CTJ's Tax Justice Digest, February 16, 2007

Debate Continues Over Federal Minimum Wage and "Compensation" for Business

House of Representatives Willing to Accept Some Tax Breaks as Part of Minimum Wage Deal

The House Ways and Means Committee on Monday approved a package of small business tax breaks to be combined with legislation to increase the minimum wage. At a cost of $1.3 billion over ten years, the Ways and Means package is much smaller than the $8.3 billion deal approved by the Senate by a vote of 94-3 on February 1. Senate leaders said that the House, which had previously approved a "clean" or stand-alone minimum wage increase, was now showing that it was ready to negotiate and compromise, although significant differences between the two chambers remain. A clean minimum wage hike in the Senate had earlier fallen six votes short of the 60 votes needed to pass in that chamber, as several Republican Senators insisted that the legislation include tax breaks to "compensate" businesses for the added costs. (The last minimum wage increase, back in 1996, is estimated to have cost employers $13 billion while the total tax breaks for businesses since that time cost $276 billion.)

The largest tax break in the House bill would be a one-year extension of the Work Opportunity Tax Credit (the Senate version would extend it for 5 years). The second largest tax break would be a change in the Alternative Minimum Tax (AMT) paid by restaurants, allowing them to use a tax credit for FICA taxes paid on tipped workers and the Work Opportunity Tax Credit to reduce their AMT. A smaller break, but one apparently important to business lobbyists, is a one-year extension of a special expensing provision (section 179) through 2010 and an increase in the amount that can be expensed.

Costs of Tax Breaks, Revenue Increases from Offset Provisions, 2007-2017

Another provision of the package is currently scored as having no cost, but it is noted that it will cost a projected $457 million (over ten years) when the tax package is combined with a minimum wage hike. This provision concerns the tax credit restaurants get for paying FICA taxes on tips above and beyond the amount that brings employee pay up to the minimum wage. This provision enables restaurants to enjoy as much of the credit as they do today, even though the minimum wage will be higher so the credit would otherwise decrease.

As for the offsets, the largest in the package would stop children of wealthy families from enjoying special capital gains and dividend tax breaks meant for low-income people. The other significant change would allow the IRS to charge interest on delinquent payments for a longer period of time before it must give notification and suspend interest.

The legislation does not include some tax breaks sought by business lobbyists and included in the Senate version, such as increased write-offs for restaurants and retail stores. It also does not include the offsets included in the Senate version. Some of the Senate offsets have been controversial (among business lobbyists) such as the $1 million limit on deferred compensation that can receive tax breaks and retroactive restrictions on sale-in, lease-out arrangements (SILOs). For a description of the Senate version, see the Tax Justice Digest on that topic.

Untargeted Tax Breaks for Seniors: An Idea that Ought to be Retired

The Missouri House of Representatives has just approved a bill that would eliminate the state income tax on Social Security benefits and allow retirees to deduct as much as $6,000 in other retirement income. Middle- and low-income people are already exempt from the Social Security benefit tax, and as a result 72 percent of seniors will receive no benefit from that part of the proposal. The group Missourians for Tax Justice has begun an online letter campaign to urge the state legislature to reject the proposal, which would cost at least $230 million a year. The bill must be passed again in the House for procedural reasons, and will then move to the Senate.

Georgia Governor Sonny Perdue is proposing to eliminate the state income tax on retirement benefits for Georgians 65 and older. Elderly Georgians already enjoy generous exemptions on their retirement income that are scheduled to increase to $35,000 per spouse by 2009 while working seniors only enjoy a $4,000 exemption on earned income. An ITEP analysis cited in this report from the Georgia Budget and Policy Institute (GBPI) found that only 10 percent of elderly Georgians would benefit from this costly proposal. Alan Essig, Executive Director of GBPI raises the more relevant question, ``...Is there a better way of spending the money?''

Last year, Wisconsin Governor Doyle signed into law a bill completely eliminating all taxes on Social Security benefits by 2008. This week, Governor Doyle prepared a new budget, which includes a measure fast-forwarding the exemption by one year. The proposal comes at a time when the state is straining to fill a $1.6 billion shortfall. The proposed budget attempts to find new revenue by increasing vehicle registration fees, cigarette taxes, and the real estate transfer tax. The Legislative Fiscal Bureau estimated that the Social Security exemption alone would cost around $100 million per year. In his State of the State speech earlier this year, Governor Doyle said that Wisconsin had to learn to live within its means — advice that he should heed himself.

Race-to-the-Bottom: Economic Development "Incentives"

Last week there were three states offering competing tax incentives for a new ThyssenKrupp steel mill. Now there are two; ThyssenKrupp has taken Arkansas out of the running, leaving Alabama and Louisiana as its final two candidates. In a press release announcing the move, the company explained its rationale for dumping Arkansas: "geological conditions, energy costs and logistical disadvantages." Notably absent from its explanation: tax breaks.

