Last week U.S. Representatives John Salazar and Tim Mahoney introduced the "Save the Family Farm and Ranch Act of 2007," which would exempt family farms that provide 50 percent or more of a family's income. This seems unnecessary. The American Farm Bureau Federation famously admitted to the New York Times in 2001 that they could not cite a single example of a farm that was lost due to the estate tax. Moreover, as a Citizens for Tax Justice paper explained last summer, family farms receive several additional breaks (beyond the $2 million dollar exemption in effect this year) from the estate tax and can pay off estate taxes over a period of 14 years.
April 2007 Archives
Connecticut may be a comparatively small state, but it is now gearing up for what could be a huge debate over tax policy. Already this year, Governor Jodi Rell has proposed increasing the personal income tax rate from 5.0 to 5.5 percent, eliminating the estate tax, repealing the car tax, and capping the growth of local property taxes at 3 percent per year. Senate Democrats have responded with an equally ambitious set of proposals. Legislation approved last week by the Joint Finance, Revenue, and Bonding Committee would create a much more graduated personal income tax rate structure (with a top rate of 6.95 percent for married couples with annual incomes above $250,000) as well as a state Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC. The Democrats' plan would also double - from $500 to $1000 - the maximum personal income tax credit for property taxes paid. However, some elements of the Democratic plan are less fair - an increase in the cigarette excise tax from $1.51 per pack to $2.00 and the elimination of the sales tax deduction for clothing purchases of less than $50.
A recent analysis of the two sets of income tax proposals by the state's Office of Fiscal Analysis shows married couples with adjusted gross incomes below $200,000 and individuals with gross incomes below $150,000 faring better under the Democratic approach. At the same time, it shows that married couples with incomes above $600,000 per year - and individuals with incomes in excess of $300,000 - would pay substantially higher taxes if the Democratic plan were to become law instead of the Governor's. Connecticut Republicans have been quick to point out that the OFA's analysis leaves out the impact of higher cigarette and sales taxes.
With Connecticut facing a structural budget deficit of half a billion dollars, the stakes in this debate are obviously quite high. Still, it is an encouraging sign to see that both sides in the debate seem committed to using the state's fairest tax - the personal income tax - as the principal means of addressing existing problems and funding new priorities.
It's easier to confuse people about taxes than it is to educate them. And some people count on this to help them achieve their anti-tax goals. Exhibit A: the ongoing debate over how to fix the federal Alternative Minimum Tax (AMT). When people hear that the AMT threatens to hit 23 million people in 2007, the first question they ask is typically "how did this happen?"
The answer is pretty straightforward:
1) Every Congress since 1986 is at fault for not indexing the AMT exemptions for inflation.
2) The architects of the 2001 federal tax cuts are at fault for cutting the regular income tax rates but leaving the AMT rates unchanged.
But you wouldn't know it to listen to this guy:
The scenario in question is not, as Early implies, "here's how things would be in 2007 if the Clinton tax changes had never been enacted." Rather, the 2.7 million scenario is "here's how things would be in 2007 if the AMT exemptions had been increased every year since 1987 to keep pace with inflation." A big difference.
How could Early get this so wrong? Well, there are a couple of documents floating around on the Internet that are clearly designed to mislead people on this score. Start with this thing from the "Republican Policy Committee." The RPC report says:
Fortunately, we've got the Tax Policy Center to help us understand these things. This TPC publication looks at the factors shaping the current AMT time bomb, including the two things the RPC paper looks at (non-indexation and the Clinton changes) as well as the Bush tax cuts. And unlike the RPC paper, the TPC report actually does us the favor of separating out the impact of the Clinton changes from the impact of not indexing the exemptions.
The result? It turns out that "the OBRA93 changes to the AMT and to regular tax rates alone--ignoring the [Bush tax cuts]--would have reduced the number of AMT taxpayers in 2010 by about 2 million."
Maybe Early knows this and maybe he doesn't. But the RPC paper seems intentionally designed to confuse people into making this kind of mistake. (Granted, in order to be lulled into this mistake you probably have to be the kind of person who refers incessantly to the "Democrat Party" or who prattles endlessly about the fact that Al Gore cast the tie-breaking vote in the 1993 tax hikes.)
If the RPC paper seems misleading, the Wall Street Journal editorial on this topic from a while back is simply a lie:
The always-excellent "Taxing Matter" weblog disembowels the WSJ editorial effectively; read it here.
Hard to see how these guys can look in the mirror in the morning-- playing the "blame game" and lying to boot. This is exactly why people don't try to learn about taxes.
The answer is pretty straightforward:
1) Every Congress since 1986 is at fault for not indexing the AMT exemptions for inflation.
2) The architects of the 2001 federal tax cuts are at fault for cutting the regular income tax rates but leaving the AMT rates unchanged.
But you wouldn't know it to listen to this guy:
Once again, you have shown your Democratic bias by noting that the AMT was created in 1969 instead of reporting that this AMT problem was created by the 1993 Clinton tax increases on so-called "millionaires." These changes included an increase in the AMT rate from a single rate of 24 percent to rates of 26 percent and 28 percent. This tax increase was passed without a single Republican vote in either the House or Senate and required the then-vice president, Al Gore, to cast a tie-breaking vote to get this tax increase through the Senate...According to Congress' Joint Committee on Taxation, which "scores" tax policy changes, if the 1993 Clinton increase in the AMT rates were reversed, the AMT would hit "only" 2.6 million taxpayers in 2007 instead of 23 million.The Joint Committee on Taxation document the author (a guy named Steve Early) is referring to can be found here. And in fact, the JCT report does describe a scenario under which the number of AMT families in 2007 would be 2.7 million instead of the currently-scheduled 23 million. The only problem is, Early complete misunderstands what this scenario means.
The scenario in question is not, as Early implies, "here's how things would be in 2007 if the Clinton tax changes had never been enacted." Rather, the 2.7 million scenario is "here's how things would be in 2007 if the AMT exemptions had been increased every year since 1987 to keep pace with inflation." A big difference.
How could Early get this so wrong? Well, there are a couple of documents floating around on the Internet that are clearly designed to mislead people on this score. Start with this thing from the "Republican Policy Committee." The RPC report says:
But for the Democrat Congress' 1993 increase and its failure to index for inflation, only 2.6 million tax filers would be subject to an AMT penalty in 2007 rather than the projected 25 million under current law.This is very clever-- but very misleading. What the RPC does here is to take two separate policy choices (one a long-term choice by every Congress since 1987 to not index the AMT exemptions, the other the Clinton 1993 tax changes), lump them together, and blame the whole thing on Clinton. But these two changes have very different impacts:
- The long-term, ongoing choice of Congress not to index the exemptions has had the inexorable impact of pulling more and more people into the AMT every year. It's a choice any Congress over the past 20 years could have reversed-- but none have.
- The 1993 Clinton tax changes did three things that affect the AMT, and these things have impacts that work in opposite directions. First, the exemptions were increased (which, taken on its own, should reduce the number of AMT taxpayers). Second, the AMT rates were increased (which, taken on its own, should increase the number of AMT taxpayers). Third, the top regular income tax rates were increased (which, taken on its own, should reduce the number of AMT taxpayers.
Fortunately, we've got the Tax Policy Center to help us understand these things. This TPC publication looks at the factors shaping the current AMT time bomb, including the two things the RPC paper looks at (non-indexation and the Clinton changes) as well as the Bush tax cuts. And unlike the RPC paper, the TPC report actually does us the favor of separating out the impact of the Clinton changes from the impact of not indexing the exemptions.
The result? It turns out that "the OBRA93 changes to the AMT and to regular tax rates alone--ignoring the [Bush tax cuts]--would have reduced the number of AMT taxpayers in 2010 by about 2 million."
Maybe Early knows this and maybe he doesn't. But the RPC paper seems intentionally designed to confuse people into making this kind of mistake. (Granted, in order to be lulled into this mistake you probably have to be the kind of person who refers incessantly to the "Democrat Party" or who prattles endlessly about the fact that Al Gore cast the tie-breaking vote in the 1993 tax hikes.)
If the RPC paper seems misleading, the Wall Street Journal editorial on this topic from a while back is simply a lie:
[T]he politician most responsible for the AMT's relentless expansion in recent years is none other than William Jefferson Clinton...Going back to the pre-Clinton rates would leave only about 2.6 million tax filers subject to an AMT penalty next year instead of 23 million under current law.If the RPC paper misleads people by describing the collective impact of two very different tax changes in one breath, the WSJ editorial simply lies by attributing the impact of both policy changes to the Clinton rate hikes. To make my criticism perfectly clear, if the WSJ editorial had been accurately written, the last sentence of this quote would have read: "Going back to the pre-Clinton rates and increasing the AMT exemptions to equal their inflation-adjusted 1987 levels would leave only about 2.6 million tax filers subject to an AMT penalty next year instead of 23 million under current law." And to really be accurate, the editorial would have pointed out that the real driver in these changes would be the inflation adjustment, not the Clinton tax changes.
