Legislative Newsletter -September 2016 Issue
Chicago Water Tax Hits Laundry Owners, Customers HardThe Chicago City Council has passed Mayor Rahm Emanuel’s new tax on water and sewer service in an effort to bail out the city’s largest pension fund. The plan calls for a 29.5 percent increase on Chicagoans’ water and sewer rates, which would be implemented over the next four years. Starting in 2017, a 59-cent additional tax will be placed on every 1,000 gallons of water used. In 2018, the tax will be raised to $1.28; by 2019, the tax will be $2.01; and finally in 2020, the tax will come to a stop at $2.51 per 1,000 gallons of water. The estimated $239 million a year generated by the tax would be poured into the city pension fund for municipal workers to prevent it from going broke within a decade. Of course, laundry owners and their customers will be among the hardest hit by the 29.5 percent tax. Paul Hansen, president of the Illinois Coin Laundry Association, branded the new tax “immoral” because of the disparate impact it would have on low-income residents who can least afford it. Hansen noted that, in Emanuel’s first term, laundry owners “tried to absorb most” of the mayor’s plan to double water rates to rebuild Chicago’s crumbling water and sewer system. This time, however, store owners will have no choice but to pass the new tax on to consumers, Hansen said. “There’s no way to effectively do a small, 7 percent or 14 percent increase as this thing ratchets up,” explained Hansen, in a Chicago Sun-Times report. “They’re going to have to increase their prices by 25-cent increments, which means they’ll either have to overcharge or undercharge. People are not going to be able to wash their clothes as often. “They need to find another revenue source, instead of putting this on the backs of the poor and working class,” he added. “It doesn’t matter what your income is. You’ll have to pay this tax, and it’ll hit poor people twice. They’ll pay it at home, and they’ll pay it again when they wash their clothes. That’s not a luxury. It’s a necessity. Hansen noted that the tax on water and sewer bills comes on the heels of a series of property tax increases that have nearly doubled the city’s levy.The business community also has taken a series of financial hits, thanks to mandates imposed by the city council. They include a higher minimum wage and an ordinance requiring Chicago employers large and small to provide their employees with at least five paid sick days per year.”Many laundromats are already teetering on the edge of insolvency with all of these other costs that the city has heaped upon us over the last several years,” Hansen said. “As many as 25 laundromats have closed. It’s going to be harder and harder to find a place to wash your clothes. People will have to travel farther.”Molly Poppe, a spokesperson for the city’s Office of Budget and Management, said the mayor “does not take the decision to raise revenue lightly.” However, Emanuel has “very limited options available” to confront a massive pension liability that’s the “result of decades of underfunding,” she said.Doing nothing would allow the city’s largest pension fund to go bankrupt and require paying retirees their benefits on a pay-as-you-go basis. That would take an additional $900 million to $1 billion per year.Perhaps the worst part is that Chicago’s retirement funds have not changed course despite the increased cost to taxpayers. In the last four years, the number of city pensioners receiving six-figure payments has tripled. The combined debt of Chicago’s four pension funds is $34 billion, not including Chicago Public Schools. Without fundamental reforms to collective bargaining and a transition to 401(k)-style retirement plans for new employees, pension debt will only grow.
Top Ten Business Tax Changes of 2016With most state legislatures having wrapped up their work for the year, here’s a list of the top “Top 10” business tax changes enacted in the states this year, according to MultiState Associates:
Mississippi passes biggest tax cut in state history. Businesses in the Magnolia State won a major victory this year with the legislature agreeing to begin phasing out the state’s corporate franchise act. Dubbed the “Taxpayer Pay Raise Act of 2016,” the new law reduces the franchise tax rate from $2.50 per $1,000 of capital by 25 cents in 2019 and then continues to cut the rate by 25 cents per $1,000 each year until it’s fully repealed in 2028. Economists estimate that this measure will return $415 million to taxpayers over the next 12 years and represents the single largest tax cut in the state’s history. Businesses and their legislative allies had been seeking to repeal the tax for years, arguing that the franchise tax imposition regardless of profitability placed a heavy burden on the state’s economy.
Louisiana passes “a clean penny” expansion of the state’s sales tax. The signature piece of Louisiana’s first special session of the year, lawmakers passed a pair of bills that temporarily increases the state’s sales tax rate by 1 percent and expands its base to include a wide array of previously untaxed goods and services.
Delaware move state toward single sales factor apportionment. As part of a bipartisan push to bolster their state’s economic competitiveness, Delaware lawmakers unanimously approved a plan (“The Delaware Competes Act”) to phase in single sales factor apportionment over the next four years. The bill sailed through the legislature without controversy, with lawmakers on both sides of the aisle hailing it as a common sense reform that would benefit all taxpayers and recognizing the overwhelming trend among states to adopt this apportionment standard. Clearly, for companies with significant Delaware sales but relatively little payroll or property, this represents a tax increase.
