Multistate Tax Update -- January 29, 2015
New York: Governor Cuomo’s Start-up NY generates high quality jobs
Governor Cuomo launched Start-Up NY in October of 2013. Described as a “game changing initiative,” the program was created to grow new businesses and accelerate entrepreneurialism across the state by way of the establishing tax-free zones for businesses looking to start-up or expand. In addition, Start-Up NY matches state and private universities with these companies to assist with advanced research and development in high tech and other industries. The tax-free feature offers “zero taxes for ten whole years.”
Start-Up NY’s focus is on the upstate New York region, and leverages the facilities of the State University of New York (SUNY), City University of New York systems, and other public and private institutions.
At the end of December of 2014, the Governor announced that 13 additional companies had plans to expand or relocate to New York, bringing along with them $11.4 million in investment capital and the potential for 268 new jobs in tax-free areas like SUNY Buffalo. These firms will join the 40 already participating members, resulting in commitments to create 2,100 new jobs and invest $98 throughout the state.
Many of these new jobs are expected to be in the following locations and sectors:
- 130 at SUNY Buffalo in technology, biotechnology and composite materials sectors;
- 51 at SUNY Stony Brook in technology, electric and hybrid vehicles, and life science sectors;
- 44 at SUNY Ulster in materials remanufacturing and waste-to-energy sectors; and
- SUNY Downstate Medical Center in the biotech sector, focusing on cancer diagnosis and treatment.
In total, 61 schools establishing more than 345 tax-free areas have been certified.
When Governor Cuomo released the initial details of his idea, economists noted that it was the first of its kind in the country.
States encounter the effects of income tax fluctuations
The Tax Foundation reported that in 2011, Illinois was suffering from an $8.5 billion backlog of unpaid bills and other financial troubles. In an effort to improve its financial situation, the state raised its flat individual income tax from 3 percent to 5 percent, and increased the corporate income tax from 7.3 percent to 9.5 percent. These increases generated between $7 billion and $8 billion in additional tax revenue each year.
Under the Taxpayer Accountability and Budget Stabilization Act, the increases were scheduled to partially sunset in 2015. The state plans to proceed with the tax cuts and announced that for income earned on or after January 1, 2015, the individual tax rate reverts to 3.75 percent and the corporate rate (excluding S corporations) will be 5.25 percent.
While tax reductions are welcome news for most, the New York Times reported that new Governor Rauner’s “campaign promises are about to meet budget realities.” Illinois faces $2 billion less in revenues for this year while the state continues to struggle to pay its bills. The Times points to the fact that Moody’s Investor Services has downgraded Illinois five times in five years and given it the lowest credit rating among the 50 states.
Another problem is that revenue from corporate income tax collections are declining faster than expected. In Illinois’ three year budget projection, the revised figure for fiscal 2015 is $2.7 billion, down from 2014’s $3.14 billion. The downward trend is puzzling because, as indicated by the Institute for Illinois’ Fiscal Sustainability (Institute) in November of 2014, “[n]early all indicators point to positive economic growth in the State of Illinois for the fifth consecutive year in 2015 but due to a change in income tax rates, State government finances remain in crisis.”
Here are some of the bright spots that the Institute cited:
- Improvement in unemployment, which fell from 11 percent in January 2010 to 6.7 percent at the end of September 2014;
- Increases in gross receipts of individual income taxes for the first quarter of fiscal year 2015, which at $4.1 billion were $102 million more than forecasted;
- Positive trends in underlying factors, such as the housing market, employment, manufacturing and monetary policy;
Despite these bright spots, the Times acknowledged that the Governor “found a budget worse than he had expected — rife with accounting shenanigans and budgeting gimmicks, not to mention core structural gaps.” Even so, he insists that he will enact meaningful changes.
At the end of 2014, numerous outlets confirmed that Massachusetts had satisfied all the requirements necessary for automatic tax decreases to take effect on January 1, 2015. As anticipated, Masslive.com announced that the personal income tax fell from 5.2 percent to 5.15 percent as of January 1, 2015 after the state collected $1.59 billion in taxes, which is 1.5 percent more as compared to a year ago. Despite the increased figures versus a year ago, “[t]ax collections missed the monthly benchmark by $9 million and are trailing the fiscal 2015 benchmark by just over $40 million.”
Massachusetts faces a situation similar to Illinois. According to the Massachusetts Budget and Policy Center (“Center”), lawmakers enacted various tax reductions from the late 1990s to 2002, before the dot.com bubble burst. As a result, the state has had difficulty maintaining its investments in “key public investments” including investments in schools, colleges, subways, highways, and public safety.
