CTJ's Tax Justice Digest, July 28, 2006

Maneuvering to Gut the Estate Tax Continues

Senate Republican Leader Bill Frist this week attempted yet another tactic to get the Senate to pass legislation cutting the estate tax. The Senate legislation could be close to the "compromise" that the House passed after the Senate failed to fully repeal the estate tax. This "compromise" would cost $60 billion a year, or at least 76 percent of full repeal. Senator Frist had signaled in the last couple weeks a desire to attach the estate tax legislation to the pension bill currently being worked out by House and Senate conferees. The conferees, however, resisted any move that would threaten their painstakingly negotiated deals.

Frist's latest maneuver involves a package of extensions for corporate tax breaks that enjoy bipartisan support, including the research and development credit and the state sales tax deduction. Even though these tax breaks have questionable value, it is thought that their popularity can help any bill they are attached to win more votes. The package had been included in the pension legislation but now Senator Frist is attempting to split it from the pension bill and attach it to the estate tax cut. However, the Republican pension bill conferees again are divided and have yet to approve Frist's plan. As of this writing, there is talk that a minimum wage increase could even be added to the estate tax. With the House leaving for its five-week recess after Friday and the Senate left with only one week before its own recess begins, Republicans are feeling pressure to resolve the stand-off and boost their list of legislative accomplishments before going home.

Pension Bill Still Includes Regressive Tax Breaks Disguised as Savings Incentives

Even if Senator Frist does manage to pry the package of corporate tax breaks from the pension bill, other language concerning contributions limits to 401(k) plans and individual retirement accounts (IRAs) will still be in the pension bill. These limits were increased in the tax break legislation enacted back in 2001 and would be made permanent without being paid for. Increasing the limits didn't make sense even back in 2001 when almost no one was making the maximum allowable contributions and those who were generally had high incomes and didn't need any incentive to save.

Is the Administration's Plan B on Estate Tax to Gut Enforcement?

The IRS has announced plans to cut 157 of its estate tax auditors, which is nearly half its current total of 345. Since these attorneys find thousands of dollars owed to the government for every hour they work, some find it odd that their jobs would be eliminated. The IRS says that legislative changes will make the estate tax less important and therefore fewer auditors are needed to focus on it. That seems like a questionable claim considering Senator Frist's current difficulties in passing an estate tax cut. The estate tax legislation enacted in 2001 gradually reduces the tax and eliminates it in 2010 but revives it almost fully in 2011. One veteran IRS estate tax lawyer told the New York Times that this move by the IRS is a "back-door way" for the administration to repeal the estate tax.

Treasury Reports that Tax Breaks Do Not Pay for Themselves

It's been over 25 years since conservative politicians began arguing that tax breaks actually pay for themselves and then some by boosting the economy. Even though this so-called "supply-side economics" had few supporters in mainstream academia, conservative politicians have shamelessly peddled this as fact ever since. That could change now because Bush's Treasury has issued a report projecting the change in the U.S. economy due to tax breaks will be very small and not necessarily positive. In the long-term (which is not defined but could be decades) the size of the U.S. economy is projected to grow by 0.7 percent if services are slashed enough to pay for the tax breaks or will shrink by 0.9 percent if taxes are increased to pay for shortfall. The service cuts considered by the report to be necessary to pay for the tax breaks would be even bigger than any cuts President Bush has proposed.

Bob McIntyre has pointed out that since the economy is projected to grow by 50 percent over the next thirty years, a difference of less than one percent is really no difference at all considering the uncertainties of such projections. The Treasury report used "dynamic analysis" which includes the projected effects of tax cuts on the economy. Some believed this method would lead to projections of economic gains great enough to cause a revenue surge that would offset the tax breaks. According to the Center on Budget and Policy Priorities, the sort of increase in the size of the economy that is projected under the best circumstances in this report would increase revenues somewhat — but would pay for less than ten percent of the cost of the tax breaks.

