The Monty Python character expressed something that all politicians aspire to when he said, "To boost the British economy I'd tax all foreigners living abroad." Every elected official would prefer that any taxes be paid by someone who can't vote them out of office. It's not any different in Missouri, which recently triggered a war of words with its neighbor, Kansas.

Kansas Governor Kathleen Sebelius is becoming irritated about a seemingly arcane provision in a recent tax bill signed by Missouri Governor Matt Blunt. The provision does what all states would love to do: It raises taxes on people who work in the state but live and vote somewhere else. And for the Kansas residents who work in Kansas City, Missouri, that means their taxes have been raised by people unaccountable to them.

Earlier this year, Governor Blunt signed into law H.B. 444, an ill-advised bill that created a tax break for better off seniors who receive Social Security benefits. Included in this legislation is a provision ensuring that anyone who works in Missouri, but lives out of state will no longer be allowed to write off their out-of-state property taxes if they itemize on their Missouri income tax forms. This means that many workers who live outside of Missouri will pay higher Missouri income taxes. This is a good thing for Missouri, which is struggling to provide adequate health care and education.

But if you're a policymaker in neighboring Kansas you'd quickly understand that workers who live in Kansas will actually pay less Kansas income tax because they can claim credits for taxes paid to other states. Governor Sebelius asked Governor Blunt to repeal this provision, which she says amounts to a tax increase on nonresidents.

Seeing that shots were being fired at him from the other side of the border, Governor Blunt relented partially and said that he'll support the provision's repeal in the 2008 legislative session. But it's really not clear that the Missouri legislature would relent at all. "What obligation do we have to Kansas people? Why would we want to give them a break on Missouri taxes?" one Missouri legislator said publicly. Kansas Rep. Kenny Wilk, chairman of the House Taxation Committee, is vowing to retaliate unless Missouri acts soon. He said, "Missouri just needs to decide whether they want to do this the hard way or the easy way. We will respond to make sure we recoup all "and plus a bit more... of what we're losing."

Fight Over Federal Gas Tax Brewing

According to the U.S. Department of Transportation, an eighth of bridges in America are "structurally deficient" which is the same designation that had been given to the Minnesota bridge over the Mississippi that collapsed on August 1. This designation does not necessarily mean that a bridge is unsafe, but the Department has stated that $65 billion could be spent immediately in cost-effective ways to address these deficiencies.

So it might seem reasonable that one effect of the August 1 tragedy would be to wake the nation up to pressing infrastructure needs. And in fact, Rep. James Oberstar (D-MN), chairman of the House Transportation and Infrastructure Committee, has introduced a bill to temporarily raise the federal gas tax by five cents to fund bridge repairs.

But anti-tax advocates are having none of it. A coalition of 56 right-wing organizations has sent a letter to the President and Congress opposing the proposed gas tax increase. It's not clear which side will win this argument. There is some support on the Republican side of the aisle for raising revenue to address the issue. Rep. Don Young (R-AK), the former chair of Oberstar's committee, caused a stir when he said that hundreds of bridges are "potential death traps," which would justify a tax increase to fund repairs.

Food Fights in State Legislatures?

Meanwhile, the situation on the state level doesn't look any less cantankerous. Minnesota Governor Tim Pawlenty and legislative leaders have not yet agreed on the parameters of a special session that weeks earlier seemed the likely result of the horrific tragedy. Recently Governor Pawlenty said on a local radio program "I'm not going to call a special session if there's going to be a food fight. Not everybody's on the same page." But if he fears a food fight, he's strangely ready to throw the first pie. The Governor said he may add property tax relief to the session's agenda, which would be oddly placed in a session that is supposed to address the bridge collapse. The session isn't likely to start until after Labor Day.

Other states are also taking transportation funding more seriously. Maryland Governor Martin O'Malley is expected to call for a gas tax increase that would adjust automatically for increases in the cost of construction. A thoughtful Baltimore Sun article describes the crisis that is created when gas taxes are low, but infrastructure costs are rising. There's no such thing as a free lunch, and certainly no such thing as a free bridge.

In many ways, Maryland's current debate over legalized gambling is depressingly familiar. Faced with a loophole-ridden and unfair tax system that cries out for progressive reform, some elected officials want to introduce thousands of slot machines as a politically palatable revenue-raising alternative. But Maryland offers an interesting, if bizarre, twist. Governor Martin O'Malley's administration is arguing that slot machines would make an excellent economic development tool for propping up the state's ailing horse-racing industry.

About the best one can say about the idea of providing tax subsidies for such a small and distinctly 19th-century industry is that it's less expensive than the more conventional smokestack-chasing other states continue to engage in. But Maryland isn't the first state that's had this idea -- and neighboring Delaware's experience has not exactly yielded dividends for that state's racing industry. And as an excellent Washington Post editorial explains, the environmental and economic policy goals the administration allegedly seeks to achieve with slots are a red herring.

The author of the O'Malley administration report that makes the economic development-based pitch for slots, Thomas Perez, claims that the introduction of slots in neighboring states has "revitalized the previously moribund horse racing industries in those states." Perez describes his report as "a fact finding tour of racetracks in Delaware, West Virginia and Pennsylvania." Perez's research techniques included counting the number of Maryland license plates in a West Virginia parking lot -- but his time might have been better spent just asking West Virginia's Racing Commission chairman, who sees "no correlation... inverse, in fact" between their 1994 introduction of slots at racetracks and the current health of that state's racing industry.

Louisiana is the number three film producing state in the nation, but behind the multi-million dollar films and flashy actors lies the dirty side of what can only be called the state's tax credit industry. As explained by an article in the magazine Fast Company, the FBI is investigating whether or not a company was improperly granted film production tax credits, which in Louisiana can be converted to cash by resale to another party that pays state taxes. One credit granted was worth more than the entire budget of the film produced. In 2002, when the state first developed these credits there wasn't even a system in place for the independent auditing of expenditures.

Louisiana's former Film Commissioner, Mark Smith, is currently under investigation and, in a perhaps predictable twist, now works for the movie industry. The lack of oversight is not the only reason to question the whole idea of tax credits for film production. Their impact on economic development is questionable, particularly since nearly all states now have some type of film tax credit.

Property tax reform continues to make headlines in several states. Some Indiana property taxpayers are revolting against what they perceive to be an unfair system. Recently more than 3,000 Hoosiers signed post cards addressed to their state policymakers urging them to fix the state's property tax mess permanently. In fact, a legislative commission began hearings last month and Governor Mitch Daniels' appointed blue ribbon commission started work this week. The problems are that taxes are not based on a homeowner's ability to pay and that assessments are executed poorly.

One thought-provoking solution described in the Indianapolis Star is to closely study the property in the state that is not being taxed. Indiana, like most states, exempts nonprofit organizations and religious institutions from paying the property tax. In Marion County alone millions of property tax dollars could be collected if religious institutions paid property taxes. Estimates show there is $2.7 billion in property that goes untaxed in Marion County. Should churches and nonprofit organizations pay property taxes? It's probably the case that no politician in Indiana would seriously propose to tax churches, but the fact that some are contemplating such a move could startle legislators enough to enact real reform.

