CTJ's Tax Justice Digest, March 16, 2007

Senate Democrats' Budget Plan Would Block Tax Cuts if Not Paid For

The Senate Budget Committee approved a plan Thursday that would allegedly bring the budget into surplus by 2012. The resolution would also require any extension of the Bush tax cuts or reform of the Alternative Minimum Tax (AMT) to be paid for. The budget resolution is the blueprint for spending and revenues in fiscal year 2008 and also sets goals for a five-year period. The resolution revives a PAYGO requirement, meaning any new entitlement spending or new tax cuts must be offset with either increases in revenue or cuts in spending. The Bush tax cuts were specifically written to expire in 2010 so the baseline used by the Congressional Budget Office also assumes a 2010 expiration. By retaining this assumption and reviving PAYGO, the resolution would force Congress to either let the tax breaks expire in 2010 or come up with money to offset whatever parts of the tax breaks they want to extend.

The budget resolution would allow discretionary programs (programs for which Congress must approve funding each year) to receive $16 billion more than the President's proposed budget in fiscal year 2008. But the President's proposed discretionary funding level is actually a $10 billion cut below what would be needed to keep up with inflation, so the Senate Budget Committee is only suggesting a very modest increase in spending. The budget resolution would also allow for an expansion of the State Children's Health Insurance Program (SCHIP) — if Congress finds a way to pay for it.

Is Requiring a Balanced Budget the Same Thing as Hiking Taxes?

The proposal has been criticized by opponents like the ranking Republican on the Senate Budget Committee, Judd Gregg (R-NH) (who did not oversee any budget improvement during his time as the Budget Chairman). Gregg claims that the proposed resolution is dodging important decisions by not specifying where the extra revenues for SCHIP expansion and other initiatives will come from, but budget resolutions under the Congressional process established in 1974 are not supposed to instruct the appropriations committees or the tax-writing committees exactly what to do. Rather, the resolution is to only provide the overall spending and revenue goals for the committees. Gregg and others are also saying that any requirement that tax cuts be paid for is a tax increase that must be opposed. This logic seems to favor increasing the national debt, and the interest payments on it, indefinitely or making massive (and politically unlikely) cuts in services Americans currently depend on.

In Search of a Free AMT Fix

The critics also have attacked the proposal's assumption that revenue will be needed to "fix" the AMT only for two years, when no one really thinks Congress will allow the AMT to revert to current law and start reaching tens of millions of taxpayers. But this is actually consistent with the desire to stick to PAYGO. Any change from current law (and the AMT will reach tens of millions more people under current law) that loses revenue must be offset to avoid increasing deficits. Perhaps the first step in countering these criticisms would be for Congress to fix the AMT in a budget-neutral manner as proposed by Citizens for Tax Justice. The House Democrats will present their budget propsal next week.

America to Congress: "So, about that raise we were promised..."

As we've reported previously, the Senate and the House of Representatives have approved different bills that would increase the minimum wage by $2.10 over two years and offer tax breaks to business to "compensate" them for the added cost. The idea that businesses need to be "compensated" after they've received $276 billion in tax breaks since the last minimum wage hike (which was worth only about $13 billion to workers) is absurd. But both chambers have decided that some level of absurdity is acceptable if it helps get the minimum wage increase passed.

The problem is that the two chambers are in a spat over the details. The Senate's bill includes $8.3 billion in tax breaks over ten years for business while the House version only includes $1.3 billion over ten years. Both versions have provisions that raise revenues to offset the tax breaks. Predictably, many conservatives and business leaders have decried the offsets as "tax hikes" (since they apparently only support tax breaks that are not paid for). House Ways and Means Chairman Charlie Rangel (D-NY) went so far as to hold a hearing Wednesday on how bad the revenue-raising provisions are in the Senate version — and heard testimony only from representatives of business who opposed the "tax hikes" included in it. We would agree that the Senate version is frustratingly illogical, but not because of the revenue-raising provisions. The problem is the tax cuts. Businesses should not have to be bribed with $8.3 billion in tax cuts so that we can rescue the minimum wage from its lowest purchasing power in half a century.

