Last week, Congress left for its Memorial Day recess having completed some important work but leaving a lot more for the summer weeks ahead. Among the issues we've been following:

- The tax "extenders" bill which includes extensions of tax cuts for business and energy and a few new tax cuts like an improvement in the Child Tax Credit for poor families.

Status: Passed by House.

The House passed its version of this bill (H.R. 6049) last week. As explained in a CTJ report, the President has threatened to veto the bill mainly because the House had the audacity to include revenue-raising provisions to offset the costs and prevent an increase in the budget deficit. This bill contains some provisions, like the extension of the Research and Experimentation Credit and a tax break for offshore financial services, that are not good policy, but the White House supports all of those.

One of the revenue-raising provisions would delay a 2004-enacted law that has not even gone into effect yet. The soon-to-take-effect law is designed to make it easier for multinational corporations to take U.S. tax deductions for interest payments that are really expenses of earning foreign profits and therefore should not be deductible. Under the House bill, implementation of this tax break (the new "worldwide interest allocation" rules) would be delayed until 2019, raising about $30 billion over ten years.

The second revenue-raising provision would crack down on the use of offshore schemes that private equity fund managers use to avoid taxes on deferred compensation, raising about $24 billion over ten years.

Democratic leaders in the Senate would like to pass an extenders bill that does not increase the budget deficit, so they are considering whether to have the Finance Committee consider a bill or simply bring the House-passed bill right to the floor of the Senate.

- The farm bill.

Status: House and Senate voted to override President's veto. Provisions targeting the tax gap were not included in final version.

There was hope that this long-fought-over legislation would include provisions that target the "tax gap" (the difference between taxes owed and taxes actually paid). None of these provisions were included in the final bill (H.R. 2419), which instead raises some revenue by reducing the ethanol tax credit and making other changes related to agriculture.

The White House had opposed a revenue-raising provision that the House attached to its version of the farm bill passed back in July of last year. 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 mainly to avoid taxes. Citizens for Tax Justice advocated for this measure (although calling for a stronger version of it).

The House Ways and Means Committee chairman Charles Rangel (D-NY) had proposed a different revenue-raising provision that would require credit card issuers to report payments made by cardholders to merchants. The Senate wanted 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. Another version of the bill included the two revenue-raisers that are now part of the House extenders bill.

- Emergency supplemental spending bill.

Status: The House approved a version with a surcharge for the very rich while the Senate approved a version without the surcharge.

On May 15, the U.S. House of Representatives took votes on amendments to an emergency supplemental spending bill to fund military operations in Iraq and Afghanistan, to improve veterans' education benefits and to extend unemployment insurance benefits to get jobless Americans through difficult times.

The House actually voted down the war funding. One amendment that was approved would improve the educational benefits available to veterans by increasing them to match the highest public university tuition in a given recipient's state and providing a monthly housing stipend.

This improvement in veterans' education benefits would cost about $52 billion over ten years. To offset this cost, the legislation includes a small surtax on those who have most enjoyed the benefits of living in and doing business in America. The surtax of 0.47 percent (just under half a percent) would apply to adjusted gross income (AGI) over a million dollars for married couples and over half a million dollars for other taxpayers.

Figures from Citizens for Tax Justice show that in 2007 only 0.3 percent of taxpayers were rich enough to be affected by such a tax. Moreover, the sacrifice asked of them is tiny, equal to about 7 percent of their Bush tax cuts.

The Senate then passed a version that included the war funding, the improved veterans' educational benefits and extended unemployment insurance benefits, but no surcharge on the very rich. Democratic leaders in the House could try to pass the Senate version or pass a different version and send it back to the Senate. Meanwhile, the White House wants a "clean" supplemental without any increased domestic spending or tax increase.

- Military tax benefits bill.

Status: Approved unanimously by House and by voice vote by the Senate.

This bill, H.R. 6081, spends a relatively small amount of revenue on tax breaks for military personnel and veterans. Of particular note are two of the revenue-raising provisions in the bill. One would close the loophole used by Kellogg Brown & Root (KBR), the former subsidiary of Halliburton, to avoid paying Social Security and Medicare taxes for the Americans it employs to work in Iraq. This provision, which is a victory for tax fairness, was earlier proposed as legislation offered by Senator John Kerry (D-MA) as reported in the Digest. Another revenue-raising provision in this bill would make it harder for wealthy Americans to escape federal taxes by leaving the country and giving up U.S. citizenship.

- Congressional Budget Resolution (S Con Res 70).

Status: The House and Senate passed different versions. The conference agreement is expected to come up for a vote sometime after the recess.

As explained in a CTJ report, the resolution approved by the House offered more responsible tax provisions in a number of areas.

Most importantly, the House budget plan used "reconciliation instructions" that would make it easier to pass a bill to provide relief from the Alternative Minimum Tax (AMT) without increasing the deficit. Any further increase in the national debt is likely to be borne, in the long-run, by the middle-class, so it would be unfair to take on debt to provide AMT relief, which mostly benefits families that are relatively wealthy. The Senate plan, unfortunately, did not use this approach because the Senate assumed that an AMT patch will be deficit-financed.

The conference agreement that has been worked out would create a point of order in the Senate against legislation that increases the deficit by over $10 billion during any year covered by the budget resolution. As with the pay-as-you-go (PAYGO) rule, this point of order can be waived by 60 votes. The conference agreement also assumes that Congress will extend several of the Bush tax cuts for the middle-class, but it unfortunately includes in this category a cut in the estate tax that can only help families owning estates worth several million dollars. Of course, the budget resolution does not raise taxes or cut taxes and is not legislation, but a blueprint for Democratic leaders in the House and Senate. Most spending and tax decisions are likely to be put off until a new president takes office.

Policymakers in Pennsylvania seem bent on cutting taxes before the year is out... but how and for whom remains to be seen. After proposing his own Protecting Our Progress tax rebates earlier this year, Governor Ed Rendell last week suggested he could support a plan, put forward by Senate Republicans, that would expand eligibility for the state's so-called tax forgiveness credit. At present, single people with incomes up to $6,500 and married couples with incomes up to $13,000 receive a tax credit that completely eliminates any tax liability. (Individuals and families with slightly higher incomes receive credits that reduce, but do not eliminate, their tax liabilities.) The Senate Republican plan would ultimately raise those thresholds to $8,500 and $17,000 respectively. There's a catch, of course... the Senate Republican plan also calls for substantial business tax breaks, such as increasing the state's net operating loss carry forward and giving greater weight to sales in the state's corporate income tax apportionment formula. For more Pennsylvania fiscal information, visit the Pennsylvania Budget and Policy Center.

Rhode Island Governor Don Carcieri last week announced the formation of a Tax Policy Workgroup to consider fundamental changes to the Ocean State 's tax system. While the group has been charged with devising changes that promote "equity, efficiency, predictability, competitiveness, and transparency" - laudable goals all - the Governor's comments regarding the group's aims suggest he may favor one particular outcome over others. In the Governor's view, " Rhode Island cannot prosper if its tax policies hinder the creation of jobs and are a disincentive to investment. Unfortunately, [Rhode Island is] now at a competitive disadvantage with many of the other states in New England, including Massachusetts and Connecticut. That needs to change." In light of the fiscal woes now confronting Rhode Island and the regressive legacy of past tax cuts, changes are clearly needed, but will they be the "business-friendly" sort that the Governor seems to have in mind or will they help to produce the revenue state government needs in a fair and sustainable fashion?

