes place. According to the Chicago Tribune, state officials estimate that 75,000 machines will evenutally be up and running, generating $375 million in annual revenue. That money will be used to fund construction projects.
In fiscal year 2009, gaming revenue accounted for 3.1 percent of Illinois’ own-source revenue, according to the Rockefeller Institute of Government. The national state average that year was 2.4 percent. In the Midwest, it ranged from a high of 6.2 percent (South Dakota) to a low of 0.2 percent (North Dakota).
Indiana law, surplus trigger automatic refund for taxpayers
by Tim Anderson ~ December 2012 ~ Stateline Midwest »
When the state closed its books on the 2012 fiscal year, Indiana had the largest budget reserves in its history.
And thanks to a law enacted one year earlier, two things happened automatically: Half of the $721 million budget surplus went to shore up state pension funds, and the other half will be delivered to residents when they pay their 2012 income taxes. The refund, allocated on a per capita basis, will result in a $111 income tax credit for single filers and $222 for joint filers, The Indianapolis Star reports.
Under a state law passed in 2011, the extra payments to the pension system and the tax refund occur for state reserves exceeding 10 percent of spending. (Under legislation passed this year, HB 1376, the automatic trigger in future years will be reserves of 12.5 percent.)
Indiana’s new approach is an alternative to the tax-and-expenditure limitations typically instituted by states — restricting yearly revenue increases or spending growth. Wisconsin, for example, has a cap on spending tied to personal income growth in the state. Michigan limits state revenues to a proportion of total personal income (9.49 percent), and in Ohio, year-over-year spending can increase by no more than 3.5 percent.
Illinois OKs hike in license fee to bolster state parks funding
by Tim Anderson ~ December 2012 ~ Stateline Midwest »
Concerned about the condition of the state’s parks, Illinois lawmakers voted in November to boost funding for the system through a $2 increase in license-plate fees. Over the past 10 years, the Chicago Tribune reports, staffing and budget levels for the Illinois Department of Natural Resources have been cut by more than half.
Along with the additional dollars that will come from the higher license-plate fee, the DNR is exploring other revenue options as well, including charging out-of-state visitors to the parks. Illinois is one of three Midwestern states (along with Iowa and Ohio) that don’t charge park entrance fees, according to a 2012 National Association of State Park Directors survey.
The same survey found that every state uses a unique mix of revenue sources to fund its parks. Michigan, for example, is the only state in this region where general fund dollars are not used. It instead relies largely on park-based revenue, including a $10 “recreation passport” that motorists can purchase when renewing their vehicle licenses. The passport allows entry into all Michigan state parks. In Minnesota, a significant portion of the state parks budget comes from lottery sales. In addition, some proceeds from a sales tax hike approved by Minnesotans in 2008 go to state parks.
Do states truly balance their budgets? New study says most in the Midwest do not
by Tim Anderson ~ November 2012 ~ Stateline Midwest »
All 11 Midwestern states have laws on the books to keep their budgets balanced from year to year.
But very few of them are living up to the intent of these constitutional or statutory requirements, says Sheila A. Weinberg, founder and CEO of the Institute for Truth in Accounting, which earlier this year published its second edition of “The Financial State of the States.” More »
In Indiana, lottery sales and marketing put in hands of private firm
by Tim Anderson ~ November 2012 ~ Stateline Midwest »
Indiana lottery officials announced in October that they were handing over day-to-day operations of sales and marketing to a private contractor. This decision to outsource services is designed to boost state revenue from the Hoosier Lottery, with officials projecting an annual increase of $100 million during the first five years of the integrated services agreement.
Gov. Mitch Daniels noted in a press release following the decision that his state’s lottery revenues “lag far behind most states.” GTECH, the company handling sales and marketing for Indiana, will receive performance incentives. According to The Wall Street Journal, Hoosier Lottery officials expect revenue to increase when they begin to sell tickets at grocery stores, big-box stores and discount stores. Illinois was the first state to hand over management of its state lottery.
The Chicago Tribune reported in July that in the first year of this new arrangement, the lottery turned a record profit. Net revenue, though, was still less than promised. According to the most recent U.S. Census Bureau data, ticket sales from state-administered lotteries in the Midwest range from $2.3 billion in Ohio to $23 million in North Dakota.
