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.
June 2007 Archives
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.
Ruben Navarrette, Jr.: Thank you, Tavis. This week, billionaire Warren Buffett said that the very wealthy aren't taxed nearly enough. In fact, he noted that he's taxed at a lower rate than some of his employees who earn much less. Do you agree that the rich aren't paying their fair share of taxes and, if so, what would you do about it?You can read the whole transcript or watch the full debate here.
John Edwards: Well, in fact, I've heard Warren Buffett himself talk about the genetic lottery that we have in America where the family you're born into has an awful lot to do with what happens with your life. What we want to do, I think, is live in an America where, no matter who your family is or what the color of your skin or where you were born, everybody gets the samechance to do well and people who have done well ought to have more responsibility to pay back to the country and to the community and those around them. I think there are at least a couple things we need to do. First, we need to get rid of George Bush's tax cuts for rich people which have distorted the tax system in America. I would use that money to pay for universal health care to make sure everyone's covered. But the second problem that he's talking about is, we have a capital gains rate, fifteen percent, which is the rate that most people pay on their investment income like Warren Buffett that's significantly lower than the tax rate that his secretary pays. That's not right. There is a moral disconnect. We ought to honor work in this country and not just wealth.
Tavis Smiley: Thank you, sir.
Barack Obama: There's no doubt that the tax system has been skewed and, the Bush tax cuts, people didn't need them and they weren't even asking for them and that's why they need to be lapsed so we can pay for universal health care and other initiatives. But I think this goes to a broader question and that is, are we willing to make the investments in genuine equal opportunity in this country? People aren't looking for charity and one of the stressing things sometimes when we have a conversation about race in America is that we talk about welfare and we talk about poverty, but what people really want is fairness. They want people paying their fair share of taxes. They want that money allocated fairly. One of the distressing things about Katrina was the fact not only that the Bush administration did not respond, but the tragedy had happened before the hurricane struck. That is because we had not made systematic investments and the only way we're going to make it is by making sure that those of us who are fortunate enough to have the money actually make a contribution for all the programs that we've been talking about tonight.
Tavis Smiley: Congressman?
Dennis Kucinich: There's three questions involved here.What are we taxed, who is paying and how are our tax dollars spent? Right now, we know that those who are in the highest brackets are not paying a fair share. We understand that. And we also understand that a lot of these corporations are taking their business offshore so they can offshore their profits and escape paying tens of billions of dollars in taxation. We also know that our tax dollars right now are being spent overwhelmingly on war and military buildups. I want to see a new direction. I want to see the wealthy pay their fair share. I want to make sure that these corporations, if they have an American name, they have to pay taxes here and I want to see the end of war as an instrument of policy.
Tavis Smiley: Senator Gravel?
Mike Gravel: I want to say that none of you are going to live in your lifetime to see our system of taxation change based upon what you've heard here. I was eight years on a Finance Committee. None of them have served on that committee and, I'll tell you, the code stands that high and there's not a human being alive that understands it. It's with Democrats, with Republicans. They take care of the people. You think it's an accident that all of a sudden we wake up and the wealthy aren't paying a fair share? The only way they're going to pay a fair share is wipe out the income tax. It is corrupt. It is corrupting our society. Begin to put a place a tax that everybody will know what everybody is paying, and that's a retail sales tax. You can make it as progressive as you want. Keep in mind, a tax where everybody will know what everybody is paying. You won't see it with this.
Tavis Smiley: Senator Dodd?
Christopher Dodd: Thank you, Tavis. I happen to believe very strongly that our tax and fiscal policies ought to reflect our moral values. Our tax and fiscal policies ought to be fair, responsible and pro growth as well. We live in a society where obviously it's going to be important to expand our economy so that jobs can be created and businesses can grow and people have an opportunity in this life. I'm deeply disappointed, as many. We had a very good period of time, I might say, under the Clinton administration where we balanced the budget. We had a tax policy that was much more fair. We need to get back to those days again where we had that kind of fiscal policy. One of the taxes that needs to be addressed because we're losing manufacturing jobs in this country. We today reward industries that leave America by giving them tax breaks. I would like to see us reward companies that stay in our inner cities, go to places where jobs ought to be created. That ought to be a part of our tax policies.
