On Thursday, Governor Jon Corzine signed New Jersey's fiscal year 2008 budget into law, but warned that difficult times may be ahead if the state fails to address a looming structural budget deficit. But, as Jon Shure of New Jersey Policy Perspective explains in a recent op-ed, this concern didn't stop the Governor from approving a number of substantial tax cuts included in this year's budget, such as more than $2 billion in additional property tax rebates and a $275 million business tax cut. Though much smaller in cost, at roughly $36 million, the state budget contains another tax change that may be more meaningful for some working families - an expansion of New Jersey's earned income tax credit. As a result of the change, approximately 300,000 taxpayers, all of whom have incomes between $20,000 and just under $40,000 per year, will now receive the credit, while the overall value of the credit will rise from 20% of the federal credit to 25% over the next few years.

Last Thursday South Carolina legislators passed a substantial tax cut package, two weeks after the legislative session was scheduled to end. Fierce disagreement between policymakers caused delays but lawmakers finally reached a compromise. Starting November 1, South Carolina visitors and residents will no longer pay a three percent sales tax on groceries. Of course, there are more targeted ways to assist low income tax payers than simply eliminating the grocery tax altogether (take a look at ITEP's policy brief). Progressives did win a defensive victory by lobbying hard against the House plan to lower income tax rates for better off South Carolinians. Instead, the state's bottom income tax rate was eliminated - a move that benefits taxpayers at all income levels.

Louisiana's 2007 legislative session came to an end yesterday. Fueled by large projected budget surpluses, lawmakers spent the session pondering all sorts of options for tax cuts, ranging from smokestack-chasing tax giveaways to tax breaks for struggling artists. In the end, lawmakers took an important first step towards tax fairness by enacting a refundable Earned Income Tax Credit, thanks in part to the work of the Louisiana Budget Project. But legislators took a step backwards as well, expanding the ability of the wealthiest Louisianans to claim the same itemized deductions they took on their federal tax forms. This move is estimated to benefit only 20 percent of Louisiana families. Left to be seen is whether Governor Kathleen Blanco might veto these high-end cuts.

President Bush stated Wednesday that he opposed expanding the State Children's Health Insurance Program (SCHIP) and would rather Congress enact his proposal to create a standard deduction from federal taxes for health insurance, whether it's employer-provided or purchased in the individual health insurance market. The President's proposal, which he first announced during his State of the Union address in January, has little chance of being enacted. It is widely opposed by many in Congress because it could undermine employer-based health insurance without guaranteeing that an adequate alternative would take its place.

President's Proposal would Shift Risk onto Individuals and Families

The stated purpose of the proposal is to "even the playing field" between those with employer-provided coverage (which is currently subsidized through the tax code) and those who purchase coverage in the individual health insurance market (which is mostly not subsidized under the tax code). Unfortunately, rather than evening the playing field, the President's plan would make the tax code more biased towards individually purchased health care and maybe even high-deductible health care. There would no longer be any incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer and employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous. Since the amount of the new deduction would be indexed to regular cost inflation but not to health care inflation (which is steeper) more and more people over time would find that their coverage costs more than the new deduction.

Little Effort at Practical Solutions in the White House

The President's words seemed geared towards satisfying certain ideological interests rather than finding practical solutions. He cast the issue as a choice between government intrusion in people's lives and the freedom of individuals to make choices in the market. As the Center on Budget and Policy Priorities has pointed out, most SCHIP and Medicaid recipients already choose between different private health plans that have contracted with their state and that have agreed to meet certain standards.

The President also invoked the fear that public health insurance "crowds out" private health insurance. The preeminent health economist whose work is often used to make such claims, Jonathan Gruber, has said that the public programs like SCHIP result in an increase in coverage among children who would otherwise go without health insurance and this far outweighs any "crowding out" of private insurance.

As reported in last week's Digest, one proposal being considered by Congress would pay for an SCHIP expansion with increased federal tobacco taxes.

Warren Buffet attacked the federal tax preference for the rich over the middle-class Tuesday, arguing that it is an outrage that his receptionist pays a higher effective tax rate than he does. A major cause of the problem is the special low tax rate (15 percent) for capital gains and dividends, which mostly benefits the wealthy. Conservatives often argue that repealing this tax break or allowing it to expire (it currently is scheduled to expire at the end of 2010) would cause investment to dry up and lead to a loss of jobs. Unfortunately for proponents of the tax break, there has been no relationship between low capital gains tax rates and economic growth over the past 50 years. The lower rate can just as easily lead to greater inefficiency in the economy, since it can result in tax shelters that have no real economic rationale (as investments are made purely to transform ordinary income into capital gains).

Congress May Take a Small Step in the Right Direction

For those members of Congress who get a little weak-kneed at the thought of allowing the President's favorite tax cut to expire or be repealed, there are smaller steps that can be taken in this direction. For one thing, private equity fund managers making millions or even billions of dollars are taking advantage of the special capital gains rate even though they are not actually investing their own capital.

