CTJ's Tax Justice Digest, April 6, 2007

The Myth of the "Biggest Tax Increase In History"

Earlier this week, Citizens for Tax Justice issued its response to conservative claims that the budget resolutions passed by the House and Senate include the "biggest tax increase in history." In short, the budget resolutions do not raise a single penny in taxes. What's really infuriating right-wingers is that the resolutions include "pay-as-you-go" rules that prevent Congress from using increased national debt to fund new tax breaks. Since the President and the Republican-controlled Congress designed all of their tax cuts to expire at the end of 2010, any extensions of the Bush tax cuts will be new tax cuts that are covered under this rule.

By 2010 the majority of the Bush tax cuts will go to the richest 5 percent of Americans. If Congress enacts new legislation to extend those tax cuts, it will cost a total of $5 trillion over a decade (including the added interest on the national debt that will result). By including the pay-as-you-go (or PAYGO) rule in the budget resolutions, Congress is saying that we will not increase the national debt to enact more gargantuan tax breaks that mostly go to the wealthy. This is a common sense policy that is long overdue.

Progress on Progressivity

Minnesota's legislature has taken an important step towards a fairer tax system. The state House and Senate both passed legislation that would introduce a fourth income tax tax tier which would be targeted to upper income taxpayers. The Senate proposal would add a new 9.7 percent tax rate for those with taxable income over $250,000 for married couples ($141,250 for singles). The House proposal would introduce a 9 percent rate on taxable income above $400,000 for married couples ($226,000 for singles). The editorial board at the Minnesota Star Tribune eloquently expresses its support for the legislature's plan. Governor Tim Pawlenty has threatened to veto any tax hike — but as one commentator points out, Pawlenty's "no new tax" stance could really just mean Minnesota will continue to increase its reliance on regressive user fees to fund public investments.

Corporate Tax Reform Odd Couple: West Virginia and New York

Other than both bordering on Pennsylvania, West Virginia and New York aren't generally seen as having too much in common — until this past week. In agreeing to a budget for fiscal year 2008, policymakers in New York followed the lead of their counterparts in the Mountain State and incorporated combined reporting into their corporate income tax. Combined reporting, as ITEP's February policy brief explains, is the "most effective approach to combating corporate tax avoidance" available to state lawmakers. West Virginia enacted legislation to institute combined reporting last month and, with New York

's more recent step forward, the number of states using this essential approach to corporate taxation climbs to twenty. It could climb higher still by year's end, as North Carolina Governor Mike Easley, like the Governors of Massachusetts, Iowa, Michigan, and Pennsylvania, also now supports combined reporting. See this ITEP table to find out where your state stands on this important tax reform.

Cease Fire in Phoenix?

Arizona is considering legislation that would end the destructive "race to the bottom" in tax competition among some of the state's municipalities. The Arizona Senate — and a key House committee — have both approved measures that would reduce state aid to any municipality in the Phoenix metropolitan area that uses tax breaks to entice businesses to locate there. State Senator Ken Cheuvront, one of the backers of the legislation, argues in a recent op-ed that "developers have learned that they can play off one city against another in order to get special tax incentives", usually in exchange for projects that would go forward without tax incentives.

Phoenix's CityNorth project — the recent recipient of $100 million in municipal tax breaks — is a perfect case in point. As the development's web site boasts, CityNorth will be "surrounded by some of the strongest housing growth in the country and the highest incomes in Phoenix," so it hardly seems that the project wouldn't be viable without millions in city subsidies. For more on how wasteful these kinds of giveaways can be and what can be done to curb them, visit Good Jobs First.

Imitation is the Sincerest Form of …?

Just weeks after recommending the elimination of Connecticut's car tax, Governor Jodi Rell last Wednesday put forward a plan to limit property tax growth in the Nutmeg State to 3 percent per year. Among the myriad problems with such property tax limits is that they fail to help those individuals and families who are struggling the hardest to make ends meet, while leaving cities and towns more vulnerable to fluctuations in state aid.