States look to weed out use of automated “sales-tax zappers”
by Tim Anderson ~ October 2012 ~ Stateline Midwest »
Concerned about the potential of “sales-tax zappers” to sap state and local governments of revenue, lawmakers are exploring new measures to stop this method of tax evasion. Earlier this year, the Michigan Legislature approved two bills (SB 768 and SB 769) that make it a felony to sell or use devices that skim cash sales. These automated sales-tax devices are installed in electronic cash registers or point-of-sales systems. Zapper software gives retailers the ability to hide the amount of cash transactions.
The Michigan bills were passed following a federal investigation into a chain of Detroit-area restaurants, which allegedly “zapped” more than $20 million in sales over a four-year period.
Sales-tax zappers have also gotten the attention of Indiana lawmakers, who explored various policy options in September. One idea is to join Michigan and seven other states that now explicitly ban the devices. (The Council of State Governments’ latest docket of draft bills under its Suggested State Legislation program includes a Utah measure banning automated sales-suppression devices.)
The province of Quebec has gone a step further; it requires restaurants to use an anti-fraud device known as a sales recording module — a move that netted $160 million in revenue in 2011.
New gaming in town: With gambling already expanding, technology brings more games, and policy questions, to Midwest states
by Tim Anderson ~ September 2012 ~ PDF of Stateline Midwest article »
Several states in the Midwest have expanded gambling in recent years, and policymakers now face new questions as the result of technological advances and legal decisions that pave the way for online lottery sales, more electronic gaming, and online gaming such as Internet poker. More »
PDF of timeline of gambling expansion in Midwest »
Illinois creates fund for sexual assault services with ‘strip club tax’
by Tim Anderson ~ September 2012 ~ Stateline Midwest »
Over the past five years, state funding for Illinois’ 32 rape crisis centers has declined by 28 percent.
State lawmakers took actions in 2012 to reverse that trend, by creating a new revenue source that will be dedicated to funding these centers.
The “skin tax,” as it is sometimes called, imposes a $3 per patron surcharge on strip clubs that serve alcohol or a flat fee based on a club’s taxable receipts.
Under HB 1645, signed into law in August, money from the tax will go toward a new Sexual Assault Services and Prevention Fund. Dedicating revenue from the tax to rape crisis centers is appropriate, proponents of the bill say, because alcohol consumption at strip clubs has been linked to sexual assault, sexual harassment and prostitution.
Lt. Gov. Sheila Simon noted in a March press release that Illinois is following the lead of Texas, which passed a similar law in 2007. The Texas measure has since withstood a legal challenge that it was an unconstitutional violation of free speech. According to the Chicago Sun-Times, Illinois’ new tax is expected to raise up to $1 million a year.
Big changes coming to teacher retirement system in Michigan
by Tim Anderson ~ September 2012 ~ Stateline Midwest »
Under a restructuring of the state’s retirement system for public school employees, Michigan teachers will be paying more for their benefits. SB 1040 was signed into law in August. Proponents of the measure hailed it as a necessary cost-saving move, noting that the rate that school districts pay toward employee retirement benefits has doubled since 2002. Opponents said the measure takes away an earned benefit and will dissuade young people from entering the teaching profession.
According to the Detroit Free Press, SB 1040 will require school employees to either make larger pension contributions or receive reduced pensions. It also calls for a cost-benefit analysis of moving new hires into a 401(k)-style defined-contribution plan.
Michigan is changing the retiree health care system for teachers as well. Most current retirees will have to pay more (20 percent of their premiums rather than 10 percent), and retiree health care was eliminated for new hires. Instead, employees will have to save for the costs of health care through a 401(k)-style plan. Over the past decade, Indiana and Minnesota are among the other states that have set up tax-free accounts for public employees to save for post-retirement health care.
After lost decade for pension systems, states enact series of reforms aimed at
fiscal turnaround
by Tim Anderson ~ July/August 2012 ~ Stateline Midwest »
In 2000, more than half of the U.S. states were fully funding their state pension systems. By 2010, Wisconsin stood alone as the only state that had set aside enough money to meet 100 percent of its long-term pension liabilities. Perhaps most concerning of all, funding levels in 2010 were below 80 percent in 34 states, including Illinois, Indiana, Kansas, Michigan, North Dakota and Ohio. That 80 percent threshold is used as a barometer to gauge the health of a state’s pension system. More »
Vote preserves property tax in North Dakota, but changes likely
by Tim Anderson ~ July/August 2012 ~ Stateline Midwest »
Nationwide, property taxes account for about one-third of total state and local government revenue. They could have been abolished this year in North Dakota in one fell swoop — via a proposed constitutional amendment that appeared on the June ballot.