The always-excellent "Taxing Matter" weblog disembowels the WSJ editorial effectively; read it here.
Hard to see how these guys can look in the mirror in the morning-- playing the "blame game" and lying to boot. This is exactly why people don't try to learn about taxes.
One of the classic rhetorical tricks used by anti-taxers is to characterize a tax as being so fundamentally flawed that it simply can't be saved. In other words, these guys will argue that repeal, not reform, is the only way to go. We've seen it ad nauseum with the estate tax, and now we're seeing it with the Alternative Minimum Tax (AMT). Here's Senator Chuck Grassley, appearing on CNBC's "Kudlow and Company:"
But it doesn't follow that outright repeal is the only solution-- or even the best solution. As CTJ has demonstrated, repealing just one of the AMT loopholes-- the special AMT tax break for capital gains income-- could almost singlehandedly pay for increasing the AMT exemptions in a "tax swap" that would restore the AMT to its original purpose of ensuring that truly wealthy taxpayers should pay at least a minimal amount of income tax.
A sensible discussion of AMT reform options is arguably too much to expect from Kudlow's program. But is it too much to expect from Senator Grassley?
KUDLOW: Senator, is there any way that you can personally get me out of the AMT? I got nailed this year. I didn't know it was coming?Both halves of what Grassley says here are true. In fact, absent Congressional action, 23 million Americans will owe the AMT in 2007. And, because Congress has added many of the same loopholes to the AMT that originally plagued the regular income tax, the AMT is less good at backing up the regular tax than it used to be.
Sen. GRASSLEY: Yeah, I need seven more votes in the United States Senate. Because on the budget resolution, I had an amendment to do away with the alternative minimum tax, and I got 44 votes. So get me seven more votes, and we'll get rid of the AMT for everybody because, you see, what's wrong with the AMT, it was only supposed to hit very wealthy people in 1969. It
wasn't indexed. It's going to hit 23 million people this year. And we're counting on income coming in that was never supposed to be collected in the first place. And we even reached a point where very wealthy people have found ways around the alternative minimum tax. I'm surprised you haven't. But anyway...
KUDLOW: I did my best.
Sen. GRASSLEY: OK.
But it doesn't follow that outright repeal is the only solution-- or even the best solution. As CTJ has demonstrated, repealing just one of the AMT loopholes-- the special AMT tax break for capital gains income-- could almost singlehandedly pay for increasing the AMT exemptions in a "tax swap" that would restore the AMT to its original purpose of ensuring that truly wealthy taxpayers should pay at least a minimal amount of income tax.
A sensible discussion of AMT reform options is arguably too much to expect from Kudlow's program. But is it too much to expect from Senator Grassley?
Now that tax filing season is over, we can look back and decide who gets the award for saying the most ridiculous things about our tax system. Surely one prize goes to Ari Fleischer, the former White House press secretary who is distraught that taxes are too progressive.
Writing in the Wall Street Journal, he selectively focuses on the most progressive part of the tax system, the federal income tax, and ignores other federal taxes and state taxes, which are generally regressive. He writes that the top 40 percent of taxpayers are paying 99.1 percent of all income taxes and the top 10 percent are paying 70.8 percent of all income taxes. Fleischer seems to find this simply unfair and also worries that America thinks it can simply keep piling on more taxes on the rich to fund services for everyone, a dynamic that cannot last in his mind.
As Citizens for Tax Justice explained in a 2004 analysis, once you consider the impact of regressive federal payroll taxes and state taxes (which are often regressive because of the effect of sales taxes that hit the poor the hardest) the share of taxes paid by the wealthy overall is not so outrageous. For example, CTJ found that the wealthiest one percent of taxpayers was paying 20.8 percent of taxes overall and that this group also had 19.1 percent of the total income. So the tax system as a whole is really flat or just barely progressive in light of this. Yes, the federal income tax is progressive, but it has to be to counter the regressive effects of other taxes.
Fleischer particularly singles out the federal Earned Income Tax Credit as contributing to this unfairness. Remember what President Reagan, that left-wing firebrand, said of the EITC, "It is the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress." We could also add that it simply counteracts the unfairness of other taxes. For example, in many states, low-income taxpayers actually pay a larger percentage of their incomes towards taxes than the wealthy. Federal and state EITCs counteract this unfairness.
Fleischer doesn't even try to address state taxes but he does attempt to deal with payroll taxes. He claims that since payroll taxes are paying for Medicare and Social Security (which is fairly progressive in its benefit structure) these shouldn't really count as regressive taxes. But anyone who is even casually familiar with the federal budget process can doubt that Social Security taxes are really going to pay for Social Security. Right now we're all paying more Social Security taxes than are needed to pay for the benefits of current recipients, but this surplus is has actually been used to finance the Bush tax cuts.
The President and the Democratic leaders in Congress have both talked about achieving a budget surplus in 2012, but CTJ has argued before that this can only be true if you assume we will use up the Social Security surplus on non-Social Security spending or tax breaks (among other things). That money was supposed to be used to pay down the debt, which would free up money needed to pay benefits when the baby boomers retire in large numbers. If we keep spending the Social Security surplus, Congress will either have to raise taxes or cut the benefit program that Fleischer says is such a good deal for low-income people. In other words, it doesn't necessarily make sense to say that the regressive nature of payroll taxes should be dismissed because they go towards Social Security and Medicare.
Fleischer seems to think that democracy itself is threatened by the federal income tax. He writes
If, as now happens, 60% of the people in our democracy can force 40% to pay the bills, what's to stop 65% from making 35% pay it all? Since no one wants to pay taxes, what's to stop 90% of people in a democracy from making 10% pay it all? Or why not let 99% of the country off the hook, as long as the remaining 1% picks up the tab?
Is America about to enslave it's wealthy? Certainly not during this administration. By 2010, over half of the Bush tax cuts will go to the wealthiest 5 percent of taxpayers. If you consider the additional national debt caused by the tax cuts and assume Americans will have to pay it off at some point, you find that this debt outweighs the tax breaks for all but the richest 1 percent of taxpayers, because their tax breaks have been so huge.
We're hardly at the point where pitch fork-wielding populists have taken over the Congress and thrown the rich out of their mansions. The fact that Fleischer can even make these claims seriously in a paper that is (if nothing else) widely read shows the level to which our political discourse has sunk.
Writing in the Wall Street Journal, he selectively focuses on the most progressive part of the tax system, the federal income tax, and ignores other federal taxes and state taxes, which are generally regressive. He writes that the top 40 percent of taxpayers are paying 99.1 percent of all income taxes and the top 10 percent are paying 70.8 percent of all income taxes. Fleischer seems to find this simply unfair and also worries that America thinks it can simply keep piling on more taxes on the rich to fund services for everyone, a dynamic that cannot last in his mind.
As Citizens for Tax Justice explained in a 2004 analysis, once you consider the impact of regressive federal payroll taxes and state taxes (which are often regressive because of the effect of sales taxes that hit the poor the hardest) the share of taxes paid by the wealthy overall is not so outrageous. For example, CTJ found that the wealthiest one percent of taxpayers was paying 20.8 percent of taxes overall and that this group also had 19.1 percent of the total income. So the tax system as a whole is really flat or just barely progressive in light of this. Yes, the federal income tax is progressive, but it has to be to counter the regressive effects of other taxes.
Fleischer particularly singles out the federal Earned Income Tax Credit as contributing to this unfairness. Remember what President Reagan, that left-wing firebrand, said of the EITC, "It is the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress." We could also add that it simply counteracts the unfairness of other taxes. For example, in many states, low-income taxpayers actually pay a larger percentage of their incomes towards taxes than the wealthy. Federal and state EITCs counteract this unfairness.
Fleischer doesn't even try to address state taxes but he does attempt to deal with payroll taxes. He claims that since payroll taxes are paying for Medicare and Social Security (which is fairly progressive in its benefit structure) these shouldn't really count as regressive taxes. But anyone who is even casually familiar with the federal budget process can doubt that Social Security taxes are really going to pay for Social Security. Right now we're all paying more Social Security taxes than are needed to pay for the benefits of current recipients, but this surplus is has actually been used to finance the Bush tax cuts.
The President and the Democratic leaders in Congress have both talked about achieving a budget surplus in 2012, but CTJ has argued before that this can only be true if you assume we will use up the Social Security surplus on non-Social Security spending or tax breaks (among other things). That money was supposed to be used to pay down the debt, which would free up money needed to pay benefits when the baby boomers retire in large numbers. If we keep spending the Social Security surplus, Congress will either have to raise taxes or cut the benefit program that Fleischer says is such a good deal for low-income people. In other words, it doesn't necessarily make sense to say that the regressive nature of payroll taxes should be dismissed because they go towards Social Security and Medicare.