Ironically, in offering her proposal, Governor Rell cited Massachusetts' experience with property tax limits as a positive example for her state to follow. Massachusetts was one of the first states in the nation to impose property tax caps, enacting Proposition 2 ½ more than 25 years ago. Yet, as the Boston Globe reports, cities and towns in Massachusetts continue to struggle with the constraints imposed by Prop 2 ½. In the wake of significant cuts in local aid during the early part of this decade, twenty- five cities and towns have already scheduled "Prop 2 ½ overrides" this year, so that they can raise the funds necessary to provide vital public services. With these votes, libraries, teachers, and policemen are all on the line — the lasting legacy of an ill-advised approach to property tax reform.

Connecticut Voices for Children has some better ideas on how to improve Connecticut's tax system and how to help low- and moderate-income taxpayers.

The Nonsensical "Tax Freedom Day"

If it's April, it must be time for... Tax Freedom Day. According to the folks at the Tax Foundation, Tax Freedom Day is the day on which "the nation has finally earned enough to pay all the taxes that will be due for that year." The calculation is a pretty simple one: as the Foundation describes it, they're just "dividing the nation's total tax payments by the nation's income." In 2007, that figure is 32.7%. So, the report concludes, Tax Freedom Day is 32.7% of the way through the year in 2007, which would be April 30.

The Center on Budget and Policy Priorities explains why Tax Freedom Day is a meaningless concept. For one thing, the average percentage of income paid towards federal taxes, as reported by the Tax Foundation, is actually higher than the percentage that all but the highest income quintile really pay. The wealthiest have incomes so high that they pull up the average above what people in the middle pay. The statistic also fails to capture certain sorts of income. Also, if the percentage has gone up as the Tax Foundation claims, it's because of rising income at the very top (which leads to more taxes paid in higher income brackets), not because of higher taxes.

Unfortunately, every year a few media outlets gullibly (or knowingly) write this story in a way that makes readers think the statistic says something about the "typical" American's tax level. Some media outlets use the Tax Freedom Day as a rhetorical tool to assert that our taxes are too high. Others simply regurgitate the report's results without making the faintest effort to evaluate what it all means. And a few worthy reporters bring up the topic just to point out that the data doesn't mean anything.

Congress Mulls Several Proposals to Protect Taxpayer Rights

Members of Congress are currently considering a series of proposals meant to strengthen taxpayer rights. The latest of these, the "Taxpayer Protection Act of 2007" (H.R. 1677) was approved by the House Ways and Means Committee before it adjourned for the Congressional recess. It includes provisions that would

- prevent the IRS from giving third parties information about taxpayers' tax debts,

- require the IRS to notify taxpayers in cases where identify theft may have occurred,

- notify taxpayers that they may be eligible for the EITC,

- clarify rules that prevent deceptive use of the IRS's name (targeting websites like www.irs.com that people may believe belong to the IRS itself.)

Of particular note is the provision preventing the IRS from sharing tax debt information with predatory banks marketing refund anticipation loans (RALs). The IRS and some members of the committee argue that it would actually be in the taxpayers' interest to provide banks information helping them to determine whether a taxpayer is likely to repay a loan, and that without this information the interest rate on such loans could be higher to reflect that lack of certainty about repayment. But the provision targets those that are "predatory," which is not defined in the legislation. RALs sometimes have an interest rate around 90 percent.

We Should Be Able to File Our Taxes Online Easily — Without Paying a Tax Preparation Firm

Another taxpayer rights-related bill (S. 1074) has been introduced in the Senate by Daniel Akaka (D-HI) to create a single internet portal that can be used to file taxes online directly with the IRS for free. Currently people who file online must use the services of one of several companies that charge a fee for those with incomes above $52,000 and which subject users to advertisements for other products.

Outsourcing of Tax Collection in Congress's Crosshairs

A third bill in the area of taxpayer rights is the legislation introduced in the House and Senate (H.R. 695/S. 335) that would end the IRS's use of private debt collectors. The program pays private contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. Since the private contractors are paid on a commission unlike IRS employees, there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate. If you haven't already, send your members of Congress a quick email in support of the legislation to end this program.