Tobacco Tax Hikes — A Lesser Evil?
People who follow tax issues know that cigarette taxes are regressive, meaning they take a larger percentage of a poor person's income than a wealthy person's income. This is generally true of other consumption taxes such as sales taxes and gasoline taxes because poor people consume a larger percentage of their income than wealthy people, who have the luxury of saving and investing a large percentage of their income.
So cigarette taxes are not the best way to raise revenues from a fairness perspective. But there seem to be situations in which the only tax increases politicians will tolerate are the unfair ones. The state legislature in Delaware wanted
revenue to address health and school construction, and just raised $48
million by increasing cigarette taxes from 55 cents to $1.15 a pack. Raising progressive taxes (for example, state income taxes) would be a fairer alternative, but tobacco taxes may
be a second-best option when lawmakers refuse to increase other taxes.
New Hampshire just enacted a
budget that includes a cigarette tax increase of 28 cents to $1.08 a pack
as well as several other regressive fee hikes. While this is unfortunate,
the budget also expands children's health insurance by as many as 10,000 kids,
which might be hard to do in tax phobic New Hampshire. In Connecticut, the legislature recently approved a
budget that raises the cigarette tax 49 cents to $2 per pack in a compromise
between Republican Governor Jodi Rell and the Democratic-controlled
Assembly. (Rell had earlier suggested increasing income taxes but quickly
changed her mind about that.)
Now members of Congress are eyeing an increase in the federal tobacco tax from 39 cents to $1 a pack to
fund an expansion of the State Children's Health Insurance
Program (SCHIP). Some members of both parties on the Senate Finance Committee have come to a tentative agreement to raise $35 billion over 5 years (less than the $50 billion envisioned in the Senate budget passed several months ago). One can imagine many more progressive ways of raising federal revenues. But if the Senate lacks the leadership and courage to fight for more progressive funding sources, this may be the best chance to expand children's health care this year.
More State Tax
Justice News
Tax Breaks for Tax Avoiders
Anyone compiling a list of similarities between Hawai'i and
the Cayman islands can now add "aspiring tax haven" to "sparkling beaches" and "mild climate." Late
last month, Hawai'i Governor Linda Lingle signed into
law a measure that will cap the premiums tax paid by so-called captive insurance
companies in the hope of luring more of those companies to the Aloha State. (A captive insurance company is a subsidiary of a larger company that insures that larger company's property or employee benefits.) Using tax policy to try to influence business location decisions is questionable enough on its own, but it's especially troubling in this case, since captive insurers can enable major corporations to avoid millions of dollars in federal taxes annually. As reported earlier this year, Wells Fargo, by establishing a captive insurer in Vermont,
will receive "…tax breaks totaling at least hundreds of millions of dollars over the next 30 to 40 years…"; ADM, Heinz, Alcoa, and Sun Microsystems may already be following suit. So,
policymakers in Hawai'i may think that they're bringing more jobs to their
shores, but what they're really doing is using scarce tax dollars to make
federal taxes scarcer still.
A Step Forward in the Desert
Arizona Governor Janet Napolitano last week affixed her
signature to HB 2515, an innovative piece of legislation aimed at curbing
self-destructive tax incentive competition among municipalities in the Phoenix
metropolitan area. The new law will reduce state-shared revenue to any city or town entirely in Maricopa or Pinal Counties that provides tax giveaways for retail development. While
the new law won't undo such abuses as the $100 million tax break previously
granted for Phoenix's CityNorth development, it could serve as a model for other states seeking to put an end to this inefficient and unsound approach to economic development.
Singing the Same Old Tune... and He's Still Tone Deaf
It seems that every time the waves splash against Georgia's shores another Georgia policymaker is singing the praises of eliminating one tax or another. This time Georgia House Speaker Glenn Richardson says that eliminating property taxes will
be his main legislative priority for the 2008 session. He would replace the
lost revenue by broadening the sales tax base to include groceries and services.
He'd also implement a rebate for taxpayers with incomes less than $40,000.
Georgia's tax structure is regressive and taxes some families living in poverty. Speaker Richardson's proposal will likely do nothing to improve those basic facts. Let's hope before the legislative session begins he changes his tune.
On Your Mark, Get
Set, Go! It's Initiative
Time!
This week the Ballot Initiative Strategy Center (BISC) released its comprehensive list of state ballot initiatives that are either
qualified or circulating for this fall's election season. Folks interested
in tax fairness may be concerned to learn that Tim Eyman is up to no good
in Washington; he's heading up an initiative that would
hamstring fiscal policymaking by imposing excessive barriers to any tax increase,
no matter how necessary. A proposal to amend the state's constitution to
increase cigarette taxes to raise money for kids' health care will be on the ballot in
Oregon this
November. For a complete list of states and their potential initiatives
check out this
list from BISC.
