CTJ's Tax Justice Digest, August 3, 2007

Good News and Bad News in New York

First, the good news. According to the New York Times, officials in the Empire State this week issued warnings to about a third of the roughly 10,000 businesses that participate in the state's enterprise zone program for failing to make good on job creation or investment commitments. The enterprise zone program offers a wide range of tax breaks - including sales tax refunds, property tax credits, and investment tax credits - to businesses in hopes that they will boost employment and investment in the state.

As the Times points out, the program has been around for twenty years - and has cost New York taxpayers $3 billion since 2000 - yet these warnings mark the first real effort to enforce the commitments businesses make to receive those tax breaks. For example, Wal-Mart and Lowes, two of the largest companies cited, pledged to invest $45 million and $9 million respectively, but together have put up only about $4 million. New York has the power to recoup tax breaks from businesses that fail to meet their commitments, but won't attempt to do so until program participants have filed their 2006 reports. Still, given the prevalence of these types of programs around the country - programs that are likely yielding similarly poor results - New York's action will hopefully spur other states or municipalities to do the same.

Now, the Bad News

Unfortunately, New York lawmakers haven't exactly been paying attention to the poor track record of the state's enterprise zones and how little the public got in return for the investment of tax dollars in this fashion. Otherwise, when the Yankees came to them looking for help in building a new stadium, they probably wouldn't have given them over $660 million in subsidies. (Just call it "The House that Giuliani Built.") The latest report from Good Jobs New York - entitled Insider Baseball - has all the details.

Human Needs Services Endangered by Budget Standoffs

Three states - California, Illinois, and Wisconsin - remain without budgets this week, even though their fiscal years began about a month ago. The delays are linked to disputes over tax policy and will soon begin to have major consequences for vital state services like public education and health care for the poor and the elderly.

California

In California, the state Senate fell one vote shy Wednesday of adopting a budget and may not resume deliberations until August 20^th. Republicans maintain that some $700 billion in spending cuts are necessary to balance the budget, yet continue to back a tax package that, by the estimate of Senate President Don Perata, could cost the state $600 million to $1 billion annually. Among the principal elements of that tax package are $100 million in tax credits for movie and television production companies, $175 million in credits for research and development, and changes to the state's corporate income tax apportionment formula.

As the Sacramento Bee points out, this delay will likely force the state to suspend Medi-Cal payments to the 500 hospitals and 11,000 nursing homes and other facilities that serve the 6.8 million Californians who participate in the program. It may lead to a similar stoppage in funding for subsidized day care across the state, leaving 250,000 low-income families without caregivers for their children while they are at work. Interested readers can visit the California Budget Project's website for the latest on the showdown.

Illinois

Little progress has been made in the Illinois budget standoff. In fact, Governor Rod Blagojevich pleaded with state employees to continue working even though the state's one-month temporary budget extension ended on July 31. State Comptroller Dan Hynes says that the state must have some sort of budget by August 8 - when the state is scheduled to make school aid payments. In the meantime, legislative leaders have rejected the Governor's proposal for another one-month budget extension. Powerful House Speaker Michael Madigan has said, "I think we're close." Looking through our crystal ball we predict that Illinoisans can expect a modest budget that does little to improve education, expand health care coverage, or improve the state's tax structure.

Wisconsin

The budget clock is also ticking in Wisconsin as the Governor and the University of Wisconsin chancellors have both denounced the budget approved by the Assembly, saying that the budget cuts included would increase class sizes in universities and decrease class offerings. A conference committee is currently meeting to reconcile the Assembly budget with the Senate's which included tax increases and a health care plan. Senator Neal Kedzie says the state "could be in for a very long and bumpy ride."

Sales Tax Holidays Offer Little Reason to Celebrate

Currently, fifteen states and the District of Columbia offer some form of sales tax holiday. These "holidays" ensure that specific items purchased by shoppers aren't subject to the sales tax. When the holiday begins and ends, the specific "tax-free" items allowed, and whether or not the holiday applies to both the state and local sales tax are all policy options that states grapple with. For a complete look at the states that currently offer these holidays, here's a helpful list from the Federation of Tax Administrators.

