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okay hello everyone welcome to the budget and tax overview my name is mandy rafal and i'm the director of ncsl's fiscal affairs program and i'm going to be your host here today during our session and i thought it would be fun to um before we begin take a quick survey of the audience and see how you rate your understanding of the budget and tax processes that we're going to be discussing here today so i have a quick pull question so go ahead and hit the poll tab poll number one and the question is which movie title best describes your understanding of the federal and state budget process and your options are lost in translation dazed and confused pans leverage as good as it gets and educated so go ahead and take a minute to vote okay votes are coming in okay so it looks like um we've got equal parts uh dazed and confused and educated so you're in the right place because we're going to have a high level overview but we'll also get into some details of current activities so that should appeal to both levels of understanding um oh now we have more dazed and confused okay well that's good because we are going to shed some light on all of this um but before we do that i just want to point out a couple of key features of this platform you'll see two tabs that say chat and q a chat function is informal and allows you to interact with each other so you're welcome to go ahead and introduce yourself in the chat function if you like and then the q a is if you have a question for any of our speakers at any time go ahead and write a question in there and then if you see a question from someone else that you like you have the opportunity to upvote it by using the up arrow and then lastly if at any time you need technical help just use the help button at the bottom of the page and i know many of you are new to policy making and to ncsl so i just want to give you a quick rundown of the fiscal affairs program i mean our main purpose at ncsl is to help you all do your jobs better and one of the ways we do that is by providing information and we conduct research and provide expertise on a number of fiscal issues including budget and taxes and while that's one of our core areas we also cover economic development tax incentives gaming tourism financial services and much more and you can find all of our fiscal program work on the ncsl website under the fiscal policy tab so it's now my pleasure to introduce three of my ncso colleagues first up is erlinda doherty and orlinda covers federal budget and tax issues and she's going to give us a high level overview of how the federal budget process works and then after orlinda we'll hear from erica mckellar and jackson brainard erica covers state budget issues for in csl and jackson follow state taxes and all three of them are super knowledgeable and they will be available at the conclusion of all the presentations to answer any questions that you have and again just put those in the q a and so at this point i will just turn it over to orlando and she can kick off the presentation wonderful thank you so much i'm just going to share my screen here welcome everyone thank you so much mandy for that lovely introduction as mandy mentioned we work in concerts are here in the dc office with our with our friends and colleagues in the fiscal office in denver i am the director of the budgets and revenue committee in our washington dc office i'm going to give you all a overview of the federal budget process as well as an update on uh covered relief to states which i know is of huge interest to to everyone at this moment so again i'm the this is the budgets and revenue committee in washington dc and we examine all the federal and state policies with fiscal implications you can see the list of items here all of them having to deal with of course tax budget appropriations also with unfunded mandates down to state and local fiscal relations we represent the 50 states before dc on these fiscal issues advocating before congress in the administration for for those of items of interest to you as well as communicate and collaborate with other like-minded organizations advocacy organizations and think tanks all right so as we start here a little bit of a breakdown of how we're going to structure this presentation starting with what is a federal budget the steps of the budget what budget control mechanisms exist and then finally with the wrap up with the covet 19 relief efforts that have been happening since this pandemic began almost a year ago and then an update on where we are with the most latest round of federal release that's being worked on in congress right now so what is the federal budget well it's not just a spreadsheet of pluses and minuses it really is a remuneration of the goals priorities and values of the federal government has trade-offs and challenges for putting the government on a sustainable path while also trying to stabilize debt as we'll talk about in a minute here too we call it policy alphabet soup and it really is the spending plan for for government which was enacted into policy or into law with the congressional budget act of 1974. so what are the steps so step number one is the in theory this is all theory of course we'll get into why it doesn't really happen this way a lot but the in theory the first process in the in the budget process or the first step i should say is the president's budget request it officially kicks off the budget normally it's submitted by the first monday in february um this year it still uh hasn't been submitted yet because uh president bio has been focused on his code relief package so there's still some discussion as to when he's actually going to officially um you know present his budget last year president trump um submitted his budget uh a month late so you know this has been a floating sort of a target i guess uh for a few years now it is the recommendation for the president's um overall vision for for his federal fiscal policy and uh it puts across or he he or she explains in this document uh how much to spend on public purposes how much the plan is to take in our revenues and how much of the debt or deficit the government should run and just as an fyi the latest deficit update that we have is that uh for the first quarter of fy21 which began in october 572.9 billion which is up 61 from a year earlier this is again all kind of reflecting the massive amounts of stimulus that the government has uh injected into the economy so again it's uh it's a remuneration of the president's policies and priorities what specific programs are important to to him or her relative to other programs um and there is basically two pots of money on how uh or two two categories of funds that are that are put into this program we have our discretionary funds which are programs that are annually appropriated under the jurisdiction of that house and senate appropriations committees and these are funds that uh have to actually are programs that have to actually be uh discretionary that have to be going through this process versus what we call mandatory or entitlement programs which are mostly tax code and federal federal spending that's been set uh and things that are paid automatically and that actually takes up a large chunk of of the the government uh the budget you actually see the actual discretionary slice of the money pie is less than a third and here's an example of fy 2019 you can see that mandatory spending is is truly the the lion's share of the of the dollars discretionary only taking about a third and the largest uh pot or piece of discretionary funding is the defense budget so number two what is the second step theoretically in the budget process it's called the congressional budget resolution uh basically congress develops its own budget plan house and senate budget