Talking Taxes

California: Smart Sales Tax Reform Isn't Dead Yet

2008-04-28T11:45:00.002-04:00

When it comes to sales tax reform, the policy answers are pretty straightforward: Unless you've got a really good reason to do otherwise, whatever people buy should be subject to tax. It shouldn't matter where you buy it (on the 'net or in a store); it shouldn't matter what color or size it is. Individual purchases should be subject to sales tax. Period.

So from a policy perspective, it's not especially surprising to see this sort of idea emerging from California: Judy Chu, the chair of the state's Board of Equalization, is recommending expanding the state sales tax base in a way that could yield up to $10 billion a year.

From state lawmakers' perspective, the main reason for doing this is adequacy. Since $10 billion is the ballpark estimate for next year's state budget deficit, anything they can find to plug that hole will be welcome.

But Chu is telling a story that's much more about consistency and fairness-- and she's right:"We tax exercise equipment, but we don't tax health club services. We tax movie rentals, but we don't tax movie admissions," Chu said.

Of course, tax reform isn't just about the policy-- it's also about the politics. And judging from recent experience in Maryland and Michigan, the politics are a lot murkier than the policy on this issue. In each of these states, recent efforts to expand the base have been almost immediately repealed. Our Tax Justice Digest takes a quick crack at explaining why reform efforts failed in these states here. For more details on how to broaden your state's sales tax base, check out our policy brief here.

Gas Taxes: When Is An 'Increase' Not An 'Increase'?

2008-03-25T17:42:00.003-04:00

Facing the clashing realities of rising transportation costs and widespread opposition to tax increases, state governments are turning to tolls, fees, and less visible local sales taxes wherever possible. But though increasing the gas tax has been perceived as political suicide by many politicians, tinkering with this traditional centerpiece of transportation funding is worth a second look. Gas taxes are intended to charge drivers for their use of public roads, and when gas tax revenues consistently fall short of the amounts needed to maintain those roadways, increasing that tax makes great intuitive sense.

Aside from all this, in most cases raising the per-gallon gas tax can boost revenues without actually “increasing” taxes in the traditional sense. This paradox, where a “tax increase” may not actually be a “tax increase” at all, arises primarily from the odd structure of the gasoline tax. Unlike traditional percentage-based sales taxes where the tax you pay is a fixed amount of every dollar you spend (typically 5-7 cents per dollar), gas taxes are levied as a fixed amount per gallon (typically 15-35 cents per gallon at the state level).

Under a traditional sales tax, as the price of goods increase, tax revenues increase accordingly. With a 5% sales tax rate, for example, the tax owed on a $3 gallon of milk is 15 cents. If after a few years milk has increased in price to $4 as a result of inflation, the tax per gallon will rise to 20 cents. This increase in taxes paid is in essence identical to what occurs when the legislature decides to increase the per-gallon tax on gasoline, but it receives none of the negative publicity. Additionally, given that inflation increases the cost of providing public services, such tax increases are in fact a necessary component of any sustainable method of financing government.

Though this problem plagues every government relying on per-gallons gas taxes, taking a look specifically at Minnesota’s recent gas tax increase is particularly illuminating. Legislators in Minnesota who were involved in the tax increase are currently taking a lot of criticism for being “tax-first liberals” unconcerned with perceived out-of-control government spending.

Using data released by the U.S. Energy Information Administration, the 2 cent gasoline tax enacted in Minnesota in 1925 was at the time equivalent to a 9% tax (when gasoline cost 22 cents per gallon). Where does Minnesota stand today now that their tax was recently increased from 20 to 28.5 cents? This may come as a shock to some, but today’s 28.5 cent tax is still the same as a 9% rate (assuming, conservatively, that gas costs $3.07 per gallon). Without the 8.5 cent hike, the effective gas tax rate would have been only 6.5%. For some perspective, Minnesota gas taxes have been levied at effective rates of 20% or more for 13 of the past 83 years, most recently in 1988 and 1989.

A similar result can be shown by examining the effects of inflation over this time period, using data from the Consumer Price Index (CPI). Adjusted for inflation, the 2 cents collected on each gallon of gas in 1925 was the equivalent of what would be a 24.4 cent tax today. By setting the rate at 28.5 cents, what the legislature has done is little different from what inflation does to percentage-based sales taxes, though inflation of course does not have to face any of the harsh criticisms currently directed at Minnesota legislators.

Data released by the U.S. Census Bureau also suggests that Minnesota’s 8.5 cent hike may not really be a tax increase by yet another measure: as a share of consumer income. While many meaningful measures exist for measuring tax changes, what has the most meaning for consumers is tax as a percentage of personal income. Data on this measure do not extend as far back, but what is clear is that a smaller portion of Minnesotans’ budgets is going to paying the gas tax than at almost any time in the last 30 years. In 1977, 0.7% of income earned by Minnesotans went to paying the gas tax. The trend since then has been steadily downward, reaching a low of 0.3% of income in 2005. The 8.5 cent hike will certainly change this figure, though not by enough to negate the overall trend. This trend can be observed in nearly every state, and it demonstrates plainly that despite numerous per-gallon tax increases across the nation over the past few decades, gas taxes have become a less important component of taxpayers’ daily budgets and daily lives. If transportation is to continue to be adequately funded, the portion of taxpayers’ budgets devoted to its funding it will have to rise.

Summing up, it should be clear that states are justified in regularly increasing their per-gallon gas tax rates. Doing so is necessary for maintaining transportation infrastructure, and doing so should, in reality, be relatively painless since inflation is always hard at work minimizing and eventually negating the impact of such increases.

Social Security Reform, KBR-Style

2008-03-07T08:33:00.003-05:00

In case you thought the dearth of Halliburton-related scandals in the news lately meant that the company's leaders were regaining their moral compass-- fear not. Yesterday's Boston Globe breaks the story of how Kellogg Brown & Root (KBR), until last year a subsidiary of Halliburton, is avoiding hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

According to the Globe, KBR has made a special arrangement to avoid paying taxes on about 10,500 of its American employees who are working in Iraq on various reconstruction programs. The way it works: KBR recruits people to work on reconstruction-related projects. But when the workers get their first paycheck, they see that it's not coming from KBR, but from a KBR subsidiary, Service Employers International Inc. (SEI). The Globe's Farah Stockman quotes several KBR hires who had no idea they were working for SEI until they landed on the ground in Iraq.

Why such deception? Because unlike KBR, SEI is not based in the United States. SEI's corporate home is the Grand Cayman Islands. (Legally, anyway--- SEI has no actual offices in the Caymans, just a mailing address.) And while KBR employees working in Iraq would be subject to the 15.3 percent payroll tax for Social Security and Medicare (half of which is paid by the employer, the other half of which is paid by employees), SEI employees don't incur federal payroll tax liability, because they're not working for a US-based company.

While KBR isn't releasing information on SEI employees' pay, the Globe's Stockman estimates a ballpark average pay of $63,000 for their 10,500 Cayman-based workers. At 15.3 percent, this would mean SEI is avoiding about $101 million in payroll taxes every year. And if this has been going on throughout SEI's 5-year stint in Iraq, that's more than $500 million in revenue that won't be shoring up the Social Security system.

The good news, according to Stockman, is that virtually none of KBR's competitor companies for Iraq reconstruction contracts have been pulling the same shenanigans:

Other top Iraq war contractors - including Bechtel, Parsons, Washington Group International, L-3 Communications, Perini, and Fluor - told the Globe that they pay Social Security and Medicare taxes for their American workers.
"It has been Fluor Corporation's policy to compensate our employees who are US citizens the same as if they worked in the geographic United States," said Keith Stephens, Fluor's director of global media relations.

The bad news is that the US Defense Department apparently knew about KBR's malfeasance four years ago, in 2004-- and didn't do anything about it. Pentagon auditors told the Globe they were OK with KBR's offshore shenanigans because the tax savings "are passed on" to the US military.

You'd have to know a lot more about the bidding process for reconstruction contracts to know whether this is true. Since labor is a big cost for these contractors, the ability to reduce these costs by 15 percent would clearly make it easier for KBR to underbid its competitors. But would they underbid by the full 15.3 percent, or by just enough to make sure they get the bid? Take a wild guess.

Now, if KBR is shortchanging Social Security and Medicare trust funds by $500 million, we should be upset about this, right? The Globe says KBR representatives breezily dismiss this argument by pointing out that "the loss to Social Security could eventually be offset by the fact that the workers will receive less money when they retire, since benefits are generally based on how much workers and their companies have paid into the system."

So, for those looking for a more creative way of subverting Social Security than John McCain's privatization plans, here it is: reduce future Social Security benefits by pretending your employees aren't entitled to them!

One glitch in this clever plan, as the Globe alertly points out, is that Medicare benefits are not reduced for those who don't contribute. So the Medicare portion of the foregone 15.3 percent tax is money that is going to have to be raised through taxes on the rest of us.

