Advocates of tax breaks for business typically argue that such tax breaks will benefit workers as companies are more able to expand and invest. The latest study to call this into question comes from the University of Kentucky, which finds that tax breaks don't create as many jobs as previously hoped. The report concludes, "Based on our evidence showing that training incentives are positively related to economic activity in an area, and given that relatively little is spent on this program, the Legislature may want to consider increasing the amount spent on training incentives" rather than more tax breaks.

It's also doubtful that tax breaks are very important to the success of businesses themselves. Despite the fact that Kansas business owners named excessive taxation as their biggest concern for the fourth year in a row, nearly half of the businesses surveyed by the Kansas Chamber of Commerce weren't even aware that the Legislature had enacted a six-year, $632 million business tax cut last year. The bill eliminated the state's property tax on new capital investment in business equipment and machinery and went into effect last July. It's difficult to believe that tax breaks could be vital to economic expansion if they're not even noticed by the corporations that benefit most from them.

In his State of the Union address on Tuesday, the President proposed a change in tax policy that would end the link between employment and health care ... but that could make health care less affordable overall. The stated purpose of his proposal is to "even the playing field' between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). This would be accomplished by giving all taxpayers a new deduction if they have health insurance, whether it's through an employer or otherwise. The deduction would be $7,500 for an individual and $15,000 for a family, regardless of how much the health insurance costs, and would reduce both income and payroll taxes. In addition, health insurance benefits provided by an employer would be counted as income for the first time. But most of the families receiving health insurance through their employer would get a tax break initially, since for most (although certainly not all), coverage costs less than $15,000 for a family or $7,500 for an individual.

Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. The new health care deduction could encourage some employers to "cash out" the health insurance benefits they currently offer to their employees, since the tax subsidy would no longer be limited to employer-provided insurance. If their employees try to buy health insurance individually, they will find that the plans offered on the individual market are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction. And many people in more expensive plans are those with more critical health care needs or those who live in a part of the country where health care is simply more expensive. In the end, this plan is another attempt to shift risks back onto individuals who have little ability to cope with it on their own.

On Wednesday newly elected Arkansas Governor Mike Beebe kept a campaign promise and proposed a cut in the state's sales tax on food. The proposal would cut the state's 6 percent sales tax, as it applies to groceries, by half. The Governor hopes to eventually repeal the tax on food altogether. However, the price tag for this cut is over $200 million and the benefits from this tax cut aren't targeted towards those who need it. Also, despite the state's recent higher-than-expected revenues, many advocates are worried the funding for the tax cut could come from education or other programs.

A similar discussion is taking place in Idaho, where Governor Butch Otter is proposing a more progressive approach to this issue. His proposal would keep the grocery tax and would instead offer a low-income tax credit designed to offset it. For more on the relative merits of exemptions and credits as strategies for making sales taxes less unfair, check out this ITEP Policy Brief.

States that enjoy a large endowment of mineral resources usually levy a severance tax on the extraction of these resources and these taxes are receiving a lot of attention these days. In Colorado the Auditor's office found that many oil and gas companies may not be filing tax returns. Officials in West Virginia worry that coal severance taxes are on the decline there, while advocates in Arkansas say that now is the time for severance tax reform. For more on this, read the report " Digging Deeper," from Arkansas Advocates for Children and Families.

Rural representatives in North Dakota's legislature have started a revolt against local option sales taxes used by some localities to help fund local education.State Rep. Mike Brandenburg argues that the lack of stores in more rural communities forces residents to shop in towns in more affluent districts, increasing the inequality between rich and poor districts.However, his proposed solution, House Bill 1314, may well create more problems than it solves.The bill would require stores to keep track of the home district of any shopper who spends more than $5, so the sales tax revenue can be directed to the shopper's home county.This system would create a huge administrative burden for both businesses and local governments.For a better solution to the problem of funding inequality between counties, North Dakota should consider revenue-sharing programs like those in Minnesota and Vermont.

In what some Democratic members of Congress are calling a first step towards a larger change in energy policy, the House of Representatives on Thursday passed the Creating Long-Term Energy Alternatives for the Nation (CLEAN) Act (H.R. 6).

The legislation only repeals two of the tax subsidies directed at oil and gas companies that CTJ has criticized. One is the domestic manufacturing tax deduction, which is available for oil and gas companies only because a provision of the 2004 tax cut bill redefined manufactured goods to include oil and gas. The White House has argued that it would be unfair for manufacturing companies, but not energy companies, to take advantage of this tax subsidy

The other is the five-year amortization of geological and geophysical expenditures (the faster write-off of the cost of exploring for oil and gas, in other words), which would be changed to a seven year amortization.