committees have hearings from all the different agencies um it does not enact the spending law but actually sets the targets for congress themselves very broad 19 budget functions and really and there's all uh basically it sets the limits and the authority um for the cash outflow and normally or in theory um these are supposed to this budget resolution is supposed to be passed by april 15th but uh surprise hasn't happened for a while now uh hardly ever met as you can see and it doesn't if there isn't a budget resolution that's actually passed uh congress has the ability to to deem that's sort of an informal resolution if you will verbally um that basically will set the overall standards um for or the spending um measures plans for for congress and uh basically with the ending of the bipartisan budget act um which had established statutory budgets in two-year increments um that more or less took the place of a budget resolution okay so then we're into the and actually enacting the budget legislation and there's two options and uh the second one we'll talk a little bit more about too because it's being discussed uh quite frequently now but option one we call slow and steady it's the regular annual appropriations process where both chambers times 12 committees equals 24 spending bills that each of the committees are supposed to to pass individually um discretionary spending is constrained to the amounts that were laid out in the actual budget budget budget resolution if there it was in fact one uh and uh cbo the congressional budget office uh must score or give their analysis as to what these these bills would actually cost option two which has gotten a lot of press lately and uh has been uh you know resurrected more or less is the what we call the budget reconciliation process and it's used on occasion to expedite spending bill consideration uh what it does is it requires a simple majority as opposed to a two-thirds majority and uh what happens is both the house and senate have to approve basically identical packages and then the bill gets presented with an upper down vote all right so so if a budget doesn't get passed in time by by the end of the fiscal year well what happens and we've become very familiar with this sadly uh government shutdown unless the unless government or unless congress has decides to pass a continuing resolution which basically funds the government at the levels of the previous uh fiscal year's levels um and we've had several occasions sadly again of these government shutdowns with i've listed the top three here 35 days during the trump administration we had 16 days um during during obama's administration and 21 days so we become very familiar with again sadly with this kind of overarching looming destabilizing government shutdown process and it this every year basically calls into question the validity and the utility of the current budget process that we have because as i mentioned it is not in theory these are the steps but every year it doesn't you know in reality does not follow um what was put into place and here again is an example of 2019 2019 spending uh 2020 20 numbers are still being figured out but this is exactly what you can see here again that the discretionary pieces is really only truly a smaller piece of the overall mandatory spending so what budget control control mechanisms are there how do we keep budgets from going off the rails well uh you know there's a few and we'll be one called pago which again was talked about a little bit earlier on uh for the senate uh basically which uh requires for every outlay uh that you know that another um either a spending cut or a revenue increase to make up for that so trying to achieve some sort of balance here and again the government federal government doesn't have the requirements that state governments do to actually have balanced budgets so this is why there are these control mechanisms are here in existence um then we have caps sequestration and release that are also mechanisms that congress can use to rein in some of the spending and uh make cuts and um revenue increases in other ways and again this is theory versus reality right so this whole process in general we've got these steps that are laid out that was enacted by the by the uh congressional budget act in 1974 but rarely do uh our budget does our budget process ever truly follow this pattern and of course uh this brings into question or not a question but it kind of transitions over into what the federal government has already done with respect to proven 19 federal legislation which is the biggest uh piece that the congress is dealing with right now has basically taken priority over the regular appropriations process of course because we're undergoing this massive pandemic but so far the federal government has given the states and citizens 3.4 trillion dollars in what i like to call four rounds of federal funding um of course the first round was when the pandemic first started uh in early march and that was more so of emergency supplemental appropriations um round two was the uh ffcra so the family's first chronovirus response act uh which really put into play a lot of the programs that we're relying upon now the biggest was the cares act which of course was important for states with the establishing of the crf the chronovirus will be fund um uh in april we passed around 3.5 which replenished the kci protection program and then the last most recent was uh the um cova 19 relief and omnibus appropriations act where basically congress not only funded the government in but also gave the last transgender 19 release in in one big bill and again here's sort of a summary of all the release legislation that congress has passed um again this whole pandemic has you know basically abended the the normal appropriations process again which is why this whole notion of whether the federal budget what is budget process is being discussed again to see its validity in the future and how we may need to reform it this is the uh excuse me president vines most recent proposal and what is being currently discussed right now so i as i mentioned the last big big uh relief tranche was passed before uh the new year and this is the the next big step that's being discussed right now is president biden's uh proposal that's being now taken up by various committees and actually put into actual legislation to be to be taken up and discussed and it's 1.9 trillion dollars with the various um priorities you can see here with the most i think relevant right now is a 350 billion dollars for states and localities that are that is also being discussed right now and here is the latest update on that so the house and senate have already approved as i mentioned before this budget resolution to help fast track the elements of president biden's 1.9 trillion measure the house committees of jurisdiction this week are marking up the individual elements of the proposal of the proposal and you can see i've listed here the different committees of jurisdiction over various pieces of the president's plan um again of no most interest to us is the 350 billion dollars for state and local aid um and of course i've listed all the other important pieces of his uh proposal that the various committees are taking up and uh the house leadership expects to have all these components passed by the week of february 22nd in order to prevents a lot of the programs that are currently available now the unemployment insurance especially to lapse before the mid uh march deadline okay and that is that concludes my presentation of course any questions feel free to to reach out or we'll have some q a at the end and with that i will turn it over to my colleague erica mckellar thank you so much your linda and mandy i believe is going to share some slides and while she works on that um thanks to linda