CTJ's Tax Justice Digest, September 14, 2007

Romney Tax Plan Unlikely to Help Middle-Class

Presidential candidate Mitt Romney has presented a plan to allow income from wealth to go tax-free for people with incomes below $200,000. Romney favors making permanent the Bush tax cuts for capital gains and dividends (which resulted in the current 15 percent tax rate for those forms of income) but would go further by eliminating tax on income from interest, capital gains and dividends for families with incomes less than $200,000.

The plan is being presented as a boon for middle-class families who are trying to save, but few of the beneficiaries would be truly middle-class. Roughly three fourths of the current tax break for capital gains and dividends went to the richest 0.6 percent in 2005 (as Citizens for Tax Justice pointed out recently). The truth is that most wealth and savings are in the hands of the richest Americans.

"For people earning below $100,000, cutting the tax rate on interest, dividends, and capital gains means almost nothing," said Robert S. McIntyre, director of Citizens for Tax Justice, as quoted in the Boston Globe. "For those people earning between $100,000 and $200,000, you might be talking several hundred dollars in tax savings. Then, the question is, does he really have a plan that cuts off exactly at $200,000? That would be nuts - the person who makes $200,001 would be kind of angry."

At least one other presidential candidate has moved in a different direction. John Edwards would allow families a tax exemption of the first $250 of income from interest, capital gains or dividends, but he would raise the top capital gains tax rate to 28 percent while also expanding the EITC and child tax credit and matching savings up to certain limit for low-income families.

President's Reckless Tax and Fiscal Policies Force Congress to Raise National Debt Limit — Again

A new short paper from Citizens for Tax Justice examines the debt accumulated under President Bush in light of the Senate Finance Committee's vote to raise the national debt ceiling again. President Bush has added $3 trillion to the national debt so far, despite inheriting a balanced budget when he took office in 2001. Since then, Congress has been forced to raise the statutory limit on the total amount the federal government is allowed to borrow four times - in 2002, 2003, 2004 and 2006.

On Wednesday the Senate Finance Committee approved legislation to raise the debt limit a fifth time, to an unprecedented $9.815 trillion, to prevent the federal government from defaulting on its debts and being unable to borrow any more. In contrast, when Bush took office, the debt limit was $5.950 trillion - $3.9 trillion less than the new amount.

What has caused the budget deficits over the past six years? The largest cause is the cuts in federal income taxes enacted by President Bush and Congress. The total cost of the Bush tax cuts, including interest on the money borrowed to finance them, has been just over $1.4 trillion so far — about half of the total increase in the national debt under Bush so far.

Senate Bill Would Crack Down on Employers Who Misclassify Workers to Avoid Payroll Taxes

A new proposal in the Senate would crack down on employers who misclassify workers as independent contractors to avoid paying federal payroll taxes. Low-income workers who are not knowledgeable about the tax rules can be classified as independent contractors and not realize that this means they must pay both the employer portion and the employee portion of federal payroll taxes to the IRS on their own.

Anecdotal accounts from volunteer tax preparers who help low-income families file for the EITC indicate that they have had to tell some people in this situation that they actually owe a huge amount of payroll taxes that they had not planned for. When these workers do not or are not able to make the payment, this results in reduced taxes being paid into Social Security and Medicare. The Government Accountability Office has estimated that the cost each year is at least several billion dollars in lost revenues.

The proposal would reform the current rules, which provide a "safe harbor" that lets employers who misclassify workers as independent contractors continue doing so if they had a "reasonable basis" for the classification. Under current law, the reasonable basis can be that the practice is widespread in the particular industry, meaning that construction companies can misclassify workers because so many other construction companies do the same. The misclassification can also lead to the denial of other workers' rights and benefits as well as employer-provided health benefits and pension benefits.

The bill (S. 2044) would bar employers from using this "reasonable basis" argument and would allow the IRS to tell employers to reclassify workers in this situation. The bill is sponsored by Senators Barack Obama (D-IL), Edward Kennedy (D-MA), Richard Durbin (D-IL), and Patty Murray (D-WA).

