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CTJ's Tax Justice Digest, January 18, 2008

Welcome to CTJ's Tax Justice Digest, our regular survey of new and interesting trends in state and federal tax policy. Click here to browse through archived editions of the Digest.


Who's Rich? New CTJ Paper Analyzes Presidential Candidates' Definitions of "Rich"
Several Presidential candidates have proposed allowing the Bush tax cuts to expire for wealthy Americans. For Senators Hillary Clinton and Barack Obama, "wealthy" means those with income above $250,000, while for former Senator John Edwards, this means those who make more than $200,000. John Edwards thinks people with incomes higher than $200,000 should pay more in Social Security payroll taxes, while Mitt Romney thinks that people with incomes below $200,000 need a new tax break for investments.
There seems to be a perception that people with incomes below $200,000 or $250,000, depending on who you talk to, are "middle-class" people who deserve every tax break they have ever received.
A new paper from Citizens for Tax Justice finds that in 2008, only 3.2 percent of taxpayers nationwide will have adjusted gross income (AGI) greater than $200,000 and only 2.1 percent will have AGI over $250,000. The paper also shows how many taxpayers have incomes higher than these levels in each state.
It further explores how people are often even more confused when the discussion revolves around the "richest one percent," partly because about a fifth of the public seems to believe they're in the top one percent.

Congress and the White House Eyeing Stimulus Package 

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 will announce today the broad principles of a stimulus plan, which will likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the 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 could not possibly do anything to counteract a recession taking place today. What's more, the resulting increase in the budget deficit would 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." Democratic House Speaker Nancy Pelosi, Ways and Means Chairman Charles Rangel and several other Democratic leaders have echoed these three principles.
The Democratic and Republican House leadership met on Wednesday to discuss the possibility of a bipartisan effort to enact a stimulus package. No deal was reached, but both sides have suggested they could work together to pass legislation quickly. Some House Republicans have indicated that they might offer amendments that would extend the Bush tax cuts but that they will not make their support for a stimulus package conditional on passing such an amendment. Meanwhile, Rangel has said that he is open to including some business tax breaks, even though he may not agree with them, in order to get a bill passed.

However, some dark clouds appeared to form over the discourse on the stimulus package on Friday morning. It was reported that the White House was considering $800 rebates for income tax payers in the 15 percent bracket. Taxpayers in the 10 percent bracket would get only part of the benefit the President is proposing, and those not even in the 10 percent bracket would get nothing.
Meanwhile, the top three Democratic presidential candidates all have their own stimulus plans, although it's not entirely clear how influential they will be on the issue.
Stimulus Must Go Towards Those Who Need It -- Or Else Congress Shouldn't Even Bother
A recent paper from the Center on Budget and Policy Priorities explains that stimulus legislation must be "temporary, timely and targeted." Tax breaks or spending should be temporary because if they are permanent, they could actually harm the economy, particularly if they result in ongoing increases in the federal budget deficit. The point is to stimulate demand and utilize excess productive capacity in the economy, but this is not needed after demand picks up again and the recession ends.
The stimulus should also be timely. 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.

Any stimulus also must be targeted to those who are likely to spend whatever money is given to them. 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 naturally want as many voters and contributors as possible to get benefits.

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 earlier this month, 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.
The Congressional Budget Office issued a paper on Wednesday that also argued that any stimulus should be timely and targeted to those most likely to spend any money given to them. It cites some studies suggesting that people would spend the majority of a rebate check, especially those with low incomes. Other types of stimulus -- particularly tax breaks for business -- are argued by the CBO to be unlikely to provide any immediate boost to the economy. Tax breaks for investment, for example, are not immediately effective because business investment usually requires a lot of lead time. Lowering the corporate tax rate might actually encourage corporations to delay investment since their deductions will be larger when rates go back up. Several Republicans have mentioned accelerated depreciation, but the CBO finds that the same measure in 2002 and 2003 had a small effect on output compared to other possible measures.
Giuliani and McCain Release Tax Plans
Former New York mayor Rudy Giuliani proposed new tax cuts last week 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 its 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.

Senator John McCain of Arizona released his tax plan on Thursday. McCain would also lower the corporate tax rate to 25 percent.

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.

