Earlier this year, members of the Arizona business community formed a new organization - the Transportation and Infrastructure Moving AZ's Economy or TIME Coalition - to advocate for additional transportation funding and to push for a ballot initiative to generate the revenue necessary to support that funding. At first, that may sound like business leaders acting in a fiscally responsible way to ensure that the state invests in the public structures on which all Arizonans rely.

Two details might make you think otherwise. First, the taxes that the Coalition would like to see raised through the initiative - the general sales tax and the gasoline tax - would fall disproportionately on low- and moderate-income people. Second, as the Arizona Republic points out, some of the members of the TIME Coalition - such as the Arizona Chamber of Commerce - are at the same time actively lobbying for the acceleration of tax cuts for commercial and industrial property and the outright repeal of the currently-suspended equalization assistance property tax. So, while Arizona may need to make critical public investments to foster economic growth and to improve the quality of life in the state, don't expect businesses to pony up - in their view, that's just for working people.

Despite a growing consensus that imposing income taxes on families living in poverty is a terrible idea, many states continue to do so. According to a new Center on Budget and Policy Priorities report, " The Impact of State Income Taxes on Low-Income Families in 2006," 19 states collect income taxes on two-parent families of four who live below the federal poverty level. The report discusses some of the options available to states to prevent those in poverty from having to spend their limited resources on income taxes, including state Earned Income Tax Credits (EITCs), no-tax floors, and personal exemptions and standard deductions.

The good news is that states are increasingly seeking to avoid imposing their income tax on those who can least afford to pay it. A promising example of this is in Alabama, where the efforts of Alabama Arise have helped to spearhead state income tax changes that have decreased the income tax on those living in poverty by increasing the income filing threshold used to determine whether income taxes are owed (from an unbelievably low $4,600 to a still egregious $12,600). Although the state still ranks at or near the bottom in terms of the state income tax imposed on its poor, additional reform proposals have been made this year that would further increase the income threshold to $15,600 or $15,800.

Another positive development has occurred in Virginia, where lawmakers recently enacted a law that will raise the state income tax filing threshold from $7,000 to $11,950 for individuals and from $12,000 to $23,900 for couples.

Alabama and Virginia represent two examples of positive developments in decreasing the disproportionate tax imposed on the working poor by nearly every state. An even better solution to this problem would include refundable tax credits, like those found in the federal (and increasingly within state) EITC's.

Senate Says Business Now Needs Even Bigger Bribes Before Minimum Wage Can Be Increased

The U.S. Senate, which has been holding a long-anticipated minimum wage hike ransom for months, has just increased its demands and now insists that $12 billion in tax breaks are needed to "compensate" businesses for the alleged costs of paying a higher wage to those at the bottom of the wage scale.

On February 1, the Senate approved a bill pushed by Senate Finance Chair Max Baucus (D-MT) raising the minimum wage along with a tax cut package costing $8.3 billion over ten years. The Senate had made a half-hearted attempt to pass a "clean" wage increase (without the tax breaks) on January 24 and came six votes short of the 60 needed to end debate. In the House of Representatives, Ways and Means Chairman Charlie Rangel was unenthusiastic about attaching tax cuts (and the offsetting provisions needed to pay for them) to the minimum wage increase, but eventually agreed to a $1.3 billion package that was approved and added to the wage legislation.

Ransom Demand Increased

Now the Senate says $12 billion in tax breaks are needed, an increase of around $3.8 billion from its original demand. BNA reports that the additional tax breaks were proposed by Finance Chairman Baucus, ranking member Charles Grassley (R-IA) and Jon Kyl (R-AZ). They include a one-year extension of the bigger write-offs for restaurants and retail stores (the original extension was only for three months) and a further expansion of the Work Opportunity Credit for companies in rural counties that are losing population. The Senate approved by unanimous consent an amendment to include these new additions to the tax cut package.

A Pragmatic Approach to Increasing the Minimum Wage?

It is sometimes said that including the tax breaks is necessary to get the 60 votes needed to prevent a filibuster in the Senate by members who are not generally supportive of increasing minimum wage. But it's hard to believe the current strategy is a politically feasible way to increase the minimum wage. The wage increase and tax package have been added to the emergency war spending bills just passed by the House and Senate, which President Bush has already vowed to veto because they include timetables for withdrawing from Iraq.

We've said it before and we'll say it again: The idea that businesses need to be "compensated" after they've received $276 billion in tax breaks since the last minimum wage hike (which was worth only about $13 billion to workers) is absurd. Businesses should not have to be bribed billions in tax cuts so that we can rescue the minimum wage from its lowest purchasing power in half a century.

Like the Senate Version, It's More Responsible Than the President's Budget

The U.S. House of Representatives approved a budget resolution Thursday that would require any extension of the Bush tax cuts, which expire at the end of 2010, to be offset with new revenues or spending cuts to avoid increasing the deficit. Like the Senate version, this budget resolution includes pay-as-you-go (PAYGO) rules and is supposed to balance the budget by 2012 (at which point it claims to produce a surplus of $153 billion). The plan is not perfect. Like the Senate version and the budget proposal offered by the President, this "balanced budget" projection includes the Social Security surpluses, which are really supposed to be counted separately from other revenues as explained in last week's Digest.

Nonetheless, the House should be commended for passing a budget that shrinks deficits and does not assume that tax cuts will be extended without being offset, as the President's budget does. Republicans are trying hard to portray the budget plan as a tax increase because it requires extension of the tax cuts to be paid for. The tax cuts enacted over the past six years (when Republicans controlled the House, Senate and White House) were written to expire at the end of 2010, so any extensions will in fact be new tax breaks. Prohibiting new tax breaks or new spending that is funded by increased borrowing is a common sense reform that helped balance the federal budget in the 1990s.

Democrats in the House of Representatives are hoping to pass legislation by Memorial Day that will permanently reform the Alternative Minimum Tax (AMT) and prevent it from reaching millions of more taxpayers. The Bush tax cuts increased the number of people subject to it and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from paying the AMT. As a result, 23 million taxpayers (17 percent of taxpayers) will pay the AMT if Congress makes no change to the law. The AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) more than half of the AMT would still be paid by the richest 4 percent of taxpayers.

But it's widely accepted that Congress will simply not allow a tax to begin affecting millions of people who have never even heard of it, so more responsible members of Congress have focused on how to change the AMT in a way that is fiscally sound and progressive.

There are several ways to do this. Democrats on the House Ways and Means Committee are said to be interested in exempting people with income below $250,000 from the AMT, lowering the AMT for people with incomes between $250,000 and $500,000, and and shifting the cost of the change to those with incomes above $500,000. How exactly the cost would be shifted to those taxpayers with incomes over half a million dollars is yet undetermined. This could be done through the regular income tax. The Tax Policy Center has recently shown the impact of doing this by raising the top AMT rate from 28 percent to 35 percent. Another proposal, made by Citizens for Tax Justice in December, would close the main loophole in the AMT, the lower AMT rate for capital gains and dividends, extend the exemptions and index them to inflation.

What's most important is that AMT reform should not increase the federal budget deficit and that the costs should be borne by those who were the original target of the AMT in the first place, the super-rich.

Michiganders call it the "pop-up tax." It's what happens when long-time Michigan residents sell their homes. A home that generates, say, $1,000 in property taxes under its current owner suddenly incurs a much bigger tax, say $1,500, after it is sold to a new owner. Michigan lawmakers think there is something unfair here-- and they're right. Unfortunately, they've identified the wrong culprit: it's not unfair that the new owner pays $500 more-- it's unfair that the old owner paid $500 less.

