The U.S. Senate is now expected to wait until after the July 4 recess to vote on a bill (H.R. 3221) that reforms the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac, modernizes the Federal Housing Authority (FHA), allows the FHA to guarantee refinanced mortgages for homeowners in danger of foreclosure, and provides communities with additional Community Development Block Grant funds to buy foreclosed or abandoned properties.

The bill also includes over $14 billion in tax cuts aimed at housing. A provision costing $4.3 billion over ten years creates a refundable $8,000 credit for first-time homebuyers that must be paid back in equal installments over the next 15 years. This is the equivalent of an interest-free loan. Eligibility is phased out beginning with taxpayers with incomes of $75,000 (or married couples with incomes of $150,000). It's not clear how helpful this could be, partly because it would not make any money available at the time a down payment is made but would be claimed afterwards.

Another provision costing $1.5 billion over ten years creates a deduction for property taxes for non-itemizers, which is capped at $500 per spouse. Because of the home mortgage interest deduction that is currently available for itemizers, most people with a mortgage already 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.

Limitation Interferes with State and Local Property Tax Decisions

Disturbingly, the new non-itemizer deduction for property taxes 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. State and local governments hardly need an extra reason to avoid raising property taxes, given the unpopularity of that particular form of taxation at this time despite massive budget shortfalls in the states. The Center on Budget and Policy Priorities points out that this limitation interferes with state and local prerogatives and would create an administrative headache for the IRS.

Most Unjustified Tax Break Left Out of New Version in the Senate

Fortunately, the very worst provision of the previous Senate bill has been dropped from this version. That is the "net operating loss carryback" provision (or NOL carryback) that would have allowed 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 be a tax break with no strings attached for any company (not just home builders). Citizens for Tax Justice and several other groups had issued harsh criticisms of the previous Senate bill because of this and other provisions.

Senate Bill Includes Revenue-Raising Provisions But Is Not Quite Deficit-Neutral

The bill replaces $9.8 billion of the revenue by requiring banks to report to the IRS credit card transactions for most businesses. It replaces another $1.4 billion by limiting the provision that currently allows someone who sells a home to exclude the resulting gains from taxable income. Some more revenue is replaced by increases in various penalties, but the bill still leaves about $2.5 billion of the $14 cost unpaid for, a shortcoming that Democrats in the House of Representatives will likely attempt to rectify when they receive the bill.

Bill Faces Amendment Dispute, Veto Threats

This week Senator John Ensign (R-NV) demanded that a $8 billion amendment to extend tax breaks for renewable energy -- without any revenue-raising provisions to offset the costs -- be attached to the housing bill. He has promised to use procedural mechanisms to slow the consideration of the bill if this amendment is not adopted. This forced Senate leaders to push consideration of the bill off into the week after the July 4 recess.

Even after the Senate approves the bill, the House may approve another version that improves upon the revenue-raising provisions or other parts of the bill, which would require another Senate vote of approval. Then it faces a veto threat from the White House, partly because it feels the credit for first-time homebuyers is a waste of resources.

The U.S. House of Representatives voted mostly along party-lines Wednesday to approve H.R. 6275, which would extend relief from the Alternative Minimum Tax (AMT) for another year and offset the costs mostly by closing tax loopholes.

As explained in last week's report from Citizens for Tax Justice, it is only fair that the cost of AMT relief be offset by closing loopholes that benefit the wealthiest Americans. One of these is the much-hated loophole for "carried interest," a form of compensation paid to private equity fund managers in return for investing other people's money. Most of us who earn an income from work are subject to federal income taxes at progressive rates, starting at 10 percent and going up to 35 percent for the very wealthiest. Private equity fund managers are at the top of this wealthy group, but nevertheless pay only 15 percent -- the special low capital gains tax rate -- on their carried interest. Closing this loophole makes up about half of the $61 billion needed to offset the cost of extending AMT relief for a year.

Republican leaders in the Senate will try to block consideration of this bill, arguing that any legislation extending a tax provision that is currently in effect should not be paid for. The absurd implication of this argument is that Congress should not have to pay for tax cuts if they start out as one-year or two-year provisions and are then extended past their original expiration date. It's also a demand for an increase in the budget deficit, which seems to no longer be a concern of conservative lawmakers.

For proponents of a sustainable, fair state corporate income tax in 2008, there's good news and there's bad news. The good news is that there is growing awareness of the damaging tax loopholes that are eroding the state corporate income tax base, and that states are enacting reforms such as combined reporting to help eliminate these loopholes. The bad news is that some lawmakers in Congress are bent on enacting a bill, the "Business Activity Tax Simplification Act" or BATSA, that would enshrine an entirely new class of tax loophole into federal (and state) law.

At the heart of the controversy is a straightforward problem: states want (reasonably) to tax the activities of multi-state corporations doing business within their boundaries, but there's no single agreed-upon answer to the important question of how much in-state activity is required before a company should be taxable-- or, in tax-speak, the level of activity that generates "nexus" between a business and a state. The BATSA bill would impose such a definition on states-- and would do so in a way that could sharply curtail the ability of states to tax multi-state corporations fairly. A pair of new reports from the Center on Budget and Policy Priorities outlines the bill's negative impact on state tax systems and explains why the arguments of pro-BATSA lobbyists are misleading.

As was discussed in last week's Digest, adequate transportation funding has been hard to come by for many states as a result of stagnant gas tax revenues and rising transportation infrastructure costs. This past week, a couple of interesting developments in the transportation finance debate arose out of this nationwide problem.

The first of those developments was a summit held with the cooperation of the National Governor's Association and the U.S. Department of Transportation. Though no formal recommendations were made, among the more intriguing revenue-raising ideas to come out of that meeting were an expansion of tolling on new and existing roads, implementing congestion pricing during high-traffic times, and creating a tax on the number of "vehicle miles" one travels. Each of these provisions would be regressive, requiring low- and middle-income people to pay more of their incomes than their wealthier counterparts, but this could be offset with increases in the overall progressivity of state and federal tax systems. What makes each of these options most appealing is that they can serve two purposes simultaneously -- providing needed funding for roads while at the same time reducing traffic congestion by placing a "price" on driving.

