Republicans

The Republican candidates are in many ways stuck in a routine that does not look very promising. They all support lower taxes but are unable to square this with the fact that Americans aren't clamoring for the drastic cutbacks in public services that new tax cuts would inevitably require. They have generally tried to wish this fact away with the claim that tax cuts actually result in increased revenues (because tax breaks encourage work and investment and thus profits and incomes explode, pushing revenues up). Unfortunately for them, President Bush's own Treasury Department has refuted the idea that tax cuts come even close to paying for themselves, and recently OMB director Jim Nussle also conceded the same thing.

But we still hear this claim made at the Republican presidential debates as candidates pander to anti-tax extremists. All of them support making the Bush tax cuts permanent and must explain away the fact that this will cost $5 trillion over ten years.

Giuliani and McCain: Denying Reality to Win Over Republican Voters

To cite just one example, former New York City mayor Rudy Giuliani said on October 9 that as mayor he cut taxes 23 times, including cutting income taxes by 24 percent, which he says resulted in a 42 percent increase in the revenue collected from the income tax. (It would have been inconvenient for him if any of his opponents had pointed out that he happened to run the city during a stock market surge that boosted incomes, but no one seemed interested in making that point.) Some people have questioned his claim to have cut taxes 23 times.

Senator John McCain still presents one of the more interesting attempts to rationalize a tax policy that is truly irrational. One would like to believe that he is among the saner candidates at the GOP debates since he voted against the tax cut bills enacted in 2001 and 2003. He explained once again on September 5 that he voted against those bills because they did not include cuts in spending, which he thought were also necessary. But at the same time, he also makes the claim that "it's very clear that the increase in revenue we've experienced is directly related to the tax cuts that were enacted, and they need to be permanent." This is baffling. Why was he adamant about cuts in spending if tax cuts actually raise revenue? Under his logic, he can afford even more spending if we cut taxes.

Both these candidates are also known for their proposals to use the tax code to push families toward the individual health insurance market (the market for coverage that is not employer-based). Individual-based 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. Giuliani would offer deductions for such health care, while McCain would offer credits (which are slightly fairer but still have the same underlying problem).

Romney: Make the President All-Powerful and We'll Get the Budget Under Control

Former Massachusetts Governor Mitt Romney at least seems to acknowledge some relationship between taxes and public spending that coincides at times with reality. However, he claims to stand for smaller government and his strategy to bring about reduced spending, to go along with reduced taxes, is a "line-item veto." He criticized Giuliani for opposing the line-item veto that President Clinton exercised briefly before it was struck down by the Supreme Court. But the proposal Romney favors now is different and technically not a true line-item veto, although it's still possibly unconstitutional.

The legislation he's talking about would probably be similar to what the Republican House passed last year, which would allow the President to single out spending provisions in an appropriation bill (or a bill to expand entitlements), withhold funds and force Congress to vote to approve or reject the rescission (cancellation of the spending). The President would be allowed to withhold funds for a total of 90 days, even if Congress rejects the rescission. This would obviously be an unprecedented expansion of the President's power, and it's not at all clear that a president would necessarily use this power to reduce deficits (it could be used to expand them, actually).

Romney favors making permanent the Bush tax cuts for capital gains and dividends (which resulted in the current 15 percent tax rate for those forms of income) but would go further by eliminating taxes on income from interest, capital gains and dividends for families with incomes less than $200,000. Few middle-class people could really benefit from these sorts of tax cuts. Roughly three fourths of the current tax break for capital gains and dividends went to the richest 0.6 percent in 2005 (as Citizens for Tax Justice pointed out recently).

Thompson: Alternative Maximum Tax, Paid for by Cutting Social Security

Former Senator Fred Thompson recently introduced his own tax plan, which involves eliminating the AMT, extending the Bush tax breaks, and cutting the corporate rate to 27 percent. His plan also allows taxpayers to choose to pay under the existing system (minus the AMT and with the Bush tax cuts) or under a simplified system that would have just a 10 percent rate and a 25 percent rate and almost no deductions or credits. This is essentially a plan introduced last month by the House Republicans that CTJ dubbed the "Alternative Maximum Tax." Because the "simplified" option would eliminate 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.

When asked recently how he would pay for his plan, Thompson said that his tax cuts would cause "growth in the economy" that would result in more revenue. The only change in spending he mentioned was his plan to cut back the Social Security benefits that are promised to future retirees.