The problem is that Michigan's property tax laws cap the amount by which a home's taxable value can grow from year to year at 5 percent or the rate of inflation, whichever is less. This means that for many homeowners, there are two very different measures of what their home is worth: what the real estate market says (market value) and what the tax system says (taxable value). In a booming real estate market, the 5 percent cap makes taxable value smaller than market value, creating a gap between the (smaller) amount of value you're taxed on and the (bigger) amount your home is actually worth.

And the longer you own your home, the bigger that gap becomes.

Why does Michigan's tax system work this way? The idea with assessed value caps is generally to ensure that homeowners won't face an excessive property tax hike in any one year. When Michigan voters ratified Proposal A back in 1994, this property-tax-cutting proposal included an assessed value cap that basically said no Michigander, at any income level, should have to face more than a 5 percent increase in their property tax liability in any single year for as long as they own their house. And since inflation has been well under 5 percent in almost every year since then, Michigan homeowners at all income levels have seen across-the-board cuts in their property tax liability.

But the free ride ends when you sell your house. As in virtually any other state that imposes assessed value caps, the gap between taxable value and market value goes away when a Michigan house changes hands. This makes perfect sense: after all, the point of the cap is to prevent a homeowner from being taxed out of their home due to big year-to-year increases in property tax liability. But that rationale disappears when homes change hands. In the example I gave above, it's hard to see why a new homeowner should inherit the $500 tax break the previous homeowner received. And, more generally, the best way to ensure that a property tax system is fair is to ensure that what you pay depends on what your home is actually worth.

From the perspective of the new homebuyer, of course, something seems unfair. Why are they seeing a $500 property tax hike? And that's the way the Detroit Free Press article linked above generally frames this question (although the article is pleasantly neutral in its overall treatment of this topic). But the real question is not why the new homeowner sees a $500 tax hike-- it's why the previous homeowner was enjoying a $500 tax cut.

The answer one legislator, Andy Meisner, has come up with is to make the tax cut temporarily transferable. Under Meisner's bill, HB 4440, if the seller got a $500 tax break in his last year in a home, the buyer should get to keep that tax break for his first 18 months in the home. But as a representative of the home builders industry helpfully points out in the FreeP's article, this would create an artificial and totally unjustifiable gap between the tax on existing homes and on new homes. (In the example above, suppose that next door to the home that should be paying $1,500 in tax (but is paying $1,000 thanks to the transferable tax cap), a builder puts up an identical house and puts it up for sale. The two houses are worth the same amount, but the new home will pay $1,500 in tax, while the existing home will pay only $1,000. This means the home builder will have to sell the new home for less than it's really worth just to stay competitive.)

The source of the unfairness here is the 5 percent cap itself. The cap amounts to asserting that no one, at any income level, can afford to see a property tax increase higher than the rate of inflation. While this is certainly true for many fixed-income families, the idea that it's applicable to upper-income folks is simply absurd. But the Michigan system persists in doling out excessive tax breaks to every homeowner-- and efforts to expand the tax cap's benefits by making them transferable will do nothing to make these tax breaks more rational or fair. What some Michiganders are pejoratively calling the "pop-up tax" is, in fact, an entirely justified correction in the tax system-- making an unfair tax less unfair.

The Michigan House passed Meisner's plan earlier this month, and the Senate is now considering it.

Of course, an 18-month solution-- however wrongheaded-- has the virtue of only being wrong for 18 months. But even if lawmakers in the Senate approve the Meisner plan, at the end of the 18 months the "pop-up" problem will still exist. Sooner or later, Michigan lawmakers will have to confront the inherent unfairness of the tax cap approach.

If Meisner's plan is wrong, what's a better solution? One good approach would be to further strengthen the state's property tax circuit breaker credit, which (unlike the 5 percent cap) is explicitly designed to shelter Michigan homeowners and renters from excessive property taxes. The circuit breaker's design asserts that when low- and middle-income Michiganders (for a married couple, someone earning less than $80,000 or so) face property tax bills that exceed 3.5 percent of their income, those property tax bills should be thought of as excessive. The circuit breaker rebates property taxes over the 3.5 percent of income limit.

But the credit has limits. It's capped at $1,200, and it only rebates 60 percent of the "excessive" property tax. Expanding the credit so that it rebates 100 percent of the excess tax, and increasing the cap, would be a good, inexpensive and targeted way of ensuring that middle-income Michiganders won't get taxed out of their homes.

The prospects for passage of new property tax reduction legislation are looking dim in Florida, as the House and Senate must now reach a compromise between two competing measures. The House version compensates for the revenue lost from lower property taxes by raising the sales tax by as much as 2.5 cents. This tax swap idea is proving quite controversial, due to the regressive nature of the sales tax. Senate Republican leader Daniel Webster lead the charge against the House proposal, saying: "The sales tax is a regressive tax. And the more you raise it, the more regressive it becomes. The poor are going to get poorer, and the rich are going to get richer." The Senate proposal features a smaller property tax reduction, with no tax increase to offset the revenue loss.

One idea not under consideration in Florida is paying for a cut in property taxes by increasing income taxes. Just such a measure is being discussed in the Minnesota House. A few weeks ago, both the House and Senate passed legislation creating a fourth income tax bracket, although the rate differed slightly between the two bills. Now a new House proposal would pay for a property tax reduction and expanded tax credits for homeowners and renters with a 9.0 percent income tax rate for single taxpayers with incomes in excess of $250,000 or married couples with incomes above $400,000. This property-tax-for-income-tax swap would create a more progressive state tax system. By contrast, Florida lawmakers continue to refuse to debate instituting a state income tax, depriving themselves of a powerful tool for creating a more just and equitable tax structure.

Late last week, policymakers in Oregon established the state's first permanent rainy day fund, a significant step forward in improving fiscal stability in the Beaver State. Rainy day funds can be a valuable tool in helping states to weather economic downturns or other fiscal difficulties, as they set aside excess revenues during the good times to help bolster flagging revenues during the bad.The lack of such a fund was one of the factors contributing to the sizable cuts in spending that Oregon was forced to adopt in 2003.

At present, rather than setting aside surpluses to hedge against future deficits, Oregon is required under law to return any tax revenue that exceeds official projections by more than 2 percent to both personal and corporate income taxpayers, in the form of a rebate or "kicker."Projections from the Oregon Office of Economic Analysis issued earlier this month suggested that the "kicker" for the 2005-2007 biennium would amount to roughly $1.1 billion for families and individuals and to approximately $315 million for businesses.

Legislation signed by Governor Ted Kulongoski temporarily suspends the "kicker" for businesses with Oregon sales of more than $5 million and directs the $290 million that they would have received into the nascent rainy day fund.Businesses with Oregon sales below that threshold will still receive a "kicker" totaling $25 million, while the personal income tax "kicker" will go on untouched. The legislation also mandates that 1 percent of general fund revenue be deposited into the fund in all future years.

Still, as the Eugene Register-Guard observes, the legislation signed by Governor Kulongoski suffers from a number of shortcomings.With only a one-time infusion from the corporate "kicker", the rainy day fund will likely be too small to withstand a significant recession and may not be adequately replenished once it is used.What's more, the legislation leaves Oregon's "kicker" system intact over the long-run, a situation that will continue to impair the state's ability to invest in vital public services.

For more on the need for - and the proper design of - state rainy day funds, see ITEP's Talking Taxes policy brief on this topic.

New Mexico Governor Bill Richardson signed into law an Earned Income Tax Credit equal to 8 percent of the federal EITC. New Mexico becomes the 21st state to offer an EITC. Congratulations to New Mexico Voices for Children and the New Mexico Fiscal Policy Project for making the creation of the Working Families Tax Credit a Legislative Priority.

In other EITC news, the Institute on Taxation and Economic Policy (working with Nebraska Voices for Children) submitted testimony to the Nebraska Legislature's Revenue Committee and submitted several letters to local newspapers in favor of Legislative Bill 683, which would expand the state's refundable EITC from 8 percent to 15 percent of the federal credit. Tax reform and budget negotiations are continuing in Lincoln and it's unclear whether the EITC will be expanded. For more on the value of the Earned Income Tax Credit read ITEP's policy brief.