North Dakotans overwhelmingly defeated the measure, but in the wake of the vote, lawmakers say they plan to address concerns about property taxes when they meet in 2013. According to The Jamestown Sun, ideas include extending the state’s homestead tax credit to all homeowners, paying the full costs of K-12 schools’ “core educational activities,” and the state takeover of certain services now provided at the local level.
The legislature has worked in recent years to ease local property tax burdens. The state, for example, has met its goal of funding 70 percent of the K-12 education system. According to the Tax Policy Center, 23.2 percent of North Dakota’s total state and local tax revenue came from property taxes in 2009 — lowest rate in the region. In contrast, Michigan and Illinois had the highest rate in the Midwest, 40.1 percent. Over the past three decades, state and local governments’ reliance on property taxes has declined in all but three Midwestern states: Illinois, Michigan and Wisconsin.
Budget-making was smoother in 2012, but fiscal future is laced with challenges and uncertainty
by Tim Anderson ~ June 2012 ~ PDF of Stateline Midwest article »
The signs of improving fiscal conditions were apparent in most of the Midwestern states where new annual budgets were adopted this year. More »
An interview with NASBO executive director Scott Pattison on state budget conditions »
In most Midwestern states, income growth is outpacing the nation’s
by Tim Anderson ~ June 2012 ~ Stateline Midwest »
Fueled in part by strong earnings growth in the farm and manufacturing sectors, most states in the Midwest are outpacing the rest of the nation on a key economic indicator — the change in per capita personal income. More »
Minnesota becomes latest state to OK public financing of new NFL stadium
by Kate Tormey ~ June 2012 ~ Stateline Midwest »
After many years of debate, the Minnesota Legislature has approved a plan to build a new stadium for the Vikings, the state’s National Football League team. More »
Idea of cash balance plans gains traction as states consider fixes to retirement systems
by Tim Anderson ~ June 2012 ~ Stateline Midwest »
Since 2003, newly hired workers for the state of Nebraska have been enrolled in a “hybrid” retirement plan — part defined contribution, part defined benefit. It is known as a cash balance plan, and a decade later, some states in the Midwest were close to following in Nebraska’s footsteps.
Under legislation passed this year in Kansas (HB 2333), a cash balance plan will be used for new hires beginning in 2015. Upon their retirement, employees enrolled in the plan will be eligible to receive a lump-sum payment or annuity, with the amount in the final account balance based on employee contributions as well as the payment amount pledged by the employer. The employer also guarantees a certain return on investments; in Kansas, lawmakers settled on guaranteeing an annual return of 5.25 percent, the Lawrence Journal-World reports. In Nebraska, the guarantee is set at either 5 percent or a rate based on the yield of U.S. treasury notes, whichever is greater.
A cash balance plan is also part of pension legislation (SB 1673) in Illinois. According to The Springfield State Journal Register, the guaranteed rate of return was expected to range from 4 percent to 10 percent, depending on the value of U.S. treasuries. The bill had not passed as of May.
In Ohio and Indiana, new laws end estate and inheritance taxes
by Tim Anderson ~ April 2012 ~ Stateline Midwest »
Supporters of killing off so-called “death taxes” have had two notable legislative successes in the Midwest over the past two years — passage of a bill in 2011 to end the estate tax in Ohio, and Indiana’s decision in 2012 to phase out the inheritance tax. Indiana and Ohio are two of the six Midwestern states that levy either an inheritance tax or an estate tax. According to The Tax Foundation, Indiana, Iowa and Nebraska have an inheritance tax — a tax imposed on beneficiaries of an estate. Illinois, Minnesota and Ohio impose a tax on the estate of a deceased individual.
Ohio’s estate tax will be repealed in 2013. Indiana’s SB 293, signed into law in March, calls for elimination of the inheritance tax by 2022. The measure also immediately raises the amount of money exempt from the tax, from $100,000 per beneficiary to $250,000, the Evansville Courier & Press reports. A fiscal analysis of SB 293 estimates that it will cost Indiana up to $16 million in revenue in fiscal year 2013. That amount gradually increases in ensuing fiscal years, reaching $165 million in FY 2024.
Nebraska Gov. Dave Heineman has called for an end to his state’s inheritance tax, but as of March, the proposal appeared unlikely to pass the Unicameral Legislature.
Tax season a time for giving through voluntary checkoffs
by Tim Anderson ~ February 2012 ~ Stateline Midwest »
The number of voluntary tax checkoff programs in the Midwest has close to doubled over the past decade, and at least one more may soon be added to the list.
Legislation introduced in Kansas this year (HB 2454) would allow taxpayers to check off a donation to the Kansas Arts Commission.