McCain would create a permanent credit for research and development. CTJ has criticized the current research credit which, we've noted, has a peculiar following among lawmakers who usually argue that the free market works without government interference. McCain also proposes first-year deduction or "expensing" of "equipment and technology investments." Accelerated depreciation and expensing have in the past been a cause of tax sheltering and distortions in the economy. They can result in certain investments becoming more profitable after-tax than before-tax.

State of the States Roundup

News of the shaky fiscal situation in the states is making headlines. Legislators across the country are contending with slower than expected revenue growth and a weakening economy. In fact, the Center on Budget and Policy Priorities published a report Tuesday showing that at least twenty-one states are facing budget shortfalls. These bleak and uncertain economic times mean that some state officials are toning down the tax cut rhetoric and fiscal belts are tightening. How are governors responding? Here's a quick roundup of State of the State speeches given recently:


In his State of the State address earlier this month, California Governor Arnold Schwarzenegger outlined his plans for closing the state's $14.5 billion budget gap. As the California Budget Project's summary shows, his plans consist principally of slashing spending on a wide array of public services.  Indeed, the Governor maintains that his budget plans would address the shortfall without raising taxes, an approach that has rightly been criticized by numerous observers, including the state's independent Legislative Analyst, Elizabeth Hill.


Georgia Governor Sonny Purdue is singing the same old tired song in this year's State of the State address. In this year's rendition he proposed eliminating the state portion of property taxes levied and removing the tax on retirement and investment income for seniors. Georgia already has a large exemption for retirement income on the books and the state portion of property taxes levied is so small that Georgians would likely see an average tax cut of $30. On a positive note, the Governor didn't endorse House Speaker Richardson's plan to eliminate the portion of property taxes levied to fund schools -- a step in a dangerous direction that Richardson says will eventually lead to the elimination of all property taxes.

Idaho Governor Butch Otter's State of the State included one good tax policy idea, but failed to provide additional information on one terrible idea that the Governor has championed in the past.  In his January 7 speech, the Governor once again proposed improvements to the state's innovative "grocery tax" credit, which seeks to offset some of the impact of the sales tax on food purchases, but suffers from a serious flaw: the poorest taxpayers in the state are unable to receive it.  He neglected, however, to discuss his proposal to follow the disastrous lead of Florida and other states and limit the growth of a house's value for property tax purposes until it is sold.  Such limitations allegedly help state residents afford to the pay the property taxes on their homes, but, as the experience in Florida has shown, they end up leading to enormous inequities within the property tax, not to mention constraining the revenue needed to provide public services.


Governor Chet Culver's Condition of the State address was a shot in the arm to advocates for fair business taxation. In his speech the Governor unveiled his plan for combined reporting of corporate income for tax purposes. He said, "It's just not fair that big, out of state, multi-billion dollar corporations that do tens of millions of dollars of business in Iowa avoid paying Iowa income taxes because of an outdated tax loophole." Read the Iowa Fiscal Partnership's release on the importance of closing this costly loophole. Another proposal included in Culver's speech was a 2-cent tax on the purchase of bottles and cans. Part of this increased revenue would go towards enhancing environmental programs.


Kentucky residents are bracing themselves for a fiscal crisis but newly elected Governor Steve Beshear's State of the Commonwealth speech offered little more than spending cuts and grim predictions for how to handle the quandary. One of the reasons cited for the budget shortfall was "weaker-than-expected corporate income tax returns." Oddly, in his speech the Governor chose to ignore revenue raising options that would help to ensure Kentucky's fiscal solvency into the future.


Governor Dave Heineman delivered his State of the State address on Tuesday and lamented that, despite the tax cuts in recent years, Nebraska "taxes are still too high." He went on to say that, "Tax relief must continue to be a priority for our state" and promised additional property tax relief to the tune of $75 million. But this is hardly a done deal. Some high ranking legislators wonder if the state can really afford this expenditure given increasing costs and a potential recession.

New Jersey

New Jersey Governor Jon Corzine has put forward an ambitious proposal of his own to help reduce the state's debt burden and to make needed public infrastructure investments.  He has called for a 50 percent increase in tolls on the Garden State Parkway and other major roads every four years. Corzine also wants to create a new entity that would manage those roads and that would have the authority to issue as much as $38 billion in bonds backed by the revenue generated by such toll increases.  While higher tolls may be a necessary component of any long term budget plan in the Garden State, New Jersey Policy Perspective's Jon Shure points out that they ought to be considered with an eye towards improving the overall fairness of state fiscal policy.





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