In Kansas, two senators are championing a new amendment to the state constitution that would freeze the assessed value of a home upon the homeowner's sixty-fifth birthday. The proposal, designed to help fixed-income seniors struggling with their property tax payments, is a popular one. While few would argue against the intent of the bill, however, some have doubts about whether the bill is the best way to achieve these goals.

The main criticism of the bill is that it is poorly-targeted. It would help all seniors, including the most wealthy, and not just those struggling to pay their bills. Notably, the AARP came out against the bill, saying "It's not that we aren't concerned about older Kansans and their ability to pay property taxes, we just believe property tax relief should be more targeted". The issue is that, as the share of property taxes paid by one group (in this case, the elderly) goes down, the share paid by others will likely increase. In the article linked above, Randall Allen, executive director of the Kansas Association of Counties, explained it like this: "It's like a balloon. If you push one end down, the other naturally goes up. If the valuation is suppressed by artificial means, then the tax rate is going to go up because it has to generate the same dollars."

There are multiple ways to increase the cost efficiency of property tax reductions. Some have suggested that the measure should be tied to the value of the home, so that, for example, only houses valued at less than $200,000 would have their assessed value frozen. Such a move would make the amendment much less expensive to the state, while still helping elderly homeowners.

However, an even better solution would be to expand the current Kansas property tax "circuit breaker". A circuit breaker kicks in when property taxes exceed a given percent of the taxpayer's income, providing targeted relief only to those who need it. Circuit breakers directly tie the tax reduction to ability to pay the tax, making the measure much more effective for each dollar spent. For more information, check out the the latest report from the Center on Budget and Policies, which takes a hard look at circuit breaker programs across the country.

In Kansas two state senators are championing a new amendment to the state constitution that would freeze the assessed value of a home upon the homeowner's sixty-fifth birthday. The intent behind the proposal is a popular one: to help fixed-income seniors struggling with their property tax payments. However, the bill is poorly-targeted. It would help all seniors, including the wealthiest, and not just those struggling to pay their bills. Critics of the measure are starting to line up. Notably, AARP came out against the bill, saying, "It's not that we aren't concerned about older Kansans and their ability to pay property taxes, we just believe property tax relief should be more targeted". Some have suggested that the measure should be tied to the value of the home, so that, for example, only houses valued at less than $200,000 would have their assessed value frozen. Such a move would make the amendment much less expensive to the state, while still helping elderly homeowners.

However, an even better solution would be to expand the current Kansas property tax "circuit breaker" to include people of all ages. A circuit breaker kicks in when property taxes exceed a given percentage of the taxpayer's income, providing targeted relief only to those who need it. Circuit breakers are a cost-efficient way to provide targeted relief to those who need it most. For more information check out the latest report from the Center on Budget and Policies which takes a hard look at circuit breaker programs across the country.

Irresponsible Amendments Added... But It's Still Better Than the President's Budget

The Senate voted 52-47 on Friday to pass a budget resolution (S. Con. Res. 21) requiring any extension of the Bush tax cuts to be paid for. The vote marked a victory for Democrats, who seek to avoid the embarrassments of the Republican-controlled Congress that failed to pass a budget last year. However, several amendments were added to the budget resolution on the floor that, if they survive the conference committee and remain in the final version passed by the House and Senate, will make it more difficult for Congress to end budget deficits. Nonetheless, the Senate budget still can be viewed as far more responsible than the budget plan proposed by President Bush. The main reason for this is that the Senate plan maintains the pay-as-you-go, or PAYGO, rules that require any new entitlement spending or any new tax cuts - including any extension of the Bush tax cuts which expire at the end of 2010 - to be offset with spending cuts or revenue increases elsewhere in the budget.

Spending the Social Security Surplus

Both the President's plan and the Senate plan rely on some flawed assumptions in order to appear to balance the budget within five years. The President's budget proposal was far more irresponsible, since it assumed the Bush tax cuts would all be made permanent and huge cuts would be made in public services. One problem with both plans is that they would continue the practice of borrowing the Social Security surplus (the Social Security taxes collected in excess of the Social Security benefits paid out in a given year). This money is supposed to be used to pay down the national debt to free up money in the future so that we can more easily pay the benefits of the baby boomers when they retire. (This is the idea behind the Social Security Trust Fund.) The Senate budget plan as originally presented by Budget Committee Chairman Kent Conrad was supposed to produce a "surplus" of $132 billion in 2012, but if you don't count the Social Security surplus that year, the budget would not quite be balanced.

Amendments Make Matters Worse

But even this illusion of responsible budgeting was more than the Senate could handle this week. An amendment offered by Senator Max Baucus (D-MT) was adopted 97-1 to spend this imaginary "surplus" on extending certain parts of the Bush tax cuts. If this provision remains in the final version approved by the House and Senate, it would not change the fact that any such proposal to extend the tax cuts without offsetting the costs would still violate PAYGO and thus require 60 votes in the Senate to overcome a point of order. But with the support of 97 Senators, it could signal that the Senate's commitment to PAYGO is shaky.

The Senate also voted 63-35 to adopt an amendment offered by Senator John Cornyn (R-TX) which would require a supermajority of 60 votes in the Senate to increase tax rates. This provision could prove problematic if, for example, Congress wants to pay for reform of the Alternative Minimum Tax (AMT) by rolling back some part of the Bush tax cuts for the wealthiest taxpayers.

Worst Case Scenario Avoided

Fortunately, the worst proposed amendments were turned away by the Senate. For example, an amendment to exempt extensions of the Bush tax cuts from PAYGO rules was defeated. The Senate also rejected amendments to further cut the estate tax and repeal the AMT without paying for it.

The House of Representatives will likely vote on their budget resolution next week, and a conference will likely take place after the Congressional recess to work out differences between the Senate version and the House version.

The conservative spin-machine is running at full-speed to portray the Democrats' decision to block additional deficit-financed tax breaks as wildly unfair and disasterous for the economy. (For background about the Congressional budget battle, visit the budget section of our Congressional issues page.)

Take this gem from the Wall Street Journal:

Senator Kent Conrad and his fellow Democrats proposed their five-year budget outline, or at least that part of it they're willing to discuss in public. Mr. Conrad, the Senate Budget Chairman, pulled off the neat magic trick of claiming his budget includes "no tax increase," even as it anticipates repeal of the Bush tax cuts after 2010.

Bull. The Democrats are not trying to repeal any Bush tax cuts. If only we were so lucky. The Dems may let some of the Bush tax cuts expire at the end of 2010, and it was the legislation enacted by the President and Congress during their six years of one-party control that contained that expiration date. The Republicans basically wanted to use procedural mechanisms (rules allowing approval of the tax cuts by a simple majority if they did not increase deficits outside a ten-year budget window) and also wanted to force the issue of tax cuts up for a vote again in the future. Whatever the motivations of the Republicans, they decided that their tax cuts would end at the end of 2010, so any extension of the tax cuts requires new legislation and constitutes new tax cuts.

And the Democrats are not even saying that tax cuts will expire. The budget approved by the Budget Committee in the Democrat-controlled Senate merely says that if the tax breaks are to be extended past 2010, Congress needs to find a way to offset that revenue loss (through decreased spending or increased revenues) rather than just increasing our borrowing.

The idea of borrowing the money to finance a tax cut is absurd and it's incredible that this rule, called pay-as-you-go or PAYGO, is even controversial. What's more incredible is the lengths the Republicans are going to portray this common sense policy as wild-eyed big government liberalism.