Fleischer seems to think that democracy itself is threatened by the federal income tax. He writes
If, as now happens, 60% of the people in our democracy can force 40% to pay the bills, what's to stop 65% from making 35% pay it all? Since no one wants to pay taxes, what's to stop 90% of people in a democracy from making 10% pay it all? Or why not let 99% of the country off the hook, as long as the remaining 1% picks up the tab?
Is America about to enslave it's wealthy? Certainly not during this administration. By 2010, over half of the Bush tax cuts will go to the wealthiest 5 percent of taxpayers. If you consider the additional national debt caused by the tax cuts and assume Americans will have to pay it off at some point, you find that this debt outweighs the tax breaks for all but the richest 1 percent of taxpayers, because their tax breaks have been so huge.
We're hardly at the point where pitch fork-wielding populists have taken over the Congress and thrown the rich out of their mansions. The fact that Fleischer can even make these claims seriously in a paper that is (if nothing else) widely read shows the level to which our political discourse has sunk.
A standoff between the chairs of Congress's main tax-writing committees over tax breaks and efforts to hike the minimum wage ended this week. Senate Finance chairman Max Baucus (D-MT) and House Ways and Means chairman Charlie Rangel (D-NY) agreed to include a package of $4.8 billion (over 5 years) in tax breaks in legislation increasing the minimum wage, which was passed this week in both chambers as part of an emergency war funding bill. Rangel originally sided with Democrats in the House who pushed for and passed a "clean" minimum wage increase (without tax breaks). The Senate passed a package including $8.3 billion in business tax breaks on February 1, and Rangel compromised somewhat and passed a package of $1.3 billion that was approved and added to the minimum wage legislation.
Matters became more complicated when Democratic leaders in both chambers attached their respective minimum wage packages (including both the wage hike and tax breaks) to the emergency war spending bills they each passed. The President has vowed to veto this legislation because it includes timelines for withdrawing troops from Iraq, but the minimum wage and the accompanying tax breaks may be included in another emergency war spending bill that might not prompt a veto from the President.
Does Business Need to be "Compensated?"
While the new $4.8 billion level that both Baucus and Rangel have agreed to is a breakthrough, it is nonetheless disconcerting that several Senators on both sides of the aisle seem to believe that business should be "compensated" for raising the minimum wage from its lowest real purchasing power in 50 years. As we've pointed out before, business has received $276 billion in tax breaks since the last minimum wage hike in 1996. Remarkably, some members of Congress who are hostile to minimum wage legislation, such as Charles Grassley (R-IA), are actually complaining that the tax breaks are not big enough.What's in the Tax Package
More than half of the tax breaks would take the form of a three and a half year extension for the Work Opportunity Tax Credit (WOTC), an incentive for businesses to hire welfare recipients and individuals from other at-risk groups, at a cost of more than $2.5 billion over ten years. Other tax breaks would loosen various tax rules relating to Subchapter S corporations (which pay no corporate level tax), at a cost of $892 million over 10 years. Also included is a change in the Alternative Minimum Tax (AMT) paid by restaurants, allowing them to use a tax credit for FICA taxes paid on tipped workers and the Work Opportunity Tax Credit to reduce their AMT.
Tax Breaks Technically Paid For
The best that can be said for the tax cuts is that they're technically offset so that they will not add to the federal budget deficit. The most significant offset would allow the IRS to charge interest on delinquent payments for a longer period of time before it must give notification and suspend interest. Another provision would require that people under 19 years of age be taxed at the income tax rate their parents are subject to (which currently applies to people under 18). Other changes relate to how deficiency payments are treated as well as penalties and user fees.
In a Sunday editorial, the folks at the Belleville News Democrat give the thumbs down to Governor Rod Blagojevich's proposal to introduce a "gross receipts tax" to help pay for property tax cuts. The main reason? The board asserts (correctly, in my view) that the gross receipts tax would ultimately fall hardest on low-income families, not on the big and profitable corporations that Blagojevich claims to be targeting. The Democrat cites with approval the words of state representative Tom Holbrook, who rejects outright the view that the GRT won't affect families:
"John Q. Public doesn't see it as a tax increase," Holbrook said. "They're going to pay it, but they won't see it."Darn right. And the editorial offers a quite straightforward explanation of why this is true:
Another problem that Holbrook and other opponents point out is the tax's pyramiding effect. For instance, a state real estate group commissioned a study that calculated the added cost on a new home would be 2.84 percent. That figures out to $8,853 extra in the Chicago area, where the average price of a new home is $311,734.Sales taxes on businesses are ultimately, in general, paid not by businesses but by consumers, in the form of higher prices. This is part of the reason why policymakers usually try hard (as they should) to ensure that the sales tax applies only to retail consumption by individuals, not businesses: consumption should be taxed once, visibly, rather than multiple times, invisibly. Blagojevich's GRT proposal is best understood as a sales tax that is actually designed to be as invisible as possible. He obviously thinks this makes good politics-- but it certainly doesn't make for good policy. At the end of the day, the money from the GRT will be coming out of Illinois consumers' pockets-- they just won't know it.
Why 2.84 percent if the proposed tax is 1.95 percent on services and .85 on construction contracts and materials? Pyramiding. The tax would be applied at each step of the process: wholesaler, subcontractor, general contractor, developer and consumer.
A higher sales price means a bigger down payment, higher mortgage payments, and higher property taxes. In other words, more pyramiding.
Now think about all the products and services you buy, and you get a sense of how costly this proposal will be if it's enacted.
Democrats and some Republicans in Congress are hoping to expand the State Children's Health Insurance Program (SCHIP) to cover all low-income children who currently lack insurance. Proponents hope to include such an expansion, which is estimated to cost $50 billion over five years, in legislation reauthorizing the program. (The $50 billion is in addition to funds needed to simply ensure that the program serves the same number of children as it does now.)
Proponents and analysts have discussed several ways of paying for this initiative, most of which fall into one of three different categories. First, some seem to signal that they could just borrow the funds needed to finance SCHIP expansion, which is probably the worst option possible. Second, some want to increase taxes or close tax loopholes to raise the funds needed for SCHIP. This would be a responsible option, but some proposals along these lines (like increasing federal cigarette taxes) are not as good as others (like doing away with tax breaks that can only benefit the wealthy). Third, some support reducing certain unnecessary spending in health care programs in order to fund the initiative, which has the virtue of leaving proposals to raise revenue through the tax code available to fund other initiatives.
(For a longer description of options, see the recent report on this topic from the Center on Budget and Policy Priorities.)
1. Don't bother paying for SCHIP expansion. This is the worst option.
Under procedural rules that will probably be established under the final budget resolution for fiscal year 2008, any new entitlement spending or tax break must offset with spending cuts or revenue increases elsewhere. This rule, known as "pay-as-you-go" or PAYGO, is the budget process reform that successfully eliminated federal budget deficits during the Clinton years, which is why Democrats decided to revive it this year. PAYGO can be waived, however, by a simple majority vote in the House and by a 60 votes in the Senate. Senator Max Baucus (D-MT) got the Senate to approve, almost unanimously, a budget amendment that pledges to waive PAYGO to fund part of SCHIP and to fund extensions of some of the Bush tax breaks.
It must be remembered that every dollar of increased spending or tax breaks that is not offset increases the national debt and therefore increases the interest payments we must make on the debt. Right now 9 cents of every dollar we pay in taxes goes towards interest payments - towards paying for the privilege of borrowing. The amount of our tax dollars that goes towards interest payments instead of spending that benefits Americans will increase a great deal if budget deficits continue. (Supporters of the Baucus amendment may feel that they have not pledged to increase the debt because the amendment targets a budget "surplus" that is projected to appear in 2012. Those projections are misleading because they assume spending of the Social Security surplus and because of unrealistic assumptions about defense spending and other matters.)
All that being said, an SCHIP expansion that is deficit-financed might still be better than no SCHIP expansion at all. It could be the case that the cost of not providing health insurance to children is actually greater than the cost of government borrowing needed to fund the SCHIP expansion. But almost any option that avoids deficit-spending would be better.
2. Raise new federal taxes or close loopholes in federal taxes to pay for the SCHIP expansion. This would be a responsible option, although the some proposals along these lines are better than others.
a. Close loopholes that only benefit the wealthy.
One idea discussed by the Center on Budget and Policy Priorities would repeal two tax breaks that only benefit the wealthy and which are not even fully in effect yet. These tax breaks gradually (from 2006 through 2010) do away with limits on how much wealthy taxpayers can use itemized deductions and personal exemptions. Since these limits target the wealthy, it's estimated that 98 percent of the benefits of these tax breaks go to those with incomes over $200,000 a year. Repealing these tax breaks would yield around $13 billion over five years (really over three years since these tax breaks expire at the end of 2010). While this won't pay for the SCHIP expansion by itself, it could be used with other revenue-raising provisions to fully offset the cost.
b. Raise cigarette taxes.
