2017 Legislative Preview
At Ginovus, we monitor state legislatures for economic development policy changes in order to advise our clients with the most-up-to-date information affecting business climate, incentives, and ultimately, a location decision. Please find below a legislative preview of several states that are expected to make economic development policy changes in the next year.
In 2016, lawmakers approved nearly $800 million in transportation investments for new projects such as roads and bridge improvements. The General Assembly also suspended future educational assessments of Hoosier students using the ISTEP test, an evaluation tool that caused controversy last year due to its poor administration and resulting decline in student scores.
Indiana legislators have begun this session of the General Assembly with a focus on a long-term funding solution for transportation infrastructure. Republican leaders are faced with a difficult decision whether to raise the tax on gasoline and impose a wheel tax on electric vehicle registration to offset the cost of infrastructure improvements and maintenance. Other key issues for this session include the expansion of Indiana’s pilot pre-kindergarten program, addressing the opioid epidemic throughout the state, and replacing the ISTEP assessment with a new tool for evaluating the academic performance of Hoosier students. Also of note, the House is currently contemplating a workforce development bill that would extend up to $25,000 in tax credits for qualified training expenses, so long as the training results in an industry-level certification or full-time employment in a high wage, high demand job.
Illinois ended 2016 without passing a budget, with Republican Governor Rauner insisting that a budget without provisions for certain priority projects (i.e. term limits, a freeze on property taxes, and other regulatory measures) would be strictly met with a veto. Legislators seated for the 100th General Assembly in 2017 will have to pick up where the previous legislature left off, hoping to pass a budget that will address a large deficit projected to accumulate by the end of the fiscal year in June.
2016 also marked the statutory end of Illinois’ EDGE tax credit program, though the program was extended through April of 2017 to buy time for debate on the issue. The EDGE program has been in effect since 2001 and is responsible for $1.3 billion in corporate incentives, so politicians will now have 3 months to determine the best path forward for the State’s economic development incentives program. A bill to replace EDGE has already been filed this session; THRIVE, which stands for Transforming, Helping and Reviving Illinois’ Versatile Economy, would allow a company to claim 50% of withholding tax from the new jobs as a credit against corporate income taxation.
In 2016, the State of Ohio faced a surcharge on an unpaid loan from the Federal Government used for the State’s unemployment compensation fund. Lawmakers voted to pay the remaining balance of the loan with state funds in order to avoid raising taxes on businesses, which ended up saving the state about $400 million.
This year, the Ohio General Assembly will focus on passing a balanced two-year budget in the face of a 2.8% reduction in projected revenue. Another key issue will be a resolution to the state’s long-term energy plan that includes renewable energy standards, which Governor Kasich has deemed a priority for the state to prepare for the future and remain friendly to the environment.
In the upcoming session, the Michigan Legislature will have to address the Health Insurance Claims Assessment (HICA), a tax on insurance claims that funds the state’s Medicaid program. The Michigan Chamber of Commerce has called for an end to the tax, arguing that it is too burdensome for business owners in the state. Last year, Governor Snyder vetoed a bill that would have ended the tax 18 months earlier than its termination date, citing concerns that the replacement revenue source might not meet federal requirements for Medicaid.
In addition to addressing the HICA tax, Senator Zorn has introduced a bill to amend the Michigan Strategic Fund, redefining “qualified new job” to include out-of-state residents employed by a company in a county that borders another state or country. Similar legislation had been introduced in 2016, but was not brought up for a vote in the House.
The Wisconsin General Assembly failed to pass a few key economic development reforms in the 2015-2016 biennium session, including TIF reform and a provision that would make seed funding credits refundable.
Republicans in the State Assembly revealed plans to focus on two key issues in 2017: funding for new education technology and solving the State’s transportation deficit. On the technology front, legislators want to provide high school students with laptops or tablets for use in the classroom and at home, and will allow students to check-out wifi hot spots for internet connectivity. Tax increases and vehicle registration fees are currently under consideration to fund a $939 million shortfall in transportation funding.
Minnesota’s Governor Dayton, a Democrat, will release his budget recommendations to the Republican-controlled legislature on January 24th. Health care premiums skyrocketed in the state last year (an increase of up to 67%), causing lawmakers to consider passing a relief bill for MNSure, the State’s healthcare exchange. Other key issues include funding for transportation, which was derailed in a special session last year due to confusion over a light rail provision, and the expansion of pre-kindergarten, which will likely target low-income families prior to universal availability to be implemented in the future.
It’s unclear whether the legislature will have the political will to take up the issue of corporate tax reform in 2017; last year the Governor vetoed a tax bill that contained a drafting error that would have cost the state $100 million, despite the business community pushing for a reduction in tax rates. Minnesota ranks 46th on the Tax Foundation’s Business Tax Climate Index.
