This week, Senator Hillary Clinton came out in support of lifting the federal tax on gasoline during the summer months, an idea originally proposed by Senator John McCain. Senator Barack Obama publicly scoffed at the idea, saying "this isn’t an idea designed to get you through the summer, it’s designed to get them through an election." Obama explained that the overall savings for a family over the summer would probably average about "$25 to $30. Half a tank of gas."
 
The federal gas tax is currently 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. With the average gasoline price $3.60 per gallon this week, the federal gas tax is only around 5 percent of the total cost of gasoline.
 
While the benefit to the consumer may be too small to even notice, this proposal could have a very real and very negative effect on the Highway Trust Fund which is supported by the gas tax and which we depend on to fix and improve congested highways and roads in need or repair. The American Society of Civil Engineers points out that every dollar spent on highway construction is estimated to bring $5.40 in benefits and every billion dollars spent on highway construction generates about 30,000 jobs each year, according to the Department of Transportation. Repealing the gas tax for a summer would cost the Highway Trust Fund about $8.5 billion.

It's true that the gas tax is a regressive tax, requiring low-income drivers to pay more of their income in tax than wealthier drivers. But the gas tax is different from most other taxes in ways that minimize the importance of tax fairness. Most notably, the gas tax can serve to help reduce demand in a market where many would agree demand is far too high. With gasoline in limited supply (Paul Krugman explains that the supply is actually fixed for the next few months), environmental concerns continuing to mount, and traffic congestion remaining a problem, any effect the gas tax has on reducing demand should be a welcome one.

Senator Clinton would replace the money in the Highway Trust Fund by enacting a new windfall profits tax for oil companies. With a White House opposed to anything that can conceivably be called a tax increase and a Senate that has trouble paying its bills, it's hard to imagine this part of the proposal being enacted during this Congress. President Bush said he was open to considering the idea of a gas tax holiday, but there appears to be no chance he would ever support a windfall tax on oil companies to pay for it.
On Tuesday, Senator John McCain refined his health care proposal a little bit in a speech in Florida. The main thrust of his plan is still to allow a tax credit for the purchase of health insurance, including non-group insurance (insurance purchased on the individual market rather than through an employer). The credit amount would be $2,500 for individuals and $5,000 for families.
 
To pay for this, McCain would eliminate the exemption for employer-provided health insurance. This would basically make the tax code tilted towards individually purchased health care and perhaps 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. 
 
Responding to criticisms that people with preexisting health conditions would never be offered adequate health insurance, McCain on Tuesday added a detail that he calls a "Guaranteed Access Plan" which would "reflect the best experience of the states to ensure these patients have access to health coverage." Jonathan Cohn at The New Republic explains why the programs set up by the states to do this so far utterly fail to provide affordable care to the people who have a preexisting condition. In these state plans the premiums can run in the neighborhood of $600-$850 per month, cost-sharing runs in the thousands and the preexisting condition won't even be covered for at least several months.
 
McCain also wants to pass legislation that would make it easier for health insurance companies to sell policies across state lines, but health care advocates have opposed similar legislation because it would make null and void the differing regulations and standards that states have enacted for health insurance companies operating within their borders. McCain also said he would expand Health Savings Accounts (HSAs). Introduced as part of the Medicare prescription drug law in 2003, HSAs are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan. They offer the most benefit to those who are in the highest tax bracket and need no or little medical care, and can therefore serve as tax shelters. The Government Accountability Office just found that HSAs are typically used by people with incomes far higher than average.
Like many states, Ohio currently faces a serious budget deficit, one that has prompted the administration of Governor Ted Strickland to announce plans to cut agency budgets by more than $400 million for the FY08-09 biennium.  The consequences of those cuts are already being felt around the state, but, as a recent column from Joe Hallett of the Columbus Dispatch implies, they shouldn’t be entirely unexpected.  The combination of recent income and property tax cuts and the only-partial replacement of Ohio’s corporate income tax with a new commercial activities tax (CAT) will mean that the state will lose in excess of $10 billion in tax revenue between 2006 and 2010, making spending cuts all but inevitable. 

As Hallett notes, “Tax cuts are easy to love. But the reality is that taxes pay for services citizens want and need.”  This latest report from Policy Matters Ohio details the substantial revenue losses Ohio will experience as a result of reductions in personal income tax rates and explains how heavily those reductions are tilted in favor of the rich.
In the eyes of most fiscal policy experts, there are a few commonly accepted principles for judging tax policy – neutrality, horizontal and vertical equity, and enforceability, to name a few.  Apparently, in the eyes of one Louisiana legislator, “cutesy” now ought to be added to the list.