But as long as these employees figure out some other infallible way to put aside an adequate nest egg for retirement on their own, the rest is gravy, right? Well, no. As it turns out, Texas-based KBR is also avoiding unemployment taxes on these workers, when means that they'll be ineligible for unemployment benefits later on.

There's a simple solution to the whole problem, which is for Congress to pass legislation requiring companies receiving defense contracts to refrain from artificially offshoring its employees. In the Senate, John Kerry has a bill that would do just that.

McCain Backs Away From "No New Taxes"

2008-03-05T09:08:00.002-05:00

We noted a couple of weeks ago that presidential candidate John McCain appeared to be following in the footsteps of the first President Bush by making a pledge that he would almost certainly not be able to keep as President: "no new taxes." But in a recent interview with the Wall Street Journal, McCain laudably retreats from this position:

WSJ: On ABC's "This Week" on Feb. 17, in response to a question, "Are you a 'read my lips' candidate, no new taxes?" you replied, "No new taxes." Did you mean that literally?
McCain: I'm not making a "read my lips" statement in that I will not raise taxes. But I'm not saying I can envision a scenario where I would, OK? But I'm not making it a centerpiece in my campaign.
I want lower taxes. I want the family to keep more of their money.

McCain clearly wants to enact more tax cuts, of course. In the same interview, here's his prescription for getting the economy going again:

I would go very public in advocating that the tax cuts be made permanent, otherwise Americans are looking forward to a tax increase at a vulnerable time in our economy. I would call for the elimination of the AMT [alternative minimum tax]. And we absolutely need to reduce corporate tax rates, which are the second highest in the world.

But the good news is that he's not taking a blood oath that this is the only acceptable outcome. In today's political climate, that (sadly) counts as a victory for fiscal sanity.

NYT on McCain's Tax Flops

2008-03-05T08:35:00.003-05:00

Now that John McCain is semi-officially the Republican nominee for president in 2008, more attention is being paid to the important question of how he'd restructure the US tax system. As we pointed out recently, McCain's current position on extending the Bush tax cuts (he wants to) is sharply at odds with his speeches (and, more importantly, his votes) during the Bush administration's tax-cutting spree between 2001 and 2005. In short, he not only voted (sensibly, in our view) against various editions of the Bush tax cuts-- he also explained quite clearly that he thought these cuts were too tilted to the wealthiest Americans and would bust the budget. And he now claims not to be troubled by either of these concerns, despite the fact that both of these concerns remain quite accurate.

In yesterday's New York Times, Elizabeth Bumiller surveys the inconsistencies in McCain's policy positions across a number of issues, and finds that "[H]is most striking turnaround has been on the Bush tax cuts, which he voted against twice but now wants to make permanent." Here's Bumiller's take on McCain's shift:

In May 2001, Mr. McCain was one of only two Republicans...to vote against President Bush’s $1.35 trillion 10-year tax cut. On the Senate floor, Mr. McCain said, “I cannot in good conscience support a tax cut in which so many of the benefits go to the most fortunate among us, at the expense of middle-class Americans who most need tax relief.”
Two years later, Mr. McCain was one of three Republicans to vote against additional Bush tax cuts... because, he said then, the costs of the Iraq war were not yet known. Specifically, he said he was open to the idea of tax cuts in the future, “but not until Congress and the administration have a better understanding of the costs of war and peace.”
Later, he said he also opposed the 2003 tax cut because it, too, disproportionately benefited the rich. “I just thought it was too tilted to the wealthy, and I still do,” Mr. McCain told Stephen Moore, a member of The Wall Street Journal editorial board, in an interview published on Nov. 26, 2005.
These days, Mr. McCain says at almost every campaign stop that he wants to make those tax cuts permanent rather than have them expire, as the law stipulates, because getting rid of them would have the effect of a tax hike. He rarely mentions that he originally opposed them or that he did so in large part because he thought they were too tilted to the rich — an objection that
conservatives consider heresy.
When pressed, Mr. McCain now says he voted against the tax cuts because they were not accompanied by sufficient spending cuts, an explanation somewhat more palatable to the right. Asked last week on his campaign plane if he thought the tax cuts were too tilted to the rich, Mr. McCain sidestepped the question and replied that he preferred his own tax proposal at the time, which he said was “more tilted towards the middle class.”

We've argued before that the "flip-flop" epithet is often just silly. Consistency is often a foolish standard to impose on lawmakers in an ever-changing world, as our recent foreign policy exploits remind us-- in 2003 it was not all that hard for lawmakers to make what turned out to be the wrong choice on invading Iraq, and by 2005 it was pretty clear that those initial decisions were based on bad information stoked by a trigger-happy administration and a compliant media.

But when McCain was voting against the Bush tax cuts, we didn't need the CIA to help us evaluate them. McCain's earlier criticisms of the Bush tax cuts' fairness were based on the complete (and entirely accurate) information that was available then-- and remains available now-- about who would benefit from Bush's proposed cuts.

Even on an issue as cut-and-dried as this, however, you could make a case for why McCain's contradictory positions on the Bush tax cuts are sensible. McCain could, if he wanted to, explain that he just doesn't value fairness or balanced budgets as much as he used to, and that he now thinks we ought to pare down the size of government by any means necessary. If and when he does this, we can stop calling this a "flip-flop" and start calling it a lightning-quick, politically-aware evolution in his policy positions.

Until he does so, however, this seems like a case in which the "flip-flopper" label might fairly be applied.

Colorado Takes Business Tax Reform in a Refreshing Direction

2008-02-29T16:58:00.001-05:00

There’s usually good reason to view proposed tax breaks for business with a bit of skepticism. Countless tax preferences granted to businesses lack any economic or policy justification, often instead being the result of the hard work of business lobbies or simply the nagging paranoia many legislators have of their state evolving into an “unfavorable” environment for business.

A recent business tax cut approved by Colorado’s House Finance Committee, however, enthusiastically breaks this mold. The proposal under consideration eliminates the business personal property tax for businesses with less than $7,000 in personal property (i.e. those least able to pay) such as furniture, computers, and software. The business personal property tax has been the subject of serious criticism and reform efforts across the country for quite some time, most recently in Arizona, Florida, Idaho, Maine, and Utah.

One of the primary complaints of those involved in these movements has been that the business personal property tax is too complicated. Calculating one’s tax involves taking account of every item used in the operation of the business, and then determining the item’s current value from fairly complicated depreciation tables. For larger businesses that have sufficient staff to undertake this process, the burden may be only a minor inconvenience. For small businesses, however, the costs associated with figuring out what one owes can easily exceed the actual tax bill. The government faces a similar hassle in reviewing the lengthy tax returns submitted by small businesses, often with gains in revenue of no more than $50 or $100 per return for businesses of the size that will be benefited by this proposal.

Colorado has taken a well-targeted approach to reducing the problems faced by small business (as well as government itself) as a result of this tax. By exempting businesses possessing less than $7,000 worth of property from paying, the state will have reduced the number of businesses subject to the tax by about 30,000. Not only will this save the government a lot of hassle, but by targeting the tax relief to businesses with the smallest amount property, only those that were paying the smallest amounts anyway will be affected. This is the reason that the price tag of the reform is quite low, at $2.6 million annually statewide with $600,000 of that picked up by the state. The cost is also kept low by the fact that the $7,000 exemption does not apply to businesses with more than $7,000 of property – large, likely more profitable, companies will see no windfall benefits as a result of this legislation as they must continue to pay taxes on even the first $7,000 of property they possess. And finally, as government tax agencies see their workloads decline significantly they will have more resources available to scrutinize the returns of those larger businesses that actually pay significant amounts in property taxes.

But the issue here is not a concern for most states. About ten states currently do not tax any business personal property, while most others have exemptions much higher than Colorado’s current $2,500. Nonetheless, if this proposal becomes law the state will deserve much credit for deciding to approach a business tax cut in a much more responsible manner than is often the case.

Regressive Tax Hike Gains Overwhelming Support in Minnesota

2008-02-28T17:30:00.002-05:00

An unusual event took place in Minnesota this past week – support for increasing taxes was widespread enough in the Minnesota legislature to override Republican Governor Tim Pawlenty’s veto of a transportation finance bill. Unfortunately, the roughly $6 billion in transportation funds will come from a variety of regressive revenue sources, including increases in gasoline taxes, license fees, motor vehicle excise taxes, and general sales tax rates in several counties.

Also included, however, is one interesting measure designed to partially offset the disproportionate burden placed on low-income Minnesotans by the bill: a refundable gasoline tax credit. The credit, totaling $12.50 for single taxpayers and $25 for married filers, is available only to low-income Minnesotans. Though a credit this small would normally be seldom applied for, Minnesota’s generous EITC and property tax circuit breaker encourage more low-income persons to file state income tax forms than is the norm in many states. Applying for the additional $12.50 per-person credit should therefore be only a minor inconvenience for most eligible filers.