State News

Mixed News in the Mountain State

West Virginia appears poised to take a major step forward in combating tax avoidance by large and profitable businesses. Legislation (SB 749) passed last weekend would institute mandatory combined reporting of corporate income beginning in 2009. Combined reporting is widely viewed as the best way to stop businesses from avoiding taxes by shifting income (on paper) from one state to another. Governor Joe Manchin is expected to sign the measure into law. SB 749 would make West Virginia the third state in four years to put combined reporting into practice, but this progress comes at a price. The same bill would also reduce West Virginia's business franchise tax rate from 0.55 percent to 0.20 percent over the next five years. While combined reporting is expected to generate $33 million per year once fully implemented, the reduction in the business tax rate is anticipated to lose as much as $75 million annually.

For more on combined reporting in West Virginia, see West Virginia Citizen Action Group's recent policy issue brief.

Can the Tax Code Keep Educated Residents from Leaving the State?

This November Maine voters will have the opportunity (unless the Legislature acts first) to vote on a proposal that would provide tax cuts to assist college graduates as they pay back their student loans. If the initiative is approved, college students in Maine who stay and work in the state after graduation may claim a tax credit of about $2,100. Advocates of the proposal say that offering the tax credit will make education more affordable for students and also "raise the wage and skill levels of Maine's workforce." However, some important questions remain regarding how much the tax credits will cost, where the money to pay for the credits would come from, and whether or not offering a tax credit will really ensure that students stay in Maine.

In Iowa a similar proposal is focused on keeping college graduates in the state and slowing the state's "brain drain." The proposal allows businesses who repay new employees' student loan debt (up to $25,000) to receive tax credits of up to $7,500. In order to qualify for the credit, employers have to pay a minimum salary of $25,000 and start repaying the employee's loan within six months. The Des Moines Register's editorial board sharply critiques this proposal and raises good points about whether or not providing tax credits to businesses really is the best strategy for ensuring that college graduates stay or move into the state. Instead, the Register rightly suggests, "To reduce student loan debt, public money would be better used to hold down tuition costs at state universities, so students don't graduate with huge debt in the first place."

All That Glitters Isn't Gold

This week the Community Action Project blasted the decision by Oklahoma policy makers to use a temporary surge in revenue to justify permanent, unfair tax cuts. CAP says that when voting on the tax cut proposals, legislators did so "knowing only the short-term fiscal impact and without the information that could allow them to evaluate the long-term fiscal sustainability of their choices." The question before legislators now is whether or not to repeal the tax cuts that were scheduled to take place in 2008. Last fall, the Center on Budget and Policy Priorities published a study which takes a closer look at specific states that enacted tax cuts in 2006 and highlights the potential damages from "tax cuts on layaway."

Cigarette Tax Update

Wednesday, Iowa Governor Chet Culver signed into law a bill that raises cigarette taxes by $1 a pack and also increases taxes on various other tobacco products. The Governor predicts that the new $1.36 tax will cause 20,000 Iowans to quit smoking and prevent twice as many from ever picking up the habit. The tax increase goes into effect immediately and revenues generated are expected to be used for healthcare. Unfortunately, evidence from other states shows that revenues generated from this regressive tax will decline over time.

In Mississippi, a proposal to swap a cigarette tax hike for a sales tax cut appears to be dead for the second time. While promising to propose a "serious tax cut" in the future, Governor Haley Barbour refused to support a bill that would increase the state's cigarette tax from 18 cents to $1 and cut the tax on groceries by half. The problems with Mississippi's tax code go beyond sales and excise taxes, so perhaps now is the time for discussing a complete overhaul of Mississippi's tax structure.

A Delicate Balancing Act: Sales Tax Base Expansion

There are several proposals in states across the country that would expand state sales tax bases to include services. These efforts aim to improve both states' financial stability and the fairness of their tax codes. It's probably not fair, for example, that in some states people who do their own laundry pay sales taxes when they buy a washer or dryer but people who have their clothes laundered by someone else pay no sales taxes at all.

One component of an overall tax proposal in Maine would expand the sales tax base to include a variety of personal and real property services. In Maryland, a state house committee on Wednesday debated House Bill 448, which would expand the sales tax base to include luxury services like interior decorating and other personal services. In Michigan, Governor Jennifer Granholm has also proposed a measure to expand the sales tax base. The political ramifications of taking on previously untaxed businesses may make some policymakers wary. Nonetheless, as states shift from manufacturing economies to service economies, it's essential that tax structures change too. For more on expanding the tax tax base, check out ITEP's policy brief.

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