The long-sought housing bill is likely to become law by next week. President Bush dropped his veto threat this week and the House passed a revised version of the bill by a vote of 272-152. On Friday, the Senate voted 80-13 for cloture on the bill and a final vote is expected on Saturday.

The bill will temporarily allow the Treasury Department to prop up the government-sponsored mortgage funding companies Fannie Mae and Freddie Mac and will also create a federal regulator to oversee them. It will also allow the Federal Housing Authority (FHA), to guarantee refinanced mortgages for homeowners in danger of foreclosure, and will provide communities with additional Community Development Block Grant funds to buy foreclosed or abandoned properties.

The bill includes about $15 billion in tax provisions that are presented as help for homeowners and people in the home-building industry. One provision will create a refundable $7,500 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 will create a deduction for property taxes for non-itemizers, which is capped at $500 per spouse. Most people with a home mortgage do itemize in order to take advantage of the home mortgage interest deduction, so many struggling homeownders may not be helped by this.

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.

The cost of the tax breaks are offset by revenue-raising provisions. About $9.5 will be raised by requiring banks to report to the IRS credit card transactions for most businesses and $1.4 billion will be raised by limiting the provision of the tax code that currently allows someone who sells a home to exclude the resulting gains from taxable income.

Another 7.6 billion will be raised by delaying the implementation of a tax break for multinational corporations that should never have been enacted in the first place. The soon-to-take-effect law (the new "worldwide interest allocation" rules) 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. Implementation of this tax break will be delayed two years, until 2011.

States' collective fiscal outlook appears to be quite dim and could get even darker in the months ahead according to a report released this week by the National Conference of State Legislators (NCSL). The report notes that, in the aggregate, states experienced a $40 billion budget gap for fiscal year 2009, a chasm that has been bridged largely through reductions in spending.

Not every state's budget is shrouded in gloom, however. Some states derive significant revenue from severance taxes (taxes imposed on the extraction of natural resources like oil and natural gas) and have economies closely tied to these industries. These states, Louisiana, North Dakota, and Wyoming for example, are enjoying substantial budget surpluses.

Given the volatility of energy markets, these surpluses are likely a temporary phenomenon, but that hasn't stopped states from considering and enacting tax cuts that would permanently reduce revenue. Earlier this year, Louisiana briefly weighed the idea of repealing its income tax altogether, only to settle on an oh-so-modest annual cut of $300 million. North Dakota has not only revived its property tax debate from a few years ago, but may also place on this November's ballot a measure that would slash the personal income tax by 50 percent and the corporate income tax by 15 percent. In this context, a plan backed by West Virginia Republicans to completely exempt groceries from the state sales tax appears far more reasonable in scope - and would certainly help to improve the progressivity of the state's tax system. However, it would still likely leave the Mountain State with inadequate revenues once oil and gas prices come back to earth.

Perhaps the most responsible - and fair - approach to surpluses generated by skyrocketing severance tax revenue comes from New Mexico, where Governor Bill Richardson this past week put forward a proposal to dedicate the majority of the state's projected $400 million surplus to one-time tax rebates and to highway construction. Richardson's proposal does contain some permanent changes in tax law, such as an expansion of the state's working families tax credit, but they appear to be targeted towards those low- and moderate-income taxpayers who are facing the greatest challenges from the nationwide foreclosure crisis and from rising fuel and food prices.

A couple of interesting articles out of Pennsylvania recently highlighted a disturbing feature in local property tax assessments: individual property owners are being singled out by localities for reassessment of their property in order to boost tax collections. The practice, done through tax appeal boards traditionally used by property owners to argue for lower assessments, provides a glimpse both into the flawed nature of Pennsylvania's assessment system, and into the unfortunate state in which this system has left Pennsylvania localities.

Aside from when a new home is built, or when major renovations on an existing home are completed, state law specifies that a property can only be reassessed for property tax purposes as part of a locality-wide reassessment of all properties. But reassessing all properties can be a daunting task for a locality, as evidenced by the fact that some localities haven't reassessed in over 30 years.

In the period between reassessments, properties that appreciate in value at an above-average rate can see significant tax benefits. And while "spot reassessments" of specific properties are technically not permitted, localities are allowed to request a "reverse appeal" of the original assessments of specific, apparently "under-assessed" properties. This practice has produced hundreds of millions of dollars in extra tax revenues for many localities (drawn mostly from people whose property tax bills were legitimately too low) though the piece-meal fashion in which those revenues have been raised creates serious inequities between people singled out for "reverse appeals", and those who continue to fly under the radar.

Pennsylvania legislators recently mustered overwhelming support for a bill ending this practice, though the Governor vetoed the bill on the grounds that it would significantly reduce localities' ability to raise revenue. The legislature likely has the support it needs to override such a veto should they try again, but some policymakers are hoping to take things a step further and use this unsettling practice as a springboard for enacting a more comprehensive, frequent, and rational property reassessment system. What precisely that will involve is unclear, though some local officials have already suggested that mandates for more frequent property reassessments should be coupled with state aid to cover the inevitable administrative burden of such a policy change.