Huckabee: The National Sales Tax

Former Arkansas Governor Mike Huckabee continues to tout his plan for a 23 percent national sales tax to replace all other federal taxes. Supporters call this plan a "Fair Tax." 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. 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.

At the October 9 debate Huckabee made the astounding claim that this national sales tax plan "untaxes the poor in our culture." The "Fair Tax" plan does include a monthly, prepaid rebate to households that would theoretically balance some of the regressive effects of the tax on low-income households. But CTJ's study in 2004 of a similar plan found that even after accounting for these "prebates" as supporters call them, the plan still increases taxes on the poor and cuts them for the rich. Further, if the rate would really be as low as 23 percent, that implies massive cuts in public services will be necessary -- and these cuts probably would not come at the expense of the wealthiest families.

Democrats: Social Security Stealing the Show

The recent debating among the Democratic candidates has been a little more sane but still confused. A disproportionate amount of time and energy has been focused on whether or not the cap on earnings subject to Social Security payroll taxes (currently at $97,500) should be raised to deal with the alleged crisis the program is facing.

On October 30, Senator Hillary Clinton made the important point that the talk of "crisis" is generally a talking point used by conservatives who want to privatize the program. This is largely true. The assumptions used to make dour projections about Social Security's insolvency starting in 2041 are considered unreasonably pessimistic by many economists. It's also important to remember that benefits rise with wages, which usually rise faster than inflation. As a result, even if the pessimistic economic assumptions are borne out and benefits scheduled to be paid in 2041 must be reduced by 25 percent, they would still be larger in real terms than those benefits paid today.

Clinton also made the valid point that the most important thing we can do now for Social Security is to start with "fiscal responsibility." The only real problem Social Security has right now is that through the Bush years Congress and the President have spent the Social Security surplus. Social Security currently is taking in more in payroll taxes than it pays out in benefits, and this surplus can be used to pay down the national debt, thus making it easier for us to pay benefits when the baby boomers retire in large numbers. However, Presidents and members of Congress have typically spent these surpluses on other things, except for a period during the 1990s under President Clinton. Finding a way to balance the budget without spending the Social Security surpluses, in other words, basic fiscal responsibility, is indeed the place to start.

Senator Clinton did falter however, when she argued that raising the payroll tax cap would be a tax increase on middle-class Americans. Senator Barack Obama pointed out at the next debate on November 15 that only 6 percent of taxpayers have incomes above the cap so it's simply dishonest to say that raising the cap would constitute a tax increase on "middle-class" people.

But then again, Obama himself seemed to be accepting this logic on October 30, when he said that perhaps they should raise the cap, "potentially exempting folks in the middle -- middle-class folks..." Most people probably took that to mean something like what John Edwards has proposed, which would not raise the cap for people with earnings between the current cap and $200,000 but then raise it for those with incomes beyond $200,000. This would of course create a very peculiar "donut-hole" in the Social Security payroll tax between $97,500 and $200,000 in earnings.

It's also important to note that Social Security replaces a proportion of earnings (a smaller proportion for high-income people), but only those earnings that are actually covered by the Social Security payroll tax. So just as there is a limit on what wages are taxed for Social Security, there is a limit on how much a wealthy person can collect in benefits. It's unclear whether or not plans to raise the cap on wages covered by Social Security payroll taxes would also raise this limit on benefits that can be collected by wealthy individuals.

The Need to Focus on Undoing the Bush Tax Cuts

Lately, the Democratic debates have not focused on the most important tax issue of all, which is also the one they largely agree on. Will the Bush tax cuts be made permanent or not? None of the Democratic candidates would make them permanent (at least not entirely). This is crucial. CTJ projects the total cost of the Bush tax cuts over the 2001-2010 period to be about $2.4 trillion, all deficit-financed. Even if the Bush tax cuts are allowed to expire at the end of 2010, as they are scheduled to under current law, the interest on the increased debt resulting from these tax cuts would keep costing us -- to the tune of $1.5 trillion in the 2011-2020 period. Then, if the tax cuts are made permanent on top of all that, that would cost another $5 trillion from 2011 through 2020.

But the Democratic candidates want to hold on to some tax cuts for the "middle-class." Which tax breaks to extend therefore becomes a trickier question. Each of the Democrats wants to stand up for the middle-class, but there is some confusion about what that would even mean. Former Senator John Edwards would repeal the Bush tax cuts for those with incomes above $200,000, but IRS data for 2005 show that only 2.7 percent of taxpayers had adjusted gross income above this level. The top 2.7 are the only folks who would lose their tax cuts.

