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Why Republican governors are flirting with tax hikes

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(Read caption) Michigan Gov. Rick Snyder talks with Lt. Gov. Brian Calley before proposing his state budget on Feb. 11 in Lansing, Mich. Snyder is one of several Republican governors across the country proposing tax hikes to generate revenue.

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The New York Times recently reported Republican governors across the country were "bucking the party line" on taxes, citing eight GOP executives proposing tax hikes.Bloomberg also noted the trend of Republican governors and "much-regretted" tax increases earlier this week. However, the Wall Street Journal just heralded "The Tax-Cutting Boon Sweeping the States." So is 2015 the year of reluctant GOP tax hikes or triumphant GOP tax cuts?

The answer depends on the tax. Given budget demands, Republican governors are open to new tax revenue—as long as it is never, ever from individual income taxes.

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Let's start with the budget challenges. States are generally expected to balance their books, so revenue-losing tax changes must be paired with spending cuts. That's not an easy trade even in the most politically conservative states. Furthermore, as my colleague Norton Francis reported last week, states are projecting revenue growth significantly below long-term averages, suggesting many governors will struggle simply to meet current needs. No governor wants his or her state to become the next Kansas.

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So the GOP tax hike talk is real, to an extent. Republican governors in Georgia, South Carolina, and South Dakota proposed—and several others have discussed—some form ofgas tax increase this year. Republican Gov. Rick Snyder is pressing Michigan voters to approve a May ballot initiative that (among other changes) increases gas and sales taxes. GOP governors in Kansas, Nevada, and Ohio want cigarette tax increases. Nevada Gov. Brian Sandoval proposed a big business tax hike to pay for his education plan. AlabamaGov. Robert Bentley says his state desperately needs new tax revenue to fill a budget gap—although, he won't say what taxes he would raise.

But don't let all this GOP talk of tax increases confuse you. Republican governors are still determined to slash, if not eliminate, state income taxes. The only significant tax change actually signed into law this year—not counting Michigan's ballot-dependent package—was Arkansas's income tax cut championed by Republican Gov. Asa Hutchinson. MississippiGov. Phil Bryant is also considering a considerable income tax cut.

And many GOP governors have proposed tax hikes only to offset income tax cuts:

  • Maine Gov. Paul LePage proposed increasing the state's sales tax to fund income tax cuts—including the eventual elimination Maine’s income tax.
  • Ohio Gov. John Kasich wants to raise taxes on sales, cigarettes, and businesses to fund his individual income tax cuts, including the elimination of taxes on small businesses that report "pass-through" income. Like LePage, Kasich's goal is eventually eliminating Ohio's income tax.
  • South Carolina Gov. Nikki Haley wants her state's gas tax increased but if and only if the state’s income tax is cut.
  • Kansas Gov. Sam Brownback, the ultimate anti-tax hero (or villain), is proposing tax hikes on alcohol and cigarettes this year, but that's part of a budget that keeps his previous income tax cuts. Brownback did propose slowing the annual pace of those income tax cuts, but he did not back away from his plan to eventually repeal the tax.
  • Nevada Gov. Sandoval’s plan requires a large business tax increase in part because his state does not have an income tax—and he is not proposing one anytime soon.

Other Republican governors are searching for answers to budget problems, but income tax increases are off the table:

  • Wisconsin Gov. Scott Walker, faced with a budget shortfall, decided to skip debt payments rather than adjust previous tax cuts.
  • New Jersey Gov. Chris Christie pledged to veto any income tax increase passed by New Jersey's legislature.
  • Oklahoma Gov. Mary Fallin said she would proceed with scheduled income tax cutsdespite her state’s budget problems.
  • Illinois Gov. Bruce Rauner's first term began just days after his state's temporary income tax hikes expired (reverting to pre-2011 rates) as scheduled on Jan. 1. Rauner's first budget kept the lower rates and proposed only spending cuts to close deficits.

Some GOP governors may sign tax increases this year. And spending needs and balanced-budget requirements will rein in the most ambitious tax plans—every year there are far more proposals than actual tax changes. But the overarching state tax story of 2015 for Republican governors is nothing new: avoiding income tax increases at all costs.

The post GOP Governors Flirt with Tax Hikes but Still Wedded to Income Tax Cuts appeared first on TaxVox.