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CTJ's Tax Justice Digest, January 26, 2007

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.

  
 
President's State of the Union Address Includes Tax Proposal to Weaken Employer-Provided Health Care — Without Providing an Affordable Alternative
 
In his State of the Union address on Tuesday, the President proposed a change in tax policy that would end the link between employment and health care — but that could make health care less affordable overall. The stated purpose of his proposal is to "even the playing field" between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). This would be accomplished by giving all taxpayers a new deduction if they have health insurance, whether it's through an employer or otherwise. The deduction would be $7,500 for an individual and $15,000 for a family, regardless of how much the health insurance costs, and would reduce both income and payroll taxes. In addition, health insurance benefits provided by an employer would be counted as income for the first time. But most of the families receiving health insurance through their employer would get a tax break initially, since for most (although certainly not all), coverage costs less than $15,000 for a family or $7,500 for an individual.
 
Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. The new health care deduction could encourage some employers to "cash out" the health insurance benefits they currently offer to their employees, since the tax subsidy would no longer be limited to employer-provided insurance. If their employees try to buy health insurance individually, they will find that the plans offered on the individual market are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction. And many people in more expensive plans are those with more critical health care needs or those who live in a part of the country where health care is simply more expensive. In the end, this plan is another attempt to shift risks back onto individuals who have little ability to cope with it on their own.
 
 
 
Republican Senators Hold Minimum Wage Increase Hostage to Tax Breaks for Business
 
On Wednesday, Senate Democrats could not convince enough Republicans to join them to end debate on a "clean" minimum wage increase, meaning a minimum wage hike with no tax breaks or other provisions attached to it. Only five Republicans joined all of the Democrats present for a total of 54 votes - fewer than the 60 votes needed in the Senate to close off debate and move on to approve the legislation. House Democrats had hoped the Senate would approve the bill, H.R. 2, which was a key part of the "First Hundred Hours Agenda." 
 
The Senate Finance Committee has already approved a package of tax breaks and offsets (described in last week's Tax Digest), sponsored by Finance Chairman Max Baucus (D-MT). Senator Baucus and Senate Majority Leader Harry Reid support attaching these tax breaks to a minimum wage increase, and a bill that combines the two will likely come up next week. The idea that businesses need to be "compensated" for the minimum wage increase has been refuted by many sources, including a poll showing three fourths of small business owners don't think the wage hike will even affect their business. 
 
On the other hand, some Republicans and business lobbyists complain that the tax cut package doesn't do enough for business since a large part of the tax breaks go to hiring welfare recipients, newly disabled veterans and individuals from other at-risk groups, rather than other tax breaks that businesses find more beneficial to their bottom line. They have also complained because the offsets are "tax increases" on business, in their thinking. 
 
 
 
Something Both Parties Can (or Should?) Agree On: People Should Pay the Taxes They Owe
 
CTJ Executive Director Bob McIntyre testified Tuesday before the Senate Budget Committee on proposals to fix the "Tax Gap," the difference between taxes that are owed and taxes actually paid. The Government Accountability Office estimates that the Tax Gap is around $290 billion but McIntyre argued that it could be much more because of the many tax shelters that the government does not know about. McIntyre explained that while most wage-earners have few opportunities to cheat the rest of the taxpayers out of large sums of revenue, businesses and very wealthy individuals are able to hide massive amounts of money in offshore accounts and investments and other tax shelters. One option would simply make it illegal for U.S. financial institutions to deal with countries that do not cooperate with U.S. enforcement efforts (with tax havens, in other words). Another option would increase the enforcement funding of the IRS. The IRS estimates that every extra dollar for enforcement would yield between $5 and $30 of additional revenue. 
 
 
 
Who Benefits from Tax Breaks for Business?
 
Advocates of tax breaks for business typically argue that such tax breaks will benefit workers as companies are more able to expand and invest. The latest study to call this into question comes from the University of Kentucky, which finds that tax breaks don't create as many jobs as previously hoped. The report concludes, "Based on our evidence showing that training incentives are positively related to economic activity in an area, and given that relatively little is spent on this program, the Legislature may want to consider increasing the amount spent on training incentives" rather than more tax breaks.
 
It's also doubtful that tax breaks are very important to the success of businesses themselves. Despite the fact that Kansas business owners named excessive taxation as their biggest concern for the fourth year in a row, nearly half of the businesses surveyed by the Kansas Chamber of Commerce weren't even aware that the Legislature had enacted a six-year, $632 million business tax cut last year. The bill eliminated the state's property tax on new capital investment in business equipment and machinery and went into effect last July. It's difficult to believe that tax breaks could be vital to economic expansion if they're not even noticed by the corporations that benefit most from them. 
 
 
 
Georgia Talking Points Serve as Example for Communicating Fair Tax Ideas
 
The Georgia Budget and Policy Institute has recently published a set of Revenue Talking Points that explain key tax policy concepts ranging from the Earned Income Tax Credit to modernizing the personal income tax in an easy to understand way. Whether you're a trying to educate yourself before voting or you're trying to educate others to make informed choices about taxes, these Talking Points are straightforward and helpful.
 
 
 
 
 
 

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