Are Rebates the Answer?

Indianans will receive locally-funded property tax rebates this winter, but those rebates aren't being greeted with much enthusiasm. Many question the motives of the legislators who approved these rebates. The Post-Tribune writes that instead of offering credits that would be applied to a homeowner's property tax bill directly, "The General Assembly instead decided property owners should receive checks in the mail, so they can see what their elected officials did for them this year."

This week Montana homeowners can begin to apply for a $400 state-funded property tax rebate. The rebates were a highly contested issue in the legislative session as Republicans pushed for permanent property tax cuts instead of the one-time rebates supported by Governor Brian Schweitzer. The Montana rebates shed light on a problematic aspect of property tax rebates and circuit breakers. Because states don't often know how much property tax a homeowner paid, it becomes the homeowner's responsibility to know about and apply for the credit.

Itemized Deductions on State Tax Are No Better

Another misconceived approach to property tax reform is the itemized exemption for property taxes, which is allowed for most states' income taxes. One problem with this is that in the low- and middle-income families hit hardest by property taxes typically don't itemize. Also, income tax deductions are an "upside-down" tax break, since deductions are worth more to the wealthy taxpayers who typically pay higher income tax rates. If property taxes are problematic for some families, offering a deduction that is largest for the wealthiest and not available at all to many middle-income families is certainly not the solution.

In the current skirmish between Missouri and Kansas discussed above, some Missouri legislators have asked why people should be granted such an itemized deduction for property taxes paid in another state (which certainly angers those who pay Missouri income taxes because they work in Missouri, even though they live in and pay property taxes in Kansas). But the better question is why should Missouri allow an itemized deduction for property even if its located in Missouri. The deduction probably does little to help those who could actually use some help.

Another day, another state contemplating the use of legalized gambling as an alternative to fixing its tax system. But there's an interesting twist in Maryland: some pro-gambling advocates are making an obscure economic development-based argument for gambling. A new report from Governor Martin O'Malley's administration argues that allowing slot machines at Maryland race tracks would help to save the state's horse-racing industry.

There's not much substance to the administration's "report." It's thinly-disguised pro-slot-machine propaganda that makes only a passing attempt at addressing the ethical and economic arguments against a "slots for tots" revenue-raising strategy. But the report does beg a couple of questions that are worth asking:

1) Why, at a time when the state faces a big budget crisis, should Maryland taxpayers be subsidizing the horse-racing industry?

2) Even if there's a plausible answer to the first question, why is giving racetracks a cut of the take from slot machines the best way to subsidize this industry?

The report, written by the state's secretary of labor, licensing and regulation, Thomas Perez, gives two answers to the first question:
(a) it's a job-creator: Perez says "the horse racing and breeding industry in Maryland accounts for over 9,000 jobs."
(b) it would save the environment. The report says that horse farms represent "roughly 10 percent of Maryland's open space."

A Washington Post editorial effectively disembowels each of these points, noting that in a state with 2.6 million jobs, saving 9,000 jobs in a distinctly 19th-century "industry" isn't an awfully compelling goal and that the state already has more direct tools at its disposal for preserving open spaces, including special agricultural zoning rules.

Of course, even if these 9,000 jobs are worth subsidizing, the big question is how relevant the "9,000" number really is--how many of those jobs are going to go away if the race tracks don't get slots? As long as a horse-racing industry exists in the mid-Atlantic reason, there will be a market for Maryland's thoroughbred racing horses. Even if Maryland's racetracks closed tomorrow, it doesn't follow that every horse farm in the state would simply vanish.

And there's a pretty dubious trickle-down theory behind the whole argument. Follow it if you can:

1) If you put a bunch of slot machines in race tracks, more gamblers will come to the race tracks, and in between throwing rolls of quarters at the slot machines will find time (and reserve a little cash) to play the ponies.

2) This will make racetracks more profitable, which will allow the tracks to have more races each week, which in turn will increase the demand for thoroughbred horses.

3) Maryland horse farms will thrive, selling horses galore.

Which brings us to question #2: why rely on such a convoluted, trickle-down approach to subsidizing horse racing and horse farms? If the state really thinks that this is an industry worth saving, why not provide direct, annually appropriated subsidies to the racetracks, or to horse farmers? The most likely answer is that in a time of fiscal shortfalls, this is not a budget priority that many people would value highly.

The sad thing, of course, is that if you put a gun to any economist's head and made her write up a list of what's wrong with Maryland's economy and tax system, it would take a pretty long time to get to "our racetracks aren't profitable enough." Much higher on the list would be eliminating a host of egregious loopholes in the state's sales, income and corporate tax that are making it harder and harder for the state to pay for needed services.

The only reason why pro-gambling advocates in the state legislature are beating this drum, instead of talking about needed tax reforms, is that they're afraid to say the "t" word. The O'Malley administration's ginned-up rationale of saving the horse-racing industry is a smoke-screen designed to hide policymakers' cowardice on this issue.

Given that the 2008 presidential race started two years before the election, one can be forgiven for failing to keep up on all the candidates' views on tax fairness. We have already been subjected to a dozen debates, a bewildering number of candidates and a variety of tax proposals. If you have not attentively followed the race so far, don't worry, because we've done the work for you. Here is a quick review of the ideas the 2008 presidential candidates have put forward so far.

Bad Ideas

Make Permanent the Bush Tax Cuts

The tax cuts enacted under President Bush are scheduled to expire at the end of 2010. The Republican candidates want to make them permanent, including John McCain, a candidate who actually voted against the biggest tax cut bills in 2001 and 2003. It seems that all the Democrats would let at least some parts of the Bush tax cuts expire. New Mexico Governor Bill Richardson has made noises indicating that he doesn't want to be associated with opposition to any sort of tax breaks. Even he seems to have indicated (in a debate on June 28) that any tax cut for the richest two percent "has to go," but he would replace those with new tax cuts for the middle-class or for certain companies that train and pay workers above the prevailing wage. (You can see whether those candidates who were in Congress during the Bush years voted for or against the Bush tax cuts by looking up their records in CTJ's Congressional Tax Report Card.)

Repeal the Estate Tax

The estate tax is a federal tax placed on substantial inheritances, much of which consist of capital gains that were never taxed. The Republican candidates would repeal it while most of the Democrats probably would not. Those Democrats who were in Congress at the time, Joe Biden, Hillary Clinton, Christopher Dodd, Dennis Kucinich, and Barack Obama, all voted against the Republican proposal to slash the estate tax last year. John Edwards would make permanent the estate tax rules that apply this year, which exempt an estate worth $4 million for a married couple. A report from CTJ put out early this year shows that the estate tax affected only the largest 0.8 percent of the estates of those who died in 2005 (the most recent year for which data are available).

