CTJ's Tax Justice Digest, May 18, 2007

Congress Passes Budget that Revives PAYGO

Yesterday, Congress passed the final budget resolution for fiscal year 2008 which foresees $2.9 trillion in spending, including $954 billion for annually appropriated programs. This is $21 billion more than requested by the President's plan, which was criticized by many Democrats and advocates for short-changing human needs services.

PAYGO Rule Revived, But Plans to Waive It for Some Tax Breaks

The effect of the budget resolution on future tax cuts is a little confusing to people who are not budget experts. The budget revives the "pay-as-you-go" rule, or PAYGO, which creates a point of order in the Senate against new entitlement spending or tax breaks that are not paid for. (This can be waived with 60 votes.) At the same time, the budget does assume that Congress will agree to waive PAYGO to spend $180 billion over 5 years on extending some of the Bush tax breaks that are being called middle-class tax breaks (even though they include estate tax reduction for very large estates).

Also in the $180 billion tax cut package are extensions of the child credit, marriage penalty relief, the 10 percent tax rate and a one-year "patch" for the Alternative Minimum Tax (which essentially extends the exemption that keeps most people from paying for the AMT for another year). (Click here for a list of all the Bush tax cuts.) This tax break language originated in the Senate at the behest of Finance Committee chairman Max Baucus (D-MT). The budget plan projects that if Congress followed PAYGO for the next five years, a surplus of $156 billion would appear in fiscal year 2012, but the tax breaks in that year alone would whittle that surplus down to $41 billion.

A "trigger" provision applies to the House, which adds another point of order (besides PAYGO) against tax breaks if the surplus is not still projected to appear a couple years into this five-year period. The Senate was adamant that this provision should not apply to them, apparently because they want to vote for tax breaks regardless of whether there is a surplus that can be used to pay for them. Even if the surplus appears in 2012, it is calculated to include the Social Security surplus, which was never intended to be used to finance tax breaks and should not be seen as money available for that purpose.

Resolution Does Not Raise Taxes

Republican opponents of the budget resolution have been quick to say that it raises taxes. As CTJ has pointed out, the resolution does not raise a cent of taxes but says that any tax cut must be paid for under PAYGO. (Even Baucus's extension of "middle-class" tax breaks would require a waiver of PAYGO). The Republicans are complaining because when they held the majority in Congress they structured their tax breaks to expire after 2010. They know they cannot extend them without increasing the federal budget deficit, which PAYGO is geared to prevent.

Most Responsible Budget in Years

PAYGO is one reason why this is the most responsible budget we've seen in six years. The President has no role to play in the budget plan because it's a resolution (not a law) that Congress uses to set the overall spending level and to create procedural rules that will guide them as they craft bills to meet the targets spelled out in the resolution. However, the administration has threatened that the President may veto individual spending bills that implement the higher spending goals.

Private Equity Fund Managers' Use of Tax Loophole Criticized

Senate Finance Committee chairman Max Baucus (D-MT) and ranking member Charles Grassley (R-IA) are looking into private equity and hedge fund activities, including the practice of treating fund managers' compensation as capital gains which are taxed at the 15 percent rate rather than the normal 35 percent income rate. The compensation is taxed this way because it's a portion of the fund's profits that are set aside for the managers. But the managers did not themselves invest the capital, making it quite odd for them to claim capital gains income. The Service Employees International Union recently release a report called Behind the Buyouts: Inside the World of Private Equity, which details this and other practices of the industry that raise public policy concerns. CTJ director Bob McIntyre took to the airwaves last week to debate with a proponent of the capital gains rate loophole for fund managers. Click here to watch the broadcast.

State Tax Justice News

Dust-Up in Big Sky Country

Montana's Special Session adjourned Tuesday after the state's biennial budget received final approval. The regular 2007 legislative session ground to an acrimonious halt late last month. The main stumbling blocks were how to spend a projected $1 billion surplus and whether lawmakers would enact a temporary property tax "rebate," as Democratic leaders proposed, or a more permanent property tax reduction, as Republicans suggested. Ultimately a one-time $400 rebate for homeowners survived the cantankerous debate, but a tax credit of up to $120 for renters failed to win final approval. Property tax cuts for businesses that would have exempted the first $80,000 of business equipment from tax were also left out of the final budget. Ultimately the agreed upon budget is likely to be viewed as a political win for Governor Brian Schweitzer as no doubt he and other policymakers will take credit for "cut[ing] more taxes for more Montanans than any time in history."

Limited Progress for One of the Most Unfair State Tax Codes

The Hawaii Legislature, in accordance with that state's Constitution, recently approved a measure to provide temporary but targeted tax rebates. The rebates are expected to range in value from $160 for married couples with adjusted gross incomes of less than $5,000 to $90 for couples with incomes between $50,000 and $60,000; couples with incomes above that range will not be eligible for the credit, while individuals would receive smaller rebates over the same income range.

The rebates are prompted by a constitutional requirement that tax refunds be distributed whenever the state's general fund experiences a budget surplus of 5 percent or more of state revenue in two consecutive years. The wisdom of reducing taxes, even temporarily, in response to such relatively small surpluses is certainly questionable, but the need to improve the fairness of Hawaii's tax system is not. According to the Center on Budget and Policy Priorities, a family of four earning just enough to reach the federal poverty level paid $546 in Hawaiian income taxes in 2006, the second highest amount in the country. Consequently, offering targeted tax rebates - rather than flat amounts as had been past practice - is a welcome change, but is ultimately insufficient. As the Honolulu Star Bulletin observed, a better approach would be to institute a state Earned Income Tax Credit (EITC) as numerous other states have done.

This Idea Should Have Been Retired: Poorly Targeted Tax Breaks for Social Security Benefits

Missouri Governor Matt Blunt is expected to sign legislation that would remove Social Security benefits and publicly funded retirement income from the state's income tax base within six years for Missourians age 62 or older. These exemptions are limited to individuals with income of less than $85,000 and married couples with income of less than $100,000. Estimates are that the legislation will cost $125 million once fully phased in. As the nation and Missourians age, common sense dictates that the cost of HB 444 is only going to grow over time and make it more difficult to fund services that seniors (and everyone else) count on. ITEP has found that only 28 percent of elderly Missourians, generally among the better off, would benefit from the proposal. Proponents of the legislation seem oblivious to this and continue to claim that any tax on Social Security benefits is "double taxation." To find out why this argument and others in favor of the bill are deceptive, read ITEP's new policy brief.

Gas Tax Gimmicks

It's the start of the summer driving season, and gas taxes are back in the news again across the nation. Gas taxes have long been the main method used by states to fund their transportation system, but recent high gas prices have made gas taxes a hot political issue. Since most states' gas taxes are fixed dollar values, inflation decreases their value every year, forcing lawmakers to pass new laws raising the gas tax every few years. However, this time around, many states just can't seem to find the political will to do so. Nebraska's governor Heineman is threatening to veto the paltry 1.8 cents per gallon gas tax increase passed by the state's legislature. Minnesota's Governor Pawlenty waited less than twenty-four hours to veto an equally modest five cent per gallon gas tax increase. Even worse, some lawmakers in Connecticut and Minnesota have proposed completely suspending their state's gas taxes, for the summer and for one year respectively. While in the short term these gas tax gimmicks may pay political dividends, in the not-so-long term these states cannot afford to play politics with transportation funding.