One idea that could raise most of the needed funds but that would be less progressive is a hike in the federal cigarette tax. Senator Gordon Smith (R-OR) has proposed raising it from the current 39 cents a pack to 99 cents a pack, which he says would raise $46.5 billion over five years. The problem is that cigarette taxes are regressive, as the Institute on Taxation and Economic Policy has pointed out. If two people, one poor and one rich, both smoke two packs of cigarettes a day and both pay 99 cents for each pack, that 99 cents is taking a greater percentage of the poor person's income than the rich person's income. (This is not to say that cigarette taxes serve no purpose at all. If the goal is simply to reduce smoking, cigarette taxes can be effective.)
Despite the regressive nature of cigarette taxes, an SCHIP expansion funded with an increase in the federal cigarette tax is probably better than no SCHIP expansion at all. To see why, one can look to a recent analysis by the Tax Foundation. They project the effects of this proposal on different income quintiles and show that the proposal as a whole is actually progressive, even if the cigarette tax is not. They project the SCHIP spending for each income quintile, minus the additional cigarette taxes paid, as a result of this proposal. The middle income quintile essentially is unaffected while the bottom two quintiles gain and the top two quintiles lose a bit (the wealthiest 20 percent of households lose about $100). The Tax Foundation sees this as evidence that the costs of the proposal outweigh its benefits for too many people, but the clearer implication is that the regressive nature of the cigarette tax can be remedied if the funds are used for a progressive initiative such as SCHIP expansion.
c. Take measures to close the "tax gap."
The IRS has estimated that $345 billion in taxes was not paid correctly in 2001, of which $290 billion was never retrieved or paid at all. Citizens for Tax Justice has offered several recommendations as to how to close this "tax gap," and one of them is to improve capital gains tax enforcement. To do this, Congress 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.
Representative Rahm Emanuel has introduced a bill (H.R. 878) that would use this measure to raise revenue to pay for SCHIP expansion. The President's budget included a similar capital gains enforcement measure and the Joint Committee on Taxation estimated that it would raise only $465 million over 5 years. This measure by itself would therefore not be sufficient, but coupled with other tax gap measures and other revenue-raising provisions, this could achieve the goals of tax enforcement while also funding an important social policy initiative.
3. Offset the increased SCHIP funding by making changes to existing spending on health care. This would have the advantage of leaving all the tax-increase options or loophole-closing options to offset other proposals (like AMT reform, alternative energy initiatives, or further reducing the budget deficit).
Several recommendations were recently offered by the Medicare Payment Advisory Commission (MedPAC), a non-partisan body that advises Congress on Medicare, to eliminate unnecessary spending that is not helping beneficiaries. One of the biggest cost-savers suggested is to reduce the payments made to private plans (Medicare Advantage Plans) that provide private coverage through Medicaid. These plans are actually costing more than traditional fee-for-service Medicare that most beneficiaries use, and this proposal would "even the playing field" so that the government is not subsidizing one type of coverage more than the other. The Congressional Budget Office has estimated that this would reduce Medicare spending by $54 billion over five years, enough to fund the SCHIP expansion.
The benefit of finding revenue in this way is that the other options described for raising revenue, which involve changes in the tax code, would still be available to pay for other initiatives in the future.
Proponents and analysts have discussed several ways of paying for this initiative, most of which fall into one of three different categories. First, some seem to signal that they could just borrow the funds needed to finance SCHIP expansion, which is probably the worst option possible. Second, some want to increase taxes or close tax loopholes to raise the funds needed for SCHIP. This would be a responsible option, but some proposals along these lines (like increasing federal cigarette taxes) are not as good as others (like doing away with tax breaks that can only benefit the wealthy). Third, some support reducing certain unnecessary spending in health care programs in order to fund the initiative, which has the virtue of leaving proposals to raise revenue through the tax code available to fund other initiatives.
(For a longer description of options, see the recent report on this topic from the Center on Budget and Policy Priorities.)
1. Don't bother paying for SCHIP expansion. This is the worst option.
Under procedural rules that will probably be established under the final budget resolution for fiscal year 2008, any new entitlement spending or tax break must offset with spending cuts or revenue increases elsewhere. This rule, known as "pay-as-you-go" or PAYGO, is the budget process reform that successfully eliminated federal budget deficits during the Clinton years, which is why Democrats decided to revive it this year. PAYGO can be waived, however, by a simple majority vote in the House and by a 60 votes in the Senate. Senator Max Baucus (D-MT) got the Senate to approve, almost unanimously, a budget amendment that pledges to waive PAYGO to fund part of SCHIP and to fund extensions of some of the Bush tax breaks.
It must be remembered that every dollar of increased spending or tax breaks that is not offset increases the national debt and therefore increases the interest payments we must make on the debt. Right now 9 cents of every dollar we pay in taxes goes towards interest payments - towards paying for the privilege of borrowing. The amount of our tax dollars that goes towards interest payments instead of spending that benefits Americans will increase a great deal if budget deficits continue. (Supporters of the Baucus amendment may feel that they have not pledged to increase the debt because the amendment targets a budget "surplus" that is projected to appear in 2012. Those projections are misleading because they assume spending of the Social Security surplus and because of unrealistic assumptions about defense spending and other matters.)
All that being said, an SCHIP expansion that is deficit-financed might still be better than no SCHIP expansion at all. It could be the case that the cost of not providing health insurance to children is actually greater than the cost of government borrowing needed to fund the SCHIP expansion. But almost any option that avoids deficit-spending would be better.
2. Raise new federal taxes or close loopholes in federal taxes to pay for the SCHIP expansion. This would be a responsible option, although the some proposals along these lines are better than others.
a. Close loopholes that only benefit the wealthy.
One idea discussed by the Center on Budget and Policy Priorities would repeal two tax breaks that only benefit the wealthy and which are not even fully in effect yet. These tax breaks gradually (from 2006 through 2010) do away with limits on how much wealthy taxpayers can use itemized deductions and personal exemptions. Since these limits target the wealthy, it's estimated that 98 percent of the benefits of these tax breaks go to those with incomes over $200,000 a year. Repealing these tax breaks would yield around $13 billion over five years (really over three years since these tax breaks expire at the end of 2010). While this won't pay for the SCHIP expansion by itself, it could be used with other revenue-raising provisions to fully offset the cost.
b. Raise cigarette taxes.
One idea that could raise most of the needed funds but that would be less progressive is a hike in the federal cigarette tax. Senator Gordon Smith (R-OR) has proposed raising it from the current 39 cents a pack to 99 cents a pack, which he says would raise $46.5 billion over five years. The problem is that cigarette taxes are regressive, as the Institute on Taxation and Economic Policy has pointed out. If two people, one poor and one rich, both smoke two packs of cigarettes a day and both pay 99 cents for each pack, that 99 cents is taking a greater percentage of the poor person's income than the rich person's income. (This is not to say that cigarette taxes serve no purpose at all. If the goal is simply to reduce smoking, cigarette taxes can be effective.)
Despite the regressive nature of cigarette taxes, an SCHIP expansion funded with an increase in the federal cigarette tax is probably better than no SCHIP expansion at all. To see why, one can look to a recent analysis by the Tax Foundation. They project the effects of this proposal on different income quintiles and show that the proposal as a whole is actually progressive, even if the cigarette tax is not. They project the SCHIP spending for each income quintile, minus the additional cigarette taxes paid, as a result of this proposal. The middle income quintile essentially is unaffected while the bottom two quintiles gain and the top two quintiles lose a bit (the wealthiest 20 percent of households lose about $100). The Tax Foundation sees this as evidence that the costs of the proposal outweigh its benefits for too many people, but the clearer implication is that the regressive nature of the cigarette tax can be remedied if the funds are used for a progressive initiative such as SCHIP expansion.
c. Take measures to close the "tax gap."
The IRS has estimated that $345 billion in taxes was not paid correctly in 2001, of which $290 billion was never retrieved or paid at all. Citizens for Tax Justice has offered several recommendations as to how to close this "tax gap," and one of them is to improve capital gains tax enforcement. To do this, Congress 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.
Representative Rahm Emanuel has introduced a bill (H.R. 878) that would use this measure to raise revenue to pay for SCHIP expansion. The President's budget included a similar capital gains enforcement measure and the Joint Committee on Taxation estimated that it would raise only $465 million over 5 years. This measure by itself would therefore not be sufficient, but coupled with other tax gap measures and other revenue-raising provisions, this could achieve the goals of tax enforcement while also funding an important social policy initiative.
3. Offset the increased SCHIP funding by making changes to existing spending on health care. This would have the advantage of leaving all the tax-increase options or loophole-closing options to offset other proposals (like AMT reform, alternative energy initiatives, or further reducing the budget deficit).
