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“My Inauguration – Starting 2017 with a Bang”

Thomson Reuters Tax & Accounting Blog David Brunori

David Brunori is a regular contributor to Checkpoint State & Local Tax news. David is a partner at Quarles & Brady and a professor at The George Washington University. The views expressed in his articles are his own and should not be construed otherwise or as legal advice. He can be reached at [email protected]

Perhaps the most important inaugural event this month is this column! Okay, some folks may disagree with that, but I am honored to begin this bi-weekly column for Thomson Reuters Tax and Accounting. I have been practicing, writing about, teaching, and opining on state and local tax policy for nearly a quarter century. And I am humbled to be able to write for a company with such a great reputation in the business. I will try to be provocative, insightful, entertaining, informative, and irreverently respectful. I have always gotten some of my best ideas from readers. So, if there is something you want me to write about let me know.

Best tax idea of 2017! Yes, I know we are only a few weeks in. But the proposal in Missouri to eliminate the state's corporate income tax is a very good idea. Senator Will Kraus (R) introduced S17 which will reduce the corporate tax rate by about a third for the next three years until the tax is gone. The current rate is 6.25%. Kraus will take it to 4% this year, 2% in 2018, and it will be gone in 2019.

Kraus should get a medal for good tax policy. The state corporate income tax simply does not work. I am not saying that from a philosophical position. But it does not work practically. It raises very little money, certainly compared to the personal income tax, the sales tax, or even excise taxes. The planning opportunities to avoid or minimize corporate tax burdens are legion-and they will never go away. States will always structure their corporate tax regimes to benefit their in-state businesses. States will always double down on tax incentives in the hope that a large corporation will actually make a decision based on tax incentives. Moreover, as states continually shift toward single sales factor apportionment formulas, you cannot even make the case that the corporate tax is a benefits tax.

Missouri raises about $425 million from taxing corporate profits. Many liberals will cry foul at the thought of a half billion tax break for corporate America. But much of the corporate tax burden falls on the back of employees in the form of lower wages. So, propping up the corporate income tax is not doing the working man any favors.

$425 million is real money. Phasing the repeal over three years will lessen the budget hit. But, this proposal would be better if there were corresponding spending reductions. Yes, the corporate tax repeal will likely lead to more investment and more jobs. But those amounts are speculative. Still, the corporate income tax is fundamentally a bad tax. And Kraus should be applauded. If Missourians are lucky, the legislature will approve this plan and the new Republican governor will sign it.

Stranger things in Maine. One of the most interesting characters in the state tax policy arena is Maine Governor Paul LePage (R). LePage, as many know has long been a champion of eliminating the state's income taxes. The problem he always faced was that the personal and corporate income taxes account for about $1.8 billion a year. The corporate income tax revenue makes up a tiny fraction (about $200 million) of that amount. But the governor never had a good explanation as to how he would pay for repeal of all income taxes. His supporters believed that the economy would grow to such an extent that repeal would pay for itself. But most economists, including conservative economists, were doubtful.

While their Republican governor was touting income tax repeal, the people of Maine had a different idea. They voted in the last election to approve Question 2, which imposed a whopping 10.15% top marginal rate on those earning over $200,000. I guess the voters never saw the memo that says when you impose high taxes on high earners, the high earners move to Florida. But the election proved that the people of Maine have no appetite for dismantling their income tax system.

The governor has always been viewed as combative. But perhaps he is mellowing at least with respect to taxes. His recently released budget proposal is chock full of good ideas that should find bipartisan support. In a nutshell, the governor would like to replace the newly imposed income tax regime with a flat 5.75% tax. That makes eminent sense. He wants to reduce the corporate income tax rate from 8.93% to 8.33%-hardly a radical move. He would like to expand the sales tax base (a revenue raiser) to include more services. I realize that people who sell services do not like to hear this, but services purchased by consumers should be taxed. He wants to repeal the estate tax. The estate tax does not work at the state level (the rich folks tend to leave before they die). He also wants to increase the lodging tax (which is his one terrible tax idea in the budget). And he wants to provide property tax relief to poor, elderly Mainers.

Personally, I do not think the governor went far enough on the corporate tax reductions. But the rest of his plan is sound. It certainly is not radical. The question is how will the populace, which three months ago, seemed adamant about making the proverbial rich pay their fair share, react?

Speaking of budgets. Washington Governor Jay Inslee (D) has a budget proposal that calls for a lot of tax increases. That is not unusual, as Inslee has been prone to raise taxes and Washington is laboring under a Supreme Court order to increase k-12 spending.

The governor would like to impose a new capital gains tax of 7.9% on all gains over $25,000 ($50,000 for joint filers). He would also like to impose a $25 per ton carbon tax. And he would like to increase the business and occupation tax rate from 1.5% to 2.5% for service providers.

If any of this looks familiar, it is. The legislature blocked a proposal to adopt a capital gains tax in 2015. Two things to consider. First, it is weird to have a capital gains tax when you don't have a personal income tax. It just is. As an aside, Washington voters have overwhelmingly rejected income taxes seven times. Second, the whole world is moving to reduce taxes on capital. Why? Because when you tax something you get less of it. And who wants less capital formation?

Perhaps the governor missed it, but voters rejected a carbon tax in November. I think the no votes outnumbered the yes votes 58% to 42%. That seems pretty convincing. Inslee is proposing the carbon tax for revenue and not because he is trying to save polar bears. The problem is that the people of Washington don't want a carbon tax. We have seen politicians propose taxes that have been rejected by the people before. I find it, well, insulting.

The increase in the B & O tax on services is also curious. The tax is essentially a gross receipts tax-and no one I have ever met thought that taxing receipts is a good idea from a policy perspective. Trying to increase the tax on services is mostly about not trying to offend manufacturers. But the legislature has rejected proposals (by the governor) to increase the gross tax on service providers in the past.

Curious outcomes. My friends at the Tax Foundation reported recently that sports drinks in Philadelphia are now more expensive than beer thanks to the new "soda tax." While I certainly do not want to tax beer more, I find it curious that the city would think it okay to tax sports drinks (i.e., the stuff you drink after exercising) more than beer. I personally like beer way more than sports drinks. I also haven't been to a gym since 1978. But the Philadelphia desire to raise revenue (and this tax was all about raising revenue) has some weird consequences.