Wyoming Governor Dave Freudenthal recently proposed a constitutional amendment for his state as well, offering a plan to cut property taxes for the elderly. An amendment is necessary as Wyoming's constitution requires that all property be assigned its full value for tax purposes in one of three classes - mineral, industrial, and personal. More specifically, the Governor's plan would exempt one half of the fair market value of an elderly taxpayer's residence from taxation, up to $100,000, resulting in an average tax cut of $638 for senior property owners and in an annual revenue loss of $15 to $18 million.

Given that Wyoming already has two means-tested property tax relief programs - one targeted to the elderly and another for all taxpayers - and a third not presently funded by the legislature, one could legitimately ask whether the goal of alleviating property taxes for those least able to pay them would be best accomplished through the Governor's amendment. Reed Eckhart of the Wyoming Tribune-Eagle poses that question and others in his recent column, arguing for all Wyomingites to contribute to public structures like schools and roads.

At long last, the Wisconsin legislature approved a two-year $57.2 billion budget. The agreement comes 4 months after the budget deadline and is expected to be signed by the Governor Friday. A hospital tax and taxes on oil companies didn't make it into the final bill. But t he bill did include a cigarette tax increase that will raise the tax on a pack of cigarettes from 77-cents to $1.77. The bill also includes additional school aid for low-income districts and children's health insurance expansion and eliminates the tax on Social Security benefits.

Wisconsinites may be relieved that the budget impasse is over. Advocates for tax fairness will find the budget compromise lacking. However, advocates seem pleased with the overall spending priorities set forth in the new budget. For more read this statement from the Wisconsin Council on Children and Families.

As we noted in last week's Digest, South Carolina will likely face a budget deficit of roughly $430 million in the coming fiscal year. Predictably, this has prompted some, including Senate President Pro Tem Glenn McConnell, to call for a constitutional amendment to limit state spending. Similar proposals have been offered before in South Carolina and in other states. The only such limitation that has passed in any state is Colorado's so-called "Taxpayer Bill of Rights" or TABOR. The result for Colorado has been a dramatic deterioration in essential public services and the state chose to suspend that limitation in 2005.

More to the point, as Cindi Ross Scoppe of The State points out, South Carolina's real problem is not runaway spending, but a deeply flawed tax system. Among the tax policy challenges that South Carolina must address are limitations on property tax growth and property tax assessments, wasteful tax breaks for profitable corporations like Michelin, and an excessive reliance on a sales tax that fails to tax services adequately. ITEP's Issue Briefs can help to explain the shortcomings of South Carolina's approach to property and sales taxation - and what can be done about them.

This week, taxpayers in Indiana will read promising headlines like, " Daniels announces property-tax plan" and assume that their angst about the property tax will disappear. But one doesn't have to read very far to know that Governor Daniels' proposal is an empty promise for low-and middle-income taxpayers. He is proposing $1 billion in property tax relief by 2009, but the relief comes at a steep price in the form of raising the state sales tax by 1 percent and capping homeowner property taxes at 1 percent of assessed value. Property tax caps are a long proven foe for taxpayers with less ability to pay. For more on property tax caps check out ITEP's policy brief.

Congressman Rangel's Tax Bill Would Make the Tax Code Simpler, More Progressive, and the Changes Are All Paid For

House Ways and Means Chairman Charles Rangel introduced his proposal Thursday to address the Alternative Minimum Tax and simplify the tax code without increasing the federal budget deficit. One title of the bill would address the income tax for individuals, including the AMT reform which would be paid for by reducing the Bush tax cuts for the wealthiest Americans and closing some unfair loopholes that benefit the very richest taxpayers. The other title of the bill would simplify the corporate tax by trading a lower corporate tax rate for the elimination of some inefficient loopholes. Lawmakers may take some of the provisions, such as a one-year fix for the AMT, and pass them more quickly as a separate, smaller bill.

Individual Income Taxes Would Be Simpler and More Progressive

Several Republican lawmakers demand that Congress repeal the AMT without replacing the revenue because it was never "intended" to be collected. This is nonsense, because the Bush Administration very intentionally declined to address the AMT when it passed tax cuts. The President's most recent budget assumes that the AMT will, in fact, expand its reach to millions of families after 2007.

