There's usually good reason to view proposed tax breaks for business with a bit of skepticism. Countless tax preferences granted to businesses lack any economic or policy justification, often instead being the result of the hard work of business lobbies or simply the nagging paranoia many legislators have of their state evolving into an "unfavorable" environment for business.

A recent business tax cut approved by Colorado's House Finance Committee, however, enthusiastically breaks this mold. The proposal under consideration eliminates the business personal property tax for businesses with less than $7,000 in personal property (i.e. those least able to pay) such as furniture, computers, and software. The business personal property tax has been the subject of serious criticism and reform efforts across the country for quite some time, most recently in Arizona, Florida, Idaho, Maine, and Utah.

One of the primary complaints of those involved in these movements has been that the business personal property tax is too complicated. Calculating one's tax involves taking account of every item used in the operation of the business, and then determining the item's current value from fairly complicated depreciation tables. For larger businesses that have sufficient staff to undertake this process, the burden may be only a minor inconvenience. For small businesses, however, the costs associated with figuring out what one owes can easily exceed the actual tax bill. The government faces a similar hassle in reviewing the lengthy tax returns submitted by small businesses, often with gains in revenue of no more than $50 or $100 per return for businesses of the size that will be benefited by this proposal.

Colorado has taken a well-targeted approach to reducing the problems faced by small business (as well as government itself) as a result of this tax. By exempting businesses possessing less than $7,000 worth of property from paying, the state will have reduced the number of businesses subject to the tax by about 30,000. Not only will this save the government a lot of hassle, but by targeting the tax relief to businesses with the smallest amount property, only those that were paying the smallest amounts anyway will be affected. This is the reason that the price tag of the reform is quite low, at $2.6 million annually statewide with $600,000 of that picked up by the state. The cost is also kept low by the fact that the $7,000 exemption does not apply to businesses with more than $7,000 of property - large, likely more profitable, companies will see no windfall benefits as a result of this legislation as they must continue to pay taxes on even the first $7,000 of property they possess. And finally, as government tax agencies see their workloads decline significantly they will have more resources available to scrutinize the returns of those larger businesses that actually pay significant amounts in property taxes.

But the issue here is not a concern for most states. About ten states currently do not tax any business personal property, while most others have exemptions much higher than Colorado's current $2,500. Nonetheless, if this proposal becomes law the state will deserve much credit for deciding to approach a business tax cut in a much more responsible manner than is often the case.

On Wednesday, the House of Representatives voted 236-182 to pass an energy tax bill that would shift nearly $18 billion in tax breaks away from oil and gas companies to renewable energy. The President has stated that he would veto the bill (H.R. 5351) if passed by the Senate. Congress attempted to include a very similar set of tax provisions in last year's law improving fuel efficiency standards, but failed -- by just one vote -- to obtain the sixty votes needed to defeat a filibuster and keep the tax provisions in the law. This year that vote could go very differently, as Democrats may use the budget reconciliation process for an energy tax bill. Under this process, the budget resolution could spell out some fiscal goal and then Congress could later pass a bill meeting that goal with just a simple majority of votes in the Senate instead of the usual 60 needed to overcome a filibuster.

If passed by both chambers of Congress, this maneuver would set up a very public fight with the White House over whether tax breaks should be targeted toward big oil and gas companies or renewable energy.

H.R. 5351 would extend and modify the "section 45 credit" for energy from renewable sources like wind, geothermal and hydropower, at a cost of $6.6 billion over ten years. Other provisions costing over a billion dollars each include a $4,000 credit for hybrid vehicles that can be plugged into an electric socket for recharging, bonds for state and local conservation programs, the extension and modification of a $300 credit for energy efficiency improvements in homes, and bonds for infrastructure in and around the World Trade Center. Several other provisions would promote the production and use of renewable fuels and other goals.

The costs of these initiatives would be offset by provisions that reduce or eliminate tax breaks for oil and gas companies. The largest of these provisions would raise $13.6 billion over ten years by barring large oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction) and limiting the deduction for smaller oil and gas companies.

Earlier this week, legislators in Minnesota overrode Governor Tim Pawlenty's veto and enacted a $6.6 billion transportation plan, one of the key elements of which is a 8.5 cent per gallon increase in the state's gas tax. While higher gas taxes tend to fall harder on low-income individuals and families, the plan does include a refundable low-income tax credit of up to $25 per family to help mitigate the regressive impact of the larger levy. Other states considering proposals to raise their gas taxes to meet transportation funding shortfalls would do well to follow Minnesota's lead and provide similar credits.

A gas tax increase that will soon be before the Nebraska Legislature may also be worth emulating in some respects. A bill there would effectively increase the state's gas tax by 3 cents per gallon. But it is the means by which that increase would be accomplished that is notable. The bill would reduce the existing gas tax by 8 cents per gallon and instead impose a tax equal to 5 percent of the wholesale price of gas. Using what amounts to a sales tax on gasoline rather than an excise tax is preferable since it ensures that state revenues are more responsive to economic growth.

Lastly, raising the gas tax wasn't envisioned in New Jersey Governor Jon Corzine's transportation or budget plans, but, in a new report, New Jersey Policy Perspective (NJPP) argues that it ought to be part of any comprehensive approach to improving state finances. In observing that the New Jersey gas tax has been raised just once since 1972, the NJPP highlights one of the key flaws with excise taxes like the gas tax... they fail to grow with inflation, the economy, or personal income. NJPP points out that a 20 cent increase in the Garden State gas tax would mean $1 billion in new state revenue, a portion of which could be used to lessen the impact of such a change on low-income residents or to support mass transit improvements for all.

Despite a school funding debate that is now a decade old, New Hampshire remains one of just two states in the nation that lacks both a sales tax and a broad-based income tax, instead relying principally on property taxes to support vital services. (The other state in that pairing, Alaska, can at least rely on revenues generated from its energy resources.

This absence of alternatives to the property tax is perpetuated by the so-called "pledge", a vow to oppose income and sales taxes to which numerous candidates for public office in the Granite State have committed themselves. In the weeks ahead, though, many New Hampshire voters will have an opportunity to instruct local officials to forego such misplaced promises. Due to the efforts of the Granite State Fair Tax Coalition, residents of 88 of New Hampshire's 221 cities and towns will have a chance at upcoming town meetings to approve resolutions calling on legislators to reject the "pledge" and to keep an open mind about all revenue raising options.

Conservative critics say that the resolutions are a veiled attempt to impose an income tax, while others maintain that a more direct approach would yield more tangible results. Still, it's hard to argue against something that simply suggests doing what anyone would do when confronting a major problem... keeping all of one's options open.

Click here to learn more about the Granite State Fair Tax Coalition.

While the coalition isn't advocating an income tax, some state lawmakers are discussing far-reaching tax reforms that would lead to a fairer and more sustainable tax system in the Granite State. Rep. Jessie Osborne explains her approach to a "tax swap" here.

This week tax justice advocates in Virginia (including the Commonwealth Institute and the Virginia Organizing Project) defeated a bill that would have favored large companies with out-of-state business at the expense of smaller "mom and pop" establishments. House Bill 1514 had been approved by a daunting 94-0 vote in the House, but then the bill hit a massive road block in the Senate Finance Committee, which voted 9-7 to not take action on the bill this year and instead carry the bill over to next year.