According to The Wichita Eagle, the measure is an attempt to raise private funding for the commission, which had its funding cut out of last year’s state budget. If the legislation is adopted, Kansas would become the region’s first state to create a tax checkoff program for the arts.
Starting this year, Ohio becomes the first state in the region to raise money for its historical society through a tax checkoff program. States have most commonly used tax checkoffs to raise money for wildlife conservation. Every Midwestern state but Michigan will still offer this checkoff option in 2012, and in Indiana and Minnesota, wildlife conservation remains the sole option. In contrast, taxpayers in Wisconsin have 10 different choices (highest total in the Midwest) — from helping with Lambeau Field renovations to assisting military veterans and their families. The latter is one of the more common types of state tax checkoff programs, as are cancer research and child abuse prevention.
Midwestern states take differing actions on tax credits for working poor
by Kate Tormey ~ February 2012 ~ Stateline Midwest »
While one Midwestern state has passed legislation to decrease taxes for some low-income residents, two other states in this region have scaled back their credits for the “working poor.” In January, Illinois Gov. Pat Quinn signed a bill (SB 400) to expand the state’s earned income tax credit (EITC).
According to the Center on Budget and Policy Priorities, 24 states offer an EITC, which is usually given as a percentage of the taxpayer’s federal credit. EITCs, which are targeted to low-income workers, are typically refundable — meaning a taxpayer can receive a check for an amount exceeding his or her tax bill.
In Illinois, the state EITC rate will increase from 5 percent of a taxpayer’s federal credit to 7.5 percent in tax year 2012. In 2013, it will increase to 10 percent of the federal credit. According to the Chicago Tribune, the expanded credit will save working families $100 more in taxes each year.
For 2011 taxes, however, Wisconsin is reducing its credit for families with two children (from 14 percent to 11 percent) as well as those with three or more children (from 43 percent to 34 percent). In the 2012 tax year, Michigan’s EITC will decrease to 6 percent of the federal credit (from 20 percent).
Illinois to be among first states to sell online lottery tickets
by Tim Anderson ~ January 2012 ~ Stateline Midwest »
Illinois will be one of the first states to take advantage of a recent U.S. Justice Department opinion that could mark the start of a new era in how states run their lotteries.
The Peoria Journal Star reports that an online version of the
Illinois Lottery will be launched this spring, with state residents 18 and older eligible to play. In 2009, lawmakers approved legislation allowing lottery tickets to be sold via the Internet.
Illinois and New York were the two states that sought clarification from the federal government on the legality of online lottery operations under the Wire Act. They likely won’t be alone in exploring new gambling-related policy options and reven-reue sources in 2012 and beyond.
According to the Minneapolis Star Tribune, Minnesota and North Dakota are among the states that already offer online lottery ticket subscriptions.
The issue of online gambling has also attracted the attention of Iowa legislators, who passed a bill in 2011 (SF 526) requiring a study of state-regulated, intrastate Internet poker. A final report of the Iowa Racing and Gaming Commission was issued in December. It explored the societal impact of legalized, state-regulated Internet poker as well as the boost it would give to state revenues — estimated to be between $3 million and $13 million a year.
Even with uptick in tax revenue, states not at pre-recession levels
by Tim Anderson ~ December 2011 ~ Stateline Midwest »
In fiscal year 2011, all 11 states in the Midwest either met or exceeded original revenue projections, according to the “Fiscal Survey of States” released in November. More »
A unique tax landscape: Most states rely heavily on income tax, but South Dakota hasn’t had one in 70 years
by Mike McCabe ~ November 2011 ~ Stateline Midwest
South Dakota, like most other states, adopted a statewide tax on personal income early in the last century — only to abandon it during World War II, when sales tax revenues soared nationwide. More »
State revenues on rise, but other warning signs temper good news
by Tim Anderson ~ November 2011 ~ Stateline Midwest
State tax collections are on the upswing across the Midwest, but lawmakers have another emerging fiscal problem that they may have to deal with in the year ahead: the deterioration of local government revenue sources. More »
Major decisions coming on future of Kansas’ retirement system
by Tim Anderson ~ November 2011 ~ Stateline Midwest
Change is coming to Kansas’ pension plan for
public employees. But what form it takes remains uncertain, as a study
commission of lawmakers and non-government officials readies recommendations for
legislative consideration in 2012.