for that great federal overview and good afternoon everyone and thanks for being with us today um as erlinda and mandy mentioned i'm erica mckeller and i am in the denver office of ncsl and i primarily track state budget conditions and work on state budget process issues for ncsl and i'm going to talk a little bit about both today i'm going to start off talking a little bit about the budget process and i really love talking about the budget process because it's something you know that we don't really talk about often we tend to kind of get siloed in our state and recognize you know r ally get an in-depth knowledge of the way our state particularly budgets but i think it's always helpful to remember that no two-stage budget budget the same way there are really 50 state ways to budget and you know it's something but the budget process tends not to change a lot there's a lot of tradition and history that goes into it um but the times that states do tend to kind of revisit the way they might be budgeting are usually after an economic downturn so i think it's a good and exciting time to kind of be revisiting this issue so just to kind of kick things off i just want to review sort of the timing of most state budgets typically agencies submit budget requests to the governor's office in the fall then the governor kind of chooses his priorities puts together his budget and submits it to the legislature in january from february to may depending on the length of sessions we know legislative session links varies greatly states will legislatures will hold budget hearings i'm sure many of you are knee-deep in that process right now and then sometime between march and june the legislature usually adopts that enacted budget uh you know as i mentioned session link varies by state so um this can happen anytime between uh march and july 1st but that june 30th at midnight is really the kind of final time for states to be able to pass their budget uh the new fiscal year begins on july 1st in all but four states alabama michigan texas and new york and i'll talk a little bit about what happens if states don't pass their budget on time in a little bit so most states meet annually and pass a budget every year but there are 15 states that meet annually but pass a budget every two years and four states that pass a budget every two years and the legislature also only meets every two years you know whether it's better to have an annual or a biennial budget is you know a topic that comes up from time to time it doesn't change often but some states have changed over the years but in practice um you know it doesn't really matter that much the argument for a biennial budget is usually that you know states spend a lot of time passing their budget it's usually the main thing that a legislature has to do every session um and you know in practice i guess the argument is that it takes a lot of time and it takes a lot of attention of lawmakers and if you budget every two years the idea is that you might have more time in those offers to deal with other legislative issues other policy and priority issues in practice though a lot of biennial budgeting states almost act as annual budgeting states instead of enacting a true two-year budget they'll enact two one-year budgets at one time they'll often be amending those budgets in the op years or passing supplemental budgets and on the flip side states that pass an annual budget sometimes present two-year budget information to legislatures so in practice there's not a lot of difference it's it's mostly important to just kind of have those good practices in place and a tradition and culture that works for your state a lot of states also kind of mix the two they might pass two-year budgets for small agencies and then annual budgets for larger agencies so no right or wrong way but again just an interesting look at the different way that states budget next slide please mandy okay so one of the most fundamental parts of state budgeting is figuring out how much the state has available to spend um you know we know that this has been a real challenge for states over the last year um you know we've never experienced the type of economic downturn that we start that we saw at the start of last year it's really been a challenge for states to figure out how to how to revenue estimate in this kind of new world um but typically you know there are a few different ways that states produce a revenue forecast mandy sorry can you go back a couple of slides thanks um states there are a few different ways that states can produce their revenue estimate um the first is to have the executive branch produce a revenue estimate the second is having a consensus revenue forecast and that usually involves representatives from the executive branch the legislative branch and then a lot of times kind of some outside economists um the third way are sort of kind of some alternative ways that states might budget um some states will have a university or other outside economists prepared their forecast and then you know sometimes states will have sort of competing forecasts they'll have two different groups do it so in montana for example the executive branch and the legislative branch prepare estimates and then the legislature gets to choose which forecast um they're going to follow as they review the budget um when states officially revise their forecasts also varies by state some states only do it once a year at the start of legislative session other states do it quarterly um some states have informal revisions um every month or two so you know that varies again greatly by states you're probably going to get tired of hearing me say it varies by state but um there really are no two ways that states budget the same the meaning of the forecast also varies by state in some states the forecast is more of a guideline and in other states it's really a hard and fast number that the governor the legislature cannot go above and it can be binding on the budget that states pass so some differences in what the revenue estimate means for states as well next slide please mandy okay so it's friday afternoon to to keep everybody kind of on their toes i kind of want to do a quick um a quick trivia question here uh if you feel like it uh i'd like you to just kind of guess in the chat box how many states you think have a balanced budget requirement and give you just a second to do that all right well if you guessed 49 uh you're right every state except vermont has a balanced budget requirement but it's almost a trick question because vermont always does balance its budget by tradition but i think balanced budget requirements are really important because one of the reasons revenue estimating is so important is that unlike the federal government that our linda mentioned you know states can't run deficits they have to follow these balanced budget requirements balanced budget requirements usually only apply to a state's general fund rather than kind of the total state budget which gives states a little bit of flexibility there are a handful of states that have education trust funds in addition to their general funds that are applicable but things like bonds and some special funds are sometimes outside of those requirements the stringency of requirements varies it depends a lot on the language in the states for example you know at what point in the process does the budget have to be balanced does the governor have to pose a balanced budget or does the legislature have to enact a balanced budget and you know in some states a deficit can be carried forward to be resolved in the next fiscal year so you know there's a lot of academic discussions around the language and what it really means to have a balanced budget requirement but i think the most important thing is that in practice you know states balance their budget as a