The Economist last week presented a 14-page special report on why offshore tax havens are good for us. In 2005 the Tax Justice Network estimated that $255 billion in revenues is lost each year from governments whose citizens hold their funds in offshore tax havens, a figure the magazine says "not everyone believes" even though no one has ever shown this number to be inaccurate. The effects of offshore financial centers (what we might call havens) are divided into two categories. One effect is tax evasion, which the Economist and everyone else claims to recognize as harmful, and the second is "tax competition" which is presented as being beneficial and even outweighing the harm from tax evasion.

Several arguments are made that "tax competition" is important and healthy. One is that governments need an incentive to lower their corporate taxes to a (low) level that will benefit the economy. But if low corporate taxes were so good for us, surely that seems like the sort of decision our elected government is supposed to make and is quite capable of making. Another argument cited is that tax havens actually help larger countries with normal tax rates like ours by lowering the effective rate paid by companies, who in turn find our country a more tolerable place to invest. Again, if lowering the effective tax rate would attract so much investment to our country that the loss of revenue would be outweighed by the increase in investment, surely that is exactly the sort of decision our elected government can make. How could it possibly be just to say that tax havens help us by allowing companies to evade the tax laws that our elected government decided were optimal?

Another argument mentioned is that perhaps companies in larger countries with normal tax rates like ours receive so many benefits from their subsidiaries in offshore financial centers that it helps our economy in the end. Perhaps that's true in some cases. But a lot depends on what these subsidiaries really are. Insofar as any of them are the "companies" that really exist on paper only for tax avoidance purposes, this argument cannot apply. Senator Kent Conrad (D-ND), during a recent meeting of the Budget Committee which he chairs, described how 12,000 "companies" claim to inhabit one five-room building in the Cayman Islands. These "companies" can hardly be said to create a benefit for anyone except the owners who are evading taxes in the U.S. and other larger countries.

Which brings us to the point that a lot of what's going on in "offshore financial centers" is really tax evasion and is therefore quite illegal. On ways to stop tax evasion, the authors seem to endorse information sharing between jurisdictions. That's an easy solution anyone can agree on - except the jurisdictions that profit from their refusal to hand over such information and the lobbyists who represent their customers. Another suggestion is that jurisdictions like the United States lower their taxes to reduce the incentive for tax evasion. By that logic we could reduce speeding on America's highways by raising the speed limits to 150 mph, or reduce stealing by abolishing property rights. If you want real solutions for dealing with tax havens and other causes of the tax gap, see Bob McIntyre's suggestions to the Senate Budget Committee.

Twelve states are considering proposals to hike cigarette taxes, mostly in order to pay for healthcare initiatives, while a proposal in the U.S. Senate would hike the federal cigarette tax to fund an expansion of the State Children's Health Insurance Program (SCHIP). Of the 12 states, seven would use the money for healthcare. In one of those states, Indiana, the increase may now be off the table. Governor Mitch Daniels's proposal to increase the tax from 55.5 cents to 80.5 cents was just rejected by the State House of Representatives.

In the U.S. Senate, Gordon Smith (R-OR) argues that increasing the federal cigarette tax from its current level of 39 cents to 79 cents would raise $31 billion over five years while increasing it to 99 cents would raise $46.5 billion over five years. Senator Smith is not proposing an actual bill but says he wants to show he's open to such measures, and Senate Finance Committee Chair Max Baucus (D-MT) is said to be supportive. Smith claims that using cigarette taxes would be justified by the link between cigarettes and healthcare, which is not exactly a watertight argument since the vast majority of children served would not be smokers. Of course, efforts to find revenue sources for SCHIP are welcomed. (SCHIP faces a shortfall and the President's proposed budget would leave 1.4 million fewer children served by the program in 2012.)

But there are two problems with cigarette taxes. First, as is the case with sales taxes generally, they are highly regressive, taking a far greater percentage of income from poor households than the wealthy. Second, they are bound to be a declining revenue source. The value of the tax is reduced over time with inflation, and if smoking really does decline as a result of the tax increases, then the revenue also declines, leaving important health programs in a lurch. Of course, if the real purpose is simply to reduce smoking, then cigarette taxes can be quite effective in that regard. For more, see the ITEP policy brief on cigarette taxes.

In the wake of a proposal last week by the Florida State House of Representatives' Republican leadership last week to repeal all homeowner property taxes, the proposal continues to find a skeptical audience among state media outlets. The Jacksonville Sun's editorial board weighs in on Sunday's op-ed page, and they've got good questions for advocates of repeal:

But how would local governments absorb the lost revenue and how would their tax distributions be sorted out?
Would becoming the highest sales-tax state in the nation discourage tourists or drive business to border states or to the Internet?
What about the hit on the poor from a sales tax increase?

These are all legitimate and well-stated concerns. The most likely answers to these questions are "With difficulty," "Almost certainly," and "The poor will pay more."

The Sun has its own broad recommendations that generally focus more on goals than on strategies:

More fairness: The property tax benefits are tilted too far to those who have been in their homes the longest. Some longtime home-owners pay no property taxes at all.
More balance: Businesses and other nonhomesteaded property owners are getting rocked with higher taxes. Some type of reasonable cap is in order that protects them but allows for moderate growth in tax revenues.
Consideration for local governments: State and federal governments, meanwhile, are shifting costs to the local level. Most governments have room for belt-tightening, but beware of placing one-size-fits-all limitations on local government spending.
More moderation: Officials must be careful not to make fixes that are worse than the problem itself. Officials should phase in changes so that adjustments can be made.
More information: Taxes are complicated. Floridians need as much analysis as possible to understand how any changes would affect them, businesses, local governments, schools and the state overall.

