Tax & Budgets
Tax on Services: States to Watch in 2020
November 21, 2019 | Ryan Maness
On election day, Democrats took a bite into the state legislative hegemony that Republicans have enjoyed for much of the last decade. After being relegated to minority party status and hamstrung by supermajority fiscal policy requirements, liberal lawmakers in certain states now have the ability to chart a new fiscal policy course. Four states are most likely to leave this vanguard of fiscal progressivism in 2019: California, Illinois, New York, and Oregon.
In California, progressive members of the legislature have been agitating for years for a more aggressive policy agenda, only to be stymied by Governor Jerry Brown’s (D) relative moderation and their intermittent lack of a supermajority of votes necessary to pass tax increases. Whether it’s tapping into the rainy day fund to boost funding for social services, broadening the sales tax to professional services in response to federal tax reform, or the enactment of a single payer healthcare system, segments of the Democratic caucus have seen their political priorities hindered by procedural and political roadblocks.
But when the next legislative session starts up, many of those barriers will be gone. The biggest change will be Gavin Newsom (D) succeeding Brown as the state’s chief executive. Brown has been a fixture of California governance for more than fifty years and he has proven himself to be a canny and effective politician. Despite California’s reputation as a high-tax state, he has been able to exert a level of relative fiscal moderation, particularly in the last few years as he has pushed the state to conserve funds in anticipation of another economic downturn. This has required a level of diplomatic skill that few lawmakers will ever hope to possess. Lt. Gov. Newsom made a name for himself as a progressive champion during his tenure as mayor of San Francisco, but he found himself in political exile after a series of missteps. He has since made his way back into the limelight, but his previous foibles suggests that he will have difficulty holding the reins of a legislature that is champing at the bit to take big moves in opposition to President Trump.
While not as high-profile, the other vital change come January will be the fact that Democrats will again have supermajorities in both legislative chambers. In January 2018, state Senator Josh Newman (D) was recalled from office, targeted in a vulnerable district after he supported a gas tax increase, depriving Democrats in that chamber of the two-thirds majority needed to pass tax legislation. That changed on November 6 when voters sent more than enough new Democrats to the Senate to restore their lock on power.
The election of JB Pritzker (D) promises to end an era of partisan gridlock that has defined Governor Bruce Rauner’s (R) tenure in office. Since Rauner ascended to the top job in 2015, he has been at loggerheads with the political power centers in Springfield, most notably Speaker Mike Madigan (D). As the two leaders fought and sniped, the state’s budget deteriorated: lawmakers went for two years without passing a budget and credit ratings agencies have threatened to relegate their bonds to junk status. This year they were able to pass a budget on time only to admit later that it was $1.2 billion out of balance.
The personnel changes in the governor’s mansion will reshuffle the political environment, but the state will still need to make serious course corrections to right the financial ship of state. On the campaign trail Pritzker said that one his prescriptions for these fiscal woes is to replace the Illinois’ flat income tax rate with a progressive series of brackets. Since this would necessitate amending the state constitution, it wouldn’t be a quick fix and other revenue patches would be needed in the meantime.
Currently lawmakers are looking at expanded gaming and recreational marijuana to get them through, but if those revenues alone can’t balance the books then other steps could be necessary. Given the seriousness of the problem, some lawmakers may push drastic correctives without any legislative checks or moderating forces. It’s hard to predict what could shake out of such a scenario, indeed there is the distinct impression that anything could be possible.
While New York has been nominally under Democratic control for most of the last decade, in 2011 a group of lawmakers defected from their party to form the Independent Democratic Conference (IDC) to caucus with the Republicans. Despite his protestations to the contrary, it is widely believed that Governor Andrew Cuomo (D) had encouraged the splinter group in order to maintain his credentials as a moderate. Without unified control of the legislature, the left flank of the New York Democratic caucus have not been able to make any headway on their legislative agenda, despite living in a blue state.
That status quo evaporated earlier this year, when the IDC’s membership reached an agreement to rejoin their party. The party moved even further left on election day, when many of its former members lost their races to more liberal, insurgent challengers.
Democrats will head into 2019 with solid majorities in both legislative chambers and years of policy backlog to work through. When asked about their priorities for the coming session, the most common answers are social issues like codifying Roe v. Wade, marijuana legalization, immigration protection, and voting rights. It’s possible that these issues will crowd out any significant tax reform efforts, but if they do choose to focus on fiscal policy (either in an effort to repair New York City’s transit system or to counteract the effects of federal tax reform), then the Democrats could have wide authority to embrace a more progressive vision for the state’s finances.
Like California, Oregon lawmakers have been pushing for a more progressive fiscal agenda for some time, with a particular focus on boosting funding the state’s chronically underfunded school system. There have been several efforts to address this, but so far none have made it over the finish line.
For example, in 2016, education activists and union leaders sponsored a ballot question (Measure 97) that would have levied a 2.5 percent tax on gross receipts tax on revenues in excess of $25 million. The measure was soundly defeated, losing at the ballot box by a 59 to 41 percent margin. The state legislature tried again in 2017 by introducing legislation (OR HB 2830), which also would have levied a revenue based tax on top revenue earners. That measure failed in committee when the sponsors were unable to pick up the Republicans necessary to overcome the three-fifths supermajority vote requirement to pass tax legislation. When the proposal failed, however, Governor Kate Brown (D) said that she fully intended to reintroduce it in 2019.
Since then, the political landscape has only become more favorable to Oregon tax proponents. On election day, voters sent enough Democratic lawmakers to the legislature to meet the supermajority threshold necessary to pass tax legislation. Portland voters also approved the "Portland Clean Energy Community Benefits Initiative," which levies a 1 percent gross receipts tax on businesses with total annual revenue over 1 billion dollars and Portland annual revenue of over $500,000.
We don’t have any details for a 2019 proposal yet, but there are already reports that lawmakers are in a huddle with activists and business interests to craft a bill.
It’s important to note that these are not the only states with progressive verve where Democratic hold power, but they are the states with the widest political latitude to change fiscal policy. Colorado, for instance, will also be controlled by Democrats, but the Taxpayer Bill of Rights requires that any tax increases be approved by a vote of the people and that has historically been too high a bar for most policies to clear. The election of Michelle Lujan Grisham (D) in New Mexico means that that states will also have unified governance, but efforts at big revenue changes there are unlikely given the state’s culture of fiscal moderation.