Nebraska enters the 2017 session with a projected $910 million budget shortfall due to missed revenue projections for the state. Despite the funding gap, Governor Ricketts has signaled his intent to reduce income and property taxes to attract new business ventures to the state. Lawmakers will likely focus on areas where government spending can be cut in the upcoming session.
In the 2017 session, Missouri became the 28th state to pass right to work legislation; like Kentucky, the law was met with derision from the state’s unions and labor interests. Additionally, lawmakers are considering another labor bill that would not only allow public workers to opt-out of paying union dues, but would require them to annually opt-in to the automatic deductions to their paychecks. Tax credits and corporate tax reductions are also up for debate this session, with many members of the Missouri General Assembly opting to lower the corporate rate to 4% in exchange for reduced caps for many of the state’s credit programs.
2017 is anticipated to be another volatile budget year for Pennsylvania, which will likely be a source of lively debate between a Democrat Governor and the Republican-controlled legislature. The State is facing a deficit of $1.7 billion, and conservative members of the Pennsylvania General Assembly have signaled a willingness to privatize certain government services to reduce expenditures. Though no specifics have been released, some suspect that State-run correctional facilities may be on this list due to the State recently announcing the closure of two prisons.
Last year’s state budget allocated approximately $150 million to the Regional Economic Development Councilsset up by Governor Cuomo in 2011. However, Republican and Democrat lawmakers have recently criticized the program’s efficacy and transparency, favoring an approach implemented by the Assembly rather than through the executive branch. The Governor has also come under fire for expending approximately $50 million to market the Start-Up NY economic development program, which is now undergoing a rebranding as the Excelsior Business Program.
Massachusetts lawmakers will consider tax increases as a way to generate increased revenue, which has remained lower than expected despite increased job growth in the state. Last year, voters approved a 4% surtax on personal incomes over $1 million, and the liberal House and Senate are expected to advance the measure this year. Both bodies have not ruled out additional taxes in the 2017 session, which they say are needed to fund new initiatives such as education reform.
In the 2016 General Assembly, Kentucky lawmakers passed a law to redefine certain classes of data centers as “manufacturing establishments,” allowing municipalities to exempt such businesses from local taxation for a period no longer than five years.
In 2017, Republicans in Kentucky hold the House, Senate, and Governor’s office for the first time in nearly a century, and plan to make job creation a top priority for the state. Labor issues are at the forefront of the debate, with Governor Bevin signing both right-to-work legislation and a repeal of the prevailing wage law at the beginning of the session. For the remainder of the session, lawmakers will also consider charter school legislation, energy regulations (particularly those affecting the coal industry), transportation and road funding, and laws to address the state’s drug epidemic.
In 2016, Tennessee officially became a no income tax state after passing a law to phase out its tax on dividend and interest income. Tennessee lawmakers also passed a revision to the annual Payment in Lieu of Taxes (PILOT) reporting process, as well as granted an extension on the waiver of payments without State approval from 20 to 23 years.
Tennessee will start this legislative session with a $500 million budget surplus due to higher than expected tax revenue. Though the budget is likely to be a key issue this year, the state has a leg up on those states that must address shortfalls. Other key issues include education initiatives such as vouchers and teachers’ salaries, as well as Governor Haslam’s stated desire for criminal justice reforms.
The Virginia General Assembly is entering a 45-day “short session” this year, and the legislature is expected to focus on Medicaid expansion, the state’s drug epidemic, and amendments to the two-year budget. Democrat Governor McAuliffe will have to work with a GOP-controlled Assembly, though this will not necessarily have a calming effect on the debate of hot-button issues due to his term limit preventing another gubernatorial run.
Last year, North Carolina revised its education budget to accommodate increases for teachers’ salaries, instructional materials, textbooks, and need-based scholarships. The legislature also reduced personal and corporate income tax rates, as well as provided additional funds for the Commerce Department to promote economic development throughout the state. Depending on revenue projections, the corporate rate could drop to as low as 3% in 2017.
The State enters a “long session” in 2017 to pass a two-year budget. Governor Cooper has stated that he hopes money will be spent on workforce development measures such as community colleges and universities. In addition to funding state government, lawmakers on both sides of the aisle have signaled their intent to debate Medicare reforms that were passed two years ago, and Cooper, a Democrat, favors a state Medicaid expansion and a repeal of House Bill 2 – the infamous “bathroom bill” that made national headlines last year.
Last session, South Carolina passed a transportation funding bill that was unenthusiastically signed into law by former Governor Haley, who emphasized that “roads will be at the top of our agenda in 2017” due to the need for additional budgetary reform. However, as a result of this year’s election, Haley was recently confirmed by the U.S. Senate as Ambassador to the United Nations, and Lieutenant Governor McMaster has replaced her.