Congressman Rangel's bill includes a "patch" for the AMT for this year and then repeals it altogether. The revenue is replaced largely with a surtax on families with incomes over $200,000. These families have benefited the most from the Bush tax cuts. Nearly half of the benefits from the Bush tax cuts flow to the richest five percent of taxpayers, whose income is above $170,000. In 2010 well over half of the benefits will flow to this group if the Bush tax breaks are not repealed. So Congressman Rangel's bill would reduce the bonanza of tax cuts enjoyed by this elite group of families to help pay for AMT relief for families who are somewhat more likely to be middle-class.

In addition, the bill would eliminate the loophole for "carried interest" as many advocates have urged because it allows wealthy fund managers to pay a lower tax rate than middle-income people.

Congressman Rangel's bill also includes important improvements in the Child Tax Credit and the EITC for childless workers. The Child Tax Credit is currently structured so that the poorest families cannot benefit from it, while the EITC for childless workers is currently so low that childless workers can live in poverty and still pay federal income taxes, in addition to federal payroll taxes.

Corporate Taxes Would Be Simpler and More Efficient

The bill reduces the corporate rate from the current 35 percent to 30.5 percent and replaces the revenue lost from this change by eliminating certain loopholes. Corporations should consider themselves lucky to be offered this lower rate. CTJ has argued recently that Congress should close corporate tax loopholes and not lower the corporate rate but instead use the new revenue for deficit-reduction or to address the many needs this country faces right now.

It's often said that the U.S. corporate tax rate of 35 percent is among the highest in the world, but really the effective rate is much lower because of the loopholes that corporations use to lower their taxes. The United States collects less in corporate taxes as a percentage of GDP than all but two OECD countries. In other words, corporations should be thankful they're being offered any tax breaks at all.

Wisely, the bill includes changes to offset the costs of the rate reduction. These include eliminating several existing tax provisions, including a tax subsidy for manufacturers, an accounting method that allows oil companies to understate their profits, and another provision that encourages companies to move operations offshore.

Republicans Defend Government Interference in the Economy Through the Tax Code, Defend Complexity in the Tax Code

Republicans in Congress have placed themselves in the strange position of defending a system that taxes some millionaires at lower rates than middle-class families, defending a tax system that provides subsidies to certain businesses at the expense of the rest of the taxpayers, and defending the complexity in a tax code that causes business decisions to be made for tax reasons rather than economic ones. Treasury Secretary Henry Paulson went so far as to say (subscription required) "The corporate proposals will hurt the ability of our businesses and workers to compete in a global economy." This is despite the fact that closing loopholes to pay for a lower tax rate is an idea that he and others in the Bush administration proposed during the summer.

Over the past year we've told you about the growing popularity the earned income tax credit (EITC) at the state and federal levels. This credit offers financial assistance to low-income workers based on family size and income. The credit usually receives strong bipartisan support and keeps many families from living in poverty. Now twenty-three states plus the District of Columbia offer some type of EITC in addition to the federal one. One criticism of the credit is that people don't know they could be eligible to receive benefits -- thus millions of dollars in credits goes unclaimed. Legislation signed into law last week in California goes a long way to ensuring that working folks are notified about the federal credit. Assembly bill 650 mandates that "an employer [will] notify all employees that they may be eligible for the federal earned income tax credit." Other states would do well to follow in California's groundbreaking footsteps.

Policymakers in South Carolina learned late last week that the state will likely face a budget deficit of some $430 million heading into FY 2009. A number of states will have to close budget gaps in the coming fiscal year -- in part because critical sources of revenue growth have slowed with the cooling housing market. But South Carolina has brought some of this problem on itself. As the Bureau of Economic Advisors -- the body responsible for the latest budget projection -- indicates, one of the three largest factors contributing to the likely deficit is the $240 million in tax cuts enacted this summer.