The House Ways and Means Committee is expected to hold hearings in July to consider a bill ( H.R. 2834) that would close this loophole. Meanwhile, Senate Finance Committee chairman Max Baucus (D-MT) and ranking member Charles Grassley (R-IA) are sponsoring a narrower bill that would require publicly traded partnerships that get their income from investment services to pay the corporate income tax rate of 35 percent (which is what other publicly traded partnerships almost always must pay) instead of the capital gains rate they currently pay. The Finance Committee is expected to hold hearings later this summer and it is not yet clear if Baucus will add the provisions the House includes in its version relating to the taxing of the fund managers' compensation.

Citizens for Tax Justice director Robert McIntyre has recently appeared on television twice to debate this issue, once on May 7 and a second time on June 21.

Legislatures in Rhode Island and Arizona approved their state budgets for fiscal year 2008 this past week and, in each case, dealt significant setbacks to corporations seeking to avoid or to reduce their taxes. Rhode Island's budget will close three loopholes that have allowed profitable corporations to use creative accounting measures to pay less than their fair share in taxes. This will generate $12.5 million that will help to close the state's expected budget gap and finance vital public services. In addition, the budget halts the scheduled elimination of the state's tax on capital gains income, though it fails to restore the tax rate on such income to its prior level of 5.0 percent. While Rhode Island Governor Donald Carcieri (R) has vowed to veto the spending plan, that veto will likely be overridden. For more on how Rhode Island could strengthen its tax system, see the Rhode Island Poverty Institute's recent fact sheet.

Meanwhile, in Arizona, Governor Janet Napolitano (D) is expected to sign her state's budget into law soon. While that budget includes $11 million in tax cuts - including a state version of so-called section 529 education savings plans - these tax cuts are far smaller than those proposed by House Republicans, due to legislators' unwillingness to provide businesses with a 2.5 percentage point reduction in the state's corporate income tax.

Legislatures in Rhode Island and Arizona approved their state budgets for fiscal year 2008 this past week and, in each case, dealt significant setbacks to corporations seeking to avoid or to reduce their taxes. Rhode Island's budget will close three loopholes that have allowed profitable corporations to use creative accounting measures to pay less than their fair share in taxes. This will generate $12.5 million that will help to close the state's expected budget gap and finance vital public services. In addition, the budget halts the scheduled elimination of the state's tax on capital gains income, though it fails to restore the tax rate on such income to its prior level of 5.0 percent. While Rhode Island Governor Donald Carcieri (R) has vowed to veto the spending plan, that veto will likely be overridden. For more on how Rhode Island could strengthen its tax system, see the Rhode Island Poverty Institute's recent fact sheet.

Meanwhile, in Arizona, Governor Janet Napolitano (D) is expected to sign her state's budget into law soon. While that budget includes $11 million in tax cuts - including a state version of so-called section 529 education savings plans - these tax cuts are far smaller than those proposed by House Republicans, due to legislators' unwillingness to provide businesses with a 2.5 percentage point reduction in the state's corporate income tax.

Earlier this month, Oklahoma Governor Brad Henry (D) signed into law the " Taxpayer Transparency Act" which directs the Office of State Finance to "build a web site detailing virtually all expenditures of state funds, including state contracts and tax credits and incentive payments given to businesses." The proposal received widespread bipartisan praise. According to the Oklahoma Council of Public Affairs, 72 percent of Oklahomans support the creation of the website. Oklahoma Senator Tom Coburn has advocated for a similar website to monitor federal spending. The State Chamber of Commerce opposed this bill saying that the legislation, "will shine an unwanted light on those who invest in Oklahoma, and it will make it much more difficult to attract those investors." Undoubtedly the website will be a helpful tool for legislators, the public, and the media. Mark Thomas from the Oklahoma Press Association says this about letting the sunshine in on government spending: "If you want the people of Oklahoma to give you a tax break, go ahead and ask us, but don't expect us to keep it a secret."

On Thursday, the Senate fell three votes short of the 60 needed to end debate and pass a $32 billion dollar energy tax package that was intended to be attached to a broader energy bill. The broader bill includes changes in Corporate Average Fuel Economy standards, fuel price gouging, ethanol and other related matters, and was passed with 65 votes. The tax package, which the Finance Committee approved on Tuesday, could be revived in the days to come. Meanwhile, the House Ways and Means Committee marked up its own energy tax package on Wednesday which, at $16 billion, costs about half as much as the Senate's version. The two packages create and expand several tax breaks that purportedly encourage energy efficiency and the production of energy from alternative sources and both include revenue-raising provisions to offset the costs.

