Some anti-tax commentators and right-wing blogs have apparently given up trying to paint Barack Obama's tax plan as a tax increase on the middle-class (since that would be untrue in any interpretation humanly possible). Instead, they have settled on a novel argument: The Obama tax plan would unacceptably raise marginal tax rates on low- and middle-income people, as argued by Alex Brill and Allen Viard of the American Enterprise Institute.

People who don't live and breathe tax policy might scratch their heads and say, "Wait, I thought I heard that Obama wants to cut taxes for everyone except the rich."

He does. The critics' new argument is not that he would raise taxes but that he would raise the marginal rates, meaning the tax rate applicable to an additional dollar of income, for people in specific income ranges. This would occur, they complain, because the various new or improved tax credits that Obama proposes would be phased out for people above certain income levels.

Imagine a working person paying income taxes at the 25 percent rate. Imagine also that in 2009 this person benefits from a newly enacted tax credit that is phased out for people with higher income, at a rate of $100 for each $1,000 of income over some threshold, and that this taxpayer's earnings are just one dollar above that threshold. The critics reason that this would translate into a tax rate of 10 percent for each additional dollar earned, on top of the ordinary income tax rate of 25 percent, resulting in a marginal rate of 35 percent. This would be true even though the taxpayer has lower taxes as a result of the new credit. Surely, the critics argue, this person would be better off if she never received the tax credit, because then her marginal rate would be just 25 percent, and she would have greater incentive to work and save.

The right-wing critics want this working person to pay higher taxes? Are they against tax cuts? Yes, actually, if they're targeted towards poor or middle-class people. These critics are essentially against any tax benefit (or any public benefit, for that matter) that is made available only to people with incomes below a certain level because such income-targeting, in their view, discourages people from working harder to increase their income.

So would low-income people or middle-income people see a new credit on their federal tax form and decide that they should work fewer hours? No. Common sense, and the academic literature on this topic, tell us that people do not respond this way to tax policy.

The evidence that marginal tax rates really impact decisions about work is weak or nonexistent. The last time the right trotted this line out, it was to support the Bush income tax cuts, which reduced marginal rates, with most of the benefits going towards the well-off. (Put aside for a moment the tax cuts Bush has showered on people who live off their investments.) As the Center on Budget and Policy Priorities pointed out back when the 2001 Bush tax cut was being debated, it's not clear that higher marginal rates discourage work or savings, and they may even encourage it. Logically, if someone has a particular earnings goal or savings goal, the result of a higher marginal tax rate could be that they work more in order to meet that goal. The Center on Budget cited several economists who found that the evidence pointing towards reduced work was very weak.

It is extremely doubtful to us that cutting taxes for any income group is a wise policy right now given the budget deficit and the fact that people are paying relatively low taxes already. But Senator Obama has proposed tax cuts nonetheless, and he at least has ensured that the bulk of them would go to people who are not super-rich. Some right-wing activists feel like they've won the argument about whether tax cuts are good -- both candidates seem to think they are -- so now they want to argue with Obama because he refuses to target most of his tax cuts towards the wealthy instead of the poor and middle-class. It's a telling moment for the right. And it shows us what happens when you start to give in to anti-tax rhetoric.

Four of the nation's most populous states, together home to more than one out of every four Americans, are facing serious budget problems. Important new developments occurred in each of those states this week, the theme of which is perhaps best conveyed through California Republican Mike Villines' question: "How many times can we say no to taxes?" State residents will soon learn that this is really saying "no" to keeping alive public services like education, transportation and health care that families depend on.

See the following posts on the budget situations in California, Florida, New York, and Virginia.

Today marks the 53^rd day of the new fiscal year in which California is operating without a budget. With the state $15.2 billion in the hole, all sides concede that the budget gap cannot be filled with spending cuts alone. Unfortunately, the debate has devolved significantly from where we thought it might have been headed back in June. A proposal to expand the sales tax base to include the state's growing service sector has been defeated, and a proposal to increase income tax rates on wealthy Californians has just been defeated by a vote of 45-30.

The new sides of the debate are as follows. Republicans have flatly rejected the idea of increasing any taxes, a fact central to the nearly two months of gridlock that has gripped the state. Instead, they support borrowing money and cutting spending to fix the budget gap. Governor Schwarzenegger has called such a solution a "get-out-of-town budget" that simply "kicks the can down the road and lets someone else worry about it later on".

Curiously, then, the Governor's proposal combines spending cuts with a temporary sales tax hike that would last three years, after which point the rate would be lowered 0.25 percentage points below the current rate. But like the Republicans' plan, a temporary tax hike followed by a tax cut certainly seems to leave a problem for "someone else to worry about later on". Since the Democrats' plan to hike income tax rates on the wealthy has been soundly defeated, it seems that their support may shift in favor of the sales tax hike as the next best option. In order to gain passage, however, a handful of Republicans will also have to back the plan -- a prospect that, at the moment, seems pretty dim.

Aside from the problem of how to fix this year's budget, the other major hang-up has been over what measures should be taken to prevent future shortfalls. Republicans have proposed a strict spending cap that only allows revenues to grow at a rate consistent with growth in population and the inflation rate. Such caps always amount to an unrealistic restraint on government since the cost of health care, education, corrections facilities, and various other state services often grow faster than population or inflation. Fortunately, Democrats have rejected this plan. As a substitute, the Governor has proposed that excess tax revenue in strong-growth years be tucked away into a rainy day fund, rather than spent. That fund would be allowed to grow to as much as 12.5% of the state's budget.

Late last week, the official estimates of general fund revenue collections in Florida during each of the next two years were reduced by 7% and 8%, respectively. For the current fiscal year, this means that the state is expected to have $1.8 billion less in funds than was thought in March. Slowing sales tax collections are the primary culprit.

Raising taxes to help fill this shortfall appears to be completely out of the question. The likely solution will involve some combination of:

-Relying on the $300 million the legislature set aside last year.
-Making permanent Governor Crist's order to cut state agency budgets by 4%, saving up to $1 billion.
-Tapping into reserves contained in the hurricane recovery fund (apparently ignoring the potential costs of Tropical Storm Fay) and health care endowment, which have about $1.6 billion available.

Lawmakers could, of course, also convene in a special legislative session to make the needed adjustments, though election-year politics make that option extremely unlikely.

Perhaps more important than how Florida will fix its budget this year, however, is how it will address the inevitable shortfall looming next year. State economists are projecting revenues to be $2.2 billion lower than was originally thought. Tapping into reserves this year will only reduce the number of options available next year, and with cuts in vital programs already having gone quite deep, that option will undoubtedly be even more painful next year. Perhaps the dire situation on the ground in Florida will eventually begin to loosen the seemingly unshakeable grip of anti-tax advocates in the state. On a somewhat encouraging note, the Orlando Sentinel this week even ran an editorial suggesting something previously unheard of in Florida... an income tax!

New York this year has also had to face the reality of declining tax revenues. Without giving a second thought to the idea of reinstituting the higher income tax rates paid by wealthy New Yorkers just a few years back, Governor Paterson this week spear-headed an effort to slash the budget into balance. Legislators and the Governor agreed to cut over $400 million from the budget, primarily from Medicaid and aid to local governments. This is in addition to about $1 billion in administrative cuts the Governor instituted himself over the last several weeks.

