December 2008 Archives

Evaluating the National Retail Federation's "Tax Holiday" Idea

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Yesterday the National Retail Federation published an open letter to President-to-be Barack Obama urging that come January, Obama's stimulus package should including a national "sales tax holiday," three ten-day periods in 2009 during which states that normally collect sales taxes on retail purchases would stop collecting them.

A new Citizens for Tax Justice report takes the shine off this idea a bit, noting a few fairly important reasons why a tax holiday might be not the right answer for America at this time.

Among them:
  • As with state sales tax holidays, it's hard to know whether the benefits would go to consumers or retailers.
  • To the extent consumers would be better off, the savings would go to even the very best-off families. No effort could be made to target these savings to families hit hardest by the current downturn.
  • Even if Congress likes the idea, that's not enough to implement it. Every state with a sales tax would have to pass legislation to make this work. And then every retailer in these sales-tax states would have to train workers and program computers to stop collecting state sales tax (but keep collecting local sales tax) during the holidays.
  • Since the first proposed tax holiday would take place in March, the immediate effect of such a plan would be to... encourage people to spend less money right now, and wait until March. Which is an odd feature in a stimulus plan.

The CTJ report is here.

Why Virginia Won't Hike Its CIg Tax

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Earlier this week, Virginia Governor Tim Kaine proposed doubling the state's cigarette tax from 30 to 60 cents per pack. Once upon a time, this would have been a pretty substantial hike. But with the wave of cigarette tax hikes nationwide over the past decade, this proposal would best be described as bringing Virginia's tax more in line with what the rest of the states currently do. As the Campaign for Tobacco-Free Kids reports, the nationwide average cig tax is now $1.19 per pack.

The Republican-led House quickly announced that it was having none of this. Their reason? Economic development:
[Virginia House Speaker William] Howell and [U.S. House member Eric] Cantor argued that a cigarette tax hike would send the wrong signal to other states, which might be more inclined to raise their cigarette taxes. That could lead to job losses in the tobacco industry, especially in Virginia.
The most obvious response to this rationale is that they're trying to close the barn door after the horses have gotten out. State lawmakers have looked--and continue to look, right now-- to cigarette taxes as their favorite source of new tax revenue for years now. The idea that other states are waiting for the official sanction of tobacco-producing states before further jacking up their cig taxes is pretty far-fetched.

But the more interesting question is why Howell views the tobacco industry as the most vital component of Virginia's economic development strategy going forward. (To say nothing of why Cantor, who after all is a member of the US Congress, not Virginia's legislature, is weighing in on this point.) Tobacco consumption has been falling for decades nationwide. Not just on a per capita basis either-- we're just collectively purchasing fewer and fewer smokes every year, as public knowledge of the immense healthcare costs associated with smoking increases.

It's a dying industry, a relic of the past. So why should Virginia, a state that has enjoyed a real technology boom over the past decade, want to reinforce the role of this industry in its economy? The Washington Post's Pete Earley has a disheartening, but probably apt, answer: because Virginia lawmakers got paid to think this way. As Earley notes, virtually every member of Virginia's tax writing committees in the House and Senate regularly take campaign contributions from the tobacco industry. You don't have to be a Rod Blagojevich for these contributions to have a subtle influence on how you think and vote on economic policy issues.

At a time when we're contemplating spending billions of dollars to prop up the US auto industry, it's hard to get too sniffy about efforts to keep the Virginia tobacco industry going. But as Virginia confronts a major budget deficit, every dollar of tax revenue not collected from the tobacco industry is coming from somewhere else. And by refusing to consider hiking the cigarette tax on economic development grounds, Virginia lawmakers are basically asserting that any other interest that could be taxed-- whether it's manufacturers, small retail businesses, or individual wage-earners and consumers-- are less vital to Virginia's long-term economic growth than are tobacco farmers. And it's hard to see any other explanation for this backwards approach to economic development than campaign contributions. As the late, great Mark Felt apparently never really said, "follow the money."

Economic Stimulus: Good Ideas and Bad Ideas

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When Congress convenes in January, lawmakers will immediately begin to debate what action they can take to best stimulate the economy. Economists and experts have generally found that tax cuts cannot provide the sort of quick boost that the economy needs to mitigate a recession, and that direct government spending in programs that can immediately spur economic activity are more effective. But that is not stopping anti-tax lawmakers and their supporters from making the case that our prosperity can only be ensured by another round of tax cuts. The next two articles look at some of the good and bad ideas being discussed to address the economic downturn.

Good Ideas: Government Spending to Boost Consumption by the Needy and Build Infrastructure

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Most economists believe that recessions are caused largely by slackening demand for the goods and services that firms provide, which leads to layoffs, which in turn lead to more slackening demand. If the downward spiral is not stopped, it can do real damage that takes a long time to reverse. But most analysts believe that the process can be mitigated with a short-term infusion of government money into the economy to boost consumption so that the recession never reaches a severe level.

Many analysts say this sort of government spending should not be offset with tax increases that would simply take the money back out of the economy. As we've argued before, it seems doubtful that tax increases on the wealthy would undo the stimulative effect, but so long as any deficit-spending is only temporary, there is little downside to this approach.

The short-term government spending therefore needs to be the type that will result in an immediate boost in consumption. Increasing Food Stamps for needy families or extending unemployment insurance benefits fall into this category, since they go to people who have probably been cutting back on necessities and will immediately spend the new cash (or vouchers).

Many experts have also argued that aid to state governments can be stimulative if it goes towards "shovel ready"/"ready-to-go" projects or simply prevents the states from cutting needed services and laying off staff. Either way, the money would immediately put income in the pockets of people working on the funded projects, or would prevent a decrease in income for the state government workers who will otherwise fall victim to budget cuts.

Tax cuts that benefit the wealthy are not likely to stimulate the economy because wealthier families tend to save and invest more of their income. Tax cuts for investment (like new cuts in income taxes for capital gains) are likewise not very stimulative. They mostly benefit the wealthy, and besides that, investment decisions take a while to plan and might not be made until after a recession has passed.