matter of history and tradition and culture and it's something that i think is very important in the state budget process so you know similar to some of the other things we've talked about what the appropriation bill means is also different in states you know throughout this presentation i've been referring to the state's operating budget for the most part um but but there are 18 states that roll every agency every program every line item into one omnimus budget budget excuse me appropriations bill in colorado we creatively here call it the long bill but there are 32 states that have multiple appropriations bills many times these are general fund or operating budget a capital budget and then sometimes states will also break out a transportation budget um and there are a few states that will have multiple budget bills and like every agency or a group of agencies will be rolled together into a budget bill fun fact arkansas has the most appropriation bills of any state um each agency gets funded separately and they have over 500 budget bills so a lot of time and effort goes into that i'm sure next slide please nandy so who controls the budget process in every state only the legislature can appropriate funds it's one of the fundamental powers of the legislative institution in practice what that means can can vary in practice in most states the budget conversation is largely driven by that governor's proposed budget but that's not true in every state there are six states arizona colorado new mexico oklahoma mississippi and texas that actually draft a budget independent of the governor's budget so those states we tend to think of as having the most control the legislature having the most control over their budget in the states um but as we as we mentioned you know most legislatures are part-time so once the legislature has enacted the budget the governor signs it into law and the session is over everybody goes home who has control of it that during the interim um governors have the authority in most states in the interim to transfer funds between programs within their agencies and in some states they can transfer funds between different agencies usually there are some controls on that threshold a monetary threshold of how much they can transfer and in a few cases the governor can authorize additional funding without legislative approval but again that usually has a threshold control on it in a majority of states the governor has the authority to withhold funds from agencies you know as a cost saving measure we saw a lot of governors put spending freezes in place during the the start of the pandemic as states were trying to get a handle on what the fiscal impact would be of the pandemic on their economies and governors largely have the authority to spend unanticipated federal funds without legislative approval and i'll talk a little bit about a little bit more about what that means in just a minute um you know the the ability of legislatures i think to have more control over budgets during the interim is really kind of hindered by the part-time nature of most state legislators there's quite broad authority for governors during those interim fights so unanticipated federal fund you know most legislatures have the authority to appropriate anticipated federal funds so medicaid matches other grants that states expect to receive you know legislatures largely have control over those funds but things get really messy when it comes to these unanticipated federal funds um we've seen that kind of play out with era a few years ago we saw it with the cares act last year and i anticipate we'll see it again um if the proposal that our linda mentioned passes um you know it gets oh sorry i could go back a second andy i just want to mention that you know unanticipated federal funds sounds like it would be one big category but a lot of questions have sort of arisen over what these what type of funds these really are are they kind of regular unanticipated federal funds are they disaster funds so we've seen like the individual language in states around these unanticipated funds has really played a role in who has had the authority to appropriate them we've seen courts have to weigh in in a few cases and i think you know we've seen some legislatures introduce measures this legislative session to kind of try to get more control over those funds especially in the interim so something that i think we're going to continue to see playing out as more federal stimulus might come down the pipeline now you can go mandy thanks so the last budget process issue that i kind of want to touch on uh is what happens if a state doesn't pass its budget by that june 30th july 1st deadline and again of course you know it depends there are a lot of states that have actually never been in this situation they've always passed their budget on time it just hasn't come up it's never been tested they don't really know exactly what would happen um in over 20 states the government would shut down at least in part you know a lot of payments might be continuous either in state law from some state court rulings public safety employees tend to be sort of exempted from those 12 states can pass continuing resolutions or temporary spending plans we actually saw a lot of states do that during the pandemic last year as legislators kind of suspended their operations and tried to get a handle on how much revenue they were going to have they implemented a temporary budget and decided to come back in the fall so we saw that as a tool that states used during the pandemic three states north carolina rhode island and wisconsin have provisions in place that will automatically continue fund continue funding at last year's appropriation levels if a budget's not in place by the the start of the fiscal year um and just to kind of come back to that government shutdown piece a little bit so i think it's always very dramatic when it happens but in reality it really doesn't happen that often and when it does it doesn't usually last very long and i think one of the biggest reasons for that is the july 1st deadline that most states face you know most people are getting ready to go on their july 4th holidays and people get upset when you know they can't go to go visit their state parks and do some of the other recreation and and things that um would fall under those government shutdowns so they don't happen a lot they're just kind of a little dramatic when they do happen so i want to spend just a few minutes talking about state budget conditions around the country i know most of you are probably working on your budgets now so i think it's kind of helpful to see where state budget conditions are you know at the start of all this we really saw some catastrophic revenue estimates a lot of states were preparing for cuts of 5 to 25 of their general funds a lot of states freezing spending and dipping into their rainy day funds and we we at ncsl try to kind of keep tabs and keep track on how fiscal conditions are progressing in the states throughout the year and as part of that we survey legislative fiscal offices two or three times a year and ask them how the major tax categories are performing how their overall revenues are performing issues that they anticipate coming up in their legislatures and we currently have a survey in the field right now where we're getting tabs on that we have 35 state surveys back and a survey from washington dc so i just kind of want to kind of go through some of the preliminary results of what we're seeing um and and largely you know hopefully it's good news and an upbeat for everyone because things are looking a lot better than we expected at the start of the pandemic i'll caution you know that it's all relative i mentioned those kind of catastrophic estimates at the start but you know i think it's still very good news so