The Tennessee legislature last week passed a resolution directing the state comptroller to conduct an analysis of the revenue effects of instituting combined reporting in the state. If adopted, Tennessee would become the sixth state in five years to enact this reform (a total of twenty-one states currently have combined reporting requirements).

Combined reporting reduces corporate tax avoidance by requiring a corporation operating in multiple states to include all the profits of its subsidiaries in one report. Without combined reporting, companies with out-of-state subsidiaries and sufficient resources are able to make use of creative accounting practices to artificially shift profits to low-tax states. This both reduces Tennessee's revenues and creates an uneven playing field for business. This report from the Center on Budget and Policy Priorities explains in more detail why combined reporting is so important, and highlights some recent trends in states' interest in adopting the measure.

The Tennessee Comptroller's report will be ready by December.

South Carolina Governor Mark Sanford vetoed a bill this week that sought to increase the state's cigarette tax rate, which is currently the lowest in the nation. While the Governor supported the cigarette tax hike (as most people in the state do), he criticized the bill for linking the new revenues to a Medicaid expansion that would ultimately be unsustainable.

The cost of providing health care is constantly on the rise, and the real value of tax collected on each pack of cigarettes continuously declines as a result of inflation and other factors. The Governor, perhaps correctly, pointed out that the bill "virtually ensures future tax increases" in order to maintain consistent Medicaid funding. Interestingly, this is precisely the problem the legislature tried to address in attempting to index the amount of tax to the rate of medical cost inflation (as was discussed in a previous Digest).

The Governor's complaints about the bill's lack of sustainability seem suspect when one considers the purpose to which he would like to see the revenue dedicated: an optional flat income tax that (primarily wealthier) taxpayers could use to avoid the state's graduated rate structure. If the Governor wants a tax cut that neatly offsets the cigarette tax hike, then his plan would fail this test dramatically. While cigarette taxes exhibit some of the slowest growth (or even decline) of any tax, income taxes on the wealthy are among the most quickly growing revenue sources. This is in part because income is becoming increasingly concentrated in the hands better-off individuals who pay at the top marginal tax rate. Reducing the rate at which this income is taxed would almost certainly come to cost more than what the cigarette tax could provide.

With any issue as visible and complex as the recent mortgage foreclosure crisis, you can expect a vast array of proposals for addressing the problem to arise. Unfortunately, at least at the federal level, many of those proposals have left much to be desired.

One of the more bizarre ideas to come out of Congress is an expansion of the "net operating loss carryback" provision. This proposal would allow companies taking a loss in either of the next two years to deduct that loss against taxes already paid at any time during the last four years (currently the deduction is limited to the previous two years). This is an inefficient and poorly targeted approach to the foreclosure problem because the deduction would be available to all companies - not just homebuilders and other housing-related businesses. It is also a troubling proposal because the breaks it provides have no strings attached to them. If there isn't a demand for new homes, there isn't going to be a demand for homebuilders regardless of whether or not the company gets a check from the federal government.

Another idea Congress proposed is a no-interest loan in the form of a refundable tax credit for first-time homebuyers that must be paid back over 15 years. Unfortunately, the credit will not be available to the buyer until after the downpayment has already been made, so its usefulness is seriously constrained.

Other tax changes are discussed in the link above, but overall it seems clear that Congress has missed the mark. Their collection of proposals raises one interesting question in particular: why are so many of the approaches to this crisis centered around tax cuts when nobody is arguing that the problem is a result of high taxes? As Bob McIntyre, director of Citizens for Tax Justice, recently 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." It's always good for politicians to be able to offer up tax cuts, though.

But while for the most part Congress' proposals are nothing more than the result of an over-eagerness to cut taxes, another one of their proposals actually did touch on one potential solution involving taxes. Property taxes are not the cause of the foreclosure crisis, but lowering property taxes on those homes most at risk for foreclosure seems like a sensible component of any broad strategy for reducing the number of foreclosures. Unfortunately, but perhaps unsurprisingly, even Congress' efforts at providing property tax relief aren't tremendously helpful - an income tax cut of no more than $350 per spouse (or roughly $150 under the Senate bill) for all homeowners who do not itemize is all they could muster. Additionally, since the cut comes in the form of a deduction, it's value increases for better-off homeowners in higher tax brackets who are presumably at less risk of foreclosure.

In contrast to this meager amount of relief proposed in Congress, a bill introduced in Michigan (where the foreclosure crisis has been particularly devastating) takes works the property tax angle more aggressively (and arguably more productively) by offering a full exemption from the property tax for homeowners earning less than 200% of the federal poverty level. Homeowners earning up an income limit to be determined by the taxing district are eligible for a 50% reduction of their property tax bill. Taxpayers possessing assets worth more than an amount to be determined by each locality will be excluded from the relief, as will taxpayers whose homes are worth more than 300% of the median home price in their district.

By providing extensive relief to those least fortunate homeowners most vulnerable to foreclosure, rather than only offering more minor relief to a broad swath of taxpayers, the Michigan legislature has before it a bill much more likely of meaningfully impacting the foreclosure crisis. And by introducing a degree of progressivity into the property tax, this bill could make life just a bit easier for those individuals most likely to be impacted not only by the foreclosure crisis, but also by the recent economic slowdown in general.

Notably, this emergency bill is in addition to the state's property tax circuit-breaker that provides tax credits to lower- and middle-income families based on the share of their income they are required to pay in property taxes. The emergency relief, then, isn't something that even needs to be made permanent. A circuit-breaker is the preferred method for assisting those in need of relief in a normal housing market - but under the current, very abnormal housing market, this additional relief could play an important role in a broader plan designed to address the needs of Michigan homeowners.

As an interesting aside, one of the other primary benefits of this bill would be a standardization of the process for providing need-based property tax relief. Detroit has recently been plagued with reports that their "Hardship Committee", appointed to decide who is in need of property tax relief, has been awarding tax benefits to wealthy, well-connected homeowners. The state bill would offer local committees less discretion in deciding who can see a tax reduction. This investigation into Detroit's "Hardship Committee" by The Detroit News provides a very interesting read that discusses a stunning example of tax fairness being thrown out the window.

A new report from Citizens for Tax Justice examines the $54 billion tax cut bill that the President is threatening to veto because it includes revenue-raising provisions to offset the costs. The President's stance threatens a needed improvement in the Child Tax Credit for poor families with children, as well as several other tax changes sought by lawmakers.

The bill, (H.R. 6049) was approved by the House of Representatives on Wednesday and includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well as renewable energy tax incentives and a few new tax cuts. Similar bills passed during the Bush years resulted in increases in the federal budget deficit because they did not include revenue-raising provisions.

The Office of Management and Budget (OMB) issued a statement asserting that it would advise the President to veto the extenders bill if approved by both chambers in its current form. The main reason is that the legislation includes revenue-raising provisions to prevent it from increasing the federal budget deficit.

Equally alarming is the fact that the White House actually supports all of the most poorly targeted and unjustified tax breaks in the extenders bill, even while opposing any effort to pay for them.

But at least one of the tax cuts in the bill is a good idea. It would expand eligibility for the Child Tax Credit for one year, at a cost of $3.1 billion.

The report concludes that the President should champion provisions like this, which actually do make the tax code more progressive, as well as the responsible and fair revenue offsets that would raise enough money to pay for this and other tax breaks in the bill.