As in Florida, the more relevant question now is what to do about next year's projected deficit. This session also featured the slashing of about $1 billion in spending from next year's budget, though that still leaves a $5.3 billion projected deficit. Will lawmakers decide just to cut deeper next year? With the Governor still supporting tax cuts (in the form of a local property tax cap) despite the condition of the state budget, that prospect unfortunately appears quite likely.

Sales and income tax revenues have both slowed in Virginia, stirring Governor Kaine to push his financial advisors to prepare a revised estimate of the inevitable budget shortfall a bit sooner than first expected. The official estimate won't be available until early October, but legislators and analysts are predicting that the shortfall will exceed $1 billion. The Governor has flatly rejected the idea of increasing any general fund taxes. Pure spending cuts, unaccompanied by any tax increases, appear to be in Virginia's future as well.

This fall, voters in Oregon will decide on one of the nation's more fiscally disastrous ballot initiatives. Known as Measure 59, the initiative would eliminate the cap on a personal income tax deduction that state taxpayers can currently take for the federal income taxes they pay. As the Oregon Center for Public Policy points out in a report released this week, the vast majority of state residents would see no benefit at all from the initiative -- but would certainly feel the consequences if it were enacted. The report notes that only about one in four Oregon taxpayers would witness a tax cut if the initiative became law, with the vast majority of the cut accruing to families and individuals with incomes in excess of $83,000 annually. Of course, the cost of the initiative, (which could range from $1.1 to $2.4 billion over the state's biennium depending on the fate of the Bush tax cuts) would be seen across the state. After all, a $1.1 billion revenue loss is the equivalent of a 70 percent pay cut for each and every public K-12 teacher in the state, to give just one example.

This week New Mexico policymakers adjourned their special legislative session, which focused on tax breaks for low- and middle-income residents. The Land of Enchantment is one of a handful of states that is not experiencing budget shortfalls. The state is actually enjoying surplus revenues generated because of the state's ability to produce oil and gas. However, the tax relief package that was ultimately approved by legislators amounted to about half of what Governor Bill Richardson requested. Recent budget projections show that the state's windfall is expected to decline from about $400 million to $200 million.

In fact, the Governor asked for an enormous temporary tax rebate package that had a $120 million price tag. The rebate package that became law was about $56 million. The one-time rebate is targeted to New Mexicans with AGI of less than $70,000 and is scheduled to arrive in mail boxes by Thanksgiving. He also requested about $58 million for children's health care, but the final legislation included only about $20 million. A portion of revenues was also put aside for highways. Kudos to New Mexico lawmakers for adjusting the package when revenue projections changed and for making the bulk of the package temporary and targeted.

In the past year, Florida lawmakers (and voters) have ratified a couple of measures designed to reduce property taxes, by forcing local government tax rates downward and expanding homestead exemptions. So one would expect homeowner taxes to "drop like a rock" (to steal a phrase from Governor Charlie Crist) in the wake of these changes, right?

Well, no. As the Pensacola News-Journal's Michael Stewart points out, for many homeowners part of the tax savings from the previously enacted tax cuts is getting eaten up by an arcane "recapture rule." In a nutshell, the recapture rule says that if a home's market value falls, its assessed value will still rise by up to 3 percent.

If this rule sounds screwy, it's not-- or, at least no screwier than the "Save our Homes" tax break that is entirely responsible for it.

Here's the problem: since 1995, Florida has had in place a cap on the amount by which a home's assessed value can grow each year. It's 3% or inflation, whichever is less. This cap is known popularly (and with a touch of drama) as "Save Our Homes."

Of course, when market values are growing and the assessed value is not allowed to grow along with it, the result is a gap between what a home is really worth and what the tax system says it's worth. This gap is an inequity-- it takes the tax system further away from being fair and measuring things properly. The recapture rule is designed to undo this inequity. Simple as that.

An example: suppose you bought your house in 1995 for $100,000. Between 1995 and 2006, your home value doubles to $200,000. A properly functioning tax system would take account of the fact that your home is worth a lot more. But Florida's tax system only allows your home's value to grow at 3 percent a year. At this rate, the assessed value of your home in 2006 would only have risen to $138,000.

So in this example, your home is worth $200,000 and the tax system is treating it as if it were worth $138,000-- the tax system is basically pretending one-third of the value of your home doesn't exist. And all you've done to "deserve" this tax break is to not sell your house. Doesn't matter if you're rich or poor. Doesn't matter who you are, just that you didn't sell your house.

If you treat this $62,000 as basically an unearned, incorrect tax giveaway, then a mechanism that reduces the size of that giveaway seems like a good idea.

And that's what the recapture does.

Palm Beach County Appraiser Gary Nikolits knows this perfectly well, which is why it's a laughably political move when he writes a letter to the governor expressing shock that this sort of thing could happen. As Stewart reports:

"Can you imagine the outcry when they open their (tax notices) in August to find that while their market value may have decreased, their taxable value increased?" Nikolits stated in the letter.

Nikolits (and other appraisers around the state) have plenty of reason to be politically nervous about the impact of the recapture rule, but that doesn't make this rule wrong.

Put another way, anyone who thinks the recapture rule is "unfair" has got it exactly backwards. The true "unfairness" is in the Save Our Homes break, which creates a huge gap between market value and assessed value. The recapture rule is a perfectly acceptable way of mitigating that unfairness.

This lesson holds true, of course, in any other state that has similar caps on assessed value. Caps inherently create inequities, and require mechanisms like the Florida recapture to help reduce these inequities. Complaining about the recapture process amounts to missing the forest for the trees. That means you, Michigan!

The Government Accountability Office (GAO) issued a report earlier this week comparing the tax liability of foreign-controlled corporations operating in the United States with U.S.-controlled corporations between 1998 and 2005. It compares tax liability in a number of ways, including the percentage with no tax liability, the number of years with no tax liability, and tax liability as a percentage of gross receipts or assets.

The study was requested by Senators Carl Levin (D-MI) and Byron Dorgan (D-ND), out of concern that foreign-controlled corporations are able to manipulate transfer pricing to avoid U.S. taxes. Very generally, transfer pricing is the way a division of a corporation or family of corporations accounts for the "price" that they charge another division for the transfer of some good or service. If a foreign-controlled corporation has a parent corporation in the Cayman Islands, it might try to claim that it was charged a very high "price" for something it received from the parent, like the right to use a logo or trademark, thus wiping out its profits for U.S. corporate tax purposes.

The GAO report does not determine the extent to which transfer pricing is the explanation for the fact that many corporations studied have no or low tax liability. It does find that foreign-controlled corporations have lower tax liability by most measures used. But it also cautions that this could be explained by several other factors, like the fact that foreign-controlled corporations tend to be younger and younger businesses may be less likely to profit, and the fact that they are more likely to be in certain industries than are U.S. controlled corporations or vice versa.

Several newspapers reported that each year covered by the study saw around two-thirds of all the corporations paying no taxes, while the percentage for large corporations (defined as having income of $50 million or assets of $250 million) was lower but still seems high at around 28 percent.

