Last week Senator John McCain finally completed a process that has been underway for some time now. McCain has worked his way back into his party's good graces by coming out in support of running massive budget deficits to extend the Bush tax breaks and give new tax breaks to business.

It's difficult to remember now, but Senator McCain had said back in 2000, "There's one big difference between me and the others -- I won't take every last dime of the surplus and spend it on tax cuts that mostly benefit the wealthy." He also said of the tax plan George W. Bush proposed while running for president in 2000, "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."

The New John McCain

Let's compare this to the new John McCain, who fleshed out his latest ideas a bit more during a tax day speech in Pittsburgh.

McCain said he would extend the Bush tax cuts, even though over half of the benefits would go to the richest one percent and the cost would be $5 trillion over a decade. He would cut the corporate tax rate down from 35 percent to 25 percent, even though measured as a percentage of GDP, U.S. corporate taxes are among the lowest of any developed country. He would double the personal income tax exemption for dependents to $7,000, which would do the most for those families in higher income tax rates and nothing for low-income people who pay payroll taxes but who do not have taxable income (meaning a family of four with income of less than $25,000). He would abolish the Alternative Minimum Tax, even though about 9 tenths of it is paid by people with incomes over $100,000.

He would enact first-year deduction or "expensing" of "equipment and technology investments, which, along with a lower corporate tax rate, will create new opportunities for tax sheltering by the wealthy. He would ban internet and cell phone taxes permanently because he seems to believe that new technologies need to be granted a waiver from taxes that lasts forever. (If only Thomas Edison had thought to lobby for laws shielding his inventions from taxes.) He would make permanent the research and development credit because he believes innovation comes from the private sector, except not really, because apparently he also believes that no one will invent anything unless we give them a subsidy through the tax code.

And, most tantalizingly, he would offer a simplified alternative income tax that people can choose, at their option, to file. It's optional, presumably because everyone claims they want a simpler tax form but no one can agree on actually giving up the various deductions and credits that make filing ones' taxes complicated. Rather than simplifying tax filing, this will probably lead some people to calculate their tax liability under two different systems to determine which will result in lower taxes.

Massive Cuts in Public Services Would Be Necessary to Pay for McCain's Tax Plan

The Tax Policy Center has calculated that McCain's plans would cost $553 billion in 2012 alone. That's not even including the interest payments on the additional debt that will result, but let's put that aside for a second. McCain claims he can avoid increasing the national debt, at least to a degree, by cutting spending. But the cost of his plan in 2012 is about 17 percent of all projected federal spending that year according to estimates from the OMB (on page 134 for anyone interested). That's a whole lot of spending to cut. Looked at another way, it's more than all the non-defense discretionary spending that year and about equal to discretionary spending on defense.

During his Pittsburgh speech, McCain said he could get $100 billion in "savings from earmark, program review, and other budget reforms" but was not any more specific. The Senator's oft-mentioned earmarks are said to account for only around $18 billion at the most.

McCain has also said that he will obtain $30 billion in revenue by closing corporate tax loopholes. But his corporate tax cut alone is estimated to cost $143 in 2012.

Actually, You Should Just Bill My Grandkids

Then finally, on Sunday, McCain said on ABC's "This Week" that his tax cuts would take priority over balancing the budget.

To get a sense of what a huge shift this is for McCain, remember that during presidential debates he tried to explain away his opposition to President Bush's tax cuts in 2001 and 2003 by claiming that he thought cuts in federal spending should have accompanied those tax cuts to ensure that the nation's fiscal health would not deteriorate.

Of course, what he said back in 2000 also touched on the fact that the benefits of the Bush tax cuts would go mostly to the rich, but the new McCain is apparently unwilling to remind anyone about this.

On "This Week," George Stephanopoulos asked McCain, "If Congress does not give you the spending cuts you say you can get, will you hold off on signing the tax cuts?"

McCain replied, "Uh, no, of course not, because we don't want to increase people's taxes during a recession..."

It's worth pointing out that none of the candidates are actually talking about raising taxes (with the possible exception of the capital gains tax). Allowing parts of the tax cuts to expire exactly as the Republican House, Republican Senate and Republican White House wrote them to expire can hardly be called a tax increase. Further, it would be interesting to know how McCain might explain the prosperity that followed Clinton's tax increase or the economic doldrums that have followed George W. Bush's tax cuts.

The road to progress rarely travels in a straight line. Nowhere has that been more evident than in Massachusetts this month, as a major effort to combat corporate tax avoidance could end up being undermined by an eleventh-hour maneuver to permit businesses to continue to exploit weaknesses in the tax code.

About two weeks ago, the Massachusetts House of Representatives approved a bill that, among other things, would institute combined reporting of corporate income for tax purposes in the Commonwealth. Combined reporting is the single most important reform states can adopt to prevent corporations from using legal and accounting techniques to shift income from one state to another in order to avoid taxation. It is now used in 20 states. Should the House bill be made law, Massachusetts would become the third Northeastern state in as many years to embrace the change.

Yet, during its consideration of the measure, the House approved, with little open debate, a last-minute amendment that would seriously weaken the reform, to the likely benefit of such behemoths as Wal-Mart and McDonald's. The amendment would constrain the Commonwealth's ability to enforce combined reporting, would create new tax planning opportunities for companies with operations both in Massachusetts and overseas, and would compensate companies for accounting losses they might incur due to statutory changes intended to curb tax avoidance. Ultimately, the Massachusetts Department of Revenue indicates that the amendment could lead to annual revenue losses of "at least $100 million to $200 million" -- or about half of the corporate tax revenue the bill might otherwise be expected to generate! Importantly, that expected revenue yield is already diminished by the fact that the bill also would, over time, reduce the tax rate paid by corporations from 9.5 to 7.5 percent and by financial institutions from 10.5 to 9 percent.