The report: http://www.ctj.org/pdf/extenders20080523.pdf

On Wednesday, Paul Ryan (R-WI), the ranking Republican on the House Budget Committee, presented a comprehensive tax and entitlement plan that would cut Social Security benefits, end Medicare as it's currently structured and attempt to simplify taxes by creating an optional income tax that one could choose in lieu of the current system. The plan follows a string of losses of formerly Republican-held House seats in special elections and a general sense that Republican members of Congress want to improve their message.

One part of the plan would replace Medicare benefits with a "payment of up to $9,500 - adjusted for inflation and based on income, with low-income individuals receiving greater support." Another part of the plan copies a Bush proposal to offer tax credits - $2,500 for individuals and $5,000 for families - to purchases health insurance. Perhaps most surprising is the part of the plan that essentially revives the prospect of diverting money out of Social Security to fund private accounts.

The tax reform part of the plan would go much further -- and cost much more -- than the Bush tax cuts. The estate tax would be abolished (at a cost of a trillion dollars over a decade) and the AMT would be eliminated (which would cost $1.5 trillion over a decade), and taxpayers would get to choose to file under either the current income tax or a "simplified" income tax with rates of 10% on income up to $100,000 for joint filers, and $50,000 for single filers; and 25% on taxable income above these amounts. The standard deduction and personal exemptions would be larger, totaling $39,000 for a family of four.

While many anti-tax lawmakers have suggested an optional simplified tax, it's not obvious how having two income taxes can be simpler than having just one. The most likely result is that people would calculate their taxes twice to see which system offers them less tax liability. And of course, the reason why the simplified version must be "optional" is that all lawmakers claim to support simplification but can't bring themselves to really close down the various loopholes that benefit certain pockets of voters (and campaign contributors) and which actually cause the complexity in the tax code.

Interest, capital gains and dividends would no longer be taxed. (Most of the benefits of the current capital gains and dividends tax breaks go to the richest one percent.) The corporate tax would be replaced by business consumption tax of 8.5 percent.

The plan would allegedly eliminate the federal budget deficit, in part with a provision that would require the OMB to make across-the-board reductions in discretionary and mandatory programs if spending rises above a certain percentage of GDP "but applies the reduction only to fast-growing programs, and is limited to no more than 1 percent of a program's spending." But given the magnitude of the tax cuts included in this plan, it's difficult to imagine Congress ever paying for them by reducing spending, which did not occur even when Rep. Ryan's party controlled the House, Senate and White House.

Last week, Louisiana's House Ways and Means Committee approved a measure (SB 87) to repeal one more element of the state's 2002 "Stelly Plan," marking further retreat from that landmark legislation's principles of tax fairness, adequacy, and stability. As reported by the Ways and Means Committee, SB 87 would raise the income levels at which married couples begin to pay the state's top 6 percent income tax rate from $50,000 to $100,000 (and from $25,000 to $50,000 for single people). As a result, the measure would reduce annual income tax revenue by close to $300 million per year, but would only cut taxes for the one-third of Louisianans who currently pay at the 6 percent rate. In fact, more than a quarter of the bill's benefits would accrue to the wealthiest 5 percent of Louisianans.

While the Committee's version of the measure is certainly an improvement over the version adopted by the Senate -- which would have repealed the state income tax altogether -- less expensive, more fair, and farther reaching alternatives are available.

A new analysis, jointly released by Louisiana 's Agenda for Children and the Institute on Taxation and Economic Policy, offers one such alternative. It shows that, by expanding the state's bottom income tax bracket -- instead of shrinking its top bracket -- and by strengthening its EITC, Louisiana policymakers could cut taxes for twice as many people... but at half the cost of SB 87. Such an alternative would lower the taxes paid by slightly more than three-quarters of Louisianans, while reducing annual income tax collections by roughly $130 million. The alternative would not only provide a larger average tax cut to middle-income Louisianans, but would also ensure that the bulk of the tax reduction it would produce would go to the bottom 60 percent of the income distribution. Other alternatives -- such as reducing Louisiana 's lowest income tax rate or lowering the state's sales tax rate -- would also be preferable to SB 87 from a tax fairness perspective

Given the highly regressive nature of Louisiana's current tax system -- as of 2006, the poorest 20 percent of Louisianans faced an effective tax rate that was more than twice that of the richest 1 percent -- the need for such an equity-enhancing alternative is clear. It's now up to Louisiana's elected officials to respond.

Count Texas among the states seeking to preserve the vitality of their sales taxes by addressing sales made by on-line retailers to in-state residents. As the Dallas Morning News reported earlier this month, Texas Comptroller Susan Combs is investigating whether Internet titan Amazon owes millions of dollars in uncollected taxes on sales made to Texas residents in recent years. At issue is a distribution center in Irving which Amazon has operated since 2006, but which the company maintains is run by a subsidiary. (Owning and operating such a center would mean that Amazon has a physical presence in the Lone Star State and would therefore be required to collect sales taxes.) At stake is some portion of the $541 million in sales taxes that Texas officials believe the state loses to on-line sales.

The Comptroller's decision comes on the heels of new legislation in New York -- enacted as part of the state's FY 2009 budget -- to require on-line retailers to collect sales taxes on sales made to New York residents, if those retailers rely on affiliated web sites based in New York to refer customers to the retailer's own site. The change, which effectively expands the criteria for determining whether a business has a presence in New York, is expected to generate $50 million in additional revenue each year. Not surprisingly, Amazon -- one of the parties most affected by the statutory change -- has already filed suit against New York, questioning the constitutionality of the measure.

To be sure, the most effective and most sustainable solution to this problem would be Congressional action permitting states to require "remote sellers" to collect sales taxes (in addition to more widespread participation in the Streamlined Sales Tax Project). In the absence of such action, though, no one should be surprised that states -- many of which are under substantial fiscal strain -- are now using any means at their disposal to shore up an important source of revenue.

To learn more about Texas' current financial situation, see the Center on Public Policy Priorities -- 2008 Tax and Budget Primer.

As was discussed in an earlier issue of the Digest, California is facing a serious budget crisis that many observers hoped would force the state to address some of the fundamental problems with its tax system. Last week, Governor Schwarzenegger proposed a plan he asserted would remedy the deficit problem, but that plan would do nothing to improve the state's tax system. Rather than proposing a broadening of the sales tax base, as has been discussed, the Governor would like to expand the lottery with new games, bigger prizes, and less restrictive marketing rules. The new revenues expected to be generated by these changes would be made available immediately by selling the securitized future earnings from the lottery to investors.

Attempting to fill such a huge budget hole with lottery revenues has already raised the concerns from members of the legislature and of the Legislative Analyst's Office (LAO) who fear that increasing the prominence of the lottery will disproportionately affect the poor, both through financial loss and increased social problems. Even more importantly, though, the LAO expects the Governor's plan will produce far less revenue than he has claimed. With lottery revenues this year declining to a five year low, the Governor's plan to double revenues within ten years appears overly optimistic. Legislative Analyst Elizabeth Hill believes that if revenues fall short of the Governor's estimates, public schools could lose out on as much as $5 billion over the next twelve years.