Experts can certainly debate whether or not energy policy should be implemented through the tax code, but perhaps the more important point is that Congress has already showered oil and gas companies with numerous tax breaks that CTJ has criticized in the past. The energy tax legislation being debated now would generally shift some tax breaks away from oil and gas towards more sustainable types of energy. Lobbyists from the oil and automotive industries convinced many Senators that the tax package would "raise taxes" on oil and gas companies, but most of the provisions would really close loopholes for these companies that have no justification.

Tax Breaks to Encourage Energy Efficiency and Independence

According to the Congressional Joint Committee on Taxation, the biggest item in both versions is the expansion of the tax credit for electricity production from renewable resources, which costs $6.6 billion over ten years in the House version and $10.1 billion over ten years in the Senate version. This credit is currently available for the production of wind, geothermal, solar and many other types of energy. The Senate version would allow more energy sources to qualify (such as tidal energy) and would extend the credit for a longer period of time.

Some noteworthy provisions appear in the Senate package but not in the House package. One is a $3.8 billion expansion and modification of the tax credit for coal gasification, a process by which coal is broken down into a gas which can be burned. The CO2 that results can be more easily separated from the gas and stored, thereby reducing CO2 emissions. Groups like Environmental Defense support coal gasification, particularly since the use of coal in the US and the world is projected to rise a great deal over the next few decades.

Other provisions that appear only in the Senate version include about $1.5 billion in tax breaks for "carbon mitigation," including a credit for capturing and storing CO2 resulting from industrial processes, at a cost of just over $1 billion. The Senate extends certain credits for longer periods and in some cases offers larger credits, such as a tax credit for production of cellulosic alcohol, which is basically alcohol produced from parts of plants that are not edible, at a cost of $828 million over ten years in the Senate version but only $24 million in the House version.

Both versions include incentives to purchase hybrid vehicles, including a provision for "plug-in" hybrids, which are said to use even less gasoline than the hybrids currently in use because plug-in hybrids can be charged up from an electrical socket. This provision would cost $706 million in the Senate version and $1.2 billion in the House version. Both versions also include several billions of dollars to encourage the use of energy-efficient buildings and energy-saving devices and appliances.

Revenue-Raising Provisions

One of the offsets included in both tax packages is the elimination of the "section 199" domestic manufacturing tax deduction for oil and gas companies. (The House included the elimination of this deduction in the energy bill it passed earlier this year.) The deduction was made available to energy companies in 2004 when Congress redefined manufactured goods to include oil and gas. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) The House version would eliminate this deduction for all oil and gas companies and raise $11.4 billion over ten years. The Senate would eliminate it only for large oil and gas companies and would raise $9.4 billion over ten years.

The Senate package has more offsets since it includes more tax breaks. Among them are a 13 percent tax on the production of oil and gas in the Gulf of Mexico, projected to raise $10.6 billion over ten years. While criticism of this provision from some Republican Senators was fierce, it is designed merely to obtain payments from those oil companies who are drilling on public lands without paying royalties, which can be used as a credit against the tax. Other offsets include restrictions on foreign tax credits for oil and gas and an increase and extension of the excise tax on oil for the Oil Spill Liability Fund, among other provisions.

Amendment Adopted Includes Controversial Offsets

While marking up the Senate tax package, the Finance Committee adopted an amendment introduced by Ron Wyden (D-OR) that would fund the Secure Rural Schools and Community Self-Determination Act, which provides what are often called "county payments," at a cost of $3.6 billion. The amendment included two revenue-raising provisions to fully offset this cost. One takes aim at tax shelters known as sale-in, lease-out (SILOs). These arrangements, which can involve an American bank buying something like a subway or sewer system in another country and "leasing" it back to the foreign government for tax advantages, were already banned starting in 2004 but that ban would retroactively apply to deals made before 2004 under this provision. Some members of Congress oppose any such retroactive changes in tax laws, but the Senate Finance Committee earlier this year tried to include this change in the tax provisions that were attached to the minimum wage legislation.

The House Appropriations Committee approved the "Financial Services" spending bill last week, which includes funding for the IRS and other agencies within the Treasury, as well as for the District of Columbia and several other agencies. Notably, the bill includes language that limits funding of tax debt collection by private collection agencies to $1 million, effectively killing the IRS's practice of outsourcing tax collection.

The IRS's private debt collection 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. The private contractors are paid on a commission unlike IRS employees, so 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.

In earlier Digests we've told you about how policymakers across the country have been dealing with increasing gas prices. Indiana Governor Mitch Daniels (R) been asked recently to suspend the state's sales tax on the sale of gasoline. The Governor declined to do so, saying "...although I can appreciate the short-term popularity that would go with it, I don't think it is a responsible step when you consider all the factors." Now it looks like the Governor may be relieved of the burden of making any choice at all. The state's Attorney General ruled late last week that the Governor doesn't have authority under a specific statute to suspend the gas tax. However, the ruling hasn't ended the controversy as the Speaker of House is urging that the gas tax be suspended anyway.

