CTJ's Tax Justice Digest, June 23, 2006

House of Representatives Approves Proposal to Gut the Estate Tax

The House of Representatives approved a bill Thursday slashing the federal estate tax by over $60 billion a year. Touted by Ways and Mean Chairman Bill Thomas as a "compromise" between conservatives who want to fully and permantly repeal the tax and those concerned about the fiscal implications, the proposal would cost 75 percent as much as full repeal according to figures from the Joint Committee on Taxation. The House had earlier approved legislation to permanently repeal the estate tax but Republican leaders in the Senate failed on June 8 to garner the 60 votes necessary to consider that bill. State factsheets released by CTJ earlier this month showed that only those inheriting the very largest estates (less than one percent of estates) can possibly benefit from this costly proposal.

Similar to a "compromise" bill sponsored by Jon Kyl (R-AZ) in the Senate, Thomas's bill would exempt estates valued at $5 million for each spouse (the current exemption is $2 million for each spouse) and lower the rate to 15 percent for the value of an estate under $25 million. Any value above that amount would be taxed at 30 percent. The exemption would also be indexed to inflation under Thomas's bill.

Estate Tax Legislation May Revive Loophole for Timber Companies As A Sweetener

In related news, the Senate will apparently take up one of the institution's time-honored traditions while it considers the House's estate tax bill: pork-barrel politics. Senate Majority Leader Bill Frist said that “I will encourage them to attach appropriate provisions to make it attractive, and will hold a vote by July Fourth.” The Senate failed to vote on June 8 to consider full repeal by only 3 votes and Frist clearly hopes to win over some Senators with promises unrelated to the estate tax. Thomas obligingly inserted one such sweetener in the House version that is apparently meant to sway Democratic Senators Patty Murray and Maria Cantwell from Washington State. The provision would give $940 billion to timber companies over two years and, as argued by a recent CTJ analysis, amounts to a revival of a harmful loophole that was closed in the 1986 Tax Reform Act under President Reagan.

Despite Massive Tax Give-Aways to Wealthy, Congressional Leaders Want Budget Rules to Slash Spending

The House of Representatives yesterday approved legislation giving the President a scaled back version of the line-item veto authority that was found unconstitutional in 1998. One of the strangest components of this debate concerns how the line-item veto should affect tax breaks. The White House proposed that while any annually funded programs or any expansions of entitlement programs would be vulnerable to the line-item veto, it could be used to strip tax breaks only if they benefit fewer than 100 people. Even that strict limit had a loophole; the tax break would be protected if it applied to people in the same industry or owning the same type of property.

Remarkably, the House wants even fewer tax breaks to be vulnerable. Under its bill the President could only strip a tax break provision that benefits a single individual or company -- and the chairmen of the tax-writing committees in the House and Senate could decide unilaterally that such a provision is not a "targeted tax benefit" and therefore not open to the line-item veto. It seems unlikely that these chairmen would identify their own provisions as pork that needs to be cut back by the President. In the Senate Budget Committee, Chairman Judd Gregg (R-NH) wanted his line-item veto bill to at least appear more balanced. Under his proposal any tax break can in theory be targeted with the line-item veto, but even his bill would require that the provisions be defined as “targeted tax benefits” by the Joint Congressional Committee on Taxation before they could be stripped. The Joint Committee's director is appointed by the chairmen of the tax-writing committees and Gregg explicitly stated that the director would be keep that in mind.

Good Ideas and Bad Ideas for State Budget Surpluses

Several states are debating ways to spend budget surpluses. Arkansas Governor Mike Huckabee has "tax reformation" plans which include putting more money in a rainy day fund and rebating money to taxpayers in the form of a tax credit. In response to the surplus in Idaho, legislators are debating ways to shift the tax burden from property taxes to regressive sales taxes. North Carolina legislators are taking notice of the financial hit that mental health services took during the previous recession and both houses have passed budgets that would provide more funds for these services. Of course, if any of these states had a Colorado-style TABOR policy there wouldn't even be a question about how to spend state surpluses because TABOR takes these important budget decisions out of the hands of elected officials.

Property Tax Reform

For the first time in almost thirty years, Pennsylvania has passed major property-tax cuts. In an unusual display of election year bipartisanship, Democratic Governor Ed Rendell and the Republican-controlled legislature agreed on a series of measures designed to lower property taxes. There are two components to the legislation. First, the number of senior citizens eligible for property-tax rebate checks was nearly doubled. Second, most homeowners will have their property taxes reduced. Lawmakers are planning to pay for the tax cuts with revenue raised by casino gambling, which was recently legalized in Pennsylvania. Some state residents, however, might like to move in a more progressive direction and rely even less on property taxes and more on income taxes.

Things have not worked out so smoothly for property tax reform in Washington State. A Superior Court Judge has ruled Initiative 747 unconstitutional. The 2001 voter-approved initiative capped increases in state and local property taxes at 1 percent. Governor Christine Gregoire has said that if this ruling survives an appeal she will support some type of property tax reform. Early indications are that the Governor and legislators are specifically interested in reform that would benefit the elderly and low-income families.

New York: Holding Corporations Accountable

Counties in New York, as in many states, often provide tax-breaks to businesses through Industrial Development Agencies (IDAs). The IDAs were originally created to stop companies from relocating to states with lower wages and benefits. However, a recent study by the New York Comptroller’s office has found that companies receiving tax incentives rarely create the promised number of jobs. In fact, two-thirds of all companies show either stagnant or declining employment numbers. The Comptroller’s report has received wide media attention and it seems likely that some reforms will be forthcoming.

A More Refined Policy on Energy?

Will building more oil refineries in the United States help to combat rising gas prices? In recent weeks, both Oklahoma and Kansas passed legislation that streamlines the permit process and provides financial incentives for new oil refineries. None have been built in the United States since the 1970s, but with the high demand for oil and the volatility of the southern climate as hurricane season once again approaches, the legislatures are hoping these new incentives entice big oil to move a little further north.

Missed a past issue of the Digest? Click here to read past versions.

To report broken links or share comments, email us

CTJ Home Page