CTJ's Tax Justice Digest, March 23, 2007

Senate Passes Budget

Irresponsible Amendments Added — But It's Still Better Than the President's Budget

The Senate voted 52-47 on Friday to pass a budget resolution (S. Con. Res. 21) requiring any extension of the Bush tax cuts to be paid for. The vote marked a victory for Democrats, who seek to avoid the embarrassments of the Republican-controlled Congress that failed to pass a budget last year. However, several amendments were added to the budget resolution on the floor that, if they survive the conference committee and remain in the final version passed by the House and Senate, will make it more difficult for Congress to end budget deficits. Nonetheless, the Senate budget still can be viewed as far more responsible than the budget plan proposed by President Bush. The main reason for this is that the Senate plan maintains the pay-as-you-go, or PAYGO, rules that require any new entitlement spending or any new tax cuts — including any extension of the Bush tax cuts which expire at the end of 2010 — to be offset with spending cuts or revenue increases elsewhere in the budget.

Spending the Social Security Surplus

Both the President's plan and the Senate plan rely on some flawed assumptions in order to appear to balance the budget within five years. The President's budget proposal was far more irresponsible, since it assumed the Bush tax cuts would all be made permanent and huge cuts would be made in public services. One problem with both plans is that they would continue the practice of borrowing the Social Security surplus (the Social Security taxes collected in excess of the Social Security benefits paid out in a given year). This money is supposed to be used to pay down the national debt to free up money in the future so that we can more easily pay the benefits of the baby boomers when they retire. (This is the idea behind the Social Security Trust Fund.) The Senate budget plan as originally presented by Budget Committee Chairman Kent Conrad was supposed to produce a "surplus" of $132 billion in 2012, but if you don't count the Social Security surplus that year, the budget would not quite be balanced.

Amendments Make Matters Worse

But even this illusion of responsible budgeting was more than the Senate could handle this week. An amendment offered by Senator Max Baucus (D-MT) was adopted 97-1 to spend this imaginary "surplus" on extending certain parts of the Bush tax cuts. If this provision remains in the final version approved by the House and Senate, it would not change the fact that any such proposal to extend the tax cuts without offsetting the costs would still violate PAYGO and thus require 60 votes in the Senate to overcome a point of order. But with the support of 97 Senators, it could signal that the Senate's commitment to PAYGO is shaky.

The Senate also voted 63-35 to adopt an amendment offered by Senator John Cornyn (R-TX) which would require a supermajority of 60 votes in the Senate to increase tax rates. This provision could prove problematic if, for example, Congress wants to pay for reform of the Alternative Minimum Tax (AMT) by rolling back some part of the Bush tax cuts for the wealthiest taxpayers.

Worst Case Scenario Avoided

Fortunately, the worst proposed amendments were turned away by the Senate. For example, an amendment to exempt extensions of the Bush tax cuts from PAYGO rules was defeated. The Senate also rejected amendments to further cut the estate tax and repeal the AMT without paying for it.

The House of Representatives will likely vote on their budget resolution next week, and a conference will likely take place after the Congressional recess to work out differences between the Senate version and the House version.

State News

Real Tax Reform in Illinois?

This week ITEP offered testimony before the Illinois House of Representatives regarding HB 750, a bill that would increase the state's income tax, broaden the sales tax base and lower property taxes. The proposal offers an opportunity for Illinois legislators concerned with increasing both the fairness and adequacy of the state's tax structure. For more on the bill's specifics check out the Center on Tax and Budget Accountability's brief. The so-called "tax swap" bill has received a lot of attention especially because Governor Rod Blagojevich has a very different tax plan of his own, which involves the implementation of a gross receipts tax. This tax is controversial but the Governor backed himself into a corner by pledging during his reelection campaign to enact no new sales or income taxes. For more background, read ITEP's policy brief on gross receipts taxes.

EITC Update: Victorious in New Mexico, Hopeful in Nebraska

New Mexico Governor Bill Richardson signed into law an Earned Income Tax Credit equal to 8 percent of the federal EITC. New Mexico becomes the 21st state to offer an EITC. Congratulations to New Mexico Voices for Children and the New Mexico Fiscal Policy Project for making the creation of the Working Families Tax Credit a Legislative Priority.

In other EITC news, the Institute on Taxation and Economic Policy (working with Nebraska Voices for Children) submitted testimony to the Nebraska Legislature's Revenue Committee and submitted several letters to local newspapers in favor of Legislative Bill 683, which would expand the state's refundable EITC from 8 percent to 15 percent of the federal credit. Tax reform and budget negotiations are continuing in Lincoln and it's unclear whether the EITC will be expanded. For more on the value of the Earned Income Tax Credit read ITEP's policy brief.

Oregon Takes One Small Step Towards Fiscal Sanity

Late last week, policymakers in Oregon established the state's first permanent rainy day fund, a significant step forward in improving fiscal stability in the Beaver State. Rainy day funds can be a valuable tool in helping states to weather economic downturns or other fiscal difficulties, as they set aside excess revenues during the good times to help bolster flagging revenues during the bad. The lack of such a fund was one of the factors contributing to the sizable cuts in spending that Oregon was forced to adopt in 2003.

At present, rather than setting aside surpluses to hedge against future deficits, Oregon is required under law to return any tax revenue that exceeds official projections by more than 2 percent to both personal and corporate income taxpayers, in the form of a rebate or "kicker." Projections from the Oregon Office of Economic Analysis issued earlier this month suggested that the "kicker" for the 2005-2007 biennium would amount to roughly $1.1 billion for families and individuals and to approximately $315 million for businesses.

Legislation signed by Governor Ted Kulongoski temporarily suspends the "kicker" for businesses with Oregon sales of more than $5 million and directs the $290 million that they would have received into the nascent rainy day fund. Businesses with Oregon sales below that threshold will still receive a "kicker" totaling $25 million, while the personal income tax "kicker" will go on untouched. The legislation also mandates that 1 percent of general fund revenue be deposited into the fund in all future years.

Still, as the Eugene Register-Guard observes, the legislation signed by Governor Kulongoski suffers from a number of shortcomings. With only a one-time infusion from the corporate "kicker", the rainy day fund will likely be too small to withstand a significant recession and may not be adequately replenished once it is used. What's more, the legislation leaves Oregon's "kicker" system intact over the long-run, a situation that will continue to impair the state's ability to invest in vital public services. For more on the need for — and the proper design of — state rainy day funds, see ITEP's Talking Taxes policy brief on this topic.

Do Retirees Living in Mansions Need Tax Breaks?

In Kansas two state senators are championing a new amendment to the state constitution that would freeze the assessed value of a home upon the homeowner's sixty-fifth birthday. The intent behind the proposal is a popular one: to help fixed-income seniors struggling with their property tax payments. However, the bill is poorly-targeted. It would help all seniors, including the wealthiest, and not just those struggling to pay their bills. Critics of the measure are starting to line up. Notably, AARP came out against the bill, saying, "It's not that we aren't concerned about older Kansans and their ability to pay property taxes, we just believe property tax relief should be more targeted". Some have suggested that the measure should be tied to the value of the home, so that, for example, only houses valued at less than $200,000 would have their assessed value frozen. Such a move would make the amendment much less expensive to the state, while still helping elderly homeowners.

However, an even better solution would be to expand the current Kansas property tax "circuit breaker" to include people of all ages. A circuit breaker kicks in when property taxes exceed a given percentage of the taxpayer's income, providing targeted relief only to those who need it. Circuit breakers are a cost-efficient way to provide targeted relief to those who need it most. For more information check out the latest report from the Center on Budget and Policies which takes a hard look at circuit breaker programs across the country.