Where States Stand on Tax Reform

Date: March 17, 2014

NFIB members sound off on deductions and exemptions on their 2014 state member ballots.

Each year, NFIB asks our members to fill out a ballot to tell us which policy issues matter most to their small businesses. This informs our positions on state and federal issues, and we use your answers to provide testimony before legislative committees.

Tax reform was a key issue on many 2014 state member ballots, but several states had two specific issues in common. Here’s how members responded to each question:

1. Should the Legislature enact revenue-neutral tax reform to lower income tax rates for businesses and individuals, while at the same time eliminating many deductions and exemptions?

Answers:

Georgia: 

39% Yes

44% No

17% Undecided*

Hawaii: 

45% Yes

17% No 

38% Undecided*

Idaho: 

50% Yes

24% No

26% Undecided*

Iowa: 

45% Yes

25% No

30% Undecided*

Nebraska: 

42% Yes

31% No

27% Undecided*

New York: 

49% Yes

29% No

22% Undecided*

 

West Virginia: 

53% Yes

10% No

36% Undecided*

Explanation:

Many states have considered lowering income tax rates in exchange for eliminating deductions and exemptions. 

Proponents argue that their state tax codes have become too complex, with deductions, deferrals, credits and exclusions that are inconsistent, arbitrary and politically motivated. They believe that high marginal income rates are a disincentive for businesses to grow. In states where we asked the question, more than 40 percent of members in all states except Georgia supported this reform. 

Opponents believe that if the specific deductions, exemptions and credits are eliminated, they’ll be assigned a higher effective tax rate. They also believe it’s unfair to take away deductions that were part of the equation in past economic decisions.

2. Should NFIB support legislation that would make a portion of pass-through entity net business income deductible from state taxes?

Answers:

Arizona: 

58% Yes 

13% No

28% Undecided*

Iowa: 

61% Yes

15% No

24% Undecided*

Maryland: 

60% Yes

15% No

24% Undecided*

 

New Mexico: 

66% Yes

11% No

23% Undecided*

Explanation:

Many small businesses are structured as pass-through entities, including sole proprietorships, partnerships, S-corps and limited liability corporations. Some states have allowed taxable income from pass-through entities to be reduced by a percentage, such as 50 percent on a portion of their income for the first $250,000. It’s generally limited to investor-owner income rather than the entity’s income. Proponents believe such reform frees up funds for small businesses, allowing them to grow and create jobs. In all states surveyed, a majority of members supported this reform.

Opponents believe that such reform doesn’t provide business owners enough cost savings to hire more employees. Rather, wealthy passive investors—who would pocket their tax savings—would benefit most. In addition, the cost associated with the tax relief would reduce state spending in areas like education and workforce development.

*While NFIB members generally support tax policies with lower rates and fewer exemptions, the tax trade-off issues often come down to the specific details in a tax proposal, likely leaving some undecided for now.

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