The credit does suffer from another problem, however. A credit of $12.50 per-person is enough to offset the 5 cent gasoline tax increase on only the first 250 gallons of gasoline purchased. Data released by the U.S. Department of Transportation, however, suggests that the average annual per-capita consumption of gasoline by Minnesota motorists is much closer to 500 gallons. Ultimately, while the idea behind the Minnesota gasoline tax credit is very sensible and relatively unique (and will hopefully catch on around the nation) the credit itself, as a mechanism for improving the fairness of the state's tax system, is not incredibly exciting.

The coupling of a slew of regressive tax increases with the insufficient gasoline tax credit prompted one Republican legislator to question what the bill would mean for “the little guy, the striver, the dreamer”. Though the impact on “strivers” and “dreamers” specifically is difficult to determine, the sentiment behind the statement is valid: low-income Minnesotans will be harmed by this bill.

The bottom line is this: Minnesota was justified in increasing its gasoline tax. Since gas taxes are traditionally levied on a per-gallon basis and not indexed for inflation, the real value of the revenue raised from gas taxes inevitably declines with time, leaving states with insufficient funds to maintain their transportation infrastructure unless they continually increase gas taxes to keep up with inflation. Given this reality, the gasoline tax credit enacted by Minnesota was simply too small. Preferably, the credit would have covered not only the entire gasoline tax increase, but also some of the existing (regressive) gasoline tax to which the increase was added. Aside from the gasoline tax issue, the local sales tax, license fee, and vehicle excise tax increases are regressive tax policies enacted only because they were easier to muster support for than an even higher gasoline tax increase would have been. The vehicle excise tax is especially poorly formulated - a $20 tax is levied on any vehicle bought through a retail establishment regardless of if that vehicle is worth $5,000 or $250,000. Not only is such a tax even more regressive than a regular sales tax, but the real returns on that tax, like the gasoline tax, can be expected to fall with time as inflation erodes the value of that $20 collected.

Despite its shortcomings, given political and budgetary realities in Minnesota and the obvious necessity of financing transportation, this bill should at the least be given praise as a fiscally responsible method of paying for transportation projects. At the very least, most everyone should be able to agree that the bill enacted by Minnesota is a better alternative than allowing the state’s transportation infrastructure to fall into disrepair.

Other states seeking solutions to their transportation funding shortfalls have plenty of lessons to learn from Minnesota, both good and bad.

Bush 41 Redux: McCain Says "No New Taxes"

2008-02-22T13:11:00.003-05:00

Under the best of circumstances, this year's presidential candidates have been a little bit vague when discussing their plans for tax reform. There are, of course, politically sensible reasons for the candidates' caginess: presidents don't get to unilaterally make fiscal policy, and specific tax promises can blow up in your face. To make matters worse, tax policy topic #1 this year is a real hot potato: whether each candidate would repeal all (or some of) the Bush tax cuts. So it was a bit of a shock to hear likely Republican nominee John McCain take a page out of the George H.W. Bush playbook in an interview with George Stephanopoulos last weekend:

Stephanopoulos: The number one issue right now, the economy. Senator Obama went at that on Tuesday night as well.
(Plays clip of Obama speech) I admired Senator McCain when he stood up and said that it offended his conscience to support the Bush tax cuts for the wealthy in a time of war. But somewhere along the road to the Republican nomination, the straight talk express lost its wheels because now he's all for those same tax cuts. (End of Obama clip)
Stephanopoulos: He says basically you've sacrificed your principles for the sake of the nomination.
McCain: Well, for a long time, I have said that I thought the tax cuts ought to be made permanent. For a long time back, I said, look, we're going to have spending restraint the way that Reagan did when he restored our economy when it was in the tank, thanks to then President Carter's mismanagement of the economy. And we entered into a great period of prosperity in America. Spending restraint is why our base is not energized. Spending restraint is why we are having to borrow money from China. And we've got to have spending restraints in my view. But to impose on the American people what essentially would be a tax increase of thousands of dollars per family in America is not something I think - well, I'm sure would be bad for the economy of this country.
Stephanopoulos: So on taxes, are you a "read my lips" candidate, no new taxes, no matter what?
McCain: No new taxes. I do not - in fact, I could see an argument, if our economy continues to deteriorate, for lower interest rates, lower tax rates, and certainly decreasing corporate tax rates, which are the second highest in the world. Giving people the ability to write off depreciation in a year. Elimination of the AMT. There's a lot of things that I would think we should do to relieve that burden, including, obviously, as we all know, simplification of the tax code.
Stephanopoulos: But under no circumstances would you increase taxes?
McCain: No.

Whether he intended to or not, McCain went well beyond the scope of the original question here. He won't repeal the Bush tax cuts-- but he also said that he won't increase any other taxes.

Given the breadth of this extraordinary promise, a few follow-up questions are in order: did he really mean to issue a blanket "no new taxes" pledge, or was he still referring just to the Bush tax cuts? Does "loophole closing" count as a tax hike? What if loophole closers are combined with other tax cuts in a revenue neutral package?

Under any interpretation, though, McCain's pledge brings up an important question for his potential supporters: what good is "straight talk" if you can't back it up? The Fort Worth Star-Telegram's Jack Smith explains why McCain's pledge probably isn't worth the paper it was probably written on here.

Debating the Stimulus Package

2008-02-06T15:10:00.000-05:00

It's funny how agreeable and bipartisan everyone becomes once it's decided that we need some new tax cuts that are not paid for.

The stimulus package being debated by Congress right now may do some real good for the economy. The theory is that there is excess capacity in the economy and not enough demand, and putting money in the hands of people who will spend it will boost demand and get the engine running again. The part that Democrats and Republicans agree on, naturally, is tax cuts.

They won't be paid for, which makes sense in the short-run since taking money away from the economy would theoretically undo the stimulative effect of giving people more money to spend. It would have been nice to have some revenue-raising provisions that kick in a couple years down the road, when any recession will be over, to ensure long-term budget neutrality, but the world Congress inhabits is far, far, far from a perfect world.

What's amusing about this process is that the President and his allies in Congress make a philosophical distinction between tax cuts and increased spending that has no basis in reality. Both tax cuts and increased spending mean less revenue for other priorities (or in our current situation, a higher budget deficit). And it's not as though the Republicans are against spending because it's targeted to very specific groups; they support countless tax cuts that are targeted towards specific groups and businesses.

Rather, they opppose spending increases because it represents larger government, while giving money back to people moves us closer to their ideal of smaller government in their minds. Of course, this is ludicrous because the government does not actually shrink to a degree that corresponds with any of these tax cuts (the bill is just sent to the next generation), but that seems to be besides the point.

Once we've decided that we're going to increase the deficit to stimulate the economy, we might as well do it in a way that really will be effective in warding off a recession. And as several economists have pointed out, the way to do that is to through benefit programs like unemployment insurance and food stamps because they put money in the hands of people who will spend it immediately rather than saving it, because they have so many needs that are unmet right now. Middle-income and especially high-income people are likely to save any money given to them, which does not have the immediate positive impact on the economy needed to prevent or counteract a recession.

But that would be spending, and spending, in the conservative mind, is always bad. It's better to use tax cuts. Even if the tax cuts cost more revenue and stimulate the economy less, they're still preferable to increased spending.

The plan negotiated between House leaders and the Bush administration includes a small tax rebate for people who work and pay federal payroll taxes but don't earn enough to pay federal income taxes. The White House apparently acted as though this was a concession and extracted, in return, tax cuts for business investment that will probably do little to help the economy because investment usually takes a while to arrange and will typically not really happen until after the recession has passed.

Now Republican leaders in the Senate and the White House have agreed to Senate Democrats' plans to extend those rebates to seniors and people with disabilities who receive Social Security and veterans with disabilities. But they have not yet agreed to extending unemployment benefits, even though that's one of the measures most likely to actually stimulate the economy.

New Hampshire: A Granite State Income Tax?

2008-01-28T06:54:00.000-05:00

Could New Hampshire be the next state to enact a broad-based personal income tax? The Granite State is one of only nine states that do not currently levy such a tax, and an ongoing school funding debate is leading otherwise tax-averse lawmakers to look for ideas on how adequate school funding could be paid for. An excellent op-ed by state Representative Jessie Osborne asks the hard questions.

Osborne isn't shy on this point, having introduced legislation this year that would take a bold and progressive step towards a more sustainable-- and equitable-- New Hampshire tax system. In the rep's own words, here's the plan:

HB 1593 establishes a combination statewide "enhanced education" property tax at $5.50 per $1,000 of equalized assessed valuation, with a $200,000 homestead exemption; and a 4 percent education income tax with liberal income exemptions and a credit for the statewide property tax the household pays. These taxes replace the current interest & dividends tax and business enterprise tax, which are both repealed totally; the bill also reduces the business profits tax to 7.5 percent. The bill also contains a circuit breaker (abatement) program for taxpayers whose total property tax bill (municipal, school, county and statewide property taxes) exceed 8 percent of household income. In short, this bill bases the financing of education on ability to pay.

Which sounds like a great place to start. The "ability to pay" goal has two important components here.

