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CTJ's Tax Justice Digest, November 17, 2006

Welcome to CTJ's Tax Justice Digest, our regular survey of new and interesting trends in state and federal tax policy. Click here tobrowse through archived editions of the Digest.

  

 

Republican-Controlled Lame Duck Session May See Action on Tax "Extenders"

In what seems to be an endless saga, many members of Congress on both sides of the aisle are hoping to enact a package of tax break extensions commonly called "extenders" in the lame-duck session that began this week and ends sometime in December. The extenders generally have bipartisan support but, as a new paper from CTJ explains, there are doubts about their economic benefits. They include tax breaks for research and development by business, the deduction for state sales taxes, the deduction for college tuition and even tax subsidies for restaurants and many other things. Over the summer the tax extenders were made part of the "trifecta" bill, combining them with a change in the minimum wage and a measure nearly repealing the estate tax, but this bill failed to pass the Senate. Deliberation of the extenders has been pushed off until after Thanksgiving.

 

Incoming Democratic Congress May Face Difficult Choices on Taxes

Once Democrats take charge of the two chambers and the committees, they will have to decide how far to go in extending tax breaks that help the middle-class (as they often pledged to do during the campaigns) and also how to pay for them. Charlie Rangel (D-NY), who will become the chairman of the House Ways and Means Committee that will initiatiate tax policy, has talked of making permanent the research and development credit (which is currently part of the tax extenders that must be renewed every couple years), making college tuition permanently deductible and preventing the alternative minimum tax (AMT) from affecting middle-class families. The last point is one that would get wide agreement in principle but a conflict could easily erupt over how it should be paid for.

The AMT is basically a backstop to the federal income tax designed to ensure that wealthy people with deductions, credits, capital gains or other tax advantages are not able to avoid paying their fair share. Unless it is changed, the AMT will start affecting more middle-class and upper-middle-class people because the exemptions built into it are not indexed for inflation and because the Bush tax breaks generally lowered taxes without changing the AMT. The tax reconciliation bill Congress passed early this year included a "patch" for this problem, increasing the exemption levels through 2006 and extending a rule allowing taxpayers to use non-refundable personal credits to offset the AMT. Extending this patch for one year is estimated to cost $40 billion and providing a permanent fix could cost nearly $1 trillion over a decade.

 

Democrats' Pledge to Revive Real PAYGO Rules May Complicate Tax Agenda

Whereas the outgoing Republican leadership saw no problems with deficit-financed tax breaks, the new Democratic leadership has pledged to restore pay-as-you-go (PAYGO) rules, meaning any new entitlement spending and any new tax breaks (including changing the AMT) must be paid for. Democratic leaders have discussed ways to offset tax breaks by increasing compliance and closing corporate loopholes. Some compliance-related measures could include provisions of bipartisan bills introduced during this Congress to crack down on business owners who are evading paying Social Security and Medicare taxes on their earnings from partnerships and "Subchapter S" corporations. Legislation targeting loopholes will likely affect energy companies. As BNA reports:

"[Incoming House Speaker] Pelosi has proposed repealing at least $4 billion in tax breaks and new subsidies from the Energy Policy Act of 2005 and another $8.6 billion in tax loopholes for energy and large oil companies... One energy lobbyist told BNA Nov. 13 that it is unclear how the $4 billion figure was determined, given that the tax piece in the 2005 act amounts only to $2.8 billion for oil and gas, with only a small portion of that benefiting large integrated oil companies."

Several pieces of legislation currently have provisions that can be revived in the next Congress for this purpose, including measures reining in excessive write-offs for equipment purchases, a recently enacted tax break for U.S. manufacturers, and tax loopholes for energy companies. Lobbyists for oil companies are already getting ready for a fight even though these measures do not appear to raise massive amounts of revenue by themselves.

 

Georgia Republicans Propose Abolishing Income Tax

Republican leaders in the Georgia House of Representatives recently proposed the complete elimination of the state's income tax. This budget-busting, less-than-credible political maneuver will reportedly be paid for by eliminating special preferences in the sales tax base. This tax deform will be debated in the coming legislative session. Replacing a fair income tax with sales taxes would immediately make Georgia's tax system among the most regressive in the nation and is not a solution that anyone concerned about tax fairness or adequacy should endorse.

 

The Property Tax Cap Craze Collides with Reality in Texas

Texas State Republican Chairman Tom Pauken recently embarked on a tour of the state to spread the good news: Governor Rick Perry is going to save voters from high property taxes by lowering the state's property tax cap from ten percent to five percent a year. Governor Perry and Chairmon Pauken are putting quite a bit of effort into promoting the proposed lower tax cap, but not everyone is convinced. The House Committee on Local Government Ways & Means conducted a survey on the effects of lowering the cap, only to find that "Appraisal caps unfairly shift the property tax burden from the wealthiest of property owners to the less wealthy." 

Worse still, lowering the cap would leave less money avaible for both local and state governments. The effect would be particularly severe in small towns that do not generate much sales tax revenue, and must rely on property taxes to fund local services. The Metropolitan Organization has come up with a better solution: a property tax "circuit breaker". Circuit breakers, which help protect the most vulnerable from high property tax bills without gutting state coffers, are already in place in thirty-five states. Texans should urge Governor Perry to adopt this solution.

 

Healthcare: When It Sounds Too Good to be True... 

In a giant shift from its previous position opposing the healthcare reforms proposed in the early 1990’s, the health insurance industry has proposed a new plan which they claim would guarantee coverage for nearly everyone within ten years.  The plan includes the very laudable step of expanding Medicaid coverage to more low income children and adults. 
 

At the same time, however, the plan would oddly exacerbate the healthcare crisis by establishing “universal health accounts.” These accounts would purportedly be used to pay health insurance premiums. But if the nation’s experience with health savings accounts are any indication, these accounts would largely be used as tax shelters for the wealthy and would do little to increase health coverage or decrease the burden of medical costs. In a report released just a few months ago, the GAO reported that the majority of people in their study who contributed to health savings accounts withdrew no funds from their accounts in 2004. Further, many survey participants reported using their accounts as a tax-advantaged savings vehicle. 

 

 

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