Fortunately, as the Boston Globereports, the Massachusetts Senate may reconsider this particular amendment when it takes up the larger reform bill sometime next month. To learn more about the House bill and the impact that it would have, see this latest report from the Massachusetts Budget and Policy Center.

Colorado might permanently loosen a constitutional constraint that has caused the state on-going fiscal damage, the so-called Taxpayer Bill of Rights (TABOR).

Voters approved an amendment to their constitution enacting TABOR in 1992. TABOR limits the growth of state revenues to a combination of inflation and population growth by requiring that any revenue in excess of this limit be refunded to taxpayers. TABOR also requires that any tax increase be approved by voters. The main problem is that inflation is only a very crude measure of changes in the costs faced by state and local governments, which for the most part have outpaced inflation in the rest of the economy.

In 2000, Colorado voters complicated matters further by approving a very different measure, Amendment 23, which mandates an increase in funding for K-12 education by at least 1% plus inflation every year. This amendment was a response to the dismal state of Colorado public schools in the wake of unrealistic revenue restrictions enacted in TABOR.

Enacting both of these provisions made sense to many voters who would like to see both lower taxes and more spending on education. The problem is that the combination of TABOR and Amendment 23 serve to starve transportation, higher education and just about anything that is not K-12 education.

Now, Colorado House Speaker Andrew Romanoff, with the backing of Governor Bill Ritter, plans to unshackle the legislature from these impossible demands. His proposal, if approved by two thirds of both chambers and by the voters, would repeal Amendment 23 and the part of TABOR that requires the state to refund taxes when the revenue limit is exceeded. Fortunately, the citizens of Colorado are likely to look favorably on this proposal, given that they voted in 2005 to suspend TABOR's revenue-refund provision for 5 years. This suspension would essentially become permanent under this proposal.

But one problem associated with TABOR would not be fixed under this plan: tax increases would still require voter approval. Of course, it would be better if the Colorado legislature were allowed to write tax policy themselves. That is, after all, what lawmakers are elected to do. But a related improvement to the policymaking process appears to be on its way. Local legislators will likely soon be given the authority (by a bill expected to be signed by the governor) to propose sales tax increases to their voters without having to first seek the approval of the state legislature.

State legislators in Maine last week missed a great opportunity to expand health care coverage to a significant number of residents. The state's health insurance program was originally created in 2003 with the mission of providing insurance to 135,000 uninsured persons by 2009. Currently, just 15,000 people are covered by the program. The reason for this huge disparity is primarily an unwillingness on the part of legislators to raise taxes to pay for it. In describing this year's legislative session, one representative stated that avoiding tax increases was one of the "overarching goals that we began the budget deliberations under."

Rather than seizing upon the fast-approaching 2009 target they set for themselves, legislators working under the "overarching goal" chose to expand coverage to only 4,000 of the additional 120,000 people they had originally planned to cover by next year. Instead of addressing the problem head-on with needed tax increases, Maine legislators sidestepped the issue by only enacting relatively minor excise tax increases on alcohol and soda.

This proposal is totally inadequate and will disproportionately affect those lower-income Mainers who are most likely to have trouble affording health care coverage in the first place. In addition to having all the regressive traits of the sales tax, excise taxes possess an additional degree of regressivity in their per-unit rather than percentage basis. That is, rather than being levied at a fixed percentage of a product's price (5-7% for general sales taxes in most states), excise taxes are levied at a fixed amount on a specific type of good, regardless of that good's price. The Maine excise tax collected per gallon of wine, for example, is the same 65 cents whether that wine costs $6 or $600 per bottle. The obvious result is that low-income people who purchase less expensive brands will usually face a higher effective tax rate than their wealthier neighbors.

Admittedly, Maine has taken more initiative to provide health care than most states. This does not change the fact, however, that thousands remain uninsured and many would quickly enroll in the state-subsidized program if funding was to be provided in amounts sufficient to meaningfully raise existing enrollment caps. Next time health care is debated in the Maine legislature, policymakers would do well to make assisting the uninsured, rather than steadfastly avoiding tax increases, the "overarching goal" of their work.

A report released this week from Citizens for Tax Justice explains how "tax day" has changed under President George W. Bush. The answer for most Americans is: very little. Despite claims made by the President and his supporters, the tax breaks enacted after 2000 provide little benefit for the middle-class. However, for the richest one percent of American families, tax day is considerably easier. Once the President's tax cuts are fully phased in, the majority of the benefits will flow to this small group of lucky families.

What has changed for most Americans is the very real threat posed by the increased national debt resulting from these tax cuts. The national debt must eventually be paid off with tax increases or cuts in public services that Americans -- particularly the middle-class -- rely on.

The report explains that:

• The tax cuts received by the typical American are nowhere near as large as the President and his supporters imply, and are in fact too small to make any difference in the life of a typical American family.

• When the Bush tax cuts are fully phased in, the majority of the benefits will go to the richest one percent.

• If the Bush tax cuts are made permanent, as the President proposes, the cost will be $5 trillion over the 2011-2020 period. To put that in context, the federal government collected $2.6 trillion in revenue last year.