The outrageously named "Fair Tax" reared its ugly head in Utah earlier this month when members of the Utah Legislature's Revenue and Taxation Interim Committee heard a presentation by Fair Tax guru Thomas Wright. He proposed scrapping Utah's current tax system and shifting to a consumption tax on most goods and services, which he calls a "Fair Tax." This would actually be a disaster from the perspective of fairness and adequacy. Relying on sales tax revenues alone is folly and would place a larger burden on low-income families. Luckily there are advocates on the ground working against this proposal. Alison Roland, budget and research director for Voices for Utah Children says, "People are considering it a cure-all but I didn't see any solid proposals to mitigate regressivity. Low-income people live paycheck to paycheck, and they would be taxed on virtually everything they do." There are real reasons to want to reform the state's tax structure. The state's new dual income tax system is complicated and lacks low-income credits to help offset regressive sales and property taxes. Let's hope legislators investigate ways to reform the current ailments of the tax structure instead of inviting more unfairness and complexity with a so-called "Fair Tax."

As parents gear up to send children back to school this fall and economic uncertainty looms overhead, several states are reconsidering their August sales tax holidays. Despite their political appeal, back-to-school sales tax holidays are inherently flawed. Low-income taxpayers often do not have the luxury to time their purchases around these holidays. This is probably even more true during a period of higher gas prices, inflation and a faltering economy. States not only lose a great deal of income but must also work closely with retailers to ensure that the complicated provisions are carried out smoothly and correctly.

The Massachusetts legislature voted this week to continue the recent tradition of a back-to-school sales tax holiday for August 16th and 17th. Although initially reluctant to do so in the face of a faltering economy, lawmakers justified their approval of the holiday by continually calling it a "shot in the arm" for small business. But the fact is, a large majority of these purchases will be made regardless of the sales tax break. Back-to-school shopping occurs year in and year out; a weekend-long incentive is not going to change that nor is it going to stimulate the economy. And the cost to the state will amount to an estimated $16 million at a time when Massachusetts, like so many other states, faces a budget shortfall. A recent Boston Globe editorial blasted lawmakers for making such an irresponsble choice.

Floridamade a rare responsible policy decision in choosing not to have a sales tax holiday this year. State lawmakers acknowledged that because their tax system is in such sad shape, they cannot afford the annual back-to-school sales tax holiday and have decided not to enact it this year. Rep Keith Fitzgerald (D-Sarasota) explains that the "little holiday amounts to a significant amount of money" that is not available in the Sunshine state's already atrocious budget. Meanwhile, many retailers are competing to offer generous mark-downs, knowing that parents will go back-to-school shopping regardless of a tax break and that business will not be harmed by the scrapping of the holiday

This week brought news that many politicians who see tax cuts as the solution to our economic woes tend to unilaterally cut their own taxes -- by not paying them. Needless to say, political candidates running on a platform of fiscal responsibility strain credibility when it's revealed that they cannot even keep their own fiscal house in order. On Wednesday, The Politico ran an article with a list of House challengers and incumbents who have suffered tax penalties for reasons ranging from misreporting to late payments of their property, business, and income taxes. Some even continue to have tax bills outstanding during their candidacies.

For example, Keith Fimian, a Republican running for an open seat in Northern Virginia was charged $16,000 for a lien filed against his home appraisal business in 2005 after the company lost track of some of its 5,000 subcontractors. Republican Luke Puckett running for a U.S. House seat in Indiana still owes nearly $2000 in property taxes due in 2006.

It's easy to be cynical when you see politicians like Mr. Fimian and Mr. Puckett respectively calling for "lower and fewer taxes" and "mak[ing] the Bush Tax Cuts permanent." Taxation is a necessary requirement of democratic governance and we expect our politicians, who should know better than anyone the importance of adequate tax revenues, to set a good example by paying their taxes in-full and on-time.

Unfortunately, one of this year's presidential candidates has had some oversights in the tax department himself. Newsweek reported several weeks ago that the McCain family failed to pay property taxes on one of their homes in La Jolla, California for four straight years.

Separately, Time Magazine reported that Sen. McCain commonly spends several thousands of dollars shooting craps at casinos. Yet for the past two years, he has failed to report any gambling gains or losses on his tax return. You're required to file a Form W-G if you win more than $600 at any one time.

Perhaps, we should give Senator McCain the benefit of the doubt and assume that he never purposely avoided paying taxes but merely erred unintentionally in these matters. This lack of attention to detail is not very comforting, especially when we consider some of the promises he has made that do not add up.

Should states be able to collect state sales tax on internet purchases and catalogue sales that cross state lines? That's the issue that's currently confronting state governments around the country desperate for revenues in these poor economic times. In theory, it is grossly unfair for a purchase that is made online to be taxed less than an identical item purchased at a "bricks and mortar" store (individuals are technically subject to use tax on their internet purchases but it is almost impossible to enforce). But in practice, taxation of remote sales falls victim to legal barriers as well as decentralized tax policies.

To this day, a company in question must be benefiting from the services which the state provides in order to be subject to sales tax levies. The Due Process clause has been interpreted for tax liability purposes as meaning the state must "give something for which it can ask return." The Supreme Court has ruled that taxation of remote retailers is unconstitutional unless they have nexus or a physical presence within the state's boundaries. But in the era of widespread e-commerce, the lines between a physical and virtual presence are blurring. Companies that buy and sell goods within a state are making use of that state's infrastructure whether or not they physically own operations in the state.

