New England legislators and academics convene to explore solutions to state tax challenges

From federal tax reform to the opioid crisis, powerful forces are leaving their mark on New England state economies and budgets, according to U.S. public finance experts, who spoke to legislators from five states in May at Economic Perspectives on State and Local Taxes , a Lincoln Institute conference cohosted with the Federal Reserve Bank of Boston’s New England Public Policy Center .

The annual event bridges the gap between academic research and policy, according to Joan Youngman , senior fellow and chair of the Institute’s Department of Valuation and Taxation, who welcomed the 45 participants along with Robert Triest, vice president and director of the New England Public Policy Center. Organized and moderated by Daphne A. Kenyon , Lincoln Institute resident fellow in tax policy, the event featured nine presentations on the impact of the federal Tax Cuts and Jobs Act on states, critical expenditure challenges, tax policy innovations, and an update on the New England economy.

The Tax Cuts and Jobs Act (TCJA), which cut federal income tax rates and eliminated many deductions, will lead to “significant” revenue increases in most states because most states use federal definitions of income, said Jared Walczak , senior policy analyst at the Tax Foundation ( more on this dynamic here ). Expected gains present an unusual opportunity for states to reform their tax codes, Walczak said. The TCJA cap on the state and local tax (SALT) deduction will increase the cost of state and local taxes for many people who itemize deductions on their federal income tax return, and that could hurt support for state and local spending, said Lincoln Institute Research Fellow Andrew Reschovsky . States are considering workarounds such as charitable contributions in lieu of taxes, but these workarounds have a questionable legal basis, would benefit only those with high income, and would increase tax complexity. Financing infrastructure may become more difficult for states according to W. Barley Hildreth , professor of economics at Georgia State University, both as a result of the cap on SALT deductions and the elimination of advance refunding bonds. Hildreth urged state policy makers to focus on reducing liabilities and fixed costs.

Lincoln Institute President George "Mac" McCarthy called on legislators to help improve the flow of intergovernmental transfers so states don't leave federal grant money on the table. States are not making full use of federal grant disbursements, but reconciling the federal budget with local expenditures is fraught with challenges. Few states centralize management of grants, federal agencies are reluctant to provide data on program usage, and tracking grant money from year to year is difficult because funds are not always spent in the same year they are allocated.

New England state and local governments face critical expenditure challenges, notably the opioid epidemic and pension funding. New England states are spending about 1 percent of their budgets on the opioid epidemic—a fiscal crisis as well as a public health emergency, according to new research from the New England Public Policy Center. Policy Analyst Riley Sullivan urged better collection of public health data at the state level. Meanwhile, unfunded pension liabilities are still "near record" relative to the economy, despite an increase in employer contributions to pensions, according to Lincoln Institute Visiting Fellow Donald Boyd . The degree of fiscal stress varies among the New England states, with Connecticut and Massachusetts facing the greatest challenges.

NEPPC Senior Economist Mary Burke painted a mixed picture of the New England economy, reporting robust net growth from the prerecession peak in all six states. Unemployment is well below the lowest prerecession rates, and big employment gains in construction are offsetting declines in the information sector. Burke pointed to the aging population as a partial explanation for flat labor force participation. Regional economic forecasts predict slowing growth in the labor force, slowing or steady growth in GDP, and flat unemployment.

The forum ended with three presentations on tax policy case studies. Kansas's historic 2012 tax reform experiment, which cut the state's top income tax rate from 5.9 percent to 4.6 percent and eliminated the state’s 5.9 percent tax on pass-through entities, did not produce the expected gains in economic growth according to Nicholas Johnson , senior vice president for state fiscal policy at the Center for Budget and Policy Priorities. Kansas responded to revenue declines by cutting education and infrastructure spending and in 2016 mostly reversed the tax cuts. A key lesson for other states, according to Johnson, is that tax cuts don't pay for themselves.

According to Alicia Munnell and Abigail Walters of the Center for Retirement Research at Boston College, half of working families in the U.S. will face a retirement shortfall, and the risk is greatest in states with high housing costs, such as the New England states. Munnell and Walters believe expanding property tax deferral programs could be a partial solution. They proposed reforming a largely unused Massachusetts program by expanding eligibility to all residents over age 65, reducing interest rates, increasing awareness, and simplifying enrollment.

Finally, Northwestern University Economics Professor Therese McGuire proposed a tax on sharing economy services like Uber and Airbnb. She said it would keep the tax base relevant to the modern economy, level the playing field with traditional service firms, address externalities such as congestion and increased housing costs, tax services with relatively inelastic demand, tax services largely purchased by high-income individuals, and make public transit more viable, among other effects.

Economic Perspectives on State and Local Taxes is a small interactive seminar that allows legislators from New England to consider the state and local taxes of their cities and towns from an economic perspective. The program is cosponsored with the Federal Reserve Bank of Boston.