• The Bush tax cuts received by the richest one percent in 2008 will be more than the funding received by the Department of Education, almost twice as much as the funds received by the Department of Homeland Security and over ten times as much as received by the Environmental Protection Agency.

Several organizations came together on tax day to call on the House of Representatives to pass legislation dealing with the housing crisis -- and to criticize the Senate for passing a bill that mainly gives tax breaks to businesses. (Click here to view coverage by Lou Dobbs). At the press event organized by the Laborers' International Union of North America (LiUNA), the union's president Terence O'Sullivan and others blasted the Senate bill, which CTJ criticized earlier this month. "To call it pigs at the trough would give a bad name to pigs," O'Sullivan said. Representatives from the Economic Policy Institute, the Center for American Progress, ACORN, the Service Employees International Union (SEIU), as well as a woman facing foreclosure on her home all called for action by Congress, and several noted that most of the action needed would be outside the tax code. CTJ director Robert McIntyre said, "If we gave this issue to the agriculture committees, they'd probably give us farm subsidies, so if we give this problem to the tax-writing committees they give us tax breaks because that's what they do. I'm pretty sure we have committees in Congress to deal with housing."

In the House, that committee is the Financial Services Committee chaired by Barney Frank, who wants to allow the Federal Housing Administration to guarantee refinanced home mortgages. Another provision that many advocates want would allow a judge in some situations to rewrite the terms of a home mortgage, but Democratic leaders in the House have cast doubt about whether this can be passed.

The Ways and Means Committee (the tax-writing committee in the House) approved a package of tax provisions that was an improvement over those passed by the Senate and which may be attached to a broader bill. The Ways and Means bill does not include the very worst provision in the Senate bill, the "net operating loss carryback" provision (or NOL carryback). This provision would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.

Unlike the Senate legislation, the Ways and Means Committee bill includes revenue-raising provisions to offset the costs of the tax breaks. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. (For more on these offsets, see last week's article on the House legislation.)

Both bills include a deduction for state and local property taxes available to people who don't itemize deductions (currently this is only allowed for itemizers). At Tuesday's event McIntyre pointed out that most people with mortgages are itemizers, so the people most likely to benefit from this are homeowners without mortgages, making it difficult to see how the provision has anything to do with a mortgage foreclosure crisis. Both bills also include a credit for buying a home, but in neither case would the credit be available for a down payment. It would not be received until after after a homebuyer files taxes after the home is purchased.

In the House version, this is a refundable credit of $7,500 of first-time home-buyers, but it must be paid back over 15 years. In the Senate version, it's a non-refundable $7,000 credit for the purchase of foreclosed homes, which actually might encourage foreclosure. The credit in the Senate bill is disallowed to taxpayers in jurisdictions that raise property taxes, which would hamstring state and local governments struggling with fiscal problems from raising revenue to avoid cuts in public services.

House leaders are hoping to have a full bill ready for a floor vote in early May.

The House of Representatives approved a bill on "tax day" that would end the IRS's use of private debt collection agencies to locate unpaid taxes. The Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719) would ban the federal government from entering into new contracts with the private collectors and the extension of the existing contracts with two companies. (A third company, a scandal-plagued firm based in Texas, was dropped from the program for reasons the IRS would not make public). Similar legislation was passed by the House last year but the Senate did not act.

The IRS's private debt collection program pays contractors a commission of 21 to 24 cents for every dollar of tax debt that they recover, while it's estimated that IRS employees can do the job for about 3 cents for every dollar collected. The private contractors are paid on a commission basis unlike IRS employees, so there is a concern among many that they have an incentive to be overly aggressive and less respectful of taxpayers' privacy rights.

In the Senate, Byron Dorgan (D-ND) has introduced legislation (S. 335), with 23 cosponsors, that would end the private debt collection program. However, the Senate Finance Committee chaired by Max Baucus (D-MT) has not yet acted, and the committee's ranking Republican, Charles Grassley (R-IA) has been particularly vocal about allowing the private debt collection companies, one of which is based in his state, to continue the work for IRS.

The Congressional Budget Office and the Joint Committee on Taxation have estimated that ending the private debt collection program will cost over half a billion dollars over a decade (since that's the net revenue the private companies would collect if allowed to continue). Of course IRS employees could collect much more for the same level of funding, but the budget "scoring" process does not treat funding for the IRS in a manner that accounts for the vast return on every dollar spent on tax collection.

As a result, the House had to come up with provisions that would raise revenue to offset the costs of the bill. One would require that people using money from a health savings account (HSA) provide more evidence that the money was used for a medical expense. HSAs, introduced as part of the Medicare prescription drug law in 2003, are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan (plans with deductibles of at least $1,050 for an individual or $2,100 for a family). One fear health care advocates have about HSAs is that they will, over time, encourage healthier and wealthier people to leave the traditional health insurance market, which will make health insurance even less affordable for those at-risk workers and families who really need it. A fear tax fairness advocates have is that HSAs are just a way for better off people to shelter money from taxes. The deduction is worth the most to well-off families who will likely have health insurance with or without a tax incentive.

Another revenue-raising provision in the bill would close a tax loophole that is used by Kellogg Brown & Root (KBR), which until last year was a subsidiary of Halliburton. As we explained a month ago, KBR used the loophole to avoid hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

Both of these are provisions that would be worthy even if Congress was not trying to raise revenue and they make the overall bill even more praiseworthy. Predictably, the President has threatened again to veto any legislation that ends the private debt collection program, in line with a pattern of positions that choose the private sector over the public sector even in situations in which the latter is able to operate far more efficiently.

