What types of "offsets" are attached to an AMT bill in the Senate is not decided by Senator Reid. It's decided by the Senate Finance Committee, and Finance Chairman Max Baucus (D-MT) has not yet said whether or not he'll include a provision to close the carried interest loophole. But he and ranking member Charles Grassley (R-IA) have both shown interest. An AMT bill needs to include offsets now that Congress operates under pay-as-you-go (PAYGO) rules that prevent it from increasing the budget deficit. Once the Finance Committee approves an AMT bill and sends it to the full Senate, Senator Reid will make time for a floor vote, since it will shield over 20 million families with voting members from an increase in their Alternative Minimum Tax.

Carried Interest Issue Won't Die Regardless of What Happens This Year

Regardless of what happens this year, there's enough public anger over the carried interest loophole to keep the issue alive for some time. Presidential candidates Hillary Clinton, John Edwards and Barack Obama have come out in favor of eliminating the loophole. Edwards and Obama even made a point of expressing their outrage that the issue hasn't been resolved by now. Even a chief lobbyist for the private equity industry said Wednesday that "It's not over; it's only just beginning."

For now, all eyes should be on the members of the Senate Finance Committee, particularly its chairman, Max Baucus.

Republicans Call for Replacing Alternative Minimum Tax with Alternative Maximum Tax

House Republicans have called for replacing the complicated Alternative Minimum Tax with a potentially even more complicated Alternative Maximum Tax. The plan, which also proposes permanent extension of the Bush tax cuts, would add more than $5 trillion to the national debt over the 2011-20 period.

Under the GOP plan, taxpayers could choose to continue to pay taxes under the current tax code -- but with no Alternative Minimum Tax and with all of the Bush tax cuts permanently extended. Or they could switch to the new Alternative Maximum Tax, with lower rates than current law and no credits or deductions except for a large standard deduction and personal exemptions similar to those under current law.

Because the plan would repeal refundable tax credits now available to low-income working families, it would be of no benefit to the poorest one-third of Americans. Wealthy families, however, would get huge tax reductions.

To maintain or enhance complexity, the plan would allow couples to switch between the two tax systems annually by divorcing or remarrying. Single taxpayers would be allowed only one lifetime switch between the two systems after their initial choice, unless they get married.

The bill's lead sponsor, Rep. Paul Ryan (R-Wisc.) calls his plan "The Taxpayer Choice Act." But budget-deficit hawks have condemned it as "The Bankrupt America Act," while others have dubbed it "The Divorce Lawyers' Relief Act."

House Votes to Kill IRS's Use of Private Debt Collectors

The House of Representatives voted Wednesday to ban the IRS from using private debt collectors to help collect delinquent taxes after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

The Senate Finance Committee has not taken up the private debt collection issue although there is a bill (S. 335) sponsored by Senator Byron Dorgan (D-ND) to end the program. Meanwhile, the White House has threatened to veto the House bill (H.R. 3056) if enacted because it will cost the federal government revenues "that are otherwise not likely to be collected by the IRS."

This argument is ridiculous. The ten-year projected cost of the measure is just over $1 billion and that cost is offset in the bill with revenue-raising provisions. But the more fundamental point is that this measure should not be scored as costing anything at all. When Congress cuts back the tax enforcement staff at IRS, this reduction is not counted as a "cost" even though IRS personnel actually collect a lot more in taxes than do the private debt collectors. The private debt collection program seems driven by the ideology that the private sector always works better, even when the facts clearly state otherwise.

House Finally Gets It Right on Estate Tax, But Trouble Is Brewing in the Senate

Before the House passed the bill ending the private debt collection program, Republican members used procedural rules to force a vote on a complete, unpaid for repeal of the estate tax. The measure was defeated 212-196, a major setback for the handful of super-rich families that have been funding a repeal campaign for several years. The House has voted several times during the Bush years to repeal the estate tax. According to a statement from Republican Whip Roy Blunt (R-MO) 42 Democrats voted to repeal the estate tax the last time it came up for a vote while this time only ten did, indicating that several have decided for the first time to stand up to the extreme anti-tax rhetoric used by opponents of the estate tax.

Supporters of a fair estate tax needed this news after developments in the Senate last week. As the Senate Finance Committee marked up its tax package for the agriculture bill reported on last week, Senator Jon Kyl (R-AZ) offered an amendment to significantly reduce the estate tax without paying for it. Senator Kyl only withdrew his amendment after Senate Finance Chairman Baucus agreed to hold a hearing on the estate tax sometime this year and mark up a bill in the spring.

Fewer Than One Percent of Estates Subject to Tax

The most recent data released from CTJ show that the percentage of estates subject to the tax was less than 1 percent in most states in 2005. Even fewer estates are likely to be taxable this year because the exemption is larger ($2 million for a single taxpayer vs. $1.5 million in 2005). Under the estate tax cut enacted by the Bush and the Republican-led Congress, the estate tax is gradually reduced until it disappears in 2010, but then returns in 2011.

