United States Remains One of the Least Taxed Industrial Countries
Taxes continue to take up a relatively small part of American economic output, according to data compiled
by Citizens for Tax Justice from the Organization for Economic Cooperation
and Development, the U.S. Treasury and the U.S. Census. In 2005, U.S. taxes as a share of GDP were the
third lowest among the 30 OECD nations. This
data shows that the United States generally is not overtaxed, despite
vigorous pleas to the contrary from the right.
House
and Senate Pass Minimum Wage Increase and "Compensation" for Business
A
standoff between the chairs of Congress's main tax-writing committees over
tax breaks and efforts to hike the minimum wage ended this week. Senate
Finance chairman Max Baucus (D-MT) and House Ways and Means chairman Charlie Rangel
(D-NY) agreed to include a package of $4.8 billion (over 5 years) in tax breaks in legislation increasing the minimum wage, which was passed this week in both chambers as part of an emergency war funding bill. Rangel originally sided with Democrats in the House who pushed for and passed a "clean" minimum wage increase (without tax breaks). The Senate passed a package including $8.3 billion in business tax breaks on February 1, and Rangel compromised somewhat and passed a package of $1.3 billion that was approved and added to the minimum wage legislation.
Matters
became more complicated when Democratic leaders in both chambers attached their respective minimum wage packages (including both the wage hike and tax breaks) to the emergency war spending bills they each passed. The President has vowed to veto this legislation because it includes timelines for withdrawing troops from Iraq, but the minimum wage and the accompanying tax breaks may be included in another emergency war spending bill that might not prompt a veto from the President.
Does
Business Need to be "Compensated?"
While
the new $4.8 billion level that both Baucus and Rangel have agreed to is a breakthrough, it is nonetheless disconcerting that several Senators on both sides of the aisle seem to believe that business should be "compensated" for
raising the minimum wage from its lowest real purchasing power in 50 years.
As we've pointed out before, business has received $276
billion in tax breaks since the last minimum wage hike in 1996. Remarkably, some members of Congress who are hostile to minimum wage legislation, such as Charles Grassley (R-IA), are actually complaining that the tax breaks are not big enough.
What's in the Tax Package
More
than half of the tax breaks would take the form of a three and a half year
extension for the Work Opportunity Tax Credit (WOTC), an incentive for
businesses to hire welfare recipients and individuals from other at-risk
groups, at a cost of more than $2.5 billion over ten years. Other tax breaks
would loosen various tax rules relating to Subchapter S corporations (which
pay no corporate level tax), at a cost of $892 million over 10 years. Also
included is a change in the Alternative Minimum Tax (AMT) paid by restaurants,
allowing them to use a tax credit for FICA taxes paid on tipped workers
and the Work Opportunity Tax Credit to reduce their AMT.
Tax
Breaks Technically Paid For
The best that can be said for the tax cuts is that they're technically offset so that they will not add to the federal budget deficit. The most significant offset would allow the IRS to charge interest on delinquent payments for a longer period of time before it must give notification and suspend interest. Another provision would require that people under 19 years of age be taxed at the income tax rate their parents are subject to (which currently applies to people under 18). Other changes relate to how deficiency payments are treated as well as penalties and user fees.
House Democrats' Goal: Alternative Minimum Tax Reform by Memorial Day
Democrats in the House of Representatives are hoping to pass legislation by Memorial Day that will permanently reform the Alternative Minimum Tax (AMT) and prevent it from reaching millions of more taxpayers. The Bush tax cuts increased the number of people subject to it and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from paying the AMT. As a result, 23 million taxpayers (17 percent of taxpayers) will pay the AMT if Congress makes no change to the law. The AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) more than half of the AMT would still be paid by the richest 4 percent of taxpayers.
But
it's widely accepted that Congress will simply not allow a tax to begin
affecting millions of people who have never even heard of it, so more responsible
members of Congress have focused on how to change the AMT in a way that
is fiscally sound and progressive. There are several ways to do this. Democrats
on the House Ways and Means Committee are said to be interested in exempting
people with income below $250,000 from the AMT, lowering the AMT for
people with incomes between $250,000 and $500,000, and and shifting the
cost of the change to those with incomes above $500,000. How exactly the
cost would be shifted to those taxpayers with incomes over half a million
dollars is yet undetermined. This could be done through the regular income
tax. The Tax Policy Center has recently shown the
impact of doing this by raising the top AMT rate from 28 percent to 35
percent. Another proposal, made by Citizens for Tax Justice in December,
would close the main loophole in the AMT, the lower AMT rate for capital gains and dividends, extend the exemptions and index them to inflation.
What's
most important is that AMT reform should not increase the federal
budget deficit and that the costs should be borne by those who were the
original target of the AMT in the first place, the super-rich.
Democratic Congressmen Propose Estate Tax Break for Farms
Last
week U.S. Representatives John Salazar and Tim Mahoney introduced the "Save the Family Farm and Ranch Act of 2007," which would exempt family farms that
provide 50 percent or more of a family's income. This seems unnecessary.