The most recent Supreme Court decision to address this issue, Quill Corp. v. North Dakota in 1992, upheld previous limitations to the circumstances under which the state may collect taxes from a remote retailer. According to the Court, the Dormant Commerce Clause prevents states from placing undue burdens on interstate sales which was violated by North Dakota's sales tax of Quill Corporation. Tax laws are so complicated and widely divergent between the 7,400 tax jurisdictions in the U.S. that the Court ruled it unreasonable for retailers to have to account for all the technicalities. It's important to mention, however, that many observers including the chief executive of Netflix note the improvements in tax software in recent years have dramatically reduced the practical complexity of accounting for different tax policies.

Legal realities haven't kept states from trying to tap this potentially large revenue source, upwards of $18 billion per year according to an estimate from the University of Tennessee. An organization of more than 20 states known as the Streamlined Sales Tax Project (SSTP) created in 2000 has been trying to streamline their tax codes enough so that determining tax liability is less burdensome. This will help convince Congress to change the law and allow states to tax internet sales, bypassing the Court decision. It's probably fair to say they've only had limited success so far. This is due both to the difficulty of adopting a commonly accepted definition of taxable goods and services that doesn't benefit some states while disadvantaging others and the difficulty of getting such a bill through Congress.

Thus presents the Amazon.com dilemma. Its "wholly owned subsidiaries" own thousands of square feet of distribution facilities in several states according to the Wall Street Journal. Although they are legally separate, there is a debate as to whether they constitute a nexus. It's fairly common practice for companies to establish "shell companies" to take advantage of tax loopholes that allow them to expand operations without expanding tax liability. Several states, including Texas, are reviewing whether Amazon's in-state operations should really be exempt from taxation.

Unfortunately, the prospect for expanding the tax base has dimmed as the State Board of Equalization in California has ruled that entities that refer customers by links to Amazon do not trigger nexus under California law. This is true even though the sites benefit financially from their relationship with Amazon, garnering a percentage of the sales made from the sponsored links.

New York has already passed a law requiring remote retailers to collect sales tax on purchases made in the state which Amazon has challenged, saying it unfairly targets Amazon. Amazon has a number of affiliates and advertisers that benefit financially from Amazon sales within the state (other companies such as Overstock.com cut ties to its New York affiliates rather than have to face sales tax liability). New York law states that companies that enter into financial arrangements with Amazon are considered Amazon vendors for sales tax purposes. The question is whether they are acting as agents of Amazon or whether they are primarily out for their own financial interests. It will be up to the courts to decide whether affiliates trigger nexus in New York or whether it's back to the drawing board for advocates of equal tax treatment of e-commerce.

Carly Fiorina, a surrogate for the presidential campaign of Senator John McCain, said last week that under the tax plan of McCain's opponent, Senator Barack Obama, "23 million small businesses will see their taxes raised" because "23 million small businesses file their income tax as individuals."

Senator Obama has promised that, if elected, he will allow the Bush tax cuts to expire (as current law provides) only for people making more than $250,000 a year. Analysts generally agree that this means the lower rates Bush enacted for the top two tax brackets will expire. According to the U.S. Treasury Department, only 1.4 million taxpayers will be in the top two tax brackets this year.

Although it's impossible to determine how many of those 1.4 million taxpayers are small-business owners, two things are crystal clear: It's a lot less than all of them, and it's certainly not 23 million.

"John McCain has admitted that economics is not his strong suit," noted Robert S. McIntyre, director of Citizens for Tax Justice. "Apparently, he and his surrogates don't even grasp basic arithmetic."

Fiorina previously achieved notoriety as head of Hewlett-Packard, where she spearheaded HP's 2002 merger with Compaq Computer. That merger, which led to Fiorina's firing, turned out to be one of the biggest corporate follies since Dick Cheney, as head of Halliburton, bought an asbestos company in 1998, a deal that subsequently cost Halliburton billions of dollars to settle hundreds of thousands of medical-injury claims.

For more details, see the CTJ press release.

The Permanent Investigations Subcommittee of the Senate Committee on Homeland Security and Governmental Affairs held a hearing and released a 115-page report yesterday on offshore tax evasion, which it says costs the U.S. around $100 billion a year. It focuses on two European banks in what subcommittee chairman Carl Levin (D-MI) calls offshore secrecy jurisdictions, Switzerland and Liechtenstein.

The report explains that the Swiss bank UBS has 20,000 accounts for U.S. clients but only 1,000 of those have been reported to the IRS for tax purposes. The remaining 19,000 hold around $18 billion. Liechtenstein's LGT is known to have had several thousand offshore accounts but it is unclear how many belong to Americans.

The report details how both banks advised and assisted clients in structuring financial arrangements to avoid reporting income to the IRS in order to escape taxes. It includes detailed examples of specific taxpayers helped by these institutions to avoid their taxes

Levin introduced a bill last year to crack down on offshore tax havens. It has four cosponsors, Norm Coleman (R-MN), Barack Obama (D-IL), Sheldon Whitehouse (D-RI) and Ken Salazar (D-CO). A companion bill was introduced in the House by Representatives Rahm Emanuel (D-IL), Lloyd Doggett (D-TX) and Rosa DeLauro (D-CT) and has 46 cosponsors. The legislation includes a presumption that offshore trusts and shell corporations in designated tax havens are controlled by the taxpayers funding them or directing them. It would also allow the federal government to order American banks to stop accepting or authorizing credit cards from foreign countries or banks not cooperating with U.S. tax enforcement laws.