Tavis Smiley: Senator Clinton?
Hillary Clinton: Well, I clearly think that our economy was working a lot better in the 1990s. We had the creation of twenty-two million new jobs, a balanced budget and a surplus. Certainly, when the Bush administration came in, they were determined to tilt the balance back toward the privileged. We are paying a very big price for this because middle class and working families are paying a much higher percentage of their income. That was Warren Buffett's position that he pays about seventeen percent because, don't forget, it's the payroll tax plus the income tax. When you cut off the contribution at $90,000 or $95,000, that's a lot of money between $95,000 and the $46 million that Warren Buffett made last year. He's honest enough to say, look, tax me because I'm a patriotic American and I want to make sure our country stays strong and is fair. So, yes, we have to change the tax system and we've got to get back to having those with the most contribute to this country.
Tavis Smiley: Thank you, Senator. Senator Biden?
Joe Biden: Warren Buffett is right. I would eliminate the tax cut for the wealthy. They didn't ask for it, as someone earlier said. They don't need it. They're as patriotic as anyone else if you ask them. We've asked nothing of them. The second point is, understand what happened this last election in 2000. The first time in our history since we had the federal income tax, there was a fundamental shift of the burden from people who were wage earners away from people who were investors. For the first time in our history, we are in a position where those who are the wage earners are paying a bigger chunk than they should. It's got to shift back and the basis for them doing that is they really believe the wealthy know better. They think we don't know how. Average folks don't know how to make the economy work. It's all about their ideology. It's got to fundamentally change. You have to tax investment and you've got to give a break to wage earners.
Tavis Smiley: Thank you. Governor?
Bill Richardson: There's no question that there's tax unfairness in this country, but we have to rebuild the economy. Yes, the Bush tax cuts, the two percent, that has to go. But I would replace those Bush tax cuts with tax cuts for the middle class. I would reward companies that pay over the prevailing wage, that go into the inner cities, that go into rural areas. I would also have tax-free holidays for technology startups. Three years if they train people in the inner city, if they hire people over the prevailing wage. We need to rebuild this economy by being pro growth Democrats. We should be the party of innovation, of entrepreneurship, of building capital, getting capital for African American small businesses. We need to find a way in this country that we say that globalization must work for the middle class. We need to find ways also to use the tax code not just to simplify it, but to make it fair and also to generate jobs and reward entities in this country.
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.
But there are some situations where things get more complicated and the budget process might need some fine-tuning to deal with this. Funding for the IRS clearly results in a big gain, since that agency collects 98 percent of the revenue. The budget process does not recognize this, however. As a result of this and other factors, over the past few years Congress has cut funding for the IRS. (And let's face it, not many people are out there lobbying to protect IRS funding the way they lobby to protect other types of federal spending). This is clearly shortsighted, because every dollar you cut out of IRS funding can lead to several dollars lost in revenue. Anyone who managed a business this way would be considered insane.
As Bob McIntyre testifiedearlier this year before the Senate Budget Committee, "From 1994 to the present, the overall IRS budget has been slashed by more than a fifth, both as a share of the economy and in terms of the number of IRS employees compared to the total U.S. population... IRS audit rates, of both businesses and individuals, declined precipitously, especially for upper-income tax returns. In 1996, the IRS audited 210,000 returns of people reporting more than $100,000 in income. By 2001, the number had fallen to only 92,000 -- even as the number of returns with incomes above $100,000 jumped by 80 percent."
Someone from the National Treasury Employees Union who works on this issue directed me toward the National Taxpayer Advocate's legislative recommendations which start out by noting that on a budget of over $10 billion the IRS manages to collect over two trillion dollars, a return-on-investment of about 210 to one. Increasing IRS funding, especially after budget cuts, can more than pay for itself. So it makes sense that former IRS Commissioner Charles Rossotti told the IRS Oversight Board in 2002 that assigning more revenue agents to debt collections could see a return of $30 to every $1 invested.