the personal income taxes and general sales taxes make up the largest portion of state revenues in most states and jackson will talk more about state tax structures in a little bit but we ask how those major tax categories are performing relative to their latest estimates so you can see pretty good results here above estimate in 13 states on target in 15 states and only one state right now reporting that they do not anticipate personal income tax collections coming in where they expected so largely really good news on that front you'll probably notice that these don't actually add up to 36 there they'll be one or two off the reasons for that are we know which states don't levy these major taxes so even if we haven't reserved received their survey response back we're able to add that in and a couple of times states don't have enough information to say how their revenues are performing and usually that has to do with the timing of when they estimate their revenues so just a little copy up there all right general sales and use tax collections the second largest state tax category also performing really well 14 sta es above estimate 14 states on target only a couple expected to be below so um you know i think really good news that we're seeing these um come come in on target and we'll talk a couple minutes about the reasons for that in just a minute overall at the end of the the fiscal year most states right now are expecting to meet that forecast or exceed that forecast um so good news again this is relative to some of those pre-pandemic or excuse me those pandemic episodes estimates but i'm generally good news so the reason that taxes are performing better than expected it varies across the states but some of the reasons are the federal stimulus really did play a major role in helping states kind of weather this storm there's a lot of evidence that the aid allowed states to kind of move some of their general funds around to different priority areas specifically the fmap the federal government increased the matching amount that they were giving states for medicaid that really kind of helped shore up state medicaid budgets and allow states to kind of move some of those general funds around so that's one major reason additionally you know states didn't see heavy job losses from some of these higher income tax brackets that tend to make up the bulk of the personal income tax collections you know those jobs were largely able to move to a remote working scenario so states um that that helped state revenues quite a bit we saw we largely didn't see consumers you know quit spending as sectors kind of shut down we saw them shift a lot to online sales purchases purchasing of home goods i think everybody is redoing their house right now that type of thing so those online sales taxes and that shifting consumer spending definitely helped states and then lastly you know the stock market has stayed largely strong so all of this is combined to keep state revenues you know kind of afloat during the pandemic in our survey we also asked legislative fiscal offices what they expect to be the top fiscal issues um for the upcoming legislative session and into the future um and can again of course this varies based on individual state needs um but some of the issues that kind of rose to the top this year education funding was a very big one um in some cases it was referenced more as just reviewing the funding formula but in quite a few it was also sort of restoring any cuts to education that may have been made at the start of the pandemic unsurprisingly medicaid and health care are still big areas of concern for states unemployment trust funds are a big issue over 20 states are already borrowing from the federal government for those programs and 23 states use cares act money to help shore up those accounts so something that i see i think we'll continue to see states grapple with um then finally it's kind of concerned that um this influx of federal aid is really there's a difference between recurring revenues and one-time revenues for states and this is really kind of a big one time influx of cash for states and depending on the trajectory of the recovery and you know what we expect to see down the road in terms of federal aid there's a concern that as those programs run out states will either have to cut spending or um replace that money with general funds spending um i think the proposal that erlinda laid out will go a long way to alleviate those fears definitely something that legislative fiscal officers think you know and then finally you know i'll just kind of wrap up by saying that um there's a lot of cautious optimism i think out there things in from a state revenue perspective at least are looking a lot better than we expected but there is still a lot of kind of uncertainty and concern we don't know how quickly the vaccine rollout will happen we don't know when travel will recover you know obviously there is unevenness and disparity in the economic recovery so you know things are looking better than we anticipated but there's still a lot of and uncertainty about what the future will hold and i will stop there and let jackson take over and tell you more about tax structures great thank you erica and hello to everyone tuning in thanks for uh popping on on a friday afternoon got some exciting material on state tax structures to go over here so you can really kick your weekends off with a bang but first we're going to start with a quick trivia round set the tone with some state tax 101 tidbits these are going to be the last two polls on your screens i've got the fun polling feature might as well use it how many states to start tax the sale of netflix subscriptions i'll give you a few seconds to make your selection okay time is up the answer is only half 25 states maybe surprising depending on your familiarity with sales tax issues next question how many states have an estate or inheritance tax taxes imposed when a deceased person transfers money or property to a beneficiary maybe another few seconds okay time's up the answer here is 18. well 17 and dc technical next slide please maybe so the world of state tasks can be pretty complex and that is due in part to the fact that as our trivia questions suggest every state tax system is unique just like their budgeting processes the economic strengths resource endowments and demographic compositions of each state's berries and these are factors that quality revenue systems should take into account there are some significant similarities though in general states tend to rely on three primary tax sources these are known as the big three in only the coolest tax policy circles these are the personal income tax sales in corporate income tax most states levy all of these but nine don't have a personal income tax five do not have a sales tax and six do not levy corporate income tax next slide please the largest portion of state tax collections comes from the personal income tax followed closely by sales and use those are far and away the two largest tax categories so it's really the big two in their little brother corporate income tax is much smaller slice around five percent then you have selective sales taxes that includes all of the excise taxes that are levied on specific goods and services motor fuel tobacco alcohol cannabis amusement taxes etc the miscellaneous tax category includes things like severance taxes on oil and gas or coal mining state taxes licensing taxes and then some people might be surprised that the property tax represents uh such a small slice of state revenue pi it is the single largest state and local tax source but it is primarily a local revenue pool although some states do not they narrow property taxes on things like utilities then not pictured in this pie graphic are charges and fees or federal transfers to states which