For example, the ranking Republican on the Senate Budget Committee, Judd Gregg (R-NH) was reported by BNA (subscription required) as saying

"The Democratic budget as proposed will increase taxes or revenues by approximately $916 billion. It will increase non-defense discretionary spending by approximately $140 billion."

The $916 billion estimate includes the expected five-year cost of extending the 2001 and 2003 temporary tax cuts, extending other expiring provisions, indexing the AMT for inflation, and the interactive effect of the AMT and rate changes.

So, if I get this right, the Democrats are being accused, in an outraged tone, of saying "no" to more borrowing? The Democrats are being blasted because they don't want to increase the budget deficit and the national debt?

The Center on Budget and Policy Priorities has a great paper out refuting the claim made by the Bush Administration and its allies that the tax cuts enacted over the previous six years actually made the tax code more progressive. The richest Americans received the largest percent increase in income due to the tax cuts. The largest drop in federal income tax rates in percentage points went to the wealthiest one percent.

We might add that CTJ's latest figures show that if Congress went along with the President's budget proposal, over 50% of the benefits of the tax breaks will actually be flowing the to richest one percent. (Assuming that the AMT is "fixed," which the President's budget does not assume but which is likely to happen, over 53 percent of the benefits would still go to the richest 5 percent and over 40% of the benefits would still go to the richest 1 percent.)

So how can the administration claim that the tax cuts are progressive? Well, they've latched on to one particular statistic that really has nothing to do with the effects of their tax breaks: the percentage of income taxes paid by the richest one percent, which increased from 36.5% in 2000 to 36.7% in 2004.

The Center on Budget explains that this in no way shows progressivity in the Bush tax cuts.

1. The richest one percent saw their share of pre-tax income rise in those years, so of course their share of the income taxes paid is going to rise, and that has nothing to do with changes in the tax code.

2. Taxes paid by the wealthiest one percent did drop a great deal, and their share of income taxes paid was able to rise because the total amount of income taxes paid dropped.

3. These tax breaks are deficit-financed, and when you take into account how we're going to have to pay the bill at some point down the road, it's almost certainly the case that lower-income and middle-income people will lose out more.

A paper from CTJ made this point last year. We found that when you make some very basic assumptions about how the Bush tax cuts will eventually be paid for, that cost will be greater than the benefit Americans receive from the tax cuts. This is true except for the richest one percent, since their tax cuts were so huge and so much bigger than everyone else's.

There's one important point that I would add to this.

The fact that the richest one percent pay over 36 percent of the income taxes does NOT mean that our tax code is wildly progressive because this fails to account for all the other types of taxes - which hit poor people harder.

Social Security taxes, for example, don't even cover income beyond a certain cap (set at $97,500 in 2007) and only cover wages. For many poor and middle-class people, the payroll tax (which includes the Social Security tax and the Medicare tax) is the more significant (or the only) federal tax that applies to them. State taxes are often quite regressive, particularly sales taxes, which take a much larger percentage of income away from the poor and middle-class families than they take from wealthy families.

A couple years back, CTJ analyzed just how much of the total tax burden (meaning federal and state taxes, income taxes and other types of taxes) were paid by different income groups compared to their shares of total income. It turned out that the richest one percent of families had 19.1 percent of all the income in America and paid 20.8 percent of all the taxes in America. From that perspective, our tax system as a whole is essentially flat, or just barely progressive. It would be highly regressive if not for the progressive rates in the federal income tax that counter the regressivity of the federal payroll tax and many state taxes.

(For those who don't feel like reading below the fold, the quick answer to the title question is:no. At least, not good ones.)

Property tax debates are a striking regularity in states around the nation. But what's equally striking is that no one seems to be able to point to an example of a state that has confronted property tax reform in a universally acceptable way.

But the Miami Herald's Lisa Arthur thinks she's found the solution to states' property tax woes: just do what Nevada did back in 2005. To hear Arthur tell it, Nevada eliminated pretty much every property tax inequity one could think of:

• Issue: Homeowners were about to be taxed out of their houses.
• Solution: Tax bill annual increases were capped at the lesser of 3 percent or the rate of inflation -- no matter how high a home's value climbs.
• Issue: Commercial property owners would shoulder an unfair tax burden without a cap. And as values on their properties and their taxes rose, they would pass the cost to renters.
• Solution: Tax bill increases were capped at 8 percent annually for commercial property, including rental property. If a landlord could prove rents are at or below the fair market value set by the federal government, they get the 3 percent cap.
• Issue: Snowbirds with second homes would get slammed unfairly if they didn't get the same tax breaks as full-time residents.
• Solution: As long as they don't own another home in Nevada, out-of-staters with second homes get the same 3 percent cap as full-time residents. If they rent the home part of the year, the cap goes to 8 percent. If the rent meets the affordability definition, they get the 3 percent cap.
• Issue: Newcomers to the state and first-time home buyers who bought into a hot market with escalating home prices would get hit with much higher tax bills than longtime homeowners in the same neighborhood.
• Solution: In Nevada, the tax break stays with the property. The new home buyer inherits the seller's tax bill no matter how high the value of the property has climbed or what it sells for.

Put this way, Arthur's got a point. Pretty much every property owner in Nevada has protection against large tax hikes (where "large" means more than 3 percent a year). But Arthur is setting the bar pretty low for a successful property tax reform. Her benchmark appears to be that there's a mechanism restricting the growth of everyone's property taxes to something resembling the growth rate of inflation. Such an oversimplified benchmark overlooks two equally compelling (actually, even MORE compelling) objectives of property tax reform:
1) preserving adequate revenues. Capping everyone's property tax growth at 3 percent will make taxpayers happy, but only until they notice their schools don't have new textbooks anymore.
2) targeting property tax breaks to those who need them. Arthur recognizes the universal refrain of people "being taxed out of their homes," and clearly thinks preventing this is a good goal, but says nothing about the fact that simply capping the growth of everyone's property taxes is a remarkably blunt instrument for achieving this goal. If you're a fixed-income Nevada homeowner whose property taxes were unaffordable before 2005, the 2005 reforms don't help you.

Arthur is right in one important respect: if you cap everyone's property taxes, inequities in property taxes between different property owners will be less noticeable, and complaints about higher property taxes will likely diminish. But the part of the story she misses is that this goal comes with a price: a tax system that is more inadequate over the long run, and one that is even more divorced from ability-to-pay considerations than property taxes normally are. Fairness and adequacy are both important goals-- and the tax cap approach amounts to abandoning both of these goals.

It's understandable that Arthur, and other Floridians, are grasping at straws. Florida's property tax situation seems to be deteriorating by the hour. But here's hoping policymakers in Florida and around the nation check with a few Nevadans before they adopt Arthur's recommendations.

I have already argued at great length that the IRS should reform e-filing so that there is one government-provided portal that is simple and free for all taxpayers to use. What he have instead is a crazy situation in which several private companies collectively known as the "Free File Alliance" have contracted with IRS to provide online tax filing and it is currently not free for people with incomes over $50,000. Even we don't love doing our taxes so much that we want to pay to do them.

One member of Congress who feels the same way took the opportunity at a subcommittee hearing today to shine a light on the sort absurd things that happen when you give private companies what are fundamentally government tasks. At this morning's hearing of the Ways and Means Subcommittee on Oversight, Representative Earl Pomeroy (D-ND) told IRS Commissioner Mark Everson about a website, http://www.irs.com/, that is clearly designed to fool people into thinking it is part of the IRS (whose actual website is http://www.irs.gov/).

The website has links leading to offers for Refund Anticipation Loans (RALs) which are notorious scams that involve taxpayers receiving a loan that they will pay off, usually with ridiculously high interest, after they receive their tax return. One page on the site even shows that these loans can have an interest rate exceeding 93 percent. Congressman Pomeroy then explained that the site seems to belong to company called TaxACT (several, but not all, of the pages seem to indicate this) which happens to be one of the companies in the Free File Alliance!