But Congress did not take Rossotti's advice. Instead, in 2004 Congress authorized the IRS to contract with private debt collection agencies to seek unpaid tax debts. One serious problem with this program is that the private agencies take a commission of 21 to 24 cents on every tax dollar they recover, while it's estimated based on Rossotti's figures that IRS staff could do the same work at a cost of just 3 cents on every dollar collected. The private debt collection program is totally irrational (unless you represent a state where one of the collection agencies is based).
As Congressional Quarterly reports, now Congress wants to cut off funding(sorry, subscription required) for this program. But apparently, the money the private debt collection program is projected to recover is recognized by the budget process while all the revenue that the IRS is projected to collect itself is not recognized by the budget process. So the private debt collectors could be scored as eventually paying for themselves, and the real tax collectors back at the IRS (who are far more efficient) are not.
What this means in practical terms is that defenders of the private debt collection program could attempt this week to block the bill to cut off funding because, it is argued, getting rid of the program will increase the federal budget deficit (which the budget rules are geared toward preventing). In the same appropriation bill that cuts funding for private debt collection, the IRS gets an increase for enforcement of $239 million and an increase for taxpayer assistance of $51.9 million (both of which will lead to more revenue collected) but none of this is "scored" as paying for itself several times over, which of course it will.
Apparently House leaders plan to bring the appropriations bill to the floor and either waive the rule as it concerns the private debt collection program or find some other procedural solution, which is sensible. But the more important lesson is that the budget rules are a little backwards when it comes to tax collection. IRS funding, as the National Taxpayer Advocate's legislative recommendations argue, should be dealt with under rules separate from the normal budget process.
Twenty years later, the capital gains tax breaks are back with a vengeance-- the top tax rate on capital gains is 15 percent, less than half the 35 percent top rate on regular income-- and Berkshire Hathaway chairman Warren Buffett is ringing the same bell:
Last year, Buffett said, he was taxed at 17.7 percent on his taxable income of more than $46 million. His receptionist was taxed at about 30 percent.By most accounts, the driving factor behind his super-low tax rate is that virtually all of his income comes in the form of capital gains.
It's a little bit harder to figure how his receptionist could be paying an effective tax rate of 30 percent, however.
Read more about it here.
The PCA program was started because the IRS simply didn't have the resources to police collections adequately-- a persistent problem ever since Congress held McCarthy-style hearings in the late 1990s on the supposed excesses of IRS collections agents. But it immediately became clear to many that it was the wrong solution to the problem, since private collection agencies receive big commissions on their collections. It simply costs more to have PCA's do this work than to have the IRS do it.
It's not too late to tell your lawmakers what you think on this issue: visit CTJ's "action" page here to write a letter to your member of Congress.
Parenthetically, if you had to guess what an organization called the "Tax Fairness Coalition" does, would you ever, in a hundred years, guess that it's a coalition of private debt collection agencies lobbying to preserve their role in the tax collection process? Neither would I.
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."
So it's a little jarring when we see conservative lawmakers touting positions pushed by corporate lobbyists that essentially call for special favors for business owners at the expense of taxpayers. Two stories from this week's Tax Justice Digest demonstrate the startling phenomenon I'm talking about.
The first concerns a new law just signed by the governor of Oklahoma, Brad Henry (D) that will require the state to "build a web site detailing virtually all expenditures of state funds, including state contracts and tax credits and incentive payments given to businesses." Remarkably, the Oklahoma Chamber of Commerce opposes this measure, saying it will "will shine an unwanted light on those who invest in Oklahoma, and it will make it much more difficult to attract those investors."
Think about this for a second. Ordinary people, working people with families, who pay state taxes, are supposed to see their tax burdens increase so that special subsidies or tax breaks can be enacted for certain business interests. Then to top it off, these businesses believe that the public should not have access to a list of the gifts that the public is paying for. Can you imagine what conservatives would say if a single mother on welfare said she didn't think the public had a right to see how much public money was being spent on programs for low-income people? Put in this context it becomes clear what an absurd argument the state's chamber of commerce is making.