Should federal tobacco taxes be raised from their current level of 39 cents a pack to help pay for health insurance for uninsured children? That question may be addressed soon, as the Senate Finance Committee and the House Ways and Means Committee are expected sometime this summer to mark up legislation to fund an expansion in the State Children's Health Insurance Program (SCHIP) that will cost $50 billion over five years. In February Senator Gordon Smith (R-OR) proposed raising the federal tobacco tax to about a dollar per pack, which he has recently said would raise as much as $35 billion of the $50 billion needed for the SCHIP expansion. The Campaign for Tobacco-Free Kids released a survey recently showing that two thirds of voters support hiking the federal tobacco tax by as much as 75 cents a pack if the funds go towards health care for uninsured children.

As the Campaign for Tobacco-Free Kids has pointed out, cigarette taxes are an effective policy if the goal is simply to reduce smoking or to prevent young people from taking up the habit. But using this revenue source to fund important programs is more problematic. Cigarette taxes (whether on the federal or state level) are regressive, meaning they take a larger proportion of income from a poor family than from a wealthy family. (If two smokers, one poor and one wealthy, are smoking the same amount and paying the same tax of one dollar a pack, that one dollar equals a larger percentage of total income for the poor smoker than for the wealthy smoker). It's always better to fund important programs with progressive taxes. Tobacco taxes also provide less funding over time, since they do not increase with inflation or with the price of cigarettes generally, so they are rarely a "permanent" solution to any funding problem.

Nevertheless, expanding health insurance for children is an extremely important priority that may require compromise. Tobacco taxes are not an ideal funding source, but then again, legislation produced by Congress is rarely ideal.

The U.S. Senate began debate this week on H.R. 6, a bipartisan energy bill that promises to protect consumers from price gouging, strengthen the economy, increase energy efficiency and develop clean alternative fuels. Senate Majority Leader Harry Reid spoke Monday morning at the Center for American Progress about America's "oil addiction" that has resulted in tax breaks and record profits for the oil-industry while low-income consumers still face higher energy prices.

Senator Reid claims that too few resources are being devoted to the development of clean, efficient, and renewable alternative fuels. The multi-part bill would set new green standards for federal buildings, raise Corporate Average Fuel Economy (CAFE) standards for new cars and trucks to 35 mpg by 2020, reduce crude oil consumption by 10 percent over 15 years by producing renewable fuels, and set new energy efficiency standards. It would also punish companies that "price gouge," provide research funds for carbon sequestration programs, and seek to improve relations with worldwide energy partners.

Debate has been moving swiftly but not without protests from the auto, coal and oil industries who stand to be the hardest hit by reductions in subsidies and the higher CAFE standards. Questions are being raised as to whether or not the bill can garner enough support and still create policies that will prevent consumers from seeing energy prices rise.

As the week ended, Senate Finance Committee Chairman Max Baucus (D-Mont.) released a proposed $13.7 billion package of tax incentives to go along with the energy bill aimed at improving energy efficiency and expanding production. More than $9 billion of the package's cost would be offset by eliminating the manufacturing tax deduction for major oil producers. Baucus expects that the committee markup next week will add another $10-12 billion in additional amendments. Reid hopes to finish the bill by next week.

This week the Tennessee General Assembly adjourned after passing legislation that increases the state cigarette tax by 42 cents a pack and also reduces the state's sales tax on food from 6 to 5.5 percent. Progressive groups like Tennesseans for Fair Taxation are calling the reduction in the grocery tax "a very positive first step that we can build [on] as we move forward."

Massachusetts' corporate taxation study commission this week released a set of interim findings that endorsed two key reforms to the Bay State's tax code. Appointed by Governor Deval Patrick and legislative leadership in April, the commission recommended that Massachusetts immediately enact changes in its corporate income tax - commonly referred to as "check the box" rules - that would prevent companies from exploiting differences in state and federal law that determine how they are classified for tax purposes and that allow them to avoid taxes in Massachusetts.

Forty-five other states already have these rules in place; instituting them in Massachusetts would generate an additional $100 million in FY 2008. The commission also expressed its support for combined reporting - a still more comprehensive reform that New York and West Virginia approved this year and that twenty states now employ - but will study implementation and design issues further in the coming months. Of note, the commission also found that the absence of such safeguards as effective "check the box" rules and combined reporting has allowed Massachusetts corporate income tax to fall from 11.5 percent of corporate profits in 1989 to 5.5 percent last year.

The commission also points out that "Insisting on greater shared responsibility for our Commonwealth's future, principally by asking a fairer share from larger, multi-state businesses, will not harm competitiveness and economic growth; influential economists cited to the Commission have concluded that, while taxes are one factor that businesses consider in deciding where to locate or expand, the predominance of other factors usually renders business taxation a much less significant consideration."