First, and perhaps most important, the bill would take an existing tax that is notoriously insensitive to "ability to pay" considerations, the property tax, and add a feature (the circuit breaker) that would go a long way toward solving this problem.

Second, the bill would enact what is generally recognized as the fairest tax out there-- a broad-based personal income tax.

Osborne has no illusions that the bill could survive a veto threat this year, but is to be commended for introducing legislation that gets right at the heart of what's wrong with the current New Hampshire tax system.

The full text of the bill can be found here.

Is It Time for Congress to Enact a Stimulus Package?

2008-01-11T14:47:00.000-05:00

Both the White House and Democratic leaders in Congress are discussing the possibility of some sort of economic stimulus package in the wake of a report from the Labor Department showing that unemployment rose in December from 4.7 to 5.0 percent. While the number of jobs increased overall during the month, the private sector shed 13,000 jobs.

The White House has indicated that the President has not decided yet whether or not to offer a stimulus plan, but that any package sent to Congress from him would likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the $300 and $600 "advance" rebate checks mailed to taxpayers in 2001, as well as extending the existing Bush tax cuts. The latter idea has been panned by economists (including Martin Feldstein, former chief economic adviser to President Reagan) since the Bush tax cuts do not expire until the end of 2010 and therefore extending them through 2011 and longer could not possibly do anything to counteract a recession taking place today. What's more, the massive increase in the budget deficit that would probably result could actually hurt the economy overall.

Democratic leaders and several economists point out that spending could be very effective in stimulating the economy and certain types of tax breaks could be as well, if they were carefully structured. A recent forum on this topic sponsored by the Brookings Institution included Feldstein, former Treasury Secretary Robert Rubin and other economists. They all agreed that any stimulus should be "temporary, timely and targeted."

A recent paper from the Center on Budget and Policy Priorities explains why these principles are important. Tax breaks or spending to stimulate demand in order to utilize excess productive capacity in the economy are not needed forever but only through the period in which we face a recession. If the extra spending or tax cuts are permanent, they could actually do more harm to the economy, particularly if they result in ongoing increases in the federal budget deficit.

The stimulus should also be timely, the experts agreed. Legislation that is passed when a recession is starting to abate, or that does not lead to an immediate increase in consumer spending or other immediate economic activity, is probably useless in fighting the recession.
Any stimulus also must be targeted to those who are likely to spend whatever new money they run into. Low-income people are far more likely to immediately spend any extra money they receive in the form of a tax rebate or extended unemployment insurance, for example, whereas higher-income people may be more inclined to save or invest any extra money they receive, meaning it will be a long time before it has any palpable effect on the economy. Targeting the tax cuts or spending might be particularly difficult for members of Congress who want as many of their constituents (not to mention their friends in business) to get benefits as possible.

The Center on Budget paper explains that certain measures have a much higher stimulative impact on the economy because they benefit those who will immediately spend any money they receive. For example, extended unemployment benefits provide $1.73 worth of increased demand for every dollar spent. On the other hand, a tax break for capital gains and dividends provides only 9 cents of increased demand for every dollar of revenue reduced.

Immediate, one-time tax rebates are on the list of measures favored by the experts at the Brookings forum, but they may have to be targeted to low-income families to be truly effective. A survey done in 2001 found that less than a quarter of taxpayers planned on actually spending their rebate checks. The rest would save it, which provides no immediate boost for the economy overall.

One problem is that we often don't know if we're in a recession (technically defined as two consecutive quarters of negative GDP growth) until after it's well underway. We don't know if we're seeing one begin now. Feldstein has recommended that Congress pass a package now that will not actually go into effect until some economic indicators "trigger" it, such as a rise in unemployment over three months.

The ideal scenario would probably involve a stimulus package that includes revenue-raising measures to offset the costs but that do not go into effect until several years later, when a recession would be likely to have ended. But at the Brookings forum and elsewhere, some experts have argued that PAYGO should essentially be waived. This probably reflects a concern that the President and his allies in Congress have taken such an extreme position against raising revenue in any shape or form, while cutting spending in the future may end up hurting those who the stimulus is geared to help.

It's reassuring that House Ways and Means Chairman Charles Rangel (D-NY) has indicated that he agrees that the "temporary, timely and targeted" principles should guide any stimulus proposal. Nonetheless, it's worth wondering whether Congress has the self-control to abide by all these nuanced principles in crafting legislation.

Rudy Giuliani Releases Tax Plan

2008-01-11T14:45:00.000-05:00

Former New York mayor Rudy Giuliani has proposed new tax cuts that go beyond making permanent the Bush tax cuts (which in itself would cost $5 trillion over ten years). Giuliani proposes to also cut the capital gains rate from it's current level of 15 percent down to 10 percent, and to cut the corporate tax rate from 35 percent to 25 percent.

CTJ published a paper this past summer showing that the current tax subsidy for capital gains and dividends cost $92 billion in 2005 alone, and nearly three quarters of that went to the richest 0.6 percent of taxpayers. This regressive tax break would become more costly under Giuliani's proposal.

Another CTJ paper from last year found that U.S. corporate taxes as a percentage of GDP are already among the lowest in the developed world, meaning American corporations are not unduly burdened, or made less competitive than those in other countries, by our corporate tax.

Rebating Sales Tax on Groceries: Colorado Local Governments Give it a Try

2008-01-04T20:14:00.000-05:00

As lawmakers nationwide debate the morality of applying sales taxes to purchases of groceries and other necessities, it's worth remembering that for governments seeking to provide low-income sales tax relief without blowing a hole in their tax base, there is another way.

The Denver Post has an interesting article from February of 2007 (sorry, a bit behind on my Denver Posts) evaluating the experience of local Colorado governments in providing tax rebates for grocery taxes.

Colorado's state sales tax (which is 2.9 percent) exempts groceries, but locals are allowed to levy a grocery tax. This matters because statewide, Colorado local sales taxes actually bring in more than the state tax.

The article provides details on a couple of the strategies pursued by different Colorado towns and cities to rebate low-income sales taxes on groceries:

Boulder, which collects about $10 million annually in grocery tax, gives a flat
amount: $66 per year for the elderly or disabled and $199 for a family, regardless of size. An individual living alone must make less than $30,450 and be over 61 or disabled. A family of four must make less than $43,500 to qualify.
The rebate in Fort Collins is $40 per year for each person, and single people living alone - it doesn't matter if they are disabled or elderly - must earn less than $24,200 to qualify.
It's the same to qualify in Loveland, but the rebate is $70 per person for up to four people in a home, and food stamps are factored in the rebate amount. Likewise in Greeley, though the base rebate is $45 per person.

As with all such rebates, the main strike against this approach is that unless you apply for the rebate, you obviously don't get it. But the approach taken by these Colorado locals-- tax it, then provide targeted rebates--is worth thinking about for anyone concerned with the unfairness of taxing food.

Conservative Spin Machine Fights to Define 2007

2008-01-03T10:49:00.000-05:00

While 2007 is over and we really want to just move on, it's hard to avoid getting tangled in the battle to interpret what Congress has done on the tax front and why.

Clearly, Congress extended the so-called "patch" that keeps most of us from paying the Alternative Minimum Tax (AMT) and did not replace the $50 billion that the AMT was supposed to collect. As we've reported, it's extremely disappointing that Congress waived the pay-as-you-go (PAYGO) rule that it reinstated when the Democrats took over. But conservatives are still trying to spin this issue into something entirely different from what it actually is.

Let's look at the Wall Street Journal's coverage. I know, I know, we can't respond to every ridiculous thing the WSJ says because that in itself would be a full-time job for a staff of one-hundred. But they exemplify the sort myth-making that is still going on about the AMT and about the two parties' positions on it.

"...because it isn't indexed for inflation, and because Democrats raised AMT rates in 1993 to 26% and 28% from a single rate of 24%, the AMT has turned into a blob that sucks in ever more taxpayers earning between $75,000 and $200,000 a year.

Now back in the majority, Democrats have found themselves hoist on their own 2006 campaign pledge for "pay as you go budgeting," which meant offsetting any AMT tax "cut" with $50 billion in other tax increases or spending cuts. Mr. Bush and Republicans sensibly argued that, because it was never intended to hit so many people, the AMT shouldn't be used as an excuse to raise taxes on other Americans. And with an election year coming, Senate Democrats didn't want to raise taxes on their rich hedge-fund donors. So House Democrats had little choice but to abandon "paygo" as well and pass AMT relief without any offsetting tax increases.

This is good news for the economy, which is struggling enough without a new tax on private equity or other risk takers... "

In these few paragraphs I immediately spot at least five statements that are... Well, I'll just say it: There are at least five blatant, bald-faced lies in these paragraphs.

1. The Democrats are responsible for the expanding reach of the AMT. As this blog has already explained, first, the Clinton AMT changes of 1993 actually reduced the growth of AMT liability, and, second, failure to index the AMT for inflation is a bipartisan failure, equally attributable to the folks who run Congress now (Democrats) and the folks who ran it for the previous 12 years (Republicans).