National Sales Tax

A proposal that anti-tax radicals call a "Fair Tax" is basically a national sales tax that replaces all other federal taxes. It's misleadingly described as a federal sales tax of 23 percent, and former Arkansas Governor Mike Huckabee claimed at a May 15 debate that the transition to this tax would be revenue-neutral. CTJ studied the idea of a national sales tax in 2004 and found that in order to maintain current revenue levels, this sales tax would have to be around 50 percent. It is also very regressive. Low-income households would pay more for everything they buy, while the wealthy would hit the jackpot with tax-free capital gains, dividends and interest. We are fairly confident that this proposal will go nowhere when people realize that a house that costs, say, $200,000 would cost $300,000 under this plan.

Republican candidates Duncan Hunter, Tom Tancredo, Ron Paul, Mike Huckabee, and even John McCain have expressed support for the "Fair Tax" proposal. Former Senator Mike Gravel seems to be the only Democratic candidate in favor of this notion, and has claimed that a national sales tax would even solve global warming.

Flat Tax

Some Republicans favor a flat federal income tax rate as opposed to progressive rates. The idea is to tax all income at the same rate and its proponents misleadingly argue that this will lead to simplification. (Of course, in reality it's the various deductions and credits and other factors in the tax code, not progressive rates, that makes taxes complicated.) Mike Huckabee, Rudy Giuliani, and Sam Brownback are in favor of this plan, although Brownback has a plan to employ an optional flat tax system that will keep both progressive and flat tax rates available. Brownback's idea is perhaps the most bizarre because it's even more difficult to see how we could simplify anything by having two different tax systems.

But of course the bigger problem with the flat tax is that it's just blatantly, unapologetically, regressive. Currently the wealthy pay income taxes at higher rates than middle-income and low-income families. (This helps balance out the regressivity of other taxes, like federal payroll taxes and state sales taxes.) A flat tax has just one income tax rate, which will be lower than the rates paid now by the wealthy and probably higher than the rates paid now by the middle-class. If the switch to a flat income tax is revenue-neutral, that means poor people will pay more in income taxes and rich people will pay less. If everyone can pay less, well, then it can't be revenue-neutral and must involve massive cuts in government spending. We'll take a wild guess that any such spending cuts won't be at the expense of the wealthy.

Increase Revenue by Cutting Taxes

Giuliani has said that new revenue can be generated by cutting taxes, which will cause the economy to grow so much that tax revenues paid to the federal government will actually increase. Giuliani, remarkably, told an audience on August 5 that we can raise revenue to fix collapsing bridges not by increasing the federal gas tax but by lowering taxes. And Giuliani is not alone among Republicans who believe this fantasy. In the May 15^th Republican debate John McCain also claimed that the Bush tax cuts resulted in "dramatically increased revenues."

What's remarkable is that McCain explains his votes against the Bush tax cuts in 2001 and 2003 by saying that needed spending reductions were not being made at the time taxes were lowered. But if tax cuts raise revenues, why should anyone care whether or not spending is reduced? Why not just keep cutting taxes until the revenues grow enough to pay for whatever spending we want? It's hard to believe that McCain doesn't see how absurd this theory is. One could be forgiven for thinking that he is contorting his positions in order to win over the conservative voters in the Republican primaries.

There's wisdom in the saying, "If it sounds too good to be true, it probably is." This saying applies to the theory that tax cuts raise revenues. President Bush's own Treasury Department issued a report last year that refuted the claim that tax breaks spark so much economic growth that they pay for themselves.

Tax Breaks for Healthcare

Rudy Giuliani's healthcare plan consists of a tax deduction of up to $7,500 for individuals and $15,000 for families who purchase health insurance. But a tax deduction is worth the amount of the deduction times the top tax rate a family is subject to, so this offers more for the rich families in higher income brackets than middle-income or low-income families who actually need help obtaining health insurance. And low-income people who pay payroll taxes, but not federal income taxes, get no benefit, even though they're the group most likely to be without healthcare. John McCain has proposed a $3,000 credit for healthcare. A credit is more progressive than a deduction since its value doesn't depend on the income tax bracket a family is in, but if it's not refundable it still won't help those who pay federal payroll taxes but not federal income taxes.

But the more important problem is that we should not use the tax code to push families towards the individual health insurance market (the market for coverage that is not employer-based). Individual health coverage is usually much more expensive, has less generous benefits, and may be more likely to involve high deductibles that discourage people from getting care they actually need.

Eliminate the IRS

Mike Huckabee and Ron Paul, two Republican candidates, are both in favor of abolishing the Internal Revenue Service. It's not entirely clear who would administer the national sales tax these candidates support if there was no IRS.

Better Ideas

Repeal Bush Tax Cuts to Fund Other Priorities

While probably all the Democratic candidates would let at least some parts of the Bush tax cuts expire at the end of 2010, some have expressed interest in repealing certain parts of them before that time and using the revenue for other priorities like health care. Barack Obama and John Edwards both favor some version of this maneuver to fund their healthcare plans, with Obama repealing some tax breaks for families with incomes of $250,000 or more, and Edwards doing the same for families at $200,000 or more.

No reasonable person could disagree in principle with the idea of rolling back some of the tax cuts. By substantially cutting taxes, mostly for the rich, President Bush has managed to add $2.4 trillion to the national debt already, despite facing a small surplus when he came to office. By 2010, most of the benefits of those tax breaks will go to the richest 1 percent under the administration's budget plans.

However, repealing the Bush tax cuts does not create much new revenue compared to the budget baseline that Congress already uses, which assumes the Bush tax cuts will be allowed to expire at the end of 2010.

Obama has not specified how his healthcare program will be funded past the first year. Edwards, on the other hand, claims that his healthcare plan with be funded permanently through the repeal of the 2001 tax cuts for those with income over $200,000. The cost of extending the tax cuts for those with incomes below $200,000 would reduce revenues, a cost that he has not yet accounted for. Although his heart is in the right place when it comes to healthcare, his plan could be improved with additional provisions to raise needed revenue.

But at least these candidates are facing the fact that taxes must be raised. Clinton is still "wrestling" with whether or not to increase taxes and she and Richardson (and to an extent, Obama) both seem to think that they can pay for their plans partly by eliminating inefficiencies in the healthcare system.

Stop Taxing Work More than Wealth

One extremely good idea proposed by John Edwards is to end the tax subsidy for people who have capital gains. One signature tax cut enacted by President Bush reduced the tax rate on capital gains from 20 percent to 15 percent and made dividends, which had been taxed as ordinary income, also taxed at 15 percent. At the end of 2010, that break will expire if Congress doesn't extend it and dividends will be taxed as ordinary income and capital gains will be taxed at 20 percent again.

But even the 20 percent tax rate is a break for the wealthy investors whose other income is mostly taxed at the highest ordinary income rate (currently 35 percent). CTJ recently found that the cost of the current tax treatment of capital gains and dividends was about $92 billion in 2005 alone and three fourths of that went to the richest 0.6 percent. Edwards has proposed taxing capital gains at 28 percent, which is certainly a huge step in the right direction.