The visibility of a tax dodge for hedge fund managers continued to grow this week, as former Treasury secretary Robert Rubin spoke Tuesday at a forum arranged by the Hamilton Project about why hedge fund and private equity managers ought to be taxed at a higher rate. Currently, these managers charge a fee for their investment and money management services and report their fee as a capital gain, making it subject to a tax rate of just 15 percent. Fees are assessed as 20 percent of profits.

Private equity firms, and increasingly hedge funds, operate by using independent investor money to purchase companies, improve them, and then sell them for a profit. The overall investment process, which may take up to seven years, does constitute a capital gain. However, fund managers are performing a management service, not risking their own money, so any capital gains are not really theirs to report.

Rubin argued that the managers are performing a basic service, and "fees for that service would ordinarily be thought of as ordinary income." Income for these wealthy managers, he argued, should be subject to the regular income tax rates of up to 35 percent. Manager income has skyrocketed recently with earnings ranging from $500 million to $2 billion a year. With an already quite low capital gains rate, fund managers are clearly not paying their fair share, and a new plan could bring in additional revenue and create a more progressive tax system. On a related issue, Democrat Max Baucus and Republican Charles Grassley of the Senate Finance Committee proposed on Friday that some private equity firms should be taxed under the corporate tax rate rather than being taxed as partnerships as they currently are. We look forward to hearing more about this proposed legislation.

Many observers thought this could be the year for progressive tax reform in Illinois. But in the wake of a disappointing regular legislative session that was dominated by one poorly-thought-out idea (Governor Rod Blagojevich's proposal for a " gross receipts tax"), lawmakers are back in Springfield for a special "overtime session." A new report from Voices for Illinois Children reminds lawmakers that reforming the state's low,flat-rate income tax could make the Illinois tax system both fairer and more sustainable. To read the Voices report, click here.

Some are calling it the biggest tax reduction in Florida history, but it might better be described as the most confusing. After almost a year of documenting the flaws of Florida's "Save our Homes" property tax break for homeowners (which include its complexity and unfairness), the state legislature this week ratified a plan that will provide a replacement homeowner tax break known as the "super exemption." This new exemption will shelter up to 75% of the first $200,000 of a home's value (and up to $195,000 of value for wealthier homeowners) from property taxes. The catch: homeowners who decide they prefer the old Save Our Homes break can keep it. But they'd better think carefully: if a homeowner decides to claim the new homestead exemption, they can never again file under the old system.

Because Florida's property tax breaks are enshrined in the state constitution, this proposal must go before Florida voters; a January 2008 vote is set.

Over the past few weeks, three more states have taken steps towards helping low-wage workers and their families by means of the earned income tax credit (EITC). In Delaware, the Senate Revenue and Taxation Committee recently approved a measure that would make the state's existing EITC refundable, meaning that individuals and families who owe less in personal income taxes than the value of their EITCs would receive refund checks to help offset other taxes and to make it easier to make ends meet. In Oregon, Republican and Democratic members of the House Revenue Committee have put forward a proposal that would raise that state's EITC from 5 percent of the federal EITC to 12 percent. As the Eugene Register-Guard observes this proposal would help to achieve a vital goal - eliminating income taxes on working families living in poverty in Oregon. Lastly, the Louisiana Senate has passed legislation that would create a state EITC equal to 5 percent of the federal EITC. This report from the Louisiana Budget Project details the positive impact that such a credit would have.

Newly elected Ohio Governor Ted Strickland has proposed expanding the state's means-tested homestead exemption by eliminating the exemption's current income limits. This year, the homestead exemption is only available for seniors and the disabled with incomes less than $27,000; the benefit of the exemption decreases as incomes grow closer to $27,000. Governor Strickland's plan would provide a blanket property tax exemption for the first $25,000 of a property's market value for elderly and disabled homeowners at all income levels. This week, Policy Matters Ohio and the Institute on Taxation and Economic Policy teamed up to analyze the impact of the Governor's proposal and also to offer less expensive alternatives that provide targeted tax relief - instead of simply providing an exemption that goes to everyone regardless of their need. By targeting property tax relief to select homeowners, Ohio could save $118 million annually. To read the full Policy Matters Ohio report click here.

North Carolina policymakers appear to be deeply divided over the state budget and much is at stake for low- and middle-income taxpayers. In one corner, the state House of Representatives and the Governor are advocating budget packages that include extensions of temporary tax rate hikes in both the income and sales tax. House leaders say this revenue is necessary to help pay for the growing needs of the state. An exciting development in the House budget is the North Carolina Rewarding Work Tax Credit (a state version of the Earned Income Tax Credit). In the other corner, the state Senate passed a budget which allows the temporary tax hikes to expire and there's no targeted tax credit included. Earlier this week the House voted to reject the Senate's budget, so now the real show down begins. Policymakers must work quickly if they hope to pass a two-year budget by July 1 when the fiscal year begins.