Thankfully the legislature and the governor have put aside these complaints. But there are legislative bodies less enlightened than the one in Oklahoma. Like the U.S. Congress, for example. On Capitol Hill, corporate lobbyists display the same sense of entitlement to the public purse and they're widely defended by lawmakers who like to call themselves conservative.
Take this week's debate over energy policy, another story in this week's Digest. The Senate yesterday was unable to pass a package of tax provisions that would essentially eliminate or reduce some loopholes enjoyed by oil and gas companies and redirect the money towards tax breaks for alternative energy sources.
Now we can debate all night about whether the tax code should be used to encourage one kind of energy production over another, but the fact is we're already handing out special tax breaks to oil and gas companies, so redirecting those tax breaks to more environmentally friendly energy sources would be an improvement. Anyway, lobbyists for the oil and automotive industries have been screaming, and many conservative Senators seemed to be repeating their talking points for them.
Kay Bailey Hutchison (R-TX) complained about the closing of tax loopholes for oil, saying "It's commonsense that if you tax something, the price will probably go up because the higher the business cost, you know the consumer is going to have to absorb that cost at some point." How this justifies a tax break for oil companies that other businesses or tax payers don't get is entirely unclear. By this logic we should probably have more loopholes for companies that provide gasoline since we use it and we want it to be cheaper, but... isn't that true of just about every product we buy and use? What makes BP and Exxon-Mobil special? At least the people advocating tax breaks for alternative fuels have an argument about helping the environment, for what it's worth.
But more to the point, how can someone like Hutchison ever claim to be conservative? Isn't giving out goodies to oil companies (or anyone) courtesy of the federal taxpayer sort of against what the conservative movement is all about? Special tax loopholes for business are really just a form of corporate welfare; they cost us in terms of revenue lost and ordinary taxpayers (as in you and me) have to make up for it with higher taxes or fewer of the services we depend on.
Conservatives talk a great deal of their fear of higher taxes, but they really ought to be afraid of the corporate interests that are eroding all the principles they claim to believe in.
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.
A recent publication by the Campaign for Tobacco-Free Kids claims that federal cigarette taxes aren't regressive because they actually benefit low-income people more than high-income people. Why? "Higher smoking rates among lower-income groups means they are now suffering the most from smoking and will, consequently, benefit the most from any effective new measures to reduce smoking," namely higher Federal cigarette taxes. The group sites a study done by the Center for Disease Control proving these results. While the results seem valid, I think there is still another side to this story.
There are many social and health-related benefits that can come from a tobacco tax. Some adults may choose to quit, many children may choose not to start, and as a result these people and others perhaps, will have improved health. Most would agree these are desirable outcomes. However, the issue remains that these lower income groups are the ones being essentially forced to bear the costs, whether "costs" entail additional taxes or changing their behavior. They are giving something up, more so than higher income groups and this is still somewhat regressive. This also opens another can of worms about whether it's paternalistic or not to have the government dictate what level of health every individual ought to attain, which is beyond our scope for the time being.
If a tobacco tax was put in place to change smoking behavior in the first place, fine; you can argue about whether this is correct for moral reasons. But this tax is being put on to raise money for a social program, with the side effect of decreasing smoking. The tax is regressive if you exclude the unintended effects, and probably still regressive if you include the unintended effects. The bottom line is, any type of progressive tax is always going to be the superior way to fund a program. You can choose to support the tax because it can cause good things to happen, but don't be mislead into thinking that having these good things absolves any negative consequences.
For previous blog discussion about the cigarette tax and SCHIP see April 6 and April 23.
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 Progressive States Network released an interim report Thursday detailing state-by-state legislative successes this past year and promoting best practices. The report was presented as part of a conference hosted by the Center for American Progress which featured representatives from Iowa, Washington, and Maryland, three of the clear leaders in progressive policy. Unified around a progressive agenda, and fueled by constituent support, Democrats in many states pushed through reforms that failed to be tackled by the federal government. Tax policy reform didn't seem to be the focus of legislative summaries in the PSN publication despite its omnipresence in state budget debates. Nevertheless, it's important to recognize themes of reform appearing among the states. Which tax policies garnered the most attention and favor? Here are the highlights.
