Multistate Tax Update -- February 5, 2015
Governors announce budget proposals
On Monday, Feb. 2, 2015, Gov. Kasich released Blueprint for a New Ohio, the 2016-17 budget proposal (proposal). As with his last budget, the governor seeks to lower the state income tax on “virtually all” Ohio based small businesses and increase exemption levels for lower and middle income Ohioans. Since taking office in 2011, the governor has already reduced income taxes by approximately $3 billion.
According to The Plain Dealer, the governor's proposal cuts state taxes overall by $500 million. It does this in part by shifting tax burdens from income based taxes to consumption based taxes, by way of a sales tax hike and a cigarette tax, and increasing taxes on oil and gas profits, as described below.
The proposal, previewed as a “comprehensive plan for helping all Ohioans share in our state's prosperity” includes these key provisions:
- For small businesses that report income on their owners’ tax returns and have annual gross receipts of $2 million or less, complete elimination of the income tax.
At one of Gov. Kasich's pre-release appearances, The Plain Dealer noted that 98 percent of small businesses, including sole proprietors and S-corporations, fall into this category. In 2011, there were 970,570 small businesses that qualified for this benefit. The administration estimates that this component will cost Ohio about $696 million over the life of the two-year budget.
- For individuals earning less than $40,000, an increased personal exemption from $2,200 to $4,000.
- For individuals earning between $40,000 and $80,000, an increased personal exemption from $1,950 to $2,850. In 2012, about 3.05 million individuals had income below $80,000.
Gov. Kasich intends to pay for these cuts with tax increases in the following areas:
- Sales tax: An increase from 5.75 percent to 6.25 percent will generate a portion of the revenue lost to the income tax reductions. This would apply to the usual goods, along with certain services such as: lobbying, marketing, public relations, management consulting, debt collection, travel, parking, and cable television.
- Cigarette tax: The governor’s proposed increase is $1.00 per pack, resulting in a new tax of $2.25 per pack. According to the Tax Foundation, a 2014 excise tax ranking put Ohio at #27 in the nation. New York and Massachusetts are ranked first and second, respectively, and Missouri has the lowest excise tax. The Plain Dealer reported that Gov. Kasich’s previous proposed increase, from $1.25 to $1.85 per pack, would have generated $635 in additional revenue.
- Oil and gas taxes: Though oil and gas drillers oppose the idea, the proposal seeks a 6.5 percent severance tax on oil and gas production levels at the wellhead for fracking wells. Bizjournals.com reported that in light of the impact that fracking has on roads and water supplies, Gov. Kasich believes that a higher tax on the industry is justified, especially considering that the areas where fracking is most prevalent typically have small populations and an insufficient tax base to compensate for such impacts.
Bizjournal.com notes that Ohio's current oil and gas tax rate is 20 cents per barrel on oil and three cents per thousand cubic feet of natural gas. This provision is expected to generate $76.5 million in fiscal year 2016 and $183.4 million the following year.
- Social Security benefits tax: Part of Gov. Kasich’s plan to eliminate tax breaks for the most affluent Ohioans involves means testing that would tax Social Security benefits for those with a total income of over $100,000. This and other changes for seniors would generate an additional $166.5 million per year by 2017.
Gov. Kasich is also very focused on fighting poverty. As indicated in the same preview document referenced above, he wants to “end the siloed, fragmented approach” that merely treats the symptoms of poverty without addressing the underlying challenges that “needy Ohioans face.” The proposal addresses this by allocating $310 million in existing federal and state funds to the creation of a comprehensive case management and employment initiative.
For a more detailed summary of the proposal’s initiatives beyond the tax provisions, see our Ohio Statehouse Update.
Gov. Rick Scott recently unveiled his 2015-2016 budget proposal, “Keep Florida Working.” The budget is focused on four main components:
- $673 million in tax cuts for Florida families and businesses;
- The highest per-student K-12 funding in Florida history;
- Making Florida a global destination for jobs; and
- Strengthening Florida’s communities by enhancing workforce training, protecting the environment, and keeping families and communities safe and healthy.
The total budget is $77 billion. Of this, $28.3 billion is general revenue, representing a four percent increase from the previous fiscal year and primarily attributable to additional sales tax collections.
Within the $673 million tax cuts, Gov. Scott proposes the following:
- A 3.6 percent decrease in cellphone, cable, and satellite TV taxes, representing a reduction of $470.9 million annually. An average family spending $100 a month on cell phone, cable, and satellite television services will save about $43 annually.
- Elimination of the sales tax on college textbooks, which is expected to save students about $41.4 million per year. For example, a student taking five courses per semester will save about $30 per semester and over $240 for four years.
- Effective April 30, 2014, Gov. Scott enacted a bill that exempted certain industrial machinery and equipment purchased by manufacturers from the sales tax until April 30, 2017. In Keep Florida Working, he made that exemption permanent. Beginning in 2017, this provision is expected to reduce the tax liability of Florida’s manufacturing businesses by $142.5 million annually and is intended to increase Florida’s competitiveness while encouraging the start-up and expansion of manufacturing businesses to spur job creation.