These reforms are important to anyone who pays her fair share in taxes -- and is tired of subsidizing people who don't.

Earlier this year in his State of the State Address, Minnesota Governor Tim Pawlenty announced his plan to create a 21st Century Tax Reform Commission. The 15 member Commission was charged with "providing advice and recommendations to the Governor" on options for revenue-neutral tax reform. The Governor said that "this Commission will specifically focus on improving our job climate by reforming Minnesota's tax laws."

Ensuring that a state's tax structure is able to sustain the challenges of the 21st century goes far beyond a state's business climate. In fact, there's been a lot of talk in Minnesota about how the Governor's Commission is too narrowly focused on corporate concerns. Given this obvious slant, perhaps it's not surprising that in their deliberations members were asked to take into consideration various tax policy principles, including simplicity, competitiveness, efficiency, and stability, but tax fairness didn't make the list!

The Commission is heavily stacked with representatives from the business community. The Minnesota Budget Project's Budget Bites Blog tells us of one especially egregious exchange, "when one member asked what percentage of the state's total revenues come from the corporate income tax... so how much money would the state lose if we eliminated it? 'Seven percent,' was the reply. 'So, if it's just 7 percent, we could live with that,' said the member." Let's hope the Commission moves away from eliminating the corporate income tax, which is projected to bring in $1.9 billion in revenue for FY 08-09.

In slightly more hopeful news, testimony heard earlier this month by the Commission included a discussion of broadening the sales tax base to include more services and applying the sales tax to items purchased online. If enacted, both of these changes would modernize the state's tax structure. For more see ITEP's latest policy briefs on sales tax base expansion and taxing internet sales.

In Illinois, Lt. Gov Pat Quinn and Cook County Commissioner Forrest Claypool are leading the charge to allow taxpayers to use the ballot to block local tax changes. Currently voters in the state don't have the power to decide tax questions through the ballot. But in response to the Cook County sales tax's recent increase to 10.25 percent, some now want the state assembly to give voters the power to stop tax increases by local governments.

To decide whether or not this is a good idea, one need only look around at the states that are already deciding tax issues via the ballot. One can look to Maine, where business interests are spending large amounts of money to convince voters to choose cheap beer over health care. Or look to Massachusetts, where some well-funded individuals have managed to secure a ballot question that would abolish the state's income tax, the source of 40 percent of the state's budget, without any provision to replace the money. Or look to the train wreck that started it all, California's Proposition 13, the infamous ballot referendum approved by the state's voters 30 years ago. One of the changes it made requires that the legislature approve any income tax increase by a two-thirds majority. Another provision limited property taxes to one percent of property's assessed value and limited increases in assessments to 2 percent each year. California's schools went from the best in the nation to among the worst as a result.

Why does direct democracy produce unfair tax policy? The answer is obvious. Every single state has people who are elected and paid to make policy decisions. It's their job. They are supposed to study up on issues, talk to the people who care about the issues, and make a an educated decision. Most of us don't have the time to put that kind of work into learning about public policy and formulating positions. That's why we pay our lawmakers to do it. If they do a good job we reelect them, if they do a terrible job we throw them out. Ballot referenda allow lawmakers to escape this responsibility by placing issues before the voters, who have not thought through certain intricate questions (like whether or not eliminating a state's income tax will make it impossible to pay for schools, health care and road repair).

As budget watchers have noted, the Illinois state government would probably not receive any awards for excellent fiscal policy these days. They will only make matters worse if they saddle the local governments with what is possibly the worst conceivable process for determining fiscal policy.

Advocates of sensible property tax reform can take heart from a new poll released by Siena College last week asking New Yorkers to evaluate Governor David Paterson's proposed school property tax cap and a more progressive measure known as a "circuit breaker." A circuit breaker is a credit that prevents property taxes from exceeding a certain percentage of a homeowner's income. This generally provides much more targeted relief than a property tax cap, which benefits all homeowners no matter how wealthy they are.

An idea to create a circuit breaker funded by an income tax increase on millionaires is supported by most New Yorkers (75% to 17%). A majority, albeit a smaller one, also supports a state-wide property tax cap of four percent of year (69% to 20%). But the interesting result is that when asked to choose between the two, more people support the circuit breaker (52% to 36%).

Governor Paterson should take this as a strong signal and press for targeted tax-relief rather than the across-the-board cap. A circuit breaker would guarantee that property taxes are fairly distributed. A property tax cap, on the other hand, could deprive localities of more revenue and will make it likely that they will turn to more regressive revenue sources like the sales tax to fund their needs.

Other states that have experimented with state-wide property tax caps have had poor results. New York should look to neighboring Massachusetts which imposed a statewide property tax cap under Proposition 2½. Although Massachusetts has indeed avoided massive cuts in school funding, its cap has led to cuts in other areas funded by municipalities (parks, libraries, etc.) and the state has needed to contribute significant funds to prevent cuts to education.