Just take a step back and think for one second about how ridiculous it is for the party that has controlled Congress from 1995 through 2006, and controlled both Congress and the White House for six years, and passed several tax bills that did not permanently fix the AMT, to blame the Democrats for not permanently fixing the AMT.

But it's particularly absurd to claim that Democrats are responsible for this problem because the Bush tax cuts greatly increased the number of people who are subject to the AMT. Since the AMT is an alternative tax that kicks in if it's greater than your regular income tax, there will clearly be more AMT payers if you lower the regular income tax rate without making a corresponding change to the AMT, which is what the Bush tax cuts did.

2. AMT relief does not represent a new tax cut, since no one expected the AMT's reach to expand. The editorial puts the word "cut" in quotation marks as if to suggest that AMT relief is really not a tax cut at all, buying into the Republican talking points that this measure somehow prevented a tax increase that was never supposed to happen and therefore does not constitute a new tax cut.

First of all, President Bush and his aides knew full well that when they cut regular income taxes, they were making a conscious choice not to change the AMT, which would increase the number of AMT-payers because the AMT would take back a large chunk of the tax breaks. In fact, Bush’s chief economic advisor during his first campaign was adamant that Bush’s plan contemplated a huge increase in the AMT.

Since the cost estimates for the tax breaks accounted for this fact, this made Bush's first tax cut proposal look less costly than it otherwise would be. But of course it was always a sham. Bush and his allies always knew that the corresponding reductions in the AMT would come later. These AMT reductions would therefore be additional tax breaks. Now the Republicans say AMT relief does not represent a new tax break but simply the prevention of a tax increase that was never expected, and therefore AMT relief doesn't have to be paid for. (So we should just ignore that $50 billion increase in the federal budget deficit.)

Let's talk about just how "unexpected" this situation is. The Center on Budget and Policy Priorities brilliantly explains that several people in the Bush administration and allied with it were quoted early on as stating that the number of AMT payers would clearly increase due to the Bush tax cuts.

One person who is probably feeling absolutely humiliated by the Center on Budget paper is Senator Chuck Grassley of Iowa, the ranking Republican on the Senate Finance Committee.

Senator Charles Grassley, January 4, 2007:

“It’s ridiculous to rely on revenue that was never supposed to be collected in the first place… It’s unfair to raise taxes to repeal something with serious unintended consequences like the AMT.”

Senator Charles Grassley, March 8, 2001:

“Roughly one in seven taxpayers will come under the shadow of the Alternative Minimum Tax by the end of the decade… That figure will significantly be higher if President Bush’s tax plan is adopted, and that is according to the Joint Tax Committee of the Congress.”

Senator Charles Grassley, February 28, 2001:

“In addition, President Bush’s plan [will] bring millions more Americans into the AMT process; the Joint Tax Committee estimates that the Bush tax plan will nearly double the number of American taxpayers affected by the AMT.”

3. "Senate Democrats didn't want to raise taxes on their rich hedge-fund donors." Democrats in the House and Senate wanted to pay for AMT relief, since it clearly constitutes a new tax cut that will increase the federal budget deficit if it is not paid for. It seemed logical to Democratic leaders, and to us, that one way to offset the costs could involve closing a tax loophole for fund managers that should never have existed in the first place. The loophole for "carried interest," a certain type of compensation paid to fund managers who can make hundreds of millions of dollars a year, allows them to pay taxes at a lower rate than middle-income people.

It's true that there was resistance from some quarters within the Democratic caucus in the Senate on the proposal to end this outrageous tax giveaway. But in the end the Democrats were united in their effort to eliminate it. Every Democrat present on December 6 voted to end the loophole (which the WSJ describes as an effort to "raise taxes" on hedge funds). Regardless of how you describe the measure, the truth is that all the Democrats in the Senate voted for it, except for the presidential candidates who were off campaigning, most of whom have specifically, publicly, said that they support closing the loophole.

The bill could not pass because 60 votes are needed to approve legislation in the Senate. The Republicans voted unanimously to kill the bill.

4. We need to continue a tax subsidy for wealthy fund managers because the economy is struggling. No reasonable human being could believe that, to keep the economy running, middle-income people need to subsidize billionaires. But that's what the loophole in question does.

If Congress grants a tax break to a buyout fund manager that saves him $20 million, that's effectively the same thing as giving him a direct subsidy for $20. It costs the federal government the same amount, which really means it costs the rest of the taxpayers -- mostly middle-income people working hard to get by -- the same amount. A tax break targeted to one person means that others who don't get that tax break will have to shoulder a greater proportion of the tax load, and pay higher taxes or face cuts in public services, as a result.

Which gets us to a question conservatives have never adequately addressed: Why should middle-income people subsidize, through the tax code, the compensation paid to these folks who earn millions, hundreds of millions, and even sometimes in excess of a billion dollars?

5. Ending the tax subsidy for wealthy fund managers by closing the loophole is a "new tax" on "risk takers." The conservative spin machine is very keen to describe any effort to close even the most blatant tax loophole as a "new tax." This is particularly crazy in the case of the effort to close the carried interest loophole.

Let's just look at the law as it stands today, with the loophole still in place. If an unmarried receptionist working for a private equity firm earns $42,000 a year, the top federal marginal tax rate that applies to his income is 25 percent. This is on top of the 15.3 percent he pays in payroll taxes on all of his income. The fund managers he works for, however, pay only the 15 percent “capital gains” rate on the “carried interest” they receive as compensation for managing other people’s money.

This makes absolutely no sense from a tax policy perspective (see our first and second fact sheets explaining why this compensation cannot be honestly called capital gains) or from the perspective of fairness. The effort to close this loophole was motivated by the desire to have these wealthy fund managers pay taxes under the same rate structure that everyone else is subject to, which hardly constitutes a "new" tax.

Further, the idea that closing the loophole will constitute a new tax on "risk takers" is nonsense. When people from the financial industry came to the Hill to defend their loophole, there was a lot of talk about how the special capital gains rate of 15 percent was needed, even for these folks who don't really have capital gains, to encourage risk.

Why the tax code should be used to encourage people to place their money in risky investments was never clear, but that's largely besides the point since the fund managers we're talking about aren't even investing their own money but are actually managing other people's money.

Anyway, risk has nothing to do with what taxes you pay. There are many types of income that are risky, meaning you don't really know whether they will materialize at all, like performance bonuses, stock options, and royalties, and yet these are all taxed at ordinary income rates rather than the 15 percent rate for capital gains.

So why rehash this all now? Isn't the debate over?

Unfortunately, no, it's not over. Congress enacted an AMT patch just for 2007. The whole thing needs to happen again for 2008. Few of us are in any mood to endure this sorry ordeal again, but it really does not have to be hard, if only the Republicans would display a modicum of rationality.

There are very straightforward ways to pay for the next AMT patch even without closing the loophole for carried interest. In fact, the Democrats did attempt to pass another bill to pay for AMT relief without the carried interest provision, after Republicans in the Senate blocked the first bill. The second bill had excellent provisions to offset the costs of AMT relief, including language that would close a loophole for offshore compensation by wealthy fund managers and language delaying a business tax break that hasn't even taken effect yet.

Incredibly, the Republicans in the Senate blocked this second bill also. We think the bill demonstrates that the tax code is riddled with loopholes that have no justification, and that closing these loopholes is an obvious way to offset the costs of other initiatives (such as AMT relief). The question is: How long can the Republicans in Congress deny the obvious?

Bold New "Use Tax" Frontiers

2007-12-30T17:48:00.000-05:00

The Associated Press today has the story of Stephen Kahn, a Massachusetts residents who bought a plane in Massachusetts, then flew it to his Maine vacation home-- and Maine slapped him with a $26,000 tax bill.

The story is more complicated than this, of course: it turns out that Massachusetts sales tax doesn't apply to sales of airplanes. So when Kahn showed up in Maine with a tax-free plane, the state told Kahn he had to pay the state's 5 percent "use tax" on his plane.

The use tax is supposed to prevent residents of sales-tax states from buying things tax-free in states that don't have sales taxes. It's meant to be a backup to the regular sales tax. It applies to basically the same things a sales tax applies to, but only comes into play when a state's resident avoids the state sales tax by buying something tax-free in another state. So if Kahn had bought his plane in New Hampshire, which doesn't have a sales tax, then his home state of Massachusetts could very plausibly have claimed that he'd bought the plane there to avoid Massachusetts sales tax, and could have charged him a use tax instead-- if, of course, Massachusetts sales tax rules applied to planes.

But it's less clear why the same thing should happen when a guy who clearly lives in Massachusetts buys a plane tax-free because his state's elected officials have decided it should be tax free.

The answer given by Maine tax administrators (as best I can make out from the AP article) is that they think, in fact, that Kahn lives in Maine too. He's got a vacation home there, and in the year he bought his plane, the plane spent more than 20 days (excluding travel days) in Maine. And that makes him a resident in their eyes.