Other provisions would close loopholes that have allowed companies drilling on public lands to avoid paying royalties. Around $14 billion of savings would be reallocated towards the development of alternative energy sources.

The Senate Finance Committee had approved the package of tax "sweeteners"... at a cost of $8.3 billion over ten years... for small business to be combined with the minimum wage hike. The biggest tax break is an extension and expansion of the Work Opportunity Tax Credit, an incentive for businesses to hire welfare recipients and individuals from other at-risk groups. Other breaks would allow restaurants and retail stores bigger tax write-offs, expand the number of businesses allowed to use the more advantageous cash method of accounting, and loosen various tax rules relating to Subchapter S corporations (which pay no corporate level tax).

To his credit, Chairman Max Baucus (D-MT) also included in his bill several revenue offsets to ensure that the bill as a whole is budget-neutral. The biggest offset would restrict an especially egregious form of 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.

Another offset would increase restrictions on "inversion transactions," in which American companies set up phony offshore "headquarters" to avoid U.S. taxes. The bill would also crack down on wealthy people who renounce their U.S. citizenship and move abroad, by making them pay taxes on their unrealized capital gains when they leave the country.

Projected Costs of Individual Tax Break Provisions and Revenue-Raising Provisions, 2007-2017

Deferred Compensation Controversy

One provision, which constitutes a smaller fraction of the offsets but has caused surprising consternation among lobbyists, would end tax advantages for "non-qualified deferred compensation" over $1 million a year. To put this in context, the tax code allows employees to defer paying taxes on money that they or their employer put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan

Many corporate executives, however, have set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out (and which are not deductible by companies until then either). Currently, there is no limit on how much money executives can defer taxes on through these plans. The Senate bill would limit such tax-deferred compensation to $1 million a year. President Bush admonished business executives this week to "pay attention to the executive compensation packages that you approve" but did not endorse the Senate provision.

Future of Bill Uncertain

Senators from both parties said even before the vote on the "clean" minimum wage hike that it could not get the 60 votes needed to pass if it was not combined with tax breaks for small business, although the rationale for "compensating" small businesses. Under the U.S. Constitution, tax legislation must originate in the House, and House Ways and Means Chairman Charlie Rangel (D-NY) could use this rule to stop this legislation from moving if a deal is not worked out between him and Baucus.

The offsets are key because one hurdle any new tax breaks would have to overcome is the pay-as-you-go (PAYGO) rules that the Democrats in the House restored. PAYGO rules basically require that any new entitlement spending or any new tax breaks be paid for by either revenue increases or spending cuts. PAYGO was waived and then replaced with weaker rules while President Bush and his allies in Congress enacted deficit-financed tax cuts. Now, as lawmakers consider large tax proposals such as adjustments to the Alternative Minimum Tax (AMT) or large spending proposals, PAYGO will make it harder for Congress to take any action that increases the federal budget deficit.

Tax legislation is often messy and complicated. This presents a challenge for those seeking to change state tax systems through ballot initiatives or referenda: how can these complex tax issues be boiled down to a simple and accurate description that voters will be able to read and understand while in the voting booth? Arizona's latest ballot-initiative snafu illustrates this difficulty. Health-care advocates successfully gathered signatures last summer for an 80-cents-per-pack cigarette tax hike... but what appeared on Arizona voters' November ballots was a 0.8 cent tax, which was approved by a 53% majority. This would provide one-one-hundredth of the revenue these advocates sought. The state's Attorney General has ruled, oddly, that the 80-cent tax can be collected anyway, but RJ Reynolds is considering filing a suit to prevent the implementation of this tax hike. Read more about it on the Talking Taxes weblog.

In his state of the state address, New Jersey Governor Corzine outlined a proposed property tax reform package and emphasized property tax breaks that are fairly progressive in terms of who benefits. The proposed package would reduce property taxes by 20% for those with incomes less than $100,000. Those with incomes of $100,000 to $150,000 would see 15% reductions, and those with incomes of $150,000 to $250,000 would see a reduction of 10%. In addition to the tax cuts, the proposal would also cap the amount property taxes can be increased per year at 4%.

New Hampshire courts have ruled that the state's school funding system is unconstitutional, and has given the legislature until July to remedy this. Predictably, some anti-tax advocates are making noise about amending the state constitution to bar the state's supreme court from ruling on this matter. A new Concord Monitor poll takes the public's pulse on this question. The good news: 53 percent of New Hampshire residents think it would be a bad idea to take away the court's ability to monitor the constitutionality of education funding. The bad news: 40 percent think it's a great idea.