According to The Topeka Capital-Journal, some kind of defined-contribution system — either for all new workers, or a “stack plan” that puts worker salaries above a certain level into a 401 (k)-style plan — will likely be proposed. Earlier this year, the Legislature approved higher contribution rates for public employers and workers. Those changes would take effect in 2014, but are contingent on the Legislature voting on the commission’s recommendations.
Like most states, Kansas currently employs a defined-benefit model, tying retirement benefits to a worker’s years of service and salary. One exception in the Midwest is Michigan, which uses a defined-contribution plan. According to the National Association of State Retirement Administrators, Indiana and Ohio have hybrid defined-benefit/defined-contribution plans for state employees. Nebraska, which once had a defined-contribution system, now uses a “cash balance” plan: Each worker has a retirement account and is guaranteed a 5 percent return on investment. Upon retirement, the worker can set up an annuity or get a lump-sum payment.
Study of business tax burdens shows most Midwestern states below national average
by Tim Anderson ~ September 2011 ~ Stateline Midwest
In the competition for business and job growth, most Midwestern states fare better than the U.S. average on at least one measure — the burden that their overall tax structures place on businesses. More »
Regional Analysis: Trends in States' Per Capita Personal Income
September 2011 ~ "The Book of the States 2011"
The Midwest had an annual regional average growth rate
that fell between the East, the highest regional performer in 2010, and the West, which had the lowest annual growth
rate in 2010. More »
Michigan ‘deduction’ for retiree health care rejected by court
September 2011 ~ Stateline Midwest
A Michigan law that reduced the pay of current state workers to offset the state’s retiree health care costs has been ruled unconstitutional. If the decision stands, lawmakers will have to find a way of making up for the annual loss of $75 million — the amount estimated to come from the 3 percent paycheck “deduction,” the Detroit Free Press reports. (A similar measure affecting teachers is also being challenged.)
The Michigan Appeals Court ruled that the Legislature had wrongly encroached on the constitutional authority of the state’s Civil Service Commission. Only a two-thirds vote of the Legislature can override a wage increase, as set by the commission via the collective bargaining agreement reached with state employees. The 3 percent deduction, or “contribution,” was passed by a simple legislative majority and amounted to a pay cut, the judges ruled, noting the money would go toward paying the health care costs of retired, rather than current, workers.
Three Midwestern states (Michigan, along with Illinois and Ohio) cover most or all of the health care premiums of retired state workers. The other eight states in the region require workers to take on much of this cost burden, though retirees in states such as Wisconsin and Iowa can “cash in” their unused sick leave to pay for their premiums.
Four states in Midwest now hold higher credit rating than U.S.
When Standard & Poor’s lowered the credit rating of the U.S. government, it marked the first such downgrade in modern history.
It also resulted in another first: Some states now boast a higher credit rating than the U.S. government. Iowa, Indiana, Minnesota and Nebraska are among that group. Those four have a AAA rating from Standard & Poor’s, compared to the U.S. rating of AA+. In May, Nebraska became the latest state in the Midwest to receive S&P’s highest rating. At the time, the ratings agency cited several reasons for Nebraska’s upgrade: low unemployment, relatively strong personal income growth, and a commitment to structurally balance budgets and not rely on “nonrecurring actions.”
These economic and budgetary factors, along with a state’s debt and liability profile, determine the credit rating, which, in turn, affects borrowing costs. In addition to Nebraska, South Dakota had its S&P rating raised this year, from AA to AA+. Here are the other S&P ratings for the Midwest: Kansas, Ohio and North Dakota, AA+; Wisconsin, AA; Michigan, A-; and Illinois, A+.
The credit outlook for states is not tied directly to U.S. ratings, S&P says, as long as states maintain “significant latitude to raise revenues and alter expenditures.”
Regional Analysis: Trends in State Tax Rates ~ Corporate Income Taxes
July 2011 ~ "Book of the States"
As of January 2011, eight of 11 CSG Midwest states charged an average 8.24 percent corporate income tax rate. The 2011 average is up from 8.04 percent in 2007 due to an increase in the fl at rate in Illinois (+2.2 percent), slightly offset by a decrease in the top rate in North Dakota (-0.6 percent). More »
Regional Analysis: Trends in State GDP
July 2011 ~ "Book of the States"With average year-over-year GDP growth of 3.1 percent, CSG’s Midwestern region showed the most improvement of any region in 2010 and was well above the national average of 2.6 percent. More »
State budgets: Surpluses a welcome sign, but brace for loss of federal funds and higher Medicaid costs
First, the good news on state fiscal conditions.
