CTJ's Tax Justice Digest, August 10, 2006

Congress Vacations, Leaving Various Tax Issues Unresolved

As the House and Senate enjoy their August recess several tax issues are waiting until the fall to be resolved.

Estate Tax: In its final week in session, Senate Majority Leader Bill Frist (R-TN) failed to secure the 60 votes needed to pass his "trifecta" bill combining near-repeal of the estate tax with a package of tax break extensions and a change in minimum wage laws. This bill did not attract any more Senate votes than an earlier proposal to fully repeal the estate tax. Wealthy individuals and big business are reportedly joining forces in an all-out effort to pass this bill in September, so continued vigilance is in order.

Tax Extenders: The package of temporary tax break extensions, or "tax extenders" as they are often described, generally have bipartisan support despite doubts about some of the economic benefits. Extending these provisions is often an annual exercise, and usually is a given. If Senator Frist continues to insist on pairing them with the estate tax and minimum wage, their passage is in jeopardy.The largest is the research and experimentation tax credit, followed in size by provisions making business depreciation more generous for certain leasehold improvements, and deductibility for state sales taxes. The package also includes an extension of tax breaks for employers who hire disadvantaged low-income workers.

Budget Process: Another area of uncertainty concerns various proposals to change the federal budget process. The most sweeping changes have been proposed by Senate Budget Chairman Judd Gregg (R-NH) but Senator Frist has made clear that those will not be taken up this year. The legislative line-item veto, however, has already passed the House. It would give the President more power to pressure Congress to cut needed services while leaving regressive tax breaks in place. The Senate might take up this bill after it returns, which would be a source of great concern to the progressive community.

Sunset Commissions: Congress is also considering various types of unelected commissions, sometimes called sunset commissions, that would look for ways to change or eliminate programs. Decisions from the commissions either would take effect unless Congress acts to stop them or would be proposals that could be approved by Congress without the usual procedural requirements. One problem with these plans is that they are structured to result in massive cuts in services Americans depend on while doing nothing to reign in the huge tax breaks that have caused our fiscal crisis and which primarily benefit the wealthy.

Business Activity Tax: GOP leaders had planned to bring the Business Activity Tax Simplification Act (BATSA) to the floor of the House before the recess but delayed the vote in the face of fierce oppposition from the National Governors' Association and other groups who argued that the bill would cost states billions in lost revenues. Rather than simplifying state taxes for businesses, BATSA would actually create a more confusing framework for determining which states can tax a company's profits and would help many companies escape taxes altogether. It might be tempting to assume that even if BATSA passed the Hosue it would have more trouble in the Senate, but even there it does have some bipartisan support. The Senate version of BATSA was introduced in May by Charles Schumer (D-NY).

New Tax Reform Ideas for Southern States

The Center for the Better South in association with the Georgia Budget and Policy Institute recently released Doing Better: Progressive Tax Reform for the American South. This book provides easy to understand scorecards containing policy options for Southern States. The Clarion Ledger in Jackson, Mississippi recently wrote about the 11 tax reform ideas presented in the book.

Property Taxes: What to Do About Rising Home Values?

A New York Times article reports that for many homeowners, property taxes are growing much faster than income. New Jersey Governor Jon Corzine blames this trend on the property tax being "imposed without any regard to income or ability to pay." This isn't quite true, of course: a well-administered property tax will be based on a homeowner's actual home value, which is a decent, if imperfect, measure of ability to pay for most people. And for lower-income families, an income-sensitive circuit-breaker credit can make the property tax even more responsive to ability to pay considerations. Unfortunately, state lawmakers typically respond to rising property values by freezing or capping assessed values, which further warps the relationship between property taxes and ability to pay. A gubernatorial candidate in Alabama wants to put an end to a recently adopted reform requiring annual reassessment of properties, and at least one county in South Carolina has taken the step of throwing out the results of its most recent reassessment. The likely outcome of this misguided tax deform is a tax shift away from homes that are appreciating rapidly and toward homes whose values are stagnant or declining. Facing a localized home-value boom of its own, Mississippi policymakers are discussing imposing another, equally misguided approach: capping the allowable annual growth in homeowner property taxes. Find out more about why tax caps are counterproductive here.

State Economic Incentive Follies

Three months after the US Supreme Court's Cuno decision reaffirmed state lawmakers' ability to offer corporate tax incentives to their heart's delight, local governments around the nation are once again busily shelling out tax breaks to footloose corporations. Even in the best of times, governments usually can't be sure that they're getting their money's worth from these tax giveaways. But in North Carolina, the city of Holly Springs has figured out that they can't even afford to pay for the tax breaks they've promised drug manufacturer Novartis. Although city leaders remain confident that they'll figure out a way to cough up the cash, one wonders whether even Novartis will still think this was a good deal when the city is unable to keep its roads paved and its children educated as a result. (Thanks to our friends at the North Carolina Budget and Tax Center for the tip.)

An Old Regressive Stand-By: Cigarette Taxes

Cigarette taxes are very regressive, forcing low-income smokers to pay a much higher percentage of their income in taxes than high-income smokers. A 2002 ITEP study found that cigarette taxes are ten times more burdensome for low-income smokers than for the wealthy. But this doesn’t stop lawmakers from trying to find revenue this way.

This year, a ballot initiative in California would increase the price of cigarettes in that state by $2.60 a pack, bringing average pack prices to $6.50. In Missouri, an initiative to increase the cigarette tax by 80 cents failed to garner enough support to make the November ballot. And in Indiana, Governor Daniels vowed to introduce legislation in the next session to increase the state’s cigarette tax. All three proposals are to be commended for attempting to increase funding for health care. However, voters and legislatures in all three states would do well to increase tax revenues in a way that is both reliable and fair.

Can’t Get No (Tax) Relief?

The Rolling Stones are rock icons known for their energetic live performances and ability to pump up a crowd. Unfortunately, they also can now be known for their ability to dodge paying taxes. According to reports in the U.K. press, the Rolling Stones earned $860 million last year and paid just 1.6% in taxes. Their financial advisors reportedly use off-shore accounts based in the Dutch West Indies.

Perhaps even more distressing are reports that the band U2 is using similar tactics to avoid paying their fair share in taxes. Headed by anti-poverty crusader Bono, U2 has long been known for their involvement in social causes. It is both surprising and disappointing that they have chosen to duck their responsibility and avoid paying taxes.

In many ways, the offshore accounts used by both U2 and the Rolling Stones are similar to the tax evasion schemes recently exposed by a senate report commissioned by Sen. Carl Levin. The report found that a large number of corporate executives are using off-shore accounts to avoid paying taxes on their fortunes.

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