News like this should give elected officials in Utah some pause. According to the Deseret Morning News, legislators there are already talking about using a projected $400 million budget surplus to cut taxes once again. Yet, as the News points out, that surplus may exist only because Utah's budget projections have not yet been updated to account for previously enacted tax cuts. In other words, some elected officials want to use these surpluses, which may not even exist because of previous tax cuts, to fund more tax cuts. Anti-tax politicians with this kind of mindset like to portray themselves as conservative, but this kind of behavior can only be described as reckless

It has been reported in several news outlets that Senate Finance Chairman Max Baucus (D-MT) was unable to get a majority of his committee's members to agree, at a meeting Wednesday, on how to pay for a temporary fix for the Alternative Minimum Tax (AMT). As a result, some Senators have suggested that they should waive the pay-as-you-go (PAYGO) rules that were reinstated at the start of this session and which are supposed to prevent Congress from expanding the national debt.

The Bush tax cuts increased the number of people subject to the AMT and the Republican-led Congress never permanently indexed for inflation the exemptions that keep most of us from having to pay it. As a result, 23 million taxpayers (17 percent of all taxpayers) will pay the AMT for 2007 if Congress makes no change to the law.

Not Worth Breaking the Bank

But the AMT is not exactly the greatest threat right now to the average American. Even if Congress does nothing (which is extremely unlikely) around 60 percent of the AMT would still be paid by the richest 5 percent of taxpayers. In other words, if there was ever a good reason to borrow billions of dollars and have to pay it back with interest, this is not it.

Several Measures Would Be Good Policy AND Could Pay for AMT

That is especially true because there are plenty of options that Congress can pursue to offset the cost of temporarily or permanently fixing the AMT. For starters, Congress could scale back the Bush tax cuts for the wealthiest people, who are reaping most of the benefits.

Congress could also close the loophole for "carried interest" paid to billionaires who run investment funds, and who are currently allowed to pay a lower tax rate than their secretaries. Several hundred organizations signed a letter in early September urging Congress to close this loophole. Congress could also crack down on tax avoidance associated with offshore schemes, stock options and misreporting of business income, and limit tax breaks for the deferred compensation of millionaire executives.

Early this year CTJ pointed out that one simple solution would be to close the loopholes within the AMT itself for capital gains and dividend income.

It's expected that a bill to "patch" the AMT for one year will be introduced in the House by Ways and Means Chairman Charles Rangel in the coming weeks and will likely include some combination of revenue-raising provisions to offset the cost. Rangel has, however, said members of the House may also disagree over how to do so. (Rangel also plans to introduce a larger bill to repeal the AMT entirely, and offset the costs, but that may not be acted upon until next year.)

Deficits Are Not a Progressive Solution

Congress should not waive PAYGO. The more money we borrow, the more we have to pay to make interest payments. Currently nine cents of every dollar we send to Washington goes just to interest payments -- just to pay for the privilege of borrowing. Besides that, budget deficits can endanger vulnerable families since the public services they depend on are often targets of cuts whenever conservative politicians decide it's time for "deficit-reduction" measures.

Georgia House Speaker Glenn Richardson's plan to repeal all Georgia property taxes and make up the lost revenue by expanding the state and local sales tax base ran into a roadblock last week. Two new reports from Georgia State University's Fiscal Research Center (FRC) show that repealing property taxes would dig an annual $8.6 billion budget hole for the state -- and that under any reasonable scenario for expanding the sales tax base, a property-for-sales tax swap would fall at least $2 billion short of filling that hole. Since Richardson has described his plan as "revenue neutral" without actually providing detailed revenue estimates, the new reports cast doubt on whether this tax swap can be accomplished.

As the FRC report's detailed revenue estimates make clear, the only way such a plan could even approach revenue neutrality would be to tax items that (to put it mildly) wouldn't find much support among the public or tax analysts, including purchases by the federal, state and local government ($2.2 billion), health care ($600 million), and rent ($405 million).

Richardson helpfully suggested this week that the authors of the reports "should sharpen their pencils," but didn't offer more substantive criticism of the FRC analysis.

Even worse for advocates of this tax swap, the latest data show that Georgia sales tax collections in September were down 10% from last September's collections, which is not a good sign for those who want to use sales taxes to pay for property tax repeal.

Before the House passed the bill ending the private debt collection program, Republican members used procedural rules to force a vote on a complete, unpaid for repeal of the estate tax. The measure was defeated 212-196, a major setback for the handful of super-rich families that have been funding a repeal campaign for several years. The House has voted several times during the Bush years to repeal the estate tax. According to a statement from Republican Whip Roy Blunt (R-MO) 42 Democrats voted to repeal the estate tax the last time it came up for a vote while this time only ten did, indicating that several have decided for the first time to stand up to the extreme anti-tax rhetoric used by opponents of the estate tax.