The IRS actually stopped the Free File Alliance from offering and advertising RALs in the e-filing process. Now that it appears one of the companies is nonetheless involved in an egregious RAL, perhaps the IRS will feel some pressure to go further. Or, if more embarrassments like this materialize, maybe more people will swing around to the view that this is really not something that private companies should be providing in the first place.

This week the Community Action Project blasted the decision by Oklahoma policy makers to use a temporary surge in revenue to justify permanent, unfair tax cuts. CAP says that when voting on the tax cut proposals, legislators did so "knowing only the short-term fiscal impact and without the information that could allow them to evaluate the long-term fiscal sustainability of their choices." The question before legislators now is whether or not to repeal the tax cuts that were scheduled to take place in 2008. Last fall, the Center on Budget and Policy Priorities published a study which takes a closer look at specific states that enacted tax cuts in 2006 and highlights the potential damages from "tax cuts on layaway."

West Virginia appears poised to take a major step forward in combating tax avoidance by large and profitable businesses. Legislation (SB 749) passed last weekend would institute mandatory combined reporting of corporate income beginning in 2009. Combined reporting is widely viewed as the best way to stop businesses from avoiding taxes by shifting income (on paper) from one state to another. Governor Joe Manchin is expected to sign the measure into law.

SB 749 would make West Virginia the third state in four years to put combined reporting into practice, but this progress comes at a price. The same bill would also reduce West Virginia's business franchise tax rate from 0.55 percent to 0.20 percent over the next five years. While combined reporting is expected to generate $33 million per year once fully implemented, the reduction in the business tax rate is anticipated to lose as much as $75 million annually.

For more on combined reporting in West Virginia, see West Virginia Citizen Action Group's recent policy issue brief.

There are several proposals in states across the country that would expand state sales tax bases to include services. These efforts aim to improve both states' financial stability and the fairness of their tax codes. It's probably not fair, for example, that in some states people who do their own laundry pay sales taxes when they buy a washer or dryer but people who have their clothes laundered by someone else pay no sales taxes at all.

One component of an overall tax proposal in Maine would expand the sales tax base to include a variety of personal and real property services. In Maryland, a state house committee on Wednesday debated House Bill 448, which would expand the sales tax base to include luxury services like interior decorating and other personal services. In Michigan, Governor Jennifer Granholm has also proposed a measure to expand the sales tax base. The political ramifications of taking on previously untaxed businesses may make some policymakers wary. Nonetheless, as states shift from manufacturing economies to service economies, it's essential that tax structures change too. For more on expanding the tax tax base, check out ITEP's policy brief.

This November Maine voters will have the opportunity (unless the Legislature acts first) to vote on a proposal that would provide tax cuts to assist college graduates as they pay back their student loans. If the initiative is approved, college students in Maine who stay and work in the state after graduation may claim a tax credit of about $2,100. Advocates of the proposal say that offering the tax credit will make education more affordable for students and also "raise the wage and skill levels of Maine's workforce." However, some important questions remain regarding how much the tax credits will cost, where the money to pay for the credits would come from, and whether or not offering a tax credit will really ensure that students stay in Maine.

In Iowa a similar proposal is focused on keeping college graduates in the state and slowing the state's "brain drain." The proposal allows businesses who repay new employees' student loan debt (up to $25,000) to receive tax credits of up to $7,500. In order to qualify for the credit, employers have to pay a minimum salary of $25,000 and start repaying the employee's loan within six months. The Des Moines Register's editorial board sharply critiques this proposal and raises good points about whether or not providing tax credits to businesses really is the best strategy for ensuring that college graduates stay or move into the state. Instead, the Register rightly suggests, "To reduce student loan debt, public money would be better used to hold down tuition costs at state universities, so students don't graduate with huge debt in the first place."

Wednesday, Iowa Governor Chet Culver signed into law a bill that raises cigarette taxes by $1 a pack and also increases taxes on various other tobacco products. The Governor predicts that the new $1.36 tax will cause 20,000 Iowans to quit smoking and prevent twice as many from ever picking up the habit. The tax increase goes into effect immediately and revenues generated are expected to be used for healthcare. Unfortunately, evidence from other states shows that revenues generated from this regressive tax will decline over time.

In Mississippi, a proposal to swap a cigarette tax hike for a sales tax cut appears to be dead for the second time. While promising to propose a "serious tax cut" in the future, Governor Haley Barbour refused to support a bill that would increase the state's cigarette tax from 18 cents to $1 and cut the tax on groceries by half. The problems with Mississippi's tax code go beyond sales and excise taxes, so perhaps now is the time for discussing a complete overhaul of Mississippi's tax structure.

As we've reported previously, the Senate and the House of Representatives have approved different bills that would increase the minimum wage by $2.10 over two years and offer tax breaks to business to "compensate" them for the added cost. The idea that businesses need to be "compensated" after they've received $276 billion in tax breaks since the last minimum wage hike (which was worth only about $13 billion to workers) is absurd. But both chambers have decided that some level of absurdity is acceptable if it helps get the minimum wage increase passed.

The problem is that the two chambers are in a spat over the details. The Senate's bill includes $8.3 billion in tax breaks over ten years for business while the House version only includes $1.3 billion over ten years. Both versions have provisions that raise revenues to offset the tax breaks. Predictably, many conservatives and business leaders have decried the offsets as "tax hikes" (since they apparently only support tax breaks that are not paid for). House Ways and Means Chairman Charlie Rangel (D-NY) went so far as to hold a hearing Wednesday on how bad the revenue-raising provisions are in the Senate version - and heard testimony only from representatives of business who opposed the "tax hikes" included in it. We would agree that the Senate version is frustratingly illogical, but not because of the revenue-raising provisions. The problem is the tax cuts. Businesses should not have to be bribed with $8.3 billion in tax cuts so that we can rescue the minimum wage from its lowest purchasing power in half a century.

The Senate Budget Committee approved a plan Thursday that would allegedly bring the budget into surplus by 2012. The resolution would also require any extension of the Bush tax cuts or reform of the Alternative Minimum Tax (AMT) to be paid for. The budget resolution is the blueprint for spending and revenues in fiscal year 2008 and also sets goals for a five-year period. The resolution revives a PAYGO requirement, meaning any new entitlement spending or new tax cuts must be offset with either increases in revenue or cuts in spending. The Bush tax cuts were specifically written to expire in 2010 so the baseline used by the Congressional Budget Office also assumes a 2010 expiration. By retaining this assumption and reviving PAYGO, the resolution would force Congress to either let the tax breaks expire in 2010 or come up with money to offset whatever parts of the tax breaks they want to extend.

The budget resolution would allow discretionary programs (programs for which Congress must approve funding each year) to receive $16 billion more than the President's proposed budget in fiscal year 2008. But the President's proposed discretionary funding level is actually a $10 billion cut below what would be needed to keep up with inflation, so the Senate Budget Committee is only suggesting a very modest increase in spending. The budget resolution would also allow for an expansion of the State Children's Health Insurance Program (SCHIP)... if Congress finds a way to pay for it.

Is Requiring a Balanced Budget the Same Thing as Hiking Taxes?

The proposal has been criticized by opponents like the ranking Republican on the Senate Budget Committee, Judd Gregg (R-NH) (who did not oversee any budget improvement during his time as the Budget Chairman). Gregg claims that the proposed resolution is dodging important decisions by not specifying where the extra revenues for SCHIP expansion and other initiatives will come from, but budget resolutions under the Congressional process established in 1974 are not supposed to instruct the appropriations committees or the tax-writing committees exactly what to do. Rather, the resolution is to only provide the overall spending and revenue goals for the committees. Gregg and others are also saying that any requirement that tax cuts be paid for is a tax increase that must be opposed. This logic seems to favor increasing the national debt, and the interest payments on it, indefinitely or making massive (and politically unlikely) cuts in services Americans currently depend on.