As the Center on Budget and Policy Priorities reported in May, schools could be hit harder in New York because its proposed property tax limit is solely on school property taxes. New York State has a projected $5 billion budget deficit over the next fiscal year and is unlikely to be able to bail out school districts when they are unable to raise enough revenue to meet their needs. If New York raises taxes to increase education funding, the property tax cap effectively means replacing one tax with another and it's possible that the state will end up with a more regressive tax system in the end.

The Fiscal Policy Institute has published the poll results here.

Virginia legislators last week proved themselves totally incapableof raising revenue, no matter how serious the need. In the wake of a ruling from the state's Supreme Court that struck down the previous regional transportation funding regime, legislators recently assembled in a special session with hopes of resolving the resulting $3 billion transportation funding shortfall that will hit the state over the next six years. In part as a result of regional rivalries, that special session ended in complete failure last week when not one tax increase could be agreed upon.

As one legislator stated proudly, "For now, asking families to pay more is something the public doesn't support, and as we've seen, nor does the General Assembly". What this sentiment fails to consider is that the public also does not support the gross underfunding of transportation that will result from this session. Even the business community, a group traditionally opposed to tax hikes, has begun to voice serious frustrations regarding the inability of the Virginia government to produce a means of paying for needed transportation improvements.

Two major plans to boost tax revenues were proposed during the session as a fix for Virginia's inevitable transportation shortfall. These plans included options such as raising taxes on the sale of real estate, vehicle sales taxes, state and/or regional sales taxes, and the gas tax. One of these options even included some progressive elements, such as eliminating the sales tax on groceries.

The gas tax is an especially appealing option in Virginia, where the tax hasn't increased since 1987. As a result of inflation, Virginians are currently paying the equivalent of 47% less per gallon than they did at the time of the last tax hike. In 2008 dollars, this amounts to about a 15 cent tax cut on each gallon purchased. While this is somewhat good news for lower-income families hurt by rising gas prices, it's very bad news for the state transportation infrastructure. A change in the gas tax could improve infrastructure funding while a low-income tax credit, as proposed by the Virginia-based Commonwealth Institute, could provide ample protection for poor families.

Earlier this month Missouri Governor Matt Blunt signed into law legislation that could have disastrous effects on schools. The law essentially creates a new restriction on property taxes beyond the one that already exists. It requires localities to lower their property tax rates to offset increases in property tax assessments -- even if the rate is already below the existing rate ceiling. Missouri already has "rollback" procedures in place for localities that were already at the rate ceiling if assessed property values rose faster than inflation.

Even legislators who voted for this legislation understand that the new law will have a negative impact on the amount of money available for local schools. State Senator Frank Barnitz says, "I think that we will see funding improve to public education through our general revenue dollars, through our taxpayer dollars, and not necessarily see it only through property tax values." Only time will tell if lawmakers like Senator Barnitz are able to gain support for increased education spending on the state level, in the meantime locals may need to start preparing for a budget crunch.

In better news, this legislation also includes provisions that increase the state's well-targeted property tax credit. The credit operates like a circuit breaker and ensures that property tax cuts go to renters and homeowners for whom the property tax is most burdensome.

This week the so-called "Fed Up with Taxes" campaign successfully gathered enough signatures to place an initiative on the ballot in Maine this fall. What important question are the voters being asked to decide? Whether they want cheap beer or healthcare.

The initiative will allow voters to decide whether to scrap the recent sales tax hike on beverages. The increase would have amounted to a $4 per gallon tax on syrup used to make soda in restaurants, a 42 cents per gallon tax on bottled soft drinks and a doubling of the tax on beer and wine to 54 cents per gallon for beer and 65 cents per gallon for wine. The drive to obtain signatures for the petition was led by a number of groups, who, according to Gordon Smith of the Main Medical Association, had an "unlimited bank account." Among those funding the petition drive were the beer and wine industry, beverage and soft drink associations, Coca-Cola, Maine's two largest chambers of commerce, the Maine Restaurant Association, the Maine Innkeepers Association, the Maine Tourism Association, and the Maine Merchants Association.

The tax raise came in response to the fiscal struggles of Maine's state-funded health care program, DirigoChoice. Members of the Maine Medical Association along with Democratic Majority leaders Sen. Libby Mitchell (D-Vassalboro) and and Rep. Hanna Pingree (D-North Haven) are leading the fight to preserve the tax, calling it a "corporate veto" of funding for an absolutely necessary but fiscally strangled program. Lawmakers say DirigoChoice will have to be funded in some way, regardless of whether the initiative is passed by voters. This means higher taxes elsewhere. If the tax is repealed by voters in November, 18,000 Mainers will be left without health care coverage and 40,000 additional individuals will see their health care costs rise. So Maine voters must decide whether to reject a "corporate veto" of an essential tax or face rising taxes elsewhere and seriously jeopardize the innovative state healthcare program and its beneficiaries.

A new report from the Maine Center for Economic Policy makes the case for preserving these new tax revenues -- and explains the merits of Maine's DirigoChoice program.