Senator Barack Obama tries equally hard to appear pro-middle-class. His plan would cut taxes for 150 million Americans at a cost of $85 billion a year. He would give families a credit of $1000 (or $500 for unmarried taxpayers) and eliminate income taxes for seniors whose income is below $50,000 (although seniors in this category pay little in income taxes anyway). The credit would essentially offset payroll taxes on the first $8,100 in earnings. But it's not entirely obvious that what people in this income category really need is more tax cuts when the revenue spent on this plan could be spent on health care, retirement security or energy efficiency.

But Edwards and Obama both are certainly moving in the right direction. They would both restore the progressivity of the tax code that has been reduced dramatically under Bush. They also want to reduce the tax code's bias for income from wealth over income from work. Edwards would increase the tax rate for capital gains to 28 percent for those with incomes above $200,000 and Obama would raise it to as much as 28 percent for those with incomes over $250,000. When Bush took office, capital gains, which flow mostly to the wealthy, were already taxed at a special low rate of 20 percent. In 2003 that was reduced to 15 percent and dividends, which were previously taxed as ordinary income, were also made subject to the special 15 percent rate. As a result, people who live off of their investments or inherited wealth can actually pay federal taxes at a lower rate than many middle-income people. Edwards and Obama would both end this outrageous feature of the tax code with their higher rates for capital gains.

There are some minor variations among these plans. Edwards wants to make the first $250 in income from wealth (interest, capital gains, dividends) tax-free, which could save a middle-income family $63 at most each year. Obama would eliminate capital gains taxes on startup businesses, which is a strange idea because capital gains is not involved in the starting up of businesses but rather in the selling of assets. But these details are far less important than the overall progressive direction in which both candidates would take tax code.

Senator Clinton has spoken in more general terms about her ideas on taxes. She would also restore much of the progressivity lost during the Bush years by repealing the Bush tax cuts for those with incomes above $250,000. She has not stated whether she would also propose further tax changes for capital gains.

The Democrats' Plans Still Have Costs

But even these more progressive tax plans have costs that must be addressed. The Bush tax cuts expire at the end of 2010. That means that when Democratic candidates say they will do away with the Bush tax cuts for families above a certain income level, that really means they're going to extend the tax cuts for families with incomes below that level. In other words, new tax cuts are being offered, just not to the richest Americans. Whether and how we would pay for these new tax cuts, along with the health care plans and other initiatives promised by each Democratic candidate, is crucial and has not been fully explained yet by any of them.

As Maryland lawmakers pack up after completing a month-long special session on tax reform, dozens of Maryland lobbying groups are thanking their lucky stars they didn't get dinged.

Typical is the reaction of the Mid-Atlantic Carwash Association, which isn't happy that sales and cigarette tax rate hikes got enacted, but is delighted that the sales tax will still not apply to carwashes:

"All in all, I think we have to feel relieved," said David DuGoff, president of the MCA. "Even though we will get stung by the increases, we can live with them, especially compared to the devastating effect of a sales tax on carwashing."

Every industry goes on record arguing that taxing them would be devastating, of course. But one hopes these guys (and MD lawmakers, to say nothing of the public) can see the big picture. The victory of the car washers, and of the health clubs and the various other businesses that still won't have to collect sales tax because Maryland lawmakers chickened out from doing the right thing, comes at the direct expense of... every other individual and business in the state who currently pays sales tax, and who will now pay sales tax at a higher rate.

And every occasion on which the carwashers win their lobbying battle, marginally increases the likelihood that the rest of us will face a higher sales tax rate (or income tax rate) further down the road. Tax breaks are never free-- everyone else has to pay for them.

It's that simple.

After close to a month of intense debate and lobbying, Maryland lawmakers have agreed upon a plan to increase the state's taxes by over $1 billion a year. After a marathon weekend session, lawmakers came to an agreement at about 2 AM Monday morning-- and Governor Martin O'Malley signed the plan into law before the end of the day.

The full-year effect of the plan's tax provisions won't be felt until fiscal year 2009 (at which point the plan will bring in $1.35 billion a year). And the main non-tax revenue raiser, the much lamented "video lottery terminals," or VLT's, won't bring in their estimated $400 million a year until FY 2012, at which point the package at a whole will be bringing in $1.9 billion a year.

In FY 2009, about 67% of the tax hike is coming from the state sales tax-- most of it by increasing the tax rate from 5 to 6 percent, and a couple hundred million from expanding the tax base to including "computer services."