These broad goals are all right on. The question is, when will anyone with a voice in this debate start talking about the forgotten reform option-- enacting a personal income tax?

New Jersey's property taxes are among the highest in the nation. Much has been made in the national press about New Jersey Governor Jon Corzine's efforts to reduce the state's property tax. The property tax saga has been full of ups and downs including heated political debates, a sales tax increase, and even a temporary government shut down. Now lawmakers expect the Governor to sign a bill that includes $2 billion in property tax credits that will cut property taxes for most homeowners. Those earning less than $100,000 a year would see a 20 percent cut in their property tax bills. Those earning between $100,000 and $150,000 would see a 15 percent cut, and those with incomes between $150,000 and $200,000 would see a 10 percent cut. But 90 percent of New Jerseyans remain skeptical of the proposal. Jon Shure of New Jersey Policy Perspectives is skeptical too, arguing that the proposal (which pays for these across-the-board property tax cuts by diverting sales tax revenue and repealing an existing "circuit-breaker"-style property tax credit) falls far short of the long-term structural reform that New Jersey needs

Wisconsin's tax laws allow cities that rely heavily on tourism to levy a special "premium resort area" sales tax. Governor Jim Doyle's new budget would rewrite the tax laws to declare parts of Milwaukee a "premium resort area." This would give Milwaukee officials the authority to levy a half cent sales tax within the "resort" area of the city. If adopted by local officials, Doyle's idea would help to diversify the city's revenue structure ... but an equally welcome option would be reforming the taxes collected by the state government. As the Institute for Wisconsin's Future's Jack Norman documented last fall, two thirds of the corporations doing business in Wisconsin pay no corporate income tax right now.

The stoplight has turned yellow for Virginia legislators in their attempt to pass transportation funding - now will they speed up or slam on the brakes? With the state legislature set to adjourn on Saturday, the House and Senate have appointed conferees to negotiate a compromise to raise much needed revenue for transportation projects.

While both proposals would authorize the raising of $2 billion in bonds, the House's proposal would garner additional transportation funding through an annual diversion of $250 million from the state's general fund as well as through increases in user fees and diesel fuel taxes. Meanwhile, the Senate's proposal would avoid a general fund diversion and instead raise the additional funding by implementing new auto registration fees of $150 per driver.

By now many people know that the Alternative Minimum Tax (AMT) is likely to be modified because it was meant to be a back-stop tax for the super-rich but will start affecting the more moderate-income families if the existing AMT exemptions are not extended. By now, most people in government know that "fixing" the AMT is not cheap. Continuing Congress's recent practice of applying a one-year "patch" each year will cost $250 billion over the next four years.

What nobody knows, however, is whether the President thinks AMT reform should paid for or not. Since some members of Congress, including Senate Finance Chair Max Baucus (D-MT), have proposed repealing the AMT altogether (which could cost $1.5 trillion over a decade), the possible implications for the federal budget deficit are alarming. Senate Finance Committee ranking member Charles Grassley (R-IA) is adamant that the AMT be repealed and not paid for because, he argues, it is a tax that was not expected to have the effect it will have. This logic is a little difficult to follow. Even if it was true that no one saw the AMT affecting more moderate-income families, it's rather difficult to see how this leads him to the conclusion that the super-rich, who were the intended target of the AMT in the first place, should also get a break from the AMT and that it should be deficit-financed. But anyway, it's entirely untrue that this effect of the AMT comes as a surprise. The original Bush tax break package enacted in 2001 intentionally changed the AMT only for one year, which made the projected cost of the tax break seem smaller for budget scoring purposes. By assuming that the AMT would remain unchanged (except for one year), the Congressional Budget Office had to conclude that the AMT would take back a lot of the tax cuts, therefore lowering the projected costs and allowing the administration to say that the proposal was not quite so expensive as it would otherwise appear.

But of course it was really assumed that the AMT would be changed so that it would not take everyone's tax breaks away, just as it is assumed that the AMT will be changed this year. One difference this year, however, is that more people are talking seriously about a permanent fix rather than continuing the annual practice of one-year patches. Another difference is that PAYGO rules now in place in the House prohibit, at least officially, increasing the federal budget deficit. The Wall Street Journal has noted that the White House has signaled that it is interested in some sort of budget-neutral reform without being specific. Last week White House Press Secretary Tony Snow gave a muddled response that tried to assert the President was not, in fact, in favor of any sort of tax increase but that the White House was open to suggestions for how to fix the AMT.

So essentially conservatives in the White House and in Congress pushed massive cuts in the regular income tax that would greatly reduce revenues and cause more people to be affected by the AMT, and then when more people were affected by the AMT they cried that this was unfair and unexpected and that the AMT should be cut or repealed which would cause a further loss of revenue, and that any attempt to replace the revenue lost as a result of an AMT reform would be a tax increase. Or something like that.