This bill would have allowed manufacturers operating in the state to figure their tax bills using a Single Sales Factor (SSF) apportionment approach. Each state uses its own apportionment formula, which is basically a formula to separate each company's nationwide taxable business income into an "in-state" portion and an "out-of-state" portion. Often these formulas use three factors in determining tax liability: the percentage of the corporation's property, payroll, and sales that are in the state. Currently Virginia has a double-weighted sales tax formula that relies on all three of the factors mentioned, but doubles the sales factor in the calculation. The SSF approach would use only a sales component. The Commonwealth Institute published a brief describing the pitfalls of this approach.

Allowing manufacturers to have the option of using only a sales component has not proven to be an effective economic development tool in the eight states that had SSF in effect for at least six years. The brief explains that "smaller Virginia firms, which are not as likely to be taxable in other states, are not able to profit from this approach, while their significantly larger, multistate competitors are." Some have claimed that the SSF approach can lead to company relocation, but there is little evidence to back this. For example, in 2005 Michael Mazerov at the Center on Budget and Policy Priorities wrote a paper which found that the SSF "tax incentive have had little impact on Intel Corp's major plant location decisions."

Iowa Governor Chet Culver is usually committed to closing corporate tax loopholes. As in 2007, he is championing combined reporting legislation, which would reduce corporate tax avoidance by requiring a multi-state corporation to add together the profits of all of its subsidiaries, regardless of their location, into one report. This is better from a tax enforcement perspective than separate accounting, which allows companies to report the profit of each of its subsidiaries independently. Separate accounting is often cited by critics as an "open highway for tax avoidance." Despite studies from the Iowa Policy Project and the Center on Budget and Policy Priorities which show that combined reporting is an essential tool for policymakers looking to close tax loopholes and level the playing field for all types of businesses, the Iowa Legislature has reacted lukewarmly to the idea.

The state's legislature shows no such hesitation, however, when it comes to providing tax giveaways to large corporations like Microsoft. This week the Legislature passed HF 2233, which will expand certain property and sales tax exemptions for "web search portal business and property," apparently in a bid to lure the software giant to the state. The governor, despite his stance on other corporate tax issues, signed the bill on Thursday.

Many anti-poverty advocates advise low-income families not to resort to Refund Anticipation Loans (RALs) when filing their taxes. RALs allow filers to get their tax refund quickly by borrowing against that refund. According to the Center for Responsible Lending (CRL) these cash advances come at a steep price, with interest rates ranging from about 40% to over 700%. CRL says that in 2003 over 12 million people took advantage of an RAL, which translates to over a billion dollars in fees for tax preparation companies.

Of course, many teetering on the edge of poverty may genuinely need extra cash as soon as possible to pay bills or to deal with some emergency. Acknowledging this, New Jersey Citizen Action has followed the lead of the city of San Antonio and offers alternative refund anticipation loans with lower fees. Governor Corzine recently signed legislation that allowed nonprofit organizations like New Jersey Citizen Action to offer free tax preparation services and loans. The legislation also "prohibits tax preparers from requiring clients to take refund-anticipation loans and requires preparers to provide itemized statements of charges related to the loans and other services."

An unusual event took place in Minnesota this past week - support for increasing taxes was widespread enough in the Minnesota legislature to override Republican Governor Tim Pawlenty's veto of a transportation finance bill. Unfortunately, the roughly $6 billion in transportation funds will come from a variety of regressive revenue sources, including increases in gasoline taxes, license fees, motor vehicle excise taxes, and general sales tax rates in several counties.

Also included, however, is one interesting measure designed to partially offset the disproportionate burden placed on low-income Minnesotans by the bill: a refundable gasoline tax credit. The credit, totaling $12.50 for single taxpayers and $25 for married filers, is available only to low-income Minnesotans. Though a credit this small would normally be seldom applied for, Minnesota's generous EITC and property tax circuit breaker encourage more low-income persons to file state income tax forms than is the norm in many states. Applying for the additional $12.50 per-person credit should therefore be only a minor inconvenience for most eligible filers.

The credit does suffer from another problem, however. A credit of $12.50 per-person is enough to offset the 5 cent gasoline tax increase on only the first 250 gallons of gasoline purchased. Data released by the U.S. Department of Transportation, however, suggests that the average annual per-capita consumption of gasoline by Minnesota motorists is much closer to 500 gallons. Ultimately, while the idea behind the Minnesota gasoline tax credit is very sensible and relatively unique (and will hopefully catch on around the nation) the credit itself, as a mechanism for improving the fairness of the state's tax system, is not incredibly exciting.

The coupling of a slew of regressive tax increases with the insufficient gasoline tax credit prompted one Republican legislator to question what the bill would mean for "the little guy, the striver, the dreamer". Though the impact on "strivers" and "dreamers" specifically is difficult to determine, the sentiment behind the statement is valid: low-income Minnesotans will be harmed by this bill.

The bottom line is this: Minnesota was justified in increasing its gasoline tax. Since gas taxes are traditionally levied on a per-gallon basis and not indexed for inflation, the real value of the revenue raised from gas taxes inevitably declines with time, leaving states with insufficient funds to maintain their transportation infrastructure unless they continually increase gas taxes to keep up with inflation. Given this reality, the gasoline tax credit enacted by Minnesota was simply too small. Preferably, the credit would have covered not only the entire gasoline tax increase, but also some of the existing (regressive) gasoline tax to which the increase was added. Aside from the gasoline tax issue, the local sales tax, license fee, and vehicle excise tax increases are regressive tax policies enacted only because they were easier to muster support for than an even higher gasoline tax increase would have been. The vehicle excise tax is especially poorly formulated - a $20 tax is levied on any vehicle bought through a retail establishment regardless of if that vehicle is worth $5,000 or $250,000. Not only is such a tax even more regressive than a regular sales tax, but the real returns on that tax, like the gasoline tax, can be expected to fall with time as inflation erodes the value of that $20 collected.

Despite its shortcomings, given political and budgetary realities in Minnesota and the obvious necessity of financing transportation, this bill should at the least be given praise as a fiscally responsible method of paying for transportation projects. At the very least, most everyone should be able to agree that the bill enacted by Minnesota is a better alternative than allowing the state's transportation infrastructure to fall into disrepair.

Other states seeking solutions to their transportation funding shortfalls have plenty of lessons to learn from Minnesota, both good and bad.

We thought it was difficult to keep track of the tax positions of all the GOP presidential candidates. But with the GOP primary essentially over, we're finding that wasn't nearly as difficult as keeping track of the tax positions of one particular candidate: John McCain.

Now that the Arizona senator is the presumptive Republican nominee, it's worth asking what sorts of tax policies he would push for as President. Our honest answer: We have no idea. He has held several views and his recent explanations don't quite explain his various policy permutations. As our Congressional report card covering the years 2001 through 2006 shows, CTJ has given McCain an "A" in some years and an "F" in other years. But one might think that the "real" John McCain could be found by digging deeper, farther back into his history.

So it's worth looking at McCain's record before he ran for president in 2000. As explained in a report issued by CTJ on the senator's record back then, McCain often voted against bills that would reduce the deficit by closing tax loopholes (apparently "pork" is OK in his eyes if it's done through the tax code) or raising tax rates. He did vote in favor of the sweeping revenue-neutral tax reform bill in 1986 (along with an almost unanimous senate), but after the Republicans took over Congress in the 1990s, he sided with his party on bills to provide unaffordable and unnecessary tax cuts.

During his campaign for president in 2000 and for quite a while thereafter, something strange happened to John McCain. He strongly opposed the most central planks in the GOP platform and the driving force behind the conservative movement: tax cuts. Specifically, McCain was one of only two Republican senators to vote against both the 2001 and 2003 tax cuts. It is hard to exaggerate how amazing these votes are, since tax cuts have been the main policy proposal offered by Republican presidential candidates in almost every election since 1980. (Taxes weren't McCain's only deviation from conservative ideology; Jonathan Chait's recent article provides a long list of the ways McCain became a functional Democrat.)