Here's how the remaining 33% breaks down:
Cigarette tax hike 12%
Car sales tax hike 7%
Corporate tax 10%
Personal income tax 2%

Put another way, 88% of the tax hikes in 2009 are coming from things that hit low-income families hardest (sales and cigarette taxes), and 12% is coming from things that hit upper-income families harder (income and corporate tax).

So it shouldn't be surprising to know that on balance, these tax changes will make Maryland's tax system more regressive. A new report from the Institute on Taxation and Economic Policy, published earlier today, shows the biggest tax hikes, as a share of income, from the agreed-upon tax plan will fall on the very poorest Maryland families.

Today's Washington Post headline on the plan's fairness impact said that experts were "Divided" on the fairness impact of the plan. But the numbers don't lie. The only folks who are defending the legislature plan on tax fairness grounds are those who have a vested interest in seeing it pass-- and who haven't seen the numbers.

But, of course, fairness isn't everything. And it's not even the main goal lawmakers wanted to achieve over the last month. The name of the goal has been adequacy: making sure there's enough tax revenue to fund needed public services.

And, from a short-term adequacy perspective, the legislature has obviously done a good thing here.

But from a longer-term adequacy perspective, the plan doesn't look so good either.

By "longer-term adequacy," I mean sustainability-- the ability of a tax system to bring in enough revenue in the long term. In general, the way to achieve this is through having a broad tax base, eliminating loopholes, and ensuring that your taxes are designed to keep up with economic growth.

The way NOT to achieve this is to ignore the structural flaws, loopholes, etc. in your tax system and just jack up the tax rates.

At every turn, Maryland lawmakers had a choice between raising taxes the smart, sustainable way (by using combined reporting to close a variety of harmful corporate tax loopholes, for example) and doing it the dumb way (hiking the corporate tax rate, for example). And seeminly at every turn, they chose the dumb way.

To stick with the example, Maryland will realize more corporate tax revenues because they hiked the rate. But in the long run, they may not, because they chose not to close the single most threatening corporate tax loophole in the Maryland tax code.

The same song and dance happened with the sales tax, where lawmakers largely squandered an opportunity to redefine the tax base to include more of the services (haircuts, health clubs, etc) that Marylanders are buying these days, and ending up getting most of their money out of a higher tax rate.

On balance, the Maryland legislature has done a good and necessary thing. Their #1 goal was to figure out a way to pay for public investments next year, and they've achieved that.

And while lawmakers failed to fix the leaks in the roof, they can always come back in 2008 to deal with corporate combined reporting, and with an expanded sales tax base.

But it's hard to be thrilled with the legislative outcome here, simply because lawmakers had it in their power to do things in a much smarter way: less rate hikes, more loophole closing.

Wait til next year...

Read ITEP press release.

Victory for Tax Adequacy, Missed Opportunities on Tax Equity and Essential Reforms

The tax plan approved by the Maryland General Assembly on Monday will help provide the revenue necessary to fund vital public services in Maryland, but, according to the latest analysis from the Institute on Taxation and Economic Policy (ITEP), working families will bear the brunt of the tax changes contained in the plan. All told, taxes for the poorest Marylanders will rise, on average, by more than 0.7 percent of their incomes under the Assembly's plan, while taxes for the wealthiest one percent of Marylanders will climb by just over 0.5 percent of their incomes.

Last Tuesday voters made their voices heard on a variety of tax related issues. In Washington State it appears that anti-tax radical Tim Eyman won another initiative battle. The passage of Initiative 960 makes it more difficult for the state to raise needed revenue, but does little to increase government transparency or encourage economic development. Opponents of the measure rightly say that I-960 will increase dreaded red tape and bureaucracy. Read an FAQ about the initiative from the Washington Tax Fairness Coalition here.

But in a victory for tax justice, an earlier Eyman initiative has been ruled unconstitutional. This 2001 initiative, I-747, capped state and local property tax collections at 1 percent each year, unless a higher increase was approved by voters. Be on the lookout for more on how Washington responds to the passage of I-960 as courts may get involved again.

Elsewhere in the Pacific Northwest, a ballot initiative to raise cigarette taxes and to use the funds to provide universal health care for children was defeated in Oregon, due in large part to the $12 million spent by RJ Reynolds and other tobacco companies to oppose it. Governor Ted Kulongoski, one of the initiative's key backers, has vowed to continue the fight for expanding health care.

To read about the outcomes of ballot measures across the country check out this report from the Ballot Initiative Strategy Center.