There are actually many limitations on what exactly can be concluded from the study, since many of the corporations that did not pay taxes may simply have earned no profits on which they could be taxed. Also, the study relies on IRS data, meaning that it relied on what corporations tell the tax collector.

A 2004 study from Citizens for Tax Justice examined tax liability for a period of years (2001-2003) contained within the window covered by the GAO report. It focused on 275 of the largest corporations and includes only corporations that were profitable in each of the three years. It is also based on information gleaned from the financial statements that corporations make for their shareholders to see, with adjustments to account for certain gimmicks (like accounting for the tax savings corporations receive when stock options are exercised, which they do not include in their financial statements).

CTJ's report found that the average effective tax rate for these corporations had fallen to less than half the statutory rate of 35 percent. The average rate fell from 21.4 percent in 2001 to 17.2 percent in 2002-2003. Nearly a third of the corporations paid no taxes in at least one of the three year.

Late this week, Florida Circuit Court Judge John Cooper ordered that the amendment set to appear on the November ballot repealing most state-required school property taxes be removed because of the misleading nature of both the title and the summary of the proposal that voters would read. This comes a little over a week after Florida Governor Charlie Crist offered his full support for the proposal.

From a policy perspective, the proposal is extremely poorly targeted and overly expensive. Judge Cooper's opinion, however, highlights some more technical, though extremely important, reasons for why this proposal shouldn't make the ballot. First, the title of the proposal speaks only of school property taxes and replacement funds, but makes no mention of the fact that non-school property taxes would also be limited with a 5% cap on increases in the assessed value of non-homestead properties. Second, and more importantly, nothing in the title or summary of the proposal makes clear that the amendment's mandate that local school funding be held harmless applies only to the 2010-2011 fiscal year. After that time there is no guarantee that schools will not have to suffer through spending cuts as a result of this gutting of Florida's property tax system.

Unfortunately, the decision to keep this deceiving and poorly-conceived proposal off the ballot is not yet final. The state is virtually certain to appeal the ruling very soon.

Most business groups, including the Florida Chamber of Commerce, are pleased that this proposal may not make it to the ballot. The Chamber has, however, used this opportunity to advocate a variety of irresponsible property tax cuts it would like to see enacted without an accompanying sales tax hike. Realtors and Governor Crist, on the other hand, are much less excited by the verdict. Referring to the possibility of the verdict being overturned upon appeal, Crist said that Judge Cooper's verdict"doesn't mean anything. What really matters is what the last ruling is."

Hopefully, though, that last ruling will be the same as the first.

As has been explained in previous Digest articles, Michigan property taxes are, on their face, behaving a bit strangely right now. Despite home values being on the decline in many parts of the state, property tax bills are actually increasing. This is one of many side-effects of the state's decade-old cap on increases in a home's taxable value.

This phenomenon has led both to a good deal of dissatisfaction among Michiganders, and to a proposal by two Michigan legislators that is intended to fix this problem. But despite the claims of the bill's sponsors (and the uncritical acceptance of those claims by the media), their proposal would do much more than simply "make sure that if a home's market value decreases, the property's taxable value will not increase". To understand why, it's necessary to look deeper into the mechanics of how Michigan's fairly convoluted property tax cap works.

Under the existing cap, if in any given year a home's assessed (market) value increases by more than the inflation rate or 5% (whichever is lower), then the lower of those two alternative measures is used in calculating the amount by which the home's taxable value can increase in that year. In short, this limitation is meant to ensure that property tax bills never jump by "too much" as a result of a leap in housing prices.

Until recently, home prices have been increasing much faster than limits set by the cap, meaning that the taxable value of many homes has been suppressed to a level far below their actual market values. But with the recent housing downturn, taxable values under Michigan's capped system are now being allowed to catch-up with the actual values of residents' homes, despite declines in those actual values.

Effectively, the agreement established by this cap says that, "We won't increase your tax bills very much in any given year, but this means we may in some cases end up increasing them by a little bit every year, regardless of what's going on with your property's actual value". The bill proposed in Michigan, ostensibly designed to block tax increases when home values decrease, would actually eliminate the second half of this agreement entirely -- "catch-up" periods in which your taxable value increases by more than your assessed value did would no longer be allowed. Instead, taxable value can never increase by more than assessed value in any given year, and if assessed value decreases, so does taxable value, regardless of how far below assessed value it currently stands.

Aside from starving state and local coffers, ending the "catch-up" component of the cap would further divorce the Michigan property tax from being a tax on the actual value of property, as all attempts to align taxable and market values would come to an end.

Got all that? If not, it's probably not your fault. Assessment caps are a notoriously complicated and side-effect plagued type of property tax relief. What makes more sense, as a large number of states already recognize, is enacting a property tax circuit-breaker that gives property tax relief to those whose incomes are lowest relative to their tax bills. This can provide a much simpler, less expensive, and more progressive solution. Michigan already has a circuit-breaker, and if lawmakers are interested in reducing their constituents' property taxes, divvying out relief through that program would be much preferable.

A number of states are considering funding transportation infrastructure with "direct pricing" on the use of roads -- e.g. by increasing the prevalence of tolling and instituting taxes on "vehicle miles traveled". If coupled with relief for low-income drivers, direct pricing has the potential to adequately and fairly fund transportation while at the same time creating incentives to reduce driving and its corresponding ills (e.g. traffic congestion, environmental damage, and excessive wear-and-tear on the roads).

But a new development in the already drawn-out debate over Pennsylvania's plan to institute "direct pricing" (i.e. tolls) on its Interstate 80 highlights some serious equity issues involved in making the transition to this form of transportation finance.

A national trucking organization this week announced its opposition to the tolling plan, instead offering its support to a ten cent gas tax hike to raise the money Pennsylvania needs. The reasons for their opposition provide some very useful insights into the equity issues associated with a transition to a direct pricing regime.

While tolling every road could distribute the obligation for funding transportation across all drivers, singling out specific roads for tolls disproportionately affects those people who regularly travel on those roads. After all, these people continue to pay gasoline taxes, vehicle registration fees, inspection fees, and various other charges dedicated to funding transportation. While the revenue from all of these other taxes and fees is being sent all over the state to fund various projects, drivers who rely primarily on tolled roads for their commute (as well as businesses who rely on those roads to transport their goods) are forced to pick up their own tab at the tollbooth. As the trucking industry argued, what the state needs are "alternatives that make all Pennsylvanians responsible for paying for our roads, not just a certain segment."

Pennsylvania has to some extent attempted to minimize the impact of these tolls on frequent users of the road by proposing to let drivers with the E-ZPass electronic toll collection system installed in their cars travel some short distance before tolling kicks in. But this benefit would not help those who take longer trips down I-80, nor would it help the trucking industry, which is excluded from this benefit. Much of the responsibility for paying tolls would therefore fall on out-of-state travelers and trucking companies. That is certainly appealing to Pennsylvania lawmakers seeking to please their constituents.

But some of the burden would also fall on those living closest to I-80. And in any case, is there any reason why I-80 travelers (Pennsylvania residents or otherwise) in general should be contributing more to transportation than users of other roads? As tolling continues to be gradually implemented in a piece-meal fashion, look for more equity concerns of this sort to arise.