Slightly less encouraging was the insistence by U.S. Transportation Secretary Mary Peters that the gas tax is essentially outdated and broken and should not be increased to keep up with inflation-driven increases in transportation costs. Peters' criticism was that as people consume less fuel by either driving less, switching to mass transit, or purchasing more fuel-efficient vehicles, the gas tax will become increasingly unsustainable. But with states facing immediate transportation shortfalls that need to be addressed in a matter of weeks and months, not years, such a firm opposition to a gas tax increase seems unwarranted.

The transportation funding debate in many states has recently turned to a competition between increasing the gas tax and increasing the sales tax. The gas tax, like Peters' other ideas, asks the most of those people who drive the most, and potentially has some effect on decreasing traffic congestion by adding to the price of driving. If the gas tax is indexed to inflation, as it is to some extent in Florida and Maine, it can also be a sustainable funding source. The sales tax, on the other hand, is just as regressive as the gas tax but isn't at all based on one's driving habits -- it therefore also has no role in reducing congestion. It would seem that until her more long-term goals could be enacted, Peters' should be a staunch supporter of the gas tax as the next best solution.

By contrast, the other big transportation development of the week was a report released by the Kansas Department of Transportation that recommended "protecting [gas tax] revenues from inflation" by continuously adjusting the tax rate. That report also recommended adding additional tolling as a method for addressing the state's transportation woes. But with Kansas facing an immediate transportation funding shortfall estimated at $30 billion over the next 2 decades, an easily implemented solution like a gas tax hike seems like an absolute necessity to any transportation funding package. Other states that lack the luxury of time would do well to listen to the recommendations out of Kansas and consider adjusting their gas tax rates so that the widening gap between revenues and costs may begin to be bridged.

For once, there's some upbeat news when it comes to Proposition 13, though unfortunately it doesn't involve California. The Utah Revenue and Taxation Committee this week heard testimony on the merits of enacting a Proposition 13 style property tax cap in their state. With home values generally on the rise up until recently, Utahans have begun to express some frustration with the rising property tax bills coming out of their current fair-market-value assessment system. One knee-jerk way to prevent property tax bills from rising is to enact a law preventing taxable home values from increasing more than a certain amount in any year -- which one of the major provisions contained in Proposition 13 does. Unfortunately, the unintended consequences of such laws, including grave inequities between neighbors, huge windfalls for the rich, and the potential to slow the housing market, are less than desirable. These consequences have been discussed in more detail in earlier Digest pieces, and this ITEP policy brief.

Thankfully, the reaction to the idea in the Utah legislature has been notably unenthusiastic. But with the debate still very focused on concerns over the recent "sticker-shock" of rising property tax bills and the possibility of "taxing people out of their homes", at some point property tax reform is likely to come to the state. So far, that reform appears to be headed in the direction of forcing localities to vote any time the property tax is increased. Perhaps with some work on the part of policy advocates, a more progressive reform (such as a low-income property tax circuit-breaker) could arise out of the discontent in Utah.

Until then, Utahns can at least take comfort in the fact that with home values recently on the decline, their property tax bills can be expected to do the same. If the state were to enact a Proposition 13 style cap on assessment increases, that would by no means be guaranteed, as has been shown in Michigan.

Virtually every business group in Florida, with the exception of realtors, has joined tax fairness advocates in opposition to the proposed Amendment 5 on the November ballot. Amendment 5 would eliminate most state property taxes for schools, costing them about $9.5 billion a year, in exchange for a 1 percentage point increase in the state sales tax. The sales tax increase would only bring in $4 billion a year at most, not enough to fill the gap left from the loss of property tax revenue. The amendment does require the state to appropriate another $1.5 billion towards education using other revenue, but educators are rightly suspicious that lawmakers might not live up to this promise. Even if they did, there would still be a gap of a few billion dollars at least.

Most business interests oppose the amendment because they fear the sales tax increase will hurt their profit margins. Realtors clearly believe lower property taxes will raise home sales. The last public policy initiative they backed for this purpose, " portability", a part of Amendment 1 that was approved in January, failed to mitigate the housing crunch.

There are plenty of reasons to oppose the amendment that have nothing to do with profit margins. It is unwise to shift from property taxes to sales taxes in the midst of a recession. Sales tax revenues are strongly linked to economic cycles and they are not a reliable source of income during an economic downturn. Moreover, the sales tax is a regressive way to raise money and will hurt the poor the most at a time when they can least afford it.

Finally, leaving a future source of revenue undefined is an invitation for more deep cuts for public services at a time when states are already facing serious budget shortfalls. The legislature just passed a state budget $6 billion smaller than the year before, followed by an additional 4% across-the-board cut. This leaves vital public services vastly under-funded at a time when they're needed most.

Amendment 5 shifts the state's fiscal burden to lower-income people and also threatens to tear a bigger hole in the system that funds education. It's a step backwards that Floridians should reject.

Facing a $2 billion budget deficit and a looming transportation funding shortfall, Arizona is planning to consider a 1-cent increase in its sales tax this fall. Backed primarily by business leaders along with Governor Janet Napolitano, a sales tax hike would make worse an already highly regressive tax system. With a modest income tax and one of the highest sales taxes in the nation (the tax would be over 10% in some localities if the proposed increase is enacted) Arizona's tax policy disproportionately burdens its low-income residents. Legislators in the Grand Canyon State are looking to use the tax hike to relieve transportation woes, including road and mass-transit projects. But at a time when the economy is sluggish, depending solely on an unreliable, high-rate sales tax to fund key infrastructure projects is foolish. Rather than making low-income Arizonans (whose budgets are markedly tighter in this economic climate) foot the bill for the much-needed improvements, Arizona should consider re-vamping its income tax system to generate more revenue and distribute the responsibility for paying taxes more fairly.

And if comprehensive income tax reform is off the table, there is something to be said for a gas tax hike coupled with carefully designed, offsetting income tax provisions. For more on the relative merits of sales versus gas taxes for financing transportation, see this article in this week's Digest.