Complicating matters further is that if the Governor's proposal does not gain the approval of the voters, his back-up plan is a temporary 1 cent increase in the sales tax rate. A new survey from the Public Policy Institute of California suggests this outcome is actually very likely... 62% of likely voters oppose the lottery plan, while 57% of likely voters favor the sales tax hike. Aside from being starkly regressive, Hill estimates that the sales tax increase, which would not take effect until midway through the fiscal year, would fall $2 billion short of raising the amount needed to fill the budget gap.

Due to concerns about the huge uncertainties in the Governor's plan, Hill recommends that borrowing against future lottery earnings be significantly scaled back and combined with a temporary hike in the sales tax rate. While this proposal would be a much safer bet for California's children, it would squander an opportunity to meaningfully address the problems with the state's tax system.

A temporary hike in the sales tax rate is only a band-aid fix. California's sales tax rate is already among the highest in the nation. The real problem is that far too few purchases, including most services, are needlessly exempt from the tax. Broadening California's sales tax to include services, and eliminating other unnecessary exemptions in the tax code, could provide a boost in revenues while simultaneously enhancing the sustainability and fairness of the revenue base. Unfortunately, the Governor seems much more concerned with finding the path of least resistance than with doing the hard work involved in enacting forward-thinking policy changes.

The Minnesota legislature approved a property tax bill this week (discussed here by the Minnesota Budget Project) that should be studied very closely by New York, Massachusetts, and any other state looking to improve the fairness of its property tax. The Minnesota bill makes use of what is primarily a two-pronged approach to providing tax relief. However, one of those prongs, the property tax circuit-breaker, is noticeably more effective than the other.

The first prong of the Minnesota plan is an expansion of the state's property tax circuit-breaker credit that provides refunds to households who spend more than a given percentage of their income on property taxes (for information on the fairness gains to be had from circuit-breakers, refer to this ITEP Policy Brief). For other states interested in enacting or expanding similar programs, a recent report from the Massachusetts Budget and Policy Center proposes a variety of targeted expansions to the Massachusetts circuit-breaker (which, as in many states, is currently available only to low-income seniors) that would greatly improve the fairness of the property tax.

The second prong of Minnesota's approach to property tax relief was a late addition at the request of Governor Pawlenty: a 3.9% cap on increases in local property taxes. A Center on Budget and Policy Priorities report released this week explains why such caps are a bad idea. The most obvious problem is that caps constrain local government revenues without regard to the cost of providing public services. Tax caps also force localities to become more dependent on state aid, which becomes problematic during an economic downturn when that aid decreases but the cost of providing goods such as education and law enforcement remains the same or even increases. Fortunately, Minnesota's cap is slightly less stringent than some states. It has a higher ceiling on revenue increases, numerous conditions under which a locality can avoid the cap, and a provision to expire after three years.

This discussion is especially relevant in New York, where a state property tax panel is expected to propose both a circuit breaker and a cap on annual revenue increases sometime in the next two weeks. Thankfully, the influential Working Families Party in New York, as well as teachers' organizations and over thirty state legislators have voiced support for the circuit-breaker idea. The Working Families proposal would pay for this relief by raising income taxes on people earning more than $500,000 annually. Fortunately, the tax cap idea appears slightly less popular, though it is far too early too tell if that proposal will pick up steam as well. To keep up with the debate, which is sure to quickly gain steam, see the New York Fiscal Policy Institute.

With state budget shortfalls having recently become so prevalent, it has been interesting to watch how different states have chosen to address their budgetary woes. Fortunately, a collection of influential groups in Michigan, including the Michigan League for Human Services, is seeking to fill their state's budget gap with a combination of policy changes much better thought-out than the regressive band-aid fixes proposed in New Hampshire (cigarette tax hikes) or California (lottery revenues). The plan, proposed by the Michigan League for Human Services and backed by a slew of influential groups, proposes to raise roughly $400 million through a series of relatively small changes, each of which already gained approval at some point from either the Governor or the legislature in the 2005 or 2007 legislative session.

Among the proposed list of reforms is the elimination of numerous unjustified sales tax exemptions. Vending machine snacks, international phone calls, and purchases made at prison stores are among the items that would be subject to the sales tax under the proposal. Another major component of the proposal would decouple state business depreciation rules from the federal rules, as was advocated in an earlier Digest piece.

While certainly not a comprehensive list of what could be done, the proposal is notable for its eclectic approach that simultaneously aims to improve efficiency and boost state revenues. States considering unimaginative hikes in consumption tax rates or damaging cuts in public services would do well to instead follow the lead of this proposal and seriously examine what kind of needed tweaks to their tax systems could boost revenues.

A few years ago, Maine had grand visions of providing affordable health insurance for all its uninsured residents by 2009. But five years after the creation of its Dirigo health care program, funding remains so low that even the first year's goal of providing insurance for roughly a quarter of uninsured Mainers is very far off. The program is quite popular, especially among small businesses, but Maine simply refuses to raise taxes broadly in order to pay for it. Instead, enrollment has been capped in order to keep costs down while thousands of uninsured Mainers on the waiting list hope for an acceptable source of funding to be found.

Faced with the self-conflicting demand for better health coverage without significant tax hikes, Maine legislators earlier this year considered a fifty cent cigarette tax increase as a way to modestly expand its health program. Broad, progressive, and sustainable tax increases were still out of the question given the political climate in the state, but legislators realized they may be able to raise a smaller and less important tax. Despite being starkly regressive, cigarette taxes have become an extremely popular revenue source among states since they tend to be less controversial than hikes in income, property, or general sales taxes. But having already doubled its cigarette tax in 2005, Maine policymakers soon had to back down from this idea.

The legislature, to its credit, didn't give up completely in its effort to find funding with which to expand health care coverage. The debate then turned toward another relatively minor tax - alcohol and soda taxes. The argument was made that these products should be taxed more heavily because of their link to higher health care costs, but the more salient reason for the proposal was undoubtedly its perceived political feasibility. Rather than making the hard decision to raise taxes broadly in order to meet the goal it set for itself five years ago, the legislature tried to take the easy way out.

But in Maine, apparently any tax increase isn't so easy. In response to the tax hike, the "Fed Up With Taxes" coalition was formed, consisting largely of restaurant owners and other related business interests. The coalition is already collecting signatures at restaurants across the state in hopes of getting a repeal of the tax on the ballot.

Despite proceeding so cautiously in search of a revenue source that wouldn't get them into too much trouble with the voters, the end result of this legislative session may ultimately be a failure to find any way to secure additional funding for the uninsured.

This sudden challenge to the beverage tax suggests that the blame for the lack of funding for the Dirigo health plan should not be placed on legislators - but that the root cause of this embarrassment is instead a refusal on the part of voters to take responsibility for paying for programs they believe to be worthwhile. Across the country the clear preference has been for lower taxes and better government services. These two demands cannot be reconciled, and their interaction has helped contribute to both the national debt and to the avalanche of fiscal problems at the state level.

Too often, voters unwilling to accept higher taxes point to cutting "wasteful spending" as the source of revenues from which favored programs should be enacted or expanded. While wasteful spending certainly does occur, it's likely not of the magnitude most believe it to be, and identifying it accurately is not a simple, uncontroversial, or inexpensive process. It's easy to blame whatever one believes to be "wasteful spending" when revenues start to fall short, but the reality is that there's no easy solution to funding more government services.