Supporters of a fair estate tax needed this news after developments in the Senate last week. As the Senate Finance Committee marked up its tax package for the agriculture bill reported on last week, Senator Jon Kyl (R-AZ) offered an amendment to significantly reduce the estate tax without paying for it. Senator Kyl only withdrew his amendment after Senate Finance Chairman Baucus agreed to hold a hearing on the estate tax sometime this year and mark up a bill in the spring.

Fewer Than One Percent of Estates Subject to Tax

The most recent data released from CTJ show that the percentage of estates subject to the tax was less than 1 percent in most states in 2005. Even fewer estates are likely to be taxable this year because the exemption is larger ($2 million for a single taxpayer vs. $1.5 million in 2005). Under the estate tax cut enacted by the Bush and the Republican-led Congress, the estate tax is gradually reduced until it disappears in 2010, but then returns in 2011.

Some lawmakers want to compromise and essentially freeze in place the estate tax rules that will be in effect in 2009, including a $3.5 million exemption for single taxpayers and a 45 percent rate. The budget resolution Congress adopted for fiscal year 2008 assumes that this compromise will be enacted. The amendment offered by Kyl last week would have gone much farther because it would increase the exemption to $5 million, tax the value of the estate between $5 million and $25 million at 15 percent and then tax the rest at 30 percent.

In Search of the Elusive Family Farm Threatened by the Estate Tax

Much of the rhetoric used by estate tax opponents revolves around family-owned small businesses, especially farms, that they claim are endangered because of the estate tax. Contrary to what the anti-tax advocates claim, very few farms or small businesses, if any, would ever have to be sold because of estate taxes.

According to the Congressional Budget Office, there were only 1,659 farm estates that were taxable in 2000 (when the estate tax was steeper because the exemptions were smaller and the rate was a little higher) and of these, only 138 did not have enough liquid assets to pay their estate taxes immediately, meaning some part of the estate could conceivably be sold in order to pay the tax. The CBO also found that if the exemption level was as high as it is today only 15 farm estates would have been both taxable and lacking the liquid assets to pay the tax.

Those 15 farm estates would likely weather the estate tax just fine. This CTJ paper describes the extra breaks that family farms get from the estate tax (in addition to the exemptions all estates get) including a provision that allows the tax to be paid off over a period of 14 years. The American Farm Bureau Federation famously admitted to the New York Times in 2001 that they could not cite a single example of a farm that had to be sold due to the estate tax.

The House of Representatives voted Wednesday to ban the IRS from using private debt collectors to help collect delinquent taxes after its current contracts with collection agencies expire in March 2008. The IRS's private debt collection program pays 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 basis 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.

The Senate Finance Committee has not taken up the private debt collection issue although there is a bill ( S. 335) sponsored by Senator Byron Dorgan (D-ND) to end the program. Meanwhile, the White House has threatened to veto the House bill ( H.R. 3056) if enacted because it will cost the federal government revenues "that are otherwise not likely to be collected by the IRS."

This argument is ridiculous. The ten-year projected cost of the measure is just over $1 billion and that cost is offset in the bill with revenue-raising provisions. But the more fundamental point is that this measure should not be scored as costing anything at all. When Congress cuts back the tax enforcement staff at IRS, this reduction is not counted as a "cost" even though IRS personnel actually collect a lot more in taxes than do the private debt collectors. The private debt collection program seems driven by the ideology that the private sector always works better, even when the facts clearly state otherwise.

Photograph from New York Times

The Service Employees International Union (SEIU) staged a protest Wednesday in front of the office of the Carlyle Group, the private equity firm that buys up nursing home management operators, defense companies and other businesses that get billions of dollars from the federal government. The partners at Carlyle are able to earn hundreds of millions of taxpayer-provided dollars while paying a lower tax rate than middle-income Americans thanks to the carried interest loophole.

The demonstration included people pushing wheelbarrows full of bags of "cash" from the IRS, which is located across the street, to a "fat cat" sitting on the front steps of Carlyle's office.

In light of this sort of press, it's really no wonder that private equity lobbyists are saying that the controversy over their tax breaks is far from over.