- Business tax exemptions that help 2,189 job creators avoid the business tax by increasing the corporate income tax exemption from $50,000 to $75,000. In 2011, lawmakers increased this exemption from $5,000 to $25,000. In 2013, they increased it again from $25,000 to $50,000. The exemption is expected to save Florida businesses $18.4 million annually.
Gov. Scott’s budget also contains the “highest-per-student funding in Florida history,” and a $390.7 million increase in state education funding. Among other things, this figure includes a $40 million boost to the Digital Classroom Initiative, bringing the total cost of the initiative to $80 million.
According to WCTV, Gov. Scott plans to pay for the tax cuts with job and revenue growth. Though Florida has created more than 700,000 private sector jobs in the past four years, the governor’s critics question whether the growth is really lifting Florida's working families.
Last week we wrote about the success of Gov. Cuomo’s unique Start-Up NY initiative, designed to grow new businesses and accelerate entrepreneurialism across the state.
His efforts to provide relief to small business and other taxpayers continue in his proposed 2015-2016 budget. The governor’s 2015 Opportunity Agenda (Agenda) contains 66 proposals across multiple areas. Here are a few of the tax-related initiatives:
Proposal #1: Cut small business taxes from 6.5 percent to 2.5 percent
The four percent tax cut will result in the lowest net income tax rate for small businesses since 1917. Gov. Cuomo justified the reduction by stating that “[s]mall businesses are the engine of opportunity and we will do everything we can to ensure they thrive and grow in New York.”
For the purposes of this tax cut, small businesses are defined as those with fewer than 100 employees and with a net income of less than $390,000. To maintain consistency, however, the lower rate would be available to firms with a net income of less than $290,000, with the rate to be phased up to the standard rate applicable to companies with a net income of less than $390,000. In New York, such entities account for 43 percent of private sector employment and 35 percent of private sector wages.
The reduction would occur over a three-year period for small businesses that file under the corporate franchise tax, pursuant to the following schedule:
- For tax year 2016, from 6.5 percent to 3.25 percent;
- For tax year 2017, from 3.25 percent to 2.9 percent;
- For tax year 2018 and beyond, from 2.9 percent to 2.5 percent.
Ultimately, this provision is anticipated to benefit 42,000 taxpayers and provide $32 million in new tax relief when fully phased-in.
Proposal #2 and 3: Pass $1.7 billion in property tax relief for homeowners and renters
Recognizing that over the last few decades New York’s property taxes have risen to historic levels, the governor presented this component of his Agenda as a way to combat property taxes that have put the dream of home ownership out of reach.
Gov. Cuomo has already implemented a property tax cap limiting the amount that local governments and most school districts can increase property taxes to the lesser of two percent or the rate of inflation. A related program, the property tax freeze credit, reimburses qualified homeowners for local property tax increases on their primary residences when total household income is $500,000 or less, and where the school district in which the home is located complied with the property tax cap. This credit excludes New York City homeowners, who may qualify for a different program under the New York City Circuit Breaker Tax Credit.
With these initiatives, the governor hopes to provide relief to households in which the property tax burden exceeds six percent of the household’s income. The amount of the credit is up to 50 percent of the amount by which the property taxes exceed that six percent burden threshold. The credit is determined on a progressive income scale, with the notion of offering the greatest relief to those with the lowest incomes.
When the tax credit is fully phased-in, over 1.3 million taxpayers are projected to receive an average credit of $950. For comparison, the property tax cap credit, enacted in 2011, saved the average taxpayer slightly more than $800. The property tax freeze credit, enacted in 2014, saved the average New Yorker about $656.
Proposal #4: Modernize JFK, LGA, Stewart, and Republic Airports
The Agenda points out several interesting facts about the JFK and LaGuardia airports alone:
- They host about 80 million travelers per year;
- They support 350,000 jobs;
- They provide $18 billion in wages;
- They support more than $50 billion in economic activity; and
- They are consistently rated among the worst airports in the country in terms of design and overall passenger experience.
As part of his budget, Gov. Cuomo launched the Master Plan Design Competition, a modernization and revitalization effort at all four of these airports.
Proposal #5: Propose making Republic and Stewart Airports tax-free zones through START-UP NY
The governor’s focus on the regional airports, Stewart and Republic Airports, involves designating them as tax-free sites by way of the Start-Up NY initiative, which offers “zero taxes for ten whole years.”
The Economic Opportunity portion of the Agenda contains numerous other proposals pertaining to infrastructure development, environmental protection, farm preservation, poverty reduction, and economic mobility. Other aspects of the Agenda focus on education, public safety, government reform, and “fairness for all.”
States offer tax breaks for hydroponic (soilless) farming
Mission 2015: Biodiversity, a Massachusetts Institute of Technology (MIT) creation, was designed to present solutions to the biodiversity crisis and has identified hydroponic agriculture as one of them. Hydroponics is a system of agriculture that utilizes nutrient-laden water rather than soil for plant nourishment.
