CTJ's Tax Justice Digest, October 5, 2007

Bush Vetoes Children's Health Care Bill
Continues to Promote His Faulty Tax Proposal

This week President Bush vetoed the bill to expand the State Children's Health Insurance Program (H.R. 976) that was approved by the Senate and House of Representatives last week. The bill would increase funding for the program by $35 billion over ten years by increasing the federal tobacco tax for cigarettes from 39 cents to a dollar per pack. The President has promoted his own idea for expanding health care -- a change in the tax code that would weaken the employer-based health care system without guaranteeing that it's replaced with a viable alternative.

The President's own proposal 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 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. The Center on Budget and Policy Priorities explains this and other problems with the concept.

None of this is to say that the way the tax code currently treats health care is optimal. The deduction for employer-provided health insurance provides the greatest benefit for those in the highest income brackets and the lowest benefit 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.

Rep. Obey Proposes Progressive Surtax to Fund Iraq War

In 2003, then-Speaker of the House Republican Denny Hastert argued for the first major tax cut during a war in U.S. history, saying, "Nothing is more important in the face of war than cutting taxes." During that year, the centerpiece of President Bush's tax cut plan was enacted, the low 15 percent rate for capital gains and dividends. In 2005, this break cost about $92 billion and three fourths of it went to the richest 0.6 percent of taxpayers. Instead of asking Americans to make a sacrifice, the President guaranteed Americans that our economy depended on deficit-financed tax cuts aimed at the wealthy.

Four years later, has anything changed? On Tuesday, Congressman David Obey (D-WI), chairman of the House Appropriations Committee proposed a surtax to raise $145 to $150 billion a year to pay for the war in Iraq. Under his proposal, low- and middle-income taxpayers would see a two percent increase in their federal income tax bills, while wealthier people would see a 12 to 15 percent increase.

"Some people are being asked to pay with their lives or their faces or their hands or their arms or their legs," Obey told the Washington Post. "If you're going to ask for that, it doesn't seem too much to ask an average taxpayer to pay 30 bucks for the cost of the war so we don't have to shove it off on our kids."

Even though such temporary taxes have been used to fund wars in the past, the anti-tax establishment pounced immediately. White House press secretary Dana Perino said, "Well, we've always known that Democrats seem to revert to type and they are willing to raise taxes on just about anything. There's no need to increase taxes." When asked to compare the President's refusal to fund an expansion of SCHIP with his willingness to spend hundreds of billions of deficit-financed dollars on the Iraq war, she called the Democrats "completely irresponsible" for wanting to raise taxes to pay for children's health care and the war.

In other words, the White House's fun-house mirror version of fiscal realities has not changed since the outset of the war. In their eyes, the responsible thing to do is have tax cuts and a war that are both deficit-financed, while paying for these things would be "completely irresponsible."

Meanwhile, Congress just raised the limit on the amount of debt the federal government can rack up for the fifth time since Bush took office.

Senate Finance Committee Approves Agricultural Tax Bill with a Provision to Crack Down on Tax Avoidance Schemes

The Senate Finance Committee voted 17 to 4 Thursday to approve a tax package that will cost $17 billion over ten years and will be added to the reauthorization of the farm bill that the Senate Agriculture Committee will take up in a couple weeks. The tax package includes a $5 billion trust fund for crop disaster assistance as well as $3 billion in tax credits to encourage conservation. These items would replace direct spending programs for these purposes and, since the Finance Committee package includes offsets, will free up funds for other purposes in the larger agriculture bill.

The largest offset is a provision that will reduce tax avoidance schemes by codifying what is known as the "economic substance doctrine," which basically means that transactions having no purpose other than to avoid taxes are void. This provision, which arguably will reduce the economic inefficiency that comes with the exploitation of tax loopholes, will raise $10 billion over ten years.

Another revenue-raising provision takes aim at tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision. Some members of Congress oppose any such retroactive changes in tax laws, but the Senate Finance Committee earlier this year tried to include this change in minimum wage and energy legislation.

Another provision raises $854 million by cutting the tax credit for ethanol from 51 cents to 46 cents a gallon when ethanol production reaches a certain level. Several amendments were approved. Jim Bunning (R-KY) delayed the markup for a couple hours before agreement was reached to include his amendment to create a 50 cent-per-gallon tax credit for fuel made from liquefied coal or natural gas. Environmental organizations point out that use of liquefied coal may actually increase global warming, underscoring the possibility that these matters are not exactly within the expertise of the Congressional tax-writing committees.