Vermont is among the states considering replacements for its property tax, but like much about the Green Mountain State, legislators there take a very different approach than their counterparts elsewhere around the country. According to the Burlington Free Press, members of the House Ways and Means Committee have agreed to review a bill later this month that would repeal the existing residential property tax that is earmarked for education and replace it with an income tax dedicated to the same purpose. Municipal property levies and the statewide property levy for non-residents would be unaffected.

On Friday, the U.S. House of Representatives voted 216-193 to pass H.R. 3996, a bill to extend relief from the Alternative Minimum Tax and other tax breaks for one year and offset the costs by reducing tax loopholes for private equity fund managers and others. All but eight Democrats present voted for the bill, while all the Republicans present voted against it.

The AMT provision is known as a "patch" because it prevents the AMT from reaching millions of more taxpayers (as the AMT is scheduled to do under current law) for a year but does not permanently address this problem. A larger bill (H.R. 3970) was introduced by Ways and Means Chairman Charles Rangel (D-NY) on October 25 to repeal the AMT entirely and offset the costs, mostly with a surtax that would reduce the Bush tax cuts for those families with incomes above half a million dollars a year. This bill is a major tax reform that would make the tax code simpler and more progressive without making the fiscal situation worse than it already is.

But because Republicans seem sure to block any provision that would reduce tax breaks even for the richest Americans, Rangel introduced the smaller bill (H.R. 3996) to patch the AMT for just one year, giving Congress more time to consider his more comprehensive tax reform. H.R 3996 borrows many of the good ideas from the larger bill, like closing the loophole for "carried interest" and a loophole that allows private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes. H.R. 3996 would also extend some business tax breaks (such as the research credit) for one year. Smaller provisions in the bill would make the Child Tax Credit more accessible for poor families and would create an additional standard deduction for property taxes for those who do not itemize their tax deductions.

Surprising Amount of Focus on "Carried Interest"

The Republicans chose the counter-intuitive strategy of rallying around one of the most offensive and blatantly unfair loopholes in the tax code, the loophole for "carried interest," which is a form of compensation paid to certain types of fund managers. This loophole essentially allows these fund managers to earn hundreds of millions of dollars and yet pay taxes at a lower rate than their middle-income receptionists.

Citizens for Tax Justice sent members of Congress a new fact sheet explaining that the loophole is a subsidy paid to millionaires, through the tax code, and funded by the rest of us who are paying income taxes at ordinary rates. The loophole is enjoyed by those who manage other people's money but are allowed to pretend that they're investing their own money -- which entitles them to the low, 15 percent rate for capital gains. Contrary to the confusion sowed by fund managers, the capital gains rate for those who actually invest would not be altered.

Citizens for Tax Justice also issued a statement responding to the claim that the real estate industry would be damaged if the carried interest loophole is closed. The vast majority of people who are affected by what goes on in the real estate industry -- realtors, construction workers and home-buyers -- pay income taxes at ordinary rates like everyone else, meaning that they are paying for this loophole rather than benefiting from it.

Most important, however, was the willingness of hundreds of state and local organizations from around the country to tell Congress that this loophole is simply unfair to ordinary taxpayers in their states. Thanks to all the organizations that joined the sign-on letter urging Congress to close the loophole.

Battle Ahead in the Senate

Several in the Senate have suggested that it will be difficult to secure the 60 votes needed to avoid a filibuster in their chamber and approve this bill. Many Republican Senators, including the ranking Republican on the Finance Committee, Charles Grassley (R-IA) have made clear that they would rather increase the federal budget deficit than pay for AMT relief. We would suggest that any anti-tax conservative in the Senate who wants to take responsibility for filibustering AMT relief for millions of taxpayers should go ahead and do so to make his or her position clear to the public.

If the facts aren't on your side, why not just buy yourself a favorable change in tax policy? Well, federal authorities are now investigating whether that sort of approach helped to get legislation to cut capital gains taxes passed in Rhode Island a few years ago. As the Providence Journal reports, former House Majority Leader Gerard Martineau recently plead guilty to two federal corruption charges for the business relationships he maintained with CVS and Blue Cross & Blue Shield while a member of the Assembly and "could still face charges for influencing capital-gains tax-cut legislation" at the request of the former company, the nation's largest retail pharmacy chain.

In 2002, despite scant evidence that tax breaks on capital gains promote economic growth, Rhode Island enacted legislation to gradually eliminate the taxation of capital gains held for five years or more. As the Rhode Island Poverty Institute notes, the Assembly froze the scheduled reduction this year, but in light of the state's continued fiscal problems and the sordid manner in which the initial legislation may have been adopted, restoring the tax should be at the top of the Assembly's agenda in 2008.

