Is This the Year for Tax Reform?

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By Sheryl Nance-Nash

Is 2013 shaping up to the year of tax reform? "There are more proposals this year than we have seen in the last five years, and an unprecedented number of major state tax reform proposals," said Harley Duncan, a managing director, state and local tax in KPMG LLP's Washington National Taxduring the firm's recent TaxWatch webcast "State and Local Tax Legislative Update."
States are generally faring better during the last couple of years compared to during the Great Recession, said Duncan. In fact, "Many states are seeing 5 percent revenue growth, which is far better than during the Great Recession."
Some states have looked at their fiscal picture and decided they need more revenue, and others want to make structural changes that will make them more recession proof, Duncan said, explaining in part the large number of proposals this year.
The top fifteen states with potential for major tax reform in 2013 include, California, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Missouri, Nebraska, New York, North Carolina, Ohio, Oklahoma, Oregon, Virginia, and Wisconsin.
Recently, at least three governors announced sweeping plans to eliminate income taxes and expand indirect taxes. There are factors that could influence the adoption of significant state reforms - mainly many states lack partisan gridlock that is epidemic in Washington, and lawmakers may also be more willing to consider or enact significant changes due to the recent recession.
"New ideas and drastic reforms may be more palatable in states that have suffered for years from high unemployment and tight revenue," said Sarah McGahan, a senior manager, state and local tax in KPMG's Washington National Tax. Then too, there is a general desire to improve in-state business climates. "The thinking is that if you eliminate income taxes, it will lead to an increase in in-state jobs," she said.
However, doing away with corporate income and personal income taxes will not come without a price. Some reforms could mean a 40 percent loss of a state's revenues, said Daniel White, manager, state and local tax in the Washington National Tax practice for KPMG. They will need to look for ways to make up the difference.
"In Louisiana, where Governor Bobby Jindal has said that tax reform is a priority in 2013 to make the system flatter, simpler, and fairer for Louisiana families and businesses, they may replace lost revenues by raising the sales and use tax rate from its current 4 percent and expand the base," said McGahan. It is unclear how much the sales and use tax would be raised to offset the revenue loss from the elimination of corporate tax, personal income tax, and the franchise tax.
North Carolina has proposals to repeal corporate, income, and franchise taxes. Nebraska is eyeing repealing its corporate income tax and providing an exemption for certain types of retirement income. To do so, it would replace the lost revenues by eliminating either $395 million or $2.4 billion of existing sales and use tax exemptions, including potentially those applicable to nonprofits, certain property, chemicals, and energy used and consumed in manufacturing and agriculture.
Minnesota Governor Mark Dayton wants to correct the state's unbalanced "three-legged-stool. He has proposed a reduction in the sales and use tax rate from 6.875 percent to 5.5 percent effective for purchases after December 31, 2013. There would be sales and use tax on all service transactions, unless specifically exempted in industries including, but not limited to, labor services for construction or repair of real property, education services, health care, and medical services, among others. Sales and use tax would be imposed on certain digital products, remotely accessed software, and clothing over $100 (clothing is currently exempt).
There are a number of proposed corporate tax bills, covering net operating losses, throwbacks, combined reporting, and apportionment issues. Then there is the never-ending pursuit of sales tax from remote sellers. "This is a hot one. Various states have click-through and expanded attributional nexus proposals pending," said McGahan. States want the adoption of statues mandating that remote sellers collect and remit tax based on their relationships with in-state parties. There is a push to expand the sales base to include services and digital goods.
Also of much interest are several "sin tax" proposals on the table:
  • Mississippi, Oregon, Texas, Vermont, and West Virginia look to impose taxes on sugary beverages. California, New York, and Washington want to put a tax on disposable plastic bags.
  • Maryland and Nevada are weighing a ¢5 tax for snack/fast foods over 500 calories.
  • Minnesota has proposed a plastic surgery tax.
  • Connecticut wants to impose a 10 percent tax on mature video games and a 50 percent sales tax on ammunition.


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Proposals to reduce or repeal income taxes are also proliferating,

It certainly appears that 2013 is the year for a tax-reform revolution, particularly in the heartland. This week, Missouri got into the game with SB26, which would lower the state income tax by 0.75 percent if passed. This will be interesting to watch!

With almost all of the Midwest states considering a reduction or elimination of the income tax means this is the year to talk about tax reform. I have read the book How Money Walks, mentioned by another comment below, and would agree it is the go to reference for this issue. Terri great article and I would suggest giving that book a read...may lead to more interesting articles.

I just perused, recommended above. It tracks the correlation between the migration of wealth away from states with higher income taxes and into states wtih lower or no income taxes. A powerful case for tax reform.

I would agree that tax policies around the country are changing, especially in the midwest with Kansas zeroing out it's personal income tax & Missouri passing large state income tax cuts. The midwest is falling in line with states like Texas, Florida, Wyoming, and Washington, it's only a matter of time till other states begin seeing the benefit.
I will definitely check out it sounds like a great resource for this kind of information.