Unfortunately, the Republican candidates would like to make permanent the tax breaks for capital gains and dividends and those who support a flat tax or national sales tax generally assume capital gains and dividends won't be taxed at all. Mitt Romney has the strange idea of making interest, capital gains and dividends tax-free for "middle-income" people. It's unclear how he defines middle-income given the CTJ data showing that capital gains and dividends mostly benefit the wealthy.

Close the Loophole for Carried Interest

The only thing more senseless than a huge capital gains tax break is allowing it for income that isn't a capital gain. Private equity fund managers, who can earn hundreds of millions of dollars, use a tax loophole to have part of their compensation that they call "carried interest" taxed as capital gains, and thus at the 15 percent rate instead of the 35 percent rate that applies to their ordinary income. Various arguments are being put forth by the industry to support this tax break, most of which are easily refuted. The bottom line is that they are getting paid for the work they do, just like the rest of us, and yet they pay a lower tax rate on the hundreds of millions they earn.

Hillary Clinton, Barack Obama, and John Edwards have all come out in favor of legislation proposed by Congressman Sander Levin (D-MI) to close this loophole. Chris Dodd has expressed some misgivings about the legislation but has not taken a position yet.

Taxing Carbon Emissions

Democratic candidate Chris Dodd has come out for a corporate carbon tax as a way to reduce energy consumption and reduce emissions of carbon dioxide into the atmosphere. Clinton, Edwards and Obama are for a cap and trade program, which could have the same effect. A cap and trade program would involve a cap on the total amount of carbon that can be emitted and would allow companies to buy and sell the rights to emit carbon.

The only fear among some progressives is that under either a carbon tax or a cap and trade program, the added cost would likely be passed on to consumers in the form of higher prices that disproportionately burden low-income families. An increase in the cost of gasoline, for example, might have only a minuscule effect on the total budget of wealthy family, who would anyway be more able to rearrange their life to reduce driving. Eventually our concerns about the environment may have to be balanced against our concerns about the incidence of the cost of such policy changes. The outcome of that debate will hinge on what can be done to lower the costs for those who can least afford to pay them.

It should be noted that several candidates have expressed interest in ending tax subsidies for oil companies. During the debates, Biden, Edwards, and Clinton all expressed interest in taking this step in some form or another. These tax subsidies are described in CTJ's paper calling for their repeal and they make little sense at a time when oil companies are making record profits while the public wants to reduce and reverse global warming.

The federal government is now providing cash subsidies designed to discourage people from driving to work. It's also providing an income tax break that encourages people to drive to work. The New York Times' William Neuman has the story.

The cash subsidy, which takes the form of $848 million in grants to local governments, is a new policy. But the tax break has been around for decades. Here's Neuman on how the tax break works:

Close to 400,000 commuters nationwide -- about half of them in the New York City area -- take advantage of a provision in the federal tax code that allows them to use up to $215 a month in pre-tax wages to pay for their parking at work... While some drivers use it to pay for parking at commuter rail stations or bus stops, most take advantage of it to pay for parking near their workplace, mostly in city centers.

One transportation policy expert summarizes the problem quite concisely:

"It is perverse," said Jeffrey M. Zupan, a senior fellow for transportation at the Regional Plan Association in New York. "If you're going to institute pricing measures that are intended to reduce the amount of driving, you don't want to keep in place other measures that encourage people to drive. What you want is a set of policies that work together."

How does this happen? The most obvious answer is that the two contradictory federal policies in question are operating in completely different worlds. One policy (the new local subsidy) shows up on the spending side of the federal government's budget, and is part of Congress' annual discussion of spending priorities. The other policy (the long-standing tax break) shows up on the tax side of the ledger, which means that it's essentially a permanent entitlement. It doesn't have to compete with other spending priorities in the annual federal budget, because it's written into the tax code. But make no mistake-- it is just as much a spending program as are the new subsidies.

A sensible starting point for rationalizing these warring federal transportation incentives would be to put both of these spending programs on the same budgetary footing. Repeal the tax subsidy and turn it into a spending program, which policymakers will have to annually evaluate on its merits right alongside the local subsidies that currently work at cross-purposes with it.

The $848 million subsidy was the brainchild of a bunch of wonks sitting in a room at the Department of Transportation. Those wonks didn't think about the obvious incompatibility between their spending initiative and the existing tax incentives because they're not in charge of the tax incentives-- no one is, in fact. If the tax incentive for employee parking were a spending subsidy for employee parking, it seems likely that this roomful of wonks at the Department of Transportation would see immediately, as part of their annual budget request, that the feds are spending millions of dollars on a program that directly counteracts the impact of a program that probably costs a lot more.

The current federal parking tax break, along with a host of other not-so-bright tax breaks, is discussed in Citizens for Tax Justice's "Hidden Entitlements" report, which you can access here. CTJ's weekly email report, the "Tax Justice Digest," frequently includes a fresh look at specific "Hidden Entitlements." (Click here to read a recent edition, which looks at the federal tax code's hidden entitlements for health care.) You can sign up to receive the weekly digest here.

Connecticut Senator Chris Dodd is drawing increasing scrutiny for his reluctance to support to efforts to close the "carried interest" loophole, which allows wealthy hedge fund managers to claim capital gains tax breaks for income that can't really be described as capital gains.

To be clear, Dodd hasn't said he won't vote for these loophole-closing efforts-- he's just said he wants to think more about it:

"I am concerned about the potential adverse effects that these proposals would have on capital formation, on job creation, and on institutional investors like pension funds and college endowments," Dodd told the [Senate Banking] committee on July 31. "I have begun to hear arguments and analysis, but am not prepared to support any legislation before I have thoroughly analyzed the full impact it is likely to have on investors and markets."

As has been convincingly argued elsewhere, the tax loophole in question is pretty indefensible. It's an illegitimate use of a legal tax break. What makes Dodd's reluctance more puzzling is that back in 2003, Dodd opposed (correctly, in our view) an ultimately successful effort by the Republican-led Congress to drop the top tax rate on capital gains. (More generally, CTJ's 2006 Congressional Report Card gave Dodd an "A" for his tax policy votes.) So if he thinks the capital gains loophole is a bad thing, why would he be in favor of giving the capital gains break to income that isn't even plausibly capital gains?

Well, as the indefatigable Center for Responsive Politics points out, there's a pretty simple explanation for Dodd's position: he gets an awful lot of campaign contributions from folks who would be hurt by eliminating this loophole. In particular, employees of SAC Capital Advisers (a Connecticut-based hedge fund), in a breathtaking display of unity, have given Dodd's presidential campaign $344,000 so far.

There are good-news and bad-news ways of thinking about this linkage. The good-news way would be to say that part of a Senator's job is to reflect the interests of his constituents, and that looking after the interests of the businesses that are the backbone of Connecticut's economy is just a thing he should be doing.
The bad-news way would be to point out that Dodd is an awful lot more likely to "reflect the interests" of constituents who communicate their positions to him using suitcases stuffed with cash.

