Multistate Tax Update - June 25, 2015
Florida: Gov. Scott signs over $400 million of tax breaks into law
Last week, Gov. Rick Scott signed House Bill 33, which provides numerous tax incentives intended to benefit individuals and businesses. According to the bill analysis, the total impact of the incentives amount to $428 million, $365 million of which will occur in fiscal year 2015-16. Keep Florida Working, Gov. Scott’s initial $77 billion budget proposal, sought $673 million in tax cuts.
The bill's key provisions include:
Sales tax credits: Florida currently imposes a 6 percent sales and use tax on the retail sale of many products. The revenue from this tax accounts for Florida’s largest general revenue stream, 75.7 percent in fiscal year 2014-15.
HB 33 contains new or expanded sales tax exemptions on purchases of the following:
Agricultural items, including feed for aquatic organisms, irrigation equipment, costs of maintenance and repairs of irrigation and power farm equipment, stakes, and certain trailers used on farms;
- K-12 school food and beverage concessions in support of extra-curricular activities;
- Boat repairs exceeding the first $60,000 in tax;
- Gun club memberships or admissions; and
- Motor vehicles brought to Florida by military service members deployed outside of the U.S.
The bill also implements a back-to-school tax holiday, from Aug. 7, 2015, through Aug. 16, 2015, for clothing and footwear that cost under $100 and school supplies that cost $15.00 or less per item. For computers, the exemption applies to the first $750 of the sales price.
Additionally, HB 33 creates a one-year exemption for college textbooks and instructional materials.
Cut on the Communication Services Tax (CST): Effective July 1, 2015, there will be a 1.73 percent rate cut on the CST, which is a tax on the sale of communication services, including telecommunications (both wired and mobile), cable television, direct-to-home satellite television, and other services. The legislation reduces the standard rate from 6.65 percent to 4.92 percent and the rate on direct-to-home satellite television from 10.8 percent to 9.07 percent. In fiscal year 2015-16, the total expected impact is $206.3 million, and the recurring impact is $226.1 million.
Corporate income tax credits, brownfields cleanup: HB 33 increases this tax credit from $5 million to $21.6 million in fiscal year 2015-16 for eligible sites. The anticipated impact in fiscal year 2015-16 is $16.6 million.
Community Contribution Tax Credit (CCTC): Florida legislature enacted the CCTC in 1980 to encourage private sector participation in community revitalization and housing projects. It provides tax credits to businesses or individuals that contribute to certain projects undertaken by approved CCTC sponsors, including community organizations, housing organizations, historic preservation organizations, units of state and local government, and regional workforce boards.
In order for a project to be eligible for the CCTC, it must be located in a designated enterprise zone area or Front Porch Florida Community (with exceptions), and be designed to either:
Construct, improve, or substantially rehabilitate low-income housing;
- Provide commercial, industrial, or public resources and facilities; or
- Improve entrepreneurial and job development opportunities for low income individuals.
Currently, a taxpayer may receive a credit of up to 50 percent of their annual contribution, up to $200,000 annually; however, there is a $21.9 million cap on total CCTC payments. HB 33 extends the expiration date of the program from June 30, 2016, to June 30, 2018, expands eligibility, and provides $21.4 million in annual funding for projects that provide home ownership opportunities for low income households, or housing opportunities for those with special needs. It also provides $3.5 million for all other projects.
Research and Development (R&D): The legislation increases the total amount of credits that may be awarded during calendar year 2016 from $9 million to $23 million. During the application period beginning in 2015, 81 companies sought $24 million in credits, but only 21 received funding because the cap was exceeded. In fact, all of the applications that received funds were filed within the first nine minutes of the application acceptance window. This year, if the amount sought exceeds the cap, the credits will be distributed on a pro-rata basis, instead of in the order in which the applications are received.