Louisiana
Enacts EITC and Other Tax Changes
Louisiana's 8-week legislative session came
to a close late last month and Governor Kathleen Blanco has signed a
variety of bills into law. HB 365 allows state income tax
filers to claim the same itemized deductions they claim on their federal
returns. The problem is, only the
wealthiest 20
percent of Louisianans itemize. The estimated $157 million the provision will cost could be put to better use. SB 3 provides a "sales tax holiday" on the first Friday and Saturday in August and applies to the first $2,500 spent by consumers. The
bill makes the holiday permanent and was introduced as a "back-to-school" benefit. The
only improvement in tax fairness is SB 341,
a progressive bill that provides for a refundable state Earned Income Tax Credit (EITC), equal to 3.5 percent of the federal EITC. This will distribute $40 million in refunds to low-income Louisianans (about 29 percent of all filers) on Tax Day.
Hidden Entitlements in the Federal Tax Code
CTJ's Multi-Part Focus on Welfare for the Rich and Middle-Class Courtesy of
the Tax Code
This Week's Topic: Subsidizing Mansions for the Wealthy
Congress grants benefits
to home-owners through the tax code in ways that would seem outrageous if they were provided in a more visible way through direct spending. The most prominent tax provision in this regard is the home mortgage interest deduction (MID). The poorer a family is, the less help this provision offers them. First, the MID
is only available to those who itemize their deductions, whereas most low-income
people use the standard deduction. IRS data show that in 2004, only 18 percent
of households with incomes lower than $50,000 itemized deductions. Second,
the deduction is generally worth the interest payment times the tax rate
that the family is subject to. This means those families in a higher income
tax bracket receive larger tax savings than those in a lower bracket, even
if both families are making the same interest payments.
In 2006 alone, the tax
expenditure associated with the MID was $72.1 billion. Direct spending programs
like public housing and rental vouchers for low-income families in 2006 totaled
only $32 billion, or roughly half of what wealthier families received from
the MID.
Estimates from the Congressional Joint Committee on Taxation indicate that the MID is regressive. Families with incomes of $50,000 and under are estimated to have made up about 61
percent of all returns in 2005 but received only an estimated 5.5 percent
of the benefits of the deduction. By comparison, families with incomes of
$100,000 and over made up around 14 percent of returns but received 68.5
percent of the benefits of the deduction.
The MID has been accepted for decades as a valuable part of the tax code because it supposedly increases
home-ownership and affordability. However, a new report by
the Urban Institute suggests this sacrosanct deduction is not actually accomplishing these goals and continues to fall short of providing support and relief to low-income people. While there is no current legislation aimed at altering the housing provisions in the tax code, the idea of major reform has nevertheless garnered attention from academics and even the
President's Tax Advisory Panel in 2005. The Panel recommended replacing the
MID with a 15 percent credit, which would be non-refundable but would be
available for non-itemizers and would cap the mortgage amount eligible for the tax break to far below the current level of $1 million. The Urban
paper proposes a similar credit but would make it refundable, which would
do even more to help low-income families.
The Presidential Race: Media Can't Keep Right-Wing Tax Proposals Straight
We
were very confused late last week when headlines stated, "Giuliani
jeered over flat tax" and alternatively, "Giuliani jeered for opposing fair tax" (which is what proponents of a national sales tax are calling their idea). Both the flat tax and the national sales tax proposals have been said to 'simplify' our tax system, are regressive taxes, and are supported mostly by conservatives. Apparently people in the media didn't agree on which tax proposal they were talking about. Then again, even we have trouble keeping up with the various crack-pot ideas coming from
the anti-tax activists.
A flat tax system would replace our progressive rate system and tax everyone at a flat rate above what low-income people pay now and below what high-income people pay now. To point out the obvious, this means tax hikes for the poor and tax breaks for the rich. Or flat tax advocates propose a rate that looks fairly low, but which implicitly means
defunding public services dramatically.
The so-called "fair tax" proposal would abolish all federal
taxes and replace them with one national sales tax. It might sound simple, but it's regressive, and it results
in a sales tax between 45 and 53 percent in
order to maintain current revenue levels. We'll assume that most people would be shocked by a sales tax of over 50 percent on everything they buy. (Who wants to pay $300,000 for a $200,000 home?) But what is even more alarming are the huge tax breaks the wealthy would receive when they no longer have to pay taxes on income in the form of interest, capital gains, and
dividends.
The reports stating that Republican presidential candidate
Rudy Giuliani was jeered for opposing the national sales tax concept were correct. He questions the national sales tax proposal supported by both Republican candidate Mike Huckabee and Democratic candidate Mike Gravel. The
idea of a federal flat tax, on the other hand, is supported by Giuliani today,
which is an apparent reversal from his position 10 years ago that a flat tax
would be a "terrible mistake."