As the New Orleans Times-Picayune reported earlier this week, Sen. Joe McPherson apologized to his colleagues for casting the deciding vote in favor of an amendment to repeal the state’s income tax, which currently yields nearly $3 billion per year.  It seems that the Senator expected the amendment to lose, but “wanted to be on the record as doing away with income taxes.” He later owned up to being “cutesy” with his vote. 

The bill that Senator McPherson and his colleagues voted to amend would have repealed yet another element of the 2002 Stelly plan, which substantially improved the fairness of Louisiana’s tax system.  Just last year, Pelican State lawmakers voted to reinstate the “excess” itemized deductions that had been eliminated as part of the Stelly plan, a move that cost the state more than $150 million in tax revenue annually and that benefits only the wealthiest 20 percent of taxpayers. 

The bill being debated now was intended to raise the income tax brackets that had been lowered under the Stelly plan. It would have (before being amended) reduced state revenue by roughly a quarter of a billion dollars per annum and, despite the claims of proponents, yet again help the most affluent. As the Times-Picayune notes, the bill’s proponents portray it as a prototypical “middle-class tax cut”, but preliminary estimates from the Institute on Taxation and Economic Policy indicate that more than 70% of the benefits from changing Louisiana’s income tax brackets would accrue to the wealthiest fifth of taxpayers.
Seven tax-related ballot proposals ranging in quality from "highly regressive and irresponsible" to "completely inconsequential" are now set to be on the November ballot in Florida.  Proposed by a “reform” commission that meets only once every two decades, the small scale of most of the proposals is surprising.  Preferential property tax treatment for marinas, farm land and housing livestock, as well as for owners who improve their property with windstorm protection or renewable energy products, are among the proposals for which Florida voters have apparently had to wait twenty years.

But there is one very serious change to the state tax structure that has left progressives wishing the Commission would have stuck to making only minor changes.  Well aware of the existing $3.4 billion budget shortfall facing Florida, the Commission has nonetheless proposed that school property taxes be abolished at an annual cost of $9 billion.  In order to meet the requirement established by the Commission that school funding not decline as a result of this change, it was recommended that the legislature raise the sales tax rate by one percent, eliminate numerous sales tax exemptions (on both goods and services), and cut spending.  In addition to these ideas, the Commission helpfully suggested that the legislature might try to find “other revenues”.

A 1% sales tax hike is expected to raise less than half of the revenue needed to replace school property taxes, so expansions of the sales tax base appear imminent if the proposal gains approval in November.  Expanding the sales tax base is good policy, assuming that it is done carefully, but doing so would ideally be coupled with much better targeted tax cuts.  An across-the-board property tax reduction of the kind proposed here will provide huge benefits to those wealthier individuals with the most valuable homes.

And as if all of this wasn’t bad enough, the Commission has also proposed tightening the caps on increases in a home’s assessed value (criticized in the Digest just a few weeks ago) for homes not occupied by the owner.
Last week Senator John McCain finally completed a process that has been underway for some time now. McCain has worked his way back into his party's good graces by coming out in support of running massive budget deficits to extend the Bush tax breaks and give new tax breaks to business.
 
It's difficult to remember now, but Senator McCain had said back in 2000, "There’s one big difference between me and the others -- I won’t take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy." He also said of the tax plan George W. Bush proposed while running for president in 2000, "Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans -- and that’s not the kind of tax relief that Americans need."
 
The New John McCain
 
Let's compare this to the new John McCain, who fleshed out his latest ideas a bit more during a tax day speech in Pittsburgh.
 
McCain said he would extend the Bush tax cuts, even though over half of the benefits would go to the richest one percent and the cost would be $5 trillion over a decade. He would cut the corporate tax rate down from 35 percent to 25 percent, even though measured as a percentage of GDP, U.S. corporate taxes are among the lowest of any developed country. He would double the personal income tax exemption for dependents to $7,000, which would do the most for those families in higher income tax rates and nothing for low-income people who pay payroll taxes but who do not have taxable income (meaning a family of four with income of less than $25,000). He would abolish the Alternative Minimum Tax, even though about 9 tenths of it is paid by people with incomes over $100,000.
 
He would enact first-year deduction or "expensing" of "equipment and technology investments, which, along with a lower corporate tax rate, will create new opportunities for tax sheltering by the wealthy. He would ban internet and cell phone taxes permanently because he seems to believe that new technologies need to be granted a waiver from taxes that lasts forever. (If only Thomas Edison had thought to lobby for laws shielding his inventions from taxes.) He would make permanent the research and development credit because he believes innovation comes from the private sector, except not really, because apparently he also believes that no one will invent anything unless we give them a subsidy through the tax code.
 