ABC news anchor Charlie Gibson perpetuated a myth about taxes at the Democratic presidential debate on Wednesday night. Gibson said of the capital gains tax that "in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down." He asked Senator Obama, who has signaled that he would raise the capital gains tax from its current level of 15 percent to 28 percent, why he would bother doing this if it would actually reduce revenues.

There is just one problem. What Charlie Gibson said is not true. Revenues from capital gains do not rise when the tax is cut. They rise when the economy is booming and they collapse when the economy tanks. In fact, revenue from capital gains taxes is currently well below the peak it reached during the Clinton era ¢Â€Â” when taxes were higher.

A small group of ideologues associated with "supply-side economics" believes that tax cuts can actually increase revenues. While this notion is rejected by most mainstream economists and sounds ludicrous to the average person, members of the media and Congress seem unusually susceptible to being hoodwinked into believing it. Their general idea is that if we lower capital gains taxes, there will be more capital gains realizations (meaning more people sell their property that has gone up in value) because the tax on that profit has been cut, and this will lead to revenue increasing overall.

Even if there are more realizations as a result of a capital gains tax cut, the resulting revenue will be nowhere near enough to make the tax cut budget-neutral, much less revenue-enhancing.

The ups and downs in revenue collected by the capital gains tax seem to have more to do with what's happening in the broader economy than with tax policy. In the early and mid-1990s, when the top capital gains tax rate was 28 percent, the revenues collected by the tax shot through the roof. They continued to climb after the rate was lowered to 20 percent in 1997, but this looks more like the continuation of a preexisting trend linked to economic prosperity rather than a response to the change in the rate. Then in 2001 and 2002 the revenues collected by this tax fell precipitously. This was not following any change in tax policy at all, but clearly linked to the bursting of the dot.com bubble and its ramifications on the stock market.

Capital gains tax revenue did increase after 2003, when the rate was cut again to 15 percent, but we would expect the revenue to rise from the low point of the recession, regardless of what changes were made to the tax code. More importantly, the revenue obviously has not reached the high level of the Clinton years when the rate was higher. Measured as a percentage of GDP, the capital gains tax will probably collect only half as much revenue this year as it did in 2000, when the rate was higher.

Can support for the supply-siders' argument be found if one looks further back in time? No. Charlie Gibson seems to think that capital gains tax revenue fell when the rate was raised as part of the 1986 Tax Reform Act that was signed by President Reagan. The reality is that capital gains realizations surged in anticipation of the rate increase (which took effect in 1987). In other words, an increase in the rate actually increased revenues, albeit temporarily. After that, with fewer gains to realize, realizations predictably declined, and eventually returned to their normal level -- until the Clinton adminstration, when the stock market went up so much that realizations boomed.

When Gibson pressed Senator Obama a second time, insisting that cutting the capital gains tax rate would raise revenue, Obama replied, "Well, that might happen or it might not. It depends on what's happening on Wall Street and how business is going." Obama also brought up the issue of fairness in the tax code, and the fact that wealthy people with capital gains can pay less in taxes than middle-class Americans, which is an unacceptable feature of our system.

Senator Clinton, however, stated, "wouldn't raise [the capital gains tax rate] above the 20 percent if I raised it at all. I would not raise it above what it was during the Clinton administration." This is an unfortunate response. The rate was higher than 20 percent during most of the Clinton administration and the economy thrived and revenues poured in. And, since the revenue "baseline" used by Congress already assumes that the rate will revert to 20 percent when the Bush tax cuts expire at the end of 2010, no "new" revenue will be raised to pay for the candidates' health care proposals or other new initiatives by simply letting the rate revert to 20 percent.

House and Senate committee chairmen continue their months-long battle over reauthorizing various agriculture programs under what is usually called the "farm bill," and some of the consternation is over tax provisions. Both chambers earlier agreed that they want to spend $10 billion over the spending "baseline" for the programs (which is essentially an assumption of a continuation of current policy). But the version House conferees recently offered cut that down to $6 billion above baseline by removing a disaster trust fund that several Senators want, while Senate conferees want to include $2.5 billion in tax breaks related to agriculture and energy.

Among the tax breaks is a half a billion dollars in incentives related to livestock, including a provision that would reduce capital gains taxes on horses which is supported by Senate Minority Leader Mitch McConnell (R-KY). Other tax breaks range from incentives to protect endangered species to encouraging the use of energy from wind and other sources, many of which seem to have little, if anything, to do with farming.

How to pay for new spending and tax breaks has also been controversial.

The White House had opposed a revenue-raising provision that 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. The Senate passed a farm bill in December that had its own revenue-raising provisions. The largest was 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. Citizens for Tax Justice advocated for this measure (although calling for a stronger version of it).

Now the House Ways and Means Committee chairman Charles Rangel (D-NY) has proposed a different revenue-raising provision that would require credit card issuers to report payments made by cardholders to merchants. The Senate wants to raise revenue by requiring brokers of publicly traded securities to report the basis of a security in a transaction to ensure that capital gains taxes are paid fully. If that sounds familiar, it is. The House Ways and Means Committee included that offset in the package of tax provisions it approved to address the foreclosure crisis, as reported in this Digest.

An extension of the farm bill currently in effect expires Friday, and the White House has threatened to veto another extension.

