CTJ's Tax Justice Digest, September 28, 2006

Congress Appears Headed for Recess without Passing Tax Breaks, Further Intensifying Partisan Divide

With the fall recess quickly approaching, it appears that Congress will not pass any tax cuts before leaving to hit the campaign trail. The "trifecta" bill that combined a minimum wage change and a massive cut in the estate tax with a package of smaller tax cut extensions (or "extenders," as they're known on Capitol Hill) is no longer being discussed during this session. The trifecta bill may be revived during the "lame duck" session, which occurs after the November election but before the new Congress is sworn in.

The unfinished business has only increased tensions on the Hill, where both parties have now accused each other of wanting to raise taxes. Speaking for the Republicans, President Bush alleged publicly that if Democrats are elected to the majority in either chamber they will attempt to raise taxes. This statement seemed to be in response to House Ways and Means ranking member Charlie Rangel (D-NY) who had earlier told reporters that all of the Bush tax cuts should be examined. Rangel later clarified his comments and told BNA that if he becomes the chair of the Ways and Means Committee he may allow some tax cuts to expire and his focus will be changing the Alternative Minimum Tax (AMT) so that it does not affect middle-income families. Democrats also responded that the Republicans' failure to pass the extenders, which are generally supported by both parties, will amount to a tax increase on business and the middle-class by the President's logic.

Tax Extenders: Popular But Not Necessarily Effective

The extenders that were made part of the "trifecta" bill would include a wide range of tax breaks affecting tuition and school fees, purchases of school supplies by teachers, research and development by business and the deduction for state sales taxes. Many of the extenders actually have questionable merit. For example, as reported back in October 2004 by Tennesseans for Fair Taxation and CTJ, the federal tax break that allows taxpayers who itemize to deduct state and local sales tax was initially passed in Congress as a political ploy and does little to offset the regressivity of sales taxes. While Congressional leaders in most states without an income tax are lobbying hard for the deduction's extension, policymakers and their constituents would be better off advocating for tax policies that benefit those with the least ability to pay.

House Ways and Means Committee Approves Expansion of Tax Shelters Disguised as Healthcare Provisions

On September 27 the House Ways and Means Committee approved H.R. 6134 to expand Health Savings Accounts (HSAs) in ways that will mainly help upper-income people who already have health insurance. HSAs, which were introduced as part of the Medicare prescription drug law in 2003, are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan. Critics of HSAs fear that they will cause wealthier, healthier people to leave traditional insurance plans which will then have more difficultly pooling health risks, resulting in less affordable healthcare for the people who need it the most. H.R. 6134 would make HSAs more attractive by increasing the contribution limits beyond the deductibles that HSAs are supposedly created to pay for, which can increase their use as tax shelters by the wealthy. The bill would also allow transfers of funds from flexible spending accounts and health reimbursement arrangements to HSAs. For more information, see the HSA update on CTJ's federal legislation page.

Correct Diagnosis, Wrong Cure

David Hahn, the Democratic candidate for governor of Nebraska, is promoting a package of property tax changes, including a $50,000 homestead exemption that could eventually grow to $100,000.  Hahn describes the bill as a way to make the Nebraska property tax system less unfair. Hahn should be congratulated for recognizing the unfairness of the property tax, but a budget-straining $100,000 exemption is a poor solution. Property tax cuts that are targeted at low and middle-income families will do much more to fix the iniquities of the property tax system than would the proposed $100,000 exemption, which would be given to middle class and wealthy taxpayers alike.  A better solution for Nebraska is a circuit-breaker.  For more information, see ITEP's policy brief on circuit-breakers. Meanwhile, Maine policymakers are finding that their "circuit breaker" property tax credit isn't going to many of the Mainers for whom it was designed-- because they're not applying for it.  

Social Policy through the Tax Code

The House Ways and Means Subcommittee on Select Revenue Measures held a hearing this week on members' tax proposals and many of these involved funding specific initiatives through the tax code. These initiatives ranged from reimbursing the cost of sending children to private schools to renovating and building homes and increasing the availability of alternative fuels. In tax policy lingo, specific tax breaks like these are called "tax expenditures." One problem with enacting social policy through the tax code is that it diverts Congress's and the public's attention from the costs and effects of the provisions. Congress can enact tax expenditures that cost billions in lost revenues much more easily than it could enact bills that spend the same amounts of money directly from the Treasury. Even if Congress did successfully enact these provisions as direct expenditures, they would be under pressure each year when the federal budget is debated.

Tax expenditures, on the other hand, are typically enacted as permanent provisions in the tax code and then forgotten about ­ - even though they continue to cost us hundreds of billions each year. As a result of this inattention, these special tax breaks can be far more costly, and inequitable, without causing a political backlash.

Wyoming: A Statewide Funding Solution for Community Colleges?

Wyoming community colleges are funded primarily by county property taxes. Right now, the seven counties containing community colleges levy a special property tax for this purpose, but most other Wyoming counties don't — even though these other counties benefit from the services the community colleges provide. An interim legislative committee is exploring a statewide property tax as an alternative to this inequitable state of affairs. The committee has identified an important tax fairness problem that residents of most major cities are all too aware of: when local governments provide services that benefit a broader geographical area, how can they ensure that other localities pay their fair share of the cost for these services? A statewide property tax seems like a good place to start.

Efforts to Stop Tax Evasion on the East Coast

Maine is missing $220 million. That's the amount of unpaid taxes statewide, according to Maine Revenue Services.  But there's hope: tax administrators in eight other northeastern states have come up with a creative solution for their own tax evasion problems: a multi-state effort to share information on tax filers.  

Extension of Gulf Coast Tax Incentives Requested Despite Questionable Benefits

Recently, Donald Powell, President Bush's chief of post-hurricane Gulf recovery, attended a church service commemorating the one-year anniversary of Hurricane Rita. While attending this event Powell recommended extending post-hurricane tax incentive packages. This recommendation is troubling to many given the growing federal deficit and inadequate proof that the incentives are encouraging economic development in the region. For more on these tax incentives visit this Brookings Institution study.

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