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NCPERS Report Urges States to Strengthen Revenues Before Recession Hits by Ending Loopholes, Subsidies

State governments need to focus now, before another recession strikes, on closing tax loopholes and ending irresponsible corporate subsidies in order to avoid dire steps such as cutting state services and trimming public employees’ retirement benefits, according to an independent report released by the National Conference on Public Employee Retirement Systems (NCPERS).

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Hank H. Kim, Esq., executive director and counsel of the National Conference on Public Employee Retirement Systems (Photo: Business Wire)

Public pensions are in better shape than they have been for a decade, yet pressure to reduce benefits persists due to the hangover effect of many years of state funding missteps, according to Susan E. Kennedy and Richard Sims, authors of "Ensuring Funding for Public Pensions: A Guide to Raising Revenues and Closing Tax Loopholes." Particularly in the aftermath of the 2007-08 recession, numerous state governments skipped their scheduled contributions to public pensions, greatly exacerbating the impact of a market crash on public pensions.

State tax revenues are growing more slowly than the national economy, but it doesn’t have to be that way, the authors said. "Meeting future pension plan obligations and commitments to other public services will be much easier if states have an adequate and growing tax revenue structure," Kennedy and Sims wrote. Unless states adopt more progressive tax systems, the next recession could hit public pensions hard, presenting them with "greater challenges in obtaining the funding to meet any budgetary gaps," they warned.

Hank H. Kim, executive director and counsel of NCPERS, said state governments have an immediate opening to improve their revenue structures, and need to act decisively. "With the U.S. economy now 10 years into an economic expansion, it’s not a question of if, but when, we will face another recession," Kim said. "We commissioned this study to get an objective analysis of the options that are open to governments to weather an economic storm, and the findings include practical ideas that state governments can implement."

The report outlines nine principles for making state tax systems stronger, more resilient, and fairer for both current and future taxpayers.

  • Keep what you have. States should avoid tax cuts and other legislative actions that reduce tax revenues.
  • Be skeptical of tax incentives and special breaks. Tax cuts and tax incentives that are often offered in the name of attracting businesses and jobs rarely work as advertised.
  • Reverse previous tax cuts. Major tax increases are never easy, but the easiest tax to raise is probably one that was recently cut.
  • Increase reliance on personal income tax. Personal income tax has the capability to grow at least as fast as the growth in the income of state residents.
  • Minimize dependence on sales and other consumption taxes. Sales taxes are regressive, meaning they fall harder on low-income taxpayers than on those with higher incomes, and their revenues tend to diminish over time.
  • Avoid income-to-sales tax swaps. Replacing a portion of income tax with sales tax is foolhardy because it means giving up revenues from the only major tax that is both progressive and elastic and substituting a tax that is both inelastic and regressive.
  • Be leery of exotic revenue sources. Depending on lotteries, casinos, racetracks, riverboats, sports betting, and cannabis sales tends to displace existing revenues.
  • Conduct comprehensive and ongoing reviews of tax expenditures. Carefully consider the budgetary impact of all items that would be taxed were it not for special provisions in the law.
  • Sunset all tax breaks. Require that all tax breaks expire after some set period, preferably a fairly short one.

About NCPERS

The National Conference on Public Employee Retirement Systems (NCPERS) is the largest trade association for public sector pension funds, representing more than 500 funds throughout the United States and Canada. It is a unique non-profit network of public trustees, administrators, public officials and investment professionals who collectively manage more than $4 trillion in pension assets. Founded in 1941, NCPERS is the principal trade association working to promote and protect pensions by focusing on advocacy, research and education for the benefit of public sector pension stakeholders.

About the Authors

Susan Kennedy is the principal and owner of Kennedy Consulting LLC, where she is a government relations and policy consultant. She has worked with an array of publicly funded clients to preserve and create additional funding. Richard Sims is CEO of the RGS Economics. He recently served as the Chief Economist for the three million-member National Education Association.

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