And, most tantalizingly, he would offer a simplified alternative income tax that people can choose, at their option, to file. It's optional, presumably because everyone claims they want a simpler tax form but no one can agree on actually giving up the various deductions and credits that make filing ones' taxes complicated. Rather than simplifying tax filing, this will probably lead some people to calculate their tax liability under two different systems to determine which will result in lower taxes.
 
Massive Cuts in Public Services Would Be Necessary to Pay for McCain's Tax Plan
 
The Tax Policy Center has calculated that McCain's plans would cost $553 billion in 2012 alone. That's not even including the interest payments on the additional debt that will result, but let's put that aside for a second. McCain claims he can avoid increasing the national debt, at least to a degree, by cutting spending. But the cost of his plan in 2012 is about 17 percent of all projected federal spending that year according to estimates from the OMB (on page 134 for anyone interested). That's a whole lot of spending to cut. Looked at another way, it's more than all the non-defense discretionary spending that year and about equal to discretionary spending on defense.
 
During his Pittsburgh speech, McCain said he could get $100 billion in "savings from earmark, program review, and other budget reforms" but was not any more specific. The Senator's oft-mentioned earmarks are said to account for only around $18 billion at the most.
 
McCain has also said that he will obtain $30 billion in revenue by closing corporate tax loopholes. But his corporate tax cut alone is estimated to cost $143 in 2012. 
 
Actually, You Should Just Bill My Grandkids
 
Then finally, on Sunday, McCain said on ABC's "This Week" that his tax cuts would take priority over balancing the budget.  
 
To get a sense of what a huge shift this is for McCain, remember that during presidential debates he tried to explain away his opposition to President Bush's tax cuts in 2001 and 2003 by claiming that he thought cuts in federal spending should have accompanied those tax cuts to ensure that the nation's fiscal health would not deteriorate.
 
Of course, what he said back in 2000 also touched on the fact that the benefits of the Bush tax cuts would go mostly to the rich, but the new McCain is apparently unwilling to remind anyone about this.
 
On "This Week," George Stephanopoulos asked McCain, "If Congress does not give you the spending cuts you say you can get, will you hold off on signing the tax cuts?"

McCain replied, "Uh, no, of course not, because we don't want to increase people's taxes during a recession..."
 
It's worth pointing out that none of the candidates are actually talking about raising taxes (with the possible exception of the capital gains tax). Allowing parts of the tax cuts to expire exactly as the Republican House, Republican Senate and Republican White House wrote them to expire can hardly be called a tax increase. Further, it would be interesting to know how McCain might explain the prosperity that followed Clinton's tax increase or the economic doldrums that have followed George W. Bush's tax cuts.
The road to progress rarely travels in a straight line.  Nowhere has that been more evident than in Massachusetts this month, as a major effort to combat corporate tax avoidance could end up being undermined by an eleventh-hour maneuver to permit businesses to continue to exploit weaknesses in the tax code.

About two weeks ago, the Massachusetts House of Representatives approved a bill that, among other things, would institute combined reporting of corporate income for tax purposes in the Commonwealth.  Combined reporting is the single most important reform states can adopt to prevent corporations from using legal and accounting techniques to shift income from one state to another in order to avoid taxation.  It is now used in 20 states. Should the House bill be made law, Massachusetts would become the third Northeastern state in as many years to embrace the change.

Yet, during its consideration of the measure, the House approved, with little open debate, a last-minute amendment that would seriously weaken the reform, to the likely benefit of such behemoths as Wal-Mart and McDonald’s.  The amendment would constrain the Commonwealth’s ability to enforce combined reporting, would create new tax planning opportunities for companies with operations both in Massachusetts and overseas, and would compensate companies for accounting losses they might incur due to statutory changes intended to curb tax avoidance.  Ultimately, the Massachusetts Department of Revenue indicates that the amendment could lead to annual revenue losses of “at least $100 million to $200 million” -- or about half of the corporate tax revenue the bill might otherwise be expected to generate!  Importantly, that expected revenue yield is already diminished by the fact that the bill also would, over time, reduce the tax rate paid by corporations from 9.5 to 7.5 percent and by financial institutions from 10.5 to 9 percent. 

Fortunately, as the Boston Globe reports, the Massachusetts Senate may reconsider this particular amendment when it takes up the larger reform bill sometime next month.  To learn more about the House bill and the impact that it would have, see this latest report from the Massachusetts Budget and Policy Center.

Colorado might permanently loosen a constitutional constraint that has caused the state on-going fiscal damage, the so-called Taxpayer Bill of Rights (TABOR). 

Voters approved an amendment to their constitution enacting TABOR in 1992.  TABOR limits the growth of state revenues to a combination of inflation and population growth by requiring that any revenue in excess of this limit be refunded to taxpayers. TABOR also requires that any tax increase be approved by voters. The main problem is that inflation is only a very crude measure of changes in the costs faced by state and local governments, which for the most part have outpaced inflation in the rest of the economy.

