CTJ's Tax Justice Digest, June 1, 2007

Some Lawmakers May Try to Use Tax System to Withhold Rights from Immigrants

The immigration reform bill that the Senate is expected to return to after the Memorial Day recess may become a vehicle for tax provisions that would deny immigrants who are working and paying taxes the rights that other workers have. The bill, which aims to create a process by which undocumented immigrants can obtain legal status and eventually become citizens, already includes some provisions geared to placate conservative members of the Senate. Many advocates for immigrants' rights are nonetheless hoping that negotiations lead to a bill that improves life for foreign-born workers and their families.

Legislation Would Take Social Security from Legalized Immigrants Who Paid into It

The legislation being negotiated is Senate Amendment 1150 (which is expected to be adopted as a substitute for the placeholder bill S. 1348). It includes language that would reduce or deny Social Security benefits to immigrants who paid Social Security taxes before becoming documented. In a departure from current law, an immigrant who is working and paying Social Security taxes and then becomes documented (and even becomes a citizen) would not get credit for Social Security taxes paid while she was undocumented. This would mean the person could, upon reaching retirement age or becoming disabled, either have drastically reduced benefits or no benefits at all — even if she has become a citizen. Since older immigrants are likely to depend on Social Security benefits during old age, this could increase poverty and increase the sense that they are actually second class citizens.

Also, a bedrock principle of Social Security — and a reason people continue to support the program — is that paying into the system earns the guarantee of a benefit. Taking benefits away from people who actually paid for them would obviously call into question how serious that guarantee really is. A report from the National Immigration Law Center explains the various negative effects that could result from this provision.

Amendments to Take Tax Credits from Immigrant Taxpayers

There is no rational reason to fear that immigrants are going to somehow take federal benefits that they did not pay for. Undocumented immigrants are barred from using federal benefits programs. Also, the Senate adopted an amendment last week that requires that undocumented immigrants who owe back taxes must pay them or enter into an agreement to pay them before they can change their status. But this has not deterred some Senators from trying to deny immigrant workers and their families the rights that workers typically have in America. Next week, Jeff Sessions (R-AL) is expected to introduce amendments related to the Earned Income Tax Credit, one of which would prevent immigrants who are working and paying taxes (paying federal payroll taxes and possibly also federal income taxes) from receiving the EITC until they have had a green card for five years.

Report Shows the Immigration Reform Would Actually Increase Revenues

There is also no rational reason to fear that immigrants will drain the federal government's resources. A preliminary report issued by the Congressional Budget Office and the Congressional Joint Committee on Taxation explains that the net fiscal impact of the immigration reform bill would be positive. The figures released show that the legislation, if enacted, would cause the deficit to actually decrease by $2 billion over five years and by $37 over 10 years, compared to current law.

Uncertain Future in the House

Even if the Senate does pass an immigration bill, it's not clear how it would fare in the House of Representatives, where several Democrats have voiced concerns that it moves away from unifying families and towards having immigrants come to America to work only on a temporary basis. One proposal introduced by Republican Representative Dan Lungren (CA) would designate some immigrants as seasonal workers who must pay payroll taxes into a trust fund and then return to their country of origin to recoup that money at a U.S. consulate. Advocates for immigrants' rights and tax experts would probably agree that the tax system was not designed to be used as a tool to extract labor from immigrants while preventing them from settling in America.

President Signs Emergency War Funding Bill that Includes Minimum Wage Increase and Tax Breaks for Business

Last Friday, the President signed the emergency war spending bill, which included the long-awaited increase in the minimum wage as well as $4.8 billion in tax breaks for businesses to "compensate" them for the increased labor cost they will allegedly sustain. The wage increase followed a torturous procedural path for months. After the House passed a "clean" increase in the minimum wage bill in January, the Senate passed a package of tax breaks for business based on the idea that they would need to be compensated. CTJ and other organizations found this argument extremely troubling since businesses have received hundreds of billions in tax breaks since the last minimum wage increase in 1996.

Senate Strategy Questioned

The strategy of attaching tax breaks was sometimes presented by Democratic Senate leaders as a pragmatic approach, but the wisdom of that must be questioned now that several Senators and even a majority of House members who supported increasing the minimum wage felt forced to vote against the final bill because it continued funding for a war they oppose. In the end, most advocates for working people are probably just relieved that the minimum wage increase is finally signed into law.

The Tax Provisions

The individual tax break and revenue-raising provisions are the same as those included in the emergency war funding bill that the President vetoed a month ago (H.R. 1591) because of the provisions related to withdrawing from Iraq. The largest tax break, at a cost of over $2.5 billion over ten years, is the three-and-a-half year extension of the Work Opportunity Tax Credit (WOTC), an incentive for businesses to hire welfare recipients and individuals from other at-risk groups. 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.

State Tax Justice News

More Band Aids in the Midwest?