On Tuesday, the Washington Post created a great deal of confusion by reporting that Senate Majority Leader Harry Reid (D-NV) has told lawmakers and lobbyists that the Senate will not have time this year to consider legislation eliminating the "carried interest" loophole, which allows billionaire fund managers to pay a lower tax rate than their middle-income receptionists. This was seen in some quarters as an indication that the issue is dead for this year, provoking several editorials blasting the Senate Democrats for choosing campaign contributions from lobbyists over tax fairness. The reality is that whether the Senate addresses the carried interest issue is largely up to the Senate Finance Committee, not Senator Reid.

Carried Interest Issue Wound Up in Debate Over Alternative Minimum Tax

Whether or not the Senate is unduly influenced by lobbyists is certainly a question worthy of debate, but some clarification is in order. It's true that the Senate is not likely to consider a stand-alone bill that does nothing but close the carried interest loophole. But every member of Congress already knows that. No one in Congress is talking about a stand-alone bill. The question everyone is considering is whether or not a provision to close the loophole should be used to offset the cost of other legislation Congress wants to pass. For example, Congress needs to pass a bill to keep the Alternative Minimum Tax (AMT) from affecting more taxpayers.

The number of people affected by the AMT will increase from around four million last year to 23 million this year if Congress does not act, and just fixing the AMT for this year alone would cost over $50 billion since Congress and the administration have always assumed that this revenue would be collected. A provision closing the carried interest loophole would raise some revenue (although an official estimate has not yet been made) and could therefore be used to offset part of the cost of dealing with the AMT. Over in the House, Ways and Means Chairman Charles Rangel (D-NY) has long said that he will likely try to close the loophole to help offset the cost of fixing the AMT.

Ball Is in the Finance Committee's Court

What types of "offsets" are attached to an AMT bill in the Senate is not decided by Senator Reid. It's decided by the Senate Finance Committee, and Finance Chairman Max Baucus (D-MT) has not yet said whether or not he'll include a provision to close the carried interest loophole. But he and ranking member Charles Grassley (R-IA) have both shown interest. An AMT bill needs to include offsets now that Congress operates under pay-as-you-go (PAYGO) rules that prevent it from increasing the budget deficit. Once the Finance Committee approves an AMT bill and sends it to the full Senate, Senator Reid will make time for a floor vote, since it will shield over 20 million families with voting members from an increase in their Alternative Minimum Tax.

Carried Interest Issue Won't Die Regardless of What Happens This Year

Regardless of what happens this year, there's enough public anger over the carried interest loophole to keep the issue alive for some time. Presidential candidates Hillary Clinton, John Edwards and Barack Obama have come out in favor of eliminating the loophole. Edwards and Obama even made a point of expressing their outrage that the issue hasn't been resolved by now. Even a chief lobbyist for the private equity industry said Wednesday that "It's not over; it's only just beginning."

For now, all eyes should be on the members of the Senate Finance Committee, particularly its chairman, Max Baucus.

House Republicans have called for replacing the complicated Alternative Minimum Tax with a potentially even more complicated Alternative Maximum Tax. The plan, which also proposes permanent extension of the Bush tax cuts, would add more than $5 trillion to the national debt over the 2011-20 period.

Under the GOP plan, taxpayers could choose to continue to pay taxes under the current tax code -- but with no Alternative Minimum Tax and with all of the Bush tax cuts permanently extended. Or they could switch to the new Alternative Maximum Tax, with lower rates than current law and no credits or deductions except for a large standard deduction and personal exemptions similar to those under current law.

Because the plan would repeal refundable tax credits now available to low-income working families, it would be of no benefit to the poorest one-third of Americans. Wealthy families, however, would get huge tax reductions.

To maintain or enhance complexity, the plan would allow couples to switch between the two tax systems annually by divorcing or remarrying. Single taxpayers would be allowed only one lifetime switch between the two systems after their initial choice, unless they get married.

The bill's lead sponsor, Rep. Paul Ryan (R-Wisc.) calls his plan "The Taxpayer Choice Act." But budget-deficit hawks have condemned it as "The Bankrupt America Act," while others have dubbed it "The Divorce Lawyers' Relief Act."

