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State tax reform efforts snarled by politics but backers persist

By Nanette Byrnes

(Reuters) - From Louisiana to Ohio, Massachusetts and Nebraska, bold proposals to upend state tax laws are losing momentum in the face of political squabbles and special interest opposition.

Just a short time ago, it looked as if several state leaders would show gridlocked Washington, D.C., how to do tax reform. Then some harsh realities set in.

One case in point: Louisiana Governor Bobby Jindal.

The Republican rising star grabbed headlines in March with a plan to end his state's corporate and personal income taxes, while replacing lost revenue with higher and wider sales taxes.

Weeks later, his poll numbers sagging and under pressure from businesses and skeptical lawmakers, Jindal backed away from his plan, saying he would leave tax reform to legislators.

In Nebraska, a proposal similar to Jindal's has been shelved in favor of a tax commission study. The story is much the same in Ohio, where a version is being sharply scaled back, as well.

In Massachusetts, Democratic Governor Deval Patrick has gone the opposite direction, proposing to raise income taxes to pay for a sales tax cut, but his plan has met the same stalled fate.

At a time of deep partisan division over fiscal policy, setbacks like these show that overhauling tax laws seems to be just as difficult in America's state capitals as it is on Capitol Hill.

But supporters of change are not giving up.

With powerful and deep-pocketed out-of-state groups involved in some instances, tax experts, lawmakers and advisers said some states could still make big changes before the adjournment of state legislatures, which only meet part-time in most states.

"This is just half-time," said Meg Wiehe, state tax policy director for the Institute on Taxation and Economic Policy, a liberal-leaning Washington think tank.

TARHEEL FIGHT BREWS

In North Carolina, special interest groups are gearing up to fight over an income tax rollback and sales tax increase plan.

Republicans have a veto-proof super-majority in both houses of the legislature and a newly elected governor, Pat McCrory.

Republican legislators expect to introduce a bill this week that they hope will lay the groundwork for cutting the state's income tax rate to zero over the next three to four years from the current range of 6 to 7.75 percent.

Lost revenue would be replaced with sales taxes applied to personal and professional services currently not taxed. Governor McCrory has yet to back it and could opt for more modest change, state political watchers said.

Critics of the plan say that broadening sales taxes would not raise enough new money to offset the revenue lost from curtailing income taxes. As a result, they say, the sales tax rate would have to rise. Now at 4.75 percent, some estimates say it might have to go as high as 12.5 percent.

Critics also say that higher sales taxes hurt working class families, which spend a higher percentage of their income.

As in other states, North Carolina has become a battleground for outside pressure groups in the tax reform war.

Americans for Prosperity North Carolina, a conservative group funded by the billionaire Koch brothers, has pledged to spend $500,000 in support of lower income tax rates, closing tax loopholes and expanded sales taxes. The money will go to TV ads, mailers and voter education, said Dallas Woodhouse, the group's state director.

In opposition is, for instance, the North Carolina Association of Realtors, which is against applying sales tax to real estate transactions. It also opposes any move to eliminate the mortgage interest and property tax deductions.

KANSAS FORGES AHEAD

In Kansas, Republican Governor Sam Brownback has proposed his second major tax overhaul in as many years.

He wants the state to maintain its current 6.3 percent sales tax, eliminate some tax breaks and adopt a "glide path" to zero income tax rates by 2025.

Some polls show weak public support for Brownback and his tax plan, but the legislature is strongly Republican. Supporters and opponents predict the governor will get much of what he wants.

Kansas' 2012 tax cuts - also pushed through under Brownback - have left the state with a $231 million budget deficit this year and a projected $803 million deficit for 2014.

Kansas conservatives' commitment to their tax ideas has not wavered, said David Kensinger, Brownback's former chief of staff and chairman of his policy think tank, Road Map Solutions.

The Kansas legislature, more conservative this year than last, will again give the governor much of what he wants on taxes, Kensinger predicted.

He added he expects other states like Ohio and Louisiana will return to these ideas. "They are losing population to lower tax states and they will be forced to adapt to an environment where people, jobs and capital are more mobile," he said.

(Reporting by Nanette Byrnes; Editing by Kevin Drawbaugh and Cynthia Osterman)

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