President-elect Barack Obama has proposed to stimulate the economy partly by quickly providing federal funds for the type of "shovel ready" infrastructure projects that can make the country more productive in the long-run, in addition to boosting consumption in the short-run. Suggested projects include building roads and bridges, modernization of school buildings, expanding broadband internet access and making buildings more energy efficient.

Obama's economic recovery plan does include some tax proposals that he made during the campaign and which received a lukewarm response from Citizens for Tax Justice and many tax analysts. Hopefully the economic recovery plan that Congress passes early next year will focus little, if at all, on tax cuts.

What About Tax Cuts Targeted Towards Low- and Middle-Income Families?

In theory, certain types of tax cuts, like the refundable rebates sent to almost all households below certain income levels this year, can also have a stimulative effect because they are targeted to the income groups most likely to spend any new money they receive.

But the evidence shows that only a very modest, short-term increase in consumption resulted from the rebates. Martin Feldstein (the former top economic adviser to President Reagan) pointed out in an op-ed that the federal government spent $78 billion on the tax rebates but consumption only increased by $12 billion in response, meaning most of the money was saved or used to pay down debt.

Different parties draw vastly different conclusions from this. Feldstein and anti-tax pundits argue that tax cuts are not effective in stimulating the economy unless they are permanent, because people are reluctant to change their their spending in response to a change in income that they know is only temporary.

But this is the sort of logic that simply leads back to making the Bush tax cuts permanent. Considering how the economy has performed after eight years of lower taxes under President Bush, it's incredible that anyone still focuses on permanent tax cuts as a solution. (This is particularly true since calls for permanent tax cuts are often made by lawmakers who have no desire to replace the lost revenue, which means that increased government debt will require future tax increases or cuts in public services.)

The more sensible conclusion from the limited effects of the rebates is that any government spending or tax cuts need to be more focused on the people who are most likely to immediately spend any new cash or vouchers they receive, or focused on the sort of programs or projects that will immediately result in economic activity in the short-run (and if possible, enhance our infrastructure and productivity in the long-run).

Obama has argued that the refundable Making Work Pay tax credit he proposed during his campaign as part of his overall tax plan could be enacted quickly as a stimulative measure. The credit would be up to $500 for working adults ($1,000 for a married couple if both spouses work) which is the equivalent of refunding Social Security taxes on the first $8,100 of earnings. The credit would be limited for households above certain income levels.

It's not immediately obvious that this will be more effective than the rebates sent to households this year. However, if this tax rebate is sufficiently targeted to low- and middle-income people, it will be far more effective than some of the more radical tax cut proposals put forward by conservative lawmakers (as described in the following article).

Bad Stimulus Ideas: Untargeted Tax Cuts and Permanent Tax Cuts

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It can never be repeated enough that President Bush and his allies in Congress enacted major tax cuts in 2001, 2002, 2003, 2004 and 2006. A blinding monomania is leading some conservatives to argue that our economic problems stem from the fact that we have not sufficiently cut taxes.

Taking a Break from Taxes?

In late November, Congressman Louie Gohmert (R-TX) proposed the startling idea of having a year-long holiday from the federal income tax for 2008. He has more recently modified his proposal to be a holiday from federal income and payroll taxes for the first two months of 2009. Congressman Mike Pence (R-IN), who will be the House Republican Conference Chairman starting next year, has recently indicated that he supports this proposal.

Arguably, the people who are suffering most in this economic crisis (and the people who would be most likely to increase their consumption in response to a change in income) are the unemployed, who do not pay much in taxes. It's true that unemployment benefits are taxable but Obama has already proposed to make them tax-free, and Congress is likely to oblige.

Meanwhile, a huge proportion of the benefits of the tax holiday would go to the very rich. According to a recent report from the Congressional Joint Committee on Taxation (page 19 for those interested) households with total incomes above $200,000 will only make up 3 percent of households in America in 2009. They will receive 31 percent of the income, so it's not unfair that they will pay 39.5 percent of federal taxes (including federal income and payroll taxes and an insignificant amount of excise taxes). This means that if Congress enacts a holiday from federal income and payroll taxes, over a third of the benefits would likely go to the richest 3 percent of Americans, who receive just under a third of the nation's total income.

Throwing Money at Companies with No Strings Attached: Hatch's NOL Carryback Proposal

Another type of tax cut has been proposed that is equally ill-advised. Senator Orrin Hatch (R-UT) has proposed allowing companies to use their losses to get refunds of taxes they've paid over the past 15 years. He also proposes to make this change permanent.

Here's a little background. As a general rule, a company operating at a loss in a given year will not have to pay taxes for that year, because its deductions will wipe out its taxable income. Under current law, if a company has excess deductions for net operating losses (NOLs) beyond its taxable income for the year, it can apply those excess deductions not only against earnings in later years, but also against income taxed in the previous two years. That allows it to get previously paid taxes refunded.

Senator Hatch's proposal would allow a company to apply those excess deduction against income paid in the previous 15 years.

There is no reason to think this change would lead to the creation or retention of jobs. Allowing a company to use it's current year losses to get a refund of taxes paid in the past does not lower the cost of doing business or make it easier to profit. It would simply hand cash to business-owners who are not profiting currently. Smart business people will expand their business only if they can profit by doing so, regardless of how much cash they have on hand. A business owner is likely to lay off workers if she cannot earn enough to cover expenses and enjoy a profit. Simply giving the business some cash with no strings attached will not change that.

Some Senators wanted to include a similar provision to the housing bill in the spring, but that proposal would have only allowed NOLs to be used to offset income taxes paid in the past four years. Lawmakers eventually rejected that idea, and hopefully they will reject Hatch's even more radical proposal to allow NOLs to be used to offset taxes paid in the past 15 years.