Several recommendations were recently offered by the Medicare Payment Advisory Commission (MedPAC), a non-partisan body that advises Congress on Medicare, to eliminate unnecessary spending that is not helping beneficiaries. One of the biggest cost-savers suggested is to reduce the payments made to private plans (Medicare Advantage Plans) that provide private coverage through Medicaid. These plans are actually costing more than traditional fee-for-service Medicare that most beneficiaries use, and this proposal would "even the playing field" so that the government is not subsidizing one type of coverage more than the other. The Congressional Budget Office has estimated that this would reduce Medicare spending by $54 billion over five years, enough to fund the SCHIP expansion.
The benefit of finding revenue in this way is that the other options described for raising revenue, which involve changes in the tax code, would still be available to pay for other initiatives in the future.
North Carolina policymakers are facing short-term and long-term challenges this spring. A temporary 8 percent top income tax rate - and a quarter cent sales tax hike - are scheduled to expire on July 1, and leading elected officials (including Governor Mike Easley) are arguing that extending each of these tax increases will be necessary to make ends meet for the upcoming fiscal year.
And with an eye on long-term reform, a " State and Local Fiscal Modernization Commission" is asking hard questions about how best to reform the state's tax system ... and how to divide funding responsibilities between state and local governments. ITEP staff testified before the commission earlier this week. Among the likely recommendations of the Commission: eliminating county governments' responsibility for paying some Medicaid expenses, and diversifying the revenue-raising options available to local governments. One possible source of new county tax revenue: a real-estate transfer tax on home sales. NC Policy Watch has some sensible commentary on the merits (and demerits) of this proposal.
Presidential candidate and Senator Chris Dodd (D-CT) announced his support this week for a tax on carbon emissions as a way to reduce global warming. Other candidates have avoided any talk of raising taxes as a way to combat CO2 emissions and most have avoided talk of tax increases altogether. But even conservative economists have been publicly promoting the carbon tax for some time now.
While most Democrats in Congress have been considering several "cap-and-trade" programs that would limit the overall amount of CO2 emissions and allow companies to trade rights to pollute amongst themselves, several economists and even business leaders have lately argued that a carbon tax would be less burdensome. Part of the reason is the great bureaucracy required to measure emissions from individual plants under a cap-and-trade system. Another reason is that a carbon tax would create more certainty about how much it costs to pollute.
Some environmental groups, however, worry that a carbon tax sets no overall limit on pollution the way a cap-and-trade system would. The challenge for proponents of the carbon tax is to design it in a progressive way. Otherwise, it would be passed onto consumers and therefore act much like a consumption tax, which is always regressive. Working families probably don't use less gasoline than rich families, but if they pay the same carbon taxes (indirectly) that means the carbon tax will take a greater percentage of a working family's income. A progressive version might have to somehow target offsetting tax cuts towards those hardest hit by the carbon tax.
In a move towards a more progressive tax structure, lawmakers in both Tennessee and South Carolina have floated plans to eliminate or reduce the sales tax on groceries. However, several competing proposals are under discussion in both states, and a political food fight of sorts has broken out.
In Tennessee, the Democrats in the House of Representatives have proposed a targeted food sales tax exemption for milk, eggs, and baby formula. Meanwhile, some Senate Republicans are lining up behind the bizarre idea of completely eliminating the state sales tax on groceries for a single month.
Tennessee's neighbor to the east is also grappling with various tax cut proposals. The South Carolina Senate Finance Committee passed a measure that would phase out the state sales tax on food over three years. The proposal is competing against a House measure that would reduce the top income tax rate.
Many have expressed concern over South Carolina's ability to pay for either measure, noting (wisely) that reducing revenues during a time of budget surpluses can lead to budget deficits down the road. There are ways to make tax breaks for food more targeted to those who need them the most (ways to get the most "bang for their buck" in other words). But almost any tax break on food would be more progressive than lowering the top income tax rate. For more on the best ways to target tax breaks to those who could really use them, read ITEP's policy brief on providing targeted tax relief for residents who need it the most.
House of Representatives Uses Tax Day to Approve Taxpayer Protections
The U.S. House of Representatives approved H.R. 1677, the Taxpayer Protection Act of 2007, on Tuesday, Tax Day. As we've explained before, the bill includes several provisions geared towards protecting taxpayers from fraud, identity theft, and predatory banks offering refund anticipation loans (RALs) which often come with interest rates around 90 percent. Interestingly, a provision preventing the IRS from handing over information about people's tax debt to such predatory banks was opposed vigorously by Jackson Hewitt, the tax preparation company, when the bill was in committee. In the past two weeks, the Department of Justice has been trying to shut down around 125 Jackson Hewitt offices in which the owners are accused of fostering an environment "in which fraudulent tax return preparation is encouraged and flourishes."
The California Budget Project marked the approach of Tax Day by asking "who pays California taxes" and found that the state's tax system remains stacked in favor of wealthy families and big corporations. The CBP report finds that California taxes fall disproportionately on the lowest-income California families. Even with the recent imposition of a "millionaire's tax" income tax supplement, the wealthiest Californians pay far less of their income in tax than low- and middle-income families must pay.
As is always true in politics, the Congressional debate over the Alternative Minimum Tax (AMT) right now is not just about what's wrong with the tax-- it's also about whose fault it is.
This may seem like a spiteful thing to discuss, but in this case it's important: federal tax cuts enacted in 2001 have set the AMT on a collision course with millions of upper-middle-income Americans. People need to know that the coming AMT explosion was an entirely predictable outcome of conscious legislative decisions that can be reversed.
And the San Francisco Chronicle's editorial board nails it:
The Chronicle misses a third point, which is that the tax base of the AMT has been weakened in a way that makes it more like the loophole-ridden regular tax it's designed to back up. See CTJ's plan for more details.
But two out of three ain't bad.
This may seem like a spiteful thing to discuss, but in this case it's important: federal tax cuts enacted in 2001 have set the AMT on a collision course with millions of upper-middle-income Americans. People need to know that the coming AMT explosion was an entirely predictable outcome of conscious legislative decisions that can be reversed.
And the San Francisco Chronicle's editorial board nails it:
Thanks to a lack of foresight, however, on behalf of our former congressional leaders (who failed to index the tax to inflation) and our president (whose 2001 tax cuts pushed millions more people into the range of the alternative minimum tax), you're paying it.Part of the solution is easy-- increasing the exemption to keep pace with inflation. But part of the solution involves recognizing that the current AMT and the Bush tax cuts are inherently at war with each other.
The Chronicle misses a third point, which is that the tax base of the AMT has been weakened in a way that makes it more like the loophole-ridden regular tax it's designed to back up. See CTJ's plan for more details.
But two out of three ain't bad.
The developing debate over how Indiana local governments ought to be funded has centered, so far, on the local property tax and the conditions under which locals should be allowed to levy income taxes to pay for property tax cuts. But there's a new game in town: Rep. Chet Dobis suggests allowing local governments in northwestern Indiana the option of levying a "wheel tax" of up to $50 per vehicle to pay for an expanded commuter rail system.
As a fellow Dem, Rep. Linda Lawson, helpfully points out, the car tax "is one of the most hated taxes... the people in my community... would be just outraged if we gave them another tax." And that certainly seems to be true wherever you look. Opposition to the car tax almost single-handedly got former Virginia Governor Jim Gilmore elected and helped to give California Governor Gray Davis the boot. And if Connecticut voters aren't currently buying Governor Jodi Rell's plan to repeal that state's car tax, it's not because they like paying taxes on their cars.
But that's not, in itself, a sufficient reason to deny the car tax a place in a state's revenue system. Anti-tax sentiment is easy to channel, and the ease with which the car tax can be vilified is at least partially due to the number of syllables it takes to pronounce it. ("no car tax," "no death tax," "no food tax," all lend themselves very well to soundbites and slogans.)
You can also make a good case that a properly functioning property tax should take account of all kinds of property that most states currently don't tax, whether it's your car or your stock portfolio or that $3,000 Rolex. Property is wealth-- plain and simple. When states decide (as most have) that they're not gonna tax the value of your Rolex or your car or your stock portfolio, what's left is the one kind of "wealth" that is least recognizable as such-- homes. For many people, homes aren't a luxury and they aren't wealth-- at least not usable wealth.
So I've got a fair amount of sympathy for recognizing that the property tax should apply to things other than homes. Having said that, the wheel tax proposal seems like the wrong way to go, for three reasons:
1) The proposed wheel tax would be a flat-dollar amount. Maybe $10, maybe $50. But the biggest Bentley would pay the same tax as the tiniest Toyota. By comparison to the more sensible approach of taxing cars based on their value, the wheel tax proposal would be sharply more regressive-- a much worse deal for low-income families-- because $50 is a much bigger share of income for someone earning $10,000 a year than for someone earning $100,000 a year.