are probably the most important supporter of state fiscal health as they account for about a third of total statement next slide so this illustrates how states can vary in terms of their reliance on their taxes special economic circumstances or policy decisions have led some states to develop revenue systems that do not rely on a broad range of revenue sources states with extensive mineral resources or unique tourist attractions can rely more on more narrowly based tax systems alaska for example doesn't have a personal income tax or a sales tax and generates a significant majority of its revenue from severance taxes on oil and gas south dakota has no income tax and is therefore very reliant on sales excise taxes and then oregon has no sales tax so it means heavily on the personal incomes next slide please this map here comes from the pew charitable trusts which recently put out a report and measured revenue volatility across states from fiscal years 2000 to 2019. most states rely on a balanced variety of tax sources because it can help ensure stability in their collections and we've seen how important budget stability can be for states over the last year or so all taxes fluctuate with the economy but historically speaking the sales tax is the most stable followed by the personal income tax which has been more susceptible to fluctuations stock market severance taxes and corporate income taxes are reliably most volatile of course this is not always hold many states sales tax was hit particularly hard due to economic impacts of profit you can go ahead in the next slide when it comes to income taxes the rates are often a major point of emphasis should marginal rates be increased on higher earners who can presumably bear a larger tax burden should rates be cut to try to stimulate economic growth and make the tax climate more desirable for businesses in recent months we saw a couple states new jersey arizona increase taxes on higher earners there are also governors in several states that are emphasizing income tax cuts to provide relief for states considering cuts of growing trends in the years leading up to the pandemic involved states enacting tax changes contingent on certain variables so if a state say enacted a reduction from six to percent to 5.5 percent uh that that only happens if the state meets a certain revenue threshold and that's commonly referred to as a tax trigger and we saw over 10 states and act something like that in recent years next slide please but if you want to get a better picture of effective tax burdens though you need to take the income tax brackets into account for example uh massachusetts has a relatively low marginal rate of five percent uh but it is a flat rate that applies across all individual levels georgia has six rates leveled at different income levels and its top rate is about 5.5 percent is applied to all income over 10 000 and then you look at new jersey which has a much higher marginal rate of 10.75 but it applies only to income over 1 million dollars so if you're making 75 000 or less rates are actually lower in new jersey next slide please for both personal and corporate income taxes important thing to note is that most states tether themselves to the federal code by using federal definitions for income as the starting point for state tax calculations so this means that changes to the federal code are going to be significant for states too and revenues will go up or down depending on what is deductible and what's not the extent to which states conform to the federal tax code has been a recent focus lately we had the tax cuts jobs act a few years ago that required a great deal of state attention and continues to do so then the federal cares act included a number of changes to the tax code to provide relief businesses which many states still have not responded to so whether it conformed to those as well as federal treatment of tpp loans in particular is another issue that is building several states and then to segue into the corporate income tax final important thing to note about uh personal income tax is that 90 of all american businesses are s corporations that file their taxes through the individual income tax code it's very much a business tax so as changes are made to the corporate income side it's worth considering how the personal income tax on pass-throughs compares in terms of parity there's also been a recent rise in new entity level taxes for s-corporations ever since the federal government capped the deduction for state and local income sales and property taxes at the end of 2017. seven states have now adopted entity level taxes which are fully deductible at the federal level and they've created offsetting income tax credits for those taxpayers as a way to circumnavigate that that cap on federal salt deductions next slide please okay so moving on to the corporate income tax here again is a chart of the highest and lowest marginal rates unlike the personal income tax the majority of states impose the corporate income tax at a flat rate rather than using a graduated structure this is because the size of a corporation isn't necessarily related to the income of the owner so there's no relevant ability to pay concept like those with the income personal income tax the states with the flat tax rates range from a low of 3 percent in north carolina to 9.9 in virginia states with graduated tax rates the range is low of one percent on taxable income below three thousand dollars in arkansas to nine point eight percent on income above 25 or 250 000 in iowa there are also several states that do not have a corporate income tax but tax businesses in the form of a gross receipts tax a handful of states do this nevada texas ohio delaware has both a corporate income tax and a gross receipts tax these taxes work by taxing all business transactions with few allowable allowable deductions so it's not really tied to proper profitability tax rates on these transactions are all low usually a few tenths of a percent some compare the tax to a sales tax but sales tax is assessed only on final consumer purchases of product while the gross receipts tax is assessed at every stage of production next slide please again the corporate income tax is only around five percent of tax collections but it used to represent a much larger share it was about nine and a half percent of collections in the early 1980s this gradual erosion has several causes some of the most commonly cited ones are an increase in tax planning opportunities that smart accountants employ that they can take advantage of tax incentives the increasing popularity of s-corporations and businesses filing through the personal income tax code which until recently had more favorable tax treatment at the federal level and then changes in the apportionment formulas that states use to determine corporate tax liability increasingly they've been altered in ways that benefit larger corporations that have a lot of payroll in property in-state a lot of sales tax sales made out of state some states have taken steps to revamp various aspects of their corporate income tax to raise revenue such as increasing scrutiny and evaluations of tax incentives or requiring certain related companies to file one return as if they were a single entity in the form of combined reporting to prevent artificial intercompany income shift next slide please moving on to the sales tax again sales tax second largest state tax category 45 states impose one a number of states allow local governments to collect sales tax in addition to the state levy alaska allows sales local sales taxes even though there is no state sales tax uh this chart here shows the current highest and lowest uh sales tax rates it's commonly criticized for its regressivity people with lower incomes will have a higher percentage of it taken by the tax than