Taxpayers either need to learn to expect less from their government, or they need to take responsibility for chipping in to pay for government services. A failure to do these things is what led to the current situation in Maine where a heated battle appears imminent over a tax hike that in the grand scheme of things is too small to substantially improve upon the health care situation in the state. If voters ever decide that they are willing to pay what is needed for government services, the result will be a climate of debate in which sensible reform of the tax system can be enacted. That situation would certainly be preferable to the current one where minor, disjointed, and often regressive tax increases at the margin have the best chance of gaining approval.

A new report from Citizens for Tax Justice shows that the majority of the Bush tax cuts for capital gains and dividends go to the richest one percent of taxpayers in every single state. The report also explains that these tax cuts do not pay for themselves, despite arguments to the contrary.

Presidential candidates, reporters and pundits have lately perpetuated two myths about tax cuts for capital gains and dividends. The first myth is that the middle class benefits from these tax cuts for investment income. The second myth is that these tax cuts, particularly the tax cut for capital gains, have caused federal revenue to actually increase.

The first of these myths is easily refuted by looking at the distribution of the Bush capital gains and dividends tax cuts both nationally and on a state-specific basis. The state-by-state figures in the report show that in every single state, the benefits from the capital gains and dividends tax breaks are concentrated among the richest one percent. The average tax cut for these fortunate households runs in the tens of thousands of dollars, while the average tax cut for the poorest 60 percent is perhaps enough to buy a single meal, and in many states is even less.

Senator John McCain and other supporters of the Bush tax policies imply that these tax cuts are more important to the middle class than these figures would indicate. They argue that a large number of Americans have investment income, but they fail to mention that most of that is not taxable investment income.

The second myth is also easily refuted, by examining the actual trajectory of revenue from capital gains taxes as a percentage of GDP. The report shows that there is no evidence that the amount of revenues collected by the tax actually increases when the rate is cut.

CTJ's state-by-state capital gains data helped state nonprofits to inform policy debates in a number of states this week. The Oregon Center for Public Policy pointed out that the annual Bush capital gains/dividend tax cut for the very wealthiest 1 percent of Oregonians exceeds the cost of recently revoked federal timber payments for rural Oregon counties. Ocean State Action used the opportunity to highlight the inequity of Rhode Island's state-level tax breaks for capital gains, and the Iowa Policy Project, New Jersey Policy Perspectives and Policy Matters Ohio also highlighted the report's findings. If you're interested in using this data to inform your state's policy debate, drop us a line.

On Thursday, the U.S. House of Representatives took votes on amendments to an emergency supplemental spending bill to fund military operations in Iraq and Afghanistan, to improve veterans' education benefits and to extend unemployment insurance benefits to get jobless Americans through difficult times.

One amendment that was approved would improve the educational benefits available to veterans by increasing them to match the highest public university tuition in a given recipient's state and providing a monthly housing stipend.

This improvement in veterans' education benefits would cost about $52 billion over ten years. To offset this cost, the legislation includes a small surtax on those who have most enjoyed the benefits of living in and doing business in America. The surtax of 0.47 percent (just under half a percent) would apply to adjusted gross income (AGI) over a million dollars for married couples and over half a million dollars for other taxpayers.

New figures from Citizens for Tax Justice show that in 2007 only 0.3 percent of taxpayers were rich enough to be affected by such a tax. Moreover, the sacrifice asked of them is tiny, equal to about 7 percent of their Bush tax cuts.

The surtax could be torpedoed several ways by lawmakers who want to preserve the Bush tax cuts for the rich. The vote on the actual war funding at the center of the emergency supplemental actually failed on Thursday, which could complicate matters when it comes time to negotiate with the Senate. Some Senators have expressed misgivings about whether their chamber would ever approve a surtax, and the Senate Appropriations Committee approved a version of the supplemental Thursday that has the war funding and the provisions to improve veterans' education benefits, but no surtax or any other revenue-raising provisions to offset the costs. The Bush administration predictably issued a veto threat against the surtax, as well as other provisions promoted by Democratic leaders.

"The surtax would scale back the Bush tax cuts for the richest 0.3 percent of taxpayers, by an average of just 7 percent, to help the men and women returning from the wars and their families," said Robert S. McIntyre, director of Citizens for Tax Justice. "Lawmakers who oppose this proposal will prove that they really do value tax cuts for the wealthy over all else."

The House Ways and Means Committee approved a bill (H.R. 6049) on Thursday that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this extenders package includes revenue-raising provisions to offset the costs.

Republicans Demand Increase in the Budget Deficit

Ranking member Jim McCrery (R-LA) and other Republicans on the committee argued that Congress should not have to offset the costs of extending tax cuts because these extensions amount to a continuation of current policy. But the tax cuts in question were never enacted as permanent tax cuts, so Congress never budgeted for the costs that they would present in future years if they were permanent (meaning the revenue "baseline" used by the Congressional Budget Office assumes that these tax breaks will expire). McCrery's logic implies that Congress should be able to enact any tax cut for a single year and then at the end of that year make it permanent without offsetting the costs.

The Tax Cuts in the Bill

The renewable energy tax incentives cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources, at a cost of $7 billion.

The new tax cuts cost a total of $10 billion, and include a change in the AMT related to the treatment of stock options, a deduction for property taxes for non-itemizers which was also included in the housing legislation the House passed last week, and an expansion in eligibility for the Child Tax Credit for low-income people. The change in the credit is the biggest of this group, with a cost of about $3 billion.

First enacted during the Clinton administration, the Child Tax Credit was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit. The bill would lower the child credit's earnings threshold from the current $11,750 to $8,500 and would no longer increase the threshold every year for inflation. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision and describes some of the characteristics of the families likely to be affected.

The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks that have been criticized in the past by Citizens for Tax Justice, like the research and development credit, the deduction for state and local sales taxes, and the above-the-line deduction for tuition.

Despite these provisions, this bill is an important step forward because it improves the Child Tax Credit and maintains lawmakers' commitment to the pay-as-you-go (PAYGO) rules that require new tax cuts and entitlement spending to be paid for.

Revenue-Raising Provisions to Comply with PAYGO

The revenue-raising provisions are borrowed from a bill that the House approved last year. One would delay a law that has not even gone into effect yet and which will make it easier for multinational corporations to take deductions for interest payments that should really be considered expenses of foreign operations and therefore not deductible. Implementation of the new "worldwide allocation" rules would be delayed until 2019, raising about $30 billion over ten years.

The second revenue-raising provision would crack down on the use of offshore schemes that private equity fund managers use to avoid taxes on deferred compensation.

The tax code allows employees to defer paying taxes on money that they or their employers put into "qualified" retirement savings plans, such as 401(k)'s, until they take money out during retirement. But contributions to such "qualified" plans are limited, to no more than $30,000 a year depending on the type of plan. That's the sort of plan most Americans can get... if they're lucky.

Highly-paid corporate executives, however, often get to go a giant step farther. They can set up "non-qualified" deferred compensation plans, which are not taxable to the executives until they take the money out, but which are not deductible by companies until then either. Currently, there is no limit on how much money executives can defer taxes on through these plans. But the corporations who pay them also have to defer the deduction they take for whatever they pay into the deferred compensation plan, so in theory there is only a small loss to the Treasury (and to the rest of the taxpayers).

But private equity fund managers have managed to create an approach to deferred compensation that goes even farther, and does impose a substantial cost on the rest of the taxpayers. Private equity fund managers often have an "unqualified" plan into which is paid an unlimited amount of deferred compensation. But they arrange the payments to be technically made by an offshore corporation in a tax haven country that has no corporate tax, or a very low one, so the loss of the deduction is not an issue. Of course, this is done with paper transactions. No one is actually working in the tax haven country, so this is really just a scheme to increase the amount of deferred compensation that can be paid to these already highly-compensated fund managers without being taxed right away.