According to the AP story, some states go even further with their use tax on planes:

Florida assesses a 6 percent use tax on plane owners who didn't pay sales tax on their planes and bring them to Florida even once within six months of the purchase date.

The story doesn't say whether Florida has a residency requirement, or whether any untaxed plane passing through the state is subject to tax.

Leaving aside the question of whether we should feel sorry for a guy who had to pay a 5% sales tax when he bought a plane (at $26,000 in tax, Kahn's plan must have cost him over $500,000), are these states doing the right thing when they apply the use tax laws in this way?

The spirit of the use tax law is that it's designed to prevent tax-avoiding behavior by a state's residents. Kahn is at least a part-time resident of Maine, and may well have bought his plane in Massachusetts to avoid owing sales tax in Maine, but you certainly couldn't prove it either way. And you can construct a very simple explanation of why he bought his plane in Massachusetts that has nothing to do with tax avoidance: Massachusetts is his primary state of residence.

On the other hand, Maine and Massachusetts each have their rules about who can be counted as a resident of their state. Maine can make a decent case that Kahn "lives" in Maine, and should be subject to the state's tax rules. And the folks in Maine would presumably make a fairness argument by contrasting the tax treatment of this guy with a full-time Maine resident who lives next door to Kahn's vacation home. If Kahn's purchase of the $500,000 plane is tax-free, how can we justify taxing the neighbor's purchase of the same plane?

But (I think) they would be wrong in making this argument. Or, at least not as right as Massachusetts folks would be in making the same sort of comparison. That is, if Kahn's neighbor in Mass. buys the same plane (and doesn't have the misfortune of owning a Maine vacation home), the sale is tax free. So, how can we justify imposing a higher tax on Kahn than on his Massachusetts neighbor?

More generally, it seems to me that (assuming this all boils down to whether Maine can treat part-time residents as subject to the same use tax requirements as full-time residents) the real effect of letting Maine's actions stand is to deny multi-state residents the potential sales tax benefits of either of the states they live in.

That is, every state chooses to exempt certain things from each of its taxes. Massachusetts exempts groceries, clothing and, yes, planes. Maine's action basically says that any Massachusetts resident who also happens to own a vacation home in Maine should be denied the benefits of these Massachusetts tax breaks.

And, abstracting from the fact that this sort of multi-state residency is a really enviable problem to have, it's hard to defend that on fairness grounds.

ALEC Report on "Rich States Poor States": The Longest Wall Street Journal Editorial of All Time

2007-12-19T14:59:00.001-05:00

A new report from the American Legislative Exchange Council (ALEC) purports to construct a "State Economic Competitiveness Index" with which you can rank your state on how well it "foster[s] economic growth and prosperity."

No one seems to have taken a crack at debunking its findings yet; this could be because everyone's busy during the holidays, or it could just be because no one is taking the report's "findings" at all seriously.

Here's just one quick thought: the ALEC competitiveness index is made up of 16 equally-weighted variables. But none of the variables have anything to do with the quality of state services, like, say, education or transportation infrastructure.

From a fiscal policy perspective, in fact, the ALEC index basically asks "how bad are the bad things" and ignores the general question "how good are the good things." So, for example, a state that has higher than average taxes but also has better than average schools will score absymally on the ALEC ranking, because taxes count as a bad thing but quality public education doesn't count as a good thing. Put another way, if you have two states that have exactly the same overall tax levels, one of which has excellent schools and the other of which has terrible schools, the ALEC index won't see a difference between them.

So if you construct an index of competitiveness that says taxes hurt your economic climate but public investments don't help, it's neither surprising nor useful to solemnly present a finding (as ALEC does in this report) that low-tax states have better economic climates. Sometimes the answer you get is entirely determined by the way you ask the question, and that's the case here.

The report deserves a thorough debunking, just in case anyone ever does mistakenly treat it as a meaningful study. But for the moment, all you really need to know is that the ALEC report is really little more than the longest Wall Street Journal editorial of all time (one of its two authors is actually on the WSJ's editorial board).

To drive this point home, here's an excerpt from a January 2007 WSJ editorial discussing a proposal to repeal Georgia's state income tax:

Georgia may beat Mr. Sanford to the punch. House Republicans in Atlanta have announced that one of their top priorities is to use the half-billion-dollar budget surplus as a downpayment to "dismantle the current tax code." House Republican Majority Leader Jerry Keen tells us the debate in Atlanta is between a flat-rate income tax and a plan that would "do away with the personal income tax but broaden the sales tax by eliminating 107 exemptions. We're committed to a pro-growth tax plan that announces to the country that Georgia is open for business."

A nearly identical paragraph shows up in the December 2007 ALEC report:

Georgia may beat Gov. Sanford to the punch. House Republicans in Atlanta have announced that one of their top priorities is to use the half billion dollar budget surplus this year as a down payment to “dismantle the current tax code.” House Republican Majority Leader Jerry Keen tells us the debate in Atlanta is between a flat rate income tax and a plan that would “broaden the sales tax by eliminating 107 exemptions and then do away with either the personal income tax or all property taxes. We’re committed to a pro-growth tax plan that announces to the country that Georgia is open for business,” he said.

Cutting and pasting is an author's privilege, I suppose. But the "cut and paste" approach shouldn't be confused for well-designed economic policy research.

California: Bring Back the Car Tax?

2007-12-15T22:09:00.000-05:00

Via the 21st Century Taxation blog, news that history may be repeating itself in the Golden State.

California's historic 2003 recall of then-Governor Gray Davis, and subsequent election of Arnold Schwarzenegger, was one of the biggest tax-policy-related electoral dramas in recent memory. (And was certainly one of the most flagrant abuses of "special elections" in modern California history-- but that's another story.)

Every Californian-- including, no doubt, Schwarzenegger, who owes his job to this bit of political theater-- remembers that what drove the recall election was public anger (almost certainly fueled by out of state money, but again, that's another story) over Davis' decision to balance the state's budget by ending a state-financed cut in the annual "car tax" that he himself had pushed through back in 1998. And most Californians probably also remember that the first thing Schwarzenegger did after taking office was to restore the car tax cut.

So it might seem downright absurd to hear anyone talking about repeating Davis' tactic and ending the car tax cut. But that's what the Sacramento Bee's Dan Walters has to say in his column this week-- and he's right.

Walters points out, correctly, that Schwarzenegger's move to permanently cut the annual car tax from 2% of a car's value to 0.65% of value is simply not affordable now-- and probably wasn't affordable when he first did it in '03.

In states such as Virgina and Washington, the debate in the past decade has been more about whether an annual car tax should even exist (answer: it should), rather than what the rate should be. This doesn't appear to be the case in California, where the tax is in no danger of being repealed entirely.

The question in California is simply whether the rate cuts enacted in 1998, and permanently extended after Davis' recall debacle, were ever-- then or now-- remotely affordable. Walters makes a convincing case that Schwarzenegger has used short-term surpluses to paper over the inherent unaffordability of the car tax cut.

With those budget surpluses suddenly and spectacularly gone, a sensible approach for state lawmakers-- and the governator-- would be to put all cards back on the table, including the state-funded car tax cut. If the state can't afford to pay for the car tax cut, lawmakers owe it to their constituents-- and to the state's future-- to either repeal the cuts, or to hike some other tax to pay for it.

It remains to be seen whether lawmakers can achieve this standard of sensibility. But California wouldn't be the first state in which lawmakers were forced to eat crow by repealing tax cuts enacted during the boom days of the late 1990s-- or even the first in late 2007. Michigan lawmakers earlier this year raised that state's flat income tax rate, essentially reversing the signature tax cut pushed through by then-Governor John Engler in the late 90s.

If Michigan can come to its senses, can California be far behind?

GOP Debate: Who's Paying Too Much in Taxes?

2007-12-13T19:20:00.000-05:00

In last night's Republican presidential debate, moderator Carolyn Washburn asked the sort of tax policy question that each candidate should have been able to really tee off on: "Who in this country is paying more than a fair share of taxes relative to everyone else: the wealthy, the middle class, the poor or corporations?"

The answers rarely touched specifically on the actual question, possibly due to poor guidance from the moderator. Where salient, the responses varied, from "the rich" (Thompson, implicitly), "not the rich" (Romney, sort of), to "not the poor" (McCain), to "the middle class" (Romney, Paul, Giuliani) to "everyone" (Tancredo). In a separate category was Alan Keyes (who I quite honestly had no idea was running for President until I read the transcript), who adopted the clever and unique strategy of spontaneously combusting in response to the question.