This week the Georgia Budget and Policy Institute (GBPI) issued a report, Deficit Reduction Step Two: Bringing Other Voices Into the Planning Process which calls for a special legislative session to deal with a projected $1.6 billion deficit, and details a sensible approach for addressing the state's budget situation.

According to the GBPI report, "The state has suspended or eliminated the hiring of new and replacement positions, all out-of-state and non-essential travel, all purchases of motor vehicles, and the purchase of supplies, materials, equipment, and printing." But cutting government services isn't the only option available to cure the state's budget woes. Policymakers should hold a special session to consider the revenue-raising options that this report discusses, like a temporary income tax increase, eliminating special tax breaks, increasing the cigarette tax and reinstating the estate tax.

Arkansas legislators have put off until next year a proposed 50 cent hike in the cigarette tax from 59 cents per pack to $1.09 per pack. The increase is expected to generate about $71.1 million in state tax revenues. This money would be used to fund a badly-needed state trauma system to respond to emergencies in which victims must be sent quickly to nearby specialists. Arkansas is one of the only states lacking such a vital infrastructure. The trauma system is estimated to cost $25 million a year and the extra revenue would be used to fund community health centers and charitable clinics serving the poor.

Arkansas currently ranks in the middle of its neighboring states in terms of its cigarette tax. If the tax is raised, Arkansas will have the second highest tax in its region, behind only Texas' $1.41 per pack tax. The situation in Maryland last year almost exactly parallels the one that Arkansas is facing this year. When Maryland's cigarette tax was $1.00 per pack, the tax ranked exactly in the middle of those of neighboring states. After the tax doubled to $2.00 per pack, it became the most expensive among Maryland's neighbors.

So what does all this mean? In a recent Wall Street Journal editorial, Maryland's cigarette tax hike was slammed as a failure because, the author speculated, it did not deter smoking and the state lost sales to nearby Virginia, where a carton is almost $15 cheaper. And as usual, the WSJ misleads its readers with anti-tax rhetoric, implying that higher tax rates decrease tax revenues. But if Arkansas lawmakers take a closer look at the numbers cited in the Wall Street Journal piece, the outlook for their proposed increase appears feasible, at least in the short term.

The editorial states that Maryland's cigarette sales fell 25% after a 100% tax increase. But what is craftily omitted is that this does not mean that tax revenues will fall. In fact, quite the opposite should happen. The tax increase is large enough to offset the fall in sales so much that the state should actually gain 50% more in cigarette tax revenue thanks to the hike. And just as Marylanders descended upon their neighbors to take advantage of cheaper cigarettes, it is highly likely that Arkansans will do the same. But the purpose of the Arkansas tax is to generate at least $25 million each year to fund an essential trauma system, not to deter smoking. Indeed the tax may help to curb the habit, especially among youths but even if smokers in Arkansas leave the state to shop for smokes in Missouri or Mississippi, where the taxes are the lowest in the US, sales within the state are still likely generate a sizeable and sufficient amount of tax revenue because the increase in the tax is so high.

So what is the drawback to this plan? The percentage of smokers in the US, along with the number of cigarettes sold, declines steadily each year. While Arkansas and Maryland risk losing business to neighbors, they also risk losing a sizeable amount of business to quitters and the declining number of new smokers, regardless of the size of their cigarette taxes. This means that an essential program that requires yearly funding cannot be viably sustained by a tax on a product for which demand is shrinking. The policy may be a responsible budgetary decision in the short term, when money is tight and the tax is likely to generate a sufficient amount of revenue. But as time goes on and smoking becomes increasingly unpopular (regardless of price), Arkansas will have to find another way to fund its trauma system.

The Center on Budget and Policy Priorities has put out a critical appraisal of the Tax Foundation's latest rankings of states by their relative state and local tax levels. Due to some methodological changes and recently revised data, some states underwent huge shifts in their ranking (changes of 10 to 15 places were not uncommon) which are not explained by the minor shifts in tax policy that may have taken place within the states. They've revised downward their estimates of the overall state and local tax burden by a full percentage point since 2007. They also no longer call 2007 a "25-year high" in state and local tax burdens, now considering the year lower tax than the mid-90s.

If history is any indication, the Tax Foundation's inconsistent methodology and reliance on early projections without hard data will lead to further rankings revisions in the future. The problem is that when state and national media pick up a juicy story along the lines of, "Your taxes are too high," they don't report the numbers as estimates or tentative. They report them as fact and don't report it when figures for previous years are revised. This is problematic because if politicians take the numbers at face-value, they may overreact to the almost certainly flawed numbers that indicate an enormous shift like, "New Jersey edged out New York to become the highest taxed state in 2008" after being ranked 10^th for two previous years.

But because the numbers used to derive this conclusion are so preliminary and based on a shifting methodology, no responsible policy analyst would confidently claim that New Jersey has higher taxes than New York, Connecticut, or other similarly ranked states. The media don't mention the cautionary details that the Tax Foundation includes in its final report and methodology but excludes in its press releases. Its website even contains a sensational headline that glosses over the limitations of their study.

There are also several more fundamental problems with the Tax Foundation's ranking scheme. The Tax Foundation attempts to determine the combined tax impact from all states on a given state's residents. This is different from how most organizations would identify an average tax load, by simply dividing total state and local tax receipts by total income within a state. This is an important distinction because states generally cannot influence tax policy in other states. Also, while the Census Bureau takes two years or more to compile the official data for a given fiscal year, Tax Foundation relies on proxies (such as dividend income to estimate capital gains) to obtain data for a fiscal year that has barely ended. Using such fly-by-night estimates as a basis for ranking states against one another is so unreliable as to provide almost meaningless numbers.

Of course, the most fundamental criticism of the Tax Foundation report is that it lumps all of a state's residents, from the very poorest to the wealthiest, together in one group for purposes of measuring tax levels. As an excellent Birmingham News editorial reminds us, calling Alabama a "low tax" state conceals the harsh reality that it is among the highest-tax states in the nation in its effect on low-income families. As the editorial points out, "[Our tax fairness ranking] is the ranking that most needs to change. "

Yesterday the Illinois legislature held what was scheduled to be a one-day special legislative session on education funding. The goal, in theory, was to come up with new money for pay for the state's chronically-underfunded education system.

But, as it happened, the session lasted all of 20 minutes in the state House, and not much longer in the Senate. And all the legislature agreed on was that they probably shouldn't get a pay raise at this time.

Why the sham special session? The short answer: Governor Rod Blagojevich called the session with very clear ideas about which solutions are permissible-- and which solutions are forbidden. The former camp includes privatizing the state's lottery; the latter camp includes, well, just about every sensible tax reform one might wish to enact. Blagojevich has maintained in the past, and reiterated in advance of the special session, that increasing the state's low, flat-rate, loophole-ridden income tax is not an option he will accept. This is especially absurd given that, as some brave observers have noted, lawmakers could make the Illinois income tax fairer and more sustainable without increasing tax rates at all.

It's no wonder, then, that state lawmakers see no particular point in holding a special session: if the governor plans to veto any income tax hike, why should lawmakers take the political risk of enacting one?

Check out the weekly updates from the Center on Tax and Budget Accountability for ongoing info on the state's budget crisis.

Some great fact checks have recently been run by several news organizations and watchdog groups decrying the distortions of Obama's tax plan in several advertisements run by the McCain campaign.