Just in time for tax day, recent reports from California, Connecticut, and North Carolina remind us that the overall distribution of taxes in most states is tilted heavily in favor of the wealthiest. Those least able to pay almost always pay a much larger share of their incomes towards taxes. For instance, California's tax system, despite featuring a highly progressive income tax, requires the poorest fifth of taxpayers to devote 11.7 percent of their incomes to taxes on average. At the same time, the richest one percent of Californians pays just 7.1 percent of their incomes in taxes.

Indeed, Meg Gray Wiehe of the North Carolina Budget and Tax Center could have been writing about almost any state when she recently opined that "when lawmakers consider any changes to North Carolina's current revenue system, they should account for the effect the change will have on low- and moderate-income taxpayers. If fairness is not at the center of every tax policy debate, reform efforts will fall short on achieving long-term adequacy. Focusing on fairness will help the state meet its needs without relying on those with the least to contribute." To read more about how states can make their tax systems more equitable, see ITEP's Guide to Fair State and Local Taxes.

Earlier this month, Apple announced that it had surpassed Wal-Mart as the largest music retailer in the United States, citing data from market research firm NPD for the first two months of 2008. The announcement will hopefully help to draw more attention to a long-standing shortcoming in some states' tax systems -- namely, their inability to tax electronic commerce properly. Simply put, the form a transaction takes should not affect the amount of tax it might incur. Someone who downloads the latest Mariah Carey album from iTunes should pay the same state sales tax as someone who purchases the CD at his or her local record store, and a hotel reservation made through Orbitz should result in the same amount of revenue to the state as one made over the phone or in person.

Yet, flaws in state tax laws mean that purchases of intangible goods -- like a downloaded version of E=MC2 -- are often not subject to the same sales taxes levied on purchases of tangible goods. For example, California loses an estimated $500 million in sales tax revenue each year because it makes such a distinction between tangible and intangible goods. A proposal to move towards ending that distinction was defeated in the Assembly's Revenue and Taxation Committee this past week, the victim of lobbying by the American Electronics Association, Yahoo, Microsoft, and others.

Similarly, states and localities continue to lose vital tax dollars due to hotel reservations made via the Internet. That is, online travel companies like Hotels.com frequently avoid paying the correct amount of taxes by maintaining that they only owe tax based on the wholesale price they paid to the hotels for the room reservations they offer, rather than the retail price they charge their customers. Different jurisdictions have taken different approaches to this problem. A number of cities have brought lawsuits against hotel resellers, while the state of South Carolina recently served one such company with a bill for $6.3 million in unpaid sales taxes. On the other hand, Florida, predictably, has the worst idea. A bill before one House committee -- and backed by Expedia -- would let online travel companies keep this tax break, at a cost of $22 million in forgone revenue.

The Alabama House of Representatives this week passed a constitutional amendment that would improve the states tax system in three very important ways. Though the vote was contentious, with the amendment gaining only the bare number of votes needed to pass, each of the changes would result in a tax cut for the vast majority of Alabama families and would bring the state tax system closer in line with what most other states have been doing for years.

The centerpiece of the proposal is an elimination of the state's regressive sales tax on groceries. Alabama is currently one of only two states that provides no tax relief whatsoever for groceries, and a majority of states already exempt groceries completely from the sales tax.

Additional tax cuts would be given to almost all Alabama families by tying the state standard deduction to the larger, federal standard deduction. The personal and dependent exemptions would also be increased, though they would not increase with inflation. The most important impact of these changes would be a reduction or elimination of state income taxes for low-income families, but all Alabama families paying the income tax would see a benefit.

Revenue loss associated with these progressive cuts would be offset by ending the state's rare and regressive state income tax deduction of federal income taxes paid. The beneficiaries of the existing deduction are primarily those wealthier taxpayers who have the largest federal income tax liabilities. Unfortunately, there are already rumblings that this change may have to be scaled back in order to get the amendment through the full legislature. Instead of entirely repealing the deduction, it may be the case that the deduction is capped at some amount. Though this would preserve the benefits of this proposal for middle-income taxpayers while eliminating huge tax cuts currently being handed to the rich, it would would produce only a fraction of the revenue generated by a full repeal. Without the revenue created by a full repeal, ending the grocery tax and increasing the standard deduction and exemptions would be much more difficult. Additionally, scaling back the deduction for federal income taxes paid may be seen by some as enough, and could serve to stall a needed repeal of the entire deduction in the future.

An additional problem for the amendment may be a dispute over whether it was fairly passed. The Alabama legislature has a history of allowing other people to cast legislators votes for them when they cannot be in attendance. In this instance, however, there was some question about whether legislators votes were cast in the opposite direction from what they intended. One Democratic legislator admitted to voting in favor of the amendment on other legislators machines, though after this was discovered a motion to reconsider the bill failed and the passage of the amendment was not reversed.

According to the Tennessee Department of Revenue, state and local governments in Tennessee lose over $3.5 billion per year as a result of sales tax exemptions. Just five years ago, that number was only $2.2 billion. Five years before that, only $1.1 billion was lost annually.

So why is this number so large? And why is it growing so quickly? The answer to the first question is especially interesting in light of the fact that Tennessee is one of a minority of states that continues to tax groceries. Exempting groceries is widely recognized as an easy way to reduce the disproportionate impact that sales taxes have on the poor, but Tennessee doesn't do this. So where is the money going? For one thing, less than 40 percent of potentially taxable services in the state are actually taxed. Despite the gains in revenue and in fairness to be had from taxing services, haircuts, taxidermy, limousines, dating services, and many others remain tax-free in the state.