Despite the change in leadership, it is expected that a long-term solution for transportation infrastructure will be put into place in the new session. At the end of January, the South Carolina Secretary of Transportation proposed $50 million in improvements to rural roads. In additional to road funding, lawmakers will likely debate a solution for the State’s pension fund, which has an estimated future liability of $20 billion, as well as education reform for low-income schools.
In 2016, Georgia revised its freeport tax exemption to include fulfilment centers in the list of businesses eligible for an exemption against the personal property inventory tax. The General Assembly also clarified the language of the Georgia Jobs Tax Credit Program to define employers, new full-time employees, and average wage requirements, as well as create a new credit for companies that hire parolees.
Georgia started its 40-day 2017 session with a focus on a state hospital tax that expires this year; if the tax is not renewed, it will create an $880 million revenue gap in the Medicaid budget. With regard to workforce development, Governor Deal is expected to push for his “Plan B” education reform after an education ballot referendum was rejected by voters. Plan B will increase teacher salaries, K-12 funding, and may also include a school voucher provision.
Florida will start the next legislative session focusing on workforce development, with House and Senate leaders expressing a desire to increase funding for higher education institutions and expand scholarships for gifted high school students through the Bright Futures program. Bills have already been filed to increase the state’s competitiveness in faculty recruitment and retention, including a World Class Faculty and Scholar Programdesigned to incentivize the higher education labor market.
Despite rapid growth and an explosion of economic development in many of its cities, Texas will have a 2017 budget that is about $8.9 billion dollars less than last year, principally due to lower revenues in the oil and gas sector. Like many other states, the 85th Texas Legislature will focus on the development of new state education standards and other opportunities for workforce development. With regards to taxation, Texas has tried to position itself as tax-friendly by marketing its lack of personal income tax, but the state struggles when it comes to business personal property taxes and other forms of revenue generation that hit corporations harder than in other states. Lawmakers plan on taking a look at Texas’ economic competitiveness in order to gain an edge against states like Arizona, which has also lowered its corporate taxes as part of a multi-year plan.
Like other states that are reliant on the oil and gas industry, New Mexico will begin its 2017 legislative session debating the budgetary impacts of a $69 million revenue shortfall. The state’s Republican governor, Susana Martinez, has proposed a budget with spending cuts rather than tax increases to make up the difference. The Democrat-controlled legislature has also proposed two bills that would increase the state’s minimum wage, and Governor Martinez has signaled that she would consider a marginal increase to $7.80 per hour, though both bills in their current forms are substantially higher at $8.45 and $15, respectively.
With the inauguration of President Trump and his subsequent executive orders related to immigration, the Democratic-controlled legislature has made it a priority to rebuff the President’s actions by considering a “sanctuary state” bill. Similar in concept to sanctuary cities, establishing California as a sanctuary state would limit the ability of law enforcement to collect information related to a person’s immigration status. Critics of the bill suggest it would put federal funding in jeopardy, potentially affecting the State’s budget.
Other bills include a change to the California Competes incentive program that would redefine “small business” as contemplated in the statute. The law currently reserves 25% of the program’s credits for small businesses, and the bill would define small a business as having less than $4,000,000 in aggregate gross receipts (from $2,000,000 in gross receipts currently).
Lawmakers in Oregon will begin the 2017 session with a focus on balancing the State budget, which is currently operating at a $1.8 billion deficit. This is due primarily to the state’s Public Employee Retirement System (PERS), which pays out retirement benefits, and has received lower than expected returns that were embedded in the program’s design to remain solvent.
In addition to the PERS issue, Democrat legislators favor corporate tax increases, but they will need Republican votes in order to pass any of those proposed measures. In response, Republicans have cited Measure 97, a failed ballot measure from November 2016 that would have removed the cap on the corporate gross sales tax and imposed a 2.5% tax on gross sales in excess of $25 million. However, Republican leaders have suggested that tax increases may be a possibility in exchange for relaxed carbon standards and reduced spending in other areas.
In 2016, Washington voters rejected a ballot measure to impose a carbon tax that was offset by an income tax cut, making the provision revenue-neutral.
Since 2012, Washington State has been under pressure to comply with an education funding order handed down by the State Supreme Court that would require legislators to create and fund a plan for public schools. This year, the Washington State Legislature will tackle the final piece of the plan – increased salaries for teachers and other workers – but have not yet determined whether the money will be raised through tax increases or other measures.
For the 2017 legislative session, bills have been filed in the House and Senate to reduce or exempt certain thresholds of business personal property assessed values from taxation. Additionally, there is bipartisan support in both houses for a bill that would extend the statutory period for an investor to receive income tax credits on qualified equity investments in small business advanced industries. That credit is set to expire on January 1, 2018, and the bill would extend the period to January 1, 2023. The bill also increases the maximum amount of credits that can be extended by the Office of Economic Development, and redefines “small business” to make it easier to meet the criteria for the program.
Scott Neale, Client Advisor at Ginovus