Insurance companies and financial institutions have lobbied long and hard for all sorts of loopholes in the federal tax code, and the insurance industry alone has spent almost $1 billion over the past decade lobbying on tax issues. Some folks might say that these corporations are providing important services to help the free market function and that the government should infringe on them as little as possible. Well, here's why they're wrong: The very corporations that have persuaded Congress to grant them numerous loopholes reducing their effective tax rate to negligible levels are now lining up for a handout from the federal Troubled Asset Relief Program, or TARP.

Insurance companies have not received any bailout funds yet, but a recent Wall Street Journal article explains that many are now requesting aid, including several insurers that pay only a fraction of the statutory tax rate on corporate income. The statutory tax rate on corporate income is 35 percent, and many states impose a tax of around 4 or 5 percent as well. But insurance companies have mastered the use of loopholes to reduce their effective tax rate to much less. For example, Prudential Financial, which announced last week that it is seeking aid, received profits of about $25 billion over the past decade but its total effective tax rate was just around 5 percent over that period. Hartford Financial Services, which also seems to think it's eligible for TARP funds, received profits of $18 billion over the past decade and paid taxes at an effective rate of less than 8 percent over that period.

It would almost be a relief if it turned out that the insurance companies had done something illegal to reduce their tax liability in this way. However, the real scandal is that they are mostly using the loopholes that Congress enacted. For example, insurance companies get to immediately deduct the full costs of signing up new policy holders, but in their reports to shareholders they count these costs as being stretched across several years.

Financial institutions do not get to use quite as many loopholes as insurance companies, but they do know how to play the game. Goldman Sachs, which received $10 billion in bailout funds, expects to pay taxes of just 1 percent on its 2008 profits.

Conservatives have been grousing for a while that the corporate income tax rate is high compared to those of other countries, but these companies illustrate that the effective tax rate can be much lower than the statutory tax rate.

The corporate income tax funds many of the services that make corporate profits possible, like roads that make shipping possible, public safety that makes property valuable, even the research that lead to the internet and all of the commerce it facilitates. Now that these corporations are receiving TARP funds, it's more obvious than ever that corporations have a stake in our government and have good reason to help pay for it.

Supermajority Requirement Forces Desperate Action in California

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As you can see from just a brief skimming of the Tax Justice Digest's California archives, the fight to fill California's enormous budget deficit has been a struggle of epic proportions. Despite widespread agreement among both the Governor and a majority of legislators that some type of tax increase will have to be employed if catastrophic reductions in state services are to be avoided, a minority of tax-phobic legislators have been able to hold hostage the process as a result of California's requirement that all tax increases be approved by a super-majority of the legislature. Having struggled for months under the unworkable limitations of the super-majority requirement, California legislators took the desperate action of cobbling together and passing a (perhaps illegal) budget fix that raises taxes in a manner so convoluted that it may circumvent the super-majority requirement (that is, if it holds up in court).

The gist of the plan is this: raise the sales tax, enact an oil extraction tax, and impose a surcharge on everybody's income tax bill. Then, at the same time, eliminate the gasoline tax so that, on the whole, the proposal produces no increased revenue for the state. But getting rid of gas taxes is hardly something California can afford, especially given the well-publicized suspension of numerous transportation projects this week. In order to fix this, the gas tax is then re-imposed (at a higher rate than before), but is re-labeled as a "fee", rather than as a "tax". Presumably, this is allowed because gas taxes are largely dedicated to the very specific purpose of recovering the costs of providing transportation -- in contrast to taxes which usually finance government expenditures more generally.

Given the desperate nature of the situation, the Governor appears to have given his consent to this convoluted technique. But before you start thinking that we've heard the end of California's budget debate, think again; the Governor has already announced his intent to veto this particular proposal because of his belief that it includes too few spending cuts and does too little to stimulate California's economy. Presumably, then, if another similar proposal manages to make it through the legislature that is more tailored to the Governor's liking, we may be set for a court battle over the legality of this revenue-raising scheme.

For now, only one thing is clear: California needs to greatly magnify the amount of attention that has been given to ending the absurd super-majority requirement.

The news out of New York in recent weeks hasn't been especially encouraging for those concerned about the impact of the recent economic downturn on vulnerable lower-income families. Unfortunately, that trend seems to be continuing, as New York Governor David Patterson proposed a budget this week devoid of the type of progressive tax increases the state needs to responsibly make it through the current recession. This is despite the fact that just days earlier, over 100 economists joined the New York-based Fiscal Policy Institute in calling for tax hikes on high-income earners as a way to avoid painful cuts in the state services lower- and middle-income families rely upon. All told, the Governor's budget relies about twice as heavily on spending cuts as it does on tax and fee increases.

On the revenues side of the budget, the proposal lacks broad-based increases and instead takes a more piece-meal approach. While this is far less than ideal, it is worth noting that some of those piece-meal items are certainly worthy of being included in the final budget deal. An expansion of the sales tax to include more services, limitations on the deductions claimed by wealthy families, and a scaling back of some of the state's "broken" tax breaks for businesses are among the revenue raisers included. The Governor's budget also includes a new "luxury tax" on items such as yachts, jewelry, and furs. While such a tax would most likely be progressive, it's hard to see what advantages it brings over simply enhancing the progressivity of the state's income tax.

To enjoy an interesting and heated sub-plot, check out this New York Times piece on the tax on "unhealthy" beverages that the Governor has included in his budget plan. Despite insistence that the idea is motivated by concern over the public health ramifications of these drinks, it's hard to take seriously such claims when New York is facing a budget deficit. More meaningful, broad-based tax reform would be a preferable route to addressing the budgetary issues.

Washington state residents are in for a heap of trouble if Governor Christine Gregoire has her way when it comes to balancing the state's budget. To remedy their budget shortfall, Governor Gregoire has proposed this week to slash valuable state services, and has expressed no interest whatsoever in increasing any taxes. $6 billion worth of cuts in children's health care, unemployment benefits, education, and other key services have been put on the chopping block. The Washington Times reports that some of the Governor's cuts would even "violate voter-approved initiatives and previously negotiated labor contracts."