The New York Times has the full transcript. Here's the relevant section, very slightly edited for non sequiturs (this standard is not applied to Keyes' response, which would have had to be excised completely), including each candidate's answer to the moderator's question:

MS. WASHBURN: ... I want to go down the line in reverse order and hear from everyone very briefly, please, 15 seconds or so.
Who in this country is paying more than a fair share of taxes relative to everyone else: the wealthy, the middle class, the poor or corporations?
Starting with Mr. Keyes.
MR. KEYES: It's one of those let you and him fight questions the people in the media always want to get us involved in; because they would like to pretend that the tax question is about fighting amongst ourselves when the real sacrifice that's required from the American people we need to start sacrificing some of these incumbents who have funded their political ambition using our money --
MS. WASHBURN: Remember, we have 15 seconds.
MR. KEYES: -- who have spent overboard into deficits after promising us on the Republican side that they would limit the government, and then produced the highest budget deficits in the history of our country.
MS. WASHBURN: Senator McCain?
MR. KEYES: I think we need to stop listening to these phonies and start looking for people who will actually fulfill the words that they speak. That's what I think.
MS. WASHBURN: Senator McCain?
SEN. MCCAIN: I know that I'm happy to say low-income Americans, except for payroll taxes, don't pay taxes, but we've got to reform the tax code. Nobody understands it. Nobody trusts it. Nobody believes in it. And we have to fix it. And we can't raise taxes as our Democrat friends want.
So I don't know exactly who's paying the most of the burden, but I would say that the American people need a tax code they can understand and that they know is fair.
MS. WASHBURN: Governor Huckabee?
MR. HUCKABEE: Over 80 percent of the American people know that the tax code is irreparably broken. I would lead one to a fair tax, and that means that the rich people aren't going to be made poor, but maybe the poor people could be made rich. That ought to be the goal of any tax system -- not to punish somebody, but to enable somebody so that they can have a part of the American dream. The fair tax does just that.
MS. WASHBURN: Governor Romney?
MR. ROMNEY: I don't stay awake at night worrying about the taxes that rich people are paying, to tell you the truth.
I'm concerned about the taxes that middle class families are paying. They're under a lot of pressure. Gasoline's expensive. Home heating oil, particularly in the Northeast, is very difficult for folks. Health care costs are going through the roof. Education costs and higher education are overwhelming. And as a result, we need to reduce the burden on middle-income families in this country.
MS. WASHBURN: Okay, a little snappier, gentlemen. (Laughter.)
Senator Thompson.
MR. THOMPSON: My goal is to get into Mitt Romney's situation, where I don't have to worry about taxes anymore. (Laughter.)
Five percent of Americans pay over half the income taxes in this country. 40 percent of Americans pay no income taxes at all. I think we need to concentrate on preserving the tax cuts of '01 and '03. That's going to be a monumental battle that's going to be coming at the end of 2010.
MS. WASHBURN: Congressman.
REP. TANCREDO: Everyone that is presently paying tax, you could be -- you can make a case that they're paying too much. The reality is, of course, you need a different system entirely. We do need to move away from this archaic -- a system that taxes productivity, which is what we do, to a system that allows for a fair tax. I believe in that.
MS. WASHBURN: Thank you.
Congressman.
REP. PAUL: The most sinister of all taxes is the inflation tax and it is the most regressive. It hits the poor and the middle class. When you destroy a currency by creating money out of thin air to pay the bills, the value of the dollar goes down, and people get hit with a higher cost of living.
It's the middle class that's being wiped out. It is most evil of all taxes.
REP. HUNTER: The tax that we're all paying that doesn't help anything -- it doesn't go to defense, it doesn't go to the roads, it doesn't go to medical care -- is the $250 billion-plus that we pay each year not to the federal government, to the Treasury, but to prepare our taxes, defend our taxes, and for the massive cost of the IRS. That's all overhead -- 250 billion-plus dollars. What we ought to do is have a system -- the fair tax system is a good one, or a flatter tax or a simpler tax, because that young couple that pays 1,450 bucks in taxes may pay $450 to their tax preparer. That's a second tax.
MS. WASHBURN: Mayor?
MR. GIULIANI: A flatter tax, a simpler tax that you could file on a one page, as an option, would be a good idea. Reducing the corporate tax, as I suggested. Reducing income tax rates across the board, which would mostly benefit the middle class. That's where the focus should be.
But we've got to reduce taxes across the board, and we should give the death penalty to the death tax. It really is a very unfair tax.
MS. WASHBURN: Thank you.

The NYT has the full transcript here. NPR's coverage is here.

Giuliani: Let's Increase Corporate Taxes

2007-12-13T18:44:00.000-05:00

Well, that's not exactly what he said. But it's apparently what he meant.

In last night's Republican presidential debate (yes, another one) from Iowa, presidential candidate Rudolph Giuliani responded to a fairly open-ended question about fiscal policy strategies by calling for a reduction in the corporate tax rate, which (it turns out) would actually bring in MORE money, not less:

Right now we should reduce the corporate tax. We should reduce it from 35 percent to 25 percent. It would be a major boost in revenues for the government.

In other words, a tax hike. He's almost certainly wrong, of course: there is no credible evidence that corporate tax rate cuts would pay for themselves, let alone providing a "major boost" to tax revenues. But it would have been fun to hear a follow-up question about whether Giuliani really believed what he'd just said-- and, if so, whether the other candidates on the stage would find such a tax hike acceptable.

Clinton And the AMT: WSJ Half-Truths Get Even Less Truthier

2007-12-13T12:22:00.000-05:00

The Wall Street Journal's editorial board this week, in its discussion of how to reform the individual Alternative Minimum Tax (AMT), asks itself the bold question: if we start out by telling a half-truth and make it even more misleading, what do we end up?

The answer: an outright lie.

We've noted before that the WSJ guys enjoy blurring the truth about the AMT's history. But they now clearly think "blurring" is not enough.
RE the apparently all-important question of who should be blamed for the impending AMT mess, here's what they say in a December 10 editorial:

The AMT was never supposed to hit the middle class, and it only does so now because the Democrats who designed it failed to index it for inflation and raised AMT rates under Bill Clinton in 1993.

This is laughably wrong for two reasons, in descending order of importance:
1) The Clinton AMT changes of 1993 actually reduced the growth of AMT liability.
2) Failure to index the AMT for inflation is a bipartisan failure, equally attributable to the folks who run Congress now (Dems) and the folks who ran it for most of the last two decades (Republicans). To pin this excusively (or even primarily) on Democrats is both pointless and wrong.

Thing #2 is pretty clear, and is too obviously politically motivated to spend much time with. Thing #1 is worth explaining a bit. Here goes:

The idea of the AMT is simple: we've got a regular income tax that has a top tax rate of 35 percent (now) and a ton of loopholes. Now, if Congress could repeal all the loopholes, the rates could be lower. But they have never been able to agree on eliminating the loopholes, so instead they created a backstop tax, the AMT, that doesn't have as many loopholes and has a much lower rate. So upper-income Americans either pay higher tax rates applied to a narrower base, or lower tax rates applied to a broader base, whichever is higher.

The thing to take away from this is that the regular tax and the AMT act in concert. If you want to keep the two working together, changes in the regular income tax need to be accompanied by changes in the AMT.

Now the big tax bill in 1993 did three things that affected the AMT.
1) it increased the top regular income tax rates.
2) it increased the AMT tax rates, to keep pace with the regular rates.
3) it increased the AMT exemptions, to help keep middle-income families out of the tax.

Of course, the WSJ conveniently omits things #1 and #3 in this list, and just says Clinton hiked the AMT rate. Which makes it sound like Clinton hiked the AMT.

But, as the Tax Policy Center has demonstrated, when you look (sensibly) at the net impact of all the 1993 tax changes in the AMT, what you see is that the Clinton changes actually reduced the growth of the AMT.

The TPC report also notes that, aside from inflation, the biggest factor contributing to the AMT explosion is the Bush tax cuts.

And this makes all the sense in the world. If the regular tax and the AMT are working in concert, and you cut the regular tax rates without cutting the AMT rates, OF COURSE you're gonna push more people into the AMT. That's just the way it works. But the Bush people did it, and they did it knowingly.

So let's recap: there's two kinds of policy changes that people are talking about that affect the AMT. One has to do with inaction (the lack of indexing) and the other has to do with actions (the Clinton 1993 tax changes and the 2001 Bush tax cuts).

The WSJ correctly notes that inaction is part of the problem, so kudos to them for that. All they're doing wrong on this front is saying that it's all the Democrats' fault.

But on the "action" side, the WSJ is completely ignoring one thing that obviously, glaringly, undeniably pushes more people into the AMT (that is, the 2001 Bush tax cuts), and is dishonestly mischaracterizing the other thing (the 1993 Clinton tax changes) in a (wrong) effort to say that it's all the Democrats' fault.

Politically motivated newspaper people must, I magine, face a constant struggle between telling their readers things that are true and telling them things that will help score political points. There's often a tension between these goals. The WSJ editorial board's party line on the "Clinton AMT" may ultimately help achieve their "scoring political points" goal, if only by making people more confused about taxes. And I'm sure they'll be happy about that.

But it also subtracts from the sum total of human knowledge. Not something you can often say about a newspaper article-- that you are dumber or less-well-informed after reading it than you were before you read it. But that's exactly what the WSJ has achieved with their latest Clinton-AMT screed.