The House Ways and Means Committee approved a bill (H.R. 6275) this week that would temporarily prevent the Alternative Minimum Tax (AMT) from expanding its reach to families who are mostly well-off, but not as wealthy as those the tax was originally intended to target. Almost all lawmakers agree that this step should be taken. But President Bush and Republican leaders oppose the Ways and Means bill because it offsets the cost of AMT relief with revenue-raising provisions in order to avoid an increase in the budget deficit.

The AMT was created to ensure that wealthy Americans pay at least some federal income taxes no matter how skillful they are at finding loopholes. It is reasonable that Congress wants to prevent it from affecting more families, but as argued in a new report from CTJ, there is no reason why the deficit should be increased to provide tax relief for those who are relatively well-off. The Ways and Means bill would offset the cost of AMT relief mainly by closing unwarranted tax loopholes, which will in turn make the tax code fairer and more economically efficient.

The right-wing talk show circuit has lately worked itself into a frenzy over one of its latest causes: trying to convince America that Barack Obama's tax plan will crush working class families and destroy the economy. Media Matters for America has done an incredible job of tracking the inaccurate statements that have been made on the air about Obama's tax plan without being challenged or corrected. Unsurprisingly, a number of these incidents occur on Fox News.

On June 11 they caught Ben Stein making the outlandish claim that people "that have incomes in the five digits" would pay more because of Obama's proposed changes in the capital gains tax rate. As pointed out in a recent report by CTJ, over 70 percent of the Bush tax cut for capital gains and dividends goes to the richest one percent of taxpayers. The bottom 60 percent of taxpayers only get about 2 percent of that tax cut -- and an average tax cut of about $16!

On June 15 Media Matters caught Mara Liasson telling America that the Tax Policy Center's report on the candidates' tax plans found that Obama's tax plan would increase the deficit more than McCain's tax plan. In fact, the report found the exact opposite.

Then on June 16 they found a Republican strategist claiming, without being challenged or questioned by the anchor, that under Obama's plan, taxes for "an average family making $61,000 -- just alone letting the tax cuts expire -- would go up $2,100. That's a lot of money for an average family." Of course, Obama's plans don't call for repealing the Bush tax cuts for anyone with an income lower than $250,000. (We wish Obama would repeal the Bush tax cuts for a far larger number of taxpayers. A report released by CTJ in January showed that only 2.1 percent of taxpayers will have incomes above this level in 2008.)

Keeping track of right-wing distortions about tax policy in the media is a hard job (covering Fox News alone is daunting) so Media Matters is an invaluable asset to us all.

The House of Representatives in Rhode Island unanimously passed a $6.89 billion budget this week that is expected to receive approval from both the Senate and Governor Carcieri. Unwilling to make responsible choices during an election year, lawmakers settled on a budget that includes across the board spending cuts with virtually no tax increases. Ocean State legislators breezed through statutes that would reduce funding of organizations such as Meals on Wheels, the Rhode Island Community Food Bank and the state's largest homeless shelter, Crossroads Rhode Island. A $17.8 million cut from the state's public universities also received little attention, as did a $12.5 million cut in non-school aid funding for cities and towns. Further blows to Rhode Island's impoverished include the elimination of state-subsidized health care benefits for approximately 1,000 low-income parents, the eradication of a program that subsidizes heating costs for the poor, a cap on welfare benefits at 4 years rather than 5 years, and the removal of 300 poor children from the Head Start program.

Requests to reverse tax breaks for high-income Rhode Islanders, such as the capital gains tax or flat tax alternative were ignored. The one tax increase is on health insurance premiums which would be borne by the major insurers -- Blue Cross, United and Delta Dental. These companies will likely pass on those costs to consumers, as they did last year when the tax was expanded. With no other tax revenue increase, the remaining sources of savings or revenue all come with high degrees of uncertainty. Lawmakers are looking to unspecified state personnel cuts to save about $91 million. But this money is only guaranteed if planned labor negotiations go smoothly. In addition, the state anticipates savings of $67 million on Medicare programs; this money hinges on federal approval. Rhode Island will rely on gambling revenues, in an uncertain economy, to allocate $12.8 million in education funding to cities and towns.

Sen. Paul E. Moura, D-East Providence, happily declares, "I think we are coming out of it looking good. Any time in an election year you knock on someone's door and you haven't raised their taxes, it certainly makes the walk a lot easier." As Senator Moura proudly indicates, the motives behind Rhode Island's budget debates this year were almost completely political. And among the victims were the poor, homeless and children who have little to no say in government.

New Jersey's recent budget agreement is somewhat less disheartening with fewer cuts and more aid. Garden State lawmakers plan to only raise taxes on public utilities, a move that would disproportionately affect the poor as energy costs soar. New Jersey, already the nation's fourth-most indebted state, plans to rely on borrowing to channel as much as $3.5 billion toward school construction in the state's poorest cities following a state Supreme Court Order. Legislators opted to cut state aid to help hospitals treat uninsured patients, reduce funding to nursing homes and deny a funding increase (in the face of a rising cost-of-living) for nonprofits that care for the poor and disabled. State funding will also be reduced for municipalities and colleges. Retirement incentives for state workers were increased. But while salary costs will now fall, retirement benefit costs will rise later. Benefits for newly hired government workers and teachers were slashed. On the positive side, households with incomes over $150,000 will no longer receive property tax rebates.

New Jersey lawmakers expressed little sympathy for their plans to choke hospitals and nursing homes. Assemblywoman Joan Quigley, D-Bergen, claimed that "the pain in this budget is being shared pretty equally by everyone." But it is quite obvious that the primary burden of the budget cuts will fall to the poor, disabled, elderly and teachers.

The situation in Florida is worst of all. Governor Crist recently signed into law a $66 billion budget which slashed spending across the board, leaving Florida's public education, justice and health care systems in peril. As a recession, coupled with inflation, hits Floridians particularly hard, it is becoming clear that a sales tax on its own cannot possibly come close to adequately funding necessary programs. The cuts to public education amount to a reduction in spending of $130 per child at a time when Florida has the worst drop-out rate in the country. Tuition at community colleges and universities will rise by 6%. These institutions, forced to cut spending, are struggling to attract, recruit and retain valuable faculty members. Payments to hospitals serving the poor will be eliminated. It's predicted that cuts to nursing homes will lead to massive layoffs and shut-downs. Homes for the developmentally disabled will be forced to limit services. The justice system must cope with huge job cuts, with the burden being borne primarily by case-specific divisions such as sex crimes and drug arrests. Increased fees and wait times for justice services will disproportionately affect the poor as well as indigents, battered women and rape victims.