In 2000, Colorado voters complicated matters further by approving a very different measure, Amendment 23, which mandates an increase in funding for K-12 education by at least 1% plus inflation every year.  This amendment was a response to the dismal state of Colorado public schools in the wake of unrealistic revenue restrictions enacted in TABOR.

Enacting both of these provisions made sense to many voters who would like to see both lower taxes and more spending on education.  The problem is that the combination of TABOR and Amendment 23 serve to starve transportation, higher education and just about anything that is not K-12 education.

Now, Colorado House Speaker Andrew Romanoff, with the backing of Governor Bill Ritter, plans to unshackle the legislature from these impossible demands. His proposal, if approved by two thirds of both chambers and by the voters, would repeal Amendment 23 and the part of TABOR that requires the state to refund taxes when the revenue limit is exceeded.  Fortunately, the citizens of Colorado are likely to look favorably on this proposal, given that they voted in 2005 to suspend TABOR’s revenue-refund provision for 5 years. This suspension would essentially become permanent under this proposal.

But one problem associated with TABOR would not be fixed under this plan: tax increases would still require voter approval.  Of course, it would be better if the Colorado legislature were allowed to write tax policy themselves. That is, after all, what lawmakers are elected to do.  But a related improvement to the policymaking process appears to be on its way.  Local legislators will likely soon be given the authority (by a bill expected to be signed by the governor) to propose sales tax increases to their voters without having to first seek the approval of the state legislature.

State legislators in Maine last week missed a great opportunity to expand health care coverage to a significant number of residents.  The state’s health insurance program was originally created in 2003 with the mission of providing insurance to 135,000 uninsured persons by 2009.  Currently, just 15,000 people are covered by the program.  The reason for this huge disparity is primarily an unwillingness on the part of legislators to raise taxes to pay for it.  In describing this year’s legislative session, one representative stated that avoiding tax increases was one of the “overarching goals that we began the budget deliberations under”.

Rather than seizing upon the fast-approaching 2009 target they set for themselves, legislators working under the “overarching goal” chose to expand coverage to only 4,000 of the additional 120,000 people they had originally planned to cover by next year.  Instead of addressing the problem head-on with needed tax increases, Maine legislators sidestepped the issue by only enacting relatively minor excise tax increases on alcohol and soda. 

This proposal is totally inadequate and will disproportionately affect those lower-income Mainers who are most likely to have trouble affording health care coverage in the first place.  In addition to having all the regressive traits of the sales tax, excise taxes possess an additional degree of regressivity in their per-unit rather than percentage basis.  That is, rather than being levied at a fixed percentage of a product’s price (5-7% for general sales taxes in most states), excise taxes are levied at a fixed amount on a specific type of good, regardless of that good’s price.  The Maine excise tax collected per gallon of wine, for example, is the same 65 cents whether that wine costs $6 or $600 per bottle.  The obvious result is that low-income people who purchase less expensive brands will usually face a higher effective tax rate than their wealthier neighbors.

Admittedly, Maine has taken more initiative to provide health care than most states.  This does not change the fact, however, that thousands remain uninsured and many would quickly enroll in the state-subsidized program if funding was to be provided in amounts sufficient to meaningfully raise existing enrollment caps.  Next time health care is debated in the Maine legislature, policymakers would do well to make assisting the uninsured, rather than steadfastly avoiding tax increases, the “overarching goal” of their work.

A report released this week from Citizens for Tax Justice explains how "tax day" has changed under President George W. Bush. The answer for most Americans is: very little. Despite claims made by the President and his supporters, the tax breaks enacted after 2000 provide little benefit for the middle-class. However, for the richest one percent of American families, tax day is considerably easier. Once the President's tax cuts are fully phased in, the majority of the benefits will flow to this small group of lucky families.

What has changed for most Americans is the very real threat posed by the increased national debt resulting from these tax cuts. The national debt must eventually be paid off with tax increases or cuts in public services that Americans -- particularly the middle-class -- rely on.

The report explains that:

  • The tax cuts received by the typical American are nowhere near as large as the President and his supporters imply, and are in fact too small to make any difference in the life of a typical American family.

  • When the Bush tax cuts are fully phased in, the majority of the benefits will go to the richest one percent.

  • If the Bush tax cuts are made permanent, as the President proposes, the cost will be $5 trillion over the 2011-2020 period. To put that in context, the federal government collected $2.6 trillion in revenue last year.

  • The Bush tax cuts received by the richest one percent in 2008 will be more than the funding received by the Department of Education, almost twice as much as the funds received by the Department of Homeland Security and over ten times as much as received by the Environmental Protection Agency.