First from FactCheck.org and Newsweek:

A TV spot claims Obama once voted for a tax increase "on people making just $42,000 a year." That's true for a single taxpayer, who would have seen a tax increase of $15 for the year - if the measure had been enacted. But the ad shows a woman with two children, and as a single mother, she would not have been affected unless she made more than $62,150. The increase that Obama once supported as part of a Democratic budget bill is not part of his current tax plan anyway...

The TV ad claims in a graphic that Obama would "raise taxes on middle class." In fact, Obama's plan promises cuts for middle-income taxpayers and would increase rates only for persons with family incomes above $250,000 or with individual incomes above $200,000.

And on separate Spanish and English-language radio ads:

A Spanish-language radio ad claims the measure Obama supported would have raised taxes on "families" making $42,000, which is simply false. Even a single mother with one child would have been able to make $58,650 without being affected. A family of four with income up to $90,000 would not have been affected...

The [English-language] radio ad claims Obama would increase taxes "on the sale of your home." In fact, home-sale profits of up to $500,000 per couple would continue to be exempt from capital gains taxes. Very few sales would see an increase under Obama's proposal to raise the capital gains rate.

Lots more analysis from FactCheck and Newsweek here (under "analysis").

Really, this graph from the Urban/Brookings Tax Policy Center analysis is probably one of the best illustrations of the presidential candidates' tax proposals because it illustrates the stark difference in priorities.


Sen. Obama's tax relief is overwhelmingly focused on the lower and middle brackets while raising taxes on the wealthy (over $250,000). Sen McCain's tax plan is sharply regressive, lowering taxes the most in percentage terms for the wealthy and the least for lower and middle-income brackets.

And how will the candidates' respective proposals affect the federal budget deficit? The Washington Post ran an analysis under the misleading title "Obama's Tax Plan Would Balloon Deficit, Analysis Finds." While the article does discuss an interesting debate over whether it's better to evaluate a spending proposal against a budget baseline (assuming current fiscal policy remains unchanged) or just compare proposals to one another in terms of their effect on the national debt, the headline will leave a misleading impression for casual readers who do not delve into the details of the article. This is because it's actually the case that if all McCain's tax proposals were implemented, they would balloon the national debt significantly more than Obama's proposals.

As Media Matters for America notes:

The article stated in its third paragraph that "[a]ccording to a recent analysis by the nonpartisan Tax Policy Center, Obama's tax plan would add $3.4 trillion to the national debt, including interest, by 2018." The 10th paragraph stated that "[a]ccording to the Tax Policy Center, McCain's tax plans would increase the national debt by at least $5 trillion over the next 10 years."

So not until the 10th paragraph of the article did the Post see fit to tell its readers that McCain's plan is actually worse for the national debt. There's some "fair and balanced" journalism.

Earlier this week, the Institute on Taxation and Economic Policy (ITEP) released a brief report using IRS data and revealing that the most unequal states in the country also happen to be states that lack the type of progressive tax provisions that could reduce this inequality and raise badly needed revenue. The most unequal states either don't have a personal income tax or have one in need of improvement. Consequently, these states are left with tax systems that, on the whole, are unsustainable, inadequate, and unfair over the long-run.

The IRS data show that, in 2006, ten states -- Wyoming, New York, Nevada, Connecticut, Florida, the District of Columbia, California, Massachusetts, Texas, and Illinois -- have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Yet, the tax systems in these states generally ignore that very important reality. Of those ten states, four lack a broad-based personal income tax and three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner. Three do use a graduated rate structure, but of these, two have cut income taxes for their most affluent residents substantially over the past two decades.

Given this mismatch, it should not be too surprising that over half of these states face severe or chronic budget shortfalls. After all, the lack of an income tax, the lack of a graduated rate structure, or moves to make the income tax less progressive all mean that a state's revenue system will not completely reflect the concentration of income among the very wealthy and therefore will not yield as much revenue.

Case in point: New York. As the Fiscal Policy Institute observes, over the last 30 years, the state has reduced its top income tax rate by more than 50 percent. Most recently, in 2005, it allowed to lapse a temporary top rate of 7 percent on taxpayers with incomes above $500,000 per year. Today, the state must confront a budget deficit of more than $6 billion for the coming year and more than $20 billion over the next three. New York residents seem to understand the disconnect between the enormous disparities of wealth in their state -- where the richest 1 percent of taxpayers account for 28.7 percent of reported income -- and the state's fiscal woes. A poll released this week shows that nearly 4 out of 5 people surveyed support increasing the state's income tax for millionaires. Hopefully, Governor David Paterson is listening. As it stands, he'd rather cap property taxes than ensure that millionaires pay taxes in accordance with their inordinate share of New York's economic resources.

Presidential candidate Barack Obama has talked up several proposals relating to energy and taxes over the past couple weeks, including a one-time tax rebate of $500 per spouse that would be funded by a five-year windfall profits tax on oil companies. He also proposes a $7,000 tax credit for "advanced technology vehicles" which include hybrid cars that can be plugged into an electrical socket and flexible fuel vehicles (which can run on gasoline or ethanol). Obama has also supported eliminating tax loopholes for oil and gas companies. He also supports a cap and trade program in which businesses must obtain an allowance to emit carbon pollutants and all of these allowances (rather than just a portion of them) would be auctioned off, raising revenue that can be reinvested into alternative fuels and assistance to keep families from being harmed by the increased cost of energy.

His recent statements have caused some controversy, particularly his call to release oil from the Strategic Petroleum Reserve and his statement that he could be open to repealing the ban on offshore drilling if it was part of a larger compromise on energy policy. But some of the more strident criticism has been aimed at his desire to close tax loopholes and implement a windfall profits tax. Critics argue that many businesses have a period of unusually high profits and it's not clear why targeting the oil industry for a change in tax treatment makes any sense.

But that argument largely misses the point. The oil and gas industry has not just profited enormously. It has profited enormously partly because Americans are subsidizing it through the tax code -- and these tax subsidies have resulted in no clear benefit for the American public. Even if the tax subsidies are repealed, the public will never recoup the revenue showered on the oil and gas industry over the past years unless a windfall profits tax is implemented. The windfall profits tax blocked by Senate Republicans earlier this summer would sensibly ensure that any profits reinvested in renewable energy would not be subject to the tax.

A report released by Citizens for Tax Justice in July makes this argument and explains just how well oil and gas company stockholders are doing, just how little they invest in alternative energy, and how much they have siphoned from federal revenue through tax loopholes. For example, the report cites the American Petroleum Institute (API) which admits that in the six years stretching from 2000 through 2005 the oil industry only put a total of $1.2 billion towards investment in alternatives to fossil fuels, which is just 0.3 percent of its $383 billion in net profits over that period. If this figure had increased since then, the industry would surely be publicizing that fact.

But while the public has not benefited from the tax subsidies for the oil and gas industry, stockholders surely have. As the report explains, if you invested $10,000 in the top five oil companies 20 years ago, your portfolio would now be worth $100,000. That same $10,000 invested in an S&P 500 index fund is now worth $60,000. Oil shareholders enjoy a big advantage, and hardly seem in need of tax subsidies.