wealthy but it is a relatively easy tax to collect has high compliance rates and as i mentioned earlier it's a little less prone to uh fluctuations so a bit more reliable uh sales taxes levied on consumers at the point of retail purchase but and it's generally intended to be a tax on consumption but that's really not the case for most american sales taxes about 40 percent of total state sales tax revenue comes from taxes on business inputs that's materials used in the manufacturing process items like napkins or utensils that are provided free of charge office computers taxing these items is considered a tax on production rather than consumption which is generally frowned upon in tax policy circles so the existing tax base is far from theoretical ideal but a long-standing challenge facing the sales taxes that a growing number of consumer purchases are not subject to sales tax in many states and the result is a narrowing of sales tax bases and that means that statutory rates have gone up as a result the median state sales tax rate was three point two five percent in 1970 four percent in 1980 five percent in 1990 through 2000 and six percent today part of this is due to the fact that the existing tax base has been carved up a bit most states now exempt food things like prescription medication from tax a way to reduce regressivity beyond the specific exemptions at least 16 states plan to hold sales tax holiday in 2021 or a temporary period where certain items are able to be sold tax-free um usually this is with done with the goal of boosting economic activity and providing temporary tax relief but experts question whether the sales tax holidays effectively accomplish those goals although they can cost states tens of millions of dollars next time please the most important contributor to the eroding sales tax base though has been the shift in the american economy towards the service industry most states adopted their sales taxes between 1930 and 1960 and generally toast to apply the tax only to sales of tangible personal property this wasn't a significant exemption for services at the time goods represented more than 60 percent of total personal consumption but that number has split since the sales tax was created in service transactions now make up about two-thirds of personal consumption many of these purchases are exempt from taxed this graphic from the federal reserve shows personal consumption of goods relative to services over time and you can see that that difference has just been growing between tangible goods and services we now spend twice as much on services so and furthermore there are also many taxable tangible products that are increasingly being replaced by intangible digital products instead of buying a book at the bookstore people are downloading books on their phone this is not a new development but only half the state's tax digital products or streaming services like netflix as i mentioned so modernizing sales tax systems and expanding the sales tax base will continue to be a focus next slide please and on that front sales tax modernization has been the one of the most prevalent tax issues and leading up to the pandemic the most significant tax trend by far was the implementation of laws to require internet retailers to collect sales and use taxes all of the states that have sales taxes except for florida have passed laws to do so in the two and a half years since the supreme court paved the way for it all of the sales tax states except for missouri and kansas have also passed laws requiring marketplace facilitators entities that facilitate sales for third-party sellers your amazons and ebays require them to collect sales taxes on those third-party sales as well so this has been a revenue boost of tens to hundreds of millions of dollars in most cases and now that states have these laws in place a growing number of them next slide please are uh looking to require marketplace facilitators to require collect other kinds of taxes that are applied on certain transactions you can see here that in 2020 car sharing ride sharing uh local lodging taxes were targeted for collection by online platforms next slide please this might be a good point to segue into the selective sales tax category or excise taxes this is where many of the most trendy tax topics are the sharing economy has introduced a lot of fast-growing businesses that are upending established industries and presenting states with new regulatory and tax questions shifting viewpoints and hopes of generating new revenue has also led many states to legalize and tax things like sports betting and marijuana uh the rising popularity of vaping has made e-cigarette taxation the prevalent issue politically it's more palatable to raise sin taxes or tourism taxes than broad-based taxes so we often see states try to plug budget holes with these revenue sources before uh looking at increases elsewhere although these tax categories should be noted rarely provide enough revenue to fix structural imbalances but you can see uh coming up here that excise taxes were popular in 2020 and that will probably continue in 2021 next slide please so i think i think many are anticipating that 2021 will be a relatively busy year on the revenue front although additional federal aid could slow that down that's um partly because states are more likely to make tax changes that will result in an increase in revenue during and after recessions and they're more likely to enact tax changes that will result in a decrease in revenue when times are better a few states in 2020 such as california new jersey and tennessee enacted some significant revenue changes but most states took few or no tax actions and waited to get a better sense of their short long-term revenue systems or situations and chose to balance their budgets through cuts tapping reserve funds or borrowing um and put the revenue decisions on hold so this slide shows the major trends of 2020 uh the filing extensions that were granted for certain personal income tax filers were noted as a one of the biggest issues and surveys that we've sent to states conformity with federal carers act that was the far and away the second most cited issue in our surveys to states and then excise taxes occupy a lot of focus next slide please it's still early in most state legislative sessions but here are some pro proposals that stand out several states have proposed measures to impose a new tax on digital advertising targeting social media and tech companies and this has generated a lot of press there's some controversy around whether these could survive a constitutional challenge but they could raise a lot of money on a sector of the economy that has been growing rapidly a measure that was vetoed in maryland might be overridden by the legislature i think the senate is voting up on it today and new york and connecticut are considering similar measures as well several states have imposed personal income tax increases usually on higher earners a measure in alaska would create an income tax a few new types of taxes have been proposed on wealth or capital gains as well and then there's also several bills that have been proposed to eliminate or reduce corporate or personal income taxes another eight states have proposed increasing earned income or child tax credits or increasing standard deduction or otherwise providing relief to taxpayers to the income tax code beyond cutting rates and then several states have also introduced legislation intended to limit property tax increases or increase homestead exemptions those include indiana kentucky montana and nebraska and texas again we've seen the three states that do not have marketplace facilities facilitator laws on the books proposed measures on that front several more states looking at taxing digital goods or services and then look at those excise taxes