In Search of a Free AMT Fix The critics also have attacked the proposal's assumption that revenue will be needed to "fix" the AMT only for two years, when no one really thinks Congress will allow the AMT to revert to current law and start reaching tens of millions of taxpayers. But this is actually consistent with the desire to stick to PAYGO. Any change from current law (and the AMT will reach tens of millions more people under current law) that loses revenue must be offset to avoid increasing deficits. Perhaps the first step in countering these criticisms would be for Congress to fix the AMT in a budget-neutral manner as proposed by Citizens for Tax Justice. The House Democrats will present their budget propsal next week.

NC Budget and Tax Center Report:

Strategies for Helping Low-Income Taxpayers - Comparing a No-Tax Floor to a State EITC

Governor Michael Easley's recommended state budget set aside $63 million to reduce the income taxes paid by low-income taxpayers to be delivered through a "no-tax floor" plan. In fact, hundreds of thousands of the proposed 1.2 million taxpayers his plan claims to help already pay no income tax and would see no new benefit. In addition to not benefiting very low-income taxpayers, the governor's "no-tax floor" also has numerous design flaws that make it inferior to a state EITC.

"People in poverty should not pay income tax in this state." It was North Carolina Governor Mike Easley who said it last week in his "State of the State" speech, but it's a sentiment that is widely shared by policymakers of all stripes around the nation. However, Easley's proposed remedy "a tax credit that eliminates all state income tax for some low-income families, and cuts the income tax bill in half for others" shows both the power and the limitations of this sentiment. A new report by the North Carolina Budget and Tax Center (BTC) highlights the flaws in Easley's "no-tax floor". The main problem is that the proposed tax credit is non-refundable, which means it can be used to reduce income taxes to zero but can't be used to offset regressive sales and property taxes. As ITEP's Who Pays report has documented, these non-income taxes hit poor families far more heavily, on average, than does the income tax.

This fact may have been unclear to many initially when the proposal was presented. The governor's projections of the number who would be taken off the income tax rolls by his plan erroneously included the hundreds of thousands of North Carolinians who already pay no income taxes because of the standard deduction and personal exemption already in place.

As the BTC has also documented, there's a better answer for policymakers who are truly concerned about not taxing low-income families further into poverty: a refundable state Earned Income Tax Credit. The goal of eliminating income taxes on poor families has gained heightened visibility in recent years, largely due to the Center on Budget and Policy Priorities' terrific annual report on this topic. Now, the BTC's work is prompting a healthy debate on how best to redress the inequities highlighted in the CBPP report.

ITEP Testimony on Nebraska EITC Proposal

"... when we measured the impact of all the Nebraska state and local income, property, sales and excise paid by Nebraskans at different income levels, we found that low- and middle-income taxpayers paid substantially more of their income in tax, on average, than the wealthiest taxpayers..."

Congressmen Rahm Emanuel (D-IL) and Ray Lahood (R-IL) have put forward a bipartisan proposal to use revenues collected through better enforcement of capital gains taxes to double the funding of the State Children's Health Insurance Program (SCHIP) over the next 5 years to $60 billion. Ten billion dollars of this increase would go to children not currently covered by SCHIP. Families whose income is between 200% and 350% of the federal poverty level ($20,000 for a family of 4) would receive an advanceable and refundable tax credit to purchase health insurance for children.

The proposal to improve capital gains enforcement has already been presented as a bill by Representative Emanuel (H.R. 878) that would require securities brokers to report a customer's basis (generally the purchase price) in securities transactions to prevent understating the capital gains on such transactions. This step was one the suggestions offered by Citizens for Tax Justice to the Senate Budget Committee in January. The President included a similar proposal in his budget for fiscal year 2008. As reported in last week's Tax Justice Digest, another proposal to expand SCHIP would use revenue from an increased federal cigarette tax. The Center on Budget and Policy Priorities has a new report that outlines various ways of paying for an SCHIP expansion.

This year our federal tax forms are incredibly confusing, but it's not the IRS's fault, and it's not something that is going to be solved with the latest regressive "flat tax" plan. Rather, this year's tax filing confusion is caused by the previous Congress, which in the months before the Republicans lost power, procrastinated as long as possible before extending several tax deductions and credits. At that point it was too late for the IRS to include these deductions and credits on the tax forms, which were already printed and distributed. (To be honest, Citizens for Tax Justice has never been fond of these particular tax provisions, the "tax extenders," but we'd rather they be enacted permanently or not at all, as opposed to having Congress revisit them every couple years and spending endless amounts of time that could be applied to more pressing matters.)

Let's say you have kids in college. The general instructions say that the tuition deduction is expired but may have been extended and refers you to the IRS's web site. The 1040 (printed and on-line) has nothing about the tuition deduction. If you go to the website and look under "What's Hot" you find not a word about the tuition deduction. If you search further you can find information about changes in tax laws that apply and you discover that to take the tuition deduction, you go to line 35, which is for something called the "domestic production activities deduction" and write a "T" on the line if you're taking the tuition deduction. If you happen to be taking the domestic production activities deduction and the tuition deduction, you write "B" on the line for "both." Similar instructions are given for those taking the educator expenses deduction, the DC first-time homebuyer credit and the state and local sales tax deduction.

The good news is that this confusion could create support for tax reform and simplication. The bad news is that a lot of the plans peddled as "tax simplification" do not focus on simplification, but rather remove the progressive rates which have nothing to do with this confusion. (Tax tables are provided to tell you how much you actually owe after you work through all these deductions and credits). Our current President has persuaded Congress to enact six tax break bills in six years ... but none have simplified our tax code. Broad tax reform might be a good idea ... in 2009.

Congressmen Rahm Emanuel (D-IL) and Ray Lahood (R-IL) have put forward a bipartisan proposal to use revenues collected through better enforcement of capital gains taxes to double the funding of the State Children's Health Insurance Program (SCHIP) over the next 5 years to $60 billion. Ten billion dollars of this increase would go to children not currently covered by SCHIP. Families whose income is between 200% and 350% of the federal poverty level ($20,000 for a family of 4) would receive an advanceable and refundable tax credit to purchase health insurance for children.

The proposal to improve capital gains enforcement has already been presented as a bill by Representative Emanuel (H.R. 878) that would require securities brokers to report a customer's basis (generally the purchase price) in securities transactions to prevent understating the capital gains on such transactions. This step was one the suggestions offered by Citizens for Tax Justice to the Senate Budget Committee in January. The President included a similar proposal in his budget for fiscal year 2008. As reported in last week's Tax Justice Digest, another proposal to expand SCHIP would use revenue from an increased federal cigarette tax. The Center on Budget and Policy Priorities has a new report that outlines various ways of paying for an SCHIP expansion.

In testimony Monday before the House Appropriations Subcommittee on Financial Services and General Government, Citizens for Tax Justice Executive Director Bob McIntyre presented the latest CTJ data on the Bush tax cuts. He explained that the administration's proposal to make the tax cuts permanent will cost a total of $5 trillion dollars from 2011 through 2020. This total includes the added interest on the national debt accumulated as a result of the tax breaks. While the President's proposed budget does not include permanent AMT reform, this calculation assumes that Congress will be forced to change the AMT (either through consecutive "patches" or through legislation that permanently reforms the AMT).

Earlier this week, the House Ways and Means Subcommittee on Special Revenue Measures held its first hearing this year on the Alternative Minimum Tax (AMT), which is supposed to ensure that extremely wealthy people pay some minimal amount of taxes regardless of what loopholes they enjoy. But unless Congress acts, the AMT will soon affect some households who are upper-middle income but not super-rich. This is because the exemptions that shield most people from the AMT have never been permanently indexed for inflation, and because the Bush tax breaks changed the regular income tax calculation but not the AMT.