This also helps explain why the losses to the state have grown more than three-fold in the last decade. It is no secret that the U.S. has steadily been moving towards a more service-based economy. As this has happened, consumption has been shifted into purchases that are tax free under Tennessee law. This shift in the economy has a lot to do with why one University of Tennessee professor believes that only 48% of Tennessee's sales are subject to the sales tax. In 1979, it is estimated that that number was 65%.

But services don't explain the entire loss. Under pressure from organized interest groups, year after year, Tennessee legislators continue to add more exemptions to the tax code. This year alone, football merchandize, solar panels, and flatbed farm trucks were proposed to be made exempt from the sales tax. Exemplifying the problem perfectly was one bill that proposed to exempt mulch from taxation. Upon being introduced, a long list of goods including fencing wire and machine oil were added to the bill, ballooning its cost from $88,000 to $1.3 million per year.

This problem is by no means unique to Tennessee. As one South Carolina newspaper recently pointed out, shrinking sales tax revenues are partially a result of "small, targeted tax cuts [that] get even less scrutiny -- and make even more of a mess of our Swiss-cheese tax code". But this problem is especially noteworthy in Tennessee because the state lacks a broad-based income tax. With Tennessee state and local governments relying almost exclusively on sales taxes for revenue, these kind of exemptions are cutting into the fiscal foundation of public services. Tennessee state and local sales tax rates have already been raised to levels that are among the highest in the nation in order to make up for this lost revenue.

On Thursday, the Senate approved the Foreclosure Prevention Act, an $18 billion package of tax breaks and spending that proponents argue will ameliorate the housing crisis, by a vote of 84 to 12. The bill consists of the tax breaks criticized here last week and costing about $10.8 billion over ten years, around $4 billion to be spent through the Community Development Block Grant for local governments to buy or redevelop abandoned and foreclosed homes, and other amendments approved before passage that raised the cost by around $3 billion.

The tax breaks include one provision that would allow companies taking losses this year and next year to deduct them against taxes they paid in the previous four years (instead of the previous two years, as currently allowed) even though it is highly unlikely that this will prevent layoffs of employees or do anything for home builders other than encourage them to dump their inventory.

Another break included is a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which will probably save families $150 at the most. It will be denied to people living in a jurisdiction that recently raised its property taxes, discouraging local governments from raising revenue needed to deal with growing state fiscal problems. Also included is a $7,000 non-refundable credit for the purchase of a foreclosed home which will do little to make housing more affordable and might actually encourage foreclosure.

The House Moves in a Different Direction

Democratic leaders in the House have indicated that they plan to move in a different direction. On Wednesday the House Ways and Means Committee approved an $11 billion package that does not include the loss carryback provision. It includes a refundable $7,500 credit for first-time homebuyers (of any homes, not just foreclosed homes) that must be paid back in equal installments over the next 15 years, which is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $70,000 (or married couples with incomes of $140,000). The House bill also has a deduction for property taxes for non-itemizers, but ,capped at $350 per spouse, it is even smaller than the one in the Senate version.

Whether these provisions will help many people obtain or keep a home seems questionable. Offering people a small interest-free loan and a tiny cut in property taxes doesn't seem useful for those who are facing foreclosure or for communities that want to preserve their neighborhoods. But at least the House bill does not include the Senate's giveaway to business, the loss carryback provision.

Other changes in the House bill include modifications to the Low-Income Housing Tax Credit and other provisions. Both the House version and the Senate version have provisions to allow increased use of tax-exempt housing bonds by states and localities.

The House bill also has provisions to offset the costs of the bill, and these are provisions that should be passed regardless of Congress's search for revenue. One would require that brokers of publicly traded securities report the basis of a given security in a transaction to ensure that capital gains taxes are paid properly. Very generally, a capital gain is the difference between the price a person pays for property and the price the person sells it for later. The "basis" is the initial purchase price, and if it is not reported correctly, this can lead to an underpayment in capital gains taxes.

Another offset would delay and limit an unnecessary tax break for corporations, "worldwide interest allocation," which hasn't even gone into effect yet. Tax rules already let multinationals take U.S. tax deductions for some of their interest expenses that are really foreign. In 2004, Congress actually expanded this loophole with worldwide interest allocation, a change that is scheduled to take effect starting in 2009.

The final outcome for this legislation is unclear given the disagreements between the House and the Senate and given that the White House has signaled that it has misgivings about the Senate bill.

A state-by-state report issued jointly by the Center on Budget and Policy Priorities and the Economic Policy Institute finds that income inequality has been increasing, and that taxes are an important tool for closing the widening gap between rich and poor. The report finds that the rate at which income inequality has been increasing has accelerated in recent years, and that the very richest Americans (those in the top 5% of the income distribution) are especially pulling away from the rest of the pack.

Federal taxes, though, are playing an important role in offsetting this trend. Using data from by the US Census, the report finds that before federal taxes are levied, the top fifth of income earners possess 9.3 times more income than the bottom fifth. After federal tax payments are taken into account, however, that number falls to 7.3 times more than the bottom fifth. So while most Americans may dread April 15, it turns out that day has some positive influences for those concerned with the continued concentration of income in the hands of the fortunate few. Unfortunately, this equalizing influence has become less pronounced in recent years, largely as a result of the benefits the rich have received from the Bush tax cuts. Reductions in federal taxes for the rich are therefore at least partially to blame for accelerated income inequality.