Then, as he contemplated another run for the presidency, McCain had another change of heart. The key provision of the 2003 tax cut bill that he had opposed was the tax cut for capital gains and dividends. But In 2005 he voted for the budget reconciliation bill that extended that very gift to the wealthy for an additional two years.

McCain had earlier complained that "repeal of the estate tax would provide massive benefits solely to the wealthiest and highest-income taxpayers in the country," but in 2006 he decided that repealing most of the estate tax was just fine by him. He voted that year for the bill to gut the estate tax, which won a majority of votes in the Senate but failed to obtain the 60 votes needed for passage.

Now McCain has fully channeled his party's orthodoxy against taxes on the wealthy. He says he wants to make the Bush tax cuts permanent. He wants to slash the corporate tax rate from 35 percent to 25 percent (even though the tax "burden" on corporations in the United States is already among the lowest in industrialized countries).

Now, it would be one thing if John McCain actually offered some "straight talk" to explain all this. If he simply said he was wrong, or he was temporarily blinded by his rage at the GOP, that would be at least understandable. But instead, he has offered an explanation so convoluted that it defies belief.

John McCain now says that he opposed the Bush tax cuts in 2001 and 2003 because he thought they needed to be accompanied by cuts in spending to keep the budget deficit under control. Actually, what he said in 2000 about then-Governor George W. Bush's tax plan was, "I don't think the governor's tax cut is too big... it's just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10% of Americans... and that's not the kind of tax relief that Americans need."

But for the sake of argument let's just take his word that he was concerned about budget deficits. How does he explain his position now, since the deficit is worse than ever? Here's a typical answer given by McCain: He explained at a debate on September 5 that he voted against the 2001 and 2003 tax cuts 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 both baffling and astounding. It's baffling because if tax cuts actually could cause revenues to increase, then we would never need to cut spending ever. In fact, we could cut taxes and the resulting new revenue could be used for increased spending!

But it's also astounding because even Bush's Treasury Department has admitted (in a report released in 2006) that tax cuts cannot possibly pay for themselves. Sure, lower taxes might create some incentive to work and invest, resulting in some more income and thus more tax revenue, but that will never make up for more than a small fraction of the cost of a tax cut.

Does McCain believe, contrary to almost every mainstream economist, the ludicrous proposition that we can raise revenue by cutting taxes? Or has he been altering his view to win over an extreme fringe within his party to win its nomination?

So we have a riddle, and like any ancient sphinx, John McCain is not giving any clear answers. It almost makes us sad that we won't hear more about how Mike Huckabee wants to implement a proposal from the Church of Scientology to abolish the IRS. At least we know where he stands.

Pete Peterson, a co-founder of the Blackstone Group, is retiring from the private equity business and unveiling a new foundation bearing his name. The Peterson Foundation, which will be well-funded and staffed by luminaries like GAO director David Walker and former senator Sam Nunn, will work to promote the idea that entitlement programs cause our nation's fiscal problems, and will address other issues like nuclear proliferation.

As the New York Times reports, there is one problem with Peterson's scolding Americans for enjoying Social Security and Medicare: Peterson himself sees no problem in enjoying government largesse that is provided through the tax code. He has benefited enormously from the tax loophole for "carried interest," which allows buyout fund managers to enjoy the low 15 percent capital gains rate for compensation they receive for managing other people's money. As CTJ has argued in many places, this loophole essentially subsidizes the incomes of millionaires and billionaires through the tax code.

But this type of contradiction is nothing new for Peterson. Back in 1994, CTJ director Robert McIntyre wrote an article in the American Prospect called "False Messiah." He pointed out that the ideas Peterson promoted back then basically came down to (A) slashing entitlement programs that help people to reach and stay in the middle-class and (B) replacing the progressive income tax with a consumption tax that would be a massive boon to the wealthy while increasing the tax burden on everyone else. A consumption tax would make income from wealth and savings entirely tax-free. That's the sort of income rich families have a lot of and poor families have none of.

Nonetheless, Peterson had a remarkable ability even then to present his ideas as advice that would save the middle-class. It will be worth watching his new foundation to see whose interests it really serves.

For many tax justice advocates, Georgia has been a state to watch. House Speaker Glenn Richardson's "Georgia Repeal of Every Ad Valorem Tax" (GREAT) Plan, which would have repealed the state's property tax and replace the lost revenues by expanding the state's sales tax base, appeared to be doomed to fail this legislative session. The Plan faced numerous political road blocks and would have caused an $8.6 billion budget hole for the state according to Georgia State University's Fiscal Research Center. Yet there were many remaining questions regarding how much political capital the Speaker was willing to invest to make his plan a reality. Seeing the writing on the wall, the Speaker is now moving full speed ahead with a Plan-B.

His new proposal would eliminate just the state portion of the property tax in favor of an expanded sales tax base. The legislation also includes a troubling property assessment cap. (Residential assessed values will only be allowed to increase by 2 percent annually.)

A new report from the Georgia Budget and Policy Institute (GBPI) explains the problems with the legislation, which would create a budget shortfall of $827 million and increase the regressivity of the state's tax structure. In an Atlanta Journal-Constitution op-ed, GBPI executive director Alan Essig writes, "Low- to middle-income Georgians already pay a higher percentage of their income in state and local taxes. Swapping property taxes for more sales taxes will only make it worse." He goes on to plead for a reasoned approach to property tax reform while simultaneously making the case for investment in public services. "The speaker's proposals won't keep Georgia moving forward. In fact, his risky ideas for reform would set the state back for generations. What we need is a reasoned plan for reform that adds up and provides adequate revenue while putting in place a fair tax system for all Georgians." We couldn't agree more.

All too often, anti-immigration advocates assert that undocumented families impose huge costs on state budgets without contributing anything to state coffers in return. But a new report from the Virginia-based Commonwealth Institute for Fiscal Analysis finds otherwise. The report, Tax Contributions of Virginia's Undocumented Immigrants, points out that many state and local taxes-- including the sales and excise that fall hardest on low- and middle-income families-- are paid by everyone, legal or not, and estimates that undocumented families in Virginia likely paid as much as $400 million in these taxes in 2006. The widespread attention given the report by Virginia-based media should help to inform immigration policy debates, as similar reports already have done in in Colorado, Iowa, Georgia, New Mexico, and Oregon.

The Commonwealth Institute for Fiscal Analysis has released a report detailing the impact that Virginia's undocumented workers have on the state's budget. The report called Fiscal Facts: Tax Contributions of Virginia's Undocumented Immigrants finds that the state's undocumented population pay between $145 and $174 million in state income, sales, and property taxes. It has recieved wide attention in the media and will help to inform the debate regarding the many contributions made by undocumented Virginians. Similar state specific reports have been issued in Colorado, Iowa, Georgia, New Mexico, and Oregon.

Committees in both houses of the Indiana legislature this week proposed major changes to the property tax reform legislation first reported in the Digest in early February. A Senate Committee left untouched the heart of the bill, which would pay for across-the-board property tax cuts with a sales tax rate increase, but made several serious changes at the margin that strip even the modest gains in tax fairness for low and middle income residents that the original bill had offered. Most importantly, the proposed increases in the state's EITC and renter deduction were pared back, eliminating the only two clearly progressive components of the entire proposal.

