Year-End Legislative Summary: Republican Senators Follow Bush Off a Cliff
Congress
is hurtling toward adjournment after resolving a series of stand-offs
between Democrats and Republicans and between Congress and the President.
Republicans in the Senate twice successfully blocked attempts to pay
for AMT relief, while the President twice successfully vetoed expanded
health insurance for children. Meanwhile, an attempt to shift tax breaks
from "dirty" energy to "clean" energy failed by one vote, although
Congress did enact some important non-tax-related energy provisions.
Alternative
Minimum Tax: Congress Passes "Patch" But Doesn't Pay for It
On Wednesday, the House of Representatives approved a Senate-passed bill to "patch" the Alternative Minimum Tax (AMT). The "patch" is basically a one-year measure that extends through 2007 the exemptions that keep most of us from paying the AMT, which is a sort of backstop tax that ensures the wealthy pay at least some minimum amount of income tax regardless of how many deductions and credits they claim.
The AMT was originally intended to target only the very wealthy. Over time its reach expanded because the exemptions were never indexed to inflation, and the Bush tax cuts caused the AMT to expand much more. Since the AMT is in fact an alternative tax, if regular income taxes are cut without corresponding cuts in the AMT, more people pay the AMT.
In 2001, the President chose not to include corresponding adjustments to the AMT in his tax cut plan, although he surely assumed Congress would prevent the AMT from taking back a large portion of the tax cuts for moderately well-off families. And that's exactly what Congress has done, albeit through temporary patches passed periodically rather than a permanent fix. The cost of these patches was never included in the cost estimates of the Bush tax cuts that were presented to the public when they were being debated, effectively masking the true costs of those cuts.
This obviated the need for even a pretense of offsetting those additional costs. Today Congress is still not offsetting those costs.
Republicans Block Two Fiscally Responsible AMT Bills
The Republicans in the Senate were able to block two attempts to pay for the AMT patch in the last two weeks, both of them approved by Democratic majorities in the House. The first bill (H.R. 3996) would have replaced the revenue, partially by closing the loophole for "carried interest" paid to managers of buyout funds and other types of funds which allows these super-wealthy individuals to pay taxes at a lower rate than middle-income people.
Every Democrat in the Senate voted to act on this version (minus the Presidential candidates who almost certainly would have voted for it if they had been present) and every Republican who voted voted against. In the Senate, 60 votes are required to consider most legislation, so the bill could not be acted on despite the support of every member of the majority party. Senate Democrats were then forced to approve the $50 billion patch without any offsets, violating their pledge to adhere to newly reinstated pay-as-you-go (PAYGO) rules.
The House passed another version of the AMT patch with offsets (H.R. 4351), this time focusing more on cracking down on offshore tax avoidance by fund managers. The pattern repeated itself in the Senate, as the Republican minority was able to block the bill, choosing to protect wealthy tax evaders who use offshore shell companies rather than paying for AMT relief.
On Wednesday the House of Representatives voted to approve the Senate-passed AMT patch without offsets. Ways and Means Chairman Charlie Rangel said that it would be pointless to oppose AMT relief since it is very unlikely that the public would understand why a tax no one had ever heard of was suddenly affecting some families who were fairly well-off but not rich.
Media Neglects Role of GOP Obstruction
The press has focused unfairly on the "failures" of the Democrats to meet all of their goals.
This
is unfair partly because the goals were extremely ambitious in retrospect. Democrats promised to provide $50 billion worth of AMT relief and also promised not to increase the
deficit. This was while the Republicans in Congress and the President
took an extreme stance on tax matters. Closing any tax loophole, even
the most blatantly unfair tax loophole, represents a tax increase that
will wreck the economy according to the President and his allies in
Congress. They even equate stopping offshore tax evasion with tax increases
that will discourage investment. In hindsight, it's clear that lawmakers
taking this extremist position on taxes were ready to follow their
President off a fiscal cliff by obstructing common sense measures.
It's
also unfair to say the Democrats "caved" on PAYGO, as some media accounts have it, given that every Democrat in the Senate voted to pay for the AMT relief as did all-Democratic majorities in the House. Thanks to the 60-vote threshold to pass legislation in the Senate, the minority party was able to block the fiscally responsible legislation. Why the press has largely failed to note that Republican obstruction is the root cause of the AMT-PAYGO
debacle is entirely unclear.
Healthcare:
Congress Tries Twice to Expand SCHIP, Bush Vetoes Twice
Strong majorities of both chambers twice approved a bill to expand the State Children's Health Insurance Program (SCHIP) and twice the President vetoed these bills. Each would have increased 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
alternative would also shower benefits on more well-off people who would already have health insurance anyway.
