CTJ's Tax Justice Digest, July 21, 2006

How Big Is The Deficit -- Really?

While many in the press noted the audacity of the Bush Administration's celebrating a projected deficit of "only" $296 billion for fiscal 2006, few have picked up on the fact that even that number is a result of manipulating the budget figures in order to paint a rosier picture. A new fact sheet from CTJ explains that the Bush Administration is essentially borrowing $174 billion from the Social Security trust funds, which are designed to build up surpluses that will be needed to pay benefits when all the Baby Boomers retire. Not counting money from the trust funds, the federal budget deficit in 2006 will actually be $470 billion.

OMB Watch Report Finds IRS Threatening Rights of 501(c)(3) Organizations

A report issued by OMB Watch finds that the IRS has overreached in attempting to enforce laws designed to keep tax-exempt non-profits from engaging in partisan activities. According to the report, no violation was found in 64 percent of the investigations of 501(c)(3) organizations carried out in 2004. OMB Watch argues that clearer rules are needed to determine what non-profit activities are allowable to ensure that non-profits do not feel pressured by the IRS to give up their constitutional right to comment on candidates' policy positions.

Congress Poised to Extend Special Tax Advantages to Wealthy Families In Guise of “Savings Incentives” -- and Maybe Gut the Estate Tax While They're At It

Conferees from the U.S. House and Senate are said to be close to agreement on a pension bill that could make permanent so-called “savings incentives” benefitting higher-income families who need the least help in trying to save. The legislation, which could go to the floor of the House and Senate for final approval next week, has received attention mostly because of its provisions dealing with traditional pensions. What has been less noted is that the version of the bill passed by the House in December makes permanent provisions of the 2001 tax break legislation that raised the contribution limits for Individual Retirement Accounts (IRAs) and 401(k) plans. The problem is that almost no one was making the maximum allowable contributions to these savings vehicles even before the limits were increased. The small percentage of people who are affected by the limits are mostly upper-income people — meaning that this provision is generally a subsidy for wealthy families’ retirement savings.

One detail left unclear is the fate of several tax "extenders" or extensions of tax breaks that House and Senate leaders had wanted to include in the legislation. These might include, for example, one-year extentions of research and development tax credits and deductions for education and state and local sales taxes.

And Maybe Congress Will Gut the Estate Tax While They're At It

Senate Majority Leader Bill Frist (R-TN) has complicated matters by stating that he would like to amend the pension bill to include estate tax legislation which will cost $60 billion a year and provide a boon to people who inherit multi-million dollar estates. After the Senate failed by three votes in June to fully repeal the estate tax, the House passed this "compromise" (which costs three fourths as much as full repeal of the estate tax). House and Senate conferees are apparently in no mood to further complicate the process and have expressed a desire to keep estate tax legislation away from it.

Ohio Proposes Tax Break for Wealthy

The Ohio legislature is now debating a bill to cut the state capital gains tax from 6.555% to 3% by 2009. A new study by ITEP co-released by the Center for Community Solutions and Policy Matters Ohio shows that the proposed tax cut would benefit only a tiny fraction of Ohio’s wealthiest population, while costing $573 over the first three years. The study shows that the poorest 40% of Ohio’s population would receive nothing under the cut. The middle 20% would receive an average of $1 over three years. The top 1% of Ohio’s population, however, with an average income of $812,000 in 2007, would receive an average of $7,164.

The GOP in Ohio has championed this bill as a way to boost Ohio’s economy, but the Akron Beacon Journal isn’t convinced. Capital gains are profits made from the selling of investments, typically stocks and bonds. It is likely that most of the money saved under lower capital gains taxes would simply be reinvested in the stock market, instead of benefitting Ohio’s economy. In addition, the lower state capital gains tax means that the federal tax deduction taken by investors in Ohio for state taxes will also be lower, so much of the “saved” money will simply be sent to Washington in the form of higher federal taxes ($97 million of the tax break will go to Washington in the first three years alone). The vast majority of taxpayers would receive little or nothing under this tax cut. This bill is a blatant attempt to help the richest one percent of Ohioans at the expense of everyone else.

Trying to Export State Tax Burdens -- And Failing

How far would you go to avoid paying rental car taxes? An article by David Cay Johnston of the New York Times looks at a study conducted by researchers at the Brookings Institution and Urban Institute for Enterprise Rent-A-Car. The article points out two interesting findings: 1) people will go out of their way to avoid paying rental car taxes if they can and 2) rental car taxes are not exported to out-of-state residents as much as is perceived. Lawmakers should be aware that when they're looking for innocuous taxes in order avoid public ire, rental care taxes may not be the answer.

"Ghetto Tax"

A recent report by the Brookings Institute found that individuals from low-income neighborhoods pay a higher price for basic goods and services than residents of other neighborhoods. A combination of factors, including predatory financial practices and lack of basic services, causes this phenomenon. The report makes a number of recommendations about how state and local governments can reduce this so-called "ghetto tax" on the working-poor.

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