In contrast to the Senate plan, a new proposal passed by the House Ways and Means Committee departs fundamentally from the Governor's original plan. The plan endorsed by the House Committee limits homeowner property tax bills to a maximum of 1% of a household's income. Though income-based "circuit-breakers" such as this one are by far the most effective method for ensuring that nobody's property tax bill rises beyond their ability-to-pay it, the version endorsed in this instance has an unknown (but likely large) cost, and unlike every other circuit-breaker credit in existence, would be available even to the wealthiest homeowners. The best circuit-breakers exempt very low income individuals from property taxes entirely, and then limit everybody else's property taxes based on a graduated rate system that may range anywhere from 1% to 9% of income.

Given the constant concerns voiced by Indiana residents since at least July regarding their inability to afford their property tax bills, it is astounding that it took this long for a proposal that directly measures ability-to-pay in calculating property taxes to be given any notable attention. Though in this case the plan is unrealistic and unlikely to pass, adopting an income-based circuit-breaker is especially important in Indiana since its tax system would be made much less fair by the proposed sales tax hike.

The governors of Illinois and Pennsylvania are each seeking to follow the feds' lead and stimulate their economy with tax breaks. Governor Rendell's plan in Pennsylvania is to rebate up to $400 to low-income families with children, with the precise amount of the rebate being determined by the number of parents, number of children, and income earned in the family. In Illinois, Governor Blagojevich's plan is similar to Rendell's proposal in that it is only available to families with dependent children, though it differs in that its income eligibility thresholds are much higher: single-parent families earning up to $75,000, and two-parent families earning $150,000 will be eligible for the full $300 per child credit. Blagojevich's plan could be made more effective and less expensive by lowering the income limits to make these credits available primarily to the low and middle income families who would be most likely to immediately spend tax rebates on everyday needs.

Fortunately, both of these stimulus proposals are refundable, meaning that families receive the money regardless of how much, if any, state income tax they paid. This is an extremely important component of any fair credit or rebate since even though those in the greatest need often pay no income taxes because of their low incomes, they do pay huge portions of their incomes in regressive sales and property taxes.

One additional flaw with each plan is that low-income individuals without children will see no benefit. In terms of both stimulating the economy and assisting those in need, both of these plans could be improved by extending the rebates/credits in some form to individuals without children. This could be done very easily in Illinois by lowering the income eligibility criteria and using the resulting savings to assist low-income, childless individuals.

Under the best of circumstances, this year's presidential candidates have been a little bit vague when discussing their plans for tax reform. There are, of course, politically sensible reasons for the candidates' caginess: presidents don't get to unilaterally make fiscal policy, and specific tax promises can blow up in your face. To make matters worse, tax policy topic #1 this year is a real hot potato: whether each candidate would repeal all (or some of) the Bush tax cuts. So it was a bit of a shock to hear likely Republican nominee John McCain take a page out of the George H.W. Bush playbook in an interview with George Stephanopoulos last weekend:

Stephanopoulos: The number one issue right now, the economy. Senator Obama went at that on Tuesday night as well.
(Plays clip of Obama speech) I admired Senator McCain when he stood up and said that it offended his conscience to support the Bush tax cuts for the wealthy in a time of war. But somewhere along the road to the Republican nomination, the straight talk express lost its wheels because now he's all for those same tax cuts. (End of Obama clip)
Stephanopoulos: He says basically you've sacrificed your principles for the sake of the nomination.
McCain: Well, for a long time, I have said that I thought the tax cuts ought to be made permanent. For a long time back, I said, look, we're going to have spending restraint the way that Reagan did when he restored our economy when it was in the tank, thanks to then President Carter's mismanagement of the economy. And we entered into a great period of prosperity in America. Spending restraint is why our base is not energized. Spending restraint is why we are having to borrow money from China. And we've got to have spending restraints in my view. But to impose on the American people what essentially would be a tax increase of thousands of dollars per family in America is not something I think - well, I'm sure would be bad for the economy of this country.
Stephanopoulos: So on taxes, are you a "read my lips" candidate, no new taxes, no matter what?
McCain: No new taxes. I do not - in fact, I could see an argument, if our economy continues to deteriorate, for lower interest rates, lower tax rates, and certainly decreasing corporate tax rates, which are the second highest in the world. Giving people the ability to write off depreciation in a year. Elimination of the AMT. There's a lot of things that I would think we should do to relieve that burden, including, obviously, as we all know, simplification of the tax code.
Stephanopoulos: But under no circumstances would you increase taxes?
McCain: No.

Whether he intended to or not, McCain went well beyond the scope of the original question here. He won't repeal the Bush tax cuts-- but he also said that he won't increase any other taxes.

Given the breadth of this extraordinary promise, a few follow-up questions are in order: did he really mean to issue a blanket "no new taxes" pledge, or was he still referring just to the Bush tax cuts? Does "loophole closing" count as a tax hike? What if loophole closers are combined with other tax cuts in a revenue neutral package?

Under any interpretation, though, McCain's pledge brings up an important question for his potential supporters: what good is "straight talk" if you can't back it up? The Fort Worth Star-Telegram's Jack Smith explains why McCain's pledge probably isn't worth the paper it was probably written on here.

In his State of the Union Address last month, President Bush restated his opposition to fiscally sound tax policy, declaring "If any bill [that] raises taxes reaches my desk, I will veto it." Many expect that the President will define the term "tax increase" to include any measure that closes or reduces tax loopholes benefiting narrow interests and might even include measures that would merely reduce tax avoidance.

Congress is facing a variety of policy issues that require new funding and is wondering how it can possibly work around the President's demands. In the closely-divided Senate, most bills require 60 votes to win approval, and the Democratic leadership has been thwarted by several Republican filibusters. Below we discuss some of the issue areas where this has become most problematic.

At the end of last year, Republicans in the Senate blocked attempts by Democrats to close tax loopholes and reduce offshore tax avoidance to pay for relief from the Alternative Minimum Tax. The White House had sent signals that the President would veto the Democratic bill if passed. Some Democrats in Congress are adamant that the debacle not be repeated, while some Republicans seem equally committed to increasing the federal budget deficit.

The alternative minimum tax (AMT) was originally created in the late 1960s to ensure that super-wealthy Americans pay at least some federal income taxes no matter how skillful they are at using tax loopholes. In recent years, its reach has expanded because Congress has not permanently indexed for inflation the exemptions that keep most of us from paying the AMT and, even more importantly, because the Bush tax cuts reduced ordinary income taxes without permanently changing the AMT. As more families see their ordinary income tax liability fall below their liability under the AMT, that means the AMT becomes relevant to the lives of more and more taxpayers.

Instead of permanently indexing the exemptions for inflation, Congress has been enacting "patches" to the AMT each year, measures that temporarily increase the exemptions to keep the AMT under control. A permanent fix was not included in the tax cut bills enacted when Republicans controlled Congress because that would have added to the official costs of those bills. Since the Democrats took control of Congress, they've attempted to reconcile AMT reform with their goal of avoiding any legislation that increases the federal budget deficit. Last year, Democrats in the House passed a one-year patch that would have been paid for by closing the loophole for carried interest paid to private equity fund managers and by cracking down on their use of offshore tax shelters. The administration called these provisions "tax increases" as did the Republicans in the Senate, who voted en masse to block the bill. Democratic leaders were then forced to pass an AMT patch that was not paid for, increasing the deficit by $50 billion.

