CTJ's Tax Justice Digest, April 20, 2007

Tax Day in Congress
House of Representatives Uses Tax Day to Approve Taxpayer Protections

The U.S. House of Representatives approved H.R. 1677, the Taxpayer Protection Act of 2007, on Tuesday, Tax Day. As we've explained before, the bill includes several provisions geared towards protecting taxpayers from fraud, identity theft, and predatory banks offering refund anticipation loans (RALs) which often come with interest rates around 90 percent. Interestingly, a provision preventing the IRS from handing over information about people's tax debt to such predatory banks was opposed vigorously by Jackson Hewitt, the tax preparation company, when the bill was in committee. In the past two weeks, the Department of Justice has been trying to shut down around 125 Jackson Hewitt offices in which the owners are accused of fostering an environment "in which fraudulent tax return preparation is encouraged and flourishes."

Wal-Mart Avoiding $2.3 Billion in State Income Taxes
New Report by CTJ and Change to Win

Wal-Mart appears to be skipping out on its fair share of the taxes that most Americans have to pay to help support state governments. A new report released by Citizens for Tax Justice and Change to Win reveals that Wal-Mart avoided $2.3 billion in state income taxes, cutting its payment to state governments almost in half between 1999 and 2005.

Only one state, Wisconsin, discloses the taxes that corporations pay annually. The data from Wisconsin provide insight into how other states are individually hurt by Wal-Mart's $2.3 billion in tax avoidance over the past seven years.

Wisconsin is actually a state that does not require "combined reporting" of corporate profits for state tax purposes. This facilitates corporate tax shelters by large multi-state companies like Wal-Mart that involve accounting tricks to shift profits between subsidiaries (on paper) to avoid taxes.

Good Ideas and Terrible Ideas Get Equal Hearing in North Carolina

North Carolina policymakers are facing short-term and long-term challenges this spring. A temporary 8 percent top income tax rate — and a quarter cent sales tax hike — are scheduled to expire on July 1, and leading elected officials (including Governor Mike Easley) are arguing that extending each of these tax increases will be necessary to make ends meet for the upcoming fiscal year.

And with an eye on long-term reform, a "State and Local Fiscal Modernization Commission" is asking hard questions about how best to reform the state's tax system — and how to divide funding responsibilities between state and local governments. ITEP staff testified before the commission earlier this week. Among the likely recommendations of the Commission: eliminating county governments' responsibility for paying some Medicaid expenses, and diversifying the revenue-raising options available to local governments. One possible source of new county tax revenue: a real-estate transfer tax on home sales. NC Policy Watch has some sensible commentary on the merits (and demerits) of this proposal.

Report: California Still Socks the Poor

The California Budget Project marked the approach of Tax Day by asking "who pays California taxes" and found that the state's tax system remains stacked in favor of wealthy families and big corporations. The CBP report finds that California taxes fall disproportionately on the lowest-income California families. Even with the recent imposition of a "millionaire's tax" income tax supplement, the wealthiest Californians pay far less of their income in tax than low- and middle-income families must pay.

Food Fight
Sales Tax on Food Questioned in Tennessee and South Carolina

In a move towards a more progressive tax structure, lawmakers in both Tennessee and South Carolina have floated plans to eliminate or reduce the sales tax on groceries. However, several competing proposals are under discussion in both states, and a political food fight of sorts has broken out.

In Tennessee, the Democrats in the House of Representatives have proposed a targeted food sales tax exemption for milk, eggs, and baby formula. Meanwhile, some Senate Republicans are lining up behind the bizarre idea of completely eliminating the state sales tax on groceries for a single month.

Tennessee's neighbor to the east is also grappling with various tax cut proposals. The South Carolina Senate Finance Committee passed a measure that would phase out the state sales tax on food over three years. The proposal is competing against a House measure that would reduce the top income tax rate. Many have expressed concern over South Carolina's ability to pay for either measure, noting (wisely) that reducing revenues during a time of budget surpluses can lead to budget deficits down the road. There are ways to make tax breaks for food more targeted to those who need them the most (ways to get the most "bang for their buck" in other words). But almost any tax break on food would be more progressive than lowering the top income tax rate. For more on the best ways to target tax breaks to those who could really use them, read ITEP's policy brief on providing targeted tax relief for residents who need it the most.

Another Brick in the Wall
Missouri Proposal Would Gut the Right to an Adequate Education

Few tax-related proposals have stirred up more controversy this year than Missouri' Joint Resolution 1, which passed the House of Representatives in a party-line vote and is now under consideration in the Senate. HJR1 would prohibit Missouri courts from ordering that revenues be increased and from telling the legislature how to spend these revenues. But the first part of the proposal — prohibiting court-mandated tax hikes — is a solution to a problem that doesn't even exist. State courts do not order legislatures to raise taxes, and any talk of them doing so is a red herring. The second part of the proposal — prohibiting the court from telling the state or local governments how to spend funds — is really an attempt to ensure that courts can't rule more money should be allocated to provide for education or other services mandated in the constitution.

It's not at all clear what the point is of having a state constitution that guarantees an education — or anything else — if courts cannot interpret what such guarantees mean. It appears that the motivation is really to strip rights from the constitution without going through the process of actually amending the constitution, since the voters would probably never approve such an amendment.

Education activists are not the only people angered by this attack on checks-and-balances in state government. According to the Kansas City Star, "Critics, including many legal experts, have said the measure could prevent people from appealing any ruling in which state tax officials unfairly applied tax laws". This legislation backs the judicial branch into a corner, making it difficult, if not impossible, for the courts to perform their vital function of upholding the constitution.

Carbon Tax
Dodd Becomes the First Presidential Candidate to Endorse Tax on Emissions

Presidential candidate and Senator Chris Dodd (D-CT) announced his support this week for a tax on carbon emissions as a way to reduce global warming. Other candidates have avoided any talk of raising taxes as a way to combat CO2 emissions and most have avoided talk of tax increases altogether. But even conservative economists have been publicly promoting the carbon tax for some time now. While most Democrats in Congress have been considering several "cap-and-trade" programs that would limit the overall amount of CO2 emissions and allow companies to trade rights to pollute amongst themselves, several economists and even business leaders have lately argued that a carbon tax would be less burdensome. Part of the reason is the great bureaucracy required to measure emissions from individual plants under a cap-and-trade system. Another reason is that a carbon tax would create more certainty about how much it costs to pollute. Some environmental groups, however, worry that a carbon tax sets no overall limit on pollution the way a cap-and-trade system would.

The challenge for proponents of the carbon tax is to design it in a progressive way. Otherwise, it would be passed onto consumers and therefore act much like a consumption tax, which is always regressive. Working families probably don't use less gasoline than rich families, but if they pay the same carbon taxes (indirectly) that means the carbon tax will take a greater percentage of a working family's income. A progressive version might have to somehow target offsetting tax cuts towards those hardest hit by the carbon tax.