MIT embraces hydroponic farming as an alternative to current systems of agriculture. As it stands today, “massive portions of the world's land area and substantial quantities of fresh water and fossil fuels are being devoted to the production of food which fails to meet humanity's basic dietary needs. The continuation of the current system of agriculture would mean the continuation of the degradation and destruction of the habitats of innumerable species, both aquatic and terrestrial, with insufficient returns.”
Because hydroponics does not require natural precipitation or fertile land in order to be effective, it offers a sustainable means to grow food for people who live in arid regions. Relative to traditional agricultural methods, hydroponic systems require less space and water, while limiting wastewater. What’s more, the application of carbon dioxide at certain stages in a crop’s growth cycle can enhance both early growth and ultimate crop yield, according to simplyhydro.com.
California needs alternatives due to drought
In January of 2014, Gov. Brown declared a State of Emergency stemming from the state’s catastrophic water shortfalls, which caused reservoirs to fall below their record lows.
In the summer of 2014, in an attempt to increase conservation, the Water Board established emergency water conservation regulations intended to reduce urban outdoor water use. Reasoning that in some parts of California, “50 percent or more of daily water use is for lawns and outdoor landscaping,” the regulations prohibited using potable water to wash cars, water outdoor landscapes and operate fountains, among other things. The Water Board even set up a system in which people could report wasteful practices in their workplaces or residential neighborhoods.
In this context, in late December 2014, California’s State Board of Equalization (BOE) proceeded with regulation amendments clarifying that hydroponic farmers qualify for sales and use tax exemptions for fertilizer. The BOE amended regulations add carbon dioxide to the definition of fertilizer, and emphasize that fertilizer does not need to be applied to land to qualify for the exemption. Thus, hydroponic farms which use carbon dioxide as a fertilizer do not have to pay sales and use tax on that carbon dioxide.
Shortly before the BOE’s action, the Santa Clara television station SCVNews.com quoted the director of taxation and land use for the California Farm Bureau, John Gamper, as justifying the amendment on several grounds above and beyond the reduction in water use. Gamper said, “this amendment will result in co-benefits for the overall ecosystem because captured carbon dioxide from an industrial process is being utilized in a closed greenhouse environment to produce high quality vegetables while sequestering the carbon dioxide.”
In addition, Director Gamper pointed out that the by-products of the process will be utilized to generate electricity, which will produce carbon dioxide that will be repurposed for use in the next crop. “It is truly a win-win-win situation especially when you consider how water-efficient these highly productive operations are.”
Michigan exempts hydroponic facilities from property taxes
As we explained two weeks ago, Michigan’s Gov. Snyder recently signed numerous bills addressing road and school funding, among other things. Two of these bills, SB 786 and SB 787, were conceived to support facilities that use hydroponics and aquaculture. Aquaculture is another emerging technology that does not utilize soil, involving the cultivation of fish and other aquatic species. SB786 exempts these production facilities from property taxes, and SB 787 imposes a new “specific” tax equal to 25 percent of the regular property tax.
In the 37 to 1 vote, 97 percent of Michigan’s senate republicans, and 100 percent of its democrats supported these bills. Senator Patrick Colbeck (R-Canton) was the sole no-vote.
In the bill analysis, the Senate Fiscal Agency justified the legislation as a way to encourage soilless agriculture, a subset of the second larges—and expanding—industry in Michigan; these kinds of production facilities require a significant investment in technology and infrastructure, and are taxed at a higher rate than in other states. The bills’ sponsor, former state Sen. Bruce Caswell, hoped to align Michigan’s policy with practices of neighboring states and Ontario to help grow these parts of the agriculture sector.
Illinois: Secure Choice IRA savings program needs federal approval before taking effect
In mid-January, we described former Gov. Quinn’s Illinois Secure Choice Savings Program (Secure Choice), which he signed into law on Jan. 4, 2015, effective June 1, 2015. Secure Choice was created to help private sector workers save for retirement by way of automatic payroll deductions into employment-based individual retirement savings accounts.
Included in the law is a provision that prohibits implementation if Secure Choice fails to “qualify for the favorable federal income tax treatment ordinarily accorded to IRAs under the Internal Revenue Code.”
A second roadblock to its implementation is if “liability is established under the federal Employee Retirement Income Security Act.” The Employee Retirement Income Security Act, commonly referred to as ERISA, is a federal law that regulates private pension and health plans. According to MarketWatch.com, if Secure Choice is covered by ERISA, the state or employer would be considered fiduciaries, which would impose certain additional obligations and potential liabilities. In addition, ERISA would impose burdensome reporting and disclosure requirements above and beyond the state tax reporting mandates included in the law.
While many have praised the effort, implementation is contingent upon resolving these concerns.
For additional information regarding these subjects, or any other multistate tax issues, please contact:
David M. Kall
David H. Godenswager, II
Susan Millradt McGlone
Multistate Tax Services
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