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.

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.

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.

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.

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.

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.

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.

Recently Passed Budget Resolutions Do Not Increase Taxes Despite Accusations of "Biggest Tax Increase in History"

"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