POSTED BY MARTIN KICH

State support for public higher education—or, more precisely, the decline in such support—remains a persistent and significant issue. It continues to exacerbate the level of debt that students are assuming to get degrees (or often to pursue degrees that they do not manage to complete) and constricting the number of faculty hired into full-time positions. So when one reads a headline indicating that state tax revenues have dramatically increased, there is an immediate sense of a disconnection—and, perhaps, a glimmer of hope. Unfortunately, the disconnection is real, but the hope is probably misplaced.

The following is an excerpt from an article written by Liza Farmer for Governing:

The tax overhaul last year boosted income tax revenues for states, and a new federal budget freed up more money for domestic programs.

Total expenditures across the 50 states last fiscal year topped $2 trillion, a record high. While that includes a 4.6 percent boost in spending from states’ own money, funds from the federal government grew by nearly 6 percent. Increases in federal funding of state programs have generally gone toward Medicaid. However, non-Medicaid spending increased by 4.5 percent in fiscal 2018, according to the state expenditures report released this week by the National Association of State Budget Officers (NASBO).

“It used to be that, without Medicaid, we were seeing a decline in federal spending,” says Brian Sigritz, NASBO’s director of state fiscal studies. “But that wasn’t the case this year.”

 On the revenue side, the federal tax overhaul prompted many taxpayers to file some of their 2018 taxes early, leading to a one-time bump in revenue. Total revenue for fiscal 2018, which ended on June 30 for most states, was $838 billion. That’s a more than 6 percent increase over the prior year and the highest growth rate since fiscal 2011.

It remains to be seen, however, whether states will continue to see a revenue boost from the tax overhaul in 2019 and beyond. For high-income earners who tend to file quarterly returns, a new lower federal tax rate means more income to declare—and tax—at the state level. While some states have reacted by changing their own tax policy to have a revenue neutral effect, not all have.

The income tax boon was most evident during the first three months of 2018, according to a separate report from the Urban Institute’s Lucy Dadayan. During that period, income tax revenues grew by a whopping 12.8 percent after adjusting for inflation. Overall, individual income tax collections increased in 38 states during that quarter, with 23 of them reporting double-digit growth.

So, the takeaways seem to be that some of the boost in state revenues simply reflects that many taxpayers, especially the most affluent, filed ahead of the changes in the federal income tax that eliminated deductions for state and local taxes. But some of the revenue increase may reflect higher after-tax income reportedly federally in states that have not adjusted their income tax rates in response to the changes in the federal tax law. In other words, not only are state and local income taxes no longer deductible on the federal level, but the fact that federal income tax rates are lower increases taxable income at every level.

During the midterm-election campaigns, some GOP candidates and commentators continued to suggest that President Trump was not focused enough on promoting the tax cuts and linking them to the good news on the economy, but others belatedly recognized that the tax cuts are simply very unpopular.

But why are they unpopular? Democratic candidates pointed to the fact that almost all of the personal gains created by the tax cuts are going to the top 10% of individual earners and to corporations. But, as is the case with state tax revenues, I suspect that the unpopularity of the tax cuts is more complex. Over the past decade, the state of Ohio has dramatically reduced income taxes and corporate taxes. The cuts made to offset these state income tax reductions have included reductions in state support for local school districts and the complete elimination of state allocations to local governments, many of which had received 60%-70% of their revenue from the state. As a result, there has been a dramatic increase in new local income-tax and property-tax levies. For a long while, One Ohio Now, which advocates for more responsible state tax policy and more state spending, maintained an interactive map that with a click showed how much taxes supporting local governments and local schools had increased since the major reductions in the state income tax had been put in place. Even the taxpayers most blinded by ideology have been able to see that their taxes have actually been increasing and that without such tax increases, their local communities and schools end up deteriorating very rapidly.

In a recent article written for the Cleveland Plain Dealer, Tom Suddes notes that the Ohio House is intent on passing a “heartbeat” anti-abortion bill while they still have a super-majority while the longstanding problems with the state’s school funding remain ignored:

For 1997, the year that Ohio’s Supreme Court ruled that Ohio’s school funding “system” unconstitutionally overrelies on property taxes, Ohio real estate owners were charged $7.2 billion in taxes. (Ohio’s public schools receive about two-thirds of every $1 in real estate taxes.) For 2015, latest year at hand, owners were charged $15.7 billion in real estate taxes.

This reality is less evident but no less worthy of concern when it comes to other types of taxes. A recent editorial in the Akron Beacon Journal focused on sales tax exceptions:

Imagine $9 billion a year in virtually unchecked state spending, growing at 8 percent during the biennium. This would get the attention of the Republican majorities at the Statehouse, right? An amount approaching that sum finally did in December 2016, when lawmakers set up a Tax Expenditure Review Committee. On Tuesday, the panel made its first recommendation. A 4-2 majority advised maintaining $5.5 billion of the spending — without any changes.

That wasn’t the only majority to speak. Democratic and Republican committee members joined in expressing dismay with the process. They argued, in effect, that the panel really didn’t do its job of closely evaluating the purpose, need and effectiveness of the first 15 tax expenditures, or tax breaks, it chose to take up. . . .

The 15 breaks are all exemptions from the sales tax, and the legislation creating the committee defined the way forward in making evaluations. Unfortunately, the panel has fallen markedly short of the mandated thoroughness. It held just four hearings. For eight of the tax breaks, there was no proponent testimony. Such an absence would seem reason enough to put exemptions on an endangered list. . . .

Again, this is about $9 billion a year, or more than the state share of Medicaid or the amount for the school funding formula.

 

Liz Farmer’s complete article is available at: http://www.governing.com/topics/finance/gov-income-tax-revenues-drive-record-state-spending.html?utm.

Tom Suddes’ complete op-ed is available at: https://www.cleveland.com/opinion/2018/11/abortions-are-declining-in-ohio-property-taxes-for-schools-are-rising-which-issue-do-you-think-gop-lawmakers-are-targeting-thomas-suddes.html#incart_river_index.

The complete editorial in the Akron Beacon Journal is available at: https://www.ohio.com/opinion/20181114/beacon-journalohiocom-editorial-board-runaway-state-spending-in-form-of-tax-breaks.