CTJ's Tax Justice Digest, March 30, 2007

Minimum Wage, Maximum Delay

Senate Says Business Now Needs Even Bigger Bribes Before Minimum Wage Can Be Increased

The U.S. Senate, which has been holding a long-anticipated minimum wage hike ransom for months, has just increased its demands and now insists that $12 billion in tax breaks are needed to "compensate" businesses for the alleged costs of paying a higher wage to those at the bottom of the wage scale.

On February 1, the Senate approved a bill pushed by Senate Finance Chair Max Baucus (D-MT) raising the minimum wage along with a tax cut package costing $8.3 billion over ten years. The Senate had made a half-hearted attempt to pass a "clean" wage increase (without the tax breaks) on January 24 and came six votes short of the 60 needed to end debate. In the House of Representatives, Ways and Means Chairman Charlie Rangel was unenthusiastic about attaching tax cuts (and the offsetting provisions needed to pay for them) to the minimum wage increase, but eventually agreed to a $1.3 billion package that was approved and added to the wage legislation.

Ransom Demand Increased

Now the Senate says $12 billion in tax breaks are needed, an increase of around $3.8 billion from its original demand. BNA reports that the additional tax breaks were proposed by Finance Chairman Baucus, ranking member Charles Grassley (R-IA) and Jon Kyl (R-AZ). They include a one-year extension of the bigger write-offs for restaurants and retail stores (the original extension was only for three months) and a further expansion of the Work Opportunity Credit for companies in rural counties that are losing population. The Senate approved by unanimous consent an amendment to include these new additions to the tax cut package.

A Pragmatic Approach to Increasing the Minimum Wage?

It is sometimes said that including the tax breaks is necessary to get the 60 votes needed to prevent a filibuster in the Senate by members who are not generally supportive of increasing minimum wage. But it's hard to believe the current strategy is a politically feasible way to increase the minimum wage. The wage increase and tax package have been added to the emergency war spending bills just passed by the House and Senate, which President Bush has already vowed to veto because they include timetables for withdrawing from Iraq.

We've said it before and we'll say it again: 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. Businesses should not have to be bribed billions in tax cuts so that we can rescue the minimum wage from its lowest purchasing power in half a century.

Government Shut-Down in Michigan?

Michigan Governor Jennifer Granholm is anticipating a partial government shut-down in early May because of the state's huge structural budget deficit. Media accounts report that the state will face a "cash flow shortage" of about $400 million on May 1. The Governor has put forward a plan for solving the state's enormous budget deficit which includes broadening the sales tax base, increasing cigarette taxes, reinstituting the state's expired estate tax, and implementing a new Michigan Business Tax to replace the repealed Single Business Tax (SBT). Many state legislators have proposals of their own, including setting up a commission to review all aspects of state government, slashing public services, and temporarily increasing income taxes. Just this week the Senate voted down the Governor's proposal to broaden the sales tax base, but perhaps a threat of a government shut-down will cause legislators to come together and devise a solution to the state's budget woes.

House Approves Budget Resolution
Like the Senate Version, It's More Responsible Than the President's Budget

The U.S. House of Representatives approved a budget resolution Thursday that would require any extension of the Bush tax cuts, which expire at the end of 2010, to be offset with new revenues or spending cuts to avoid increasing the deficit. Like the Senate version, this budget resolution includes pay-as-you-go (PAYGO) rules and is supposed to balance the budget by 2012 (at which point it claims to produce a surplus of $153 billion). The plan is not perfect. Like the Senate version and the budget proposal offered by the President, this "balanced budget" projection includes the Social Security surpluses, which are really supposed to be counted separately from other revenues as explained in last week's Digest.

Nonetheless, the House should be commended for passing a budget that shrinks deficits and does not assume that tax cuts will be extended without being offset, as the President's budget does. Republicans are trying hard to portray the budget plan as a tax increase because it requires extension of the tax cuts to be paid for. The tax cuts enacted over the past six years (when Republicans controlled the House, Senate and White House) were written to expire at the end of 2010, so any extensions will in fact be new tax breaks. Prohibiting new tax breaks or new spending that is funded by increased borrowing is a common sense reform that helped balance the federal budget in the 1990s.

Hall of Shame
Study Names States that Levy Income Taxes on Poor Families

Despite a growing consensus that imposing income taxes on families living in poverty is a terrible idea, many states continue to do so. According to a new Center on Budget and Policy Priorities report, "The Impact of State Income Taxes on Low-Income Families in 2006," 19 states collect income taxes on two-parent families of four who live below the federal poverty level. The report discusses some of the options available to states to prevent those in poverty from having to spend their limited resources on income taxes, including state Earned Income Tax Credits (EITCs), no-tax floors, and personal exemptions and standard deductions.

The good news is that states are increasingly seeking to avoid imposing their income tax on those who can least afford to pay it. A promising example of this is in Alabama, where the efforts of Alabama Arise have helped to spearhead state income tax changes that have decreased the income tax on those living in poverty by increasing the income filing threshold used to determine whether income taxes are owed (from an unbelievably low $4,600 to a still egregious $12,600). Although the state still ranks at or near the bottom in terms of the state income tax imposed on its poor, additional reform proposals have been made this year that would further increase the income threshold to $15,600 or $15,800.

