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Texas: Comptroller's publication summarizes 2015 tax law changes

In the September 2015 issue of Tax Policy News, the Texas Comptroller of Public Accounts provides a legislative update of the 84th Legislature. During the legislative session, the comptroller repealed eight burdensome tax laws, amended various tax code sections, and provided more detailed definitions, among other things.

Below is a partial list of the tax law changes:

Crude Oil Regulatory Tax and Sulphur Production Tax

SB 757, effective Sept. 1, 2015, repeals the crude oil regulatory tax and the Sulphur Production Tax, starting with the production month of September 2015. Taxpayers are required to still pay the Oil Field Cleanup Fee of $0.00625 per barrel starting with production on or after Sept. 1, 2015. According to the bill analysis, supporters and opponents disagree on whether the repeal would increase or reduce administrative costs and revenues.

Franchise taxes

HB 32 decreases the franchise tax rates, including the E-Z Computation rate. It also doubles the upper limit on a taxable entity's total revenue from its entire business at or below which the taxable entity may elect to pay the franchise tax at the E-Z Computation rate. HB 32 requires the comptroller of public accounts to report on a study of the effects of economic growth on future state revenues.

More specifically, the bill analysis explains that HB 32 decreases the franchise tax rate from 1 percent to 0.75 percent, and decreases the franchise tax on retailers or wholesalers from 0.5 percent to 0.375 percent. Taxable entities with no more than $20 million in revenue, up from $10 million, may choose to pay under the E-Z Computation and rate provisions, in which case the tax rate would drop from 0.575 percent to 0.331 percent.

Another bill, SB 1049, exempts new veteran-owned businesses from the franchise tax and certain filing fees for the first five years of operation in Texas.

Reporting requirements for limited partnerships and professional associations

HB 2891, effective Jan. 1, 2016, requires limited partnerships and professional associations to file Public Information Reports, in place of Ownership Information Reports, with the comptroller’s office. In addition, professional associations are no longer required to file annual statements with the Secretary of State under the Business Organizations Code.

Short-term rental taxes

HB 1905 subjects short-term rentals of residential properties to a hotel occupancy tax, as of Sept. 1, 2015. It accomplishes this by redefining the term “hotel” to include a rental of all or part of a residential property to a person who is not a permanent resident.

Inheritance Tax

Effective Sept. 1, 2015, SB 752 repeals the estate tax, defined as “any estate, inheritance, or death tax levied or assessed on the property of a decedent's estate because of the death of a person and imposed by federal, state, local, or foreign law…” Taxpayers will owe any inheritance tax liability that accrued prior to Sept. 1, 2015.

The bill analysis reveals that the inheritance tax was originally structured to be equal to the federal estate tax credit for estate taxes collected by the states. However, in the past decade, revisions to the federal estate tax have eliminated the credit for state taxes, so the Texas estate tax collections have dropped off to zero. Repealing the tax now will eliminate the possibility of it being resurrected in the future.

Tangible personal property temporary exemption for qualifying large data centers

HB 2712, effective June 10, 2015, creates a 20-year sales and use tax exemption for certain tangible personal property pursuant to the operation of qualifying large data center projects.

The bill analysis defines a qualifying large data center project as one that:

  • Is at least 250,000 square feet
  • Creates at least 40 permanent, full-time jobs   
  • Is subject to a capital investment of $500 million from the owner or operator, made or agreed to on or after May 1, 2015   
  • Is contracted to receive at least 20 megawatts of power transmission capacity   

Supporters said that the legislation would solidify Texas as the preferred state for data center constructions, because such data centers are often multibillion-dollar projects that create thousands of construction jobs and hundreds of highly paid, high-tech jobs.

On the other hand, opponents said that HB 2712 is tantamount to subsidizing the tech industry, because Texas already has many advantages for data centers. Thus, it would not necessarily attract investment that would have otherwise gone to other states.