Some lawmakers want to compromise and essentially freeze in place the estate tax rules that will be in effect in 2009, including a $3.5 million exemption for single taxpayers and a 45 percent rate. The budget resolution Congress adopted for fiscal year 2008 assumes that this compromise will be enacted. The amendment offered by Kyl last week would have gone much farther because it would increase the exemption to $5 million, tax the value of the estate between $5 million and $25 million at 15 percent and then tax the rest at 30 percent.

In Search of the Elusive Family Farm Threatened by the Estate Tax

Much of the rhetoric used by estate tax opponents revolves around family-owned small businesses, especially farms, that they claim are endangered because of the estate tax. Contrary to what the anti-tax advocates claim, very few farms or small businesses, if any, would ever have to be sold because of estate taxes.

According to the Congressional Budget Office, there were only 1,659 farm estates that were taxable in 2000 (when the estate tax was steeper because the exemptions were smaller and the rate was a little higher) and of these, only 138 did not have enough liquid assets to pay their estate taxes immediately, meaning some part of the estate could conceivably be sold in order to pay the tax. The CBO also found that if the exemption level was as high as it is today only 15 farm estates would have been both taxable and lacking the liquid assets to pay the tax. 

Those farm estates would likely weather the estate tax just fine. This CTJ paper describes the extra breaks that family farms get from the estate tax (in addition to the exemptions all estates get) including a provision that allows the tax to be paid off over a period of 14 years. The American Farm Bureau Federation famously admitted to the New York Times in 2001 that they could not cite a single example of a farm that had to be sold due to the estate tax.

How Wal-Mart Hurts Schools and Other Public Services

The first-ever investigation of Wal-Mart's local property tax records finds that the retail giant systematically seeks to minimize its payment of taxes that support public schools and other vital government services. That is the key finding of Rolling Back Property Tax Payments, a report released this week by Good Jobs First.  

"Wal-Mart, a company with $350 billion in annual revenues and $11 billion in profits, drains vitally needed funds from communities by regularly challenging the valuation put on its properties by public officials," said Philip Mattera, research director of Good Jobs First and principal author of the report. "When the company succeeds in one of these challenges, it diminishes the funds available to pay for education, police and fire protection, and other essential services provided by local governments."

Based on a large national sample of Wal-Mart stores and a review of all of its distribution centers open as of the beginning of 2005, Good Jobs First concludes that Wal-Mart has filed assessment challenges at more than one-third of its facilities around the country. At many facilities there have been appeals in multiple years. Overall, Good Jobs First estimates that the company has filed more than 2,100 property tax challenges nationwide.

State Tax Justice News

Bridging the Gaps

Earlier this week, the Center for Economic and Policy Research and the Center for Social Policy at the University of Massachusetts-Boston released a new report examining public work supports - such as Medicaid, State Children's Health Insurance Program (SCHIP), Food Stamps, and the Earned Income Tax Credit (EITC) - and the role they play in helping low-wage workers and their families make ends meet.  The report assesses federal and state policies in nine states and the District of Columbia and finds that, despite the existence of such supports, nearly 41 million people are unable to secure some of life's basic necessities. 

The report offers some suggestions for improving those policies and for helping working families to bridge the gap between what they earn from work and what they need to achieve a decent standard of living.  In particular, it notes that, of the supports examined, the EITC was the most effective at reaching those in need. Still, it observes that "in states with a relatively high cost of the living, the federally-defined amounts for...  the EITC do not go as far to help families as they do in low-cost states," implying that states can continue to augment the federal EITC with EITC's of their own.  To learn more about the Bridging the Gaps project and its upcoming conference in Washington, visit www.bridgingthegaps.org.

Budget Misery Loves Company

The slowdown in the U.S. housing market has already had visible and major consequences for homeowners and the economy as a whole.  It is now just as clear that it is affecting the fiscal outlook in the states, exposing long-standing flaws in their revenue systems and making it much harder for them to balance their budgets. 

For instance, Stateline.org reported this week that Arizona, California, Nevada, and Florida are all experiencing difficulties because of their reliance on real estate taxes.  In fact, California officials have increased their estimate of that state's projected 2008-2009 budget deficit from $6.1 billion to $8.6 billion, while California State Treasurer Bill Lockyer recently issued a report highlighting the state's long-term financial woes and outlining a set of options for addressing them.  Of note, Lockyer's recommendations include a variety of tax policy changes, such as limiting home mortgage deductions, broadening the sales tax bases, and suspending the carryover of corporate tax credits. 

On the opposite coast, Maryland has garnered significant attention for its sizable budget deficit. Neighboring Virginia also has troubles, as Governor Tim Kaine is reporting that the state has a $641 million budget shortfall.  In an attempt to deal with this grim reality, he laid off 74 state employees, proposed numerous spending cuts and even proposed a withdrawal from the state's rainy-day fund. Many Republicans say that Governor is crying wolf and the shortfall is only $471 million.  Either way, it looks like Virginia lawmakers, like their counterparts nationwide, will have their hands full next legislative session.