Mike Huckabee's Tax Record

2007-12-05T17:16:00.000-05:00

An interesting subtext in the battle between Republican presidential hopefuls has been the state tax record of the major candidates. Mitt Romney and Mike Huckabee each have track records you can look at from their time as governors, and Rudy Giuliani ran the city of New York, which has a budget rivalling some states. And each of these three have drawn some flak from the others (most of it B.S.) for being "tax hikers" during the debates so far. But the developing story around Huckabee's record is by far the most interesting (and infuriating).

Critics of Huckabee are now painting him as a tax-and-spender because he signed into law (and expressed approval for) state tax increases during his tenure as governor of Arkansas. This is, on its face, pretty aggravating, because Huckabee had some pretty valid reasons for supporting tax hikes. In 2003, when the state legislature voted to temporarily increase the income tax and permanently increase the sales tax, Arkansas had essentially been told by the state's highest court that it was violating basic constitutional guarantees by not adequately funding K-12 education-- and that they had to fix this problem by coming up with more money for education.

Anyway, there are extenuating circumstances here, so it's quite simplistic to chastise Huckabee for being willing to consider tax hikes at a time when the state was basically flouting its own constitution.

In fact, as George Stephanopoulos noted in an interview with Huckabee on the morning talk shows this past Sunday, even if anti-taxers are correct in citing a basic disjunction between what Huckabee did as governor and what he says he'd do as president, they've actually got the problem backwards. The real question is not why he spent like a drunken sailor as governor and is holding the line on spending as a presidential candidate; the real question is why a guy who comes off, overall, as pretty reasonable on fiscal policy issues as a governor is willing to assert "no new taxes" today.

Here's the exchange from This Morning:
.....................................................
GEORGE STEPHANOPOULOS: Let me move to your record on taxes in Arkansas, which is also coming under a lot of scrutiny and great criticism from this group called the Club for Growth, which is now starting to run ads in Iowa about your record. Here's part of it.
(Plays clip of Huckabee) "There's a lot of support for a tax at the wholesale level for tobacco, and that's fine with me. I will very happily sign that. Others have suggested a surcharge on the income tax. That's acceptable. I'm fine with that." (End clip)
STEPHANOPOULOS: And the tax burden in Arkansas did go up during your tenure from about $1,900 per person to $2,900 per person over 10 years and also an overall increase of about $500 million. So how do you plead to the charge of raising taxes?
MIKE HUCKABEE: Well, first of all, I plead to the charge of cutting taxes 94 times. I also recognize that the income tax was the same when I left office as it was when I started. The overall tax burden, according to the US Department of Commerce, state and local taxes in my state in the nearly 11 years I was governor went up by 1.1%....[T]hat was a put up or shut up moment as I spoke to the legislature. If you play that whole speech, what you would see is that the context was we were days away from a budget shutdown that would have closed the government in Arkansas. We had had an impasse on the budget.
I was taking various positions of here's how we can fix this budget crisis, and every time I said this might work, there would be a press conference by some of the Democrat legislators who were saying, well, if that's what the governor wants, we're against it. So what I did was go to the legislature and I said, okay, you don't like any of my plans, fine, let's come up with yours and I started listing what some of theirs were. And the context of that speech was you want a surcharge, you want a sales tax, okay, but we've got to have a budget, people. We've got to come up with a way to keep state government working. We've got people in nursing homes. We have schools to run. We have roads to take care of. And we can't afford a complete meltdown of the government.
STEPHANOPOULOS: But if that's the right...
HUCKABEE: So if you don't like my ideas, let's get yours out there.
STEPHANOPOULOS: If that's the right thing to do as governor when you're facing a crisis, why wouldn't it be the right thing to do as president? Now in this presidential campaign you've signed a pledge saying you wouldn't raise taxes under any circumstances.
HUCKABEE: Because I don't think the federal government needs more money. If you look at the spending issues that we have, it's pretty evident to me that we need some policy changes more than we need some tax changes at the federal level. So it's a different thing when you're running a state government and you have to balance your budget, you have to make sure that you're living within the means, and the second thing is, you're constantly barraged by federal programs pushed down your throat. That's why nearly every one of the governors, 43 governors, I believe, maybe 48 face serious budget shortfalls in '01/'02 because of the combination of the recession, federal mandates that were unfunded, as well as the impact and effects of 2000 - of 9/11.
.........................................

In other words, Huckabee is saying it's OK to take irresponsible fiscal policy positions as a presidential candidate because, as we all know, federal policymakers don't have to live within their means.

Stephanopoulos goes a bit overboard here by criticizing Huckabee's allowing the per-capita tax load to increase during his watch-- after all, when per capita income goes up, per capita taxes will go up too, even if you don't change the tax system at all-- but on the narrow question of consistency, George has it exactly right: if there's mud to be slung at Huckabee for taking irresponsible fiscal policy positions, it's not what he said then, it's what he's saying now. No one who's willing to take a "no tax" pledge-- especially at a time of large, persistent budget deficits-- has any business running our country.

Florida: Rubio on User Fees

2007-12-04T20:10:00.000-05:00

Today's excellent Daytona News-Journal editorial on the likely user fee explosion that would result from passing the Florida legislature's January property tax ballot measure includes an interesting rationalization from Florida House Speaker Marcio Rubio. Here's Rubio explaining why it would be OK if local governments made up for unaffordable property tax cuts by hiking a variety of user fees:

The West Miami Republican told the South Florida Sun-Sentinel newspaper that such fees are fair. "Fees are clear; they're not hidden," he said. "If you don't like that city and county officials are raising them, you can vote them out of office on Election Day."

But exactly the same thing can be said of local property taxes. And in fact, the transparency and accountability of property taxes is what makes so many advocates of local control very protective about this revenue source.

This isn't to say, of course, that Florida's property taxes are currently all that transparent--they're not. They're unfair and unpredictable, imposing unjustifiable tax penalties on first-time homebuyers and rewarding people for nothing more exceptional than staying in the same home for a long time. But these flaws can be remedied quite easily if lawmakers are willing to renounce the "Save Our Homes" tax break that makes it all go wrong.

Moreover, user fees are actually fairly sneaky, in the same way that the sales tax is sneaky: it nickel-and-dimes you in a way that makes it hard to gauge the overall annual impact on your pocket book. In other words, you can make a pretty good case that user fees are actually less transparent than the property taxes Rubio wants to get rid of.

Florida Panel: Tax Services. Really.

2007-12-01T15:14:00.000-05:00

The Florida Taxation and Budget Reform Commission, which meets once a generation (true) to recommend structural changes to Florida's tax system, has come up with a good one: expanding the sales tax base to include more services.

This very sensible idea has an unfortunate history of inducing groans wherever it's brought up; just ask lawmakers right now in Maryland or Michigan.

But that doesn't mean it's a bad idea: it's not. It just means that implementing a sales tax on services would require taking unwarranted tax breaks away from very specific groups who would like to keep them, thank you very much, and who tend to have lobbyists on call 24-7 ready to defend these tax breaks. And that's a tall order.

Florida lawmakers probably know this better than anyone, since they were among the first (and only) states to pass (and quickly repeal) something approaching a comprehensive sales tax on services, back in the late 1980s. But at least one member of the commission who remembers those days, Martha Barnett, thinks the bitter experience from the last go-round should be used to help push through this always-good idea now. The problem last time, she thinks, was that lawmakers rushed the process:

"We tried to do too much too fast with too little information," she said.

Lawmakers in Maryland and Michigan would probably nod their heads in agreement on that one, as well.

It's easy, of course, for an unelected body such as the Commission to propose something as politically volatile as a services tax. And if lawmakers act on the Commission's recommendation, they can count on a lot of political opposition.

But it's still the right thing to do. Check out Fair Tax Florida's policy brief on taxing services for more information.

Maryland Car Washes Live to See Another Day

2007-11-20T21:03:00.001-05:00

As Maryland lawmakers pack up after completing a month-long special session on tax reform, dozens of Maryland lobbying groups are thanking their lucky stars they didn't get dinged.

Typical is the reaction of the Mid-Atlantic Carwash Association, which isn't happy that sales and cigarette tax rate hikes got enacted, but is delighted that the sales tax will still not apply to carwashes:

“All in all, I think we have to feel relieved,” said David DuGoff, president of the MCA. “Even though we will get stung by the increases, we can live with them, especially compared to the devastating effect of a sales tax on carwashing.”

Every industry goes on record arguing that taxing them would be devastating, of course. But one hopes these guys (and MD lawmakers, to say nothing of the public) can see the big picture. The victory of the car washers, and of the health clubs and the various other businesses that still won't have to collect sales tax because Maryland lawmakers chickened out from doing the right thing, comes at the direct expense of... every other individual and business in the state who currently pays sales tax, and who will now pay sales tax at a higher rate.

And every occasion on which the carwashers win their lobbying battle, marginally increases the likelihood that the rest of us will face a higher sales tax rate (or income tax rate) further down the road. Tax breaks are never free-- everyone else has to pay for them.

It's that simple.