Thankfully, the Washington-based Economic Opportunity Institute presented more responsible ideas this week that add a much-needed progressive voice to the otherwise bleak landscape. Among their proposals are a variety of expansions in the state's sales tax base, a tax on high-income earners, and a tax on oil companies' profits.

Along similar lines, as Florida's budget situation continues to worsen, Republican legislative leaders have announced a special January session to deal with a $2.3 billion budget deficit for the current year. Options on the table include spending cuts and raiding trust funds -- but tax hikes have been explicitly ruled out by legislative leaders. Democratic lawmakers are showing renewed interest in hiking the state's cigarette tax -- even though the projected yield of such a hike has fallen dramatically in the last year. One editorial observer points out that avoiding sensible tax-raising solutions amounts to "eating the seed corn."

Virginia Governor's Budget Plan Only Partly Hits the Mark

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It's a familiar problem across the nation. Virginia is facing a significant budget shortfall, and its political leaders are trying to identify the right mix of spending cuts and tax increases to balance their budget. The budget plan announced by Governor Kaine this week is not as progressive as it could be. While it's hard to criticize too harshly most of the individual changes that have been proposed, the Governor does appear to have missed a golden opportunity for more meaningful tax reform. Among the Governor's ideas are:

- Bump the state's cigarette tax rate up by a modest 30 cents. Virginia's cigarette tax is among the lowest in the nation. But as the Virginia Commonwealth Institute points out, the tax is regressive and the revenue it generates will provide little more than a temporary budget fix.

- End the state's yearly $64 million giveaway to retailers by eliminating its "dealer discount" program that allows retailers to pocket a portion of the sales tax they collect as compensation for the cost of collecting the tax. Good Jobs First recently issued a very detailed report on the problems associated with these programs.

- Scale back a credit offered to land-holders who agree to preserve their land. This credit has ballooned immensely in cost in recent years.

But the governor's plan also includes damaging cuts in education, public safety, transportation, and other areas. Rather than slicing funding and jobs from these core areas, the Governor could have followed the lead of the Virginia Commonwealth Institute by proposing to limit the eligibility of senior tax breaks so that only those in need can receive them, or by enacting combined reporting in order to close corporate loopholes. In addition, a much-needed restructuring of Virginia's income tax rate brackets, as proposed by the Virginia Organizing Project, would bring a welcome change to the state's outdated tax system.

Push for TABOR-style Spending Cap Dissolves in North Dakota

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Just over one month after progressives defeated a costly, irresponsible, and regressive tax cut on the ballot in North Dakota, backers of an even more irresponsible TABOR-style cap that would have limited spending increases to the rate of inflation have abandoned their efforts. The group pushing the spending cap says they have dropped their plan in part because of the opposition to lower taxes (and lower services) that North Dakotans demonstrated at the ballot box last month.

Wisconsin Way -- Headed the Wrong Way

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This week the Wisconsin Way coalition released a report called Blueprint for Change which outlines recommendations for change in three areas: economic development, tax reform, and government spending/management. Members of the coalition are quite diverse and include the Wisconsin Education Association Council, the Realtors Association, and the Wisconsin Counties Association. The group has been working for over a year, holding forums across the state and engaging folks in a "public conversation about modernizing and refining taxes and government." Wisconsin is one of many states facing a budget shortfall so efforts to engage the public on important fiscal issues are certainly laudable, but many of the specific proposals discussed in the report make us question whether or not the coalition and members of the public understand basic tax principles.

For example, one of the strategic initiatives on tax reform is to "enhance fairness and progressivity in the levying and collection of taxes," but later in the report "increasing reliance on income sensitive revenue sources like sales and consumption taxes" is suggested. Ironically, it is exactly because sales taxes aren't income sensitive that they are such a regressive funding option. Increasing the state's reliance on sales tax is no way to increase the fairness and progressivity of Wisconsin's tax structure.

Another contradiction in the report appears in the discussion about business development and job growth. The group purports to want to "enhance the ability of Wisconsin's tax structure to stimulate business development and expansion and job growth," but one of the action options they propose is to eliminate the state's corporate income tax. But there is solid evidence that state corporate taxes often aren't that important when companies are making decisions about where to locate.

We're puzzled by the Wisconsin Way report and wonder if a basic review of tax policy principles might be helpful for coalition members, who are welcome to look at a helpful ITEP policy brief on the issue. Despite the alleged input from 6,000 Wisconsinites, the Wisconsin Way so far seems to be exactly what Senate Majority Leader Russ Decker calls a "recipe for disaster for Wisconsin taxpayers."

New York's "Soda Pop" Tax Proposal

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New York Governor David Paterson unveiled his budget proposal this week, and one proposed tax hike is drawing a lot of attention: a plan to introduce a new tax on sales of soda pop. The 18 percent tax-- which would be on top of the existing state/local sales tax, generally about 8 percent-- would also apply to sugary juice drinks.

Paterson clearly thinks this is a good idea because it's supposed to raise half a billion dollars a year. Nicholas Kristof thinks it's a fantastic idea, but for an entirely different reason: he thinks it will get people to stop drinking so much soda. Kristof goes so far as to call it "a landmark effort that, if other states follow, could help make us healthier."

With no apparent irony, the New York Times reports that
State officials projected that the tax would raise $404 million in the fiscal year that starts in April, and $539 million in the following fiscal year, but said the proposal was primarily a public health measure.
Of course, if the yield of the tax goes up, that means that people are drinking more sugary sodas, not less. So this thing is either going to be a budgetary savior for the state, or it's going to make people healthier by encouraging them to spend less on soda pop. You can't have it both ways.