Governor Crist believes that strangling services for the most vulnerable in his state will "maintain the gains that Florida has achieved over the past several years." Would the worst drop-out rate in the nation fall under "gains"? How about the fact that Florida is the only state that does not waive court fees for indigents? Is an exodus of university professors a "gain"? Meanwhile, funds are allocated toward tourism marketing and promotion and economic-development incentives for new industry and film production. Florida can barely afford to educate its children but is more than willing to promote its image for tourists (despite the nationwide recession) and bring in big-time movie productions (which provide only temporary employment and economic benefits).

David Denslow, head of the University of Florida's Bureau of Economic and Demographic Research contends that reducing a state's budget actually amplifies and spreads the effects of a recession. Clearly the preservation of tax breaks for the wealthy and the second most regressive tax system in the nation are also in no way stimulating the economy. Florida's lack of an income tax has actually worsened its situation under the current economic conditions. Rhode Island and New Jersey lawmakers, beaming with pride over their recent "tax-free" budget agreements, should take careful notice of Florida's crisis and avoid making the same "gains."

Budget negotiations are wrapping up this week in Delaware, and unlike most states, Delaware has taken an approach to remedying their $151 million budget shortfall that utilizes both spending cuts and tax increases. While many states seem content with purely slashing spending to balance the budget, (see this week's Digest articles on New Jersey, Rhode Island, and Florida) Delaware has chosen to scrape together some extra revenues to help save some of its public services.

Admittedly, the means the state has chosen to go about doing this aren't especially exciting. On the revenue side are minor increases in the gross-receipts tax, the state's share of slot machine revenues, the alcohol tax, registration fees for limited liability partnerships, and the possibility of a tax on medical providers. Clearly, the only overarching theme of these tax policy changes is that they are the only options on which Delaware budget negotiators managed to agree.

Noticeably missing from this hodge-podge of ideas is a bill filed in the Senate seeking to increase the state's top income tax rate from 5.95% to 7.95%. This change wouldn't have provided a tremendous amount of revenue, but the revenue it did raise would have been collected from those more fortunate Delawareans least vulnerable to the hardships caused by the recent economic slowdown.

The legislature should be credited for not falling victim to the anti-tax sentiment that has paralyzed many state budget-makers in the past months, but next time a budget shortfall surfaces, progressive income tax hikes should be considered as a more equitable and more sustainable way of filling the hole.

North Carolina is suffering from an increase in the cost of asphalt. Asphalt is made of petroleum derivatives, and its cost has increased 25% since the end of 2006. This is causing the state to cut back on road repaving projects which are likely to cost more money to accomplish the longer they go unrepaired.

In Missouri, the state has a projected $1 billion transportation fund deficit. It is only expected to be able to meet 40% of obligations starting July 2009. In spite of this, all three major candidates for Missouri Governor pledge not to raise the state motor fuels tax. The two Republican gubernatorial contenders, Sarah Steelman and Kenny Hulshof suggest dedicating general funds revenue to transportation and privatizing some state roadways respectively.

Virginia is currently confronting a " growing bridge and road maintenance shortfall" which is depriving money from road construction. Governor Tim Kaine has recently released a proposal to raise vehicle registration fees and sales taxes on vehicles, while keeping the state fuel tax unchanged.

These states have in common a tendency to tinker around the edges of transportation funding policy while failing to address the taboo topic of gas taxes. The root cause of these transportation troubles is that the gas tax has been kept too low to finance the transportation needs in all these states.

Most states have a "per gallon" gas tax that leaves them unable to cope with rising costs of transportation as inflation erodes the value of the tax collected on each gallon. North Carolina's gas tax has been capped at 29.9 cents since 2006 due to pressure from anti-tax activist Bill Graham, although it was formerly readjusted to reflect price changes twice a year. Missouri has not raised its gasoline tax since 1996 and Virginia's gasoline tax has stayed constant since 1992. None of these states index their gasoline tax either to transportation costs or the general inflation rate.

Sometimes even a major crisis is not enough to get politicians to consider gas tax adjustments. Due to Iowa's recent flooding, Iowa's legislature is likely to convene an emergency session to confront their newly pressing infrastructure needs and find sources of funds for disaster recovery. Legislators rejected efforts to raise the gasoline tax earlier in the year to fill the $200 million highway maintenance deficit, opting instead to tinker around the edges and simply raise vehicle registration fees. But even now, the Iowa House Majority Leader considers a hike in the gasoline tax "an absolute, absolute last resort," with gas selling for $4/gallon.

Even a spectacular tragedy is sometimes not enough to get politicians to wake up. Before the August 2007 Minnesota I-35W bridge collapse, Governor Tim Pawlenty vetoed a bill raising the gasoline tax 7.5 cents per gallon, calling it "an unnecessary and onerous burden" as consumers were paying $3 per gallon for gasoline in May 2007. This was in a state that hadn't adjusted its gasoline tax in 19 years. Not even a bridge collapse and transportation funding shortfall of nearly $2 billion were enough to change the governor's position that gas taxes are anathema. Needed road and bridge repairs were being neglected, with obviously dire consequences. Fortunately, Minnesota lawmakers were finally able to override Governor Pawlenty's veto in February, raising the gas tax by 8.5 cents.

For many, there will never be a "right time" to raise the gas tax. It wasn't the right time at $2 per gallon in 2005 when Gov. Pawlenty first vetoed a gas tax increase, nor at $3 per gallon in 2007, nor now at $4 per gallon. In fact, it's never the "right time" to raise any kind of tax... no one wants to pay more than they have to. But sometimes in order fund vital services policymakers need to come together and bite the bullet as they did in Minnesota, even if it is politically difficult.

Opponents have sometimes successfully argued that raising the gasoline tax would be regressive and particularly damaging to the economy in such a car-dependent nation. But gas tax increases can be done in conjunction with progressive measures, such as raising the Earned Income Tax Credit and creating a refundable gas tax credit as was done in Minnesota and proposed in Virginia.