The bill approved by the Ways and Means Committee Thursday would close this loophole, raising about $24 billion over ten years.

These provisions are good policy based on fairness grounds alone. The need to raise revenue to prevent an increase in the budget deficit only makes them more important.

It is unclear whether these offsets will be included in the Senate version of the bill, which the Senate Finance Committee will likely mark up after the Memorial Day recess.

SHUT IT DOWN!

Senator John Kerry (D-MA) has proposed legislation, co-sponsored by Senators Clinton and Obama and others, that would close the loophole used by Kellogg Brown & Root (KBR), the former subsidiary of Halliburton, to avoid paying Social Security and Medicare taxes for the Americans it employs to work in Iraq. On Thursday similar provisions were added to the emergency supplemental bill for military operations in Iraq and Afghanistan as it was being marked up and approved in the Senate Appropriations Committee.

KBR has made a special arrangement to avoid paying taxes on about 10,500 of its American employees who are working in Iraq on various reconstruction programs. KBR recruits people to work on reconstruction-related projects, but when the workers get their first paycheck, they see that it's not coming from KBR, but from a KBR subsidiary, Service Employers International Inc, (SEI).

SEI's corporate home is the Grand Cayman Islands, although it has no actual offices there. While KBR employees working in Iraq would be subject to the 15.3 percent payroll tax for Social Security and Medicare (half of which is paid by the employer, the other half of which is paid by employees), SEI employees don't incur federal payroll tax liability because they're not working for a US-based company.

Kerry's bill, the Fair Share Act (S. 2775) would basically treat the foreign shell companies used in this scheme as American employers for the purposes of Social Security and Medicare taxes.

A similar provision was included in the Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719) which was approved by the House on "tax day." That bill has drawn a veto threat from the White House because it would end the IRS's use of private debt collection agencies to locate unpaid taxes.

If the amendment does not survive in the final version of the supplemental war funding bill, responsibility falls mainly with the Senate Finance Committee, of which Senator Kerry is a member. As CNNMoney.com reports, the companies that apparently want to keep the loophole are trying to influence the process.

The District of Columbia this week increased its already highest in the nation Earned Income Tax Credit (EITC) from 35% to 40% of the federal EITC. This change will provide much needed relief to low-income families in the District who are feeling the pinch of rising prices during the current economic slowdown. It also sends a message to policymakers everywhere about the effectiveness of the EITC as a method for offsetting regressive sales and property taxes for those with the most need. Twenty-three states and the District of Columbia currently have an EITC. Nine of those states, however, have EITCs of less than ten percent of the federal. In addition, three states fail to make their credits refundable -- meaning those lowest-income families with little income tax liability are unable to see any benefit. While all these states should be praised for at least having an EITC, this recent change to the EITC in D.C. provides a great example towards which these states with less generous credits should strive.

During a recent debate over a proposed cigarette tax increase, South Carolina legislators briefly considered a unique proposal to index the amount of the tax to the inflation rate of medical costs; the logic being that without indexing the tax, the revenues it raised would soon fall short (as a result of inflation) of the amounts needed to maintain the health care expansion to which it would be dedicated. The provision to index the tax has already been removed from the bill, but it nonetheless continues to provide an interesting context in which to discuss the cigarette tax. With the cigarette tax being on the agenda of so many states in just the past few months, including Maine, Massachusetts, New Hampshire, New York, North Carolina, and the District of Columbia, to name a few, any new perspective with which to view this issue is certainly useful.

Though cigarette tax increases are often packaged as attempts to curb smoking, prevent teen addiction, or offset the various costs that smoking imposes on society, many policymakers either privately or publicly view the tax primarily as a method for obtaining revenue with which to enact or expand a favored program. The problem is that the stream of funding produced by cigarette taxes always falls short over time as inflation erodes the value of tax collected on each pack sold. Indexing the tax to inflation is one way to begin to remedy this problem.

The South Carolina proposal was especially interesting in that it explicitly tied the revenues raised to the cost of the program it would fund (health care). The main problem with South Carolina's approach is that smoking rates are generally on the decline -- meaning the tax base upon which this revenue source depends is shrinking. Indexing does nothing to solve this problem, and therefore should not serve as an excuse for policymakers to increase their state's reliance on this regressive and unsustainable revenue source.

As an interesting aside, indexing the cigarette tax to inflation does make sense for states whose primary goal in taxing cigarettes is to curb smoking. As inflation erodes the true value of the tax levied on each pack, the deterrent power of that tax is reduced. Indexing the tax is the most reliable way to ensure that a consistent amount of tax is collected.

On Thursday, the House of Representatives passed two bills that are part of a housing stimulus package promoted by House Democratic leaders. The first is the Neighborhood Stabilization Act (H.R. 5818), which would make available $15 billion in grants for state and local governments and non-profits to buy up and rehabilitate foreclosed homes, in order to prevent neighborhoods from being adversely affected by vacancies. The second, larger bill is the American Housing Rescue and Foreclosure Prevention Act. This consists of several separate pieces of legislation offered as amendments to replace the language in the housing bill passed in the Senate, H.R. 3221. It includes language that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA) and allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure.

Housing Tax Provisions in the House Package

Another piece of legislation included in the larger bill is the $11 billion tax bill approved by the House Ways and Means Committee a month ago. It includes a refundable $7,500 credit for first-time homebuyers 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). It's not clear how helpful this could be, partly because it would not make any money available at the time a downpayment is made but would be claimed afterwards.

The House bill also has a deduction for property taxes for non-itemizers, which is capped at $350 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage currently do itemize their deductions. That means that the main beneficiaries of this provision will likely be homeowners who don't have mortgages -- even though this is a bill that is supposed to address a mortgage foreclosure crisis.

The bill also includes provisions to expand the Low Income Housing Tax Credit and to increase the use of bonds by state and local government to address housing needs.

Senate Bill Widely Panned

A month ago, the Senate passed a housing bill that was widely panned by housing advocates, policy experts, and labor, partly because of its inclusion of a "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). This would basically amount to a tax break with no strings attached for any company (not just home builders).

It's highly unlikely that this will prevent layoffs of employees as its proponents claim. 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 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.

The Senate bill also includes a $500 per-spouse deduction of property taxes for homeowners who do not itemize their deductions, which is larger than the similar deduction in the house legislation but will still save most families only $150 at the most. This deduction 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 fiscal problems.

Also included in the Senate bill 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. Unlike the credit in the House version, the Senate bill would not require the credit to be paid back over time, but it would be non-refundable, meaning fewer families could benefit from it. The Senate bill also includes provisions expanding the use of bonds by state and local government, like the House bill.

Unlike the tax provisions approved by the House, the Senate's tax cuts would not be paid for.

Veto Threats from the White House

President Bush opposes all of these bills, arguing that in many cases they reward lenders or homebuyers who acted irresponsibly. The President has threatened to veto the two House bills. White House Press Secretary Dana Perino even attacked the Senate bill, saying it "will likely do more harm than good by bailing out lenders and speculators and passing on costs to other Americans who play by the rules and honor their mortgage debt obligations." The differing provisions of the House and Senate bills and the opposition from the President make it very unclear what legislation -- if any -- will be enacted to address the housing situation.