The current conservative thinking seems to be that not only is the President and Congress forbidden from raising taxes on Americans, they are also now forbidden from even paying for any provisions that lower taxes on the middle-class by raising revenues with other changes in the tax code. (Meanwhile, a larger and larger percentage of our tax dollars goes toward paying the interest on the national debt and the President calls for cuts in programs that have an insignificant effect on the federal budget deficit, in the name of "fiscal discipline.")

Is the President in sync with this conservative ideology or are there any signs that he may lapse temporarily into common sense and try to pay for part of his mess? Tony Snow's response to questions about paying for AMT reform were not exactly crystal clear. He said, "The President doesn't believe in tax increases," and described how the AMT was hanging over many middle-income families and kept at bay only by the one-year patches Congress has enacted, and said Congress should be able to find a solution. He said, rather melodramatically, "it's a cruel tax and it's an unacceptable tax," which is odd seeing how the President did not bother to alter it much with his tax cut package back in 2001.

When asked if the President proposed raising taxes in his health care proposal (which essentially would reduce tax breaks for health insurance for some but expand them for others) he essentially replied that it wasn't a tax hike because people could simply leave their expensive health care plans that exceeded the tax new tax subsidy and take up one that would be fully tax deductible under the President's plan. It's hard to see where this logic might end. Maybe ending the deduction for home mortgage interest payments would not be raising taxes because people could choose not to buy a home, or maybe raising the highest rate is not a tax increase because people could choose a lower-paying job.

These rhetorical acrobatics were followed by this long-winded attempt to avoid saying anything of substance, in which he begins by rejecting tax increases but ends by leaving them on the table:

Look, again, the President is not for tax increases. And so what we've said all along is, you've got 20 months to figure this out. What happens a lot of times is that people try to do preliminary negotiations through the press by characterizing what they think the President may or may not do. It's always interesting, because they never tell you what they're going to do. The fact is, both sides have an opportunity, so let's see what people have to propose.

And there have -- we have certainly been having -- we've been having conversations with people on both sides of the aisle because it is a problem. Democrats realize it, Republicans realize it, and they want to fix it. And I think we do have enough time right now where people don't have to rush and get themselves into a political fight. They've got an opportunity to try to come up with a calm and rational way to do it. We don't think it needs to involve tax increases, but we're certainly open to hearing what other people have to say.

The words "calm and rational" are perhaps more important than they appear, since the White House is probably particularly keen to avoid hysterics from conservatives who believe that actually paying for any change in the tax code is a betrayal of their principles.

Coinciding with a new call from Citizens for Tax Justice for a crack-down on tax evasion, new legislation has been introduced in the Senate to target tax havens and to prohibit the patenting of tax strategies. The bill is sponsored by Senators Carl Levin (D-MI), Norm Coleman (R-MN) and Barak Obama (D-IL). It includes a number of important reforms, including a presumption that offshore trusts and shell corporations in designated tax havens are controlled by the taxpayers funding them or directing them. It would also allow the federal government to order American banks to stop accepting or authorizing credit cards from foreign countries or banks not cooperating with U.S. tax enforcement laws.

The bill would also ban patents on tax strategies, of which there are currently 49. Senator Levin noted in his statement that patent law is designed to create an incentive for innovation, but there is hardly a lack of such incentive when it comes to tax avoidance.

CTJ Online Letter Campaign

Citizens for Tax Justice has begun a letter campaign targeting Congress in support of legislation to end the IRS's use of private collection agencies to locate delinquent taxpayers, which began last fall. Click here to send your members of Congress a letter in support of these bills, which have been introduced by Representative Van Hollen (D-MD) in the House and Senator Byron Dorgan (D-ND) in the Senate.

One problem with the program is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while IRS employees could do the same work for just 3 cents for every dollar collected. It is also feared that the private debt collectors, driven by large profits, will have a greater incentive than IRS employees to violate the privacy rights of taxpayers in order to increase collections.

By now many people know that the Alternative Minimum Tax (AMT) is likely to be modified because it was meant to be a back-stop tax for the super-rich but will start affecting the more moderate-income families if the existing AMT exemptions are not extended. By now, most people in government know that "fixing" the AMT is not cheap. Continuing Congress's recent practice of applying a one-year "patch" each year will cost $250 billion over the next four years.

What nobody knows, however, is whether the President thinks AMT reform should paid for or not. Since some members of Congress have proposed repealing the AMT altogether (which could cost $1.5 trillion over a decade), the possible implications for the federal budget deficit are alarming. Tony Snow's recent response to questions about paying for AMT reform were not exactly crystal clear. In a long explanation of the White House position that clarified little, he said that "the President is not for tax increases," but later said "We don't think it needs to involve tax increases, but we're certainly open to hearing what other people have to say." The CTJ Talking Taxes Blog has more.

In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits ... or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.

Tell Congress: Stop the IRS

We called it the "worst property tax reform idea ever" a while back-- and Indiana lawmakers appear to agree, sorta. State Senator Clarence Weatherwax presented his two-pronged plan for Indiana property tax "reform" to a Senate committee last week, and got a response that the South Bend Tribune characterized as "lukewarm."

Weatherwax's plan has two components: SJR 16, which would repeal all state and local property taxes, and SB 538, which would establish a new spending limit for Indiana state government. The spending limit would be based on growth in population and inflation. (See this report from the Center on Budget and Policy Priorities for more on why a "population plus inflation" spending limit is too constrictive.)