Read the ITEP press release.

Governor's Plan Much More Fair than Bill Backed by Key Senate Committee

A new analysis of the tax legislation approved by the Senate Budget and Taxation Committee on Tuesday shows that the Senate's tax changes would impose the largest tax hikes, as a share of income, on low- and middle-income Marylanders. The analysis also shows that the Senate plan's regressive impact is in sharp contrast to the plan proposed by Governor Martin O'Malley late last month, which would make Maryland's tax system less unfair overall.

It's one of those tax policy debates where the battle being fought is basically principle against power. As Maryland lawmakers debate whether or not to expand the state's sales tax base to include personal services such as health clubs and tattoo parlors, lobbyists are emerging from the woodwork to argue that their particular industry is too precious to be taxed. Here's a health club owner explaining why her services shouldn't be taxed, as quoted in today's Baltimore Sun:

"People are trying to save their own lives," Brick said, "and we want to tax them for it?"

Of course, pretty much any producer of goods and services can make a similar case for why their product is socially beneficial, or is a necessity of life, or helps grow the economy, etc. If we exempted all the things we like from the sales tax, we'd be left with... cigarettes and beer. And maybe tax preparation. And you'd have to have a much higher rate on this super-limited base to raise any money at all.

It's tax policy 101: the broader the tax base, the lower the tax rate has to be to bring in the revenue you need. The closer Maryland lawmakers can get to taxing all personal consumption uniformly, the less likely they'll be to have to raise the tax rate down the road.

And, conversely, every time lawmakers cave to the tax-break demands of lobbyist for auto repairs, or tattoo parlors, or dog grooming, the more likely it becomes that the tax rate on the remaining base will be increased.

And there's a basic fairness argument for taxing services, too. In general, if a Maryland consumer spends $20, it shouldn't matter whether it was spent on a pair of scissors or on a haircut. The law shouldn't discriminate.

As quoted by the Sun, an outraged health club member misses this point completely:

"Any time they raise my taxes, I'm not a fan of it...But if the state is going to be a nanny and they are throwing around all these taxes, they should at least be consistent in their message."

But of course, consistency is exactly why lawmakers should tax health clubs.

For more on taxing services, check out this ITEP policy brief.

Next week New Jersey voters will be asked again to let their voices be heard about property tax relief. Last fall voters approved earmarking half of the revenues generated through a one-cent sales tax hike for property tax relief. The question before voters on November 6 will be whether or not to approve a constitutional amendment that would devote the second half of that one-cent increase to property tax relief -- in other words earmarking the entire $1.3 billion raised by the sales tax increase for property tax relief.

Politicians in the Garden State give the ballot measure mixed reviews. Assembly Speaker Joseph Roberts Jr. supports the measure saying, "passage of Public Question #1 must be priority #1." On the other hand Governor Jon Corzine opposes the question though he hasn't actively campaigned against it. New Jersey Policy Perspective President Jon Shure comes out squarely against the proposal for three very good reasons. The amendment reduces the state's ability to be fiscally flexible, it won't help the larger problem that the state continues to spend more than it collects, and it is "yet another Band-Aid applied" until the entire tax system can be fundamentally restructured.

Florida's property tax reform debate may finally be nearing an end - and, then again, it may not. During a special session in June, the Legislature put a plan on the January 2008 ballot to allow homeowners to choose between their existing "Save Our Homes" property tax assessment caps and a so-called "super-exemption" of up to $195,000. That plan was then removed from the ballot by a Leon County court in September because it would have been too difficult for voters to understand. Then, last Monday, the last possible day to do so, the Legislature approved an alternative plan to increase the existing homestead exemption and to permit current residents to take their "Save Our Homes" assessment caps with them when they move, thus putting property tax reform back on the ballot. Yet, as the Miami Herald points out, the state's Taxation and Budget Reform Commission, which itself has the power to put matters before the voters, could come up with another approach for the voters to consider next November. What's more, creating "portability" for "Save Our Homes" may well violate the U.S Constitution, as an analysis by Walter Hellerstein and others found back in February.

Given the particulars of the Legislature's latest plan, a different approach would certainly be warranted. As the St. Petersburg Times observes, the Legislature's latest plan "... takes what's wrong with the current property tax system and amplifies it. The unfair advantage long-time homeowners have over more recent home buyers would be extended. The shifting of the tax burden from homesteaded property to non-homesteaded property would be exacerbated. And the cost for making matters worse would be indefensible."