The American Farm Bureau Federation famously admitted to the New York Times
in 2001 that they could not cite a single example of a farm that was lost
due to the estate tax. Moreover, as a Citizens
for Tax Justice paper explained last summer, family farms receive several additional breaks (beyond the $2 million dollar exemption in effect this year) from the estate tax and can
pay off estate taxes over a period of 14 years.
Missouri
Groups Issue Joint Statement: "We Cannot Afford Any Tax
Cut"
Seventeen Missouri organizations came together this week to oppose a proposal to
enact a new tax break for well off Social Security beneficiaries. The groups
issued a joint statement against unaffordable tax cuts. As
mentioned in a previous CTJ digest, tax cuts for seniors are are often structured in a way that does nothing to
help those seniors most in need.
To
rationalize the tax cut bills, some state lawmakers claim that the state
is experiencing a budget surplus. But many advocates are
pointing out that the surplus came on the back of the massive budget
cuts over the past five years. During this period, Missouri cut over $3
billion from health care, education, and many other vital social services.
With only three weeks left to go in the state's legislative session, tax
fairness advocates are hoping the Senate and House will abandon the poor
tax policy currently proposed.
Two
Very Different Approaches to Property Tax Reductions: Florida vs. Minnesota
The
prospects for passage of new property tax reduction legislation are
looking dim in Florida,
as the House and Senate must now reach a compromise between two competing
measures. The House version compensates for the revenue lost from
lower property taxes by raising the sales tax by as much as 2.5 cents. This
tax swap idea is proving quite controversial, due to the regressive nature
of the sales tax. Senate Republican leader Daniel Webster lead the
charge against the House proposal, saying: "The sales tax is a regressive
tax. And the more you raise it, the more regressive it becomes. The
poor are going to get poorer, and the rich are going to get richer." The
Senate proposal features a smaller property tax reduction, with no tax
increase to offset the revenue loss.
One idea not under consideration in Florida is
paying for a cut in property taxes by increasing income taxes. Just
such a measure is being discussed in the Minnesota House. A few weeks ago, both the House and Senate passed legislation creating a fourth income tax bracket, although the rate differed slightly between the two bills. Now a new House proposal would pay for a property tax reduction and expanded tax credits for homeowners and renters with a 9.0 percent income tax rate for single taxpayers with incomes in excess of $250,000 or married couples with incomes above $400,000. This property-tax-for-income-tax swap would create a more progressive state tax system. By
contrast, Florida lawmakers continue to refuse to debate instituting
a state income tax, depriving themselves of a powerful tool for creating
a more just and equitable tax structure.
Tax
Debate in Connecticut May Produce Progressive Changes
Connecticut
may be a comparatively small state, but it is now gearing up for what
could be a huge debate over tax policy. Already this year, Governor Jodi Rell has proposed increasing the personal income tax rate from 5.0 to 5.5 percent, eliminating the estate tax, repealing the car tax, and capping the growth of local property taxes at 3 percent per year. Senate Democrats have responded with an equally ambitious set of proposals. Legislation approved last week by the Joint Finance, Revenue, and Bonding Committee would create a much more graduated personal income tax rate structure (with a top rate of 6.95 percent for married couples with annual incomes above $250,000) as well as a state Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC. The Democrats' plan would also double - from $500 to $1000 - the maximum personal income tax credit for property taxes paid. However,
some elements of the Democratic plan are less fair - an increase in the
cigarette excise tax from $1.51 per pack to $2.00 and the elimination
of the sales tax deduction for clothing purchases of less than $50.
A recent analysis of
the two sets of income tax proposals by the state's Office of Fiscal
Analysis shows married couples with adjusted gross incomes below $200,000
and individuals with gross incomes below $150,000 faring better under
the Democratic approach. At the same time, it shows that married couples with incomes above $600,000 per year - and individuals with incomes in excess of $300,000 - would pay substantially higher taxes if the Democratic plan were to become law instead of the Governor's. Connecticut
Republicans have been quick to point out that the OFA's analysis leaves out the impact of higher cigarette and sales taxes.
With Connecticut facing
a structural budget deficit of half a billion dollars,
the stakes in this debate are obviously quite high. Still, it
is an encouraging sign to see that both sides in the debate seem committed
to using the state's fairest tax - the personal income tax - as the
principal means of addressing existing problems and funding new priorities.
Lack of Progress on Progressivity in Indiana
Indiana
lawmakers must wrap up their legislative session by this weekend — so it was a nasty shock when a new legislative staff analysis, released on Tuesday, found
that homeowner property taxes are likely to increase by an average of 24 percent this
year. Lawmakers are likely to approve a budget deal that would offset at least $200 million of the projected homeowner property tax hikes with state aid this year, while giving local governments the option to levy local income taxes. Unfortunately, many legislators are interested in paying for these property tax cuts by, among other things, increasing the state's reliance on legalized gambling. No one seems willing to address the idea of making the state's income tax more progressive by changing from a flat-rate to a graduated-rated structure. Still
up in the air as the session dwindles: whether a cigarette tax increase
will be used to fund health care for low-income Hoosiers.