Indiana opts to study combined reporting, rather than implement it immediately. There was significant concern in the business community at the outset of Indiana’s legislative session this year when Senate Tax and Fiscal Policy Chair Brandt Hershman introduced a bill seeking to implement mandatory unitary combined reporting. After the original version of the bill was met with nearly universal opposition from the business leaders, the bill was changed to merely study the policy. This softened version passed without opposition.
Louisiana moves toward of flat corporate tax structure, dependent on November ballot measure. Approved during the state’s first special session, the bill establishes a flat corporate income tax rate of 6.5 percent if voters this fall approve a Constitutional Amendment to eliminate the existing corporate income tax deduction for federal taxes paid.
North Carolina budget bill sets state up for market-based sourcing. Governor Pat McCrory made tax reform a central part of his legislative agenda this year, and the state’s tax package lives up to that promise. Most notably, one of its provisions would implement market-based sourcing for income apportionment. The bill also increases the standard deduction for personal income tax filers and exempts tangible property purchases by certain businesses from the sales tax.
Florida governor misses historic tax cut. Governor Rick Scott invested a great deal of political capital in his plan to enact a $1 billion tax cut, but the bill that passed the legislature ended up being far more modest. Citing a softening economy, lawmakers pared the tax package down to a series of smaller policies, including a back-to-school tax holiday and exempting the purchase of manufacturing equipment from the sales tax.
Utah provides corporate tax apportionment formula options. Utah lawmakers enacted a measure that gives certain taxpayers the option to use a double-weighted sales factor formula, rather than the standard three-factor formula.
Louisiana trims net operating loss deduction. In an effort to shore up government revenues, Louisiana lawmakers passed several bills restricting the application of the state’s NOL deduction.
North Carolina creates conduit exception to related-party interest add-back requirement. North Carolina lawmakers approved a bill to reduce the corporate qualified interest expense deduction, but the bill also creates an unlimited deduction if the interest derives from a third-party lender.
States Test Mileage Fees as Potential Gas Tax ReplacementPolicymakers are increasingly faced with a stark reality: costs to build and maintain the country’s transportation infrastructure — namely the roads and bridges used by citizens to get from A to B and businesses to ship goods into, out of, and across the country — are on the rise, and the way we typically pay for that investment is raising less funds than necessary.Gasoline tax revenues, the primary financing mechanism for state transportation projects, are eroding substantially. According to MultiState Insider, gas tax rates in most states are not indexed to inflation and lawmakers in most states have not raised fixed, per-gallon rates for years. The same can be said for the federal gas tax.Other factors contributing to the gas tax’s growing ineffectiveness include more fuel-efficient vehicles and the growth of electric and hybrid cars on the roads, which pay little if any gas taxes. Left with few options but to raise an unpopular gas tax, states are searching for alternative transportation revenue sources.One alternative some states are exploring is replacing the gas tax with a fee on the number of miles a vehicle travels. Like the straightforward gas tax, a mileage fee system would collect fees from users based on how much they use the roads. A mileage fee system would end the erosion of transportation funding from the rise of electric and hybrid vehicles. In fact, many transportation experts see mileage fees as the next logical evolution to pay for the nation’s transportation infrastructural needs.Oregon was the first state to pass legislation to explore a mileage fee as an alternative to the state’s gas tax. In 2012, Oregon tested the mileage fee concept with a small pilot program. The following year, the state passed a law to authorize a mileage collection system for 5,000 volunteer motorists. The volunteers are charged 1.5 cents per mile and are refunded for any gas tax costs. The Oregon Department of Transportation’s website emphasizes “this will not be another pilot program, but rather the start of an alternate method of generating fuel tax from specific vehicles to pay for Oregon highways.”Lawmakers in California passed legislation to launch a mileage fee pilot program in 2014. The pilot program of 5,000 volunteers officially launched on July 1, 2016. Unlike the Oregon pilot, volunteers in the California program will only report data on their driving habits and won’t actually pay the state fees for miles traveled. The informational program will run until next March and has already exceeded its target of enrolling 5,000 vehicles statewide into the programAfter the nine month program concludes, California’s transportation agency will submit a report summarizing the program’s results to the state legislature by the end of June 2017. The legislature will use this report to decide how to proceed – likely with more studies and testing before a full-scale or permanent program is implemented.In addition, states looking to test mileage fee programs recently received a boost when the U.S. Department of Transportation granted seven states a total of $14.2 million to test alternative user-fee funding systems.Last year, Congress passed a long awaited federal transportation funding reauthorization called the Fixing America’s Surface Transportation Act. In Section 6020 of the Act, Congress required the U.S. Secretary of Transportation to establish a program to “provide grants to states to demonstrate user-based alternative revenue mechanisms that utilize a user fee structure to maintain the long-term solvency of the Highway Trust Fund.” Secretary Anthony Foxx subsequently established the Surface Transportation System Funding Alternatives Program under the FAST Act, which will provide $95 million in federal grants over five years for states to test alternative user-fee systems.Included in the first round of $14.2 million grant funding was money for Oregon ($3.6 million), Washington ($3.8 million), California ($750,000), Hawaii ($3.9 million) and Delaware ($1.5 million) to establish or continue to test mileage fee based systems and mileage-reporting methods.However, while the concept of mileage fees might be popular with transportation experts, stakeholders and the general public remain highly skeptical of the idea.The National Academy of Sciences’ Transportation Research Board released a report earlier this year to gauge the public perception of mileage-based user fees (MBUF). The report analyzed public opinion about mileage fees through focus groups, surveys and media stories. The report found that “the majority of the public does not yet support an MBUF system.” On average, only 23 percent of the public supported replacing the gas tax with a mileage fee.Critics point out a host of concerns regarding mileage fees. The NAS report noted privacy issues and fairness are two major concerns. Distrust of technology and the government’s capacity to administer a mileage program are other concerns voiced by the public.Nonetheless, more than half the states are looking at mileage fees in some capacity. Of course, much work is still needed to educate the public and clear up many misconceptions before mileage fees become a viable alternative to the gas tax. In the meantime, states will continue with stopgap measures like incremental increases in the fixed, per-gallon gas tax, adding a variable rate to the gas tax or indexing the gas tax rate to inflation.