North Carolina: Lawmakers finalize budget for the 2015-17 biennium

Although the North Carolina constitution requires lawmakers to enact a balanced budget by July 1, lawmakers needed extra time for the 2015-17 budget. But when Gov. Pat McCrory signed the final version of the $21.7 billion last week, he praised it as a “common-sense vision for our great state that includes job creation, education, healthcare, and transportation.”

Here are some of the key elements, as revealed by numerous new outlets:

Income taxes

  • Reduces the personal income tax rate from 5.75 to 5.499 percent in 2017.
  • Maintains the corporate tax rate decrease from 5 to 4 percent that was set forth in a 2013 law. That law called for a low rate of 3 percent in 2016, as long as the net general fund tax collections exceed $20.975 billion in a future year.
  • Increases the 2016 standard deduction by $500, to $15,500 for married filers.
  • Expands the sales tax base to cover transactions involving the installation, repair, and maintenance of tangible personal property such as automobiles and appliances. The local government's share of these revenues will benefit 79 counties for economic development and public education. The remaining 21 counties in the state will not lose funds.

State employee salaries

  • Gives $750 bonuses for all state employees by December 2015.
  • Increases minimum salaries for early-career teachers from $33,000 to $35,000.
  • Maintains the experience-based raises for teachers.
  • Increase sworn Highway Patrol officers’ salaries by 3 percent, with minimum trooper salaries growing from $35,000 to $36,050.
  • Allocates $38 million over two years for higher correctional officer salaries.
  • Allocates $30 million for community college salaries.
  • Allocates $38 million for Gov. McCrory's administration to make targeted salary increases.

Education

  • Allocates $377.1 million annually to school districts to hire teacher assistants, with a new prohibition on shifting the funds to spend on other education needs. This is comparable to last year’s amount.

  • Increases money for grants to children of low-income families to attend private schools by $14 million over two years.
  • Expands summer reading camps in public schools to help first and second graders at risk of academic failure, at a cost of $20 million annually.
  • Allocates $27 million to reduce class sizes in first grade in the 2016-17 school year.
  • Provides $53 million more over two years for public school textbooks and digital learning.
  • Provides $14 million for broadband and Wi-Fi access.

Transportation funding

  • Eliminates the annual $216 million transfer from the Highway Fund to the state's general operating fund, making more money available for road building and other transportation needs.
  • Increases funding for bridges, road resurfacing, pavement preservation, and secondary road maintenance by $189 million this fiscal year.
  • Increases state grants for public airport development and unmanned aircraft systems by $17 million this year and $12.5 million next year.

Healthcare

  • Provides $796 million over two years for Medicaid services based on increased enrollment and demand for services.
  • Sets aside $225 million over two years to prepare for the transition of Medicaid away from a fee-for-service system. In the new system, managed care entities will receive a set monthly payment per patient. The Medicaid overhaul will be contained in separate legislation.
  • Sets aside $49.9 million from the sale of the old Dorothea Dix Hospital property into a special fund to be used to increase short-term mental health services in the state. The state legislature must approve this spending.

Tobacco dependence assistance

  • Shifts $10 million annually from the national tobacco settlement proceeds to the Golden LEAF foundation, an organization focused on making grants in the areas of agriculture, job creation and retention, and workforce preparedness in tobacco-dependent, economically distressed, and/or rural communities.

Law enforcement technology

  • Allocates $6 million for the installation of vehicle cameras on State Highway Patrol cruisers currently without them.
  • Allocates an additional $2.5 million in grants for police body cameras.

The Tax Foundation favors the budget because it builds on various tax reforms that took effect in 2013. These reforms significantly increased the state’s ranking, from 44 to 16, in the group’s State Business Tax Climate Index. The income tax reduction makes North Carolina more competitive regionally, and helps small business owners, while the increased standard deduction supports lower income taxpayers.

On the other hand, the North Carolina Policy Watch decried the fact that the new budget gives corporations and the wealthy more tax breaks. At the same time, state workers’ one-time $750 bonus is not only less than the 2 percent raise that the House originally proposed, but “less than half of the $1,800 ongoing annual windfall millionaires will receive.”