Despite a massive structural deficit and increased needs, Illinois lawmakers appear ready to put off permanently fixing the state's fiscal mess — yet again. A combination of factors in Springfield may have ensured that another legislative session will end without any real victories for Illinois taxpayers. Governor Rod Blagojevich has consistently refused to consider proposals that would increase either sales or income taxes, and his gross receipts tax proposal was met with enormous opposition. Last week House Speaker Michael Madigan said that there isn't enough political will to pass tax increases except as they relate to gambling expansion. Expanding gambling in Illinois won't improve the state's already regressive tax structure, and any new revenue raised won't be enough to fix all that ails the Illinois budget.

With a government shutdown and growing deficit looming, Michigan legislators continue to try to come to a resolution about how to balance the state's books. This sensible editorial calls for "a long-term agreement that combines tax increases with spending cuts." Instead, legislators decided to postpone payments to state-supported colleges and universities and use tobacco settlement money. However, there might be light at the end of this dreary tunnel as some Michigan lawmakers and Governor Granholm say they may have finally reached a compromise regarding a new business tax which would replace the soon-to-be extinct Single Business Tax and the $1.9 billion in revenue it raises each year.

Washington State Has Low Average Taxes... But Also the Most Regressive Tax Structure in America

In order to help educate taxpayers, the Washington State Budget and Policy Center recently issued a policy brief called "Washington State Taxes Remain Low Compared to Other States" which describes how Washington's tax structure stacks up. It points out that there are several reasons why Washingtonians should not be celebrating their low tax bills, including many pressing fiscal needs like a "shrinking revenue stream" and a growing structural deficit. The brief also notes that the average Washingtonian has low taxes, but the poor are carrying a higher proportion of the tax load in Washington than in any other state. Washington has the honor of being ranked by ITEP as having the most regressive tax structure in the country. It's clear that legislators have a lot to fix.

Alabama Could Learn Some Lessons From Michigan Study

An extensive study of the Michigan Economic Growth Authority's (MEGA) business tax incentives that were distributed between 1996 and 2004 found that incentive programs frequently don't result in the job creation they promise. As the study explains, "since 1996, MEGA has put together 230 incentive agreements. Under these agreements, 127 projects should have produced 35,821 direct jobs by 2005. In fact, these deals have produced about 13,541 jobs, or 38 percent of original expectations. This represents roughly 0.3 percent of Michigan's total work force."

Perhaps Alabama lawmakers hadn't read the MEGA study because they are currently rejoicing in having won a new ThyssenKrup manufacturing facility. What will Alabama get in return? In the short-term, Alabama taxpayers have doled out $461 million in direct financial aid, including land acquisition, site preparation, worker training, and road improvements and an additional $350 million in "abatements of sales, property and utility taxes by state and local governments." But if results like those found in the MEGA study are replicated in Alabama, lawmakers and taxpayers may wish that they hadn't been so generous. For more on this topic, visit Good Jobs First.

Bill Comes Due in South Carolina

South Carolina's free lunch comes to an end today. A controversial "tax swap" enacted last year repealed all homeowner property taxes for school operating costs and reduced the state sales tax on groceries — and partially paid for these tax cuts by increasing the sales tax rate on all other items by a penny. Residents of the Palmetto State have been enjoying the reduced grocery tax since last fall, but the extra penny of sales tax only takes effect today. So, for the first time since the tax swap was enacted, South Carolinians will get a taste of the plan's real impact on them. Low-income families, especially renters, will likely be shortchanged by this move, while wealthier homeowners will enjoy the lion's share of the tax cuts. The State newspaper puts it all in perspective here.

Adding insult to injury, state lawmakers are now contemplating cutting the state's income tax rates. House lawmakers want to cut the top rate, while the Senate wants to cut the bottom tax rate. Unfortunately, neither change will do a thing for the low-income families hit hardest by last year's tax swap.

Oil Companies Targeted by Tax State Proposals

The governors of both Pennsylvania and Wisconsin have proposed new taxes for oil companies. Governor Rendell would subject oil companies' gross profits in his state to a 6.17 percent tax in lieu of the state's corporate income tax. Governor Doyle would tax oil companies' gross receipts at 2.5 percent. It remains to be seen whether state governments can really ensure that the tax will be paid by the oil company shareholders, as both governors claim, rather than being passed onto consumers.

Probably the most important step a state can take to ensure that oil companies (and other businesses) are paying their fair share is to adopt combined reporting of corporate income for tax purposes. This prevents companies from shifting costs and profits (on paper) between subsidiaries in different states to get the lowest tax bill possible. Fortunately for Pennsylvania, Governor Rendell's tax on oil companies would be calculated using combined reporting. Experts like University of Wisconsin-Madison economist Andrew Reschovsky have suggested that Wisconsin needs to move in this direction as well. Reschovsky told the Milwaukee Journal Sentinel, "In my view, if the governor wants to raise more money from oil companies, and other multinational companies, the most effective thing he could do would be to urge the Legislature to adopt combined reporting."