State Minimum Wage Laws: A Mid-Year UpdateSince the beginning of the year, there has been a flurry of developments with regard to minimum wage laws – Oregon, New York, California and the District of Columbia all raised their minimum wages substantially; Washington state certified a ballot measure that would raise the wage and mandate paid sick leave; and several localities – including Baltimore, Minneapolis and Montgomery County, Md. – are considering a $15 per hour minimum wage. Here’s a look at some of the proposals considering this year:
- Arizona: Would raise the minimum wage to $10 per hour in 2017 with incremental increases until it reached $12 per hour in 2020. It would also mandate employers at large firms to provide employees with 40 hours of paid sick leave and employers at small firms to provide 24 hours of paid sick leave per year.
- Colorado: Would raise the minimum wage from its current level of $8.31 to $12.00 per hour in 2020.
- Maine: Would raise the wage from its current level of $7.50 to $12.00 per hour in 2020.
- Missouri: Would raise the wage from its current level of $7.65 to $15.00 per hour in 2023.
- South Carolina: Would create a state minimum wage (South Carolina currently does not have one) and set it at $1.00 higher than the federal wage level.
- Washington: Would raise the minimum wage from its current level of $9.47 to $13.50 per hour in 2020. Would also mandate that employers provide one hour of paid sick leave for every 40 hours worked.
Small-Business Retirement Plan Mandates Coming in 2017Half of private sector employees don’t have access to a workplace retirement savings plan. However, by next year, several states expect to have new plans up and running.Washington state is anticipating an early 2017 start date for its Small Business Retirement Marketplace, where financial services firms will offer low-cost plans to businesses with less than 100 employees, including solo business owners. The Marketplace will be voluntary for employers – and employees.By contrast, programs in Oregon and Illinois – with expected June 1, 2017 start dates – with be mandatory for employers, while employees will always be able to opt out. In Oregon, employees will be automatically enrolled into a plan that is pooled and professionally managed. In Illinois’ Secure Choice program, employees will be automatically enrolled in a Roth IRA-like savings account.”This is a group of people that the industry forgot,” said Phyllis Borzi, assistant secretary of the U.S. Department of Labor’s Employee Benefits Security Administration. “They are people who probably aren’t the most profitable customers. That’s OK. That’s our system. What’s so exciting and heartening about the work begin done in the states and the cities is that these are the people they’re focusing on.”In all, eight states have passed legislation to establish retirement savings programs for private sector workers whose employers don’t offer a plan. In addition to Washington, Illinois and Oregon, there’s California, Connecticut, Maryland, Massachusetts and New Jersey. And many more states have legislation in the pipeline. There is great variation from program to program; for example, California’s law applies to employers with five or more employees. At the same time, the DOL issued a new proposed rule that would pave the way for large cities and political subdivisions to establish these new retirement savings programs. In New York City alone 57 percent of employed workers – 1.7 million people – don’t have access to a plan at work. Although employees who don’t have workplace retirement plans can save for retirement by setting up an IRA or Roth IRA at a bank or through a broker, those methods of saving for retirement require proactive steps. By contrast, most of the new state-sponsored programs take hand-holding further by automatically enrolling employees with payroll deductions, unless they opt out.Making the plans automatic and easy are the key features of the new plans, said Steve Hill, director of retirement security campaigns at the Service Employees International Union. “It’s hard for us in the Washington, D.C. policy circle to fully appreciate how bad it is out there,” Hill said. “This can be important and transforming for millions of people.”