Eighty million dollars for Verizon? Thirty-seven million dollars for Citigroup? Sounds almost like a modern version of Monopoly, doesn't it?

Well, as a recent New York Times op-ed by New Jersey Policy Perspective's Jon Shure points out, those are just two of the tax breaks that the Garden State has doled out to major corporations since the mid-1990s. Yet, as New Jersey's experience with MSNBC suggests, the corporations that benefit from this largesse often don't live up to their end of the bargain.

Good Jobs First has long been making that very point - and this week introduced a new on-line tool to help the public keep track of all of the subsidies that one particular corporation, Wal-Mart, is receiving from states and localities around the country. See www.walmartsubsidywatch.org to learn more.

Several bills have been introduced in the U.S. Senate to create a cap-and-trade system to reduce carbon emissions. At a recent forum on the topic hosted by the Urban Institute in Washington, DC, debate over the regulation of greenhouse gases focused on the advantages and disadvantages of implementing either a carbon tax or a cap-and-trade program, both of which are market-based approaches to reducing global warming.

A carbon tax is straightforward in that it requires firms to pay a fixed amount for each unit of carbon emissions they produce. This increases the cost of fuels for the producers and is passed down in the form of higher prices to consumers. Both producers and consumers then have the incentive to either consume less, consume more efficiently or find alternate fuels. Firms that use these alternatives avoid paying the tax and reduce their emissions. Firms that don't use the alternatives pay the tax. As with any tax on consumption, a carbon tax burdens people of low incomes disproportionately, making this tax regressive. The tax revenue generated could go toward compensating those impacted most harshly, although it might be difficult to target such compensation towards those affected.

A cap-and-trade program works by setting a limit on total emissions and then distributing allowances for firms to pollute corresponding to that limit. The firms can then trade these allowances, the idea being that this will lead to a more efficient outcome. Firms that can reduce emissions cheaply will do so, and then sell excess permits to firms for which it is costly to reduce emissions. As with a carbon tax, the added cost to firms of buying allowances would cause the price of fuels to increase. This would force consumers to alter their behavior, and also place a heavy burden on low-income families, making this option just as regressive as a tax. However, the government could initially auction off allowances, which would be extremely valuable, and use the revenues to try to target those hardest hit by increased prices.

Both programs are flexible in that the amount of tax, emissions cap, or amount of allowances could be adjusted after implementation. Both programs are likely to have regressive impacts since they would raise consumer prices, and it remains to be seen how this problem might be resolved. The cap-and-trade program seems to be more politically acceptable to many lawmakers who fear anything resembling a tax increase, while many economists favor the carbon tax because it requires less bureaucracy to implement.

The Senate Homeland Security & Governmental Affairs Permanent Subcommittee on Investigations held a hearing Tuesday focusing on stock options and the "book-tax accounting gap." Corporations sometimes compensate employees (particularly executives) with options to buy stock at a set price. The employee can wait to exercise the option until after the value of the stock has increased beyond that price, thus enjoying a substantial benefit.

When stock options are exercised, employees report the difference between the value of the stock and the exercise price as taxable wages, and corporations take a corresponding tax deduction. Until recently, however, companies didn't have to reduce the profits they report to their shareholders by the cost of the stock options.

Many people, including us, complained that it didn't make sense for companies to treat stock options inconsistently for tax purposes versus shareholder-reporting purposes. As a result of these complaints, new rules now require companies to lower their "book" profits somewhat to take account of options. But the book write-offs are still considerably less than what they take as tax deductions. That's because the oddly-designed rules require the value of the stock options for book purposes to be calculated - or guessed at - when the options are issued, while the tax deductions reflect the actual value when the options are exercised.

Senator Carl Levin (D-MI), chair of the subcommittee, stated in a press release that "Companies pay their executives with stock options in part because, right now, those stock options often generate huge tax deductions that are 2, 3, even 10 times larger than the stock option expense shown on the company books." According to calculations made by his staff using IRS data, firms deducted $43 billion that was not included in financial books in this manner between December 2004 to June 2005. He argued that this is especially problematic now because it seems to fuel the widening difference in pay for executives compared to rank and file workers. Levin said he plans to introduce legislation this fall to require companies to treat stock options the same for both book and tax purposes.

Despite evidence that a majority of Minnesotans supported an income tax increase on better off Minnesotans in exchange for property tax cuts, the legislative session ended without the creation of a new top income tax bracket. The bill sent to Governor Tim Pawlenty would have created a new 9 percent top income tax rate for married couples with taxable income above $400,000 ($226,000 for singles), but Governor Pawlenty vetoed the legislation and the battle for progressive taxes will have to wait for another year. In the meantime, the Star-Tribune is right when it says that the Governor's veto, "keeps Minnesota on a road toward more regressive taxation."