An online video linked with a petition to the presidential candidates has generated nearly 30,000 signatures in support of closing the loopholes used by the buyout fund managers ("private equity" fund managers) to generate billions without paying their fair share of taxes. The video is part of the "War on Greed" film series that Robert Greenwald has created and which takes a comical yet serious look at the greed of private equity titans like Henry Kravis of Kohlberg Kravis Roberts (KKR). The most recent video explains the tax loopholes used by the industry, including the loophole for "carried interest," which is basically compensation paid to fund managers for managing other people's money. Although the video does not use the term "carried interest," it does explain that these super-wealthy fund managers are allowed to pay taxes on their compensation at the special low 15 percent rate reserved for capital gains.

Many were disappointed last year when the Senate failed to approve a House-passed bill that would have closed the carried interest loophole and clamp down on the fund managers' use of offshore tax avoidance schemes. Hundreds of organizations had publicly endorsed the effort to close the carried interest loophole.

For its part, the private equity industry/buyout industry seems to know that the loopholes it enjoys still infuriate some members of Congress and the public. KKR just hired Ken Mehlman, the former chairman of the Republican National Committee, to run its public affairs department, demonstrating real concern that Congress may move to check the unfair advantages the industry enjoys.

With a projected budget deficit that some believe may reach $20 billion, policymakers in California can avoid the harsh reality no longer. They must either address some of the fundamental problems that plague their tax system or impose draconian cuts in vital public services.

One of the shortcomings with California's tax system that has received a great deal of attention in recent weeks is the state's sales tax and its relatively narrow base. Like many states, California taxes only a handful of services, despite the prominence of that form of consumption in today's economy. The Chair of the State Board of Equalization, Judy Chu, released an analysis late last month demonstrating that California could generate as much as $10 billion in additional revenue by expanding its sales tax base. Senate President Don Perata has previously expressed support for such a change and new Assembly Speaker Karen Bass may also be open to the idea -- as well to other reforms. Now it seems that Governor Schwarzenegger may have taken the report's ideas to heart too, as the Los Angeles Times reports he has been meeting with business leaders in recent weeks to build support for changes in tax policy.

Unfortunately, California's budget woes haven't just highlighted problems with state tax policy. They have once again shed light on a legislative process that makes constructive responses to fiscal crises incredibly difficult. In particular, tax increases require a two-thirds supermajority vote to pass the legislature, a rule that gives disproportionate power to the legislative minority and that fosters intransigence among those opposed to tax increases no matter how dire the state's fiscal situation.

Alabama's House of Representatives passed a bill on Tuesday that would decouple the state tax rules regarding depreciation from the depreciation rules in the federal tax code. If enacted, this will prevent a revenue loss that will otherise occur because of the federal stimulus law enacted in February.

That stimulus bill included Congress's latest round of "accelerated depreciation" corporate tax cuts passed under the guise of helping the economy rebound. It allows companies to claim a "bonus" depreciation tax break that lets them deduct the cost of their investments much faster than would otherwise be allowed.

Since virtually every state's corporate tax laws are based on federal rules, this tax break will create an automatic tax loss for states unless (as Alabama is in the process of doing) they take steps to "decouple" from the federal tax break. The Alabama bill, HB 455, is estimated to save the state over $50 million in the current fiscal year. The Center on Budget and Policy Priorities reports that as many as 22 other states could take the same loophole-closing step to help shore up their corporate income tax base -- and their budgets.

At the request of Governor Tim Kaine, the Virginia legislature will be convening in a special session next month to figure out how to pay for much-needed transportation maintenance. The solution most observers expect to come out of that session will involve some combination of increases in the gas tax, in the sales tax, and/or in vehicle-related fees. Unfortunately, each of these options is regressive, taking a larger share of the income of lower- and middle-income taxpayers than from their wealthier neighbors. A recent report from the Virginia-based Commonwealth Institute offers a couple of inexpensive options for policymakers to offset the disproportionate impact these tax increases will have on more vulnerable low-income families.

Along the same lines as a program recently enacted in Minnesota, the report recommends coupling any gas or sales tax hike with a $30 credit per family member for families earning less than $20,000 per year ($40,000 for married families). By limiting the credit to only low-income families, this option would be a very inexpensive way of protecting families in need from further strain upon their already tightening budgets. The credit would cost only $80 million per year, while a one cent sales tax increase would raise $940 million and a ten cent gas tax hike would raise about $500 million. Even states not contemplating a gas tax hike should give consideration to the idea of new or expanded low-income credits. A refundable credit of this sort is much preferable to the gas tax holiday shenanigans being floated at both the federal and state levels as a solution to the squeeze many families are feeling.

In addition, the report suggests making the state's Earned Income Tax Credit (EITC) refundable. Of the over twenty states that currently offer an EITC, Virginia is one of only three that fails to refund amounts of the credit beyond one's income tax liability. The result of this is that for those low-income families who owe little or no income tax, the EITC is of very little use in offsetting the impact of regressive sales and property taxes. Failing to make the EITC refundable denies assistance precisely to those families who need it the most.

At a time when it seems like only the worst kinds of property tax reform have any chance of gaining steam, the Minnesota House recently came through with a reform bill that completely bucks the trend.

Expecting that property tax bills in Minnesota may soon grow a bit too high for comfort for some families, legislators avoided the temptation that we've seen take hold elsewhere to carelessly slash property taxes without regard for how those cuts will affect families of varying income levels. Instead, the House has proposed expanding the state's "circuit-breaker" credit to include many more families than are currently eligible, and to provide many families already benefiting from the credit with even more relief.

Just as appealing as the expansion of the state "circuit-breaker", however, is the means by which Minnesota plans to pay for that expansion. The House has proposed ending the state income tax deduction for property taxes paid. This deduction overwhelmingly benefits better off taxpayers who are more likely to itemize, and for whom deductions are more valuable since they pay income taxes at a higher rate.

The combination of these changes is a significant step toward making less unfair a starkly regressive property tax in Minnesota. Scaling back the state's existing homestead credit will also provide funds with which to pay for this better-targeted relief. Finally, the bill would also eliminate what is estimated to be a $186 million loophole for foreign operating corporations.

Unfortunately, there are serious obstacles to the bill's passage. First, the Senate has been contemplating a different approach in which state money would simply be given to local governments, in the hope that an influx of funds would encourage localities to cut taxes. Fortunately, Governor Pawlenty is not on board with this plan, preferring relief be given directly to taxpayers. But the Governor is also not yet on board with the House's plan. Pawlenty continues to insist that a firm cap on increases in local property tax collections must be the "linchpin" of any reform. The House added a levy limit on local governments to its bill in an attempt to accommodate the Governor, though that limit is not as strict as he has requested. Hopefully the Minnesota legislature will be able to push this bill through without too strict a limit on local government revenues. Such limits generally tend to leave local governments hurting for funds as the rising cost of providing government services outpaces the allowed limits.

This week, Senator Hillary Clinton came out in support of lifting the federal tax on gasoline during the summer months, an idea originally proposed by Senator John McCain. Senator Barack Obama publicly scoffed at the idea, saying "this isn't an idea designed to get you through the summer, it's designed to get them through an election." Obama explained that the overall savings for a family over the summer would probably average about "$25 to $30. Half a tank of gas."