This year there has been some discussion of using special budget procedures to make it easier to pass a bill that pays for AMT relief. If the budget resolution passed by Congress provides "reconciliation" instructions to change taxes or mandatory spending, a bill can be introduced later to accomplish that goal and can pass the Senate with just a bare majority of votes rather than the usual 60. House Majority Leader Steny Hoyer (D-MD) told BNA recently that he would support using the reconciliation process for an AMT patch, but some Democrats in the Senate think that might make it more difficult to pass a budget this year.

In December, Congress passed an energy bill that increases fuel efficiency standards for automobile manufacturers (known as corporate average fuel economy, or CAFE) to 35 miles per gallon by 2020 and requires gasoline to contain a certain level of biofuels by 2022. Previous versions of the bill that included a package of tax provisions were unable to get the 60 votes needed in the Senate for approval, in one case failing by just one vote. Republicans in the Senate cast the revenue-raising provisions in the tax package as tax increases that would hurt the economy. To the contrary, the tax package was a revenue-neutral set of provisions that would merely shift tax incentives from the oil and gas industry, which seems to profit immensely regardless of what Congress does, to renewable energy sources.

House Ways and Means Chairman Charles Rangel (D-NY) has introduced a bill (H.R. 5351) that is similar to the tax package that failed in the Senate. It would extend and modify the "section 45 credit" for energy from renewable sources like wind, geothermal and hydropower, at a cost of $6.6 billion over ten years. Other provisions costing over a billion each include a $4,000 credit for hybrid vehicles that can be plugged into an electric socket for recharging, bonds for state and local conservation programs, the extension and modification of a $300 credit for energy efficiency improvements in homes, and bonds for infrastructure in and around the World Trade Center. Several other provisions would promote the production and use of renewable fuels and other goals.

The bill includes two main revenue-raising provisions to offset the costs. The largest would raise $13.6 billion over ten years by barring large oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction) and limiting the deduction for smaller oil and gas companies. To put that in perspective, this would raise an average of over $1.3 billion a year for ten years, while the net profits last year for Exxon-Mobil alone were over $40 billion.

In the 2004 tax cut law enacted by Congress and the President, manufactured goods under Section 199 were redefined to include oil and gas, thus allowing energy companies to use this tax break that was not initially intended for them. (The deduction is 6% of the cost of domestic manufacturing activities this year, rising to 9% in 2010.) The second revenue-raising provision would restrict the use of credits for foreign taxes by oil and gas companies, raising $4 billion over ten years.

The House and Senate have been battling each other, as well as the White House, over how to reauthorize various agricultural programs under what is usually referred to simply as the "Farm Bill." The battle is largely over how much the federal government should or should not support farming, which farmers should be supported and how. Proposals to raise revenue for a disaster trust fund, conservation and nutrition have added to the controversy. During the swearing in ceremony of the new Agriculture Secretary, Ed Schafer, Bush said specifically that he would veto any farm bill that raises taxes. House Agriculture Committee Chairman Collin Peterson (D-MN) is working on a new version of the bill to end the deadlock and it's reported that this version will attempt to raise revenue without tax increases.

One measure that the President considers a tax increase is a provision the House attached to its version of the farm bill passed back in July (H.R. 2419). Initially proposed by Rep. Lloyd Doggett (D-TX) and endorsed by Citizens for Tax Justice, this provision would raise $7.5 billion over ten years by stopping foreign corporations with subsidiaries in the U.S. from manipulating international tax treaties to avoid taxes. U.S. subsidiaries of foreign corporations don't have to pay withholding taxes on passive income if they are based in a country that has a treaty with the U.S. allowing that country to have the sole taxing power. But corporations based (on paper at least) in a non-treaty country can shift profits from a U.S. subsidiary to another subsidiary in a treaty country and then shift them to the parent corporation in the non-treaty country, ensuring that they are never taxed. The Doggett provision would simply apply the withholding that would apply if the payment was made directly to the parent company in the non-treaty country in that situation. The White House has singled this provision out as unacceptable.

The Senate passed a farm bill in December that had its own revenue-raising provisions. The largest is a provision that would reduce tax avoidance schemes by codifying what is known as the "economic substance doctrine," which basically means taxpayers will not obtain tax benefits from transactions that were entered into for no other purpose than to avoid taxes. In addition to raising $10 billion over ten years, this provision would arguably reduce the economic inefficiency that comes with the exploitation of tax loopholes. Citizens for Tax Justice advocated for this measure (although calling for a stronger version of it) but it is unclear whether the White House will see this as a "tax increase."

Another revenue-raising provision in the Senate bill 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 last year tried to include this change in minimum wage and energy legislation.

Now House Agriculture Committee Chairman Peterson is putting together a new version of the farm bill with the help of Republicans on his committee that will not include the Doggett provision. The White House appears to look more favorably on this effort. This bill would still require $6 billion in new revenue, and it's reported that Peterson is working with House Ways and Means Chairman Charles Rangel (D-NY) on provisions that would accomplish that by enhancing tax enforcement. Several members of the Senate, meanwhile, say that the deal would not invest enough in agriculture and are likely to respond with a new bill of their own.

Many states are in a fiscal crunch and the number of states facing budget shortfalls may be growing. This week the Center on Budget and Policy Priorities released a state fiscal update saying that, "At least twenty-five states, including several of the nation's largest, face budget shortfalls in fiscal year 2009." A sluggish economy, bursting housing bubble, and the decline of tax revenues have all had a significant impact on states and their ability to keep budgets balanced.

It's not always clear that states can act as effectively as the federal government to kick start a sluggish economy, but that doesn't stop them from trying. For any legislation to be effective as a stimulus to counteract a recession, it must be "temporary, timely and targeted," as argued by the Center on Budget and Policy Priorities. Some of the stimulus initiatives being proposed on the state level meet these goals better than others. Tax cuts that are not temporary can do more harm to states in the long-run, and provisions that will not have any benefit until after a recession has passed are useless as a stimulus. Most importantly, those tax cuts not targeted towards low- and middle-income people are not likely to result in new spending that immediately spurs the economy, but will go largely towards savings, which takes much longer to have a positive effect.

Stimulus Plans in the States: Connecticut, Iowa, Georgia, and Ohio

In Connecticut, Governor Jodi Rell has asked legislators to reconsider their economic stimulus proposals, arguing that there is no money available to pay for tax cuts. Senate Democrats there proposed increasing the state's property tax credit by $250 and House Republicans proposed offering tax credits to offset medical and energy costs. It's certainly not obvious that an increased property tax credit is well-targeted, since property-owners tend to have higher incomes than everyone else. Depending on how it's implemented, it may not be timely either.

Policymakers in Georgia have proposed legislation to expand the state's personal exemptions temporarily. The legislation is targeted to the degree that it benefits middle-income people, but it doesn't reach those too poor to pay state income taxes. It's also flawed because it's not entirely timely. A lot of people won't benefit until next year.

Some Iowa lawmakers have adopted a completely different approach to providing economic stimulus by proposing a five-year property tax break for Iowans who improve their homes. According to one state senator, the tax break "really rewards all homeowners that have pursued the American dream of owning their own home." But a five-year tax break does not qualify as temporary, at least for the purpose of responding to a recession. It's also hard to believe that it would be targeted to those who need help and will spend the extra money right away, and it's not clear that any home improvements that result will happen quickly enough to qualify this as timely. Another idea being tossed around is a proposal that would expand the state's sales tax holiday to include all items subject to the sales tax. ITEP has long argued that sales tax holidays are not good policy. In this context it's worth noting that they are usually not targeted well at all, since the benefits go to everyone who shops during the sales tax holiday and because people who need help the most are less capable of shifting the timing of their consumption to take advantage of it.