June brings the start of a new hurricane season, and this year some Gulf states are turning to a new tool to try to help residents cope: the tax code. This week is host to Florida's third annual sales tax holiday on hurricane preparedness supplies. Louisiana offered a temporary sales tax holiday in the aftermath of Hurricane Katrina last year, and now some lawmakers are pushing to make it an annual event. However, it is not known how much, if any, benefit shoppers receive from such sales tax holidays. Why would a store offer a 10% discount when shoppers are coming in to avoid paying the four percent state sales tax? Given the serious nature of hurricanes, the burden of proof is on lawmakers to show that this holiday will do what they say it will. People in the Gulf states deserve more than a three-day gimmick.

Policymakers in New England saw several budgetary showdowns this week. On Wednesday, members of the Connecticut General Assembly missed an end-of-session deadline for adopting their state's budget for the next two years. One of the most contentious issues in the debates surrounding the spending measure is, not surprisingly, taxes.

Both chambers of the Assembly recently approved bills that would make Connecticut's personal income tax more progressive and that would yield revenue needed to address structural budget shortfalls and to support new initiatives. While there are differences between the bills backed by the two chambers, conflict is much more likely with Governor Jodi Rell, who has already suggested that she would veto any such tax increase.

Interestingly, just four months ago, Rell herself proposed raising the state's top personal income tax rate. She now argues that anticipated budget surpluses are sufficient to meet the state's needs.

In New Hampshire, some substantial differences will likely have to be hammered out within the legislature. The House of Representatives previously passed a budget that relied on an increase in the state's real estate transfer tax and a 45-cent jump in the cigarette excise. The Senate this week was expected to vote on a version of the budget that abandons the transfer tax increase and that would push the cigarette excise up by just 28 cents.

Last Friday, the President signed the emergency war spending bill, which included the long-awaited increase in the minimum wage as well as $4.8 billion in tax breaks for businesses to "compensate" them for the increased labor cost they will allegedly sustain. The wage increase followed a torturous procedural path for months. After the House passed a "clean" increase in the minimum wage bill in January, the Senate passed a package of tax breaks for business based on the idea that they would need to be compensated. CTJ and other organizations found this argument extremely troubling since businesses have received hundreds of billions in tax breaks since the last minimum wage increase in 1996.

Senate Strategy Questioned

The strategy of attaching tax breaks was sometimes presented by Democratic Senate leaders as a pragmatic approach, but the wisdom of that must be questioned now that several Senators and even a majority of House members who supported increasing the minimum wage felt forced to vote against the final bill because it continued funding for a war they oppose. In the end, most advocates for working people are probably just relieved that the minimum wage increase is finally signed into law.

The Tax Provisions

The individual tax break and revenue-raising provisions are the same as those included in the emergency war funding bill that the President vetoed a month ago (H.R. 1591) because of the provisions related to withdrawing from Iraq. The largest tax break, at a cost of over $2.5 billion over ten years, is the three-and-a-half year extension of the Work Opportunity Tax Credit (WOTC), an incentive for businesses to hire welfare recipients and individuals from other at-risk groups. 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.

The immigration reform bill that the Senate is expected to return to after the Memorial Day recess may become a vehicle for tax provisions that would deny immigrants who are working and paying taxes the rights that other workers have. The bill, which aims to create a process by which undocumented immigrants can obtain legal status and eventually become citizens, already includes some provisions geared to placate conservative members of the Senate. Many advocates for immigrants' rights are nonetheless hoping that negotiations lead to a bill that improves life for foreign-born workers and their families.

Legislation Would Take Social Security from Legalized Immigrants Who Paid into It

The legislation being negotiated is Senate Amendment 1150 (which is expected to be adopted as a substitute for the placeholder bill S. 1348). It includes language that would reduce or deny Social Security benefits to immigrants who paid Social Security taxes before becoming documented. In a departure from current law, an immigrant who is working and paying Social Security taxes and then becomes documented (and even becomes a citizen) would not get credit for Social Security taxes paid while she was undocumented. This would mean the person could, upon reaching retirement age or becoming disabled, either have drastically reduced benefits or no benefits at all... even if she has become a citizen. Since older immigrants are likely to depend on Social Security benefits during old age, this could increase poverty and increase the sense that they are actually second class citizens.

Also, a bedrock principle of Social Security - and a reason people continue to support the program - is that paying into the system earns the guarantee of a benefit. Taking benefits away from people who actually paid for them would obviously call into question how serious that guarantee really is. A report from the National Immigration Law Center explains the various negative effects that could result from this provision.

Amendments to Take Tax Credits from Immigrant Taxpayers

There is no rational reason to fear that immigrants are going to somehow take federal benefits that they did not pay for. Undocumented immigrants are barred from using federal benefits programs. Also, the Senate adopted an amendment last week that requires that undocumented immigrants who owe back taxes must pay them or enter into an agreement to pay them before they can change their status. But this has not deterred some Senators from trying to deny immigrant workers and their families the rights that workers typically have in America. Next week, Jeff Sessions (R-AL) is expected to introduce amendments related to the Earned Income Tax Credit, one of which would prevent immigrants who are working and paying taxes (paying federal payroll taxes and possibly also federal income taxes) from receiving the EITC until they have had a green card for five years.