2) Car taxes can be written off on your federal income taxes (if you itemize) if they are based on the value of the car. If they're just a flat dollar amount, they can't. So the choice to impose the flat wheel tax basically means deciding that Indiana doesn't want the federal government to pick up part of the tab. A flat-dollar wheel tax leaves federal money on the table.
3) A "flat-dollar" tax is about as slow-growing a revenue source as you can invent. The only thing that can make revenues go up from year to year is an increase in the number of cars. (By contrast, income and sales tax collections increase, more or less, automatically with inflation.) The amount this tax brings in from each existing car actually shrinks a little bit each year: $50 a year in 2007 is worth a little bit less, after inflation, in 2008, a little bit less in 2009, etc.
As another lawmaker points out, Dobis deserves "all the credit in the world" for bringing up what is being described as a "political third rail." (Seems like Indiana has more third rails than the New York subway...) And it would be a good thing if this proposal resulted in some enlightened deliberation over the future of Indiana property taxes. But it's certainly not the fairest-- or most sustainable-- way to fund Indiana's transportation funding needs.
As a fellow Dem, Rep. Linda Lawson, helpfully points out, the car tax "is one of the most hated taxes... the people in my community... would be just outraged if we gave them another tax." And that certainly seems to be true wherever you look. Opposition to the car tax almost single-handedly got former Virginia Governor Jim Gilmore elected and helped to give California Governor Gray Davis the boot. And if Connecticut voters aren't currently buying Governor Jodi Rell's plan to repeal that state's car tax, it's not because they like paying taxes on their cars.
But that's not, in itself, a sufficient reason to deny the car tax a place in a state's revenue system. Anti-tax sentiment is easy to channel, and the ease with which the car tax can be vilified is at least partially due to the number of syllables it takes to pronounce it. ("no car tax," "no death tax," "no food tax," all lend themselves very well to soundbites and slogans.)
You can also make a good case that a properly functioning property tax should take account of all kinds of property that most states currently don't tax, whether it's your car or your stock portfolio or that $3,000 Rolex. Property is wealth-- plain and simple. When states decide (as most have) that they're not gonna tax the value of your Rolex or your car or your stock portfolio, what's left is the one kind of "wealth" that is least recognizable as such-- homes. For many people, homes aren't a luxury and they aren't wealth-- at least not usable wealth.
So I've got a fair amount of sympathy for recognizing that the property tax should apply to things other than homes. Having said that, the wheel tax proposal seems like the wrong way to go, for three reasons:
1) The proposed wheel tax would be a flat-dollar amount. Maybe $10, maybe $50. But the biggest Bentley would pay the same tax as the tiniest Toyota. By comparison to the more sensible approach of taxing cars based on their value, the wheel tax proposal would be sharply more regressive-- a much worse deal for low-income families-- because $50 is a much bigger share of income for someone earning $10,000 a year than for someone earning $100,000 a year.
2) Car taxes can be written off on your federal income taxes (if you itemize) if they are based on the value of the car. If they're just a flat dollar amount, they can't. So the choice to impose the flat wheel tax basically means deciding that Indiana doesn't want the federal government to pick up part of the tab. A flat-dollar wheel tax leaves federal money on the table.
3) A "flat-dollar" tax is about as slow-growing a revenue source as you can invent. The only thing that can make revenues go up from year to year is an increase in the number of cars. (By contrast, income and sales tax collections increase, more or less, automatically with inflation.) The amount this tax brings in from each existing car actually shrinks a little bit each year: $50 a year in 2007 is worth a little bit less, after inflation, in 2008, a little bit less in 2009, etc.
As another lawmaker points out, Dobis deserves "all the credit in the world" for bringing up what is being described as a "political third rail." (Seems like Indiana has more third rails than the New York subway...) And it would be a good thing if this proposal resulted in some enlightened deliberation over the future of Indiana property taxes. But it's certainly not the fairest-- or most sustainable-- way to fund Indiana's transportation funding needs.
Arizona is considering legislation that would end the destructive "race to the bottom" in tax competition among some of the state's municipalities. The Arizona Senate - and a key House committee - have both approved measures that would reduce state aid to any municipality in the Phoenix metropolitan area that uses tax breaks to entice businesses to locate there. State Senator Ken Cheuvront, one of the backers of the legislation, argues in a recent op-ed that "developers have learned that they can play off one city against another in order to get special tax incentives", usually in exchange for projects that would go forward without tax incentives.
Phoenix's CityNorth project - the recent recipient of $100 million in municipal tax breaks - is a perfect case in point. As the development's web site boasts, CityNorth will be "surrounded by some of the strongest housing growth in the country and the highest incomes in Phoenix," so it hardly seems that the project wouldn't be viable without millions in city subsidies. For more on how wasteful these kinds of giveaways can be and what can be done to curb them, visit Good Jobs First.
Other than both bordering on Pennsylvania, West Virginia and New York aren't generally seen as having too much in common ... until this past week. In agreeing to a budget for fiscal year 2008, policymakers in New York followed the lead of their counterparts in the Mountain State and incorporated combined reporting into their corporate income tax. Combined reporting, as ITEP's February policy brief explains, is the "most effective approach to combating corporate tax avoidance" available to state lawmakers. West Virginia legislation to institute combined reporting last month and, with New York's more recent step forward, the number of states using this essential approach to corporate taxation climbs to twenty. It could climb higher still by year's end, as North Carolina Governor Mike Easley, like the Governors of Massachusetts, Iowa, Michigan, and Pennsylvania, also now supports combined reporting. See this ITEP table to find out where your state stands on this important tax reform.
Minnesota's legislature has taken an important step towards a fairer tax system. The state House and Senate both passed legislation that would introduce a fourth income tax tax tier which would be targeted to upper income taxpayers. The Senate proposal would add a new 9.7 percent tax rate for those with taxable income over $250,000 for married couples ($141,250 for singles). The House proposal would introduce a 9 percent rate on taxable income above $400,000 for married couples ($226,000 for singles). The editorial board at the Minnesota Star Tribune eloquently expresses its support for the legislature's plan. Governor Tim Pawlenty has threatened to veto any tax hike - but as one commentator points out, Pawlenty's "no new tax" stance could really just mean Minnesota will continue to increase its reliance on regressive user fees to fund public investments.
Members of Congress are currently considering a series of proposals meant to strengthen taxpayer rights. The latest of these, the "Taxpayer Protection Act of 2007" (H.R. 1677) was approved by the House Ways and Means Committee before it adjourned for the Congressional recess. It includes provisions that would
- prevent the IRS from giving third parties information about taxpayers' tax debts,- require the IRS to notify taxpayers in cases where identify theft may have occurred,
- notify taxpayers that they may be eligible for the EITC,
- clarify rules that prevent deceptive use of the IRS's name (targeting websites like www.irs.com that people may believe belong to the IRS itself.)
Of particular note is the provision preventing the IRS from sharing tax debt information with predatory banks marketing refund anticipation loans (RALs). The IRS and some members of the committee argue that it would actually be in the taxpayers' interest to provide banks information helping them to determine whether a taxpayer is likely to repay a loan, and that without this information the interest rate on such loans could be higher to reflect that lack of certainty about repayment. But the provision targets those that are "predatory," which is not defined in the legislation. RALs sometimes have an interest rate around 90 percent.
We Should Be Able to File Our Taxes Online Easily & Without Paying a Tax Preparation Firm
Another taxpayer rights-related bill (S. 1074) has been introduced in the Senate by Daniel Akaka (D-HI) to create a single internet portal that can be used to file taxes online directly with the IRS for free. Currently people who file online must use the services of one of several companies that charge a fee for those with incomes above $52,000 and which subject users to advertisements for other products.
Outsourcing of Tax Collection in Congress's Crosshairs
A third bill in the area of taxpayer rights is the legislation introduced in the House and Senate (H.R. 695/S. 335) that would end the IRS's use of private debt collectors. The program pays private contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. Since the private contractors are paid on a commission unlike IRS employees, there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights, a concern echoed by Nina Olson, the National Taxpayer Advocate. If you haven't already, send your members of Congress a quick email in support of the legislation to end this program.
It's strange how two people can look at the exact same set of facts and come to opposite conclusions. Today I saw a chart published by the conservative Tax Foundation that they use to criticize a proposal to increase federal cigarette taxes - and suddenly I think I might support this proposal for the first time.
Before the Senate passed its budget two weeks ago, members approved an amendment proposed by Gordon Smith (R-OR) to raise the federal tobacco tax from 39 cents to a dollar per pack and use the money to expand the State Children's Health Insurance Program (SCHIP). The amendment is more of a statement of Congress's goal rather than binding legislation. It doesn't require Congress to act but just clears away any hurdles in the budget process as long as the SCHIP expansion is actually paid for by the tax increase.