Former Virginia Governor Jim Gilmore's quixotic quest to repeal that state's "car tax" a decade ago was emblematic of two popular (if misguided) tax policy themes of the late 1990s: unaffordable tax cuts prompted by ephemeral budget surpluses, and faux-populist efforts to cut state and local property taxes on motor vehicles. Gilmore's car tax cut was ultimately pared back in the face of huge budget deficits, and many observers have been sharply critical of his efforts to make his car tax cut seem more affordable than it actually was.

Nonetheless, after a six year absence from elected office, Gilmore has returned to Virginia to campaign for an open US Senate seat this fall. However, the ex-governor is finding less than a warm welcome from elected officials who still remember the car tax debacle: a Republican House member who was instrumental in the passage of Gilmore's original tax cuts has announced his endorsement of Mark Warner, Gilmore's Democratic rival for the Senate seat, citing the governor's use of erroneous fiscal forecasts in beating the drum for the car tax repeal effort. The lesson for policymakers: championing tax cuts isn't a recipe for political success unless your state can actually afford them.

Progressives have long contested the unfairness of depending on local property taxes for school funding. Property taxes are fundamentally regressive and many localities do not even have the tax base to adequately fund their local school district. But for some jurisdictions the only alternative funding mechanism is sales taxes, which are even more regressive. That means that localities' ability to raise property taxes to fund education is particularly important. Thus, a new court case is challenging Alabama's ultra-low property tax caps which are rooted in the state's archaic 1901 Constitution. Read much more about the case and Alabama's deeply disturbing history of racially motivated tax discrimination on our blog here.

On Friday of last week, Republican Senate leaders successfully filibustered the Lieberman-Warner "cap and trade" bill ( S. 3036). This bill would reduce carbon emissions from electric power, transportation, manufacturing, and natural gas by 4 percent below the 2005 level starting in 2012, then by 19 percent below the 2005 level in 2012 and by 71 percent below 2005 level in 2050. Permits to emit carbon would be allocated to industry. Some of these allocations would be given away while others would be auctioned off, and the allocations could be traded (hence the term "cap and trade").

The proceeds from these auctions would be used for various purposes, some of which could mitigate the resulting higher energy costs for low- and middle-income families. Part of the revenue would be dedicated towards tax changes that would help consumers, but the exact nature of the tax provisions would have to be worked out by the Senate Finance Committee.

On Tuesday, Republican Senate leaders managed to block another energy bill, ( S. 3044), which would have eliminated some significant tax giveaways for large oil and gas companies and would have imposed a windfall profits tax on those not investing enough in sustainable energy. The bill would impose a 25 percent tax on windfall profits, which are defined by a formula that targets profits far out of line with average profits over the 2002-2006 period. Any windfall profits invested into renewable energy development would not be subject to this tax.

Revenue from the windfall profits tax would be dedicated to an Energy Independence and Security Trust Fund to be used for the development of renewable energy sources. The bill would also bar large oil and gas companies from using the deduction for domestic manufacturing (often called the Section 199 deduction), raising about $10 billion over ten years, and would also restrict the use of credits for foreign taxes by oil and gas companies, raising $4 billion over ten years.

Current tax policy gives oil and gas companies breaks that other industries don't enjoy and does little to encourage the development of alternative energy sources. Jeffrey Hooke, an expert on investment and finance, argued in a Baltimore Sun op-ed back in April that "Oil executives lament that only 9 cents of every sales dollar is profit, which is below the average for American business. However, if profit margin were a reliable yardstick, all supermarkets would close, because they earn less than 1 cent per sales dollar." Further, he says, "Alternative energy research has a minuscule budget at Big Oil. Any oil substitute would be a prized commodity, but its discovery presupposes a reduced value for the industry's reserves, refineries, pipelines and the like. The companies' incentive to find a substitute is thus quite weak."

Republican Senate leaders did not pause to admire their success in blocking energy legislation this week. On Tuesday they went on to block a proposal by Senate Finance Chairman Max Baucus (D-MT) to extend several popular tax cuts and prevent the Alternative Minimum Tax (AMT) from affecting more taxpayers. The proposal was to be offered as a substitute for the House-passed bill, H.R. 6049. The first half of this bill (often called the "extenders") has a cost of $57 billion, which would be offset by revenue-raising provisions. The second half of the bill, enacting a "patch" to keep the AMT from affecting more taxpayers, has a cost of around $64 billion but this cost would not be offset.

The AMT became a major issue in negotiations over the fiscal year 2009 budget resolution between the House, which wanted to use procedures that would make it easier to pay for an AMT patch, and the Senate, where Democratic leaders thought they did not have the votes for such a move. As explained in the report issued by CTJ, the majority of the benefits of AMT relief goes to the richest 10 percent of taxpayers. It seems unfair that the Senate wants to pay for AMT relief by increasing the national debt, which could very likely be paid off by the middle-class in the long-run (in the form of cuts in public services or higher taxes across-the-board). The final budget resolution that the House and Senate approved last week did not include the procedural maneuvers that House Democrats had pushed for but instead included a point of order against increasing the deficit that may have little impact on how Congress addresses the AMT.

While Senator Baucus seems to have given up entirely on offsetting the cost of the AMT patch, he and the Democratic leaders in the Senate do want to offset the cost of the extenders, and this is what prompted the filibuster. Anti-tax lawmakers have argued that extending tax cuts that are currently in effect really amounts to an extension of current tax policy and therefore should not require any measures to replace the revenue lost. CTJ's recent report on the extenders bill explores the implications of this argument. Under this logic, Congress could pass any temporary, one-year tax break and then the following year make that tax break permanent without offsetting or even considering the revenue lost beyond that first year. This makes a complete mockery of the idea of fiscal responsibility.

Even Business Is Turning Against the Anti-Tax Lawmakers

Senator Baucus has touted a letter from 300 large companies in support of his approach. The companies seem to be far more worried about the loss of various tax breaks included among the "extenders" than they are about the revenue-raising provisions, which won't affect most of them. One of the revenue-raising provisions simply delays the implementation of a tax break that has not even gone into effect yet (worldwide interest allocation) while another prevents private equity fund managers from using offshore schemes to avoid taxes on deferred compensation. Baucus has told the BNA Daily Tax Report that even the private equity fund managers don't mind this so much because they are much more afraid that Congress will attempt to close their cherished loophole for "carried interest," a loophole that House Ways and Means Chairman Charlie Rangel may target again in order to help offset the costs of an AMT patch.