The funding mechanism in the SCHIP bills was not ideal, but reflected the realities of finding consensus on funding sources in a closely divided Congress. It's always better to fund important programs with progressive taxes, and tobacco taxes are inherently regressive. Tobacco taxes also provide less funding over time, since they do not increase with inflation or with the price of cigarettes generally, so they are rarely a "permanent" solution to any funding problem. But expanding health insurance for children is an extremely important priority that requires compromise. Legislation produced by Congress is rarely ideal.
Nevertheless, the President vetoed both SCHIP bills, partially because he says he opposes increases in tobacco taxes. In frustration, both chambers this week passed a bill to merely extend the program, without expanding it, through March 31, 2009.
Energy:
Improvements Made, But Not on the Tax Front
This week the House approved an energy bill (H.R. 6) that the Senate passed last week after stripping from it a $21 billion tax title that would have shifted tax breaks away from oil and gas companies to more sustainable energy sources. In the Senate, the bill with the tax package received 59 votes, one short of the 60-vote threshold needed to consider the bill, prompting Democratic Senate leaders to remove the tax provisions.
The remaining provisions, which passed easily, are still important. They would increase fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and would require gasoline to contain a certain level of biofuels by 2022. The President signed this legislation on Thursday.
The Republican Presidential Primary: And In This Ring...
McCain's Tax Plan: I Was Wrong About Everything
Senator John McCain (R-AZ) released his tax plan on Wednesday, which consists of repealing the Alternative Minimum Tax (AMT) without paying for it, extending the Bush tax cuts without paying for them, and requiring a 3/5 majority of both chambers of Congress to enact any tax increase.
Remarkably, this is the same senator who voted against the biggest of the Bush tax cut packages in 2001 and 2003. During a debate on September 5 he explained that he voted against those bills because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that the tax cuts have boosted revenues, which would seem to imply that no cuts in spending are ever needed to pay for tax breaks.
This seems to be the position he has settled on, since he has no plans to pay for any of his tax cuts and has a somewhat vague proposal to require a "3/5 majority vote in Congress to raise taxes." Since even revenue-neutral bills are considered tax increases by the GOP now (because they offset the costs of, say a lower corporate rate by closing tax loopholes that benefit somebody) this apparently means a supermajority would be needed to enact any basic tax reform. John McCain is now committed to the idea that tax cuts will pay for themselves and even raise revenues.
(Those who are tuning in late to this ongoing debate may be utterly confused as to why anyone thinks tax cuts could cause revenues to increase. Anti-tax activists have convinced some conservative politicians that cutting taxes actually increases revenues because tax cuts encourage work and investment so much that incomes and profits increase enormously, in turn increasing tax collections by more than enough to make up for the costs of the cuts. Mainstream economists do not believe this and Bush's own Treasury Department and OMB director have admitted that they don't believe it either.)
Also, McCain would like to stop taxing "innovation" by making permanent the ban on internet access taxes and by banning taxes on cell phone use. As we've argued before, it's a shame that Thomas Edison didn't think to lobby for a moratorium on taxing electric devices, or that Henry Ford didn't lobby for a moratorium on taxes on automobiles, since those products were innovations for their time. McCain would also make permanent the research credit, which is a tax subsidy for certain companies supported by politicians who can't decide whether the free market works or doesn't work.
Huckabee's 50% Sales Tax
Now that former Arkansas governor Mike Huckabee has been climbing in the polls, reporters are suddenly inconvenienced by the need to read up on and explain the tax proposal Huckabee has been touting for months. His proposal is often described as a 23 percent national sales tax, but supporters prefer to call it the "Fair Tax," because they've apparently figured that the idea of a new sales tax is not inherently appealing to people. Actually the tax would be 30 cents on an item that costs a dollar, which most of us would call a 30 percent tax, but supporters argue that 30 cents is only 23 percent of $1.30. But that's not even half of the problem. Citizens for Tax Justice studied this proposal back in 2004 and found that to actually replace all the revenue collected by our current tax system, the national sales tax would actually have to be set at a rate of 50 percent.
So to recap:
The proposed national sales tax rate claimed by Fair Tax supporters: 23%
The proposed rate as any normal person would define it: 30%
The rate necessary for the Treasury to break even under realistic assumptions: 50%
The chances of anything like this being enacted: 0%
Giuliani's' Mind: A Place More Peaceful than Reality
Most Republican candidates reveal some sort of ambivalence or inner-conflicts over tax and fiscal matters. On one hand, they're all fairly intelligent people who must understand that revenues cannot be increased by tax cuts. On the other hand, they must find some way to appeal to the masses who want to hear the good news of free tax cuts without any troubling analysis that might disprove this appealing message. Hence you see McCain's convoluted explanations of his votes, Huckabee's attempts to avoid discussing the less right-wing aspects of his governorship, and Romney's policy acrobatics.