Another positive development has occurred in Virginia, where lawmakers recently enacted a law that will raise the state income tax filing threshold from $7,000 to $11,950 for individuals and from $12,000 to $23,900 for couples.

Alabama and Virginia represent two examples of positive developments in decreasing the disproportionate tax imposed on the working poor by nearly every state. An even better solution to this problem would include refundable tax credits, like those found in the federal (and increasingly within state) EITC's.

Arizona Business:
We Support Public Services, as Long As Someone Else Pays for It

Earlier this year, members of the Arizona business community formed a new organization - the Transportation and Infrastructure Moving AZ's Economy or TIME Coalition - to advocate for additional transportation funding and to push for a ballot initiative to generate the revenue necessary to support that funding. At first, that may sound like business leaders acting in a fiscally responsible way to ensure that the state invests in the public structures on which all Arizonans rely.

Two details might make you think otherwise. First, the taxes that the Coalition would like to see raised through the initiative - the general sales tax and the gasoline tax - would fall disproportionately on low- and moderate-income people. Second, as the Arizona Republic points out, some of the members of the TIME Coalition - such as the Arizona Chamber of Commerce - are at the same time actively lobbying for the acceleration of tax cuts for commercial and industrial property and the outright repeal of the currently-suspended equalization assistance property tax. So, while Arizona may need to make critical public investments to foster economic growth and to improve the quality of life in the state, don't expect businesses to pony up - in their view, that's just for working people.

Confession from Minnesota Department of Revenue
Study Finds Its Tax System Becoming Increasingly Regressive

Earlier this month the Minnesota Department of Revenue released its 2007 Tax Incidence Study showing that low-income residents pay a slightly larger share of their incomes towards taxes than others, and will continue to do so in the near future. While the findings of this report are disappointing from a tax fairness point of view, it's impressive that the state publishes this report and informs Minnesota's lawmakers and public about who pays what fraction of their income towards taxes.

This Minnesota report stands out as a stellar example of states conducting tax incidence analyses. Unfortunately, only Texas and Maine join Minnesota in offering regular tax incidence analyses. Without regularly conducted, clear, comprehensive analysis of the effects of their tax policy, state lawmakers are left to guess at what the problems are and what solutions are needed. For more on the value of tax incidence analysis, check out ITEP's brief on this topic.

Property Tax Wars
Florida and Michigan Debate Some Bad Ideas and Some Less Bad Ideas

House Republicans in Florida's House of Representatives continue to back a plan to repeal the state's property tax entirely and replace just a portion of the lost revenues with an expanded sales tax, which would take a larger bite out of the incomes of poor families than anyone else. Democrats in the Senate have put forward an alternative that is less unfair than the Republican plan but still is not exactly progressive.

At issue is the state's "Save our Homes" property value cap, which limits the amount by which a home's taxable value can growth each year to 3 percent. The 3 percent cap means that a home's taxable value is typically much less than its actual market value, resulting in a big (and growing) tax break that only goes away when a home is sold (at which time the home's taxable value is sensibly reset to equal its market value). The Democrats' alternative would make the Save our Home cap portable when homes are sold, so that the savings accumulated at one home can be used to reduce the taxable value of your new home when you move. The Democrats' plan would also raise the 3 percent cap slightly, and would (like the plan put forward by House Republicans) roll back local property taxes to prior levels.

Meanwhile, Democratic lawmakers in Michigan have come up with an equally creative (but misguided) solution to a similar problem. Under a bill passed by the state House earlier this month, the accumulated value of the tax break from Michigan's assessed value cap (which is 5 percent or the rate of inflation, whichever is less) would transfer automatically to the new owner of a home after a sale (rather than following the previous owner to his next home, as in the Florida proposal). The good news is that the House-passed bill would only make the tax cap transferable for the next 18 months, after which the legislature would have another chance to come up with a more sensible reform. And the even better news is that Michigan already has an effective property tax relief mechanism in place-- its Homestead Property Tax Credit, a "circuit breaker" credit-- that could be expanded to more effectively shelter Michigan families from excessive property taxes. For more on the Michigan story, check out the Talking Taxes weblog. To understand some of the shortcomings with caps on property tax assessments, see the ITEP issue brief on this topic.

Correct Diagnosis, Wrong Prescription
Illinois Proposal Would Repeal the State's Most Progressive Tax

Illinois Governor Rod Blagojevich said in his recent State of the State address that his state has one of the most regressive tax codes in the nation. And he was right. But his proposed solution actually involves removing the most progressive tax in the state - the corporate tax - and replacing it with a gross receipts tax (GRT), which likely has the same regressive effects as a sales tax. As ITEP's new policy brief explains, a GRT might be helpful as an alternative minimum tax on those corporations that are getting away without paying their fair share (and there are plenty of those). But ditching the corporate tax entirely is the wrong answer. Now the Governor is facing huge amounts of opposition from the business community, think tanks, and influential policymakers.