Either way, the choice Dodd faces is between acting in the narrow interest of an important constituent or acting in the broader interests of American (and Connecticut) working families. Stay tuned...

More editorial support for closing the egregious "carried interest" loophole for hedge fund managers, this time from Newsday:

People who earn millions of dollars a year shouldn't be taxed at a lower rate than ordinary working stiffs. That's just basic fairness. It's also why Congress should close a loophole that allows managers of private equity firms and a few other businesses to pay federal income taxes on their earnings at the 15 percent capital gains rate, rather than the usual individual tax rate that for such high earners would typically be 35 percent.

The loophole deprives Washington of billions of dollars a year that stays in the deep pockets of rich individuals rather than flowing into government coffers to pay for things such as homeland security or health care for children.

The bone of contention here is "carried interest." That's a share of an investment fund's profit paid to the people who manage the fund. Those managers, though often called partners, don't invest their own money in the funds. The carried interest is their pay - sometimes hundreds of millions of dollars a year - for providing a service. Taxing that income as capital gains rather than earned income is a sweet deal for the lucky few. But it's an outrageous affront to ordinary workers who earn a lot less and are taxed a lot more.
There are bills in Congress to close the lucrative loophole. All other things being equal, the best approach would be the most comprehensive. Nobody enjoying the tax break should escape the reform. Sen. Charles Schumer (D-N.Y.), who has taken heat for resisting legislation that he said unfairly singles out New York firms, has promised to introduce that sort of comprehensive reform. That would give new meaning to the term, the fix is in.

A nice statement of the problem-- and the solution.

Since the rise of the "direct democracy" movement in the early 20th century, the use of ballot initiatives and referenda has spread like wildfire around the nation-- for better or for worse. It's prompted questions (although probably not enough) about what sort of policy issues ought to be decided via direct democracy rather than by elected representatives.

And now, in Nevada, it's prompting interesting and vital questions about whether proponents of a ballot initiative should be able to show a baseline level of statewide support for an proposal before it's put on the ballot. What's prompted this debate, as the Las Vegas Review-Journal's Sean Whalley tells us, is a new law that does just that:

The law requires people to gather a set number of signatures in each of Nevada's 17 counties based on the population of each county to qualify a measure for the ballot. In the last election cycle, all the signatures needed could be collected in just one urban county.

The idea behind such a reform is that urban and rural interests in Nevada are likely to diverge radically in a way that might make it easy for urban taxpayers to gang up on rural taxpayers. To bring it home to tax policy: a proposed "Proposition 13" style property tax cap could have dramatically different impacts on different areas of a state-- so, the logic of this idea goes, people who are affected in very different ways should all have to show at least a modicum of support for such an idea to ensure that an unprincipled regional power grab isn't taking place.

Interestingly, Whalley tells us, this isn't the first time Nevada has tried to implement this sort of rule:

The previous requirement for Nevada petitioners was to collect signatures representing 10 percent of those who voted in the previous general election in 13 of 17 counties.
The 9th U.S. Circuit Court of Appeals overturned that requirement, however, saying it violated the constitutional principal of "one man, one vote" by allowing a small number of voters in a sparsely populated county to preempt the wishes of the majority.

Nevada lawmakers have tried to respond to the Court's concerns this time around by applying separate signature requirements for each of the state's counties, and weighting each of the county-specific requirements by the voting population:

The new formula requires signatures to be collected based on 10 percent of Nevadans who voted in the previous general election multiplied by the percentage of a county's share of the statewide population.
To determine the number of signatures required in Clark County, for example, the 10 percent who voted in the 2006 general election totaled 58,627. Multiplied by Clark County's share of the total state population, which is about 69 percent according to the 2000 census, the number of signatures needed in Clark County is 40,364.
Using the same formula for Lincoln County, the 10 percent of the vote in 2006 would be multiplied by .2 percent, the county's share of the state population, making the signature requirement would be 122.

The result is that any ballot initiative must show some baseline level of support in every county around the state.

If this seems anti-democratic, that's because it is--and that's OK by me. Virtually every governmental institution we've got at the federal or state level is designed to take us a step or two away from direct democracy. Remember all that stuff you learned in high school civics about preventing the "tyranny of the majority"? That's a big part of our republican (small R) form of government.

Of course, it's important to have an avenue for regular voters to take their case directly to the people, but it's also important to make sure that any such effort truly has widespread support. And in an age when ballot initiatives have increasingly become a tool of well-heeled corporate interests, this is absolutely a goal for which voters should have some sympathy.

Nevada's latest change to its ballot access rules may not put the ballot back in the hands of the people, as the populist advocates of direct democracy envisioned a century ago, but it will very likely prevent the ballot box from being used as a weapon by one county against another. And it helps ensure that the ballot initiatives that ultimately make it into the polling booth each November will be well-thought-out and defensible.

When you run into a tax dodge as obviously egregious as the "carried interest" loophole for faux capital gains, you like to think that any lawmaker who cares a whit about tax fairness will be chomping at the bit to repeal it. So the Washington Post's editorial board is right on when they ask the hard question: what on Earth are some Congressional Democrats thinking when they don't line up against the carried interest loophole? There's one obvious answer:

Why Democrats are balking at these attempts to make the tax code fairer is unclear, but it may have something to do with the generosity these industries show their party.

In other words, the northeastern senators who have expressed reservations about repealing this unintended tax loophole tend to be those who have gotten beaucoup bucks from the hedge fund companies. Check out Connecticut Senator (and presidential candidate) Chris Dodd's war chest here.

The Post highlights (and debunks) the opposition of one western Democrat, Washington State Senator Maria Cantwell:

Some, such as Sen. Maria Cantwell (D-Wash.), say that increased tax costs might be passed along to investors, such as public employee pension funds or university endowments. This concern is also overblown, as some pension fund managers have acknowledged. Plenty of competing industries would not be affected by this bill, so if those affected by the bill raised their rates, they would lose their investors. And if private equity funds were going to pass along their higher tax costs to investors, it would logically follow that when their taxes were cut (as when the long-term capital gains tax was decreased in 1997 and 2003), they would have passed along their greater profitability to investors. Instead, the compensation structure appears to have remained steady.

But the Post breezes right by something that's worth thinking about a bit more: that "[p]lenty of competing industries would not be affected by this bill." New York Senator Chuck Schumer has expressed reservations about the loophole-closing bill because, as he tells it, it would disadvantage certain types of companies that take advantage of the loophole currently, but wouldn't go after other types of firm. If the unaffected "competing industries" the Post is talking about are getting the same sort of tax break that the hedge funds are claiming, the Congressional remedy wouldn't be all that much better than the disease. If Congress is gonna take steps to eliminate the carried interest loophole (and they should), they should do it right and do it completely.

It was an uncomfortable day for anti-taxers, or at least should have been. Two days after the Minnesota bridge collapse gave us our most blatant reminder since Katrina that we're starving our national infrastructure, the leading Republican presidential candidates found themselves forced to answer (or at least to dance around) this question from David Yepsen in a Sunday morning ABC debate:

[I]s it time we raise the federal gas tax to start fixing up our nation's bridges and roads?