And elected officials in the two remaining states seem to agree that non-tax factors set one state apart. Louisiana Governor Kathleen Blanco boasts and, Alabama Governor Bob Riley openly admits, that Louisiana has geographic advantages that Alabama can't match.

But Riley and some state lawmakers are pushing for a special legislative session later this month that would be devoted entirely to creating a new fund for tax incentives for ThyssenKrupp and other companies the state is currently courting. If this sounds like a devious subversion of market forces, it is — but Louisiana already did the same thing back in December, creating a $300 million fund to court the steelmaker.

How can states short-circuit this self-destructive competition of tax giveaways? Lessons might be learned from efforts by European Union members to prevent tax competition that distorts market forces, which culminated this week in an EU statement that Switzerland must curb its corporate tax giveaways.

Reducing Grocery Taxes: "Yes, but how?"

Four states — Mississipi, Tennessee, Arkansas, and Idaho — are currently debating ways to reduce the sales taxes paid on food. But how (or whether) to pay for the cuts and who should benefit remain key sticking points.

On Thursday, the Mississippi House of Representatives passed (91-27) a "tax swap" bill that would cut the state's sales tax on groceries in half and raise the tax on cigarettes to $1 per pack. The bill still faces significant challenges before becoming law, however, since key members of the Senate oppose it and Governor Haley Barbour vetoed a similar bill last year. Although the plan's reliance on revenue from cigarette taxes is not a long-term solution, it does offer a temporary mechanism to make up the revenue that would be lost from a cut on the sales tax on food.

In Tennessee, a similar "tax swap" is under consideration. However Gov. Phil Bresden has expressed reluctance to link a cigarrette tax increase with a grocery tax reduction, and has instead proposed using revenue from a cigarette tax increase for education funding.

Arkansas Gov. Mike Beebe signed a grocery tax reduction into law on Thursday that will reduce the state's sales tax on groceries from 6% to 3% effective July 1st. However, no funding mechanism was enacted to make up for the decreased revenue, as lawmakers instead decided to rely on a projected surplus to pay for the proposal.

In Idaho, Gov. Butch Otter continues to struggle with the state legislature over how best to enact a grocery tax credit. Otter's proposal would target low-income Idahoans with a credit of up to $90, while the House's newly passed version would give a smaller grocery tax credit (up to $50) to a broader range of residents.

A Step Towards Tax Fairness in Connecticut?

Sen. Martin Looney, Connecticut's Senate Majority Leader, has introduced a bill that would create a state Earned Income Tax Credit (EITC) for Connecticut. The credit would be available to all who qualify for the federal EITC and would provide a state credit equal to 20% of the federal tax credit.

The current maximum federal EITC for 2006 is $4,536 for families with two or more qualifying children. Under Connecticut's EITC, a qualifying taxpayer would receive an additional $907 credit on their state taxes.

This proposal would be an important step towards reducing the current unfairness of Connecticut's tax system. Currently, the poorest 20% of Connecticut families pay an average of 10.2% of their income in state and Federal taxes, while the wealthiest 20% pay only 7.4% on average.

Nutmeggers wishing to express their support for this proposal can circulate this petition provided by the Connecticut Association for Human Services and the Greater Hartford Interfaith Coalition for Equity and Justice.

How to Stop Corporations from Avoiding State Taxes

State corporate income tax reform is gathering momentum in 2007, as more and more states are considering adopting an important corporate tax reform: combined reporting. Governors in New York, Iowa and Pennsylvania have already proposed this important loophole-closing reform, and newly elected Massachusetts Governor Deval Patrick is sending signals that he may follow in their footsteps. Meanwhile, a new paper by the Center on Budget and Policy Priorities' Michael Mazerov gives the lowdown on an equally important corporate tax reform that could productively be adopted by every state with a corporate tax: company-specific disclosure of taxes paid (or not paid). Mazerov's paper includes model legislation for use in any state seeking to shed more light on corporate tax avoidance.

Department of Corrections

In the February 2 edition of the Tax Justice Digest we highlighted Minnesota Governor Tim's Pawlenty's property tax proposal. The article suggests that rural schools would be impacted negatively by his proposal and that a possible solution would be the implementation of a property tax circuit breaker. In fact, while rural local governments could be negatively impacted by the proposal, rural school districts would not be, and Minnesota already offers a targeted property tax circuit breaker. However, taken as a whole, Governor Pawlenty's proposals do not ensure that taxes are based on ability to pay. The Minnesota Budget Project has a quick analysis of the Governor's proposal.