go marijuana legalization and taxation has been proposed at least 11 states sports betting legalization is all over the map at least 18 states are looking to legalize or expand operations and then at least 19 states looking at tobacco tobacco or vaping tax increases so uh i'll end it here but happy to discuss any of what i've covered further if you have questions or feel free to reach out to me afterwards okay i think um early on there was a question that i think is for erlinda and they ask somebody is asking how worried should we be about the federal debt that's for you orlinda yes yeah so so obviously the the notion of the debt is has been has gotten a lot of press lately with with you know and it's expected especially since you've been putting trillions of dollars into the economy um to help you know ease the effects of the pandemic um so right now we're not as concerned about the debt because interest rates are so low but that will obviously change over time and um especially now since the numbers of regarding our deca our debt are pretty staggering so right now for 2021 the cbo reported that um the debt is supposed to be about 102 percent of gdp which is pretty mind-blowing and then one of 107 by 2031 which are purely records um so and these are you know obviously considerations too when with negotiations happening right now in the hill regarding uh president biden's 1.9 trillion dollar proposal because this is not actually factoring in um his proposal so it's definitely an issue we need to be concerned about um but uh you know again the role of federal government has been and rightly so has been to stimulate through these different measures um the economy and to to help um citizens with direct payments and businesses as well so uh yeah so it's sort of a loaded question because some people will tell you it matters a lot and others will tell you that it doesn't but uh it is definitely a consideration especially as we are getting into to really high numbers with respect to percentages but it will become an issue um i think once we get through this pandemic and once the you know the economy starts to recover there will be much more focused discussions about how we address the debt going forward great thank you rolinda okay then here's one that i think is for either jackson or linda um it's about combined reporting um mention some states are considering combined reporting how many states already do this and which are considering it now i don't have a list on me but i think it's about half that have combined reporting in the only state i'm aware of that has proposed something on it in 2021 is virginia um but it's possible that i'm missing some virginia's the only one in 2021 aware of okay great thank you um so another question this one is for jackson regarding unemployment insurance taxes have states taken any action there given so many new jobless claims so the unemployment side of things is something our employment labor and retirement program is more closely monitoring but i know we have seen a handful of states take action uh to freeze ui taxes in place and prevent them from increasing uh idaho for example is on the verge of having to increase its unemployment tax until uh the governor transferred 200 million in cares act dollars to keep it solvent um i i think at least more than half the states are already borrowing from the federal government to sustain their unemployment insurance funds that money will need to be paid back at some point so i think um increasingly we'll see states take steps to try to avoid significant payroll hikes but some may be inevitable okay great um so one more um what are the trends in tax incentives especially now that states are looking to assist businesses and help them recover uh it's an interesting moment for tax incentives every state uses them to try to encourage uh businesses to relocate to the state or expand existing operations and investments they're estimated to cost states tens of billions of dollars annually um the problem leading up to the pandemic the problem is that in addition to incentives violating a lot of basic principles of good tax policies most states have until recently not had a very good understanding of whether those investments are actually effective at encouraging development but since the recession we saw a majority of states over 30 past laws kind of require regular evaluation of incentives and there's also been a fair amount of recent research that has cast some doubt on the effectiveness of tax credits as currently constructed and then last year we saw at least 11 states proposed measures that would require um the state to join a multi-state compact where states would agree not to try and push businesses from each other in other member states um so that's a long way of saying that there's been a lot more scrutiny of these programs recently and for states that need revenue underperforming incentive programs might be considered for the chopping block but at the same time states and localities are really pressed to try to help businesses financially and historically that kind of political pressure usually leads to incentives winning out states like california new jersey nebraska have all approved pretty big incentive packages in recent months so there may be divergent approaches in the states either way i think it's a good opportunity to reform incentives and maybe make their ability availability more equitable and better targeted towards the businesses that have borne the worst impacts of the pandemic at the moment incentives more often go to out-of-state businesses but public finance experts say they're more productive if they go to locally owned companies cash incentives are usually the majority of incentives but research shows that customized job training services are a bit more effective job creation tools um most incentives don't target distressed communities but those tend to increase the multiplier effect so um yeah we'll see we'll see where states go okay thank you and i'll encourage if anyone else has any um questions go ahead and write them in the q a um but i just have one more and that's just sort of to get your thoughts what are you hearing about the and this is for jackson what are you hearing about the issue of um income tax across states as people work remotely [Music] so yeah well one of the major tax related impacts of the coronal virus has stemmed from the shift to workers moving to remote situations and um nexus is a big term in the tax world it's the point at which a person or a business's activities um or income in a state are substantial enough to allow a state to impose tax on it um and so workers that's you know traffic that once traveled into one state but have been working from home for most of 2020 you think about like the tri-state area specifically um they're suddenly no longer meeting those physical nexus requirements for personal or corporate income tax that the state would otherwise and so you know this one state would have otherwise received that income and now it's reverting to the home state so states are there there is currently a case new hampshire is suing massachusetts for imposing an income tax on remote workers and other states have joined that case so we may see the supreme court take that up and that could potentially mean a uniform national standard for uh non-resident income tax nexus requirements okay great thank you so i haven't seen any more questions come across so unless someone has one in the next 10 seconds i'm going to go ahead and thank our speakers thank you berlinda and erica and jackson for a very informative presentation and i want to thank everyone out there in the audience for your time and attention and for joining us and i hope you enjoy the rest of the state policy series whatever other sessions you decide to join with that thank you all