Whether a small tax rebate is what working families really need right now seems doubtful, but closing tax loopholes for oil and gas companies is a common sense policy, and a windfall profits tax might be a sensible supplement to this policy.

Members of Congress have left the Capitol for the August recess and some important tax bills await them when they return in the fall.

House Passes Tax Extenders Bill, Republicans Block Senate Action

In May, the House passed a bill (H.R. 6049) that includes extensions of several temporary tax cuts targeting various interests (commonly referred to as "extenders") as well as renewable energy tax incentives and a few new tax cuts. Unlike similar bills passed during the Bush years, this bill includes revenue-raising provisions to replace the $54 billion that would otherwise be lost.

The one-year "extenders" cost a total of $27 billion and include extensions of several tax breaks targeting businesses and generally well-off individuals. The renewable energy tax incentives in this bill cost a total of $17 billion and the largest is the 3-year extension of the "section 45 tax credit" for the production of energy from renewable resources.

The new tax cuts in the bill, which cost an additional $10 billion, include a change in the AMT related to the treatment of stock options and an expansion in eligibility for the Child Tax Credit (CTC) for low-income families.

The Bush administration opposes this bill because it opposes any and all tax increases, even if they are included in a bill with tax cuts to make the legislation deficit-neutral. CTJ released a report in May that was critical of the administration's position and that explained the provisions in the bill. Democratic leaders in the Senate tried three times to invoke cloture on this House-passed bill, but the Republican minority blocked the effort each time.

House Passes Bill to Patch AMT and Close the Carried Interest Loophole, Republicans Defend Private Equity Fat Cats

In June, the House passed a bill (H.R. 6275) that would provide relief from the Alternative Minimum Tax (AMT) for one year.

The AMT was first created in 1969 to ensure that wealthy taxpayers would pay some minimum level of income tax no matter how proficient they are at using loopholes. It has been adjusted several times since then but the Bush tax cuts caused more people to be affected by the AMT and did not include any permanent adjustment for it. Congress, in recent years, has frequently enacted a "patch" which adjusts the exemptions that keep most of us from paying the AMT, but has not provided a permanent fix.

The one-year AMT "patch" would cost over $60 billion, and the House bill would replace the revenue, partly by closing the loophole for "carried interest" paid to private equity fund managers. A report from CTJ explains that since AMT relief will mostly help families that are relatively well-off, it should not be deficit-financed because that could eventually lead to higher taxes or cuts in services for middle-income people.

The Senate has not acted on the House-passed AMT bill. One sticking point is the provision to close the "carried interest" loophole. Carried interest is a form of compensation paid to 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.

Presidential candidate Barack Obama favors closing the carried interest loophole, while John McCain does not. In fact, McCain's opposition to closing loopholes enjoyed by the private equity industry inspired an SEIU protest involving the performance of an ABBA song with new lyrics, retitled "Loophole King."

Senate Democrats Ready to Cave on Paying for AMT Relief But Insist on Paying for Extenders

Senator Max Baucus introduced a bill (S. 3335) that includes both the extenders, energy provisions and a one-year AMT "patch." The legislation includes enough revenue-raising provisions to pay for the extenders but not for the AMT patch. The biggest revenue-raising provisions are the same ones that are in the House-passed extenders bill. One would clamp down on the use of schemes by private equity fund managers to move deferred compensation offshore to avoid taxes. Another would delay a 2004-enacted law that has not even gone into effect yet. The soon-to-take-effect law is designed to make it easier for multinational corporations to take U.S. tax deductions for interest payments that are really expenses of earning foreign profits and therefore should not be deductible.

The Republican minority in the Senate blocked efforts to invoke cloture on this bill before the recess because they object to the revenue-raising provisions.

Needed Improvement in the Child Tax Credit

Both the House-passed extenders bill and Senator Baucus's extenders/AMT bill have a provision that would make the Child Tax Credit (CTC) more widely available for low-income families.

First enacted during the Clinton administration, the CTC was significantly expanded as part of the Bush tax cuts. It is now worth up to $1,000 for each child under age 17. But many low-income families do not benefit at all from the child credit, and many others get only partial credits. That's because the credit is unavailable to families with earnings below $12,050 (indexed for inflation), and the credit is limited to 15 percent of earnings above that amount. In other words, a working family making less than $12,050 this year is too poor to get any child credit.

The House extenders bill would lower the child credit's earnings threshold from the current $12,050 to $8,500. The Center on Budget and Policy Priorities points out that 13 million children would be helped by this provision.

After months of offering only lukewarm support (or in some cases, even "accidental" opposition) for a November ballot proposal that seeks to eliminate a substantial portion of school property taxes, Florida Governor Charlie Crist finally said this week that he would actively work to help secure the measure's passage. This announcement comes just days before state economists' are set to issue their revised projection of the state's looming budget deficit which one economist has already warned, "is going to be big". Unfortunately, unprecedented budget cuts have already been made in education, social services, and most other government functions, leaving Florida with few reasonable options for filling this additional gap. With revenues in such sad shape, there's even less reason now for Florida to move towards becoming more reliant on unpredictable sales taxes -- which this ballot measure proposes to do.

Previous Digest articles have already detailed the flaws with the plan Governor Crist now supports. (See Florida: Tax Swap or Tax Flop?; Florida: Good Thing We Don't Have To Do This Again For Twenty Years; and Florida Tax Commission Charges Ahead With Unfair and Fiscally Irresponsible Plan.) In short, it's regressive, inadequate, unsustainable, and does nothing to fix the "brokenness" of Florida's property tax system.

An article that ran in the Sun Sentinel this week provides some additional evidence on these points. One state economist has said that "the amendment's language isn't clear in some areas and creates uncertainty and multiple options." This, the Sentinel notes, means that "because economists don't know what offsetting tax increases will be imposed... there's no real way to gauge the economic impact of the property-tax cuts. In other words, nobody's certain who'd pay less taxes and who'd pay more."

Nonetheless, Governor Crist is now touting the measure as a "significant stimulant to Florida's economy". While the degree of disconnect here between rhetoric and reality is unsettling, it unfortunately has become the norm for any Florida tax debate. As things stand right now, voters appear about evenly split over the measure, though a sizeable 20% of those polled in a recent survey were undecided on the issue. Hopefully, Governor Crist's endorsement of the measure won't alter these numbers too significantly.

Check out the Florida Center for Fiscal and Economic Policy's website for more information as the November election approaches.

This week Colorado Governor Bill Ritter filed a ballot initiative petition that, if passed by voters in November, would end a $300 million a year subsidy for oil and gas companies. The property tax deduction for oil companies was originally justified as a way to encourage them to support certain local measures, such as school bonds. Supporters claimed that without the tax break the industry would pay disproportionately more in taxes and thus have an incentive to work against local measures.

But Colorado is the only state that continues to provide such a generous severance tax break to the oil and gas industry. And, as Gov Ritter points out, these companies have an obligation as responsible members of the community to support beneficial local legislation. The state should not subsidize this behavior.

The petition would channel the $300 million savings primarily to college scholarship funding for low-income students and measures that would mitigate the impact of the oil and gas industry on wildlife, transportation and water quality. Oil and gas industry spokespersons, however, claim that companies would be forced to pass on higher prices to consumers. Ritter countered this attack, explaining that Colorado's tiny contribution to world oil supplies will have a negligible impact on prices.