In an entertaining interview with the Pittsburgh Tribune-Review this week, presidential candidate John McCain makes it clear that he won't fix Social Security through payroll tax hikes. In particular, McCain argues that it's a lousy idea to increase the cap (currently $102,000) on the amount of any individual's wages that can be subject to payroll taxes in a given year:

Trib: Do you favor raising the cap?
McCain: Pardon me?
Trib: Do you favor raising the cap?
McCain: No, and I think by doing so, as Sen. Obama wants to do, you are obviously putting a very, very big increased tax on ... middle income Americans who filing jointly and in other ways will be paying a very big increase.

McCain's response here is wrong in two important ways. First, as a CTJ analysis showed a couple of years back, only about 6.5% of Americans would be affected by a proposal that simply eliminates the cap on the federal payroll tax.

But more importantly, McCain's characterization of Obama's position on Social Security is flat-out wrong. What Obama has said is that he'd allow the payroll tax to apply to an individual's wages above $250,000, which is a very different thing from simply removing the cap and taxing wages above $102,000. Here's the Washington Post's nice explanation of Obama's position:

Under current law, income up to $102,000 a year is taxed for Social Security. Obama would create a "doughnut hole" by not imposing new Social Security taxes on income between $102,000 and $250,000. His aides said income exceeding $250,000 would be taxed at a rate of 2 percent to 4 percent, rather than the 6 percent tax that people pay toward Social Security on income below the $102,000 cutoff, which is matched by their employer's paying a 6 percent tax.

And as a recent CTJ analysis points out, the Obama proposal would only affect 1 percent of Americans-- none of whom could be described as "middle class." As for the alleged "very, very big" tax increase on these middle-class Americans... well, suppose you have a "middle class" friend whose salary was $275,000 (remember, income from sources other than wages don't count toward the payroll tax, so what matters is each individual's salary). That means that under Obama's plan, he would face a tax on his wages exceeding $250,000. His income exceeds $250K by $25,000, so his tax hike would be 2% of $25,000. That would be a $500 tax hike. If this sounds like somebody you know-- and if you consider this person "middle class"-- then McCain's characterization seems apt. Otherwise, his description of the Obama plan is screamingly, almost libelously wrong.

The $500 tax hike described above certainly would count as a "very, very big" tax hike for an average middle-income family-- but, unfortunately for McCain's truthiness, there's simply no way the Obama plan would ever apply to anyone who could reasonably be considered middle-class. Period.

To be perfectly clear about the way the Obama plan would work, a two-earner married couple would not pay more tax just because their combined income exceeded $250,000. Each spouse's salary must exceed $250K to get hit by the Obama plan. And capital gains, dividends, etc., don't count toward the $250K: what matters is your salary.

One could charitably attribute McCain's false statement to fuzziness in his understanding of exactly how the Obama plan would work. One could also say charitably that perhaps "middle class" has a very different meaning in Arizona than in the rest of the nation. But a more realistic interpretation would be that candidate McCain is willfully misrepresenting the truth in the hope that scare tactics are still a good substitute for honest policy debates.

I don't trust people whose fiscal policy platforms are built around "pledges." When an elected official says that he/she will never, ever raise taxes on anyone, this shouldn't be seen as a principled stand-- it should be understood as a cop-out, a signal that this particular elected official, when he takes office, will have checked his brain at the door. The first principle of fiscal policy should be that you put all the cards on the table, and face budget difficulties as they arise using tax changes or spending changes tailored to fit the specific budget circumstances you're facing. No pledges, no vows, just a nice rational deliberative process.

So I was impressed to see presidential candidate John McCain quoted on the New America Foundation's US Budget Blog as saying that when it comes to fixing Social Security's long-term funding imbalance,"you've got to say, 'Look, everything is on the table, let's sit down at the table.'"

Given McCain's recent tendency to vocally oppose tax increases of any kind, the natural follow-up to a comment like that is "you mean you're open to increasing the payroll tax?" Since the McCain quote came from a much longer interview with the Pittsburgh Tribune-Review, I was interested to see whether, in fact, the Trib's staff asked this follow-up question. And they did, sort of, by asking not whether McCain would support increasing the federal payroll tax rate, but by asking whether he would support a proposal that would increase the annual cap (currently $102,000) on the amount of wages that can be subject to the payroll tax in a given year. Here's the exchange:

Trib: Do you favor raising the cap?
McCain: Pardon me?
Trib: Do you favor raising the cap?
McCain: No, and I think by doing so, as Sen. Obama wants to do, you are obviously putting a very, very big increased tax on ... middle income Americans who filing jointly and in other ways will be paying a very big increase.

So the good news is that McCain isn't taking a no-taxes pledge on this point. But the bad news is that he's talking out of both sides of his mouth on this "cards on the table" approach. He tries to appear conciliatory by speaking the language of rational deliberation, then poisons the well by completely mischaracterizing the impact of a relatively tame tax hike on "middle-income Americans."

In other words, when McCain says "let's put all the cards on the table," what he really means is "let's have an honest discussion of all the ideas I agree with, and tell outright lies about the rest of them." Is this better than a "no new taxes" pledge? I'm not sure it is. Pretending to be reasonable is arguably even worse than just admitting you're irrational. The "no new taxes" gang is irrational at best, but at least they're honest about it.

For more details on why McCain's statement about raising the cap is wrong, go here.
You can read the whole Tribune-Review interview here.

