CTJ's Tax Justice Digest, February 23, 2007

Tax Evasion in Congress's Crosshairs

Coinciding with a new call from Citizens for Tax Justice for a crack-down on tax evasion, new legislation has been introduced in the Senate to target tax havens and to prohibit the patenting of tax strategies. The bill is sponsored by Senators Carl Levin (D-MI), Norm Coleman (R-MN) and Barak Obama (D-IL). It includes a number of important reforms, such as a presumption that offshore trusts and shell corporations in designated tax havens are controlled by the taxpayers funding them or directing them. It would also allow the federal government to order American banks to stop accepting or authorizing credit cards from foreign countries or banks not cooperating with U.S. tax enforcement laws.

The bill would also ban patents on tax strategies, of which there are currently 49. Senator Levin noted in his statement that patent law is designed to create an incentive for innovation, but there is hardly a lack of such incentive when it comes to tax avoidance.

CTJ Online Letter Campaign Aims to End IRS Use of Private Collection Agencies

Citizens for Tax Justice has begun a letter campaign targeting Congress in support of legislation to end the IRS's use of private collection agencies to locate delinquent taxpayers, which began last fall. Click here to send your members of Congress a letter in support of these bills, which have been introduced by Representative Van Hollen (D-MD) in the House and Senator Byron Dorgan (D-ND) in the Senate.

One problem with the program is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while IRS employees could do the same work for just 3 cents for every dollar collected. It is also feared that the private debt collectors, driven by large profits, will have a greater incentive than IRS employees to violate the privacy rights of taxpayers in order to increase collections.

White House May Be Negotiating With Itself on the Alternative Minimum Tax

By now many people know that the Alternative Minimum Tax (AMT) is likely to be modified because it was meant to be a back-stop tax for the super-rich but will start affecting the more moderate-income families if the existing AMT exemptions are not extended. By now, most people in government know that "fixing" the AMT is not cheap. Continuing Congress's recent practice of applying a one-year "patch" each year will cost $250 billion over the next four years.

What nobody knows, however, is whether the President thinks AMT reform should paid for or not. Since some members of Congress have proposed repealing the AMT altogether (which could cost $1.5 trillion over a decade), the possible implications for the federal budget deficit are alarming. Tony Snow's recent response to questions about paying for AMT reform were not exactly crystal clear. In a long explanation of the White House position that clarified little, he said that "the President is not for tax increases," but later said "We don't think it needs to involve tax increases, but we're certainly open to hearing what other people have to say." The CTJ Talking Taxes Blog has more.

EITC Expansion: A Good Idea in Every State

In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits — or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.

Clock Ticking for Virginia Transportation Debate

The stoplight has turned yellow for Virginia legislators in their attempt to pass transportation funding — now will they speed up or slam on the brakes? With the state legislature set to adjourn on Saturday, the House and Senate have appointed conferees to negotiate a compromise to raise much needed revenue for transportation projects.

While both proposals would authorize the raising of $2 billion in bonds, the House's proposal would garner additional transportation funding through an annual diversion of $250 million from the state's general fund as well as through increases in user fees and diesel fuel taxes. Meanwhile, the Senate's proposal would avoid a general fund diversion and instead raise the additional funding by implementing new auto registration fees of $150 per driver.

An Original Idea in Milwaukee

Wisconsin's tax laws allow cities that rely heavily on tourism to levy a special "premium resort area" sales tax. Governor Jim Doyle's new budget would rewrite the tax laws to declare parts of Milwaukee a "premium resort area." This would give Milwaukee officials the authority to levy a half cent sales tax within the "resort" area of the city. If adopted by local officials, Doyle's idea would help to diversify the city's revenue structure — but an equally welcome option would be reforming the taxes collected by the state government. As the Institute for Wisconsin's Future's Jack Norman documented last fall, two thirds of the corporations doing business in Wisconsin pay no corporate income tax right now.

The Garden State Is Not Quite Rosy

New Jersey's property taxes are among the highest in the nation. Much has been made in the national press about New Jersey Governor Jon Corzine's efforts to reduce the state's property tax. The property tax saga has been full of ups and downs including heated political debates, a sales tax increase, and even a temporary government shut down. Now lawmakers expect the Governor to sign a bill that includes $2 billion in property tax credits that will cut property taxes for most homeowners. Those earning less than $100,000 a year would see a 20 percent cut in their property tax bills. Those earning between $100,000 and $150,000 would see a 15 percent cut, and those with incomes between $150,000 and $200,000 would see a 10 percent cut. But 90 percent of New Jerseyans remain skeptical of the proposal. Jon Shure of New Jersey Policy Perspectives is skeptical too, arguing that the proposal (which pays for these across-the-board property tax cuts by diverting sales tax revenue and repealing an existing "circuit-breaker"-style property tax credit) falls far short of the long-term structural reform that New Jersey needs

Snickers, Mole Removal and Taxes

One way for cash-strapped governments to raise extra revenue without raising taxes is to expand the sales tax base but figuring out how to go about it can lead lawmakers into some controversy. In Minnesota, lawmakers have proposed extending the state sales tax to some forms of cosmetic surgery. A tax on snack foods bought in vending machines is on the table in Michigan. Why tax a candy bar bought from a vending machine, but not one bought from a convenience store? What kinds of surgery are cosmetic surgeries? Is an operation to remove a mole cosmetic? Lawmakers will have to answer these questions and others like them when deciding which services to tax.

The more goods and services that fall under the sales tax, the lower the tax rate has to be on each good or service to raise a given amount of revenue. When done properly, tax base expansion can make sales taxes less regressive, less discriminatory and more responsive to economic growth. However, policymakers must take care to ensure that the expansion is fair. A similar proposal in Illinois avoids this pitfall: it expands the state sales tax to forty-four services. This strategy allows lawmakers to set the tax rate lower, while avoiding playing favorites by picking individual services to tax. To find out more about best practices for expanding your state's sales tax base, check out ITEP's policy brief on this topic and this report from the Center on Budget and Policy Priorities

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