The federal gas tax is currently 18.4 cents per gallon for gasoline and 24.4 cents per gallon for diesel. With the average gasoline price $3.60 per gallon this week, the federal gas tax is only around 5 percent of the total cost of gasoline.

While the benefit to the consumer may be too small to even notice, this proposal could have a very real and very negative effect on the Highway Trust Fund which is supported by the gas tax and which we depend on to fix and improve congested highways and roads in need or repair. The American Society of Civil Engineers points out that every dollar spent on highway construction is estimated to bring $5.40 in benefits and every billion dollars spent on highway construction generates about 30,000 jobs each year, according to the Department of Transportation. Repealing the gas tax for a summer would cost the Highway Trust Fund about $8.5 billion.

It's true that the gas tax is a regressive tax, requiring low-income drivers to pay more of their income in tax than wealthier drivers. But the gas tax is different from most other taxes in ways that minimize the importance of tax fairness. Most notably, the gas tax can serve to help reduce demand in a market where many would agree demand is far too high. With gasoline in limited supply (Paul Krugman explains that the supply is actually fixed for the next few months), environmental concerns continuing to mount, and traffic congestion remaining a problem, any effect the gas tax has on reducing demand should be a welcome one.

Senator Clinton would replace the money in the Highway Trust Fund by enacting a new windfall profits tax for oil companies. With a White House opposed to anything that can conceivably be called a tax increase and a Senate that has trouble paying its bills, it's hard to imagine this part of the proposal being enacted during this Congress. President Bush said he was open to considering the idea of a gas tax holiday, but there appears to be no chance he would ever support a windfall tax on oil companies to pay for it.

On Tuesday, Senator John McCain refined his health care proposal a little bit in a speech in Florida. The main thrust of his plan is still to allow a tax credit for the purchase of health insurance, including non-group insurance (insurance purchased on the individual market rather than through an employer). The credit amount would be $2,500 for individuals and $5,000 for families.

To pay for this, McCain would eliminate the exemption for employer-provided health insurance. This would basically make the tax code tilted towards individually purchased health care and perhaps even high-deductible health care. There would no longer be any tax incentive for employers to provide health care, so many could "cash out" the health care benefits they currently offer, meaning some employees would receive additional monetary compensation instead of health insurance.

The problem is that these employees would have to turn to the individual health insurance market, where plans offered are much more expensive and less generous.

Responding to criticisms that people with preexisting health conditions would never be offered adequate health insurance, McCain on Tuesday added a detail that he calls a "Guaranteed Access Plan" which would "reflect the best experience of the states to ensure these patients have access to health coverage." Jonathan Cohn at The New Republic explains why the programs set up by the states to do this so far utterly fail to provide affordable care to the people who have a preexisting condition. In these state plans the premiums can run in the neighborhood of $600-$850 per month, cost-sharing runs in the thousands and the preexisting condition won't even be covered for at least several months.

McCain also wants to pass legislation that would make it easier for health insurance companies to sell policies across state lines, but health care advocates have opposed similar legislation because it would make null and void the differing regulations and standards that states have enacted for health insurance companies operating within their borders. McCain also said he would expand Health Savings Accounts (HSAs). Introduced as part of the Medicare prescription drug law in 2003, HSAs are accounts to which individuals can make tax-deductible contributions and which are connected with a high-deductible health insurance plan. They offer the most benefit to those who are in the highest tax bracket and need no or little medical care, and can therefore serve as tax shelters. The Government Accountability Office just found that HSAs are typically used by people with incomes far higher than average.

Like many states, Ohio currently faces a serious budget deficit, one that has prompted the administration of Governor Ted Strickland to announce plans to cut agency budgets by more than $400 million for the FY08-09 biennium. The consequences of those cuts are already being felt around the state, but, as a recent column from Joe Hallett of the Columbus Dispatch implies, they shouldn't be entirely unexpected. The combination of recent income and property tax cuts and the only-partial replacement of Ohio's corporate income tax with a new commercial activities tax (CAT) will mean that the state will lose in excess of $10 billion in tax revenue between 2006 and 2010, making spending cuts all but inevitable.

As Hallett notes, "Tax cuts are easy to love. But the reality is that taxes pay for services citizens want and need." This latestreport from Policy Matters Ohio details the substantial revenue losses Ohio will experience as a result of reductions in personal income tax rates and explains how heavily those reductions are tilted in favor of the rich.

In the eyes of most fiscal policy experts, there are a few commonly accepted principles for judging tax policy -- neutrality, horizontal and vertical equity, and enforceability, to name a few. Apparently, in the eyes of one Louisiana legislator, "cutesy" now ought to be added to the list.

As the New Orleans Times-Picayune reported earlier this week, Sen. Joe McPherson apologized to his colleagues for casting the deciding vote in favor of an amendment to repeal the state's income tax, which currently yields nearly $3 billion per year. It seems that the Senator expected the amendment to lose, but "wanted to be on the record as doing away with income taxes." He later owned up to being "cutesy" with his vote.

The bill that Senator McPherson and his colleagues voted to amend would have repealed yet another element of the 2002 Stelly plan, which substantially improved the fairness of Louisiana's tax system. Just last year, Pelican State lawmakers voted to reinstate the "excess" itemized deductions that had been eliminated as part of the Stelly plan, a move that cost the state more than $150 million in tax revenue annually and that benefits only the wealthiest 20 percent of taxpayers.

The bill being debated now was intended to raise the income tax brackets that had been lowered under the Stelly plan. It would have (before being amended) reduced state revenue by roughly a quarter of a billion dollars per annum and, despite the claims of proponents, yet again help the most affluent. As the Times-Picayune notes, the bill's proponents portray it as a prototypical "middle-class tax cut", but preliminary estimates from the Institute on Taxation and Economic Policy indicate that more than 70% of the benefits from changing Louisiana's income tax brackets would accrue to the wealthiest fifth of taxpayers.

Seven tax-related ballot proposals ranging in quality from "highly regressive and irresponsible" to "completely inconsequential" are now set to be on the November ballot in Florida. Proposed by a "reform" commission that meets only once every two decades, the small scale of most of the proposals is surprising. Preferential property tax treatment for marinas, farm land and housing livestock, as well as for owners who improve their property with windstorm protection or renewable energy products, are among the proposals for which Florida voters have apparently had to wait twenty years.

But there is one very serious change to the state tax structure that has left progressives wishing the Commission would have stuck to making only minor changes. Well aware of the existing $3.4 billion budget shortfall facing Florida, the Commission has nonetheless proposed that school property taxes be abolished at an annual cost of $9 billion. In order to meet the requirement established by the Commission that school funding not decline as a result of this change, it was recommended that the legislature raise the sales tax rate by one percent, eliminate numerous sales tax exemptions (on both goods and services), and cut spending. In addition to these ideas, the Commission helpfully suggested that the legislature might try to find "other revenues".

A 1% sales tax hike is expected to raise less than half of the revenue needed to replace school property taxes, so expansions of the sales tax base appear imminent if the proposal gains approval in November. Expanding the sales tax base is good policy, assuming that it is done carefully, but doing so would ideally be coupled with much better targeted tax cuts. An across-the-board property tax reduction of the kind proposed here will provide huge benefits to those wealthier individuals with the most valuable homes.

And as if all of this wasn't bad enough, the Commission has also proposed tightening the caps on increases in a home's assessed value (criticized in the Digest just a few weeks ago) for homes not occupied by the owner.