Here's how they answered, in chronological order:
Arkansas Governor Mike Huckabee suggested that we could use money that we're currently spending in Iraq and other foreign hot-spots:

Well, I think the obvious answer is, it's not necessarily that we raise a tax to fix what we ought to fix of this country. We're spending billions of dollars all over our country and around the world, but it may be time that we start spending some of those billions of dollars to deal with our own infrastructure.

So his prescription is that we should reallocate money that we're currently spending on international aid to help pay for transportation funding. Does he mean Iraq? Or does he mean those pesky UN dues we keep not paying? Not clear. In the absence of specific recommendations, this amounts to a standard "fraud, waste and abuse" argument: we don't need more taxes, we just need to better spend the money we've already got.

Next was former NYC Mayor Rudy Giuliani, who did Huckabee one better by suggesting that a hiking the gas tax is exactly the wrong way to come up with money for bridge-fixing: in fact, we need to cut taxes to raise this money:

The way to do it sometimes is to reduce taxes and raise more money... I ran a city with 759 bridges; probably the most used bridges in the nation, some of the most used in the world. I was able to acquire more money to fund capital programs. I reduced the number of poor bridges from 5 percent to 1.7 percent. I was able to raise more money to fix those bridges by lowering taxes. I lowered income taxes by 25 percent. I was collecting 40 percent more from the lower income tax than from the higher income tax.

We'll leave for a separate post the question of where Giuliani gets this math. For the moment, let the record show simply that Giuliani's answer to the question of "how do we pay for fixing our transportation system" is that we should cut taxes more.

This would have been a hard act for Mitt Romney to follow under any circumstances, and wasn't made any easier by George Stephanopoulos' phrasing of the question ("Governor Romney, do you want to cut taxes to fix more bridges?"). Romney sorta concurred, agreeing that low taxes are the best way to generate revenue but stopping short of suggesting that additional tax cuts right now would be the way to go. Instead, he retreated to the Huckabee approach: let's reallocate our current spending away from wasteful areas, toward bridges:

There's no question but that the biggest source of revenue for this country -- if you really want to... repair our infrastructure and build for the future, the biggest source of that is a growing American economy. If the economy is growing slowly, when tax revenues hardly move at all, and, boy, you better raise taxes to get more money for all the things you want to do. But if the economy is growing quickly, then we generate all sorts of new revenue. And the best way to keep the economy rolling is to keep our taxes down. ... Growth helps us provide the revenue that we need. Our bridges -- let me tell you what we did in our state. We found that we had 500 bridges, roughly, that were deemed structurally deficient. And so we changed how we focused our money. Instead of spending it to build new projects -- the bridge to nowhere, new trophies for congressmen -- we instead said, "Fix it first." We have to reorient how we spend our money.

John McCain was the last candidate who got to answer this one, and he took the "fraud, waste, abuse" tack as well:

We passed a $50 billion transportation bill that had $2 billion in pork barrel earmarked projects: $233 million for a bridge to nowhere in Alaska, to an island with 50 people on it. Not one dime in those pork barrel projects was for inspection or repair of bridges.

The unspoken implication of which is that if we'd just stop spending money on bad projects, we could reallocate the money to good ones.

A frank appraisal of the question "is our federal gas tax too low" is clearly too much to expect of these guys, and to some extent that's understandable. There's plenty of evidence that people are mad about gas prices, and that they're not all that mad about their federal taxes right now. So this is probably the last tax for which you're gonna see office-seekers express support right now. But Giuliani's response is, I would argue, far worse than the rest of them. Arguing that tax cuts should be enacted to pay for bridge construction is something that even President Bush (for whom tax cuts have consistently been the prescription for everyone's daily blues) chose not to pursue. As punishment, he should have to look an audience full of Twin Cities residents in the eye and explain which tax he would cut to pay for their bridge repairs.

The full transcript of Sunday's debate is here. Read it and weep.

One week after a deadly Interstate bridge collapse in Minnesota, members of Congress are talking seriously about increasing the federal gasoline tax to help pay for infrastructure improvements. But President Bush is having none of it-- not yet, anyway. In a White House press conference today, Bush didn't flat-out reject the notion of a gas tax increase, but clearly has no sympathy for the idea.

Here's what he was asked in today's press conference:

Mr. President, former Chairman of the House Transportation Committee, Republican Don Young, says there are about 500 bridges around the country like the one that collapsed in Minneapolis last week. And Young and other Transportation Committee members are recommending an increase in federal gasoline taxes to pay for repairs. Would you be willing to go along with an increase in gasoline taxes of five cents a gallon or more?

And here's his response:

You know, it's an interesting question about how Congress spends and prioritizes highway money. My suggestion would be that they revisit the process by which they spend gasoline money in the first place.
As you probably know, the Public Works Committee is the largest committee -- one of the largest committees in the House of Representatives. From my perspective, the way it seems to have worked is that each member on that committee gets to set his or her own priority first, and then whatever is left over is spent through a funding formula. That's not the right way to prioritize the people's money. So before we raise taxes which could affect economic growth, I would strongly urge the Congress to examine how they set priorities. And if bridges are a priority, let's make sure we set that priority first and foremost before we raise taxes.

Given the President's track record of insisting that tax cuts can solve every problem under the sun, I suppose congratulations are in order: he didn't actually say the two-letter word containing the letters "n" and "o". But that's almost certainly because he was (or his advisor were) wise enough to recognize that in the wake of major infrastructure failures, continuing to explicitly insist on "no new taxes" is akin to insisting the earth is flat. At a time when important chunks of our highway system are literally falling to pieces before our eyes, insisting that we can pay for needed improvements by eliminating the old "fraud waste and abuse" is pretty hard to stomach.

Amid all the scurrying about on Capitol Hill last week before Congress left for its August recess, a remarkable story unfolded in the world of anti-tax activists and politicians that has not received enough attention.

Robert Novak tells the story, with great dismay, of how some Republican Senators considered introducing a proposal that would change the way the tax code treats health insurance purchased by individuals (as opposed to obtained through an employer) which is an idea that the President proposed in January. This plan would end the tax subsidy for employer-based health insurance and create one for individually purchased health care, and the net result over time would actually be a tax increase because most people would probably stay in employer-based health care. The proposal was taken up by a group of conservative Senators as an alternative to the bills passed by both chambers to expand the State Children's Health Insurance Program (SCHIP).

But the conservative Senators behind this effort would never dream of increasing taxes. So they included in their proposal a provision making the new tax credit for health insurance refundable for low-income people, making the bill budget-neutral.

Let's put aside for a moment the many, many problems with pushing families onto the individual health insurance market, where the plans offered are more expensive and less generous and probably encourage people to go without needed care. The Center on Budget and Policy Priorities does a good job of explaining this, so I won't dwell on it.