Eligibility is restricted to the following qualified target industries:
- Life Sciences
- Aviation & Aerospace
- Homeland Security & Defense
- Cloud IT
- Marine Sciences
- Materials Science
The calculation for the tax credit is complex. Generally, it amounts to 10 percent of the difference between the current tax year’s R&D expenditures in Florida and the average of R&D expenditures over the previous four tax years. However, if the business has existed for fewer than four years, then the credit amount is reduced by 25 percent for each year the business or predecessor corporation did not exist.
The state tax credit taken in any taxable year may not exceed 50 percent of the company’s remaining net corporate income tax liability, after all other credits to which the business is entitled have been applied. Any unused credits may be carried forward by the business that originally earned them for up to five years following the year in which the qualified research expenses were incurred.
Texas: Gov. Abbott signs more than $4 billion of tax cuts into law
State Sen. Jane Nelson (R-Flower Mound), who is also the chairwoman of the Senate Finance Committee, authored several tax cut bills that Gov. Greg Abbott signed into law last week. In Sen. Nelson’s press release, she highlighted the state’s strong financial position that justified the cuts, stating that the “Texas economy produced more than enough revenue to meet our needs, so we have a responsibility to return some of those funds back to the taxpayers who earned it in the first place. This will provide much-needed relief to Texas homeowners and businesses, who should benefit from the success they created...this legislative package will make Texas an even more attractive place to live and do business.”
Here is a summary of the three key bills:
1. HB 32, Franchise Tax Relief: HB 32 decreases the franchise tax rate from 1 percent to 0.75 percent, and decreases the franchise tax on retailers or wholesalers from 0.5 percent to 0.375 percent.
The bill analysis notes that each taxable entity that does business or is organized in Texas is subject to the franchise tax, also referred to as a margin tax. In fiscal year 2014, the state collected $4.73 billion in franchise tax revenues, which was 4.5 percent of total state revenues. Taking effect Jan. 1, 2016, HB 32’s anticipated aggregate economic impact is to free up $1.3 billion in fiscal year 2015. Some estimate that HB 32 would generate $3.4 billion in annual investment and up to 129,000 new jobs within five years.
Another provision of HB 32 is that it makes nearly 14,000 more businesses eligible to use E-Z computation, reducing compliance costs and allowing those businesses to cut their overhead. Entities with under $20 million in total revenue, up from $10 million, are now eligible to pay their franchise tax, and the legislation decreases the rate under this calculation from 0.575 percent to 0.331 percent.
In January 2015, the Tax Foundation characterized Texas’ franchise tax as a “failed experiment” because it is complex, unfair, and generates litigation. At that time, the group theorized that repealing the franchise tax would improve Texas’ rank in the State Business Tax Climate Index from 10th to third best in the country. Its analysis suggests that repeal of the tax would create 41,500 new jobs, $3.4 billion in new investment, and $9.8 billion in real disposable income over a four-year period.
2. SB-1, Property Tax Relief: SB-1 increases the homestead exemption from $15,000 to $25,000, but it is subject to voter approval of a constitutional amendment in November. Currently, a school district must grant an additional $10,000 exemption from the appraised value of a residence homestead for adults who are disabled or more than 65 years old, and SB-1 reduces the taxable value of such homesteads by a corresponding value. SB-1 is expected to provide $1.2 billion in property tax relief over the biennium for Texas homeowners.
The bill analysis refers to supporters of the bill who say that a tax on property ownership, one of the most fundamental of rights, is “by far the most onerous and noticeable tax.” They anticipate that the tax cut could stimulate consumption by putting more money in consumers’ pockets, which drives job growth, which in turn stimulates consumption.
On the other hand, opponents point out that there is a sizeable portion of the low-income population that rent, so they would not benefit from a homestead tax reduction. They believe that a tax cut which benefits more Texans, like a sales tax cut, would be a better use of state resources. A Legislative Budget Board estimate predicts that over five years, a sales tax cut could return 40,000 more jobs and spark $5.7 billion more in GDP growth than an equivalent increase in the homestead exemption.