For the first time in several years, budget expert Scott Pattison said during a session at the Midwestern Legislative Conference Annual Meeting, many states are projecting budget surpluses — the result of a series of cost-cutting fiscal cycles, some tax increases and overall improvement in revenue
collections. More »
Nebraska plans to re-route part of sales tax for highways
Nebraska will soon add another dedicated revenue source for maintaining, repairing and building roads — the sales tax.
Under LB 84, signed into law in May, a 0.25% sales tax for roads will take effect in 2013. According to the Unicameral Update (a publication of the Nebraska Legislature), the state’s overall sales tax rate of 5.5 percent will remain unchanged, but instead of all proceeds going to the general fund, some will be diverted to two highway funds.
Last year, Kansas legislators increased the sales tax rate (from 5.3 percent to 6.3 percent) and dedicated more money from this revenue source to transportation. Traditionally, states have relied primarily on two revenue sources for financing highway projects: federal funds (nationally, they make up 25.5 percent of the total) and user fees, such as gas taxes, tolls and motor vehicle taxes. In 2009, user fees accounted for a majority of own-source state revenue for highways in every Midwestern state — from a high of 96.8 percent in North Dakota to a low of 54.5 percent in Kansas, according to Federal Highway Administration statistics.
Seven Midwestern states used bond proceeds as well, the federal data show; Iowa, Nebraska, North Dakota and South Dakota were among the 15 U.S. states that did not.
Michigan tax overhaul cuts business taxes, eliminates many credits
Michigan lawmakers have adopted a new tax structure that proponents believe will encourage business growth but opponents say will unduly burden the elderly and low-income residents of the state.
The state is doing away with the Michigan Business Tax, which included a tax on business transactions and a corporate income tax rate of nearly 5 percent. The state also levied a 22 percent surcharge on businesses. Instead, a 6 percent income tax will be levied only on the state’s roughly 40,000 corporations.
The remaining 95,000 Michigan businesses will not have to file corporate tax returns (they will still pay taxes on profits under the individual income-tax code). At the same time, many corporate tax credits, such as one for filmmakers, are being eliminated.
Overall, the new tax structure will provide a $1.7 billion tax cut for businesses, the Detroit Free Press reports, but individual income taxes will increase by about $1.5 billion statewide. Pension income will now be taxed, and many individual tax credits and exemptions will be eliminated. In addition, the state’s Earned Income Tax Credit for low-income workers will be reduced.
Most Midwestern states levy a corporate income tax. The two exceptions are Ohio, which has a Commercial Activity Tax, and South Dakota.
State-local relations get tested in new fiscal era: More reductions in state aid and calls for efficiency
by Kate Tormey ~ May 2011 ~ Stateline Midwest
Even as the U.S. economy shows signs of a turn-around, local governments across the Midwest and nation are preparing for what Jacqueline Byers calls the “double whammy” set to cut into their primary source of revenue.
Property taxes, which account for 72 percent of local tax collections, have been affected for a few years now by the mortgage crisis that began in 2007.
But Byers says the revenue outlook will only worsen as communities face a new wave of foreclosures (due in part to high unemployment rates) and as decreased property values begin to be reflected on local property tax rolls. More »
Big split over unions: Debate over collective bargaining puts eyes of the world on Midwest, and fight over future of state laws has just begun
by Tim Anderson ~ April 2011 ~ PDF of Stateline Midwest article »
From the moment a restructuring of Wisconsin’s collective bargaining system was introduced, it became clear to legislators that state politics and policymaking — and their own jobs — were going to change as well. More »
Another type of budget debate: Annual vs. biennial budget cycles — Which is most advantageous to legislatures?
by Ilene Grossman ~ April 2011 ~ Stateline Midwest
State leaders are always looking at ways to save money, especially when budgets are tight.
The most obvious way to save money is through budget and program cuts. But some states are also exploring options to refine their budget processes in hopes of spurring more-effective long-term
fiscal
planning. More »
Search for new revenue has some states looking at retirement income
Soon after Rick Snyder introduced his first proposed budget as Michigan’s governor, lawmakers were being inundated with phone calls about one idea in particular: taxing the pension income of retirees.
This change in state tax law would raise about $900 million, The Detroit News reports. Michigan isn’t the only state where such a change is being contemplated. In March, Illinois Senate President John Cullerton said a taxation of retirement income should be considered as part of an effort to modernize his state’s overall tax structure, the Chicago Tribune reports.
According to the Retirement Living Information Center, Michigan, Illinois and Kansas are among the 10 U.S. states that exclude all federal, state and local pension income from taxation. Kansas does not exclude private-sector retirement income; most other states in this group of 10 “allow for a fairly broad exclusion” of income from private pensions, the center reports.