The oil and gas industry is expected to spend about $20 million in its campaign against the initiative and supporters of the initiative will spend about $5 million. Voters will be asked to choose between continuing to subsidize a booming industry or investing money in Colorado families and wildlife preservation. But as gas prices continue to soar and winter approaches, Colorado voters may fall victim to the threats by oil and gas companies to pass on the burden of the tax. In order for fairness to triumph, the state must adequately educate voters about the $50 million local communities stand to gain for environmental improvements as well as the increase in low-income students' opportunity to attend college.

Seattle's City Council approved a 20 cent disposable bag tax last week for grocery, drug and convenience stores across the city, scheduled to go into effect on January 1. Seattle residents use about 360 million paper and plastic bags per year, a number city officials hope to cut in half.

There are persuasive arguments on both sides as to whether this is a good idea. While a tax on disposable bags is inherently regressive, essentially an additional sales tax, many stores do offer cloth bags as alternatives to disposable ones or allow customers to bring their own. The city plans to provide all residents with a few reusable cloth bags for free. Another argument against the tax is it will require the purchase of disposable bags by many families who formerly acquired them for free to use as trash can liners, to transport food, and to pick up pet waste. This could diminish the positive environmental impact of the tax.

Supporters of the disposable bag tax say the tax provides a strong incentive for recycling which doesn't exist when bags are free. For example, Los Angeles estimates that its residents use nearly 2 billion plastic bags per year and only about 5% are recycled. There is solid evidence that disposable bag taxes have a strong effect on consumer behavior. Ireland implemented a plastic bag tax in 2002 and plastic bag consumption subsequently fell more than 90%.

Department stores are strangely exempt from the bag tax, even though they contribute nearly a quarter of disposable bag usage in Seattle. As Holly Chisa of the Northwest Grocery Association told the Seattle Post-Intellegencer, "If you're going to try to change behavior, everyone should be involved." Equally strange is where the proceeds of the tax are slated to go. Seattle allows large stores to keep 5 cents per bag for administrative purposes while the other 15 cents will go to the city to finance utility rate reductions and to purchase reusable bags. But businesses that gross less than $1 million get to keep the entire bag tax they collect. This amounts to a large unjustified subsidy for small businesses.

Whether Seattle's January 2009 bag tax is likely to be "successful" or not is certainly debatable, but there are several pressing issues that should be resolved to improve the likelihood of success. The tax should not be used to provide a small business subsidy and large retailers should not be exempt from the tax. The city should also consider reducing the regressivity of the bag tax by creating a positive incentive, such as mandating a rebate for not using disposable bags rather than a fee per bag. While this might not be quite as successful at reducing disposable bag usage, it would eliminate the potential burden on low-income families.

You don't have to have a thousand unread messages in your inbox to believe that sometimes email is a bad thing. An example: apparently an anti-Barack-Obama screed has been circulating via email that lists a dozen of Obama's alleged tax proposals, all of which (in the email) amount to taxing basically every American. Each of these proposals makes it sounds like he's going to go after everyone's firstborn son.

But as the Tax Foundation helpfully points out, basically every assertion made in this email is false.

Some of the assertions in the email ("Obama would tax all capital gains on home sales at 28 percent") can't possibly be reasonably construed from anything Barack Obama has ever said or written. In other words, it's not a matter of some knucklehead doing his best to understand Obama's plan and just mis-interpreting it. Somebody went out and just lied-- made up a bunch of the nastiest stuff they could think of about Obama and called it the truth.

Hard to say how far afield this email has traveled. A quick Google search on specific phrases within the email reveals that it can be found on some very entertaining websites. For example, next time you find yourself poking around on "forums.gunbroker.com," you can find the email here. The Iowa John Birch Society is all over it too. While it's distressing to see it posted approvingly anywhere, the good news is that each of these web forums allows readers to comment, and sensible folks have already pointed out that the email in question is completely unsubstantiated.

More pernicious is a website with the harmless-sounding name www.before-you-vote-2008.info/ that has posted the offending email in its entirety, in apparent approval of its contents right here. As long as this idiot wants to keep shelling out $20 a year to own this web domain, he can leave the anti-Obama email in all its unexamined glory as long as he wants.

Of course, in the end, if any American voter reads the anti-Obama email and believes it uncritically, that's their fault for being lazy. And one could optimistically hope that no one would be that lazy. But the underlying problem is that tax policy is complicated enough that it's not all that easy to verify or (as is universally true in the case of this email) disprove assertions about candidates' tax plans.

And even if people don't explicitly believe the specific assertions made in the email, the theory animating the sender was probably that if you tell a lie enough times about someone, it does affect your perception of them-- even if you don't explicitly believe it's true.

Someone I respect greatly, who is nonetheless a pessimist about human nature, once gave me the following metaphor for how elections are won and lost: presidential campaigns are like a picture window. One party has a red magic marker and the other candidate has a blue magic marker. Every time the Republicans run an ad, they're putting a red dot on the window, and every time the Dems run an ad they're putting a blue dot on the window. If, on election day, there are more blue dots than red dots, the Democrats win.

If my friend's metaphor is wrong, then this scurrilous anti-Obama email doesn't matter. But if he's right, maybe it does.

Which is why the Tax Foundation deserves kudos for taking the email apart point by point and showing that it's full of lies.

A recent Wall Street Journal editorial touts new figures from the IRS as evidence that the rich are actually paying a higher share of federal taxes under President Bush and that the tax code has, therefore, become more progressive over the past eight years.

The Journal uses the IRS figures to create the impression that the poorer half of Americans are contributing almost nothing to federal revenue while the wealthy are providing the bulk of it.

Do the rich pay too much in taxes? Has the tax code become even more progressive as a result of the Bush tax cuts?

Of course not. As a new report from CTJ explains, the share of taxes paid by the rich looks large and growing only because the Wall Street Journal ignores the tax that affects the poor and middle-class most heavily -- the payroll tax.

The new CTJ report provides figures that combine both the federal income tax and the federal payroll tax into the total amount of federal taxes paid by each income group in 2007. The richest one percent does pay a large share of total federal taxes - 23.6 percent. But the richest one percent also receives a roughly equal share of total income in the United States, 22.4 percent. Further, the Bush tax cuts actually reduced the total share of federal taxes paid by the richest one percent.

Read the report.

With summer in full swing and state fiscal years largely underway, most state legislators probably think that they're done with the heavy lifting, at least policy-wise, for the year. Yet, due to the poor condition of the nation's economy, tax revenue in a number of states is falling well short of expectations, reopening budget gaps that policymakers thought they had closed. For instance, the Georgia Budget and Policy Institute this week issued a report that estimates that the deficit for the current fiscal year (FY09) could reach as much as $2 billion, due to weak sales and personal income tax collections. The report calls for legislators to return in September to address the shortfall. As the Atlanta Journal Constitution reports, Senate Appropriations Chairman Jack Hill has already indicated that a variety of options for resolving any potential deficit will be considered, including undoing recent tax cuts.