3. HB 7, Repeal of the Occupation Tax: Effective Sept. 1, 2015, HB 7 repeals a $200 annual licensing fee on 16 professions: chiropractors, physicians, dentists, optometrists, psychologists, certified public accountants, architects, landscape architects, engineers, real estate brokers, investment advisors, attorneys, veterinarians, property tax consultants, interior designers, and land surveyors.
Supporters believe that the occupation tax is a hidden double tax that selectively targets certain professions which already pay licensing fees, according to the bill analysis. Supporters say the repeal of this tax will save these citizens approximately $250 million over the next biennium, allowing them to reinvest in their businesses and spend in their local economies. Opponents object on the grounds that when these cuts are combined with others enacted in the current legislative session, certain priorities, like education, are left underfunded.
HB 7 addresses numerous other subjects, including the modification of provisions governing revenue dedicated funds and accounts, and modification of fees, eligible uses of funds, and procedures. For example, HB 7 lifts the requirement on public higher education institutions that they contribute 5 percent of their tuition into a student loan account that provides no interest loans to qualifying students.
In addition, 2 percent of medical students’ payments are no longer required to be deposited in the physician loan repayment program account. Finally, HB 7 requires the entire $150 application fee for an exception to any Railroad Commission oil and gas rule, rather than two-thirds of it, be deposited into the oil and gas regulation and cleanup fund.
The total effect of the legislation is to reduce general revenue receipts by about $150 million through fiscal year 2016-17.
Oregon: Department of Transportation seeks volunteers for pilot program taxing miles driven
The Oregon Department of Transportation (ODOT) has announced OReGO, its road usage charge program designed to create "a fair and sustainable way to fund road maintenance, preservation, and improvements for all Oregonians."
Under OReGO, volunteers will pay 1.5 cents per mile for the miles they drive and will receive a credit for the .30 cents per gallon state fuel tax. Initially, OReGO is limiting the number of vehicles—cars and light-duty commercial vehicles—to 5,000.
The idea for OReGO has been circulating for years. In 2001, the Oregon Legislature formed a Road User Fee Task Force; its mission was “to develop a revenue collection design funded through user pay methods, acceptable and visible to the public, that ensures a flow of revenue sufficient to annually maintain, preserve, and improve Oregon´s state, county, and city highway and road system.”
To implement the idea, which was the first of its kind in the United States, the Oregon legislatures passed Senate Bill 810 in 2013. In May of this year, it launched its latest version of a curious infographic illustrating how the numbers work. The infographic compared the savings for a 2014 Toyota Prius relative to those for a 2014 Ford F-150, based on an annual mileage figure of 12,962, and an average gas price of $2.86. Interestingly, the Prius would pay $862.23 under the road usage model, or $116.66 more than the $745.57 it would pay under the current system. On the other hand, the F-150 would pay $21.60 less, or $2,049.43 vs. $2,071.04. The infographic points out that the Prius uses significantly less fuel, 460 gallons less, in the first place.
In California, the San Jose Mercury News reported that in fall 2014, Gov. Jerry Brown signed a law that set up a commission to study a road usage charge and establish a pilot program by Jan. 1, 2017. In addition, OReGO points out that now, several other states are developing similar pay per mile arrangements. For example, Washington State is studying and testing concepts similar to OReGO, and Indiana, Wisconsin, Michigan, Illinois, Maine, Delaware, and Florida are investigating the same.
The ODOT has published a web page to help those interested in volunteering sign up. OReGO kicks off on July 1, 2015.
Not everyone is pleased with the use of a miles-driven program as an infrastructure funding mechanism. The Institute on Taxation and Economic Policy had this to say about Oregon’s experiment: “Despite all the attention given to long-term transportation revenue issues in Oregon, the state’s new vehicle miles traveled tax is an unsustainable revenue source because it contains the same design flaw that has plagued the state’s gasoline tax for almost a century—a stagnant, fixed tax rate that is incapable of keeping pace with inflation.”
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