It's that time again. Right-wing activists, unable to convince lawmakers to gut their tax systems, are asking voters to do it themselves through the ballot. This update explains that ballot initiatives to enact regressive tax policies died in Michigan and Montana, but survived to secure spots on the ballot in Arizona, Florida, Massachusetts and Oregon.

The Good News: Two Regressive Proposals Did Not Make It onto the Ballot

Michigan "Fair "Tax": The Michigan Fair Tax proposal, a highly regressive measure that was anything but fair, failed to make it onto the November ballot. The proposal would have eliminated both the Michigan Business Tax and the personal income tax, raised the state sales tax to 9.75% and expanded it to include services, food, prescription drugs and out-of-pocket health care expenses.

Montana Property Tax Limitations: CI-99, a measure that would have capped property tax increases at no more than 1.5% annually, fell short of landing a spot on the Montana ballot. In addition to the limits on tax hikes, the proposal would have ensured that homes can only be reappraised when sold (as opposed to every seven years). Sound familiar? It looks like, at least this year, Montana averted the disastrous path followed by California's Proposition 13.

The Bad News: Other Regressive Tax Proposals ARE on the Ballot in November

Arizona Sales Tax Hike: On June 27, the Digest described the Arizona sales tax initiative which will be on the ballot in November. The proposal would hike the sales tax by one cent. The increased revenues would be directed toward a faltering transportation system. Arizona already has sales taxes bordering on 10% and a nearly flat income tax. As a result, its tax policy is already highly regressive and this initiative would make it more so.

Florida Tax Swap: In November voters will decide on Amendment 5, a 25% property tax cut and a 1 cent sales tax hike. The property tax cut would hit Florida's schools, already in shambles, the hardest. The Amendment would come at a cost of $9 billion in lost revenue and the subsequent sales tax increase would only produce about $4 billion, plunging the Sunshine State even further into debt and shifting the tax burden to lower-income Floridians.

Abolishing Massachusetts' Income Tax: In Massachusetts, voters will have the opportunity to decide on an initiative that would eliminate the state's income tax. Such irresponsible policy would cost the state $12 billion in lost revenue -- a whopping 40% of its budget. The price would be paid with teacher layoffs, school closings, cuts to higher education, worker training programs and health care services, and delays of road and bridge repairs.

Cutting Oregon's Income Tax for the Rich: Oregon voters will have the opportunity to vote on a measure that would drastically cut income taxes for its wealthiest taxpayers. The proposal would create an unlimited deduction on the state income tax form for federal income taxes paid.The state's general fund would lose about $4 billion over four years from the proposal. The general fund is used primarily for education, public safety, the justice system, human services (including health care, care for seniors and child protective services) and state parks. Meanwhile, the average tax cut for the top one percent of Oregon earners would be about $15,000. Those who fall among the middle 20% of earners would receive about $1 on average.

Read the report: http://www.ctj.org/pdf/obamasocsec20080707.pdf

Presidential candidate Senator Barack Obama has proposed increasing the Social Security payroll tax on wealthy Americans to enhance the program's solvency for years to come. While several commentators and politicians have suggested that this would burden the middle-class, a new report from CTJ finds that only around 1 percent of taxpayers would actually be affected by this proposal.

Social Security is funded by a payroll tax of 12.4 percent on the first $102,000 of each worker's earnings. Some experts and lawmakers have suggested raising the cap or eliminating it altogether. Senator Obama's idea differs in that he would only increase the Social Security tax for those whose earnings are above $250,000.

Some commentators have suggested that Senator Obama may actually change the way Social Security is financed more fundamentally by applying a tax increase to total household income rather than individual earnings. This would mean that the $250,000 threshold would apply to all household income rather than individual earnings.

We estimate that in 2008, only 2.1 percent of taxpayers will have adjusted gross income (which includes forms of income that are potentially taxable) above $250,000. This means that even under this more expansive interpretation of Senator Obama's Social Security plan, about 98 percent of taxpayers would not be affected.

Read the report: http://www.ctj.org/pdf/gophousetaxplan20080707.pdf

Representative Paul Ryan (R-Wisc.), the ranking Republican on the House Budget Committee, introduced legislation on May 21 that would cut Social Security benefits and create private accounts, end Medicare as it is currently structured, dramatically reduce the revenues available to fund federal public services, and radically reduce the fairness of the federal tax system.

A new report from CTJ shows that the tax provisions in this legislation would increase taxes on the poorest four-fifths of taxpayers while slashing taxes on those at the top of the income scale. The upper-income tax cuts would far outweigh the tax increases on everyone else, with a net annual reduction in federal revenues of $286 billion if the plan were in effect this year.

While many politicians in the District of Columbia were dismayed when the U.S Supreme Court struck down DC's handgun law, people in other parts of the country got ready to celebrate. The South Carolina legislature mustered the two-thirds majority it needed in both chambers to override the Governor's veto of the "Second Amendment Sales Tax Holiday". The "holiday" establishes an annual, two day sales tax exemption for handguns, rifles, and shotguns. That exemption will occur each year on two of the busiest days of the Holiday shopping season, the Friday and Saturday after Thanksgiving. That Friday is commonly referred to as "Black Friday" because of the heavy traffic and crowds surrounding most shopping centers. (Consider that before you cut someone off in the shopping mall parking lot on Black Friday this year.)