We generally frown upon cigarette tax increases because they are regressive. Since low-income people don't smoke any less than wealthier people and pay the same taxes per pack of cigarettes, these taxes take a larger share of their total income. It's true, or course that expanding health care for children is an extremely important priority, and SCHIP is a progressive program targeted at low-income and middle-income families. And frankly, we should be glad when Congress actually wants to pay for an initiative as opposed to just increasing the national debt. But we usually prefer to find a way to pay for things that doesn't cause the tax code to become less progressive.
The Tax Foundation put out a paper showing how the proposal would affect different income quintiles. The chart near the bottom of the paper shows SCHIP spending, minus the cigarette tax paid, on each quintile. The bottom two come out ahead, the middle basically comes out even, and the top two quintiles lose a bit. People in the top income quintile, for example, lose about a hundred dollars a year. This is logical, since wealthier people will receive little benefit from SCHIP so the cigarette taxes they pay will outweigh any added benefits from expansion of the program.
The Tax Foundation, remarkably, sees this as justification to oppose the Smith proposal. I look at this and suddenly feel much better about the Smith proposal. The cigarette tax increase is regressive in itself, but the proposal as a whole is actually progressive.
Thank you Tax Foundation, I feel much better now.
Before the Senate passed its budget two weeks ago, members approved an amendment proposed by Gordon Smith (R-OR) to raise the federal tobacco tax from 39 cents to a dollar per pack and use the money to expand the State Children's Health Insurance Program (SCHIP). The amendment is more of a statement of Congress's goal rather than binding legislation. It doesn't require Congress to act but just clears away any hurdles in the budget process as long as the SCHIP expansion is actually paid for by the tax increase.
We generally frown upon cigarette tax increases because they are regressive. Since low-income people don't smoke any less than wealthier people and pay the same taxes per pack of cigarettes, these taxes take a larger share of their total income. It's true, or course that expanding health care for children is an extremely important priority, and SCHIP is a progressive program targeted at low-income and middle-income families. And frankly, we should be glad when Congress actually wants to pay for an initiative as opposed to just increasing the national debt. But we usually prefer to find a way to pay for things that doesn't cause the tax code to become less progressive.
The Tax Foundation put out a paper showing how the proposal would affect different income quintiles. The chart near the bottom of the paper shows SCHIP spending, minus the cigarette tax paid, on each quintile. The bottom two come out ahead, the middle basically comes out even, and the top two quintiles lose a bit. People in the top income quintile, for example, lose about a hundred dollars a year. This is logical, since wealthier people will receive little benefit from SCHIP so the cigarette taxes they pay will outweigh any added benefits from expansion of the program.
The Tax Foundation, remarkably, sees this as justification to oppose the Smith proposal. I look at this and suddenly feel much better about the Smith proposal. The cigarette tax increase is regressive in itself, but the proposal as a whole is actually progressive.
Thank you Tax Foundation, I feel much better now.
If it's April, it must be time for... Tax Freedom Day. According to the folks at the Tax Foundation, Tax Freedom Day is the day on which "the nation has finally earned enough to pay all the taxes that will be due for that year." The calculation is a pretty simple one: as the Foundation describes it, they're just "dividing the nation's total tax payments by the nation's income." In 2007, that figure is 32.7%. So, the report concludes, Tax Freedom Day is 32.7% of the way through the year in 2007, which would be April 30.
The Center on Budget and Policy Priorities explains why Tax Freedom Day is a meaningless concept. For one thing, the average percentage of income paid towards federal taxes, as reported by the Tax Foundation, is actually higher than the percentage that all but the highest income quintile really pay. The wealthiest have incomes so high that they pull up the average above what people in the middle pay. The statistic also fails to capture certain sorts of income. Also, if the percentage has gone up as the Tax Foundation claims, it's because of rising income at the very top (which leads to more taxes paid in higher income brackets), not because of higher taxes.
Unfortunately, every year a few media outlets gullibly (or knowingly) write this story in a way that makes readers think the statistic says something about the "typical" American's tax level. Some media outlets use the Tax Freedom Day as a rhetorical tool to assert that our taxes are too high. Others simply regurgitate the report's results without making the faintest effort to evaluate what it all means. And a few worthy reporters bring up the topic just to point out that the data doesn't mean anything.
Just weeks after recommending the elimination of Connecticut's car tax, Governor Jodi Rell last Wednesday put forward a plan to limit property tax growth in the Nutmeg State to 3 percent per year. Among the myriad problems with such property tax limits is that they fail to help those individuals and families who are struggling the hardest to make ends meet, while leaving cities and towns more vulnerable to fluctuations in state aid.
Ironically, in offering her proposal, Governor Rell cited Massachusetts' experience with property tax limits as a positive example for her state to follow. Massachusetts was one of the first states in the nation to impose property tax caps, enacting Proposition 2 ½ more than 25 years ago. Yet, as the Boston Globe reports, cities and towns in Massachusetts continue to struggle with the constraints imposed by Prop 2 ½. In the wake of significant cuts in local aid during the early part of this decade, twenty- five cities and towns have already scheduled "Prop 2½ overrides" this year, so that they can raise the funds necessary to provide vital public services. With these votes, libraries, teachers, and policemen are all on the line ... the lasting legacy of an ill-advised approach to property tax reform.
Connecticut Voices for Children has some better ideas on how to improve Connecticut's tax system and how to help low- and moderate-income taxpayers.
The Chicago Tribune reports that three Democratic state senators have come out in opposition to Governor Rod Blagojevich's proposed gross receipts tax:
Sens. William Delgado, Martin Sandoval and Antonio Munoz put out a statement saying they want to debate other possibilities....The three senators applaud his goals but question the tax proposal. "We believe the governor's insistence on the gross receipts tax as the exclusive solution to this problem is short-sighted," the Chicago Democrats said. They suggested a plan to raise income and sales taxes while lowering local property taxes. They called that idea "more realistic."The three senators, are, of course, exactly right in their diagnosis of the governor's behavior. His insistence on a GRT as the only possible solution to the state's fiscal woes is hard to understand. Why exactly is the guv so hell-bent on pushing this one idea to the exclusion of other sensible reforms, again? Wait, it's coming to me:
Blagojevich and Senate President Emil Jones, D-Chicago, have promised to block any increase in income or sales taxes.Which means the three good senators are taking a glass-half-full approach when they describe their (eminently sensible) reform suggestions as "more realistic." But pledges were made to be broken-- especially the dumb ones. Let's hope the political leadership in Illinois can have the courage to confront these decisions on their merits.
Congress is off to its Spring Break (ahem, I mean, "district work period") after having passed the House and Senate versions of the fiscal 2008 budget. The right-wing spin machine will not, however, be taking a break, and is still pushing the line that the Democrats' budget resolutions include "the biggest tax increase in history."
CTJ issued a response to these accusations yesterday, Recently Passed Budget Resolutions Do Not Raise Taxes, Despite Accusations of "Biggest Tax Increase in History."
It explains that the budget resolutions do not raise taxes and that what is really irritating the conservatives right now is the budget rule, included in both the House and Senate versions, that requires any new tax breaks be offset (either with new revenues or with decreased spending) so that we aren't increasing federal borrowing to fund new tax breaks.
Because the Republicans, when they ran Congress, chose to make their tax cuts expire at the end of 2010, any extension of the Bush tax breaks will be new tax breaks that fall under this rule (known as the pay-as-you-go, or PAYGO rule).
What's interesting is the fear conservatives seem to have of PAYGO. They obviously know they can't balance the budget while also extending the Bush tax cuts or else they wouldn't care about PAYGO. One has to wonder if this weighs on the minds of some conservative tax cut advocates. Before the House voted on its budget bill, a vote was taken on the Republican budget proposal that exempted tax cut extensions from PAYGO and also assumed totally unrealistic cuts in public services such as Medicare. All but one Democrat voted against the Republican proposal, as did 40 Republicans.
Whether those 40 Republicans were bothered by the idea of increasing the debt to give tax cuts to wealthy families is hard to say, since there were plenty of things in the proposal that would justify a vote against. But it's interesting that the House Republicans couldn't get more members on record as opposing applying PAYGO to tax breaks.
On a side-note, CTJ's executive director Bob McIntyre has done some calculations showing that even if you accept the Republicans' logic, there is no way you can say we're facing the "biggest tax increase in history." McIntyre's calculations show that the Bush tax cuts are equal to about 1.79 percent of U.S. Gross Domestic Product (GDP). During the Vietnam War, taxes increased by about 2.10 percent of GDP. During the Korean War taxes increased by 4.60 percent of GDP and during World War II taxes increased by a whopping 14.80 percent of GDP.