Senator John McCain continues to make misleading and plainly incorrect statements about tax policy while on the campaign trail. On June 10 he told a group of small business owners that Senator Obama's tax plan would constitute the biggest tax increase since World War II. Annenberg Political Fact Check correctly points out that Obama's plan mainly involves allowing some of the Bush tax cuts to expire, and that expiration was written into law by President Bush and his allies in Congress, so it's difficult to see Obama's proposal as a "new" tax or a tax "increase." (Even if this did constitute a tax increase, measured as a percentage of gross domestic product this would constitute only the fifth largest since World War II.)

Even worse, McCain continues to claim that "Americans of every background would see their taxes rise" if any attempt is made to reduce the tax subsidy for capital gains and dividends. CTJ's recent report on this subject shows that 70 percent of the benefits of the Bush tax cuts for capital gains and dividends go to the richest one percent of Americans. The poorest 60 percent of Americans get next to nothing from this tax break. Most stock owned by middle-income people is in 401(k) plans, Individual Retirement Accounts (IRAs) or other similar retirement savings vehicles. Taxes on these investments are deferred until retirement, at which point they are taxed as "ordinary income," meaning they don't benefit from the tax cuts for capital gains and dividends.

Throughout California's latest fiscal crisis, some have argued that the state's entire $15.2 billion budget deficit should and can be resolved through spending cuts alone. This should come as little surprise. After all, California is the state that gave the nation its most well known tax limitation - Proposition 13, which turned 30 this month.

Those more in touch with reality - and those who have long struggled with the legacy of Proposition 13 - understand, however, that additional tax revenue must be part of the solution to California's financial troubles. As Jean Ross, Executive Director of the California Budget Project, pointed out in the Sacramento Bee earlier this week: "California's budget faces a chronic problem. Simply put, our tax system doesn't raise enough money to support the services Californians want and deserve." Ross further notes that one of the sources of that problem is clear; taken together, the numerous personal income, corporate income, and other tax cuts enacted over the past 15 years now drain $12 billion per year out of the state's budget.

State Board of Equalization Chair Janet Chu offers another approach to bolstering the state's tax system in the San Jose Mercury News. She proposes expanding the state's sales tax base to include an array of services, a move that would yield upwards of $8.7 billion and help bring California's tax system into the twenty-first century. Ross and Chu may be traveling slightly different roads, but their intended destination is the same - adequate revenues.

Fortunately, Assembly Speaker Karen Bass seems to be heading in the same direction, though she doesn't appear to have a very good map just yet. She indicated last week that she supports raising taxes by $6.4 billion, but offered few details on how that goal would be reached. Of course, as the Bee observes, with the start of the state's fiscal year fewer than three weeks away, the time for Bass and other legislative leaders to become more engaged in the budget process is now.

The Connecticut House and Senate each approved a bill early Thursday morning that adds to the state's existing $150 million deficit by cancelling a scheduled increase in the state's tax on wholesale earnings from gasoline sales. Governor Rell is expected to sign the measure. The bill prevents what would have been a 0.5% increase in the petroleum wholesale earnings tax, which industry lobbyists are claiming would have increased prices at the pump by about 5 cents.

Even if the industry's 5 cent figure is taken at face value, few observers are seriously suggesting that this bill will do anything to improve the financial situation of Connecticut families. During the brief debate that occurred earlier this year over a proposed suspension of the 18.4 cent federal gas tax, that plan was heavily criticized for only providing the average driver with a $30 tax cut. The Connecticut bill would save drivers less than a third of that amount, though it would drive state government millions deeper into debt. Despite the fact that this would only provide a negligible tax cut for the average family, one legislator insisted that it is important to "let our citizens know that we are very concerned about what they're up against" - an unsurprising sentiment given that this is an election year. Pure political motives are the only explanation for why a token gas tax cut is so high on lawmakers' agendas despite the existence of a state government deficit and numerous fiscal problems in many Connecticut counties.

But perhaps even more worrisome than cutting taxes in the face of a deficit is that Connecticut lawmakers have decided to play politics with a very serious issue affecting low-income families. Even if Connecticut legislators don't want to fix their state's regressive tax system, there are still much better options for assisting families hurt by high fuel costs. Instead of providing an across-the-board tax cut that benefits both Connecticut's wealthiest, as well as its poorest families, a targeted low-income gas tax credit of the type enacted in Minnesota could have distributed more gas tax relief to lower-income families at a similar cost. Lawmakers need to admit that the most dramatic impact of the recent economic slowdown has been on lower-income families struggling to make ends meet. Until then, more poorly targeted and gimmicky tax cuts of the kind passed in Connecticut can be expected.

Even though Massachusetts' health insurance mandate has had success in reducing the number of uninsured, there continues to be a significant number of people who have not purchased coverage. Eighty-six thousand people, or 2.5% of Massachusetts' 3.34 million on-time tax-filers indicated they chose not to buy insurance and therefore did not receive the $219 personal exemption in 2007. Sixty-two thousand tax payers were deemed too poor to afford health insurance and were not penalized, while 200,000 others filed for extensions.

The mandate requires that all state residents who can afford to buy health insurance purchase an insurance policy and provide documentation with their tax returns or face tax penalties. Those who cannot afford one (classified as anyone making less than 300% of the federal poverty line) are given subsidies to buy their own plan. Employers must either provide their employees with a choice of plans, make a "fair and reasonable" contribution to their coverage, or face a fine of up to $295 per worker.

The tax penalty is slated to rise dramatically. On this year's tax returns, residents who choose to go all year without health insurance coverage will be required to pay up to $912. This increased penalty may compel the few remaining Bay Staters who can afford health coverage to buy it.

According to an analysis in Health Affairs, the mandate has so far reduced the uninsurance rate from 13% to 7% of state residents. An estimated 355,000 people gained insurance coverage in the state over the past year. But, as others have pointed out, providing health insurance is not the same thing as providing health care, and there are some questions about how useful the newly obtained insurance will be.