Sounds pretty simple, right? You set up a spending limit that says any revenues over the "population and inflation" limit can only be used for one purpose: replacing lost property tax revenue. That way, the story goes, local governments aren't completely defunded when the property tax goes away. But the Weatherwax plan turns out to be too simple:

Weatherwax estimated that it also would take a 1 percent increase in the state income tax, a 2 percent increase in the state sales tax and a local option income tax increase to replace property taxes.

But oops, Weatherwax forgot to include these tax hikes in his plan:

When committee members suggested incorporating those increases into SB 538, Weatherwax said he decided to pull both bills from consideration rather than risk defeat.

He has a good reason for doing so--tax hikes can't originate in the Indiana Senate--but that's a problem he needs to overcome before such a plan can ever be taken seriously.

Senator Robert Meeks put his finger on why Weatherwax needs to fix this problem if his plan is ever to be taken seriously: if the easy parts of the plan (capping spending, repealing property tax) went before voters without forcing them to also think about the hard part (hiking other taxes to make up the revenue loss), they'd love it.

Meeks also questioned whether voters would approve a referendum on eliminating property taxes if they knew they would face increases in state income and sales taxes, as well as the possible elimination of some local services. "They would vote for it because they don't know there are consequences, they don't have all the facts," he said.

This is an excellent point, and one that raises important questions about how direct democracy should be used on tax issues. If lawmakers are going to put these questions before voters, they need to make sure they're presenting voters with a fiscally sound package. A package that addresses the easy questions, but leaves no provision for answering the hard ones, doesn't deserve to take up space on the ballot.

Iowa is the latest state in which tax-averse lawmakers are looking to the cigarette tax as an alternative to more sensible (but less popular) revenue-raising ideas. The editorial board at the Clinton Herald comes down hard on the idea that the cig tax can be used both to pay for public services and to discourage smoking:

The $1 tax increase would bring in roughly $130 million, according to state estimates, which [Governor Chet] Culver wants to use to expand access to health coverage. But anti-tobacco activists are happier about the potential impact on the number of people who smoke, hoping the extra cost will discourage people from continuing their addiction or, in the case of teens, make smoking too costly a habit to begin.
As we have argued before, the two arguments are mutually exclusive. If the state raises the cigarette tax to generate money for health care, then it needs people to continue smoking at exactly the same rate as today. Otherwise, the money will dwindle and something else will be needed to prop up that portion of the budget...All we're asking is for lawmakers and the governor to be up front about their plans. If they want to raise more money for health care, fine. If they want people to quit, fine. But it is time for everyone to acknowledge that both goals cannot be met simultaneously.

We've talked before about the basic dishonesty of asserting that a cig tax can achieve both revenue-raising and revenue-losing goals. But it would be hard to express this more succintly than the Clinton Herald does here.

Four states - Mississipi, Tennessee, Arkansas, and Idaho - are currently debating ways to reduce the sales taxes paid on food. But how (or whether) to pay for the cuts and who should benefit remain key sticking points.

On Thursday, the Mississippi House of Representatives passed (91-27) a "tax swap" bill that would cut the state's sales tax on groceries in half and raise the tax on cigarettes to $1 per pack. The bill still faces significant challenges before becoming law, however, since key members of the Senate oppose it and Governor Haley Barbour vetoed a similar bill last year. Although the plan's reliance on revenue from cigarette taxes is not a long-term solution, it does offer a temporary mechanism to make up the revenue that would be lost from a cut on the sales tax on food.

In Tennessee, a similar "tax swap" is under consideration. However Gov. Phil Bresden has expressed reluctance to link a cigarrette tax increase with a grocery tax reduction, and has instead proposed using revenue from a cigarette tax increase for education funding.

Arkansas Gov. Mike Beebe signed a grocery tax reduction into law on Thursday that will reduce the state's sales tax on groceries from 6% to 3% effective July 1st. However, no funding mechanism was enacted to make up for the decreased revenue, as lawmakers instead decided to rely on a projected surplus to pay for the proposal.

In Idaho, Gov. Butch Otter continues to struggle with the state legislature over how best to enact a grocery tax credit. Otter's proposal would target low-income Idahoans with a credit of up to $90, while the House's newly passed version would give a smaller grocery tax credit (up to $50) to a broader range of residents.

Last year, Wisconsin Governor Doyle signed into law a bill completely eliminating all taxes on Social Security benefits by 2008. This week, Governor Doyle prepared a new budget, which includes a measure fast-forwarding the exemption by one year. The proposal comes at a time when the state is straining to fill a $1.6 billion shortfall. The proposed budget attempts to find new revenue by increasing vehicle registration fees, cigarette taxes, and the real estate transfer tax. The Legislative Fiscal Bureau estimated that the Social Security exemption alone would cost around $100 million per year. In his State of the State speech earlier this year, Governor Doyle said that Wisconsin had to learn to live within its means... advice that he should heed himself.

Last week there were three states offering competing tax incentives for a new ThyssenKrupp steel mill. Now there are two; ThyssenKrupp has taken Arkansas out of the running, leaving Alabama and Louisiana as its final two candidates. In a press release announcing the move, the company explained its rationale for dumping Arkansas: "geological conditions, energy costs and logistical disadvantages." Notably absent from its explanation: tax breaks.

