CTJ's Tax Justice Digest, December 8, 2006

Republican leaders in Congress are currently trying to attach a proposal to expand regressive Health Savings Accounts (HSAs) to the "tax extenders" package, the legislation that includes extensions for many expiring or already expired tax breaks for corporate research and development, restaurant business, sales taxes paid by individuals, college tuition and other items. The tax extenders, which Citizens for Tax Justice criticized in a paper a few weeks ago, have hit several legislative bumps even though they are generally supported by members of both parties. HSAs, 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 (plans with deductibles of at least $1,050 for an individual or $2,100 for a family). The biggest fear advocates have about HSAs is that they will, over time, encourage healthier and wealthier people to leave the traditional health insurance market, which will make health insurance even less affordable for those at-risk workers and families who really need it.

The Center on Budget and Policy Priorities points out that the HSA provision, which was approved by the House Ways and Means Committee as a separate bill back in September, would provide even greater incentives for wealthier families to use HSAs as a tax shelter. Under current law, people are constrained from contributing more to the HSA than their maximum deductible, but even now most people with HSAs end up not using money in their HSAs for healthcare at all, effectively sheltering their savings. The new HSA provision would allow people to contribute up to the maximum limit ($2,700 for an individual and $5,450 for a family) even if that's greater than their deductible. This would encourage more contributions that are not truly intended to go to healthcare.

The highest court in West Virginia has rebuffed an attempt to further restrict the right of states to tax the profits of multi-state corporations. As explained in a new ITEP paper, the U.S. Supreme Court has already restricted the ability of states to impose sales taxes on remote sales by out-of-state companies, and Congress passed a law back in 1959 that restricts states' ability to tax corporate income generated by remote sales of goods into a state. In West Virginia tax Commissioner v. MBNA America Bank, MBNA argued that their profits in West Virginia — its gross receipts in the state exceeded $10 million during one of the years in question — could not be taxed under the U.S. Constitution because MBNA had no physical presence in the state. Fortunately, the court found that the amount of business MBNA has done in West Virginia amounts to "economic presence" in the state that benefits from the services provided by West Virginia — and that justifies the imposition of the state corporate income tax. Other state courts should follow West Virginia's lead in this area of jurisprudence.

From SBT to MBT?

Last week Michigan Governor Jennifer Granholm proposed the Michigan Business Tax (MBT). The revenue created from the MBT would replace revenues lost from the repeal of the state's flawed and hastily-repealed Single Business Tax (SBT). The new tax would have a very broad base and low rates. The three components of the tax base are: gross receipts, assets, and business income. A 46 percent reduction in personal property taxes for certain types of businesses is also included. While Granholm's proposal has been generally well received, many in the business community are skeptical and some would like the personal property tax eliminated entirely. The Governor wants the matter resolved before the new legislative session begins next month, making Michigan's lame duck legislative session one of the most interesting to watch.

Fiscal Reform in Oregon

Newly re-elected Oregon Governor Ted Kulongoski unveiled his proposed budget for the next biennium this week. The plan includes several important fiscal policy reforms, including a hike in the state's minimum tax on corporations (currently just $10), repealing the state's unique "kicker" surplus tax refund for businesses, and creating a rainy day fund to help the state weather fiscal downturns. Kulongoski is counting on political support from Oregon's business community to help enact these reforms. But some observers argue that he could have a tough time selling the proposls. The Oregon Center for Public Policy has more on the flaws of the "kicker" refund.

Is Wisconsin Corporate America's Utopia?

Maybe. This week, the Institute for Wisconsin's Future released a report showing that over 60% of Wisconsin's largest corporations paid no corporate income tax in 2003. Jack Norman, research director for the Institute said, "I think we're getting double talk from the big corporate lobby. They're not paying their fair share." State law prohibits the release of specific corporate tax information other than in a newspaper or public forum. Luckily many in the Badger State press have released some of the findings. This study highlights the real need for comprehensive corporate tax disclosure in all states. For more on the importance of corporate tax disclosure read ITEP's Policy Brief.

Flat, but Not Level

Indiana economist Morton Marcus writes an excellent editorial that should inspire residents of other flat tax states to keep fighting for a graduated rate structure. He says, "If we want to help low-income people and protect the lives and property of the wealthy, we need revenue to support (not cut) government services. This implies that wealthier citizens accept their responsibilities to offer a larger portion of their incomes to society." Despite Governor Daniels' temporary income tax hike proposal dying "faster than the annual hopes of a Cubs fan," it's important that advocates continue to offer a progressive income tax structure as a viable solution to their state's fiscal woes.

Missouri Proposal Threatens Checks and Balances and Education Funding

A Missouri legislative leader, Rep. Jane Cunningham, has prefiled legislation that turns the concept of checks and balances on its head. HRJ1 is a constitutional amendment that would prevent courts from telling the state or localities how state and local revenues should be spent. The judicial branch’s ability to safeguard basic constitutional rights would be clearly limited if this proposal is adopted. Because of a case currently being decided, it seems likely that next year a court will rule that the state's school funding formula provides Missouri children with neither an adequate nor fair education. If Cunningham's constitutional amendment becomes law, it would be illegal for the courts to enforce the the right to an adequate education. This proposal doesn’t offer a real solution to the school funding issue and does a disservice to the concept of checks and balances.