Let's assume for a moment that we are clueless enough to believe that this is a good proposal from a health policy perspective. Or let's say we don't even care about health care. Let's say we're conservatives who just don't want taxes raised. As conservatives, we might think that this proposal is reasonable because it's budget-neutral. Sure, it raises taxes in some places but it makes up for it by reducing taxes for low-income people who are purchasing health insurance, right? The Heritage Foundation, which is not exactly known for its bleeding heart concern for the poor or its fondness for tax hikes, found this reasoning persuasive and supported this proposal.

But apparently moving the tax burden around so that poor people have less of it constitutes a major sin in the anti-tax scriptures as set forth by Grover Norquist. His organization, Americans for Tax Reform, issued a statement that this proposal is a tax hike and anyone who signed the group's "Taxpayer Protection Pledge" and then voted for this proposal would be violating the pledge.

The logic ATR uses is that the refundable tax credit payments to people with no federal income tax liability is counted as "spending" in the budget process, so really this bill increases taxes to pay for increased spending.

This is ludicrous. Whether you want to call the refundable tax credit payments new "spending" or new "tax refunds" is really a matter of semantics. The families benefiting are not "non-taxpayers" as ATR's statement calls them. The vast majority of these families has at least one bread-winner who is paying federal payroll taxes (which are extremely regressive) so the refundable tax credits really could be said to offset a portion of payroll taxes. From this perspective, you could say that in most cases refundable tax credits are a "tax reduction" rather than "spending." That is, if you wanted to be that technical.

(Some people say payroll taxes are totally different from income taxes because payroll taxes pay for specific progressive benefit programs, but this is ridiculous. Social Security taxes can be used to pay for any government spending, since there is no "lock-box" that they go into to be truly "saved" for retirees, and the federal government is obviously spending the Social Security surplus right now to keep the government running).

The real problem that ATR has with this proposal is that the responsibility for funding the federal government would be moved slightly from people who can least afford to pay to the wealthy people who have benefited the most from Bush tax cuts. Any movement in that direction is not even worthy of discussion for the anti-tax crowd.

Think for a moment about what this rigid thinking by the anti-tax activists means for them. Imagine the House Democrats finally pass the plan they're developing to eliminate the Alternative Minimum Tax for tens of millions of families and pay for it by scaling back the Bush tax breaks for the richest one percent. ATR is sure to oppose this because it involves "tax increases" on a tiny elite even though the vast majority of families benefit. That sounds like a winning strategy.

The anti-tax people have long benefited from the simplicity of their message of "no tax hikes." But as we move into a time when everyone agrees that the government needs to do more about health care and national security, not to mention make some reforms to the tax code, this rigid, simple no-new-taxes ideology is becoming an albatross for them. Not that I'm terribly concerned for them.

North Carolina took a large step forward towards tax fairness this week when both houses passed a new budget that includes a state Earned Income Tax Credit, or EITC.North Carolina now joins 20 other states that offer an EITC.These credits receive broad bipartisan support in so many states because of their proven track record of success.The EITC works by rewarding work, making sure that working low-income families aren't taxed further into poverty.Since the measure is targeted only at these families, it provides much more benefit per dollar of state revenue than almost any other anti-poverty program.

Despite all this, however, some legislators in Michigan want to delay the introduction of that state's EITC.Last year, the state passed an EITC for the first time.Now, proponents of delaying the EITC argue that, given the state's current business and fiscal problems, the government simply can't afford the tax break.Of course, many of these senators are the same ones who have been advocating against any new business taxes in the state to replace revenue lost with the repeal of the Single Business Tax.It's true that the state is not in good fiscal condition, but during economic downturns anti-poverty measures become more important, not less.Michigan voters should urge their lawmakers to keep their promise to the working poor.For more information on state EITCs, try this helpful website.For more information on how EITCs work, read this ITEP policy brief.

First, the good news. According to the New York Times, officials in the Empire State this week issued warnings to about a third of the roughly 10,000 businesses that participate in the state's enterprise zone program for failing to make good on job creation or investment commitments. The enterprise zone program offers a wide range of tax breaks - including sales tax refunds, property tax credits, and investment tax credits - to businesses in hopes that they will boost employment and investment in the state.

As the Times points out, the program has been around for twenty years - and has cost New York taxpayers $3 billion since 2000 - yet these warnings mark the first real effort to enforce the commitments businesses make to receive those tax breaks. For example, Wal-Mart and Lowes, two of the largest companies cited, pledged to invest $45 million and $9 million respectively, but together have put up only about $4 million. New York has the power to recoup tax breaks from businesses that fail to meet their commitments, but won't attempt to do so until program participants have filed their 2006 reports. Still, given the prevalence of these types of programs around the country - programs that are likely yielding similarly poor results - New York's action will hopefully spur other states or municipalities to do the same.

Now, the Bad News

Unfortunately, New York lawmakers haven't exactly been paying attention to the poor track record of the state's enterprise zones and how little the public got in return for the investment of tax dollars in this fashion. Otherwise, when the Yankees came to them looking for help in building a new stadium, they probably wouldn't have given them over $660 million in subsidies. (Just call it "The House that Giuliani Built.") The latest report from Good Jobs New York - entitled Insider Baseball - has all the details.

The budget clock is also ticking in Wisconsin as the Governor and the University of Wisconsin chancellors have both denounced the budget approved by the Assembly, saying that the budget cuts included would increase class sizes in universities and decrease class offerings. A conference committee is currently meeting to reconcile the Assembly budget with the Senate's which included tax increases and a health care plan. Senator Neal Kedzie says the state "could be in for a very long and bumpy ride."

The federal government's primary approach to helping the middle-class access healthcare is through the tax code. Most importantly, employers can deduct funds used to provide health insurance to employees, who generally exclude the benefits from income. This is not the most rational or comprehensive approach but has helped middle-class people obtain health insurance.

The deduction for employer-provided health insurance is projected by the Congressional Joint Committee on Taxation to cost the federal government $534 billion from 2006 through 2010. Deductions for health insurance premiums available to the self-employed will cost another $22.6 billion between 2006 and 2010. While many middle-class families have obtained health insurance through this route, there are many ways in which it may not be an efficient or equitable policy. For one thing, the tax benefit is greatest for those in the highest income brackets and lowest for those in the lowest income brackets, making it an undeniably regressive policy. Also, it does nothing for the estimated 45 million Americans lacking health insurance. The rising high cost of health care has caused many employers, particularly small businesses, to decide to not provide health insurance to their workers, despite the tax break that would benefit the employees.

White House Proposal Could Make Matters Worse

President Bush argues that his health care tax proposal would remedy this situation. He would eliminate the deduction for employer-provided health insurance and instead offer a deduction for health insurance purchased on the individual market (for the purchase of coverage that is not employer-provided) The reality is that his plan could weaken employer-provided health insurance without ensuring that an adequate alternative takes its place. The President's proposal would basically make the tax code biased towards individually purchased health care and even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance. The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

A recent summary of research from the Center on Budget and Policy Priorities notes studies showing that most low-income people trying to obtain coverage on the individual health insurance market have difficulty and over a quarter are denied coverage or are charged much more because of a pre-existing condition. The types of coverage available on the individual market often result in greater out-of-pocket expenses that will cause some low-income people to forego necessary health treatments.