And elected officials in the two remaining states seem to agree that non-tax factors set one state apart. Louisiana Governor Kathleen Blanco boasts and, Alabama Governor Bob Riley openly admits, that Louisiana has geographic advantages that Alabama can't match.

But Riley and some state lawmakers are pushing for a special legislative session later this month that would be devoted entirely to creating a new fund for tax incentives for ThyssenKrupp and other companies the state is currently courting. If this sounds like a devious subversion of market forces, it is ... but Louisiana already did the same thing back in December, creating a $300 million fund to court the steelmaker.

How can states short-circuit this self-destructive competition of tax giveaways? Lessons might be learned from efforts by European Union members to prevent tax competition that distorts market forces, which culminated this week in an EU statement that Switzerland must curb its corporate tax giveaways.

State corporate income tax reform is gathering momentum in 2007, as more and more states are considering adopting an important corporate tax reform: combined reporting. Governors in New York, Iowa and Pennsylvania have already proposed this important loophole-closing reform, and newly elected Massachusetts Governor Deval Patrick is sending signals that he may follow in their footsteps. Meanwhile, a new paper by the Center on Budget and Policy Priorities' Michael Mazerov gives the lowdown on an equally important corporate tax reform that could productively be adopted by every state with a corporate tax: company-specific disclosure of taxes paid (or not paid). Mazerov's paper includes model legislation for use in any state seeking to shed more light on corporate tax avoidance.

House of Representatives Willing to Accept Some Tax Breaks as Part of Minimum Wage Deal

The House Ways and Means Committee on Monday approved a package of small business tax breaks to be combined with legislation to increase the minimum wage. At a cost of $1.3 billion over ten years, the Ways and Means package is much smaller than the $8.3 billion deal approved by the Senate by a vote of 94-3 on February 1. Senate leaders said that the House, which had previously approved a "clean" or stand-alone minimum wage increase, was now showing that it was ready to negotiate and compromise, although significant differences between the two chambers remain. A clean minimum wage hike in the Senate had earlier fallen six votes short of the 60 votes needed to pass in that chamber, as several Republican Senators insisted that the legislation include tax breaks to "compensate" businesses for the added costs. (The last minimum wage increase, back in 1996, is estimated to have cost employers $13 billion while the total tax breaks for businesses since that time cost $276 billion.)

The largest tax break in the House bill would be a one-year extension of the Work Opportunity Tax Credit (the Senate version would extend it for 5 years). The second largest tax break would be a change in the Alternative Minimum Tax (AMT) paid by restaurants, allowing them to use a tax credit for FICA taxes paid on tipped workers and the Work Opportunity Tax Credit to reduce their AMT. A smaller break, but one apparently important to business lobbyists, is a one-year extension of a special expensing provision (section 179) through 2010 and an increase in the amount that can be expensed.

Costs of Tax Breaks, Revenue Increases from Offset Provisions, 2007-2017

Another provision of the package is currently scored as having no cost, but it is noted that it will cost a projected $457 million (over ten years) when the tax package is combined with a minimum wage hike. This provision concerns the tax credit restaurants get for paying FICA taxes on tips above and beyond the amount that brings employee pay up to the minimum wage. This provision enables restaurants to enjoy as much of the credit as they do today, even though the minimum wage will be higher so the credit would otherwise decrease.

As for the offsets, the largest in the package would stop children of wealthy families from enjoying special capital gains and dividend tax breaks meant for low-income people. The other significant change would allow the IRS to charge interest on delinquent payments for a longer period of time before it must give notification and suspend interest.

The legislation does not include some tax breaks sought by business lobbyists and included in the Senate version, such as increased write-offs for restaurants and retail stores. It also does not include the offsets included in the Senate version. Some of the Senate offsets have been controversial (among business lobbyists) such as the $1 million limit on deferred compensation that can receive tax breaks and retroactive restrictions on sale-in, lease-out arrangements (SILOs).

The Indiana House Public Health Committee sent a Valentine to Indiana smokers yesterday, unanimously approving a bill that would almost double the state's cigarette tax from 55.5 cents per pack to $1.10 per pack.

Lawmakers are giving two very different answers about what this proposal is supposed to accomplish. On the one hand, it's apparently going to be the sole funding source for a plan to provide health coverage for low-income Hoosiers. On the other hand, it's supposed to act as a stick to make Indianans stop smoking. Here's what Governor Mitch Daniels said in defense of the proposed cigarette tax hike last week:

"No one's out to injure anybody's business," Daniels said last week. "But reducing the second- highest rate of smoking in America is an important public- health issue in this state. Keeping young people from smoking is a very important objective. "

These are obviously conflicting objectives. If you want the cigarette tax to pay for health care, well, the yield of the tax had better grow each year at least as fast as the cost of paying for health care. But if you want the cigarette tax to act as a deterrent, preventing people from smoking, then really what you're shooting for is a decline in the amount of tax that actually gets collected.

Taken on their own, these are each pretty good goals: health care is good, and smoking is harmful. Encouraging one, and preventing the other, are both good objectives. But if Indiana lawmakers ultimately give the thumbs up to this proposal, one of these objectives simply will not be met.