But don't get your party hat on too fast; these holidays aren't all they are billed to be. Sales tax holidays are very poorly targeted. They provide tax breaks to all consumers, even the wealthy. Of course, any sales tax cut will benefit low-income families, for whom these taxes are most burdensome. Yet, sales tax holidays do little to make a state's overall tax structure fairer. Also, the lost revenue from sales taxes can be expensive for states. Tax fairness advocates aren't the only people who see through this gimmick. Take a look at this thoughtful editorial from a small business owner about a sales tax holiday bill in Massachusetts that became law yesterday. For more on sales tax holidays, click here.

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: Health Care

The federal government's primary approach to helping the middle-class access healthcare is through the tax code. Most importantly, employers can deduct funds used to provide health insurance to employees, who generally exclude the benefits from income. This is not the most rational or comprehensive approach but has helped middle-class people obtain health insurance.

The deduction for employer-provided health insurance is projected by the Congressional Joint Committee on Taxation to cost the federal government $534 billion from 2006 through 2010. Deductions for health insurance premiums available to the self-employed will cost another $22.6 billion between 2006 and 2010. While many middle-class families have obtained health insurance through this route, there are many ways in which it may not be an efficient or equitable policy. For one thing, the tax benefit is greatest for those in the highest income brackets and lowest for those in the lowest income brackets, making it an undeniably regressive policy. Also, it does nothing for the estimated 45 million Americans lacking health insurance. The rising high cost of health care has caused many employers, particularly small businesses, to decide to not provide health insurance to their workers, despite the tax break that would benefit the employees.

White House Proposal Could Make Matters Worse

President Bush argues that his health care tax proposal would remedy this situation. He would eliminate the deduction for employer-provided health insurance and instead offer a deduction for health insurance purchased on the individual market (for the purchase of coverage that is not employer-provided) The reality is that his plan could weaken employer-provided health insurance without ensuring that an adequate alternative takes its place. The President's proposal would basically make the tax code biased towards individually purchased health care and even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance. The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

A recent summary of research from the Center on Budget and Policy Priorities notes studies showing that most low-income people trying to obtain coverage on the individual health insurance market have difficulty and over a quarter are denied coverage or are charged much more because of a pre-existing condition. The types of coverage available on the individual market often result in greater out-of-pocket expenses that will cause some low-income people to forego necessary health treatments.

Public Programs Like SCHIP More Efficient than Tax Subsidies - Yet Face Presidential Veto

The President has claimed his proposal would be more efficient than the House and Senate bills to expand the State Children's Health Insurance Program (SCHIP), which the two chambers approved this week. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care under either bill would be those who would otherwise not have health insurance. Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal, and that the majority of benefits from the President's health care proposals go to those who would have health insurance anyway.

On August 2, the Senate passed its SCHIP bill, which increases the federal cigarette tax by 61 cents to one dollar per pack to offset the costs. The House passed its broader bill, which increases the federal cigarette tax by 45 cents per pack and includes other revenue-raising provisions, on August 1. The President has indicated that he would veto either version.

One Step Forward, One Step Back for State EITCs

North Carolina took a large step forward towards tax fairness this week when both houses passed a new budget that includes a state Earned Income Tax Credit, or EITC. North Carolina now joins 20 other states that offer an EITC. These credits receive broad bipartisan support in so many states because of their proven track record of success. The EITC works by rewarding work, making sure that working low-income families aren't taxed further into poverty. Since the measure is targeted only at these families, it provides much more benefit per dollar of state revenue than almost any other anti-poverty program.

Despite all this, however, some legislators in Michigan want to delay the introduction of that state's EITC. Last year, the state passed an EITC for the first time. Now, proponents of delaying the EITC argue that, given the state's current business and fiscal problems, the government simply can't afford the tax break. Of course, many of these senators are the same ones who have been advocating against any new business taxes in the state to replace revenue lost with the repeal of the Single Business Tax. It's true that the state is not in good fiscal condition, but during economic downturns anti-poverty measures become more important, not less. Michigan voters should urge their lawmakers to keep their promise to the working poor. For more information on state EITCs, try this helpful website. For more information on how EITCs work, read this ITEP policy brief.

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