So what's the real answer? The Times' Clyde Haberman has a clear-eyed view:
Make no mistake, the last thing that government wants is for everyone, right this minute, to stop smoking, boozing, gambling and downing those nutritionally empty supersweet sodas. Too much money is at stake. By absolutely no coincidence, the New Yorkers who pay these particular taxes tend to be those who can afford them the least. Poor people spend disproportionately on smokes, booze and unhealthy soft drinks, not to mention on the prayer that God will drop everything else and shower lottery millions on them.
These are "habits that are more common among those who have the least amount of political power," said Andrea Batista Schlesinger, executive director of the Drum Major Institute for Public Policy, a liberal but nonpartisan research center in New York. "To do something in the most politically efficient way is to tax or hike the fees of those who have the least power," she said.
Folks like Kristof aren't wrong to want to discourage people from doing self-destructive things. But they're absolutely wrong to think that lawmakers' motive in proposing things like the soft drink tax is to improve public health. They're doing it because it's politically easier than the true tax reforms that could help keep New York's budget balanced years down the road.

A new report from Citizens for Tax Justice explains that if Congress again takes up legislation to save the automobile industry from collapse, it should exclude (or dramatically revise) two tax provisions that were included in the bill passed by the House and rejected by the Senate this week.

The Expansion of the Wells Fargo Ruling

The first provision waives a section of the tax code (Section 382) that was enacted by President Reagan as part of the Tax Reform Act of 1986 to prevent abusive tax shelters. Section 382 restricts companies from using the losses on the books of companies they acquire to reduce their own tax liability. Before this section was enacted, mergers often took place not because they made economic sense but because they offered a tax shelter.

In October, the IRS issued a two-page notice that simply declared, with no authorization from Congress, that Section 382 does not apply to banks. It has been estimated that this notice (often called the "Wells Fargo ruling" after its largest beneficiary to date) will cost $140 billion. Over a hundred organizations signed a letter that was sent to House and Senate offices on Monday asking Congress to reverse the notice.

Instead, House leaders inserted a provision in the end of the auto bailout bill that actually extends the Wells Fargo ruling to the automobile industry!

Some people knowledgeable about the legislation have argued that this provision is necessary because, under current law, limitations on the use of losses can be triggered by some situations that may occur as a result of the auto bailout but which are not what the section was intended to prevent. As the CTJ report explains, if that's true, then the provision can be dramatically revised to prevent an open-ended giveaway for any company that acquires an automobile manufacturer.

Transit Agencies and Banks Entered into Illegal Tax Plans that Are No Longer Profitable -- and Now They Want a Bailout!

The second troubling tax provision in the auto bailout bill would have the federal government guarantee lease arrangements made between transit agencies and banks as part of tax avoidance schemes -- which have been found illegal!

These schemes were called sale-in, lease-out (SILO) arrangements or lease-in-lease-out (LILO) arrangements. Essentially, some tax-exempt entities, such as public transit systems, abused their tax-exempt status to allow banks and other corporations to get huge federal tax write-offs. The tax-exempt entities were paid large fees for their cooperation in these abusive (and illegal) schemes.

Some of these schemes were banned by Congress in 2004, but the remaining deals are also clearly illegal and the IRS has successfully challenged several of them. Most of the participants in these deals have now agreed to settle with the IRS.

The deals are unraveling now and in some cases the banks may try to declare the transit agencies to be in "technical default" and collect payment. The last thing public transit needs right now is a reduction in available funding. But the approach taken by this legislation would essentially bail out entities when their tax planning schemes are found illegal and no longer profitable. Clearly, this should not be a goal of Congress.

Congress Should Not Fall for Corporate America's Latest "Repatriation" Plan

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Corporate America is gearing up for the upcoming stimulus by recycling one of its favorite responses to any economic downturn. The plan is to let U.S. companies bring home, tax-free, the billions of dollars they have stashed away in offshore tax havens. Most of this money was actually earned in the U.S. but then deflected to tax havens through artificial accounting schemes.

Congress and President Bush enacted a similar "tax amnesty" program back in 2004, and huge sums were "repatriated" by some giant corporations. As almost everyone concedes, most of the repatriated money was used to buy back corporate shares and for other expenditures favoring management. There is no evidence that the tax amnesty added a single job to the U.S. economy. Anyone who thinks that repeating the 2004 mistake, with supposed new restrictions on the use of the money, might work out better this time is dreaming. After all, the precise reason that corporate executives favor the amnesty is that it provides extra cash to benefit themselves personally.

To be sure, there could be some benefit from unlocking that huge horde of offshore tax-avoidance money. But the approach that Corporate America is pushing is totally backwards. The right answer, from a fairness and economic efficiency perspective, is to impose a one-time 35 percent tax on the entire amount of the tax-sheltered offshore profits.

Taxing those profits and then allowing them to be repatriated without further tax is certainly a fair result -- it would put the tax avoiders in the same position as U.S. companies that dutifully paid their fair share of taxes over the years. Perhaps more important in these troubled economic times, the move would also get high grades on efficiency grounds. A one-time levy on corporate tax-avoidance funds not only would have no undesirable effects on corporate behavior, it also might even discourage companies from shifting profits offshore in the first place.

The suggested tax on offshore tax-avoidance money would raise considerable revenue, perhaps as much as $350 billion. That revenue could be used for domestic public works projects, which could stimulate the domestic economy without resulting in any increase in the federal budget deficit.

Revival of Wisconsin Estate Tax Under Consideration

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Anybody following state politics recently knows that budget shortfalls are among the first issues that will have to be addressed when most state legislative sessions begin this January. In many cases, state policymakers have appeared heavily biased in favor of slashing services to remedy these gaps, usually based on the absurd assumption that raising taxes would somehow be more painful than stripping needed services from the nation's most vulnerable lower- and middle-income families. But Governor Jim Doyle of Wisconsin has recently set an intriguing example for other struggling states to follow by agreeing to consider an early revival of the state's temporarily suspended estate tax.