Last week, Senator Joe Lieberman (D-CT) said in a committee hearing that perhaps the federal government should enact a new tax to fund the "war on terrorism," by which he presumably means the Iraq War as well as the war in Afghanistan and other anti-terrorism efforts. I imagine I was not alone when I thought that sounded like a good idea... six years ago. With all due respect, it's startling how what once seemed like common sense today sounds strikingly innovative. What we got instead of a common sense approach to funding anti-terrorism activities and military engagements was the fiscal equivalent of putting two wars on a credit card.

I think I'll find it difficult to explain to my kids several years from now how America responded to September 11. I'll have to explain that in those first few years, Congress decided that what our country needed was a tax cut while we spent hundreds of billions of dollars on two wars, pushing the country, which had a surplus at the start of Bush's presidency, deep into deficit. The tax breaks account for half of the federal budget deficit.

To his credit, Senator Lieberman did vote against most, but not all, of the Bush tax breaks (and thus received a passing score of 80% from CTJ's Congressional Tax Report Card). Here's hoping others take up this theme. Better late than never.

Georgia Budget and Policy Institute Report

The report analyzes the legislative proposal to eliminate taxes wealthy seniors pay on retirement income, based solely on age. Since Georgia already exempts that vast majority of retirement income from taxes, this bill would help only 10 percent of seniors while doing nothing for other low-income Georgians.

Arkansas Governor Mike Beebe and the state senate worked together this week to pass a series of measures aimed at helping low-income Arkansans.The keystone of the tax package was a cut in the state sales tax on groceries from six percent to three percent, one of Governor Beebe's leading campaign proposals.A study by the Arkansas Advocates for Children and Families (AACF) projected annual savings for a family of four ranging from $98 to $298, depending on income level.The Governor's Office estimated that the sales tax change would cut state revenues by $252 million this year.Everyone involved in the effort to pass this bill deserves high praise for bringing attention to this important issue.However, research by the AACF using ITEP data indicates that a refundable Earned Income Tax Credit might be an even more effective way to help low-income Arkansans.According to the data, a 24% refundable EITC would cost almost exactly the same as the grocery sales tax exemption, but would provide more assistance to families in need.Arkansas lawmakers should consider a refundable EITC to get the most bang for their tax bucks.

At first glance, it looks like the holy grail of state governance: a way to raise more revenue without raising taxes.The idea of selling off or leasing state assets, such as the state lottery, is now under discussion in Illinois, Indiana, Minnesota, New Jersey, and Texas. It is easy to see the idea's appeal: Texas Governor Perry predicts that the sale of his state's lottery would generate at least $15 billion, for example, while Indiana Governor Daniels expects that state's lottery to carry a price tag of over $1 billion, all without a single tax increase. However, there is a catch. While the boost to revenue is substantial, it is a one-time gain, and it comes at the cost of the yearly revenue contributions these assets would provide far into the future. While the seemingly painless financial gain offered by this privatization schemes is tempting, in the long run these sales would only diminish state coffers.

2007 is barely a month old, but cutting the grocery tax has already emerged as the hip new state tax fad of the year (if such a thing is possible). Lawmakers from Tennessee to Utah to Idaho to Mississippi are discussing it. But things appear to be moving fastest in Arkansas, where the House of Representatives has unanimously approved a cut in the state sales tax on food.

The House-passed bill would cut the state sales tax on food from 6 percent to 3 percent, following up on a campaign pledge by then-candidate Mike Beebe in last fall's gubernatorial race. And every indication is that the Senate will endorse the bill as well.

It wasn't always smooth sailing, though: as the legislative debate opened in January, progressive policy advocates publicly questioned whether a cut in the food tax was the best option for Arkansas tax reform. In particular, Arkansas Advocates for Children and Families released a January report comparing the benefits of a grocery tax cut to more targeted tax reforms such as an Earned Income Tax Credit (EITC).

The AACF report was right on target: an EITC would do a much better job, at a much lower cost, of improving the fairness of Arkansas' tax system, than Beebe's pet idea of cutting the grocery tax. Not surprisingly, Beebe took issue with AACF's stance. Also not surprisingly, he was unable to attack the AACF report on its merits, and chose instead to reiterate that a food tax cut would benefit more people.

This disagreement with AACF's argument was utterly insubstantial: their whole point is that an EITC would offer targeted tax tax cuts to a smaller group of fixed-income families, and Beebe's entire criticism was that a food tax cut would offer tax cuts to more people. Which amounts, of course, to agreeing with AACF's analysis.

The food tax cut will likely be law a week from now, but this debate will remain important. As long as Arkansas continues to rely heavily on the sales tax, low-income families will get the shaft under Arkansas' tax system. Whether this year or next year, an EITC will remain a great step towards achieving a minimal level of tax fairness in Arkansas.

The President's proposed budget released Monday includes some very minor measures that would close the "tax gap," the difference between the amount of taxes owed and the amount paid each year, by $3 billion a year. But this is, at most, 1 percent of the total tax gap. The IRS has estimated that the tax gap was around $300 billion in 2001 and most experts think even that number is an understatement. Senate Finance Chairman Max Baucus (D-MT) and other Democrats criticized the steps as not nearly enough to address the scope of the problem. This is reinforced by the fact that IRS Commissioner Mark Everson told the Senate Budget Committee last year that he could, in a given year, locate some of these taxes and increase collections by "between $50 billion and $100 billion without changing the dynamic between the IRS and the people." Democrats and Republicans have become concerned about the tax gap, because it results in compliant taxpayers effectively subsidizing the tax evasion of the less honest.