Like the Bush tax cuts, the report finds that changes in state tax systems over the past two decades have contributed to the accelerated rate of income inequality. In times of plenty, states were eager to cut progressive income taxes, but whenever budgets began to get tight, states turned primarily to regressive sales taxes and fees to fill the gap. The report warns that with states now "on the brink of another fiscal crisis", this habit needs to be abandoned.

Increasing taxes, especially on the wealthy, can both slow the trend of increasing income inequality, and actually close budget gaps with less harm to state economies than what typically results from large spending cuts. The report advocates increasing income taxes, enacting or expanding low-income credits, and avoiding corporate and estate tax cuts as sensible tax policies for addressing growing inequalities. As noted in the report, and documented extensively by the Institute on Taxation and Economic Policy, state tax systems, unlike the federal tax system, are regressive and therefore actually widen the income gap. The increasing income inequality documented in this report provides yet another reason for state policymakers to take the regressivity of their tax systems very seriously.

Maryland Governor Martin O'Malley signed a temporary income tax increase on millionaires this week to make up a portion of the revenue lost by the repeal of a recently passed 6 percent sales tax on computer services that had not yet taken effect. Originally intended to be part of a service tax increase on about six different services, the computer services tax ended up being singled out after its lobbying presence was demonstrated to be much weaker than that of the other services legislators were thinking about taxing. That quickly changed as the sector set up a formidable lobbying presence in only a matter of months.

Though the tax on millionaires is a more progressive option than the computer services tax, this story ultimately has to worry those who appreciate the merits of expanding the sales tax to include services. What lessons can be learned from this failed attempt to carry out a much needed expansion of Maryland's sales tax base?

The failure of this service tax may have been a result of its narrow scope. By going after only one type of service, rather than trying to comprehensively expand the base as Hawaii, New Mexico, and South Dakota have done, Maryland set its sights too low. The debate was focused on an issue much less important than the broader issue of taxing the state's enormous and growing service sector. The position of tax fairness advocates was weakened as a result of this narrowing of the debate. By focusing on only one type of service, advocates of the tax were also left vulnerable to criticisms that they were unfairly singling out certain businesses to pay more. And even if Maryland had succeeded in expanding the sales tax base to include computer services, it would ultimately be only a small step towards the bigger goal of modernizing the sales tax base.

Fortunately for Marylanders, though, the progressive income tax change the legislature enacted was much better than most alternatives. But it certainly would have been nice to get the ball rolling on service taxation in Maryland.

Not all property tax cuts are created equal. Though the intent is to shield homeowners from property tax hikes in times of strong growth in housing prices, it is the unintended consequences of caps on increases in a home's taxable value that have gained these measures attention in recent months.

By effectively limiting the amount by which one's tax bill can increase, these provisions primarily benefit those long-term residents whose taxable home values have been suppressed for the most years. Since this creates huge inequities in tax bills between neighbors who have lived in their homes for different amounts of time, Florida voters in January passed a "portability" measure that allows long-time homeowners to take their tax savings with them to a new home upon changing residences. This obviously does nothing to assist first-time homebuyers, or correct a host of other potential problems that states with such limits have been experiencing.

In Michigan, where housing prices have actually been on the decline, homeowners are continuing to see increases in their property taxes as previously suppressed "taxable values" are using the housing slump to catch up with actual "market values". This development, in addition to baffling and infuriating homeowners, provides an excellent illustration of exactly how convoluted these tax limits make the property tax system. In their poorly conceived attempt to keep property tax bills from getting "out of control", state legislators have created a system where the property tax barely resembles a tax on the actual value of property at all. Only under one of these ridiculous assessment-capped regimes could decreases in a home's market value lead to increases in a home's taxable value.

The Foreclosure Prevention Act introduced in the Senate this week includes several measures that lawmakers argue will address the home mortgage foreclosure crisis and the problems plaguing the home construction industry. Judging from the information we have so far, it appears that the tax provisions in the bill are likely to help large corporate homebuilders and yet do little for ordinary Americans who are either struggling to keep their homes or who are hurt by the downturn in the home construction industry.

These tax provisions include:

Net Operating Loss Carryback

Cost: $6 billion ($25.5 billion over 2 years, $6 billion over 10 years)

As a general rule, a company operating at a loss in a given year will not have to pay taxes for that year, because its deductions will wipe out its taxable income. Under current law, if a company has excess deductions beyond its taxable income for the year, it can apply those excess deductions not only against earnings in later years, but also against income taxed in the previous two years. That allows it to get previously paid taxes refunded. The Senate bill would expand this benefit by allowing companies to apply losses in 2008 or 2009 to taxes paid in the previous four years.

This benefit would be available for all companies, but proponents in the Senate have argued that this will particularly ease the pain felt by home-construction companies. Proponents say the loss carryback provision will make it less likely that construction companies will need to lay off workers, and that it will somehow reduce the pressure on them to quickly sell their excess inventory at a loss.

But there is no reason to think that this tax break will have these positive effects. Companies will always have an incentive to lay off workers if no one is seeking to buy whatever the company produces. Handing the companies a tax break with no strings attached does nothing to change that. Contrary to the claims of backers of the tax break, labor groups have persuasively argued that this provision could actually encourage construction companies to dump their excess housing inventory on the market more quickly since the tax break would cushion the losses that result from selling at lower prices.

In terms of its effects on the housing industry, the main effect of this corporate giveaway will be to reward large corporate home-builders who helped perpetrate the sub-prime lending debacle. Other major beneficiaries will be large corporations who use the "bonus depreciation" tax break enacted earlier this year to reduce their taxable incomes below zero, and who will enjoy outright negative tax rates if this NOL carryback provision is enacted.