A Center fact sheet revealed that within a series of phased, automatic cuts, three areas of cuts, in particular, have been costly, resulting in a combined revenue loss of $3.3 billion annually:
- the cuts from 5.95 percent to the current 5.15 percent in the tax rate applied to wage and salary income, costing about $1.9 billion;
- a cut from 12 percent to the current 5.15 percent in the tax rate applied to dividend and interest income, costing about $880 million; and
- a doubling of the personal exemption, the amount people can deduct from their taxable income, from $2,200 to $4,400 for single filers and from $4,400 to $8,800 for married couples, costing about $540 million.
With respect to the personal income tax, there have been three rounds of cuts in total and listed below:
- Effective January 1, 2015, the tax rate fell from 5.2 percent to 5.15 percent, which will cost $70 million in lost revenue for fiscal year 2015, which ends in June 2015;
- Effective January 2014, the tax rate fell from 5.25 percent to 5.2 percent;
- Effective January 2012, the tax rate fell from 5.3 percent to 5.25 percent.
The Center estimates that cuts to the personal income tax rate will cost Massachusetts close to $400 million annually for fiscal year 2016 and beyond. And if the additional triggers are satisfied, the personal income tax will fall again, in three stages, to 5 percent by 2018.
The Center provided a map of the revenue-related triggers that lawmakers established in 2002:
- Annual state tax revenues during the prior fiscal year must grow at least 2.5 percent faster than the rate of inflation;
- This revenue growth must be "baseline" growth, meaning the effects of any mid-year tax law and/or administrative tax changes have been factored out of the growth calculation;
- Positive revenue growth must be sustained for each of three consecutive, three-month periods in the current fiscal year, relative to the corresponding three-month periods in the prior fiscal year.
The scheme’s configuration may continue pose challenges for lawmakers because even during periods of revenue declines, the trigger mechanism can still result in tax reductions. As the Center notes, “[d]eep cuts in funding for essential public investments can compromise the state's long term economic strength and harm the current and future well-being of the people who live and work here in Massachusetts.”
California: new senator proposes a sweeping overhaul above and beyond Governor Brown’s budget
On January 9, 2015, Governor Brown released his budget for 2015-2016. It calls for $113 billion in general fund spending, representing an increase of 1.4 percent over the previous budget. In a press release, the Governor’s office stressed that the Governor’s policies helped stabilize California’s “massive $26.6 billion budget deficit and estimated shortfalls of roughly $20 billion” since Governor Brown took office in 2011. Since then, billions of dollars in cuts, along with an improving economy and voter-approved temporary revenue producing measures helped to eliminate those deficits.
Reuters reported that while Senate Republican leader Robert Huff praised the budget proposal as a frugal plan and a good starting point, some progressive democrats take issue with the Governor’s failure to restore safety net measures, like those to help the impoverished and disabled.
Since Governor Brown’s budget release, one State Senator, Bob Hertzberg, D-Van Nuys, has been in the spotlight for putting forth his own proposals. The former Democrat Speaker of the Assembly introduced Senate Bill 8, or the Upward Mobility Act (“Act”), an “upward mobility ladder” for California residents. On his website, Senator Hertzberg described the Act as one crafted to “help ensure California’s residents and businesses can thrive in the 21st Century global economy.”
Initially, the Act’s goal is to explore problems with the current tax structure and discuss reform alternatives. Ultimately, the Act seeks to create broad changes to three areas of the state’s tax code:
- Broaden the tax base by imposing a sales tax on services to increase revenues. Health care and education services would be exempted from the tax, as well as small businesses with under $100,000 gross sales.
- Enhance the state’s business climate and incentivize increases in minimum wage. The corporate income tax would be reviewed to determine whether it is meeting its intended purposes, including whether it is shared fairly among California’s businesses and what impact it has on the business climate, while at the same time linking changes to a changes in the minimum wage.
- Examine the impacts of simplifying the Personal Income Tax while maintaining progressivity.
Characterizing Senator Hertzberg’s plan as a “sweeping overhaul” of California’s tax structure, the LA Times noted that it would increase revenues by $10 billion annually by broadening the sales tax, lowering personal and corporate income tax, and boosting the minimum wage. The Senator, who is also the new Chair of the Senate Governance and Finance, has received a “surprisingly warm reception.”
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
Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.