This week President Bush vetoed the bill to expand the State Children's Health Insurance Program (H.R. 976) that was approved by the Senate and House of Representatives last week. The bill would increase funding for the program by $35 billion over ten years by increasing the federal tobacco tax for cigarettes from 39 cents to a dollar per pack. The President has promoted his own idea for expanding health care -- a change in the tax code that would weaken the employer-based health care system without guaranteeing that it's replaced with a viable alternative.

The President's own proposal 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 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. The Center on Budget and Policy Priorities explains this and other problems with the concept.

None of this is to say that the way the tax code currently treats health care is optimal. The deduction for employer-provided health insurance provides the greatest benefit for those in the highest income brackets and the lowest benefit 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.

In 2003, then-Speaker of the House Republican Denny Hastert argued for the first major tax cut during a war in U.S. history, saying, "Nothing is more important in the face of war than cutting taxes." During that year, the centerpiece of President Bush's tax cut plan was enacted, the low 15 percent rate for capital gains and dividends. In 2005, this break cost about $92 billion and three fourths of it went to the richest 0.6 percent of taxpayers. Instead of asking Americans to make a sacrifice, the President guaranteed Americans that our economy depended on deficit-financed tax cuts aimed at the wealthy.

Four years later, has anything changed? On Tuesday, Congressman David Obey (D-WI), chairman of the House Appropriations Committee proposed a surtax to raise $145 to $150 billion a year to pay for the war in Iraq. Under his proposal, low- and middle-income taxpayers would see a two percent increase in their federal income tax bills, while wealthier people would see a 12 to 15 percent increase.

"Some people are being asked to pay with their lives or their faces or their hands or their arms or their legs," Obey told the Washington Post. "If you're going to ask for that, it doesn't seem too much to ask an average taxpayer to pay 30 bucks for the cost of the war so we don't have to shove it off on our kids."

Even though such temporary taxes have been used to fund wars in the past, the anti-tax establishment pounced immediately. White House press secretary Dana Perino said, "Well, we've always known that Democrats seem to revert to type and they are willing to raise taxes on just about anything. There's no need to increase taxes." When asked to compare the President's refusal to fund an expansion of SCHIP with his willingness to spend hundreds of billions of deficit-financed dollars on the Iraq war, she called the Democrats "completely irresponsible" for wanting to raise taxes to pay for children's health care and the war.

In other words, the White House's fun-house mirror version of fiscal realities has not changed since the outset of the war. In their eyes, the responsible thing to do is have tax cuts and a war that are both deficit-financed, while paying for these things would be "completely irresponsible."

Meanwhile, Congress just raised the limit on the amount of debt the federal government can rack up for the fifth time since Bush took office.

The Senate Finance Committee voted 17 to 4 Thursday to approve a tax package that will cost $17 billion over ten years and will be added to the reauthorization of the farm bill that the Senate Agriculture Committee will take up in a couple weeks. The tax package includes a $5 billion trust fund for crop disaster assistance as well as $3 billion in tax credits to encourage conservation. These items would replace direct spending programs for these purposes and, since the Finance Committee package includes offsets, will free up funds for other purposes in the larger agriculture bill.

The largest offset is a provision that will reduce tax avoidance schemes by codifying what is known as the "economic substance doctrine," which basically means that transactions having no purpose other than to avoid taxes are void. This provision, which arguably will reduce the economic inefficiency that comes with the exploitation of tax loopholes, will raise $10 billion over ten years.

Another revenue-raising provision 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 minimum wage and energy legislation.

Another provision raises $854 million by cutting the tax credit for ethanol from 51 cents to 46 cents a gallon when ethanol production reaches a certain level. Several amendments were approved. Jim Bunning (R-KY) delayed the markup for a couple hours before agreement was reached to include his amendment to create a 50 cent-per-gallon tax credit for fuel made from liquefied coal or natural gas. Environmental organizations point out that use of liquefied coal may actually increase global warming, underscoring the possibility that these matters are not exactly within the expertise of the Congressional tax-writing committees.

Senator Carl Levin (D-MI) introduced a bill this week to end the disparity between deductions taken by companies for stock options and the expenses that are actually reported on the companies' books for those options. 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 tax benefit.