Senator Levin Targets Deductions for Stock Options

Senator Carl Levin (D-MI) introduced a bill this week to end the disparity between deductions taken by companies for stock options and the expenses that are actually reported on the companies' books for those options. Corporations sometimes compensate employees (particularly executives) with options to buy stock at a set price. The employee can wait to exercise the option until after the value of the stock has increased beyond that price, thus enjoying a substantial tax benefit.

When stock options are exercised, employees report the difference between the value of the stock and the exercise price as taxable wages. The employer reports the fair value of the option at the date it's granted in its financial statements, yet takes a deduction for the value of the option on the date it is exercised, which is often much greater. This "book-tax gap" means that how the options are valued for accounting purposes and reported to stock-holders is different from how they're valued and reported to the IRS. Levin's bill would make the amount deducted for tax purposes equal to the value accounted for in financial statements.

According to calculations made by his staff using IRS data and released in June, firms deducted $43 billion that was not included in financial books in this manner between December 2004 to June 2005. CTJ's 2004 study of corporate taxes cited stock options as one of the key reasons corporations were able to avoid taxes.

More Details Emerge on Maryland Governor's Tax Plan

Maryland Governor Martin O'Malley continues to release details of his ambitious revenue-raising plan, which would use income tax, sales tax, cigarette tax and gambling revenues to close a $1.7 billion structural budget deficit. The latest wrinkle: a progressive low-income sales tax credit, which would offset a small part of the O'Malley plan's sales tax increase by giving each household earning less than $30,000 a $50 tax credit.

But the most controversial part of the O'Malley package -- allowing slot machines at Maryland race tracks -- ran into a major road bump this week, as Maryland Senate Republicans signaled that they would not support slots as part of a tax package. Since slots would ultimately account for close to a third of the revenues from O'Malley's proposal, this casts doubt on whether O'Malley's planned special legislative session for tax reform will take place this fall. The Baltimore Sun thinks that's a good thing. The Washington Post's Steven Pearlstein has a level-headed critique of the governor's plan here.

Ongoing Budget Problems in Illinois

Faced with a looming budget hole, Illinois lawmakers shied away from addressing tax reform this year -- and elected officials in the state's biggest local government, Chicago's Cook County, now find themselves asking the hard questions state lawmakers avoided. A recent report from the Center on Tax and Budget Accountability shows that the county's current budget hole, estimated at $288 million, reflects a "structural deficit" -- that is, a recurring imbalance between the services a government provides and the revenues it uses to fund those services -- that will grow to over $800 million a year by 2012. The CTBA report explains that the county's heavy reliance on slow-growth property taxes and a narrow local sales tax base make the tax system incapable of keeping pace with the cost of funding important services. County lawmakers have proposed an increase in the county's already-high sales tax rate (without expanding the sales tax base to include currently-untaxed services), which would reduce the deficit but wouldn't directly address the sustainability concerns raised by the CTBA report.

Meanwhile, state and county lawmakers are engaged in a tug of war over whether to extend the county's soon-to-expire temporary caps on the growth of residential property taxes. The Chicago Tribune explains succinctly why such caps are bad policy.

Government Shutdown Avoided in Michigan

Michigan lawmakers ended a four-hour partial government shutdown early Monday morning by enacting two bills designed to deal with a projected $1.75 billion deficit. House Bill 5194 includes an increase in the state's single income tax rate from 3.9 to 4.35 percent. The rate increase will be phased out between 2011 and 2015 and is expected to increase revenues by $765 million a year. The second revenue-raising bill (HB 5198) broadens the sales tax base to cover many services, including landscaping services, bail bond services, and even baby shoe bronzing services. This is expected to increase state revenues by $750 million. The budget also includes $440 million in spending cuts.

Michigan lawmakers deserve credit for making tough decisions to ensure that the state can work to adequately meet the needs of Michiganders. We expect other states will eventually follow Michigan's lead and expand their sales tax base as economies continue to change from goods-based to service-based. For more on sales tax base expansion options see ITEP's policy brief.

Missed a past issue of the digest? Click here to read previous issues.

To report broken links or share comments, email us.