Report Shows the Immigration Reform Would Actually Increase Revenues

There is also no rational reason to fear that immigrants will drain the federal government's resources. A preliminary report issued by the Congressional Budget Office and the Congressional Joint Committee on Taxation explains that the net fiscal impact of the immigration reform bill would be positive. The figures released show that the legislation, if enacted, would cause the deficit to actually decrease by $2 billion over five years and by $37 over 10 years, compared to current law.

Uncertain Future in the House

Even if the Senate does pass an immigration bill, it's not clear how it would fare in the House of Representatives, where several Democrats have voiced concerns that it moves away from unifying families and towards having immigrants come to America to work only on a temporary basis. One proposal introduced by Republican Representative Dan Lungren (CA) would designate some immigrants as seasonal workers who must pay payroll taxes into a trust fund and then return to their country of origin to recoup that money at a U.S. consulate. Advocates for immigrants' rights and tax experts would probably agree that the tax system was not designed to be used as a tool to extract labor from immigrants while preventing them from settling in America.

In order to help educate taxpayers, the Washington State Budget and Policy Center recently issued a policy brief called "Washington State Taxes Remain Low Compared to Other States" which describes how Washington's tax structure stacks up. It points out that there are several reasons why Washingtonians should not be celebrating their low tax bills, including many pressing fiscal needs like a "shrinking revenue stream" and a growing structural deficit. The brief also notes that the average Washingtonian has low taxes, but the poor are carrying a higher proportion of the tax load in Washington than in any other state. Washington has the honor of being ranked by ITEP as having the most regressive tax structure in the country. It's clear that legislators have a lot to fix.

South Carolina's free lunch comes to an end today. A controversial "tax swap" enacted last year repealed all homeowner property taxes for school operating costs and reduced the state sales tax on groceries... and partially paid for these tax cuts by increasing the sales tax rate on all other items by a penny. Residents of the Palmetto State have been enjoying the reduced grocery tax since last fall, but the extra penny of sales tax only takes effect today. So, for the first time since the tax swap was enacted, South Carolinians will get a taste of the plan's real impact on them. Low-income families, especially renters, will likely be shortchanged by this move, while wealthier homeowners will enjoy the lion's share of the tax cuts. The State newspaper puts it all in perspective here.

Adding insult to injury, state lawmakers are now contemplating cutting the state's income tax rates. House lawmakers want to cut the top rate, while the Senate wants to cut the bottom tax rate. Unfortunately, neither change will do a thing for the low-income families hit hardest by last year's tax swap.

An extensive study of the Michigan Economic Growth Authority's (MEGA) business tax incentives that were distributed between 1996 and 2004 found that incentive programs frequently don't result in the job creation they promise. As the study explains, "since 1996, MEGA has put together 230 incentive agreements. Under these agreements, 127 projects should have produced 35,821 direct jobs by 2005. In fact, these deals have produced about 13,541 jobs, or 38 percent of original expectations. This represents roughly 0.3 percent of Michigan's total work force."

Perhaps Alabama lawmakers hadn't read the MEGA study because they are currently rejoicing in having won a new ThyssenKrup manufacturing facility. What will Alabama get in return? In the short-term, Alabama taxpayers have doled out $461 million in direct financial aid, including land acquisition, site preparation, worker training, and road improvements and an additional $350 million in "abatements of sales, property and utility taxes by state and local governments." But if results like those found in the MEGA study are replicated in Alabama, lawmakers and taxpayers may wish that they hadn't been so generous. For more on this topic, visit Good Jobs First.

The governors of both Pennsylvania and Wisconsin have proposed new taxes for oil companies. Governor Rendell would subject oil companies' gross profits in his state to a 6.17 percent tax in lieu of the state's corporate income tax. Governor Doyle would tax oil companies' gross receipts at 2.5 percent. It remains to be seen whether state governments can really ensure that the tax will be paid by the oil company shareholders, as both governors claim, rather than being passed onto consumers.

Probably the most important step a state can take to ensure that oil companies (and other businesses) are paying their fair share is to adopt combined reporting of corporate income for tax purposes. This prevents companies from shifting costs and profits (on paper) between subsidiaries in different states to get the lowest tax bill possible. Fortunately for Pennsylvania, Governor Rendell's tax on oil companies would be calculated using combined reporting. Experts like University of Wisconsin-Madison economist Andrew Reschovsky have suggested that Wisconsin needs to move in this direction as well. Reschovsky told the Milwaukee Journal Sentinel, "In my view, if the governor wants to raise more money from oil companies, and other multinational companies, the most effective thing he could do would be to urge the Legislature to adopt combined reporting."