The estate tax is an incredibly progressive tax that only affects a few very wealthy families -- hardly the folks struggling most in our current economic crisis. As a recent CTJ report showed, less than 300 families paid any federal estate tax whatsoever in Wisconsin in 2007. This amounted to only 0.6% of Wisconsin estates. Nonetheless, even this relatively minor tax could result in enormous gains if the money is put back into the state's economy, such as by filling some of the 3,500 state jobs the governor has ordered be left vacant.

With Blagojevich's Downfall, Will Tax and Budget Issues Be Resolved More Effectively in Illinois?

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Rod Blagojevich, the Illinois governor who for years watched his states' finances spiral out of control because he refused to raise income or sales taxes, was arrested by FBI agents this week and is being charged with fraud and soliciting bribes.

Blagojevich opposed various measures that would have helped the state pay for public services, but he supported a regressive and complicated tax (a gross receipts tax) that would have effects similar to that of a sales tax.

Resignation, impeachment, conviction (maybe even two out of three) are all possible outcomes for the chief executive with the lexicon of a longshoreman.

Obviously, Illinois public policy is in enormous flux now, too. On one hand, Lt. Gov. Pat Quinn does not appear to be a big fan of sound tax policy. He championed a measure that would have allowed taxpayers to use the ballot to block local tax changes. (To assess the idea of deciding tax issues through direct democracy, one only needs to look at California's budget crisis.) On the other hand, legislative leaders like Speaker of the House Mike Madigan have left the door open to using the income tax to address the state's budget deficit.

To stay abreast of all the latest budget developments in Illinois, visit the Center for Tax and Budget Accountability's website.

New Hampshire: Tax Fundamentalism Threatens Fundamental Functions

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People of different political leanings often have quite different views about the proper and necessary role of government in society. Most would agree though (probably almost unanimously, in fact) that one of the essential functions of government is the administration of justice. Yet, in New Hampshire, the state's budget shortfall is so severe -- and the traditional hostility to taxes is so great -- that officials announced this week that the state will suspend jury trials for the month of February. It also will likely leave open one pending vacancy on the Supreme Court and seven existing trial court vacancies (out of a total of 59 such judgeships).

Needless to say, when government begins to falter in performing its most fundamental responsibilities, it is clearly time to re-examine some of the fundamental beliefs, such as the state's long-standing opposition to an income or sales tax, that contribute to such difficulties. Without new thinking, can announcements that local police and fire departments have been disbanded or that school children have been sent home for the year be far behind?

Competing Visions for Rhode Island

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Rhode Island, like many states, is facing some tough fiscal and economic times. Its current budget deficit of $357 million is among the largest in the nation (relative to total spending) and its unemployment rate of 9.3 percent is nearly the highest in the country.

So, what does Governor Don Carcieri think the state ought to do in response? Why, repeal the estate tax, of course. After all, repealing it would drain away another $35 million that the state can ill afford to lose and would benefit fewer than 5 out of every 100 people who die in Rhode Island each year.

Others have offered more sensible approaches to addressing Rhode Island's fiscal woes. As Kate Brewster, the Executive Director of the Rhode Island Poverty Institute points out, "revenue problems require revenue solutions." To that end, she suggests modernizing the state's corporate income and sales taxes, by adopting such reforms as combined reporting or by ensuring that services are subject to taxation.

To learn more about the need to preserve federal and state estate taxes, see CTJ's latest report.

South Carolina Governor More Concerned About Election Year 2012 Than Fiscal Year 2009?

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The budget picture in South Carolina is grim. The State's Comptroller General said recently that corporate income tax collections are down 57 percent, sales tax collections are down by 18 percent, and individual income tax collections are down nearly 3 percent since July. State agencies have reportedly reduced their own budgets by $600 million to take into account reduced revenues.

According to the Center on Budget and Policy Priorities forty-two other states now face a budget shortfall. Policymakers in other states have come forward with a variety of proposals to deal with their state's crisis. For example, New York Governor David Paterson recently asked for federal money to assist his state and Arizona Governor-Elect Jan Brewer won't take tax hikes off the table.

Governor Mark Sanford's answer to South Carolina's budget woes are in left field and across the street compared to these strategies.

In fact, Governor Sanford has publically argued against providing federal aid to the states and just this week he released a budget busting list of tax changes that include eliminating the state's progressive corporate income tax and introducing an optional single rate personal income tax. While some other items on his list would raise some revenue (raising the state's regressive cigarette tax, eliminating sales tax holidays, reducing business tax "incentives"), overall, it's pretty clear that Governor Sanford's solution is to dig the revenue hole deeper.

To the cynical among us it appears that Sanford may be gearing up for 2012. He was recently elected chairman of the Republican Governor's Association and is clearly attempting to beat the "supply-side" drum -- never mind that the notion of supply side economics has been debunked repeatedly.

Kentucky Leaders Open to Tax Hikes and Pay Cuts (for Themselves Too)

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The Blue Grass state is facing its own budget crisis. The latest estimates put the state's shortfall at $456 million. In an admittedly symbolic gesture, Kentucky Governor Steve Beshear and six other high ranking state officials have agreed to a 10 percent pay reduction. Latest reports are that all options, including resurrecting a failed attempt to raise cigarette taxes and cutting services drastically, are on the table. Raising cigarette taxes certainly isn't an ideal revenue raiser because of its regressive nature and declining yield, but it's good to see that the Governor is not focusing only on cutting public services.

Sign-on Letter for Organizations: Congress Should Reverse the "Wells Fargo Ruling"

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Organizations Invited to Join Letter to Congress Urging Reversal of Unauthorized Tax Giveaway for Large Banks

A sign-on letter being circulated to state and national organizations urges Congress to reverse the "Wells Fargo ruling," the $140 billion tax cut for banks that the Treasury created by telling them to simply ignore a law enacted by Congress to prevent abusive tax shelters.

The letter asks lawmakers to cosponsor legislation introduced in the House and Senate to reverse this Treasury notice so that the tax code can once again effectively block abusive tax shelters.