Congress has enacted temporary "patches" in recent years that extended the exemptions and increased them to keep up with inflation, but continuing this process would cost over $250 billion over the next four years. This cost would have to be offset if Congress is to stay within the PAYGO rules revived by the Democrats in the House shortly after they took control of Congress. The problem is that Republicans are responding to the situation by proposing to repeal the AMT entirely without paying for it, which could cost well over a trillion dollars over a decade.

Fingers Crossed for a Progressive, Budget-Neutral AMT Reform

Subcommittee Chairman Richard Neal (D-MA) indicated that a permanent reform will be proposed by the Democrats in a few weeks. It is not yet clear what that will look like, but Ways and Means chairman Charlie Rangel (D-NY) has hinted that a bill shielding more moderate-income families from the AMT could be paid for by redirecting some tax breaks away from the wealthiest taxpayers. Citizens for Tax Justice has proposed an AMT plan along those lines that would not change anything in the normal income tax rules, but other proposals have been suggested that would use new or higher regular income taxes on the wealthiest to pay for AMT reform.

Six Years Wasn't Long Enough for the Republicans to Fix the AMT

The subcommittee's ranking member, Phil English (R-PA), took the opportunity to argue that the AMT problem was the Democrats' fault. He pointed out that President Clinton vetoed an AMT repeal bill passed by the Republican Congress (that proposal would have repealed the AMT without offsetting the cost at a time when the administration was trying to balance the budget). Representative English did not explain how the Republicans managed to control every branch of government for six years without enacting a permanent solution in any of their six major tax bills. He also did not respond to the explanation that the Bush administration in 2001 intentionally chose to leave the AMT in place so as to make the cost of its first tax break appear less than it would really be after accounting for the AMT patches that Congress would inevitably enact.

The AMT essentially threatens to take the Bush tax breaks away from many Americans but leave them in place for the very richest (who, ironically, are not as likely to be affected by the AMT). Nonetheless, Representative English argued that any plan that would close loopholes used by the wealthy or raise taxes on the wealthy to pay for AMT reform would be "class warfare" and would be opposed by the Republicans.

...Because they allow people to spout drivel like this:

KUDLOW: Gentlemen, can you give me a lightning-fast one thought response ....
on... AMT reform.
[.....]
Mr. STEVE MOORE (The Wall Street Journal):
Well, Bob Reich, this is a big, big tax time bomb that's about to explode. But I don't understand the politics of this, Larry. I mean, this is the Democrats' problem. They created the AMT 30 years ago. Bill Clinton raised the AMT back in 1993. Bill Clinton vetoed a bill that would have repealed the AMT back in 1999. This is Charlie Rangel's problem. It's Hillary Clinton's problem. Why would George Bush come up with proposals? I want to see what the Democrats come up with.

These are serious, serious charges. Let's take them in order:
1) "They created the AMT 30 years ago. " Absolutely true, but hardly something to be ashamed of. The Democrats did, in fact, create the AMT back in 1969. It was designed to act as a backstop to the regular income tax, to ensure that a small number of super-wealthy tax avoiders paid their fair share. And it did a bang-up job.
2) "Bill Clinton raised the AMT back in 1993." This is your classic half-truth. President Clinton did push through an increase in the AMT rate-- as an eminently sensible accompaniment to an increase in the regular top rates. The two tax structures (regular and AMT) were calibrated to work in tandem. To keep these parallel structures working in tandem, the rates ought to follow each other: if the regular rate goes up, the AMT rate should to. Moore conveniently omits this fact, and also forgets to mention that Clinton shepherded through an increase in the AMT exemptions to help shelter middle-income people from the AMT. Did I say "half truth?" This is a third of a truth, max.
3) "Bill Clinton vetoed a bill that would have repealed the AMT back in 1999. " See point #1. He vetoed it, and he was right to veto an effort to simply repeal this important backstop to the regular tax.

Equally frustrating is that the talkshow guest spouting this claptrap, the Wall Street Journal's Stephen Moore, was paired with a lefty adversary, Robert Reich, who certainly knew that Moore's blame game exercise was nothing but spin-- and chose not to debunk Moore's arguments. Why? He was too busy trying to say something entertaining. Reich and Moore are apparently regular guests on Kudlow's show-- Kudlow refers to them as his "dynamic duo" repeatedly-- so the two of them have to work together and riff off each other. It's not a debate-- it's performance art.

You can scream at the TV all you want, but it won't stop the lies.

And that is why I don't watch CNBC.

The Greenville News' Paul Hyde wants to see a cigarette tax hike in South Carolina-- and wants to see it fail:

Some opponents of a cigarette tax -- here in South Carolina, for instance -- have argued, lamely, that the cigarette tax shouldn't be increased because the state would come to rely on a tax revenue source that's bound to decline...The obvious response to that argument is: So what if the tax declines? It's undoubtedly a good thing that fewer people would be smoking.
States also may see a decline in some health-care costs related to smoking. So the decline in cigarette tax revenues would not matter that much. Based on the experience of other states, South Carolina could expect cigarette tax revenues to decline. State leaders could plan accordingly.The decline in revenues would be slow and cigarette taxes represent only a small portion of the state budget.

Hyde is right about one thing: forward-thinking lawmakers ought to be able to see the long-term decline of cig tax revenues coming. Lawmakers who've got their eye on the long-term sustainability of South Carolina's fiscal structure should recognize that the cig tax is a quick fix that will need to be supplemented in the long run-- useful to help achieve the dual purpose of discouraging teen smoking and bringing in a few bucks in the short run, but not a long-term solution.

This is all true-- and if state lawmakers are really thinking in terms of a two-part strategy (cig tax now, structural tax reform later on), then it's not the worst idea ever. But how many lawmakers in South Carolina (or in any other state) are that forward-thinking? Most observers of state tax politics would probably agree that state lawmakers aren't thinking ten years down the road-- they're thinking about how they can get through the current fiscal year while ruffling the fewest feathers. They'll absolutely take the cigarette tax revenues if they can get them now, but won't use this short-term fix as a springboard for longer-term reform.

If Hyde overestimates the willingness of lawmakers to think long term, he completely ignores the question of popular support for tax hikes. Even in the best of times, there is a limited appetite for tax hikes-- lawmakers only get so many chances to reform the system, and if elected officials use their political capital to push through a cigarette tax hike this year, it will be that much harder for them to enact needed structural tax hikes next year or the year after. In year 2 or year 3 after a cig tax hike, lawmakers will have to explain to voters that the first tax hike they enacted wasn't enough, and that they have to do another one.

This is the sort of thing that breeds anti-tax sentiment, and it's the main reason why lawmakers should think long-term, not short-term, when dealing with tax increases. They may only get one bite at the apple.

It's nice to see that Hyde is confident in the political will and long-term vision of South Carolina lawmakers and voters. Here's hoping he's right on both counts.

"Put your money where your mouth is." As a guide to everyday life, this hoary old phrase means simply that if you believe in something, you should be willing to act on that belief. In politics, the implication is that if you think a state spending program is worth funding, you should figure out a way to pay for it. The editorial board at the State newspaper calls South Carolina lawmakers to task for not following this adage in their proposed budget:

Ask most House members about the budget they'll debate this month, and chances are good they'll rattle off a list of popular new programs the bill includes...What representatives probably won't tell you is that they're only committed to funding those programs and positions for one year.

Oh, they'll probably pay for them next year too -- if our economy keeps growing at a steady clip. But if things slow down, those programs and all the people who will have
been hired to carry them out -- and many more -- are toast. That's because the Ways and Means Committee's budget pays for them with nonrecurring, or one-time, funding. Unlike recurring money, which is what economists expect our current taxes to generate next year, this is money that has already been collected, but not spent; in other words, it's money no one can realistically expect to be available in future years -- money that should be used to buy school buses or pave roads or take care of other one-time purchases.