Pollsters Tell GOP Tax Breaks No Longer Priority for Independents

A story from Roll Call reveals that Republican Senators have been advised by their pollsters that tax breaks are no longer a priority for independent voters. Most now rate health care reform and government spending as more pressing matters.

It's not actually clear that tax breaks ever were the most important priority for many Americans. It's often been the case that survey respondents would say they support tax breaks and oppose tax increases generally. But when asked whether they would prefer an improvement in health care, education or some other public service or a tax cut, most choose the improvement in public services. Support for public services has probably increased in recent years. A recent poll shows that two thirds of Americans support universal healthcare even if it means a tax increase. (Perhaps this is because many people realize that what they pay in taxes for healthcare may very well be less than what they pay now under our health care system, which is less efficient than that of almost every other developed country).

The Roll Call story does imply that there is polling to show that independent voters have some vague sense that government spending is too high, but we suspect that as with taxes, respondents would answer very differently when presented with choices about the actual government programs that cost the most money. About a fifth of federal spending goes toward healthcare, another fifth toward Social Security, and another fifth toward defense. That means most federal spending goes towards things most Americans support. Another nine percent goes toward paying the interest on the national debt, which the Bush administration has actively increased, largely with tax breaks.

Americans express very different views when they are confronted with the trade-offs involved when vague calls for "smaller government" are turned into specific legislative plans to cut services. For example, the previous Congress's efforts to slash Medicaid and other federal services didn't seem to win it many supporters. Conservative politicians have in the past been able to appeal to voters by offering stark choices between "small government" and "large government" or between "lower taxes" and "higher taxes" but they find it difficult to get Americans to agree on specific services to cut rather than expand.

Colorado: Fiscal Policies in the Forefront Again

After years of starving state government through the so-called Taxpayer Bill of Rights (TABOR) the piper may finally get paid. It seems that a wave of ballot initiatives will ask Colorado voters next year to increase taxes to pay for government services and programs they feel are important. According to The Bell Policy Center, at last count there were 17 initiatives in the works that deal with raising revenue. The proposals include using fees on new construction to fund education and a new tax on junk food. Currently Colorado ranks near the bottom for education and highway spending compared to states around the nation. Over the years since TABOR was enacted, many in Colorado have realized that taxes are necessary for government to function and have turned to the initiative process as a flawed, second best alternative to having a legislature that can make responsible tax and fiscal decisions.

Georgia's GREAT Plan is Anything But...

Georgia Speaker of the House Glenn Richardson's Georgia Repeal of Every Ad Valorem Tax (GREAT) Plan would eliminate the state's property tax and replace the lost revenues by expanding the state's sales tax base. The plan is receiving lots of attention that Rep. Richardson probably doesn't like. For starters, media around the state are asking hard questions including this one from the Athens-Banner Herald, "How long is he willing to hold on to an idea that is already all but doomed to fail?" According to the Atlanta Journal Constitution Governor Sonny Perdue also has doubts about the GREAT Plan becoming law.

The Speaker has been traveling around the state discussing his plan and advocates for tax fairness and adequacy aren't letting his tour go unanswered. The Georgia Budget and Policy Institute along with AARP Georgia, the Georgia Association of Educators, The Georgia Municipal Association, the Georgia School Boards Association, and the Georgia Coalition United for a Responsible Budget are also touring the state and visiting nine cities to educate the public about the state's tax and budget situation.

Hopefully NOT Coming to a Mall Near You

A new report from Good Jobs First documents the "more than $200 million in economic development subsidies and tax savings from assessment appeals" enjoyed by General Growth Properties, the second-largest owner and operator of shopping malls in the country. The extensive study looks at 50 malls in 23 states and the results are shocking. The loss of state and local revenue from these subsidies and successful assessment appeals means less money for public priorities like education. To see if a mall in your area enjoyed special treatment, check out the Good Jobs First report here.

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