House Delays Bill to Help Corporations Escape State Taxes

In the face of opposition from the National Governors's Association and other groups, the House of Representatives delayed a vote on the Business Activity Tax Simplification Act (BATSA), which has the stated purpose of creating simpler and less burdensome rules to determine when a state government can tax the profits of an out-of-state company. While simplification sounds like a good idea, it's not what this bill does. BATSA actually makes it easier for large, multistate companies to avoid paying their fair share of taxes. The bill applies a "physical presence" test to determine whether or not a company selling a service from out-of-state can be taxed, but includes a variety of loopholes that will ensure that many companies' profits are not taxed at all. The Congressional Budget Office has found that by 2011 this bill, if enacted, would cost states $3 billion annually.

New Voice for Tax Reform in the Senate

Oregon Senator Ron Wyden is on a quest to reform federal income taxes. Senator Wyden is proposing a massive overhaul in line with the historic Tax Reform Act of 1986. Needless to say, the Senator has his work cut for him and many lobbyists and special interest groups will be ready at every turn.

Anti-Tax Initiatives Would Restrict Revenues and Government Services In Several States

Ballot issues are solidifying for November and as many as four states – Michigan, Maine, Nebraska, and Nevada – will vote on spending limits modeled after Colorado’s Taxpayer Bill of Rights (TABOR) constitutional amendment. Ironically, proponents are mounting a multi-state push just as Colorado decided to suspend their legislation for five years due to the degeneration of key public goods. While TABOR is poor policy that leads to the erosion of services ranging from education to infrastructure, it is a dividing issue that will be heavily debated in many areas of the country this fall.

Sales Tax Holidays: Boon or Boondoggle?

Thirteen states and the District of Columbia now hold sales tax holidays, which allow shoppers to save money by ignoring the sales tax on selected items, usually school supplies, food, and clothing. In many states these weekend or week-long holidays are scheduled to occur during the next few weeks. Lawmakers promote the holidays as a way to help the poorest residents pay for necessary items. Any sales tax cut will benefit low-income families, for whom these taxes are most burdensome. However, sales tax holidays are very poorly targeted: they provide tax breaks to all consumers, even the most wealthy. Also, the lost revenue from sales taxes can be expensive for the state. This year, Rhode Island had to abandon a proposed sales tax holiday when the state decided it could not afford to lose the revenue.

Many sales tax holiday advocates say the increased business that the holidays encourage makes them worthwhile. However, Dr. Bruce Domazlicky, director of the Center for Economic and Business Research, disputes the idea that the holidays increase sales. "What they're probably seeing is sales being shifted in time," he says. "If they're buying the same items, except that it's all in one weekend, then there's probably very little increase, if any." For more on sales tax holidays, click here.

More Complexity In State Tax Code — To Benefit the Wealthy

Republican lawmakers in Utah are proposing a new personal income tax system, or actually, two new personal income tax systems. Under the proposed plan, a taxpayer could elect to calculate their income tax using a marginal rate structure along with existing standard deduction and exemption amounts or simply apply a flat rate to a slightly modified version of their federal adjusted gross income. Needless to say this proposal would make Utah's personal income tax that much more complex but it would also benefit the state's wealthiest residents more than its poor and working class families.

The Wal-Mart Wars Continue

Across the country, state and local governments are trying to pressure Wal-Mart to be a better corporate citizen. In Maryland, the legislature passed a provision that required companies of a certain size to spend 8% of their profits on healthcare or pay the difference in taxes. A federal judge found the measure unconstitutional on the grounds that it forced Wal-Mart to operate differently in Maryland than it would in other states.

While this ruling is certainly a setback, several other localities have had success in pressuring Wal-Mart. In Chicago, the city council recently passed an ordinance that requires big-box retailers to pay a living wage and provide healthcare for their workers. A similar law was passed by San Francisco and then legally challenged by Wal-Mart. The California Supreme Court found that the ordinance was constitutional.

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