The cost of the mandate has turned out much higher than estimated as enrollment has exploded. The actual cost of the mandate has turned out much higher than estimated as enrollment has exploded. The state has budgeted about $869 million for the program this year, but actual costs are likely to be much higher. Given that Massachusetts now faces a budget deficit of $1.2 billion over the next fiscal year, it may need to go beyond the anticipated corporate income tax reforms to meet all of the unanticipated costs of the health insurance mandate.

The North Carolina House of Representatives this week approved and sent to the Senate a measure that would raise the state's earned income tax credit (EITC) from 3.5 percent to 5.0 percent of the federal EITC. The measure is bittersweet: assistance to the working poor but still not enough to lift families out of poverty and the grasps of regressive taxation.

A 10 percent state EITC in North Carolina would be more effective and would cost less than one percent of the current budget, according to estimates by the NC Justice Center. Research suggests that, among its many benefits, the EITC increases workforce participation and encourages asset building. Some surveys conclude that families invest their EITCs in education, savings accounts and transportation improvements, investments that, in turn, promote economic security among low-income workers.

At the state level, an EITC helps to offset the regressivity of the sales and property taxes, the burdens of which fall primarily on low-income earners. In North Carolina, the wealthiest one percent of families spend 6.1 percent of their incomes on state and local taxes. Compare that with the poorest fifth of families in the Tar Heel state, who devote 10.6 percent of their earnings to state and local taxes.

One in 5 North Carolinians benefit from the EITC. If the bill passes, under North Carolina's new EITC structure these residents would be able to receive from the state an additional credit equal to 5 percent of their federal EITC. Unfortunately, even with this boost from the state, low-income residents would still be subject to regressive sales taxes greater than this amount. A report by the NC Justice Center estimates that an 11 percent state EITC would be needed to offset the burden of state and local sales taxes on a family of four.

This week, the Senate debated the Lieberman-Warner Climate Security Act that seeks to establish a cap-and-trade program for reducing carbon emissions from the electricity, transportation, and manufacturing industries. Its likelihood of passing is remote and prospects for overturning a veto threatened by President Bush are even more farfetched. However, it is worth considering the soundness of the proposal due to the virtual certainty of having a president (Sen. Barack Obama or Sen. John McCain) in January 2009 who favors reducing carbon emissions at least in principle.

Under the Lieberman-Warner Act, most industrial carbon emitters (comprising 86% of U.S. emissions) would need permits in order to emit carbon. If they produced more carbon than their permits allowed, they would have to buy permits from other emitters, creating an incentive to minimize emissions. If the bill were made law, 80% of carbon allowances would initially be distributed for free, with 20% of them auctioned off. Over time a gradually increasing percentage would be auctioned off. The total amount distributed would be based on 2005 levels and would decline 2% per year between 2010 and 2050. As the number of permits declined, they would become more expensive and the new effective price of carbon should force emissions to drop. The backers of the proposal maintain that it would reduce emissions about 70% from current levels by 2050 (although many consider this inadequate).

The advantage of cap-and-trade is that it can ensure in theory that only a sustainable amount of carbon is emitted. A tax, on the other hand, doesn't set an actual cap, although the incentives to reduce emissions would be equally strong. The main disadvantages of cap-and-trade are its administrative challenges and vulnerability to political pressures and corruption. Europe's cap-and-trade program established three years ago has suffered from problems such as cheating by certain corporations obtaining more emissions credits than they should have. Carbon emissions have actually increased in Europe since the implementation of cap-and-trade.

The flawed method of implementation in Europe is present in Sen. McCain's global warming plan. McCain proposes giving away the emissions credits initially, which will not create incentives for the biggest emitters to reduce their emissions faster. Giving the credits away free of charge also would open up the possibility of the influence of special interests to creep into the process of distributing the credits. Sen. Obama's plan proposes auctioning off credits at the program's onset, which is much sounder policy according to Former Labor Secretary Robert Reich.

There is also the question of what to do with any revenues generated by permit auctions or by carbon taxes. Lieberman-Warner proposes placing revenues from carbon permits into a public-private entity known as a Climate Change Credit Corporation. This will finance other greenhouse gas reducing activities such as researching alternative energies, improving fuel efficiency, and insulating homes and businesses. But there is evidence this could be subject to abuse, as many of the biggest carbon-emitting corporations are lobbying to obtain funding to develop their own private pollution-reducing technologies. On the other hand, both cap-and-trade and carbon taxes will likely increase energy costs in the short-run and disproportionately impact the poor and middle-class. An alternative is to return the proceeds of the carbon permits to these groups which will render the policy revenue-neutral.

Al Gore, along with many environmental groups and economists, has supported creating a more straight-forward carbon tax. This will lead to more predictable energy prices over the long-term on which environmentally responsible economic decisions can be based. But, of course, proposing "new taxes" of any kind is politically difficult, even if they're imposed on something as environmentally devastating as unregulated carbon dioxide.

A case can be made for either carbon-reducing scheme, but the bottom line is that tax policy will in some form have to play a key role in any method chosen to address the climate crisis.

Policymakers in Louisiana this week took one of the final steps towards enacting an unfair and unaffordable personal income tax cut. On Wednesday, the House of Representatives unanimously approved SB 87, a measure that would repeal one more element of the landmark 2002 Stelly Plan, returning the level at which a married couple's income becomes subject to the state's top income tax rate of 6 percent from $50,000 to $100,000. (Single people will also derive some benefits from the bill, as it would push back the start of their top bracket from $25,000 to $50,000.)

As new reports from the Louisiana Budget Project (LBP) and the Institute on Taxation and Economic Policy (ITEP) show, however, SB 87 not only ignores the Bayou State's perilous long-term fiscal condition, but also the impact of its current tax system on low- and moderate-income Louisianans. While Louisiana may be temporarily flush with revenue due to escalating oil prices, as LBP points out, general fund revenue is expected to decline by 1.5 percent on average over the next four years; indeed, the Public Affairs Research Council of Louisiana further notes, "even if oil prices remain high, state revenues are projected to drop by $377 million from 2009 to 2010". Cutting personal income taxes by $300 million or so, as SB 87 would do, would only add to Louisiana's long-term fiscal woes.

