The Week in Public Finance: The Red State That's Considering a 'Millionaire's Tax'
The revenue-raising strategy is more common in blue states. So far, four Democratic-controlled states have passed such a tax.
The latest state to consider a so-callled millionaire's tax may surprise you.
Tax hikes aimed at the rich are a revenue-raising strategy that's been embraced mostly by blue states in recent years. New Jersey became the most recent government to enact one this week, following a trend set by California, Connecticut, New York and Washington, D.C.
But this fall, voters in conservative Arizona seem set to vote on whether to tax the state's wealthiest residents in order to pay for teacher raises. This week, organizers for the Invest in Education Act said they have collected enough signatures to put the question on the ballot in November. The deadline was Thursday, but the Arizona Secretary of State still needs to verify them before the ballot measure becomes official.
The measure proposes raising the income tax rate from 4.5 percent to 8 percent for people making at least $250,000 and for families earning at least $500,000. For individuals making $500,000 and joint filers making $1 million, the tax rate would be 9 percent. If passed, the tax is projected to raise $690 million annually for teacher salaries and supplies, as well as restoring full-day kindergarten and reducing class sizes. The new revenue is almost exactly equal to the gap between today’s education budget and what it was before severe cuts a decade ago, according to advocates.
Arizona is among a group of states that has prioritized cutting taxes over restoring education funding since the Great Recession. It was one of three governments gripped this spring by teacher strikes that shut down schools for more than a week to demand higher funding and better pay. Arizona’s strike ended in May, when Gov. Doug Ducey signed a budget giving teachers a 20 percent pay raise over three years plus more than $300 million in discretionary funds over that period. Ducey’s “20 by 2020 plan” is expected to cost $240 million this fiscal year, increasing to $580 million by 2021.
Ducey’s plan relies primarily on a new car registration fee of about $18 per vehicle, which is expected to generate an extra $140 million per year. To make up the rest, the governor’s office relies on money from other parts of the budget and economic growth projections that it estimates will generate an additional $1.5 billion in revenue over the next five years.
David Lujan, executive director of the progressive Arizona Center for Economic Progress, says the governor's plan is unrealistic. “His estimates for economic growth are overly optimistic compared to our legislative budget office’s estimates,” Lujan says. “It also assumes the economy won’t [go into a] recession, and that every dollar of economic growth will go to K-12 education and ignore other state needs.”
The measure is sure to face bitter opposition, as it’s essentially a doubling of the income tax rate on the wealthy. That would be a tough sell in any state, let alone a low-tax, conservative one like Arizona. Compared to other states with a millionaire's tax, the proposed top tax rate is higher than in Connecticut and New York. And it’s a bigger rate jump from middle-income earners to high-income earners (typically identified as joint filers earning more than $500,000) than any other state with such a tax.
But the millionaire's tax is controversial even in blue states. In Massachusetts, for example, business groups succeeded in getting the so-called Fair Share Amendment removed from this year’s ballot after the state supreme court ruled it was unconstitutional.
In Arizona, Ducey is expected to be among the most vocal against the measure. The governor has repeatedly said he would not support a tax hike on Arizonans. In fact, his 2014 campaign was based on cutting taxes every year he's in office. Ducey has also pointed out that his discretionary funds for school districts could help pad teacher salaries. But many school districts have already said they plan to use those funds for capital needs, an area that the state has cut by 70 percent over the last decade.
Voter support for the tax hike so far is positive. Last month, a telephone poll conducted three weeks after the teacher strike ended found that 65 percent of voters said they would support the initiative in November.
In other public finance news this week:
Bond Market Slowest in Years
It's a slow slog so far for the municipal bond market. Total debt issued for the first six months of the year is down by 20 percent and the lowest total since 2009.
But that's not exactly a bad sign.
For starters, the $161 billion issued so far was expected. That's because federal tax reform threatened to eliminate certain types of tax-free bonds, so governments rushed to issue debt in the waning weeks of 2017 just in case those benefits expired. That had the effect of shifting activity because it's likely those bonds would have otherwise been issued this year.
Second, PNC Capital Markets analyst Tom Kozlik notes a curious trend. While practically every category of issuance has been down, he says, new money issuance was up 22 percent.
"We expected new money issuance to be up this year but not by 20 percent," he writes in his analysis.
This is significant because so much of the bond market activity of the past decade has been driven by refinancings -- not new debt.
"We think this number will be important to watch going forward," Kozlik continues. "It could mean that public finance issuers are finally beginning to believe they are in a fiscal position to take advantage of still low interest rates."
Ramping Up Retirement Savings
One year after launching the nation's first state-sponsored retirement plan for private-sector workers, Oregon is reporting strong participation and positive results.
So far, Oregonians participating in the plan -- most of them first-time savers -- have collectively saved $4.6 million for their retirement. The average monthly contribution is $106. On average, more than 1,000 people are now signing up per week, according to State Treasurer Tobias Read.
Oregon's program is the first of so-called Secure Choice retirement savings programs that a handful of states are implementing across the county. Half of private-sector workers don't have an employer-sponsored retirement plan. So, states are sponsoring plans (while leaving the administration to a third party) to get more people to save for their retirement.
OregonSaves was launched in phases, first with a pilot program last year. It then opened up to large employers, with each new phase opening access to smaller and smaller firms. The program has currently opened up registration to employers with between 20 and 49 employees.
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