Ohio Governor Ted Strickland isn't proposing increased tax credits. Instead, his plan includes borrowing $1.7 billion in an attempt to stimulate the state's economy and create 80,000 jobs. If approved by voters, more money would be available for transportation, renewable energy technologies, and local infrastructure projects. Borrowing to fund important investments makes sense in some contexts, but as a stimulus it's unclear whether these investments will give a timely boost to the economy to counteract a recession that is occurring now.

In November, the Treasury Department came out with an intriguing study which looked at income mobility from 1996 to 2005. The study found that income mobility rates (the ability of taxpayers to move between income quintiles) were similar over this ten-year period to those of the previous decade. Interestingly, only about half of those in the bottom income group in 1996 moved up the income ladder by 2005. Clearly there is no guarantee that low-income Americans would see their income grow substantially over this ten-year period.

The St. Louis Post Dispatch published an editorial based on the study which found what many anecdotally already knew. "In America, you can start poor, work hard and end up rich. But winding up rich is easier if you're born to wealthy parents." The Post Dispatch calls for policies that level the playing field for those Americans who aren't lucky enough to be born with a silver (or even copper) spoon in their mouths: "If America truly wants to truly improve the odds of achieving the American Dream, it would work to counter the effects of poverty on children. A larger earned-income tax credit for low-income parents would help. We also should improve school systems and make public colleges and universities more affordable by expanding scholarships and holding down tuition."

The Wall Street Journal's Jesse Drucker explains today using an analysis from Citizens for Tax Justice that the cost of the business tax cuts in the stimulus package passed by Congress last week is over $22 billion over ten years, roughly three times the official estimate of $7.5 billion over ten years.

The official "score," or cost estimate, from the Congressional Joint Committee on Taxation for the entire stimulus package is $124.5 billion over ten years. The cost in 2008 alone is higher -- $151.7 billion -- but part of that cost is recouped later.

That's because the business tax breaks cost $44.8 billion in 2008 but their ten-year cost is officially estimated to be only $7.5 billion, since they consist of moving forward existing deductions for investments (accelerated depreciation and expensing, or immediate depreciation, for certain small business investments). In a technical sense, firms are not getting any new deductions but are just able to take certain deductions earlier.

But Drucker explains, these estimates fail to account for what economists call the "time value of money." Basically, money in your hand today is worth a lot more than the same nominal amount of money in your hand ten years from now, because inflation erodes the value of money over time and because money can be invested at a profit over several years. Of course, business people are perfectly aware of this, which is why they lobbied for this form of tax break in the first place.

The additional cost of the business tax cuts in the stimulus bill can be explained another way: Since the tax cuts are all deficit-financed, they always add to the national debt, resulting in larger interest payments by the federal government (i.e. by the taxpayers). If a deduction is taken now rather than a few years from now, that means we have additional interest we're paying on the national debt over those few years. The table below shows the calculations CTJ made to identify the added interest costs of the business tax breaks in the stimulus bill.

You might ask why the Joint Committee on Taxation doesn't take this extra cost into account. The reason is that the staff of the Joint Committee doesn't take into account any added interest payments that result from tax cuts. All of the provisions of the stimulus bill actually increase interest payments on the national debt since the entire bill is deficit-financed.

Conservative analysts like to ignore the effect of additional interest payments that result from tax cuts, because they generally want the costs of tax cuts to appear smaller. This might be more easily ignored in other situations, but in the case of the business tax breaks that are part of the stimulus package, the additional interest actually triples the costs.

This situation shows that leaving the added interest out of cost estimates for tax breaks can lead to misleading conclusions. Really we should consider the added interest that results from any tax cut proposal as we contemplate its costs. When estimating the costs of a tax cut, Citizens for Tax Justice generally calculates the additional interest payments that result from increasing the national debt and shows how this increases the overall cost of the tax cut. For example, we have calculated that if the Bush tax cuts are made permanent and the costs are not offset (which generally seems to be Republican policy) then the total costs would be just over $5 trillion over the 2011-2020 period, with $954 billion of that in the form of additional interest that results.

President Bush's proposed budget plan for fiscal years 2009 through 2013 envisions huge cuts in education, health, environmental and other programs. Most observers believe that such budget cuts are too draconian to ever be implemented. After all, Congress has rejected many of them before. However, as a new report from CTJ explains, they should be taken very seriously in one important sense: They are exactly the sort of public service reductions that would be necessary if the Bush tax cuts are extended.

The Bush administration concedes that the budget deficit will top $400 billion for fiscal year 2009, but claims the deficit will be reduced thereafter. The President continues to assert, as he did last year, that following his plans will lead to a balanced budget in fiscal year 2012. It is therefore informative to examine how public services would be different in 2012 if Congress followed his advice.

Under the Bush budget proposal, federal spending on veterans' benefits would be 9 percent lower in 2012, as a percentage of the economy, than in 2008. Education and social services would be a fifth lower, natural resources and environmental programs over a fourth lower, transportation a third lower and community development over 62 percent lower. Medicare spending in 2012 would be 9 percent lower than in 2008, as a percentage of the cost of maintaining current services.

Meanwhile, the President proposes to make permanent his tax cuts, which expire at the end of 2010. In 2012, according to the administration's own numbers, those tax cuts will cost $249 billion, which is just over the $229 billion he wants to cut from domestic programs in that year. So his promise to "balance" the budget in 2012 even while his tax cuts are extended clearly involves a trade of massive reductions in public services in return for tax cuts.

The reality is that the President's tax cuts are actually more expensive than this, and there are many more problems with his budget projections, as explained in the CTJ report.

The U.S. Senate voted on Thursday to pass a stimulus bill similar to the one the House of Representatives passed earlier and that resulted from negotiations between House Speaker Nancy Pelosi, House Minority Leader John Boehner, and Treasury Secretary Henry Paulson. The final bill, which was quickly approved afterwards by the House and will now be signed by President Bush, is a bit broader than the original House bill because it extends eligibility for rebates to people who have income from Social Security or veterans' disability benefits but little or no earnings.

This came after Republicans in the Senate succeeded Wednesday night in maintaining a filibuster -- by just one vote -- of the stimulus plan that had been passed out of the Senate Finance Committee last week. The Senate Finance bill was broader, most notably because it would have extended regular unemployment insurance benefits from 13 weeks to 26 weeks.

The filibuster seems to be driven by the conservative ideological principle that tax cuts are always good while public spending is usually bad. Republican Senators and the President could agree with Democrats on the need to provide tax rebates, but could not accept extended unemployment benefits. But the entire point of a stimulus bill is to stimulate the economy. Analysts have found that extending unemployment benefits is actually one of the most effective ways to stimulate the economy because it gives money to people who are most likely to immediately spend it. The tax rebates are likely to be helpful in stimulating the economy, but not quite as effective as extended unemployment insurance benefits. In some cases the rebates will not be spent immediately, meaning they will provide somewhat less of a boost to the economy.

Tax Rebates

The bill approved Thursday provides a rebate equal to income tax liability up to a maximum of $600 ($1,200 for married couples) and provides a minimum rebate of $300 ($600 for married couples). The bill also provides an additional $300 per dependent child. Eligibility begins to phase out for taxpayers with incomes of $75,000 ($150,000 for married couples).

The original House bill would have made the rebates available only for taxpayers with earnings of at least $3,000, while the bill passed on Thursday includes the Senate Finance Committee's provision that makes the rebates available for taxpayers whose combined earnings, Social Security benefits and veterans' disability or survivor benefits equal at least $3,000.