The Miami Herald offers its compiled coverage on the whole sorry saga here.

The Maryland General Assembly last week began a special session to consider Governor Martin O'Malley's $1.7 billion deficit reduction package, holding hearings on each of the key elements in the package. ITEP staff testified on a number of the tax policy changes the Governor has recommended, including a more progressive personal income tax rate structure, an expansion of the sales tax base and an increase in the sales tax rate, and efforts to close corporate tax loopholes through the adoption of combined reporting. The Center on Budget and Policy Priorities has also released several helpful reports on the Governor's tax proposals, detailing ways to generate additional tax revenue in Maryland and to protect low-income taxpayers from regressive tax increases. Progressive Maryland and the Alliance for Tax Fairness will hold a statewide Town Hall Meeting on Tuesday, November 6 in Annapolis to give concerned citizens an opportunity to express their support for a more equitable tax system. As the Washington Post opines, the fate of Governor O'Malley's proposal is uncertain, but the need for action - and for important reforms like a more progressive income tax and a more robust corporate income tax - are clear.

This week the Iowa Policy Project (IPP) issued a report called Undocumented Immigrants in Iowa: Estimated Tax Contributions and Fiscal Impact. The study's release received much attention in the press by rightly debunking the myth that undocumented immigrants in Iowa don't pay taxes. The study includes estimates of the average property, sales/excise, and income taxes paid by undocumented immigrants in Iowa. The results of the study may surprise many as IPP estimates that undocumented families contribute more than $40 million dollars to state revenues. Similar studies have been conducted in other states and similar myth-busting findings were revealed.

It's never easy to design an effective ballot proposal on tax issues. You've got to explain inherently complicated tax concepts in simple, easy-to-understand language, and you've got to do it in a way that doesn't misrepresent the proposal's actual impact.

In their effort to achieve these goals, the legislative architects of Florida's January 2008 ballot measure on property tax cuts may have forgotten a third important goal: don't violate the US Constitution.

As the Palm Beach Post describes it, the hallowed (since 1999, anyway) principle at issue here is "the right to travel:"

The "right to travel," established by a 1999 Supreme Court decision, gives Americans the right to move from one state to another without being treated less favorably than those who established a home earlier.

The January ballot measure falls afoul of this provision by treating current Florida homeowners much better than, say, someone who currently owns a home in Alabama. Under the legislature's latest plan, a Florida homeowner who is currently getting, say, a $50,000 reduction in his home's value from the "Save our Homes" assessed value cap would be allowed to transfer this tax break to a new (Florida) house when he moves. Someone moving from Alabama would get nothing, and would pay much higher property taxes on the very same home than would the Floridian.

Even if it wasn't unconstitutional, this would be patently unfair. It's hard to defend a tax break that's based not on your ability to pay but on your bona fides as a long-term resident. But now Florida lawmakers have to worry about whether their latest property tax bill violates the highest law in the land.

The fundamental miscalculation lawmakers are making here is that, faced with an unfair tax break that gives too much to some and not enough to others, they've decided the only way to fix it is to give more to everyone. If the US constitutional problem turns out to be legit, "everyone" just expanded to include folks who don't currently live in Florida.

When you're in a hole, the old saying goes, stop digging. Florida lawmakers are in a tax policy hole of their own making, and appear to think they can dig their way out. But a more sensible first step would be to repeal "Save our Homes" and enact property tax breaks targeted to those most in need.

The South Florida Sun-Sentinel's Michael Mayo gives a dispiriting (but probably quite accurate) assessment of Florida's property tax mess in a Sunday column.

True tax reform, and an overall fair and reasonable tax system in Florida, have about as much likelihood of happening as Fidel Castro getting a ticker-tape parade down Calle Ocho.

Mayo's pessimistic assessment is driven by the revised ballot measure referred to voters by the state legislature last month. Since the passage of a property assessment cap known as "Save Our Homes" almost 15 years ago, Florida law has allowed owner-occupied homeowners a tax break that gives the biggest tax breaks to (a) people whose homes are worth the most and (b) people who have owned the same home for the longest time. Who pays for this tax break? In Mayo's words:

Everyone Else (businesses, landlords, recent and first-time buyers, snowbirds).

From a policy perspective, the obvious solution is to repeal "Save our Homes" and enact targeted property tax breaks that are actually geared toward the homeowners, renters and businesses who need it most.

