CTJ's Tax Justice Digest, February 9, 2007

President Bush's Bogus Balanced Budget

CJT Analysis Finds "Balanced Budget" Plan Ignores Borrowing from Social Security and Assumes Unrealistic Spending Cuts

On Monday the White House released the President's proposed $2.9 trillion federal budget for fiscal year 2008 along with proposals the administration says will balance the budget by 2012. As a new analysis from Citizens for Tax Justice explains, the President's plan relies on various tricks in order to come to the conclusion that Congress can make permanent the Bush tax breaks while also balancing the budget. First, the President includes in his revenue estimates the Social Security surplus, which is projected to be $248 billion in 2012. But that surplus, which is officially saved in the Social Security Trust Fund, is supposed to be used to pay down the national debt so that the federal government is better able to keep paying benefits when the huge baby-boom generation retires. That's the reason Social Security is currently taking in more money than it pays out in benefits. Keeping Social Security separate would show, according to the President's numbers, a deficit of $187 billion in 2012.

But it gets worse. The second trick the President uses is an assumption that Congress will pass massive cuts in vital services - even bigger cuts than were ever enacted when the Republicans ran Congress. The plan actually assumes that spending on defense and homeland security in 2012 will be down 22 percent, as a share of GDP, from its 2006 level, and all other appropriations will be down 29 percent, as a share of GDP, from its 2006 level. Even though Congress is unlikely to make such cuts, they should be taken very seriously in the sense that they begin to show the true costs of the tax breaks. If the Bush tax breaks are made permanent, cuts in government services of this magnitude are only the begining of what will inevitably follow. The Coalition on Human Needs provides a description of these proposed cuts in services.

There are several other faulty assumptions used in the administration's projections. One is that revenues will grow more than they have over the past six years. The more realistic revenue projections from the Congressional Budget Office for 2012 are $155 billion lower than the administration's revenue projections.

President Proposes to Reduce The Tax Gap - By Only 1 Percent

The budget also includes some very minor measures that would close the "tax gap," the difference between the amount of taxes owed and the amount paid each year, by $3 billion a year. But this is, at most, 1 percent of the total tax gap. The IRS has estimated that the tax gap was around $300 billion in 2001 and most experts think even that number is an understatement. Senate Finance Chairman Max Baucus (D-MT) and other Democrats criticized the steps as not nearly enough to address the scope of the problem. This is reinforced by the fact that IRS Commissioner Mark Everson told the Senate Budget Committee last year that he could, in a given year, locate some of these taxes and increase collections by "between $50 billion and $100 billion without changing the dynamic between the IRS and the people." Democrats and Republicans have become concerned about the tax gap, because it results in compliant taxpayers effectively subsidizing the tax evasion of the less honest.

State News

Pigs Fly in Connecticut: Republican Governor Proposes Income Tax Increase

On Wednesday, Connecticut Governor Jodi Rell (R), as part of her biennial budget proposal, recommended a gradual increase in the state's top personal income tax rate from its present level of 5.0 percent to 5.5 percent by 2008. While such a change would generate substantial additional revenue - revenue that Governor Rell would allocate to new investments in education - and would do so in a progressive fashion, other policy recommendations put forward by the Governor would make the state's tax system less fair. In particular, Governor Rell once again called for the elimination of Connecticut's estate tax, a change that would benefit only the very wealthiest taxpayers in the state, as only about 2 percent of all deceased persons in Connecticut have estates subject to the tax.

Some Nebraska Senators Say Governor is Cutting the Wrong Tax

Last week Nebraska Governor Dave Heineman testified before the state legislature's Revenue Reform Committee on his tax reduction bill. The bill's major components include lowering income tax rates, decreasing the number of income tax brackets and eliminating the marriage penalty. Over four years the complete tax cut package is expected to cost a whopping $1 billion. An ITEP analysis showed that the Heineman plan would cut taxes for the wealthiest 1 percent by $6,500, while the lowest income Nebraskans would see an average tax cut of only $13. Opponents of the proposal testified regarding the the regressive nature of these tax cuts and the massive cost. Many state legislators, advocates, and concerned citizens think the Governor's proposal is taking the wrong approach to tax reform entirely. They see a need for property tax reform and not regressive income tax reductions that help better off Nebraskans.

Short Term Gain, Long Term Pain

At first glance, it looks like the holy grail of state governance: a way to raise more revenue without raising taxes. The idea of selling off or leasing state assets, such as the state lottery, is now under discussion in Illinois, Indiana, Minnesota, New Jersey, and Texas. It is easy to see the idea's appeal: Texas Governor Perry predicts that the sale of his state's lottery would generate at least $15 billion, for example, while Indiana Governor Daniels expects that state's lottery to carry a price tag of over $1 billion, all without a single tax increase. However, there is a catch. While the boost to revenue is substantial, it is a one-time gain, and it comes at the cost of the yearly revenue contributions these assets would provide far into the future. While the seemingly painless financial gain offered by this privatization schemes is tempting, in the long run these sales would only diminish state coffers.

Arkansas's Tax Cut: Could Be Worse, Could Be Better

Arkansas Governor Mike Beebe and the state senate worked together this week to pass a series of measures aimed at helping low-income Arkansans. The keystone of the tax package was a cut in the state sales tax on groceries from six percent to three percent, one of Governor Beebe's leading campaign proposals. A study by the Arkansas Advocates for Children and Families (AACF) projected annual savings for a family of four ranging from $98 to $298, depending on income level. The Governor's Office estimated that the sales tax change would cut state revenues by $252 million this year. Everyone involved in the effort to pass this bill deserves high praise for bringing attention to this important issue. However, research by the AACF using ITEP data indicates that a refundable Earned Income Tax Credit might be an even more effective way to help low-income Arkansans. According to the data, a 24% refundable EITC would cost almost exactly the same as the grocery sales tax exemption, but would provide more assistance to families in need. Arkansas lawmakers should consider a refundable EITC to get the most bang for their tax bucks.

All Eyes on the EITC

February 1 was Earned Income Tax Credit Awareness Day. According to the Department of Treasury more than 150 organizations held press conferences or other events all across the country to highlight the importance of this popular and well-targeted tax credit. Despite evidence that the EITC helps working families, as many as 25 percent of eligible filers don't take advantage of this tax credit. Twenty states plus the District of Columbia also offer their own EITCs. Visit State EITC Online Resource Center for more information.