Income Tax Reductions
Since state and local governments primarily rely on regressive property and sales taxes, efforts to make income taxes as progressive as possible take some burden off the lower-income citizens. Arkansas completely removed the income tax burden from 81,000 lower-income families and also cut the grocery tax in half. Virginia similarly removed 140,000 lower-income residents from income tax rolls. Hawaii created a plan to allot $245 million in tax benefits to the poorest citizens.
Earned Income Tax Credits
By rewarding work and allowing credits for income taxes paid, adopting the EITC at the state level is another effective way to make a tax system more progressive. Iowa increased their EITC to 7% of the federal credit amount, and also made the credit refundable if no income taxes are owed. New Mexico created an EITC program, giving credit to 200,000 New Mexico families for 8% of the federal credit amount. Kansas expanded its EITC program, providing it with $46 million over the next five years.
For the complete listing of progressive victories see the Progressive States Network report.
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.
"If a fella comes in with a pair of shaggy boots on, jeans and a T-shirt
and he's got a straw hat on - I mean, come on, give me a break."
I say, give ME a break. Cleveland's remarks are completely out of hand and the entire plan is unjust. Cleveland claims the excise is meant to collect taxes on thousands of dollars of income that currently go untaxed. This seems like a reasonable goal in theory; however, the action plan is poorly targeted and based on false premises.
Undocumented immigrants, in most cases, are able to use a false SSN to gain employment. In doing so, they are subject to the payroll tax as well as federal, state and local income tax that are usually automatically deducted from their paychecks. Most immigrants never see this money again, either because they do not complete tax forms, or because they are not eligible for Social Security benefits because they are undocumented.
To contend that the income they earn is untaxed is quite simply false. According to the National Immigration Law Center, illegal immigrants contribute $8.5 billion to Social Security and Medicare, and $50 billion in federal taxes every year. Furthermore, many undocumented immigrants do not earn enough to pay federal income taxes and often do not apply for available tax credits and refunds. They are clearly paying their fair share into the system.
Putting a flat excise tax on only one group of people is completely discriminatory and also regressive. It's like adding on an additional sales tax just for immigrants. This tax will only continue to burden an already overburdened section of the populous. The implementation is ill-reasoned and logistically prone to all kinds of discriminatory acts. I think lawmakers could have come up with something better than this.
Senate Majority Leader Harry Reid (D-NV) spoke yesterday at the Center for American Progress about the goals of bill S. 1419, an extensive piece of energy legislation which is scheduled for debate this week in the Senate. He cited our "addiction to oil" as causing a "three-pronged crisis: threatening our economy, threatening our national security, and threatening our environment" and made it clear he felt that President Bush was not doing enough of the right things to combat the problem. He harshly condemned Bush for allowing working families to face doubling energy prices, buying oil from other countries that are unstable and antagonistic, and for failing to acknowledge the perils of global warming.
Reid then went on to describe the steps the bill would take to amend such societal ills. The bill would set new green standards for federal buildings, raise 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 also plans to punish companies that price gouge, provides research funds for carbon sequestration programs, and seeks to improve relations with worldwide energy partners.
Reid was noticeably unspecific in his brief speech as to exactly what types of policies would be created or amended to accomplish such tasks. The Energy Tax Act of 2005 sought to remedy our energy problems through a series of tax incentives and breaks. Unfortunately, the oil and coal industries were given tax incentives to produce at the same time credits and breaks were introduced for consumers practicing energy efficiency, two goals at odds with each other. Reid seemed determined this time around not to allow Big Oil companies to receive any more privileged treatment after seeing their profits continue to increase the past year at the expense of everyday citizens.
Reid made only a passing mention of tax incentives which may be a sign of real progress. The idea of raising CAFE standards to a target mpg is a concrete action plan that will not allow special treatment or incentives, car companies will just have to do it. Setting other legal standards for green building and energy efficiency in certain products would be equally as concrete and easily enforceable. Reid also did not mention a possible cost the bill would entail.
Reid seems to have high hopes and expectations for this bill and faith in the ingenuity of our society to solve complex problems. Stay tuned this week to see how the bill fares in debates.
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."