SB 87 also directs the vast majority of its benefits to the most affluent taxpayers in the state, when those taxpayers already pay a much smaller portion of their incomes in taxes than working Louisianans do. Roughly 75 percent of the tax cut that would be spawned by SB 87 would go to the wealthiest fifth of Louisianans, while taxpayers in the bottom two-fifths of the income distribution would see virtually no change in their taxes. Conversely, as ITEP's latest analysis demonstrates, the poorest 40 percent of non-elderly Louisianans paid upwards of 12 percent of their incomes in state and local taxes in 2006, while the very best-off one percent paid the equivalent of just 6.4 percent of their incomes in state and local taxes. Of course... and leaving questions of fiscal responsibility aside -- far more progressive options for cutting taxes (such as reducing Louisiana's sales tax rate or lowering its bottom income tax rate) were available to the members of the Louisiana House, if only they had chosen to pursue them.

The House's version of SB 87 must now be reconciled with the version passed by the Senate earlier this year, but few should expect this to improve the measure any. The version passed by the Senate ultimately would have repealed the income tax in its entirety, making the House's approach seem positively responsible and equitable in comparison.

New York Governor David Patterson just kicked off what is sure to be a heated property tax debate by proposing legislation to institute a 4% cap on annual increases in school property taxes. His proposal is the result of a report put out by the New York State Commission on Property Tax Relief, released just days earlier.

As was explained two weeks ago in the Digest and in a recent report from the Center on Budget and Policy Priorities, these caps are bad policy for a number of reasons. Most importantly, to the extent that the caps actually do result in a net tax reduction, (rather than merely a shift toward increased state aid) that reduction is poorly targeted and is done arbitrarily without regard to any district's future needs.

Oddly, the Commission believes that this "blunt instrument" is precisely what the state needs, suggesting that it will "force some tough, necessary choices". What the Commission failed to realize is that another proposal contained within its report, if used properly, could remedy the property tax problem at a much lower cost that would make far fewer "tough choices" necessary.

That proposal, of course, is an income-based property tax circuit-breaker. The Commission attempted to minimize the importance of circuit-breakers by claiming that such programs address only the "symptoms of the problem, rather than the problem itself". Apparently, the Commission believes that the "problem" requires crudely slashing taxes for everyone regardless of their financial situation, and that providing fiscally responsible and targeted property tax relief to those who need it is only a band-aid fix. Since circuit-breakers don't provide windfall benefits to wealthy property taxpayers like "blunt instrument" caps do, they are also a much safer route for providing property tax relief that allows policymakers to avoid having to gut school budgets. A property tax system that emphasized this kind of relief would be preferable to one with arbitrary constraints on growth.

To learn more about property tax caps and their shortcomings, see this ITEP Policy Brief.

The North Carolina Senate seems to think that cutting taxes for the wealthy should be one of its top priorities. This week the Senate passed a bill which if approved by the House and Governor Mike Easley, would repeal the state gift tax.

In response, the North Carolina Budget and Tax Center released a brief discouraging the House and Governor from approving this bill as part of its overall budget. The brief explains that the gift tax is a progressive tax and that repealing it would negatively impact estate tax collections as more wealthy people convert their estates into gifts to reduce their taxable wealth. Estimates indicate that about $18 million would be lost each year if the gift tax were repealed, but as the North Carolina Budget and Tax Center points out, this number underestimates the true cost because it does not include revenue lost from increased estate tax avoidance. Repealing this tax would not only increase tax unfairness in North Carolina and harm state revenues, but would also send precisely the wrong message at a time of economic difficulty and ever increasing income inequality.

Instead of providing tax giveaways to those who need them the least, North Carolina could target its tax cuts more carefully by increasing the state Earned Income Tax Credit (EITC). The House appears set to approve precisely that, having proposed an increase in the EITC from 3.5% to 5% of the federal credit. Interestingly enough, the price tag of increasing the EITC is around $20 million -- roughly equal to the amount associated with the gift tax repeal. As the NC budget goes up for consideration, lawmakers should re-evaluate their priorities; the EITC rewards work rather than wealth by providing a tax credit to working low-income families. There is no better time than now to expand such a program. As Rep. William Wainwright points out, the "rise in gasoline prices, food prices, pharmacy prices, [and] trying to pay mortgages" provides excellent reason for "trying to find progressive ways to help [the working poor] make some household ends meet."

The Texas-based Center for Public Policy Priorities (CPPP) released a report this week that explains how enacting a state income tax could actually lower taxes overall for most Texans and at the same time improve public education. The vast majority of states already have an income tax, but those few states still lacking this important revenue source (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Washington, and Wyoming) would do well to study this report carefully.

The report provides details on how an income tax could provide sufficient revenues to simultaneously slash property taxes and boost education funding. Under the income tax the CPPP proposes (modeled on the fairly typical income tax used in Kansas) most Texans, including the middle-class, would see a net tax cut. This finding runs contrary to what many casual observers would expect. Failing to levy an income tax does not mean that a state has "low taxes" -- it only means the state emphasizes different taxes. Sales and property taxes are both above the national average in Texas -- adding an income tax to the mix would provide a fair and sustainable revenue source that could be used to reduce reliance on these taxes.

The report also notes that an income tax could help to free Texas from the dubious distinction of having one of the most regressive tax systems in the entire nation... a problem common among those states lacking an income tax.

Additional data contained in the report helps explain how an income tax could contribute to a more sustainable tax system. Property values and taxable sales have both been growing more slowly than the incomes with which Texans pay taxes. Linking state revenues to the growth of income (via an income tax) would provide Texas with a much more reliable tax system.

And as if all this weren't enough, estimates from ITEP indicate that $2.2 billion of the new income tax (approximately 10% of the tax) would be essentially paid for by the federal government in the form of federal income tax deductions for state income taxes paid.

The only catch is getting Texas voters to understand what an income tax would mean for them. Fortunately, there is some reason for optimism on this front: a poll conducted in 2003 showed nearly 50% support for a state income tax in Texas. Hopefully, reports such as this can help inch that figure even higher.