On Monday the White House released the President's proposed $2.9 trillion federal budget for fiscal year 2008 along with proposals the administration says will balance the budget by 2012. As a new analysis from Citizens for Tax Justice explains, the President's plan relies on various tricks in order to come to the conclusion that Congress can make permanent the Bush tax breaks while also balancing the budget. First, the President includes in his revenue estimates the Social Security surplus, which is projected to be $248 billion in 2012. But that surplus, which is officially saved in the Social Security Trust Fund, is supposed to be used to pay down the national debt so that the federal government is better able to keep paying benefits when the huge baby-boom generation retires. That's the reason Social Security is currently taking in more money than it pays out in benefits. Keeping Social Security separate would show, according to the President's numbers, a deficit of $187 billion in 2012.

But it gets worse. The second trick the President uses is an assumption that Congress will pass massive cuts in vital services - even bigger cuts than were ever enacted when the Republicans ran Congress. The plan actually assumes that spending on defense and homeland security in 2012 will be down 22 percent, as a share of GDP, from its 2006 level, and all other appropriations will be down 29 percent, as a share of GDP, from its 2006 level. Even though Congress is unlikely to make such cuts, they should be taken very seriously in the sense that they begin to show the true costs of the tax breaks. If the Bush tax breaks are made permanent, cuts in government services of this magnitude are only the begining of what will inevitably follow. The Coalition on Human Needs provides a description of these proposed cuts in services

There are several other faulty assumptions used in the administration's projections. One is that revenues will grow more than they have over the past six years. The more realistic revenue projections from the Congressional Budget Office for 2012 are $155 billion lower than the administration's revenue projections.

Last week Nebraska Governor Dave Heineman testified before the Revenue Reform Committee regarding his tax reduction bill. The bill's major components include lowering income tax rates, decreasing the number of income tax brackets and eliminating the marriage penalty. Over four years the complete tax cut package is expected to cost a whopping $1 billion.

An ITEP analysis showed that making these reductions to the state's income tax reduces taxes, on average, for the wealthiest 1 percent by over $6,500, while the lowest income Nebraskans those with an average income of $11,000 will see an average tax cut of only $13. In fact, 72% of the total tax change goes to the wealthiest 20 percent of Nebraskans. While the majority of Nebraskans will benefit from the proposal, the regressive nature of the plan is striking.

Opponents of the proposal also testified regarding the unfair nature of the Governor's plan, also saying that Nebraska can't afford tax cuts of this magnitude. Many state legislators, advocates, and concerned citizens think the Governor's proposal is taking the wrong path; instead they see a need for fundamental property tax reform and not regressive income tax reductions that help better-off Nebraskans.

Recommendations for fixing the state's property tax abound. Some Senators are advocating for a $500 refundable property tax credit for all homeowners. But because the credit isn't means-tested and excludes renters, the credit isn't targeted to those Nebraskans most in need. Many states with property tax credits do take into account the fact that renters pay property taxes.

Clearly lawmakers and advocates are dealing with complex and expensive choices. Let's hope they keep in mind the needs of Nebraskans with the least ability to pay. One way Senators could show their commitment to low and middle income workers is though passing a bill, expected to be heard next month in Committee, that expands the state's refundable EITC from 8 percent to 15 percent of the federal. The EITC has long enjoyed bipartisan and popular support--perhaps a vote on this bill won't be such a difficult decision for state leaders.

Lawmakers in several states (including Tennessee and Wyoming) are currently kicking around the notion of exempting food from their state sales tax. This will certainly be a progressive move in any state that does it--as long as states can afford to make up the revenue loss.

But here's a cautionary note, and it's a caution not so much about exempting food as about exempting anything: when Maryland decided, back in the day, that they wanted to exempt food, they had to decide what "food" really means. And one thing they decided was that ice wasn't food. Unless you put it in a drink, in which case it actually is food.

For whatever reason, Maryland tax administrators decided last fall that they needed to revise their sales tax regulations to make it clear that ice sculptures are taxable. The revised regulation on this can be found here.

Now, it's hard to see why you'd need to make this explicit-- maybe some joker tried to put an ice sculpture in their drink? But the broader point is that anytime you draw a line in the tax code between what's taxable and what's not, it ends up being a complicated process. Good intentions make complicated tax laws.

This isn't to say that exempting food is a bad idea. It's a very progressive move. But, like any exemption, it has its administrative cost.

Oklahoma lawmakers in the House of Representatives are proposing a tax credit to benefit stay-at-home moms. The theory behind the proposal is that because the state offers a dependent care credit for costs incurred for child care expenses outside the home, stay-at-home moms should be given a similar credit for their work. This proposal brings up issues of discrimination (what about stay at home dads, grandparents?) and perhaps an even larger debate about whether or not the tax code should be used as a mechanism to promote family values. For a provocative article on this issue click here.

Over the past few years, a number of states have taken incremental steps to reform their corporate income taxes to curtail tax avoidance by large and profitable companies. One such reform, combined reporting, prevents corporations from using a range of accounting schemes to shift profits from one state to another in order to artificially reduce the taxes they owe. The seventeen states that now use combined reporting may eventually get some company, as two Governors - Eliot Spitzer (D-NY) and Chet Culver (D-IA) - have included provisions in their budget proposals for the coming fiscal year to institute combined reporting. To learn more about combined reporting and how it works, see the Institute on Taxation and Economic Policy's updated policy brief.

