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.

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 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.

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.

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