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Despite this week's record $1.6 billion Powerball jackpot, state governments can forget about reaping any of the rewards. According to a map provided by the Tax Foundation, the three winners in the Jan. 13 drawing hail from a few of the states that don’t tax lottery winnings. Florida and Tennessee don’t tax income at all, while California has an income tax but doesn’t tax lottery income. Talk about beating the odds twice for these winners. Of the 45 states (including the District of Columbia) that participate in the lottery, 35 levy some kind of tax on winnings -- ranging from 3.4 percent in Indiana to 8.82 percent in New York.
You may be thinking, “but the record ticket sales had to help state tax collections!” The Rockefeller Institute of Government tackled that question this week, and its conclusion is the second letdown for state coffers. “Every bit helps, but net revenues from lottery sales are not big in the scheme of state budgets,” the researchers wrote. While gross lottery sales are substantial -- about $70.2 billion in fiscal year 2014 -- state budgets only walked away with around $18.1 billion (or 26 percent of sales) after payment of prizes, administrative costs and other expenses.
That still may sound like a lot, but when you spread it across 45 states and D.C., it’s small potatoes. Net lottery revenues represent less than 2 percent of taxes in 23 states and more than 5 percent in only three states (Georgia, Oregon and South Dakota).
New England Tax Wars
With Massachusetts’ unofficial nickname being “Taxachusetts,” some may be wondering why General Electric (GE) announced this week that it's moving its corporate headquarters from Connecticut to Boston. The move follows a contentious fight in Connecticut over the state’s corporate tax structure that would have eventually increased GE’s tax burden.
The bulk of the fight was over Connecticut's move toward “combined reporting,” which basically makes a corporation declare any tax havens it may have in other states that presumably have lower (or no) taxes on corporate and individual income. About half the states have implemented combined reporting as a way of discouraging companies from using havens to evade taxes. If GE stayed in Connecticut, its income earned elsewhere would have been subject to the state's 9 percent corporate tax rate, which is one of the highest in the country. Connecticut has also increased taxes several times in recent years, and a committee is currently studying broader tax reform.
When GE threatened to leave Connecticut over these changes last year, Gov. Dannel Malloy quickly backtracked and delayed the tax hikes until this year. But it turns out he was just buying time for GE to scout out its next move.
Oddly enough, Massachusetts already has combined reporting requirements and a similarly high corporate income tax rate. But it has a much lower individual income tax rate (a flat rate of 5.1 percent, versus Connecticut’s highest tax bracket of 6.99 percent). Massachusetts and Boston also sweetened GE’s deal by providing tax credits totaling $145 million.
After spending the past 40 years in Connecticut, GE's relocation sends a sobering message to states as they continue to see their revenue from corporate income taxes shrink. “[General Electric] becomes just another company that has chosen to relocate due to a state's decision to alter its tax code,” said Nicole Kaeding of the Tax Foundation.
A Possible State Takeover
One year after Atlantic City, N.J., was slapped with a super downgrade of its credit into junk bond status, the former East Coast casino mecca has made little financial progress.
Last winter, Gov. Chris Christie appointed an emergency management team that had experience helping Detroit exit the nation's largest municipal bankruptcy. The governor asked the team to consider the option of debt restructuring through bankruptcy. The past year has seen little agreement on a long-term financial plan for the city, but this week, state Senate President Stephen Sweeney pushed the idea of a state takeover of Atlantic City's finances. He warned that anything but a prompt approval by the legislature could result in the gambling resort declaring bankruptcy.
"This is a very clear statement to Atlantic City," Sweeney told NJ.com. "Get your act together. Knock off the B.S. and start addressing what you need to address."