In addition to the $140 billion in federal revenue that will be lost, state governments will also lose revenue, because most states have a corporate tax that is linked to the federal corporate tax. California, for example, will reportedly lose $2 billion if the Treasury notice is allowed to stand. States are already cutting back needed public services and the Wells Fargo ruling will only make matters worse.

If you are authorized to sign this letter on behalf of an organization, please sign online before noon, Monday December 8, by clicking here.

Click here to see a PDF version of the letter and the organizations that have signed on as of December 4.

If you are not authorized to sign on behalf of an organization but you would still like to take action, send an email to your members of Congress by clicking here.

For more information on the Wells Fargo ruling and the legislation that has been introduced in Congress to reverse it, see our previous Digest article on this issue.

Citizens for Tax Justice issued a new report this week showing that the percentage of deaths resulting in federal estate tax liability is less than one percent nationally -- and in most states -- and continues to fall. The report points out that President-elect Barack Obama's proposal to reduce the estate tax even further is therefore unnecessary.

Under the tax cut enacted by President Bush in 2001, the estate tax is being gradually reduced each year until it disappears entirely in 2010. But, like almost all of the Bush tax cuts, the gradual changes in the estate tax expire at the end of 2010. This means that if Congress simply does nothing, the estate tax will be repealed for one year in 2010 and then will return in 2011 in a form much closer to what existed at the end of the Clinton years.

President-elect Obama proposes to make permanent the estate tax rules that will be in effect in 2009 under current law, which includes a larger exemption than the one in effect today. Obama's proposal would be an improvement in the sense that it would prevent the estate tax from disappearing in 2010. But it would be a regressive and costly giveaway to the very wealthiest families in America, because it would mean that the tax would affect even fewer estates than it does now.

CTJ Report: Principles for Progressive Taxation During a Recession

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The debate over taxes has become somewhat confused since the recession reared its head. Discussions of how Congress should go about matching federal revenues to federal spending have been replaced with arguments over how much and how quickly to increase the budget deficit. Most economists agree that now is not the time for Congress to focus entirely on balancing the federal budget, but what exactly does that mean? Is any increase in the federal budget deficit a good thing right now? And if increasing the budget deficit is acceptable, should we stop worrying about whether anyone is paying their fair share of taxes?

Of course not. As a new paper from Citizens for Tax Justice explains, revenues should usually be raised to cover (at least roughly) government spending, and it should be raised in a progressive way. There are some exceptions for the unusual circumstances we face today, but they are limited.

For example, using deficit-financed government spending to boost the incomes of low-income families can lead to an immediate boost in consumption that helps businesses get through this downturn without being forced to lay off staff or shut down. This can help reduce the severity of a recession. This benefit could outweigh the costs of increasing the national debt, so long as any deficit-financed spending is temporary.

But if Congress turns to deficit-financed measures that mainly increase the incomes of the wealthy -- like reducing capital gains taxes -- the effects on the economy will be very minimal and will not justify the resulting increase in the federal budget deficit and national debt.

In the long-term, taxes must be raised to a level sufficient to pay for federal government services. That must mean repealing most of the Bush tax cuts (or perhaps allowing them to expire at the end of 2010).

There are some lawmakers who seem to think that repealing the Bush tax cuts would be detrimental to the economy. But this simply makes no sense. The economy thrived at the end of the Clinton years, when taxes were higher, and sank severely at the end of the Bush years, after 8 years of lower taxes. This should tell us that lower taxes, overall, are not the answer to saving the economy.

Budget Fixes Worth Embracing

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This week, the Iowa Fiscal Partnership (IFP) released a study examining Iowa's budget woes with an eye toward understanding how the state's fiscal situation will be impacted by Iowa's growing senior population. Not only are Iowa lawmakers currently grappling with a budget shortfall, this report predicts that more tough decisions are coming. One of the reasons that even harder times may be on the horizon is that Iowa, like many states, offers elderly preferences that are going to become more costly as America grays.

In fact, IFP found, "The aging of the population will probably produce a decline in state income tax revenue of 2 to 3 percent in Iowa, due largely to the adoption of tax preferences for seniors. If there were no elderly preferences in Iowa's income-tax code, the very small projected increases in total population combined with the aging of the population would increase income-tax revenues for a period of time, reaching a peak in 2015 at $2.27 billion."

The report offers helpful insight into why revenues aren't able to keep up with growing needs (beyond elderly preferences). Most notable is the sales tax base erosion taking place both because the state's tax base is made up of mostly goods and not services, and because of the continuing need to close the sales tax loophole which ensures that online purchases aren't subject to the sales tax. Resolving the problem of sales tax base erosion and poorly targeted elderly preferences is something many states could tackle now in their attempt to deal with their own budget mess. ITEP has written a variety of policy briefs on topics discussed here: elderly preferences in the tax code, sales tax base expansion, and taxing internet sales.

The Virginia based Commonwealth Institute recently issued their own set of recommendations offering suggestions on ways that the Old Dominion state could dig itself out of its budget crisis. These recommendations are good ideas any time, but will likely receive more attention now because of the state's budget crisis. Their recommendations include further means-testing of elderly tax preferences, and closing corporate loopholes through steps such as enacting combined reporting. The Institute takes a balanced approach and acknowledges that some cuts may need to be made and the state's rainy day fund may need to be tapped to deal with the state's shortfall. This balanced and comprehensive approach including both revenue enhancers and tax cuts may be the best solution for many states in crisis.

While reports such as those out of Iowa and Virginia (see "Budget Fixes Worth Embracing", in this week's Digest) highlight some of the best ways for states to dig themselves out of their current budgetary nightmares, in many cases it appears that the cigarette tax is continuing to hold on to its title as the single most popular tax to increase among the states. Policy advocates and even many legislators are often careful to frame their support of cigarette tax hikes in terms of fighting smoking or reducing health care costs, but in times as desperate as these, it's hard not to suspect that revenue needs may be the driving force. The fact is that revenue from the cigarette tax is almost never sustainable over time because the U.S. smoking population is constantly on the decline. It's therefore difficult to get excited about the cigarette tax as a budget-fix for any period of time beyond the very short-term -- and even then, states should never be excited about raising revenue through such a regressive tax. But in states that have held their cigarette taxes constant at low levels for a number of years, it's also hard to get too upset over such proposals. Five states in particular made news this week in their debates over the cigarette tax: Florida, Mississippi, Oregon, South Carolina, and Utah.