Former New York mayor Rudy Giuliani's mind appears to be serene and untroubled by such turmoil. He has been able to maintain throughout his campaign so far that the way to raise revenue for any initiative is to cut taxes, apparently freeing himself from any complicated thinking. He continued hammering this appealing message home at the debate on December 12. He argued that the solution to our national debt is that "the federal government has to restrain its spending" and that we need a policy "leaving more money in the pockets of the American people" without showing the slightest awareness of how little sense this makes.
Romney's Offshore Tax Evasion
Meanwhile, it has come to light that former Massachusetts governor Mitt Romney "was listed as a general partner and personally invested in BCIP Associates III Cayman, a private equity fund that is registered at a post office box on Grand Cayman Island and that indirectly buys equity in US companies." In other words, Romney was using a shell company -- a company located, on paper only, in a tax haven country -- to avoid paying taxes on money he was investing for his clients and himself. He had a similar arrangement in Bermuda. His campaign staff maintains that this was all perfectly legal. As far as we're concerned, that is the real scandal.
California: Once More Unto the Health Care Breach
Earlier this week, the California Assembly approved a plan that would provide access to basic health care for the nearly 4 million Californians who currently lack it. One of the key elements of the plan is a tax credit, available to low- and moderate-income families who purchase health care on their own and intended to ensure that their healthcare costs do not exceed a certain share of their incomes.
While the plan has the support of Governor Arnold Schwarzenegger, much about it remains in flux. The state Senate will not consider the plan until mid-January at the earliest and a means of funding the more than $14 billion in costs it would incur are not included in the enabling legislation. As it now stands, funding for the plan will be decided by a ballot initiative in November 2008. Still, the Assembly's plan is one more example of states stepping into the void created by federal inaction on this critical matter. The California Budget Project provides a brief summary of the plan here.
ALEC Cooks the Numbers to Promote Tax Cuts
Arthur "The Curve" Laffer is at it again. A new report from the American Legislative Exchange Council (ALEC), co-authored by Laffer and Wall Street Journal editorial board member Stephen Moore, constructs a ranking of every state's "economic competitiveness" that invites you to "gauge your state's future."
Those brave enough to look into the abyss will find that, according to the ALEC report, states with higher taxes -- or more progressive taxes -- face bleak economic prospects, while low-tax states can look forward to a prosperous future. But the report's findings should be taken with a very large helping of salt; of the 16 variables that make up ALEC's competitiveness rankings, not one measures the quality of the services governments provide. In other words, having above-average taxes is assumed to make your state less competitive, but the positive effects of above-average schools, roads or health care are not counted whatsoever in determining your state's economic development climate. When you measure economic development this way, it's neither surprising nor remotely informative to find (as ALEC does) that states that try to do the very least for their citizens always score the best.
If you really want to read what amounts to the longest Wall Street Journal editorial of all time, here it is. But for a more balanced approach to ranking your state's economic competitiveness, check out CFED's Development Report Card for the States.
Anti-Property Tax Sentiment More Popular Than Santa Claus
All across the country property tax bills are coming due and outrage about the most unpopular tax is growing. Proposals for various types of property tax cuts, reforms, and relief abound.
In Michigan, legislators are proposing to limit property tax increases and make it easier for homeowners to appeal their assessments. In West Virginia lawmakers want to freeze property taxes for seniors, and also limit property tax increases for younger homeowners. Politicians in Utah are considering a broad range of options including changing school district funding from reliance on property taxes to sales taxes and increasing their state's circuit breaker credit. Property taxes tend to be the tax that everybody loves to hate. The tax comes due in a lump sum, it's usually difficult to understand, and often it's not based on one's ability to pay. Lawmakers in these three states and others should investigate property tax credits that ensure that low-income folks aren't burdened by the tax. While it may be popular with constituents to discuss property tax cuts, it's vital that replacement revenue be identified as well.
Wisconsin: Let the Sunshine In
Last year around this same time we brought you word about the groundbreaking study from the Institute for Wisconsin's Future which found that two-thirds of companies filing 2003 Wisconsin income tax returns owed nothing in state taxes. This month the Institute issued another report that "highlights a $643 million shortfall in corporate income tax receipts in 2006 due to the use of tax loopholes." The new report once again brings to light the number of Wisconsin companies that simply aren't paying any tax." Almost fifty thousand corporations filed tax returns with the Wisconsin Department of Revenue in 2005. Two out of three returns showed a bottom-line tax of zero dollars." The study's shocking findings won't be allowed to collect bookshelf dust. Instead, the results have prompted a legislative response. On Wednesday Senator Hansen unveiled a creative corporate tax disclosure proposal that would, "require the large public corporations doing business in Wisconsin to submit publicly accessible annual disclosures of their income and all items that can be used to reduce their Wisconsin tax liability." Stay tuned into the new year for more developments on this important disclosure legislation.