Public Programs Like SCHIP More Efficient than Tax Subsidies - Yet Face Presidential Veto

The President has claimed his proposal would be more efficient than the House and Senate bills to expand the State Children's Health Insurance Program (SCHIP), which the two chambers approved this week. The White House argues that expanding SCHIP will "crowd out" private insurance. The Congressional Budget Office has found that two thirds of the children receiving health care under either bill would be those who would otherwise not have health insurance. Health care economist Jonathan Gruber has pointed out that the "crowd-out" effect of SCHIP is probably the lowest of any health care proposal, and that the majority of benefits from the President's health care proposals go to those who would have health insurance anyway.

On August 2, the Senate passed its SCHIP bill, which increases the federal cigarette tax by 61 cents to one dollar per pack to offset the costs. The House passed its broader bill, which increases the federal cigarette tax by 45 cents per pack and includes other revenue-raising provisions, on August 1. The President has indicated that he would veto either version.

Little progress has been made in the Illinois budget standoff. In fact, Governor Rod Blagojevich pleaded with state employees to continue working even though the state's one-month temporary budget extension ended on July 31. State Comptroller Dan Hynes says that the state must have some sort of budget by August 8 - when the state is scheduled to make school aid payments. In the meantime, legislative leaders have rejected the Governor's proposal for another one-month budget extension. Powerful House Speaker Michael Madigan has said, "I think we're close." Looking through our crystal ball we predict that Illinoisans can expect a modest budget that does little to improve education, expand health care coverage, or improve the state's tax structure.

In California, the state Senate fell one vote shy Wednesday of adopting a budget and may not resume deliberations until August 20^th. Republicans maintain that some $700 billion in spending cuts are necessary to balance the budget, yet continue to back a tax package that, by the estimate of Senate President Don Perata, could cost the state $600 million to $1 billion annually. Among the principal elements of that tax package are $100 million in tax credits for movie and television production companies, $175 million in credits for research and development, and changes to the state's corporate income tax apportionment formula.

As the Sacramento Bee points out, this delay will likely force the state to suspend Medi-Cal payments to the 500 hospitals and 11,000 nursing homes and other facilities that serve the 6.8 million Californians who participate in the program. It may lead to a similar stoppage in funding for subsidized day care across the state, leaving 250,000 low-income families without caregivers for their children while they are at work. Interested readers can visit the California Budget Project's website for the latest on the showdown.

The Commonwealth Institute for Fiscal Analysis released an interesting report yesterday discussing Virginia's budget and its inability to continue funding essential public services. The Institute's report shows that after 2007, there will already be a projected deficit of at least $200 million due to stunted growth in Northern Virginia's housing market. This, combined with a continued low income tax burden and increased state spending, will cause Virginia to face a shortfall of $1.2 billion. And the report shows this is a conservative number.

Personal and corporate income taxes and sales taxes represent a large portion of state revenue, but the budget will not have enough money to stretch over the course of the 2008-2010 period. Corporate and sales tax revenues are contingent upon economic conditions and thus have not produced as much revenue as orginally anticipated, causing a portion of the shortfall.

In fact, a spokesman for the Governor admitted in today's Washington Post:

"the 2008-2010 budget period will feature slower growth than anticipated, but we are not in a position to validate the numbers that the Commonwealth Institute is giving out"

Virginian officials seem not to be worried about the shortfall, expecting to rely on the state's Rainy Day Fund in case there is not enough money to cover expenses. But this fund can only be used in specific circumstances and does not hold nearly enough money to finance the deficit.

Virginians, on average, earn more than residents in most other states, coming in at #10 in average income. Meanwhile, its residents pay the 10th lowest tax rate in the country. The report discusses many issues in recent tax policy and advocates for reform of an outdated tax structure set in place in the 1920s.

This huge shortfall will hit hard on the state's various important needs such as education, healthcare, and transportation. The Institute's report outlines that a solution can be found in raising taxes to generate additional revenue. Because the state has a higher average income and a lower tax rate than most, there is potential for raising more money. One way to ensure increased revenue is to raise the personal income tax. So now the question for Virginia becomes: would you rather raise a little tax or not be able to provide free public education and low cost public transportation?

As I was driving back from New York to DC last weekend, I couldn't help but notice the dismal industrial landscape that spoils the New Jersey foliage. Dilapidated, rusting buildings and machinery spewing pollution line the highway, the tools of coal-powered energy production. I couldn't help but think at that moment, why would anyone prefer this scene to a simple white wind turbine?

But alternative energy usage is just one part of a multi-pronged solution to curb our country's excessive carbon emissions. John Dingell writes a good article in the Washington Post today stating that, while alternative sources and new fuel standards for cars or appliances are a good start, they aren't enough. Our solution must include a market instrument to raise the cost of emitting carbon. A carbon tax or fee would "be the most effective way to curb carbon emissions and make alternatives economically viable" Dingell writes.

He's absolutely correct. Market forces will work, they have in the past. Taxes or fees on emissions-intensive energy producers mean higher costs to consumers, a powerful signal to reduce consumption. Taxes on carbon emissions would also encourage research and investigation into cost-effective alternative energies and investment in fuel-efficient items as a response to high energy costs.

Dingell furthermore argues that we must be 'ambitious' and challenge the political system to adopt a carbon tax instead of settling for the more palatable cap-and-trade program. But unfortunately he fails to address the fact that a cap-and-trade program could have the same effects as a tax, and at lower costs. In economic terms, the cap and trade system is just as efficient as a tax and is more flexible in allowing firms to trade pollution permits based on their ability to reduce emissions. Firms that emit heavily will have to buy permits to do so, raising costs and sending the same price signals to consumers to reduce consumption. Revenue could be raised in a cap-and-trade program by auctioning permits.

Most importantly, a cap-and-trade program sets a concrete limit on the amount of CO2 that can be emitted by all firms, guaranteeing a reduction if well-monitored. A tax merely encourages reduction, it doesn't mandate it. In the very long run, a carbon tax may end up the most efficient option, but this doesn't mean a cap-and-trade system should be overlooked because it has its merits.

And, of course, Dingell entirely overlooks the vital fairness questions that have dogged the carbon tax idea since the Clinton administration discussed a "BTU tax" more than a decade ago. Any carbon tax, as well as any cap-and-trade program, will hit low-income consumers hardest--and would come at a time when both federal and state taxes are already hitting low-income families harder, and letting wealthy families off easier, more so than at any time in recent memory. To meet even the most modest standards of fairness, a carbon tax or cap-and-trade program would have to provide low-income tax rebates, possibly through the federal payroll tax.

It's nevertheless heartening to know that support is growing for the types of market tools necessary to cause a clear reduction in carbon emissions. Personally, I'm more than ready for the wind turbines.