Final Bill Narrower than the Bill Republicans Filibustered

Several provisions from the Senate Finance Committee's bill that Republicans filibustered were not adopted in the final version. The Senate Finance bill would have provided $500 rebates to all taxpayers ($1,000 for married couples) under the income limits, whereas the final bill gives taxpayers at the lowest income levels rebates that are only half as high ($300, or $600 for couples) as the full rebate. The Finance Committee bill also included the extension of unemployment insurance, which was a bone of contention between Senate Democrats, who all supported the extension, and Republicans, who mostly opposed it.

The final bill does not include the additional business and energy tax cuts that the Finance Committee added but does include the two business tax breaks in the original House version. The first is so-called bonus depreciation (allowing businesses to immediately write off 50 percent of equipment and other capital) and the second doubles the amount of certain investments that small businesses can immediately expense from $125,000 to $250,000. Since investment usually requires some time for planning and implementation, these are unlikely to provide the sort of immediate boost that is needed to forestall or counteract a recession. The business tax cuts make up less than a third of the total costs of the bill, however, with the rebate provisions making up the rest.

The Wall Street Journal's editorial board is at it again. Their latest riposte in their ongoing duel with mainstream economics is an attempt to cast a normal upswing in capital gains tax revenue, which always occurs in an economic cycle, as proof that cutting capital gains taxes actually increases revenues. As a new paper from CTJ explains, this revenue is well below the peak it reached during the Clinton era... when taxes were higher.

The Journal points to data from the Congressional Budget Office (CBO) that documents this most recent increase in capital gains tax revenue.

But the CBO points out that capital gains "plunged between 2000 and 2002" because of the economic downturn occurring at the time. The implication is that we would expect capital gains to increase from that low point as the economy recovered even without a new capital gains tax break. In fact, it would be very unusual had they not increased from that very low point, regardless of whether the tax laws had changed.

Revenues from capital gains taxes, adjusted for inflation, are well below their level at the end of the Clinton administration, and capital gains tax revenues are not projected to come close to their Clinton-era levels at any time in the next decade.

Measured as a percentage of the economy (GDP), capital gains tax revenues have actually declined even more dramatically.

A battle over what to do with projected budget surpluses appears imminent in Pennsylvania. Gov. Ed Rendell proposed Monday to use much of the budget surplus to provide rebates of up to $400 to low-income households. Though much less effective than enacting an Earned Income Tax Credit (EITC), this proposal would do a great deal not only to improve tax fairness and the lives of those most in need, but also to stimulate the economy by putting money back in the hands of low-income individuals sure to spend it on their daily needs.

By contrast, Pennsylvania Republicans have proposed using the surplus to cut the income tax rate. Unlike the Governor's proposal, which involves changes only to the current year's tax collections, the Republican plan would alter the Pennsylvania tax code in a way that would permanently restrict the state's ability to raise revenue. A broad income tax rate cut would also benefit the wealthiest Pennsylvanians far more than it would low and middle income taxpayers, and would completely wipe out the surplus and likely force future legislators to chose between cutting services and raising other taxes.

In addition to this plan, some legislators have suggested a "zero growth budget" where government spending increases would be strictly limited to the rate of inflation. Such limitations have proven disastrous for state governments, the most famous example having taken place in Colorado where a similar measure was suspended after education and other public services sharply deteriorated without adequate funding.

Alabama Governor Bob Riley recently unveiled his legislative agenda which included targeted tax cuts for families with incomes less than $100,000. In his State of the State address delivered on Wednesday Riley said, "Our proposal builds on our earlier tax cut and will make the first $15,000 of income for a family of four tax-free. With this plan, 90 percent of Alabama's families will receive a tax cut."

But as the editorial board at the Tuscaloosa News points out, there are better strategies for making Alabama's tax system less unfair. A plan sponsored by state House member John Knight, and championed by Alabama Arise, would tie the state's low standard deduction to the (much higher) federal deduction amount. This approach is preferable to the Governor's plan not only because it would immediately increase the "no tax floor" for low-income families more than the Riley plan, but also because it would eliminate the state sales tax on groceries and pay for these tax cuts by repealing the state's unlimited deduction for federal income tax payments -- a high-end tax loophole that only two other states allow.

As we reported in a recent digest Mississippi Governor Haley Barbour has appointed members to a commission to consider tax reform. The Mississippi Economic Policy Center (MEPC) this week published an op-ed that hopefully legislators and members of the Commission will take very seriously. Ed Sivak, Director of MEPC, says the Magnolia State has "been given the opportunity to strengthen the tax code by making it less regressive." The state has a tax structure that ensures that low and middle income families pay a far higher share of their income in state and local taxes than do the wealthiest Mississippi families.

Policymakers would do well to follow Sivak's advice and follow in the footsteps of 22 other states (plus DC) by enacting an Earned Income Tax Credit (EITC). The EITC helps lift working families out of poverty and would go long way to ensure that Mississippi's tax structure is fairer. For more on the EITC read here.

It's funny how agreeable and bipartisan everyone becomes once it's decided that we need some new tax cuts that are not paid for.

The stimulus package being debated by Congress right now may do some real good for the economy. The theory is that there is excess capacity in the economy and not enough demand, and putting money in the hands of people who will spend it will boost demand and get the engine running again. The part that Democrats and Republicans agree on, naturally, is tax cuts.

They won't be paid for, which makes sense in the short-run since taking money away from the economy would theoretically undo the stimulative effect of giving people more money to spend. It would have been nice to have some revenue-raising provisions that kick in a couple years down the road, when any recession will be over, to ensure long-term budget neutrality, but the world Congress inhabits is far, far, far from a perfect world.

What's amusing about this process is that the President and his allies in Congress make a philosophical distinction between tax cuts and increased spending that has no basis in reality. Both tax cuts and increased spending mean less revenue for other priorities (or in our current situation, a higher budget deficit). And it's not as though the Republicans are against spending because it's targeted to very specific groups; they support countless tax cuts that are targeted towards specific groups and businesses.

Rather, they opppose spending increases because it represents larger government, while giving money back to people moves us closer to their ideal of smaller government in their minds. Of course, this is ludicrous because the government does not actually shrink to a degree that corresponds with any of these tax cuts (the bill is just sent to the next generation), but that seems to be besides the point.

Once we've decided that we're going to increase the deficit to stimulate the economy, we might as well do it in a way that really will be effective in warding off a recession. And as several economists have pointed out, the way to do that is to through benefit programs like unemployment insurance and food stamps because they put money in the hands of people who will spend it immediately rather than saving it, because they have so many needs that are unmet right now. Middle-income and especially high-income people are likely to save any money given to them, which does not have the immediate positive impact on the economy needed to prevent or counteract a recession.

But that would be spending, and spending, in the conservative mind, is always bad. It's better to use tax cuts. Even if the tax cuts cost more revenue and stimulate the economy less, they're still preferable to increased spending.

The plan negotiated between House leaders and the Bush administration includes a small tax rebate for people who work and pay federal payroll taxes but don't earn enough to pay federal income taxes. The White House apparently acted as though this was a concession and extracted, in return, tax cuts for business investment that will probably do little to help the economy because investment usually takes a while to arrange and will typically not really happen until after the recession has passed.

Now Republican leaders in the Senate and the White House have agreed to Senate Democrats' plans to extend those rebates to seniors and people with disabilities who receive Social Security and veterans with disabilities. But they have not yet agreed to extending unemployment benefits, even though that's one of the measures most likely to actually stimulate the economy.

