Blog Taxes

Good Ideas in Tax Commission Report

November 14, 2013

The report from the State Tax Reform and Fairness Commission released yesterday contains many smart proposals and deserves serious study by the Governor and the Legislature. Two ideas in particular are especially worthwhile – reducing exemptions from the sales tax and reforming business tax incentives.

Sales Tax Reform

The report notes that the state sales tax has over 150 separate exemptions. According to the most recent Tax Expenditure report, these add up to more than $9 billion – just $3 billion less than the State collects in sales tax revenue each year. Some of the largest exemptions are for essential goods that consume a large share of low-income households’ budgets, such as groceries, medicine, and energy, but as the Commission notes many others disproportionately benefit higher-income consumers. These include the exemption for clothing and footwear up to $110, digital products, and a variety of services.

The Commission highlights many other exemptions for consideration, including the partial exemption for gasoline, dry cleaning, non-prescription drugs, and various entertainment admissions. In total the Commission identifies almost $1.8 billion in sales tax exemptions that should be repealed or examined.

Given the breadth of current sales tax exemptions, the Commission could have easily included billions more. Other large exemptions include capital improvements to property ($520 million), auto trade-ins ($611 million), and cable TV ($305 million). Smaller exemptions range from services to private aircraft ($4 million) to training and maintaining race horses ($3 million).

Because the sales tax is regressive (burdening lower-income households disproportionately), the Commission offers several options for tax offsets through the personal income tax. A simpler alternative would be a lowering of the sales tax rate. While this may decrease revenue from non-residents, a lower rate would increase competitiveness with New York’s neighbors and may induce greater in-state consumption.

Business Tax Incentive Reform

The CBC has previously identified $2.6 billion in state tax incentives for businesses. These costly credits and exemptions cause the State to maintain higher corporate tax rates, while little evidence exists to prove the effectiveness of these programs. The Commission rightly suggests reforms to the largest programs – the Investment Tax Credit, the Film Tax Credit, and the Brownfields Tax Credit. The reforms would tighten eligibility and save $180 million annually. Of particular note, the Commission also recommends periodic reviews of the costs and benefits of business tax incentive programs, as well as expanded transparency on which businesses benefit. Implementation of this one recommendation would change the culture of business tax breaks and have positive impacts for years to come.

This fiscal year provides a unique opportunity to reassess business tax incentives as the State must begin paying back business tax credits that had been deferred in tax years 2010 through 2012. This receipt of cash, which was originally estimated to be $1 billion in fiscal year 2015, will soften the financial impact of any prospective reforms.

In addition to sales tax exemptions and business tax credits, the Tax Commission’s report includes some worthwhile proposals in the areas of corporate taxes, inheritance taxes, property assessment, and tax administration. Between now and January, the Governor should strongly consider the inclusion of many of these proposals in his budget for the coming year.