The second most obvious solution is to take Florida out of the diminishing "no income tax" club, enacting a personal income tax to reduce the upwards pressure on state sales taxes and local property taxes.

Both approaches are sound-- but neither is obviously a political winner in the short run. In the spirit of our federal fiscal policies this decade, Florida lawmakers clearly believe that short-term realities require "no losers"-- that is, tax reform shouldn't make anyone worse off. And that's exactly what Floridians will get to vote on in January-- a "reform" that expands the Save our Homes break rather than paring it back.

This is absurd, of course. When you have a group that's received wildly too-generous tax breaks (long-time homeowners) and groups that have been completely hosed (renters, businesses, first-time homebuyers), true reform needs to gore a few oxen. And Florida lawmakers have steadfastly refused to do so.

What's it gonna take to change this depressing trend? Mayo thinks it'll take "voters going against their self-interest and politicians actually leading." He's only half-right on this score-- while it would clearly require lawmakers to show a little backbone, any shift from regressive property and sales taxes towards a progressive income tax will almost certainly make a majority of Florida's voting age population better off. A better way of phrasing it is that voters would need to see through anti-tax rhetoric and recognize where their self-interest lies-- also no easy trick.

By a party-line vote, the House Ways and Means Committee on Thursday approved legislation (H.R. 3996) that would prevent the Alternative Minimum Tax (AMT) from expanding its reach to millions of more families for one year. Ways and Means Chairman Charles Rangel (D-NY) had hoped earlier this year to pass his larger plan to address the AMT permanently, as discussed above, but some lawmakers oppose his provisions to pay for AMT reform and would rather increase the budget deficit. As a result, Chairman Rangel introduced this smaller bill, which includes a "patch" of the AMT for one year at a cost of about $50 billion, and hopes the larger plan will be acted on sometime in the next couple years.

The smaller bill approved Thursday also includes one-year extensions of some special interest tax breaks that are technically temporary but whose extension by Congress has become so routine that Hill insiders refer to them as the "extenders." The extenders cost about $21 billion.

Help for Low-Income Included

Also included is a change in the Child Tax Credit rules to make it easier for poor families to benefit from the credit, as well as a small additional standard deduction for middle-income homeowners. These two provisions combined cost about $4 billion over ten years.

Rangel Stands Firm -- Tax Cuts Will Be Paid For By Closing Carried Interest Loophole, Among Others

The smaller bill borrows some very good ideas from the larger plan in order to pay for the one-year AMT relief and the extenders. One of these provisions would eliminate the "carried interest" loophole for private equity fund managers, which would raise about $26 billion over ten years. Another provision would limit the ability of private equity fund managers to set up deferred compensation arrangements in offshore tax havens to avoid taxes, and would raise about $24 billion over ten years.

Another provision would delay the implementation of a tax break that was passed in 2004 but is not yet in effect. The 2004 tax break essentially expands a loophole allowing multinational corporations to take U.S. tax deductions for interest payments that are really foreign expenses. The provision delays this tax break several years and raises $25 billion over ten years.

Republicans Say Their Own Tax Laws Will Lead to the Biggest Tax Increase in History

Republicans members of the committee were hostile to the offsets and argued during the markup of the bill that the AMT should be repealed and the revenue should not be replaced because it was never intended to be collected. This ignores the fact that the Bush Administration intentionally decided not to permanently fix the AMT when it enacted tax cuts in order to mask the true cost of those tax cuts. It also ignores the fact that the Bush Administration, like Congress during both Republican and Democratic control, has budget plans that assume the expanded AMT revenue (based on current law under which the AMT will expand its reach) will be collected.

Congressman Earl Blumenauer (D-OR) pointed out the irony of the minority party's argument. Republicans at the hearing seemed to say that the expiration of the Bush tax cuts -- which was written into the laws enacted by President Bush and the Republican Congress, along with the scheduled expansion of the AMT that was intentionally left in place when Republicans controlled Congress and the White House -- would lead to the "biggest tax increase in history." Even if we believed that allowing the tax laws to exist as they're currently written could constitute a tax increase, it would be hard to understand why the complaints are coming from the party that held power and passed a major tax bill every year for six years.

Meanwhile, even the conservative Washington Times has editorialized that "it seems disingenuous" for the GOP to call Rangel's plan a tax hike.

Tax Reform Agenda In Maryland - ITEP Testimony on:

Closing Corporate Loopholes with Combined Reporting - October 31, 2007

Making the Personal Income Tax More Progressive - November 1, 2007

Expanding the Sales Tax - November 1, 2007