Non-Itemizer Tax Deduction for State and Local Property Taxes

Cost: $1.5 billion

Currently, homeowners are allowed to take an itemized deduction for state and local property taxes. But less than a third of taxpayers bother to itemize their deductions, because most find it more beneficial to use the standard deduction. The Senate bill would offer non-itemizers a deduction for property taxes on top of the standard deduction this year. The new deduction would be limited to $500 for single taxpayers and $1,000 for married couples.

Proponents of this provision apparently fail to understand the purposes of the standard deduction: (a) to make the tax code fairer and (b) to make tax filing simpler for most people by giving them a simple deduction that is bigger than what they'd get from itemizing.

Right now, the only homeowners who do not itemize their property taxes are those for whom the standard deduction ($10,900 for couples) is bigger than their total expenses for state and local taxes, interest, donations, etc. In effect, non-itemizing homeowners already get to write off more than their total property taxes.

Adding an additional property tax deduction on top of the generous one already implicitly allowed to non-itemizers would make tax filing more complicated and tax enforcement more difficult.

The new deduction would provide little help to those who take advantage of it. Families who have no taxable income already would not be helped at all. For couples with two children, that includes those making less than $25,000. For couples with two children making more than $25,000 but less than $41,000, the maximum tax saving would be only $100. From $41,000 to $90,000 the maximum tax saving would be only $150. And above that level, the vast majority of homeowners already itemize deductions, and would thus get no benefit.

To illustrate how little thought went into the design of this foolish tax break, the new non-itemizer property tax deduction would be denied to taxpayers if their locality raised its property tax rate this year or next. The apparent goal of this strange rule is to punish taxpayers whose state or local governments have mitigated revenue losses caused by declining home values and the economic downturn. The Senate apparently hopes to encourage local government to deal with falling revenues by cutting back on public services such as education instead.

Foreclosed Home Purchase Tax Credit

Cost: $1.6 billion

The bill also includes a $7,000 non-refundable tax credit that can be claimed over two years by people who purchase foreclosed homes during the next 12 months. It seems unlikely that this provision would make foreclosed homes more affordable for buyers who earn enough to take advantage of this subsidy (more than $57,000 for couples with two children). Instead, it will probably lead to higher prices for the foreclosed homes. Indeed, supporters of this provision admit as much. "The $7,000 tax credit for those who buy foreclosed properties should stimulate demand for them and prevent their prices from falling further, said Sen. Johnny Isakson (R-Ga.)," according to the Washington Post (Apr. 5, 2008, p. D1).

More evidence of the grim situation faced by state budget-makers was recently provided in a report issued by the Rockefeller Institute. Examining changes in state revenues across the fifty states, the report finds that states are in a worse predicament than they were one year ago, and goes on to predict that the economic slowdown will make the situation even worse.

Taking account of changes in state tax laws as well as inflation in the cost of providing government services, the report finds that state revenues decreased by 4.3% relative to where they were in that same quarter last year. Recognizing that budget shortfalls were imminent, state governments did slightly increase their tax collections during the past year, but by nowhere near the amount needed. Notably, tax hikes in some areas were partially offset by a 16% decline in corporate tax collections.

The report also notes that the Bureau of Economic Analysis estimates inflation in the costs faced by state and local government to have been about 6.2% in 2007, a rate significantly higher than the inflation rate throughout the rest of the economy. One of the most obvious lessons to be drawn from this is that tax caps tied to the rate of inflation make no sense, since the cost of programs that taxes pay for increase faster than inflation. If state and local revenues are to have any hope of keeping up with the rising cost of the services they are meant to fund, lawmakers will have to move away from cutting taxes, and start making hard decisions about how they're going to pay for the services their citizens need.

Idaho Governor Butch Otter this week signed legislation expanding the Gem State's grocery tax credit and correcting a major flaw that had plagued the credit for some time. The measure, which is projected to reduce state revenue by $122 million once fully implemented, will ultimately increase the value of the refundable credit to $400 for a family of four or $240 for an elderly couple. More importantly, though, taxpayers who are too poor to owe income taxes but who still must pay sales taxes on their groceries will finally be able to receive the credit. Until the Governor signed this latest bill, married couples earning less than $17,500 were ineligible for the credit, unless they were elderly or disabled. As this policy brief from ITEP points out, the new law is only one of several steps Idaho should take towards making its tax system more fair.

Conservative commentators frequently depict Hollywood as ridden with leftists, but the reality is that, when it comes to tax policy, the movie industry is no different from any other. Take recent legislative activity in Michigan and Georgia, for example. Michigan Governor Jennifer Granholm is on the verge of signing a bill that would, among other things, provide a refundable tax credit equal to 42 percent... 42 percent!... of a film production's costs. The Georgia Senate has adopted a measure - also expected to be signed into law - that will more than double that state's current film production credit.

Yet, as an important new report from the Massachusetts Department of Revenue (DoR) documents, states may receive precious little in return for these enormous investments. According to the report, Massachusetts will lose upwards of $140 million between 2006 and 2008 due to its film tax credit, but may receive only about $20 million in new revenue from the economic activity associated with the credit. What's more, as the report notes, "any estimate of the net economic and tax revenue impact of tax incentives needs to take into account the reduction in state government spending" associated with such credits. In such tight budgetary times, that "reduction in government spending" is sure to occur if policymakers keep trying to lure the latest blockbuster to their state.