In New York, where the fiscal year begins in April, the problem may be more prospective than retrospective, but that didn't stop Governor David Paterson from calling this week for a special legislative session to address the Empire State's burgeoning budget deficit. According to the latest analysis from the state's budget office, the expected budget gap for FY 2010 has risen from $5 billion to $6.4 billion in the span of three months, with a three-year deficit now exceeding $26 billion. With his request for legislative action, particularly with the entire Legislature up for election this November, the Governor would appear to be a paragon of fiscal responsibility, except that he is simultaneously demanding a property tax cap that would make matters worse. For more on alternatives to the Governor's property tax plan and on the state's fiscal condition generally, visit the Fiscal Policy Institute's web site.

With enormous transportation funding shortfalls on the horizon at both the federal and state levels, lawmakers are thinking about how they will address the problem of inadequate transportation funds in the short-term and long-term. Major developments in both these short- and long-term components of the issue occurred over the last few days in the form of a House bill that would supplement the Highway Trust Fund with general fund revenues, and the unveiling of the Bush Administration's transportation plan by Transportation Secretary Mary Peters.

On the revenue side of the Administration's transportation plan, Secretary Peters rightly points out that changes in Americans' driving habits, as well as the inevitable shift towards improved vehicle fuel economy, have created serious sustainability problems for the gas tax as a source of transportation funding. In the long run, these changes may spell the end for the gas tax as a meaningful source of transportation revenue, but many political figures are prematurely declaring that day to have already arrived.

In her description of the Bush Administration's transportation plan, Secretary Peters referred to the gas tax funding mechanism as "broken" and "antiquated". Unfortunately, this sentiment is surprisingly common. Virginia Governor Tim Kaine, for example, recently referred to the tax as a "fossil". The frustration being felt by government leaders over declining gas tax revenues is understandable, but persuasive reasons exist for viewing the gas tax not as an obsolete relic of a bygone era, but as a useful option for addressing immediate funding shortfalls.

While some of the blame for the inadequacy of the gas tax can be placed on reduced demand, much of the problem stems from the unwillingness of legislators to increase tax rates when necessary. The federal gas tax has been set at 18.4 cents per gallon since 1993, but because of inflation, the real value of that amount has declined by over 30%. States are feeling the pinch too, as well over half of the states haven't increased their tax in over 5 years.

The consequences of this inaction have been dire. The one year anniversary of the Minnesota bridge collapse has brought with it a pair of studies into the continued lack of maintenance (driven largely by lack of funding) of the nation's bridges. Clearly, the usual arguments that we can just "trim the fat" instead of raising taxes will not suffice. The House of Representatives recognized this fact recently and passed a bill that would fill the shortfall in the Highway Trust Fund with general revenues (which would obviously increase the over budget deficit). The Bush Administration has threatened to veto this bill on the grounds that highway users, rather than taxpayers at large, should be responsible for funding the transportation infrastructure. It's ironic then that the Administration has proposed filling the gap with funds taken from mass transit. In either case, filling a gap that is sure to reoccur with one-time revenues leaves something to be desired.

Of course, increasing the gas tax could result in revenues that would satisfy the Administration's demand that transportation be paid for by its users, but for some reason that option is completely off the table. Even some states have decided to avoid the issue of the gas tax by proposing to pay for transportation with revenues unrelated to road usage. Recent proposals in Virginia and Arizona have included provisions to use sales tax revenues for transportation, despite the fact that these states have not raised their gas taxes since 1986 and 1990, respectively.

Admittedly, increased tolling and taxes on vehicle miles traveled may now be better suited to perform the job the gas tax was originally designed to do: serve as a user-charge for drivers. But these options are cumbersome to implement, and are therefore not well suited for addressing the immediate revenue shortfall. While policymakers need to spend time fleshing out these ideas in preparation for the impending rearrangement of transportation finance, they should also spend some time thinking about the merits of increasing gas taxes (perhaps by indexing the rate to inflation, as is done in Maine) as a way of preserving a rough user-fee system in the short-term, rather than relying on sales taxes and one-time funding injections.

Washington State appears to have joined the majority of states with fiscal problems. According to the Center on Budget and Policy Priorities, over half of the states are expecting to face a budget shortfall in their FY09 budgets. Estimates are that Washington could face a budget shortfall for the 2009-2011 biennium of $2.5 billion. Governor Chris Gregoire has said that she's not interested in tax hikes. "I said it four years ago, I'll say it again now: The last thing you want to do is go for taxes when you've got an economic downturn." Instead she has asked state agencies to tighten their belts and identify ways to cut spending. Yet, during an economic downturn state services become even more important to those in need.

Washington has one of the most regressive tax structures in the country and relies more heavily on regressive sales and excise taxes compared to other states. Washington is one of only nine states without a broad-based income tax. Perhaps now is the time to consider restructuring the state's tax system. Lawmakers and advocates should spend a few minutes reading a series of fact sheets released this month by the Economic Opportunity Institute, which provide detailed prescriptions to Washington's tax policy problems. The fact sheets include information on changing the tax structure through implementing a tax on Washingtonians with high incomes, expanding the sales tax base, and closing tax loopholes.

Clearly there are some in Washington, namely anti-tax zealot Tim Eyman, who prefer gimmicks over real solutions. This week Mr. Eyman's initiative to curb traffic congestion received approval from the Secretary of State's office. The proposal will be placed on the November ballot and would further constrain the state budget by taking 15 percent of the sales and use tax on vehicles and devoting the revenue to ease traffic congestion. The initiative would mandate that high occupancy vehicle lanes are open longer hours, stop lights are synchronized, and increased funding is available for road side assistance. While nobody likes traffic congestion, this is not the sort of problem that should be solved through a ballot initiative that will permanently put congestion reduction first in the queue for funding. Mr. Eyman's proposal would constrain the budget without offering solutions to the larger issues facing residents.

In recent weeks, North Carolina Governor Mike Easley signed into law the state's 2009 budget. Totaling around $21.3 billion, the legislation is supposed to respond to the current economic climate, but falls short.

Lawmakers had earlier proposed two new tax cuts, one regressive and one progressive. The regressive cut was a repeal of the state's gift tax. North Carolina is one of the last remaining states with a gift tax and, as CTJ has previously pointed out, the tax is absolutely necessary to ensure that the estate tax is collected. If a state does not tax large gifts, wealthy residents can avoid the state's estate tax by giving their assets to their children before they die.

The progressive cut proposed earlier was an increase in the state's earned income tax credit (EITC). The credit, which will increase from 3.5% to 5% of the federal EITC, will provide relief for the working poor.

Neither progressive advocates nor anti-tax advocates got everything they wanted in the budget deal that was approved. Both tax cuts were delayed until 2010. That means that wealthy North Carolinians will be able to avoid the estate tax if they wait until 2010 and then give their assets to their children. It also means that the needed help provided by a boost in the EITC will not yet be available at a time when prices are rising and increasingly burdening low-income North Carolinians.

The fact that these tax cuts were delayed is a result of the General Assembly's desire to balance the budget. But as CTJ has noted, even a 5% state EITC in North Carolina is not enough. In order to offset the burden of state and local taxes for a family of four, the EITC must be set at no less than 11% of the federal EITC. Next year, lawmakers should reject cuts in the gift tax that will result in reduced estate tax collections and instead focus on the needs of the working poor.

As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.