Several tax avoidance techniques are available to corporations operating in states that don't have combined reporting. For example, a recent Wall Street Journal article (subscription required) notes that Wal-Mart may have been able to avoid as much as $350 million in state corporate income taxes between 1998 and 2001 due to a loophole that could be countered with combined reporting.

A bill introduced in the U.S. Senate would make the frequently abused "deferral" of taxes on American-owned corporations unavailable when those corporations are operating in a tax haven, that is, a country that does not cooperate with U.S. tax enforcement efforts. The legislation is sponsored by Senators Byron Dorgan (D-ND), Carl Levin (D-MI) and Russ Feingold (D-WI) and targets a tax provision that should be eliminated according to CTJ Executive Director Bob McIntyre. His testimony to the Senate Budget Committee last week regarding the "Tax Gap" included a proposal to repeal the "deferral" of these taxes, which is more like an exemption for the income that is claimed to be foreign. McIntyre argues that anyone with income that really is taxed overseas gets a credit for foreign taxes paid anyway, so the real effect of such a proposal would be simply to reduce tax evasion.

Two Democrats in the U.S. House of Representatives, Steve Rothman (D-NY) and Chris Van Hollen (D-MD) have introduced a bill that would end the IRS's program using private companies to assist in collecting delinquent taxes. This comes after Nina Olsen, the National Taxpayer Advocate, who heads an independent office within the IRS, called upon Congress to end the private collection program in her annual report. The problem is that the private collectors receive a commission of 21 to 24 cents for each dollar they collect, while it's argued that IRS employees could do the same work for just 3 cents for every dollar collected. IRS Commissioner Mark Everson admitted last year that the IRS staff could collect these debts for less cost but said that the agency lacked the funding to do so.

Congress needs a mechanism in its budget process to recognize the increase in revenues that will result from any boost given to IRS enforcement, which only shows up in the budget as a spending increase. This is a problem that comes up in the debate over closing the Tax Gap. One of the suggestions Bob McIntyre offered for closing the Tax Gap in his testimony before the Senate Budget Committee last week was to simply to increase funding for IRS enforcement. The IRS estimates that somewhere between $5 and $30 could be collected for every new dollar of funding for enforcement.

Legislators in Missouri, Kansas, and Georgia are debating reducing taxes on seniors in their state. Lawmakers in Missouri and Kansas introduced legislation that would eliminate income taxes on Social Security benefits. On the surface, eliminating taxes on Social Security sounds like a wonderful idea. However, only a handful of states levy a tax on Social Security benefits and the Social Security Administration estimates that nationally about a third of current beneficiaries pay federal taxes on their benefits. Those who stand to gain the most from these proposals are better off seniors.

An ITEP analysis of the Missouri bill found that 72 percent of Missourians would receive no benefit from the proposal. Also, the bill carries a price tag of $100 million and the cost is likely to increase as Missourians age. For more on the Missouri proposal read the testimony presented by ITEP staff to the Missouri House of Representatives' Tax Reform Committee.

The Peach State already exempts Social Security benefits from their income tax and offers generous retirement income exclusions (totaling $35,000 of retirement income in 2009). But recently Governor Purdue introduced legislation that would completely eliminate tax on retirement income for Georgians 65 and over. Instead of turning to these poorly targeted tax cuts, legislators would do better to provide tax relief to those state residents with the least ability to pay - regardless of age considerations.

The Senate voted 94-3 yesterday to raise the minimum wage by $2.10 over two years. Unlike the minimum wage hike passed by the House of Representatives a couple of weeks ago, the Senate bill also includes a package of tax breaks and other offestting provisions to replace the revenue.

Polls indicate that at least 80 percent of Americans 'including majorities of Democrats, Republicans and Independents" want to see the minimum wage increased. One poll even shows that three out of four small business owners think a minimum wage increase will have no effect on them. Yet President Bush and his Republican allies in Congress have come to the strange conclusion that in order to pass both chambers of Congress, any bill increasing the minimum wage must include new tax breaks for business in order to compensate companies for the alleged damage it will cause them. As Jared Bernstein and Lawrence Mishel explain in the American Prospect, the idea that business needs to be compensated because Congress is raising the minimum wage from its lowest inflation-adjusted level in 50 years is nonsensical.

Republican Senators Hold Minimum Wage Increase Hostage to Tax Breaks for Business

During the previous week, Senate Democrats could not convince enough Republicans to join them to end debate on a "clean" minimum wage increase, meaning a minimum wage hike with no tax breaks or other provisions attached to it. Only five Republicans joined all of the Democrats present for a total of 54 votes - fewer than the 60 votes needed in the Senate to close off debate and move on to approve the legislation. House Democrats had hoped the Senate would approve the bill, H.R. 2, which was a key part of the "First Hundred Hours Agenda."

On the other hand, some Republicans and business lobbyists complain that the tax cut package doesn't do enough for business since a large part of the tax breaks go to hiring welfare recipients, newly disabled veterans and individuals from other at-risk groups, rather than other tax breaks that businesses find more beneficial to their bottom line. They have also complained because the offsets are "tax increases" on business, in their thinking.