On Monday, February 4, the Senate is expected to vote on an economic stimulus package that was approved by the Senate Finance Committee earlier this week and which includes tax rebate checks mailed out to households as early as May. The more limited House stimulus bill passed on Tuesday reflects a compromise made between House Speaker Nancy Pelosi, House Minority Leader John Boehner and the Bush administration. Democratic leaders in the Senate say enough Republicans will vote for the more generous version to overcome the 60 vote hurdle to approve legislation in their chamber. Failing that, the Senate would likely approve the House-passed version.

Senate Version Sends More Money to People Who Will Use It to Stimulate the Economy

While both versions of the bill include tax incentives for business that have questionable value as a stimulus, over two thirds of the revenues spent in each bill go towards tax rebates for households.

The rebates in the House version would be lower for working people who pay federal payroll taxes but who do not earn enough to pay federal income taxes. Anyone with at least $3,000 in earnings would get a rebate of at least $300 ($600 for couples). Anyone who has tax liability above $300 ($600 for couples) would get a rebate equal to that tax liability, up to a maximum of $600 ($1,200 for couples). The Senate version would simply give all of these taxpayers a $500 rebate ($1,000 for couples). This is probably better as a matter of both fairness and as an effective stimulus, since people at the lower end of the income ladder are more likely to immediately spend any money given to them, pumping it immediately into the economy, boosting demand. Both bills also provide an additional $300 for each child.

The Senate version also takes two other steps that target more money towards the people most likely to spend it right away. First, the $3,000 income threshold for eligibility in the Senate version can be met with both earnings and Social Security, meaning many elderly people and people with disabilities who live on fixed incomes will receive rebates who would not under the House version. Second, unlike the House bill, the Senate version extends the maximum length of unemployment insurance benefits from 13 weeks to 26 weeks, providing a benefit for those who both need it the most and are more likely to spend it quickly.

Senate Majority Leader Nearly Gags

When Senate Finance Committee Chairman Max Baucus (D-MT) first introduced his proposal, most Democrats in the Senate and, reportedly a number of Republicans, were pleased because it looked like a more comprehensive and effective way to ward off a recession. However, in a move that did not please many Democrats, Baucus did away with the provisions to cap eligibility for high-income people, which is included in the version worked out between House leaders and the Bush administration. Senate Majority Leader Harry Reid (D-NV) said this provision "causes me to want to gag," a sentiment that was largely reflected in comments from other Democratic Senators as well.

During the markup of the bill in the Finance Committee, Senator Baucus added provisions that phase out the rebate for taxpayers with incomes above $150,000 ($300,000 for couples). The income limits in the House version are only half as high. But as the Center on Budget and Policy Priorities argues, the Senate bill is still far more progressive overall because of its other provisions.

In his final State of the Union Address on Monday, President Bush warned ominously that families would see a tax increase of around $1,800 if his tax cuts are not extended before the end of 2010, when they expire. A new paper from CTJ explains that only 16 percent of taxpayers will get tax cuts that large in 2010, when all the Bush tax cuts are fully phased in. In fact, the majority of taxpayers will get less than a third of that amount in tax cuts. Further, it's highly misleading for the President to imply that the tax cuts for middle-income families might disappear when even the Democratic presidential candidates have proposed to extend them for anyone who is not among the richest 2 or 3 percent of taxpayers.

Often lost in the debate over whether taxes should be increased or decreased is the fact that we can raise some revenue by doing a better job of enforcing current tax laws. A report issued earlier this month by OMB Watch explains that a lack of funding for tax enforcement by the IRS is costing us money and contributing to the "tax gap," the difference between the amount of taxes owed and the amount actually paid each year. The IRS has estimated that in 2001, $345 billion in taxes due was not collected on time, and around $290 billion of that was never collected. This means that taxpayers who comply with the law are in effect subsidizing those who do not.

The report, Bridging the Gap: The Case for Increasing the IRS Budget explains that IRS staff have been cut back since 1995 and that cuts have been especially severe among the staff who perform audits. Partly as a result of this, the number of audits is down, particularly for those with incomes over $100,000 and for large corporations -- the very types of audits that usually uncover the most in unpaid taxes. The amount of time spent on each audit has decreased and the audits are less often uncovering unpaid taxes, even though the tax gap remains a major problem.

Meanwhile, the report explains, Congress has instructed the IRS to crack down on EITC recipients (even though incorrect EITC payments account for only 3 percent or less of the tax gap) and has funded a private debt collection program that doesn't collect nearly as much money as IRS staff can collect at a given funding level.

The report argues that this situation can be turned around by increased funding for IRS enforcement, improved quality of audits, eliminating private debt collection and focusing more on assisting low-income taxpayers so that they can avoid errors in the extremely complicated EITC application process. Congress should pay serious attention. Increasing the IRS budget is one of the few opportunities lawmakers have to immediately raise revenues by spending money.

Pennsylvania lawmakers continue to tussle over how to cut local property taxes -- and how to pay for it (if at all). The principal plan making its way through the state House of Representatives would cut school property taxes for all Pennsylvania homeowners, and increase the state income tax and sales tax rate to pay for it. But Republican leaders have proposed a variety of alternatives, including a more aggressive plan that would completely repeal school property taxes and expand the state sales tax base. The "repeal everything" bill was rejected earlier this week.

But debate nonetheless ground to a halt later in the week after Republicans sponsored a successful amendment to the principal House plan. As amended, the House plan now focuses entirely on eliminating school property taxes for seniors earning less than $40,000 -- but does not include any tax hikes to pay for it, and does nothing for non-elderly homeowners.

Meanwhile, as the Pennsylvania Budget and Policy Center reminds us, truly targeted tax reform alternatives are receiving a hearing as well, with an Earned Income Tax Credit receiving more attention from state lawmakers this year.

Lost in the excitement over the presidential primary, Florida residents on Tuesday also voted to approve a property tax cut that will unfortunately do nothing to eliminate the increasing unfairness in the state tax system.

Florida already has property tax "caps" which create strange inequities between long-time homeowners and more recent homeowners or new residents. The measure approved on Tuesday includes more tax cuts almost exclusively for Florida homeowners, while renters and businesses should expect to see little change -- aside from future budgetary crunches, since this tax cut is unfunded.

One of the largest components of the cut doubles the amount of a home's value that homeowners can exempt from taxation. Another is a new option for homeowners to continue to enjoy accumulated property tax savings upon changing residences. This measure neglects newcomers to the state while carefully guarding the property tax advantages enjoyed by long-time residents. In fact, it appears so discriminatory and inequitable that lawsuits have already surfaced challenging its constitutionality.

Yet another bill attempting to swap a property tax reduction for a sales tax increase is working its way through a state legislature, this time in Indiana. Low-income Hoosiers can expect to lose out not only because of the regressive sales tax hike (from 6% to 7%). They will also find the distribution of $700 million in property tax credits completely divorced from need-based considerations. Further, the expansion of property tax caps (deceptively labeled "circuit breakers") will inevitably create inequities akin to those running rampant in Florida. The bill also caps the taxes that can be levied by Indiana localities in a manner that does not adequately take account of the rising cost of providing public services.

In an effort to offset the myriad regressive implications of the bill, the Indiana legislature also expanded the Earned Income Tax Credit (EITC) and provided some income tax relief to renters. But these comparatively minor steps will not be enough to offset the harm done to low-income Hoosiers. A recent report released by the Indiana Association for Community Economic Development includes a number of recommendations for reforming Indiana's tax system, most of which are not addressed by the current bill.