In a majority of states — including Illinois, Indiana, Michigan, Ohio and Wisconsin — Social Security retirement benefits are excluded from state income taxes. Iowa is in the process of phasing out its tax on Social Security retirement benefits.
Transfer of liquor profits part of Ohio budget fix, jobs plan
Currently, three states in the Midwest — Iowa, Michigan and Ohio — are among the nation’s 18 “ABC” states.
The name refers to alcoholic beverage control, specifically the direct control that these jurisdictions retain over the distribution and sale of alcohol. (Other states regulate by issuing licenses to private sellers.)
It is a revenue generator for states, and in Ohio, the governor is pushing a plan that would transfer the liquor enterprise, and its profits, to JobsOhio — a private, nonprofit corporation recently created by the state to lead business recruitment and job creation efforts.
According to The Cleveland Plain Dealer, the plan calls for liquor sales operations to be leased to JobsOhio for 20 to 25 years. The state’s general fund would receive a one-time shot of $500 million, as an up-front payment for the loss of future revenue from liquor profits. JobsOhio would secure that money for the general fund by issuing revenue bonds. Republican Gov. John Kasich says the plan will create a sustainable, independent source of revenue to support economic development activities.
In his budget, Kasich has also called for selling and privatizing some state prisons. In addition, he is considering leasing the Ohio Turnpike to a private company, the Sandusky Register reports.
Which states require supermajority votes in the legislature to pass tax increases?
by Laura A. Tomaka ~ March 2011 ~ Question of the Month
As most states continue to struggle to balance their budgets, state lawmakers will be weighing tough decisions regarding spending cuts and tax increases. In a number of states, increasing taxes takes more than gaining the simple majority vote required to pass most legislative proposals. More »
South Dakota searches for new solutions to sales tax collection problem
March 2011 ~ Stateline MidwestNo state in the Midwest relies more heavily on the sales tax than South Dakota.
And in a state where more than half of total tax collections come from this revenue source, it comes as no surprise that lawmakers are trying to address a growing collection problem: the inability to bring in sales and use taxes from purchases made over the Internet. According to the Pierre Capital Journal, the state is now losing an estimated $35 million due to remote sales.
How can the state try to capture more of this lost revenue? Two different approaches will be tried under bills that received overwhelming legislative approval. SB 146 requires online retailers to post on their website a reminder to customers that a use tax is due on Internet purchases. SB 147 more broadly defines a “business presence” in South Dakota. Retailers that maintain “a distribution house, sales house, warehouse, or similar place of business” would be included in the new definition — and, as a result, be required to collect the state sales tax.
South Dakota is one of nine Midwestern states (all but Illinois and Ohio) that are full members of the Streamlined Sales and Use Tax Agreement — an attempt by states to simplify sales-tax collection and to encourage remote sellers to collect taxes. Only a change in federal law, however, will require remote sellers to do so.
Indiana reworks unemployment trust fund to repay loan
March 2011 ~ Stateline Midwest
Legislation that proponents say will structurally balance Indiana’s unemployment trust fund within two years has been signed into law.
Under HB 1450, average weekly payouts for unemployment benefits were cut by more than 20 percent (from the previous average of $283), the Evansville Courier & Press reports. Opponents of the bill have said that this reduction will cause more stress on already struggling families, state assistance programs and local economies. But in signing the bill, Republican Gov. Mitch Daniels said it was a necessary fix to a system that had become unsustainable due to previous benefit increases, eligibility expansions, and cuts in employer premiums. Under HB 1450, employer premiums will go up, but will not be as high as previously scheduled under a law passed two years ago.
Business will pay a surcharge so that the state can repay the $2 billion that it has borrowed from the federal government to continue unemployment benefits.
According to ProPublica, six other states have been borrowing from the federal government: Illinois, $2.6 billion; Kansas, $101 million; Michigan, $3.7 billion; Minnesota, $565 million; Ohio, $2.4 billion; and Wisconsin, $1.5 billion. In his new budget, President Obama has proposed a two-year suspension of the interest payments that states would otherwise have to pay on their debt.
Income tax increases coming and going in Midwestern states
February 2011 ~ Stateline Midwest
In early January, Illinois became the third Midwestern state in recent years to raise income taxes as way to fix a budget shortfall.