Democrats have said repeatedly that they will not allow all of the Bush tax cuts to expire, and many freshmen Democrats in Congress campaigned on preserving what are known as middle-class tax breaks (the 10 percent rate, the child care credit, etc). But these numbers show that even if Congress went to the unlikely extreme of allowing all of the Bush tax cuts to expire, and if you assume this is a "tax increase" rather than the Republican-enacted law playing itself out, this still could not constitute the biggest tax increase in history.
CTJ issued a response to these accusations yesterday, Recently Passed Budget Resolutions Do Not Raise Taxes, Despite Accusations of "Biggest Tax Increase in History."
It explains that the budget resolutions do not raise taxes and that what is really irritating the conservatives right now is the budget rule, included in both the House and Senate versions, that requires any new tax breaks be offset (either with new revenues or with decreased spending) so that we aren't increasing federal borrowing to fund new tax breaks.
Because the Republicans, when they ran Congress, chose to make their tax cuts expire at the end of 2010, any extension of the Bush tax breaks will be new tax breaks that fall under this rule (known as the pay-as-you-go, or PAYGO rule).
What's interesting is the fear conservatives seem to have of PAYGO. They obviously know they can't balance the budget while also extending the Bush tax cuts or else they wouldn't care about PAYGO. One has to wonder if this weighs on the minds of some conservative tax cut advocates. Before the House voted on its budget bill, a vote was taken on the Republican budget proposal that exempted tax cut extensions from PAYGO and also assumed totally unrealistic cuts in public services such as Medicare. All but one Democrat voted against the Republican proposal, as did 40 Republicans.
Whether those 40 Republicans were bothered by the idea of increasing the debt to give tax cuts to wealthy families is hard to say, since there were plenty of things in the proposal that would justify a vote against. But it's interesting that the House Republicans couldn't get more members on record as opposing applying PAYGO to tax breaks.
On a side-note, CTJ's executive director Bob McIntyre has done some calculations showing that even if you accept the Republicans' logic, there is no way you can say we're facing the "biggest tax increase in history." McIntyre's calculations show that the Bush tax cuts are equal to about 1.79 percent of U.S. Gross Domestic Product (GDP). During the Vietnam War, taxes increased by about 2.10 percent of GDP. During the Korean War taxes increased by 4.60 percent of GDP and during World War II taxes increased by a whopping 14.80 percent of GDP.
Democrats have said repeatedly that they will not allow all of the Bush tax cuts to expire, and many freshmen Democrats in Congress campaigned on preserving what are known as middle-class tax breaks (the 10 percent rate, the child care credit, etc). But these numbers show that even if Congress went to the unlikely extreme of allowing all of the Bush tax cuts to expire, and if you assume this is a "tax increase" rather than the Republican-enacted law playing itself out, this still could not constitute the biggest tax increase in history.
CTJ's Executive Director Bob McIntyre forwarded the following news story to CTJ staff today.
Bush Endorses "Largest Tax Increase in American History"
Washington, April 3, 2007 -- In a speech yesterday to the U.S. Naval Academy football team, President Bush implicitly endorsed what critics called "the largest tax increase in American history," by failing to call for repeal of the entire Internal Revenue Code.
According to estimates by the Congressional Budget Office, the taxes that Bush would keep on the books will total $2.5 trillion this fiscal year, and almost $15 trillion over the following five years. A consortium of conservative organizations, led by Grover Norquist's Americans for Tax Reform and Dr. James Dobson's Focus on the Family, condemned Bush's action as "an assault on American taxpayers and Christianity itself."
A spokesman for the White House said that the President's action was "potentially an oversight," and that "an investigation is already underway" to evaluate the charges. "If anyone in the White House, the Treasury Department or any other executive agency is implicated in this scandal they will be out the door by the weekend," the spokesman asserted.
Democratic leaders in Congress refused to comment officially on the President's huge proposed tax increase. Speaking off the record, however, a top advisor to a leading Democratic presidential candidate said that the candidate is "looking to see if there might be a middle ground" that both sides could agree upon.
Happy (late) April Fools
Bush Endorses "Largest Tax Increase in American History"
Washington, April 3, 2007 -- In a speech yesterday to the U.S. Naval Academy football team, President Bush implicitly endorsed what critics called "the largest tax increase in American history," by failing to call for repeal of the entire Internal Revenue Code.
According to estimates by the Congressional Budget Office, the taxes that Bush would keep on the books will total $2.5 trillion this fiscal year, and almost $15 trillion over the following five years. A consortium of conservative organizations, led by Grover Norquist's Americans for Tax Reform and Dr. James Dobson's Focus on the Family, condemned Bush's action as "an assault on American taxpayers and Christianity itself."
A spokesman for the White House said that the President's action was "potentially an oversight," and that "an investigation is already underway" to evaluate the charges. "If anyone in the White House, the Treasury Department or any other executive agency is implicated in this scandal they will be out the door by the weekend," the spokesman asserted.
Democratic leaders in Congress refused to comment officially on the President's huge proposed tax increase. Speaking off the record, however, a top advisor to a leading Democratic presidential candidate said that the candidate is "looking to see if there might be a middle ground" that both sides could agree upon.
Happy (late) April Fools
The tax question of the day in Indiana is how the state should reduce local property taxes-- and how it should make up the revenue loss. In Sunday's paper, the editorial board of the Fort Wayne Journal Gazette thinks Republican Representative Jeff Espich has the right tax ideas:
1) there's more than one way to cut property taxes. If shifting from businesses to individuals is a concern, why not take steps to reduce property taxes for homeowners only, so a tax cut for individuals is balanced by a tax hike for individuals?
2) if inequality in local tax bases is a concern (and it should be), moving from an unequally distributed property tax base to a less unequally distributed income tax base is a step forward, but why not move to a statewide income tax increase instead, allowing the state to eliminate unjustified inequities in funding between poorer and wealthier taxing districts?
3) elaborating on point #1, Indiana already spends a lot of money rebating a fraction of everyone's local property taxes in an "across the board" way. A meaningful property tax relief plan should at least explain why the already-existing property tax breaks are sacrosanct. And if they're not, any good property tax reform plan should come up with a way of better targeting these tax breaks.
But Espich deserves kudos for recognizing that the income tax-- in some form-- is a fairer alternative. Other states considering how to deal with skyrocketing property tax assessments would do well to at least consider the Espich approach.
[O]nly one plan so far squarely addresses the elephant in the room: school construction costs. Rep. Jeff Espich of Uniondale suggests it's time to shift those costs from property taxes to a new income tax.To be clear, it's a local-option income tax Espich is talking about: replacing one local tax with another one. The Journal Gazette thinks (and they're almost certainly right) that Espich's tax swap would make the tax system less unfair and less regionally biased:
Any tax proposal requires a balancing act to achieve fairness, and income taxes are more progressive than property taxes. And Espich said that a study of individual income and assessed valuation showed there is less disparity within a district in income than in property value.The Gazette also points out, correctly, that simply reducing property taxes across the board (as a local government would likely do if they enacted the income tax option) would constitute a free ride, of sorts, for businesses:
It's not a perfect plan. It shifts a larger burden from businesses to individuals. But there are more individual taxpayers than there are property taxpayers.This is all true, as far as it goes. The most obvious (to me) objections to the Espich approach are:
1) there's more than one way to cut property taxes. If shifting from businesses to individuals is a concern, why not take steps to reduce property taxes for homeowners only, so a tax cut for individuals is balanced by a tax hike for individuals?
2) if inequality in local tax bases is a concern (and it should be), moving from an unequally distributed property tax base to a less unequally distributed income tax base is a step forward, but why not move to a statewide income tax increase instead, allowing the state to eliminate unjustified inequities in funding between poorer and wealthier taxing districts?
3) elaborating on point #1, Indiana already spends a lot of money rebating a fraction of everyone's local property taxes in an "across the board" way. A meaningful property tax relief plan should at least explain why the already-existing property tax breaks are sacrosanct. And if they're not, any good property tax reform plan should come up with a way of better targeting these tax breaks.
But Espich deserves kudos for recognizing that the income tax-- in some form-- is a fairer alternative. Other states considering how to deal with skyrocketing property tax assessments would do well to at least consider the Espich approach.
Critics of the budget resolutions recently passed by the U.S. Senate and House of Representatives are claiming that these budget plans include the "biggest tax increase in history." The truth is that they don't raise a single cent in taxes.
Citizens for Tax Justice released a response to these claims today explaining that the real cause of angst among these critics is the pay-as-you-go (PAYGO) rules that Congress wisely has decided to revive to prevent the federal government from digging itself into deeper debt.
"The President's allies in Congress understand that they have no serious plan to balance the budget while also extending their cherished tax cuts," said Robert S. McIntyre, director of Citizens for Tax Justice. "That's why they want to exempt their new tax cuts from the PAYGO rules. In other words, what they really want is the biggest deficit increase in history."
http://www.ctj.org/pdf/budgetres040207.pdf