When stock options are exercised, employees report the difference between the value of the stock and the exercise price as taxable wages. The employer reports the fair value of the option at the date it's granted in its financial statements, yet takes a deduction for the value of the option on the date it is exercised, which is often much greater. This "book-tax gap" means that how the options are valued for accounting purposes and reported to stock-holders is different from how they're valued and reported to the IRS. Levin's bill would make the amount deducted for tax purposes equal to the value accounted for in financial statements.

According to calculations made by his staff using IRS data and released in June, firms deducted $43 billion that was not included in financial books in this manner between December 2004 to June 2005. CTJ's 2004 study of corporate taxes cited stock options as one of the key reasons corporations were able to avoid taxes.

Michigan lawmakers ended a four-hour partial government shutdown early Monday morning by enacting two bills designed to deal with a projected $1.75 billion deficit. House Bill 5194 includes an increase in the state's single income tax rate from 3.9 to 4.35 percent. The rate increase will be phased out between 2011 and 2015 and is expected to increase revenues by $765 million a year. The second revenue-raising bill ( HB 5198) broadens the sales tax base to cover many services, including landscaping services, bail bond services, and even baby shoe bronzing services. This is expected to increase state revenues by $750 million. The budget also includes $440 million in spending cuts.

Michigan lawmakers deserve credit for making tough decisions to ensure that the state can work to adequately meet the needs of Michiganders. We expect other states will eventually follow Michigan's lead and expand their sales tax base as economies continue to change from goods-based to service-based. For more on sales tax base expansion options see ITEP's policy brief.

Maryland Governor Martin O'Malley continues to release details of his ambitious revenue-raising plan, which would use income tax, sales tax, cigarette tax and gambling revenues to close a $1.7 billion structural budget deficit. The latest wrinkle: a progressive low-income sales tax credit, which would offset a small part of the O'Malley plan's sales tax increase by giving each household earning less than $30,000 a $50 tax credit.

But the most controversial part of the O'Malley package -- allowing slot machines at Maryland race tracks -- ran into a major road bump this week, as Maryland Senate Republicans signaled that they would not support slots as part of a tax package. Since slots would ultimately account for close to a third of the revenues from O'Malley's proposal, this casts doubt on whether O'Malley's planned special legislative session for tax reform will take place this fall. The Baltimore Sun thinks that's a good thing. The Washington Post's Steven Pearlstein has a level-headed critique of the governor's plan here.

Senator Carl Levin (D-MI) introduced a bill this week to end the disparity between deductions taken by companies for stock options and the expenses that are actually reported on the companies' books for those options. 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 tax benefit.

When stock options are exercised, employees report the difference between the value of the stock and the exercise price as taxable wages. The employer reports the fair value of the option at the date it's granted in its financial statements, yet takes a deduction for the value of the option on the date it is exercised, which is often much greater. This "book-tax gap" means that how the options are valued for accounting purposes and reported to stock-holders is different from how they're valued and reported to the IRS. Levin's bill would make the amount deducted for tax purposes equal to the value accounted for in financial statements.

According to calculations made by his staff using IRS data and released in June, firms deducted $43 billion that was not included in financial books in this manner between December 2004 to June 2005. CTJ's 2004 study of corporate taxes cited stock options as one of the key reasons corporations were able to avoid taxes.

Faced with a looming budget hole, Illinois lawmakers shied away from addressing tax reform this year -- and elected officials in the state's biggest local government, Chicago's Cook County, now find themselves asking the hard questions state lawmakers avoided. A recent report from the Center on Tax and Budget Accountability shows that the county's current budget hole, estimated at $288 million, reflects a "structural deficit" -- that is, a recurring imbalance between the services a government provides and the revenues it uses to fund those services -- that will grow to over $800 million a year by 2012. The CTBA report explains that the county's heavy reliance on slow-growth property taxes and a narrow local sales tax base make the tax system incapable of keeping pace with the cost of funding important services. County lawmakers have proposed an increase in the county's already-high sales tax rate (without expanding the sales tax base to include currently-untaxed services), which would reduce the deficit but wouldn't directly address the sustainability concerns raised by the CTBA report.

Meanwhile, state and county lawmakers are engaged in a tug of war over whether to extend the county's soon-to-expire temporary caps on the growth of residential property taxes. The Chicago Tribune explains succinctly why such caps are bad policy.