North Carolina Policy Watch also lamented the fact that the budget subjects many additional services to the state sales tax, problematic for low-income taxpayers.

States address infrastructure funding

Michigan

Detroit-based Citizens for Fair Taxes (CFT) is advocating for a fair fix to Michigan roads by reversing corporate tax cuts that it says have unfairly and unjustifiably benefitted Michigan corporations by over $2 billion. The group wants to recoup about $900 million of that by raising the corporate income tax to 11 percent, from its all-time low of 6 percent.

CFT asserts that since 2011, corporate income taxes have dropped by 80 percent, while the middle class and working families “sacrifice more and more to make up the difference.”

According to the Detroit Free Press, CFT’s citizen initiative needs 252,523 signatures in order for the legislature to take up the issue. If the legislature does nothing, which is likely because the 63 to 47 republican majority has characterized the issue as a “non-starter,” the initiative will go on the November 2016 statewide ballot. Voters have already rejected one ballot initiative to increase the fuel tax, which we describedin May. However, only 20 percent of eligible voters turned out to cast a ballot, and the measure’s language was complicated and confusing.

The Detroit Free Press points out that the infrastructure funding problem stems, in part, from the elimination of the Michigan Business Tax in 2011, and the switch to a 6 percent flat corporate tax, a situation to which Michigan lawmakers are not blind. The Senate recently passed a plan to increase the gas tax by 15 cents, which will up to $1.5 billion annually to repair Michigan’s roads through 2017. This will be phased in over three years, starting with 4-cent increases effective Oct. 1, 2015, and Jan. 1, 2016, and a subsequent 7-cent increase on Jan. 1, 2017. The Senate's plan also requires a shift of $350 million from income tax revenues to roads in fiscal year 2015-16 and another $700 million in fiscal year 2016-17. The House is now considering the Senate’s plan.

Opponents of CFT’s ballot initiate contend that it puts a "'closed for business' sign back on Michigan…Even if the roads get fixed, there won’t be anyone left in our state to drive on them if this proposal succeeds."

Arizona

Last month, 54 percent of voters in Phoenix approved Proposition 104, which would fund a comprehensive transportation plan that maintains and expands the light rail and bus systems, improves city streets and roadways, and provides Phoenix residents with more transportation choices.

Proposition 104 increases the transit tax to 0.7 percent for 35 years beginning on Jan. 1, 2016. The current transit tax is 0.4 percent. In addition, according to The Arizona Republic, Proposition 104 increases the sales tax rate in Phoenix from 8.3 to 8.6 percent, effective Jan. 1, 2016, and shifts $16 million from the city’s general fund to the police department in order to hire more officers.

The Arizona Republic explains that the funding will be allocated approximately as follows:

  • 50 percent for maintaining and improving bus service
  • 33 percent for running current light rail service and building new routes   
  • 7 percent for street improvements, including repaving roads, constructing new streets, and adding sidewalks and bike lanes   
  • 10 percent for debt service and an operating reserve   

Supporters argued that the transportation improvements would boost the city's economy and quality of life. MovePHX.org, one such advocate, offered numerous details on how Phoenix’s transportation infrastructure would improve:

  • New asphalt for more than 680 miles of aging streets
  • Up to $240 million to fund new roads and upgraded bridges   
  • 2,000 new street lights will be added   
  • Paving for 135 miles of new sidewalks   
  • New shaded structures at bus stops and Park-and-Ride locations
  • 1,080 miles of new bike lanes
  • Improved bike infrastructure and deliberate planning to improve bikability   
  • Triple the number of miles covered by light rail   
  • Extended bus service, including the creation of and a 70 percent increase in bus frequency overall, including buses every 15 minutes during peak frequency on half of bus routes   
  • Upgrades to technologies that alert customers of a bus’s real-time status, along with service improvements   

On the other hand, opponents of Proposition 104 assert that the tax is too high, and unfair to Phoenix residents who would not benefit from the transportation improvements.

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