The three states with the most intense cigarette tax debates at the moment are Florida, Mississippi, and Oregon. Florida and Mississippi haven't increased their cigarette tax rates in 18 and 23 years, respectively, and therefore have some of the lowest cigarette tax rates in the nation. Hikes in the range of 50 cents to $1 per pack are being proposed in Florida, while Mississippi's debate appears to be over a range of 24 cents to $1 per pack. In Oregon, the governor recently proposed a 60 cent hike as part of his budget. The intent of that hike is use the new revenue as part of a package to expand health care in the state -- such an arrangement is likely to result in tensions down the road as cigarette revenues fall and health costs continue to rise.

South Carolina provides another example of a state with a cigarette tax debate worth following. In this past year's session, the legislature approved a cigarette tax hike, only to eventually be vetoed by the governor, ostensibly out of concern over linking such an unsustainable revenue source to a permanent expansion of Medicaid. As the appearance of a recent op-ed praising the benefits of hiking SC's lowest-in-the-nation rate suggests, this debate is not yet over.

Utah provides another example of a potential budding cigarette tax debate. With the American Cancer society enthusiastically seeking to capitalize on what appears to be a favorable climate for a cigarette tax hike, one has to expect the idea to pick up steam during discussions over how to close the state's looming budget gap.

... and, Some Ideas to Reject

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Of course, not every idea floated during these tough fiscal times is worth adoption or even consideration. Some are just downright bad. Take New York, for instance. As the National Conference on State Legislatures (NCSL) indicated earlier this week, the Empire State is expected to face a budget deficit of $12.5 billion in the coming fiscal year. Unfortunately, that dire outlook has not stopped Governor David Paterson from continuing to embrace an ill-advised property tax cap. On December 1, New York's Commission on Property Tax Relief issued its final report, recommending a 4 percent limit on annual property tax growth. Governor Paterson had backed the idea previously and does not seem likely to change his position any time soon, remarking upon the report's release that "Property taxes... have been the enabler of Albany's dysfunctional culture." As the Fiscal Policy Institute and others have observed, the problem with tax caps are legion and could be particularly harmful if put in place during a recession.

Similarly, North Dakota Governor John Hoeven, as part of his budget plan for the 2009-2011 biennium, has proposed cutting property taxes by $300 million and income taxes by $100 million. Fiscal circumstances in North Dakota are, to be sure, markedly different than those in New York; after all, the Peace Garden State is one of the few expected to experience a budget surplus by the end of the current fiscal year. Yet, as the Grand Forks Herald recently warned, "oil prices already have plunged, threatening the energy boom that has dramatically boosted the state's surplus," suggesting that state legislators should proceed slowly and carefully. Caution certainly seems to be what the voters of North Dakota want anyway -- in November, they resoundingly defeated a ballot measure that would have cut income taxes by more than $200 million.

Legislators in Virginia, despite that state's $2 billion plus budget deficit, seem bent on cutting taxes too, as a special House-Senate subcommittee has recommended that the state offer a new corporate tax break known as single sales factor. Where North Dakota officials should listen to the recently expressed views of their constituents, Virginia should follow the hard-learned lessons of other states. Simply put, single sales factor is a costly and ineffective means of spurring economic activity. Just ask Massachusetts: In 1995, Massachusetts adopted single sales factor for manufacturers, a move that was hailed by some proponents as "a bold step towards restoring Massachusetts as a manufacturing state." After thirteen years -- and millions of tax dollars and thousands of manufacturing jobs lost -- it's clear that that restoration has not occurred.

Transportation Funds: The Other State Deficit

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As we've argued in past Digest articles, there are good reasons for relying on gas tax revenues to fund transportation -- at least when an effort is made to offset the tax's stark regressivity. To the extent that the gas tax falls most heavily on those people who drive the furthest distances, or who drive the heaviest vehicles, there are certainly some advantages to the gas tax. But when the people driving the furthest distances are doing so because they can't afford to live near their places of work, for example, that advantage becomes much less appealing. In this light, recent news regarding the funding of transportation has been both good and bad. While states are seemingly beginning to come around to the idea that gas taxes will need to be raised to provide an adequate transportation infrastructure, interest in offsetting the tax's regressivity has yet to pick up steam.

Support for increasing the gas tax has gained some notable momentum in New Hampshire and Massachusetts as of late, and in Oregon, the Governor even included a small gas tax hike in his recent budget proposal. Utah has taken the idea to another level, as top officials are reportedly considering both increasing and restructuring the state's gas tax. In Vermont, however, while raising the gas tax has gotten some attention, the more prominent proposal has been to simply obtain permission from the federal government to continue using federal highway dollars without having to match that money with state funds (of which it has none). But while there are persuasive reasons for considering aid to the states as one form of stimulus for our troubled economy, one has to wonder why some Vermonters are apparently more averse than these other four states to the idea of paying for their own transportation network.

Unfortunately, while there has been an increasing acceptance of the fact that existing gas tax revenues are inadequate in many states, little notice has been given to the idea of offsetting the stark regressivity of gas tax hikes with low-income refundable credits. This idea was recently made a reality in Minnesota, and has been proposed by the Commonwealth Institute in Virginia as well. Notably, eight states already offer similar credits to offset the regressivity of the sales tax (usually designed specifically to offset the tax on groceries). Nineteen states and D.C. offer refundable EITC's, which while not designed specifically to offset regressive taxes, could perhaps be used in a similar matter. In states in need of additional transportation dollars, coupling any transportation related tax increases with the enactment of a low-income refundable credit, or the enhancement of an existing credit, should be a top priority.

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