Using nonrecurring money to pay for recurring programs is one of the most irresponsible things our lawmakers do. And they do it year after year. That's the main reason we had to lay off government workers and slash our Highway Patrol and our prison staffs and industrial recruitment efforts to the bone at the turn of the century: The economy tanked, and the irresponsible budgeting caught up with us.

The House's "funny money" approach is mirrored, of course, in Governor Mark Sanford's proposal to fund income tax cuts (which will cost more and more each year) with a cigarette tax hike (which will bring in less and less each year). So House budget writers are, at least, in good company. But South Carolinians should recognize that for all the good and productive areas of public investment the House budget has identified, it's all smoke and mirrors until the legislature--and the governor-- puts their money where their mouth is.

Another entry in the "no-tax floor" sweepstakes this week-- and a harsh reminder of the limitations of this approach to low-income tax relief. North Carolina Governor Mike Easley released his budget proposal for the upcoming fiscal year last week. The headline, from a tax perspective, was a plan to cut income taxes for more than a million low-income families. As the Asheville Citizen-Times covered it:

More than 1.2 million North Carolina taxpayers will get a break if Gov. Mike Easley's budget proposal released on Thursday becomes law. Easley wants to eliminate the state income tax for nearly 600,000 low-income taxpayers and cut taxes in half for an additional 630,000.

Here's the Greensboro News-Record on how the plan would work:

Those who would pay no income taxes under Easley's plan include single people who make less than $5,000, married couples making less than $10,000 and those filing as head of household making less than $7,500.

Those who would have their income tax bill cut in half include single people making between $5,00 and $12,500, married couples making between $10,000 and $25,000 and heads of household making $7,500 to $20,000.

This all sounds great. But the folks at the North Carolina Budget and Tax Center put their heads together and figured out that the numbers didn't quite add up. In particular, BTC researchers noticed that the folks who would be "taken off the rolls" under the Easley plan are, in large part, paying no income tax to begin with.

Look at married couples: Easley proposed to exempt all married couples earning less than $10,000 from income tax. This is great-- but it's already part of the tax law. A married couple with no kids can claim a standard deduction of $6,000 in 2007, plus a $2,500 exemption for each spouse, which means a total of $11,000 of income is sheltered from tax. A couple with kids currently enjoys an even higher no-tax floor.

You can do the same math for single people (Easley proposes a $5,000 floor; current law gives singles a $3,000 standard deduction and a $2,500 personal exemption, so singles already have a $5,500 floor.) and heads of household. So, the BTC folks sensibly asked, if married couples, singles, and heads of household aren't being taken off the rolls, exactly who is? The answer, according to an ITEP analysis: dependent filers. Kids with lawn mower money and/or trust funds, as well as elderly dependents. And a lot less of them than Easley's office has claimed. A BTC report released today spells out the details.

None of this is to say that Easley's plan is a bad one. The early press on the BTC report screams that Easley's plan is "flawed," but the most important flaw is in the administration's math. The goal of reducing incomes taxes on low-income families is a fine one, but the administration seems to have made a few math errors in constructing their claims about it.

The BTC report identifies a number of ways in which Easley could make his income tax plan better targeted, most important of which would be making any low-income credits refundable. This means that the credit could be used to offset not just income taxes but the sales and property taxes that hit low-income working families the hardest.

If the design problems with the Easley plan take the wind of the administration's sails, that would be a shame. The BTC's report has more good than bad to say about Easley's plan, and the administration's heart appears to be in the right place.

But the Easley plan does raise important questions about the "no-tax floor" approach to low-income tax cuts. Focusing on "taking people off the rolls" arguably puts too much emphasis on reducing a low-income family's income tax from $10 to zero, and does nothing to solve the much more important tax problems facing such families, primarily sales, excise and property taxes. A quick glance at the North Carolina result from ITEP's Who Pays report shows that the income tax is the least problematic tax out there from a tax fairness perspective.

Here's hoping BTC's eagle-eyed number-crunching leads to a better result (say, an EITC for North Carolina) rather than deep-sixing Easley's stated goal of providing low-income tax relief.

Several states are grappling with how and whether gasoline should be taxed. In Indiana, House Democrats campaigned on a proposal to eliminate the state's sales tax on gasoline entirely, but this plan was cast aside because it was entirely too expensive to carry out. Instead, the House has passed a rather complicated bill this week that would remove the sales tax from gasoline only when the price rose to $2.25 a gallon or higher. This bill, which is certainly not efficiently targeted to those who might need help the most, is expected to cost the state $45 million a year and perhaps more in later years.

Some environmentalists argue that the total cost of fuel consumption needs to be increased, not lessened, by government policy. But even states that attempt to move in that direction are not necessarily going about it in a rational or efficient manner. Oregon is in the midst of a pilot mileage tax program where cars are equipped with mileage readers and a tax is calculated based on miles driven. Governor Tim Pawlenty in Minnesota has included money to study a similar initiative in his budget. This proposal creates privacy concerns and does not seem particularly helpful from an environmental perspective. It would treat both gas-guzzling SUVs and fuel-efficient hybrids the same, so long as they drove the same number of miles.

A recent court ruling in the state of Washington has given policymakers there an opportunity to revisit a property tax cap that has imposed considerable strains on schools and other local services. A new report from the Washington State Budget and Policy Center examines some of the flaws in the state's current property tax system and explores some of the options that other states use "like a property tax circuit breaker" to improve the fairness of that particular tax.

Florida and Maine are weighing changes to their property taxes as well... changes that would make their tax systems less fair. Last week, the Republican leadership of the Florida House of Representatives proposed abolishing the statewide property tax for Florida residents, limiting local property taxes, and raising the state sales tax rate 2.5 percentage points to 8.5 percent. These changes would not only exacerbate the inequity of Florida's tax system, but would also take a $5.8 billion bite out of state and local revenues, since the higher sales tax rate would only make up a little more than half of the revenue lost due to property tax cuts. "Reckless" and "irresponsible" are among some of the nicer things that the St. Petersburg Times has to say about the proposal.

Ironically, Maine's Governor, John Baldacci, in his FY 2008-2009 budget, advocated the same sort of limits on property tax assessments for year-round residents that have contributed to Florida's fiscal problems. This ITEP Policy Brief details the shortcomings of these kinds of assessment caps.

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 authors generally downplay the loss of revenues and illegal evasion of tax laws. They seem to feel that the "tax competition" that offshore tax havens provide is healthy, no matter how much this causes democratically elected governments to lose control of their tax and fiscal policies.

Perhaps the most entertaining 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.

As expected, Massachusetts Governor Deval Patrick this week joined the ranks of chief executives calling for the use of combined reporting of state corporate income taxes to combat tax avoidance by large and profitable companies. Like the Governors of New York, Pennsylvania, and Iowa, Governor Patrick, in his FY2008 budget plan, recommended adopting this approach to corporate taxation, which would require corporations operating in multiple states to report all of their income... including that attributable to subsidiaries. This would negate any tax benefit derived from accounting schemes designed to shift profits out-of-state. A fact sheet from the Massachusetts Budget and Policy Center explains how combined reporting works and why it's needed in the Bay State. While Martin O'Malley has not yet added his name to this growing gubernatorial roster, Maryland legislators this week considered a bill to institute combined reporting in their state. ITEP Executive Director Matt Gardner was among those who testified on the measure.

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. The increase may now be off the table in one of those states, Indiana. 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) claims that using cigarette taxes for SCHIP 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, which currently faces a shortfall, are welcomed. Smith has not put forth specific legislation but says he wants to make clear that he's open to such a move, and Senate Finance Chairman Max Baucus (D-MT) is said to be supportive.

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.

Majority Goes to Richest One Percent