The flat rate in Illinois was increased from 3 percent to 5 percent. That new rate is scheduled to stay in place for the next four years; it will fall to 3.75 percent in 2015 and 3.25 percent in 2025. As part of SB 2505, too, Illinois lawmakers raised the corporate tax rate and capped annual state spending growth at 2 percent for the next four years. According to The State Journal Register in Springfield, previous proposals to ease the burden of an income tax hike on lower-income earners were not included in the final legislation.
Illinois is one of three states in the Midwest with a flat income tax rate. Indiana’s rate is 3.4 percent. The third “flat tax” state in the region is Michigan, which raised its rate from 3.9 percent to 4.35 percent in 2007. That increase will begin to be phased out later this year; the rate will return to 3.9 percent by October 2015.
Two years ago, Wisconsin added another bracket to its graduated income-tax structure: A rate of 7.75 percent now applies to the state’s highest earners. Six other states in the Midwest have a graduated income tax; South Dakota has no income tax at all.
Can municipalities declare bankruptcy? The answer depends in large part on state laws
January 2011 ~ Stateline MidwestIn a sign of fiscal times for distressed local governments, talk of municipal bankruptcy has picked up in parts of the Midwest and across the country.
An Indiana proposal introduced in December would give the option of bankruptcy for cities and towns. According to the Gary Post-Tribune, the process would be run through the existing Indiana Distressed Unit Appeals Board, a state entity that helps distressed political subdivisions establish financial plans.
Currently, Indiana is one of 26 U.S. states that does not authorize Chapter 9 municipal bankruptcy in statute. The other six states in the Midwest without such authorization are Illinois, Iowa, Kansas, North Dakota, South Dakota and Wisconsin, according to a 2010 Bloomberg News article.
Late last year, then-Gov. Jennifer Granholm denied a request by the Michigan town of Hamtramck to seek bankruptcy protection, The Detroit News reports. In a May 2010 paper examining the issue of municipal bankruptcy, the Michigan Senate Fiscal Agency noted that the state in recent years has had to take over several municipalities due to “financial emergencies.” None of these emergencies has yet led to bankruptcy. Under Michigan law, state involvement — including the appointment of an emergency financial manager — is required before a bankruptcy filing can proceed.
Demand performance: States revisit higher-education funding model that focuses more on student completion, less on student enrollment
by Jennifer Ginn ~ December 2010 ~ PDF of Stateline Midwest article »
Late last year, higher-education officials in Indiana got word that they would have to find $150 million in cuts in order to help balance the state’s biennial budget. What they did — and didn't do — tells a lot about the commitment in that state to fund higher education in a different way.
As Teresa Lubbers explains, the state’s performance-based funding formula — a relatively small, but not insignificant, portion of the larger formula for postsecondary institutions — was kept intact.
“Our recommendation was to hold true to the performance funding formula even when you have cuts,” says Lubbers, the Indiana commissioner of higher education and a former state senator. “We decided we did not want to walk away from the performance funding formula in a time of taking money away.” More »
South Dakota changing how it taxes farmland; Wisconsin re-examining its 15-year-old law
by Carolyn Orr ~ December 2010 ~ Stateline Midwest
In most Midwestern states, taxes on farmland have been on the rise in recent years, partly because of increases in the assessed value of farmland.
This trend has posed an ongoing policy challenge for state legislators: to strike the right policy balance between trying to preserve family farms — by taxing agricultural land differently — and raising enough revenue so that other property owners are not unfairly burdened and local governments receive the resources they need. More »
Tax credits for film industry get closer look
December 2010 ~ Stateline MidwestTax incentives to attract the filmmaking industry are expected to receive close scrutiny in 2011 by legislatures and newly elected governors in at least three Midwestern states.
In Michigan, incoming Gov. Rick Snyder has said his state’s incentives — the most generous in the nation — need to be scaled back. A recent analysis done by the state’s Senate Fiscal Agency found that in FY 2010, Michigan spent an estimated $100 million in film tax credits to generate $59.5 million in private sector activity and an additional $10.3 million in state tax revenue.
Last year in Wisconsin, the state cut back on its film incentive program, but incoming Gov. Scott Walker has said he would like to find ways of luring more film projects — and the jobs and economic activity that come with them — to the state. In contrast, newly elected Iowa Gov. Terry Branstad told the Sioux City Journal that he plans to eliminate his state’s incentive program. The Iowa program was suspended in 2009 after reports of abuse in how the tax credits were being used. A subsequent report by the state auditor found that $25.6 million in film tax credits were improperly issued by the state.
According to a November report by the Center on Budget and Policy Priorities, 43 states now have tax incentives in place for television and film production. Those incentives cost states about $1.5 billion last year, the center found.