Initial Reaction: Senate Omnibus Tax Bill

The music while on hold prior to the Senate Tax Committee’s webcast was “Baila Conmigo” which translated is “Dance With Me” -- an appropriate theme for unveiling the Senate’s contribution to a future tax conference committee.  As could be expected, there is a lot of overlap with the House (and the Governor for that matter) but with enough differences in priorities and emphases -- reflecting some underlying philosophical differences, the political make-up of the respective bodies, or some of both -- to make a conference committee interesting.

The big picture for FY24-25:  $2.83 billion in biennial tax relief/reductions consisting of

• One-time refundable credit (rebate) totaling $1.088 billion
• 15 new/expanded/reformed income tax credits, refunds, and subtractions totaling $1.75 billion

Ten of the 15 credits, refunds, and subtractions are also included in the House Omnibus bill, although in several cases differences in generosity and/or eligibility exist which will need to be worked out in conference.   That includes an expanded Social Security exclusion.   Both the House and Senate are proposing an expanded exclusion calculated on adjusted gross income.  In both bills all social security income for a married joint filer would be exempt from taxation up to $100,000 in AGI.  However, the House phases out the exclusion at $120,000; the Senate at $140,000 – a general fund impact difference of $87 million.   The Senate includes three economic development-related credits left out of the House bill: Angel Credit, New Markets Credit, and a reinstatement of the Historic Rehabilitation Credit.  

Notably, there is almost no direct property tax relief in the bill –  only refund eligibility for Individual Taxpayer Identification Number (ITIN) filers and an adjustment to the special homestead refund program which is based on year-on-year increases in homeowners’ bills.   Together those two provisions total $3.9 million for the biennium.   The Senate is proposing $478 million local aid spending 62% of which ($300 million) consists of one-time public safety aid.

To meet the budget target the Senate has included worldwide combined reporting for corporations ($1.17 billion for the four years FY24-27).  Mark-up is tomorrow (Thursday)

A Couple of Observations and Comments

Less Enthusiasm for Embarking on “Miracle 2.0”?

We will have more analysis and discussion of  the omnibus bills in the days ahead, but the differences in the property tax aids and credits areas between the legislative bodies is striking.  Not having a dedicated subcommittee on property tax issues this year in the Senate may have had some influence.  Perhaps the Senate was willing to let the House do the heavy analytical lifting and take the lead in this area.

Still, direct property tax relief in the Senate bill is a pittance.  Increases in general purpose aids to cities and counties is only 40% of what the House is proposing with no automatic inflation adjustments.   And the majority of the total amount of aid that is provided is one-time.  It may be simply a negotiation position to unlock the 34 local sales tax bills stacked like cordwood in the Senate for which the House refused to hold hearings.  It could be a belief that attempting to replicate a 1970-style equalization and property tax buy-down effort in 2023 with our current demographics and state responsibilities is a recipe for fiscal trouble down the road.  Regardless, it will be interesting to see how Senate and House conferees discuss this and come to an agreement.

Worldwide Bomb Drop

Senate Tax Chair Rest observed that prior to the release of the omnibus tax bill today, not a single general fund tax increase was heard in Senate tax this year.  That came to an end with the rather surprising inclusion of worldwide combined reporting in the Senate tax bill.   Chair Rest seemed reticent to raise General Fund revenues this year in a context of a $17 + billion surplus with a forecasted $8.4 billion structural balance in the out biennium ex- inflation.   But directions came from on high prompting her to remark, “this is the only bill I was hoping was not going to be necessary, I was wrong.”

Since the bill was not heard in committee, it appears some time will be devoted to getting a better understanding of this tax during mark up on Thursday.   That’s a good thing because tax committee members had a lot of questions and were clearly trying to understand what it is, how it works, and what the implication of this tax are.

They are not the only ones. In between “pass a law” and “spend money on stuff we want and need” is the collection and administration of a brand new tax on previously untaxed activity.   In this case the activity is taking place around the globe.  As we have recently noted, this proposal is exceedingly complex and challenging from a perspective of both administration and compliance.  We are unfamiliar with any testimony having been offered on these matters.

“Why does one seek to eliminate taxes on Social Security income?  Because it’s there.”   Rep. George Mallory, Everest

If the House and Senate Social Security exclusion at $100,000 AGI for married filers is enacted, 75% - 78% of state Social Security recipients would not be taxed on this income.   An additional percentage of those remaining are in the phase-out zone and will have more of this income excluded from state taxation than they already do.   Compared to a full exclusion, the state would have about $1.2 - $1.8 billion more over four years to address those failing nursing homes across the state.   Most constituents would be pacified, torch and pitchfork sales would plummet.

This compromise proposal is easy to communicate and market and should be a slam dunk for everyone to get on board with and take credit for it.  From all indications it’s not, and the numbers don’t matter.  Republicans (and perhaps some Democrats) remain singularly focused on getting rid of the tax in its entirety and continue to dangle their leverage in the bonding bill to free up extra cash to cross this finish line.

Politics aside, of all the possible structural reforms to the state tax system and types of both temporary and permanent tax relief possible in this unique moment to benefit the state economy and  position the state for future success, making higher income retired people the top priority for state tax relief and giving them the largest share of relief was baffling.  It is even more baffling under this provision with the politics of the issue neutered by a substantially larger and much more transparent exclusion.