Adding a twist to this story, however, is the fact that the bill containing the "holiday" may in fact be unconstitutional, as concerns have been raised as to whether it violates the state constitution's "single subject" requirement demanding that every bill deal with only one policy area. The bill includes a provision requiring oil companies to sell "blendable" fuel that can be mixed with ethanol, which perhaps stretches the definition of a "single subject".

As a result, some observers think the entire bill, including the "holiday", may end up never taking effect as a result of constitutional challenges. South Carolina may therefore need to begin formulating new ways to promote its vision of arming more of its citizens, though as this ITEP Policy Brief explains, a sales tax holiday may not necessarily be the most preferable route to doing so.

Ohio is one of many states that are facing a budget shortfall. One reason for the state's budget woes is the permanent income tax cuts championed by former Governor Bob Taft. The drastic cuts amount to an across the board twenty-one percent reduction in income tax rates over five years. The last round of these cuts is scheduled to take place in 2009.

Earlier this year, Policy Matters Ohio released A Step Towards Fiscal Balance: Options for Ohio's Income Tax.The report cites ITEP data and offers realistic alternatives to policymakers interested in raising revenue to fill the budget gap instead of relying on painful reductions in services. For example, freezing income tax rates at 2008 levels is offered as an option that should not be dismissed.

Momentum is building for these sound solutions. This week an Akron Beacon Journal editorial cited this report saying that it, "offered the start of an answer for a state lacking the resources to cover basic services."

Democratic lawmakers presented a budget proposal this week that will allow California to finally close its massive $15.2 billion budget deficit. Their goal is to shift the burden of closing the deficit onto business and higher income state residents instead of cutting public services. Among its more notable provisions, the plan would reinstate a 10 percent income tax bracket for married couples with incomes over $321,000 and an 11 percent bracket for couples with incomes over $642,000. These are the rates that were in place in the mid-1990s under conservative Republican Governor Pete Wilson.

California Republicans have pledged to block tax increases in any and all circumstances. This position forces Republicans to embrace a program of draconian cuts to education, health care, transportation, and public safety. They are likely to get their way, thanks to Proposition 13, the infamous ballot referendum approved by the state's voters 30 years ago. One of the changes it made requires that the legislature approve any income tax increase by a two-thirds majority.

California has faced ongoing budget deficits since 2002 that it has rolled over from year to year mainly through borrowing, exemplified by a recent proposal to borrow from future lottery revenues. California has the lowest bond rating of any state besides Louisiana, and it does not currently have money to fulfill obligations past September.

Property Tax Limitation Backfires

Proposition 13 has caused the state to have a structural imbalance between revenues and expenditures that is not likely to close without fundamental changes. Another restriction it mandated limits property tax increases to 2 percent per year. Because local authorities are unable to raise the revenues they need, they rely on state aid to finance their services.

Prop 13 mandates that only a change of land ownership will bring its assessed value in line with market value. Now, with home values in sharp decline all over California, homeowners are witnessing the curious and maddening phenomenon of their property taxes continuing to increase. This is because the assessment ratios are still far below market price and have room to continue growing 2% per year.

Democrats and Republicans in Sacramento should consider not only slightly higher income taxes on California's wealthiest, but also a fundamental restructuring of the state's dysfunctional tax code, starting with the elimination of Proposition 13.

Last week, Massachusetts became the twenty-second state, and the sixth in the last four years, to institute combined reporting, a vital reform that will help to prevent highly profitable businesses from shifting income out of the Commonwealth in order to avoid taxation. In addition, it ended its unique and deleterious "check the box" loophole, which allows corporations to elect a different entity classification for state tax purposes than for federal purposes. Together, these two changes will make the economic playing field in Massachusetts far more level and will ensure that businesses that profit from operating in the Commonwealth pay their fair share towards public services, just as private citizens do. More immediately, they will generate close to $300 million in revenue in FY 2009, thus reducing a budget deficit that, earlier this year, was expected to reach nearly $1.2 billion.

Unfortunately, the long-term contribution that these two changes will make to Massachusetts' fiscal health is mitigated by the fact that state policymakers also felt compelled to reduce the corporate rate from 8.75 percent to 8.0 percent between 2010 and 2012, and the rate paid by financial institutions from 10 percent to 9 percent over the same period. Because of these lower rates, many businesses will, in effect, be allowed to keep some or all of the tax breaks that they took for themselves through avoidance schemes like passive investment companies and captive REITs prior to the advent of combined reporting.

Bay State legislators didn't stop at the corporate income tax, though. They also raised cigarette taxes by $1 per pack, bringing the total excise to $2.51, the third highest in the country. While the change will yield an additional $170 million at a time when the Massachusetts budget is under significant stress, ITEP and others have detailed numerous flaws with tobacco taxes, particularly when they are used to finance on-going programs and services. This appears to be the case in Massachusetts, where the new cigarette tax revenue is expected to help defray the higher-than-anticipated costs of Massachusetts' mandatory health insurance plans.

For more details, be sure to read the Massachusetts Budget and Policy Center's recent publications on tax reform and the broader budget debate.