The debate over how to resolve Illinois' looming budget deficit has, so far, been an unusually gratifying one. A brand-new governor with little political capital to spend has made a gutsy (and, in our view, basically correct) decision to push for an increase in the state's personal income tax, which is bar-none the least fair in the nation and among the very lowest as well.

There are, of course, things missing from the governor's plan. Eliminating income tax exemptions and sales tax exemptions would make the tax base more sustainable (and would reduce the pressure to increase tax rates). But in the short run Quinn's doing what is needed to make ends meet and has picked a quite fair way of doing it.

If there's one quite legitimate beef with the governor's plan as proposed, it's that there's not sufficient attention devoted to low-income tax relief. Which is why it's great to see the editorial board at the Springfield Journal-Register coming out in favor of an expansion of the state's Earned Income Tax Credit. The SJR's (correct) rationale:

This kind of credit is especially valuable to low-income working families in Illinois, where the poorest one-fifth of Illinois families spend an average of nearly 13 percent of their earnings in state and local taxes while the wealthiest 1 percent of Illinois households spend less than 6 percent of their incomes likewise.

All true. The underlying point here, unstated by the SJR, is that the EITC is valuable because it's an income-tax based credit that is refundable, meaning it can be used not only to offset income taxes but to offset sales, excise and property taxes paid by low-income families as well. And the main reason why the poorest Illinoisans pay such a huge chunk of their incomes in tax is because of these non-income taxes.

So you've got to charitably assume that it's because the SJR editorial doesn't explain this point clearly that half a dozen commenters on the SJR editorial make the boneheaded assertion that the EITC constitutes "welfare" because folks who get it have "zero tax liability" and are therefore getting "free money." One commenter, who claims to work at the Illinois Department of Revenue, has this to say:

I work at Revenue. Under the current system, many people pay no tax and still get a refund of their EIC on their state return. This is a form of welfare. People are getting money from the state that is not theirs, and they did nothing to earn it.

This tells me only that it's possible to work for the Department of Revenue and understands precisely zero about how the EITC works. It's based on earned income. If you have a job and a salary, you get the EITC. The more you earn, the more you get. So to say that EITC recipients "did nothing to earn it" is quite possibly the single most breathtakingly wrong thing one could ever assert about it.

It's important for people to understand that refundable income tax credits play a critical role in helping to reduce the unfairness of state tax systems overall, and that they shouldn't be understood as applying only to income taxes. But it's equally important for people to get that the EITC is a work incentive, and that work incentives respond to... work. A generation of "welfare reformers" who've worked diligently to create work incentives for low-income poverty relief would put their heads in their hands and quietly weep (or pull their hair out in despair) at the notion that one can "do nothing to earn" the EITC.

And, I suppose, the fundamental underlying lesson of all this is that we should really just never even bother reading the 'comments' section of web-based newspapers articles.

The House Energy and Commerce Committee plans to mark up legislation next week that would create a "cap and trade" program to reduce the emission of gases that cause global warming ("greenhouse" gases). While President Obama favors auctioning off permits to pollute and then using the proceeds largely to offset the resulting costs for consumers, the Energy and Commerce Committee seems ready to give a large portion of those permits away to utility companies for free.

Why "Cap and Trade"?

The idea behind a cap and trade program is that the federal government could cap the overall amount of greenhouse gases that can be emitted into the atmosphere (and reduce that cap each year) and allow market forces to determine how the reduction in emissions can be made most efficiently.

For example, if a manufacturer finds that it can eliminate greenhouse gas emissions at its facilities very cheaply, it can then sell permits it doesn't need to another company that finds emissions reductions to be prohibitively expensive. The overall reduction in emissions would probably come with less costs to the overall economy than would be the case if the federal government simply mandated every company to reduce emissions by a set amount.

Impact on Consumers

Greenhouse gases are produced by the burning of fossil fuels like coal to provide electricity, and also by burning fossil fuels like petroleum to transport nearly every product we buy. This means that limiting the overall amount of greenhouse gases that can be emitted into the atmosphere could increase the costs of just about all consumer goods. If implemented properly, this would, in turn, provide new incentives for manufacturers, consumers, and energy companies to become much more energy efficient.

The overall added costs to consumers could be offset through refundable tax credits (an approach favored by President Obama and the House Ways and Means Committee). The result would be that energy and energy-intensive services and products would be more expensive relative to other things, but the overall buying power of consumers would not be diminished. As the Congressional Budget Office has pointed out, this is particularly important for low-income people, because they are forced to spend a larger portion of their income (or all of their income) on consumption and will therefore feel a larger impact.

The CBO has also explained that the cost increases for consumers are likely to occur whether the emissions permits are auctioned off to companies or simply given to the companies for free. Greenhouse gas emitting companies would be able to charge higher prices either way as a result of the cap. President Obama proposed in his budget outline that all of the emissions permits be auctioned to companies so that the resulting revenue can be used largely for a tax rebate (an extension of his Making Work Pay Credit) that would offset the increased costs for consumers.

The Center on Budget and Policy Priorities has analyzed the sorts of steps that can be taken to offset these regressive impacts, which would involve tax rebates for most people but would also require boosting other existing programs for people who would not be reached by tax rebates.

Energy and Commerce Committee Moving in the Wrong Direction

Henry Waxman (D-CA), chairman of the Energy and Commerce Committee, and Edward Markey (D-MA), chairman of the subcommittee handling the issue, have put forth legislative language that currently does not address whether all the permits would be auctioned or not. But media reports indicate that they are currently negotiating language that would give away as much as 40 percent of the permits to utility companies, which would be required to pass on savings to their customers.

There are many, many problems with this approach. To take just a couple: Less than half of the increased costs that consumers would face as a result of cap and trade would come from higher utility bills. Blunting the effects of cap and trade for electricity would force larger greenhouse gas reductions in other energy-intensive parts of the economy, which might raise the total costs of reducing emissions.

The President was right to propose that 100 percent of greenhouse gas emission permits should be auctioned off rather than given away for free. Hopefully, the cap and trade program that emerges will be much closer to what the President outlined.

On Wednesday, Rep. Jim McDermott (D-WA), Chairman of the House Ways and Means Subcommittee on Income Security and Family Support, introduced the Sensible Estate Tax Act of 2009. The bill would result in an estate tax that is more progressive than what either the Obama administration or Republican leaders have proposed. It would exempt the first $2 million in assets in an estate per person, or $4 million for a married couple. It would impose a 45 percent estate tax on the taxable amount of an estate up to $5 million, 50 percent on the taxable amount between $5 and $10 million and 55 percent on the taxable amount in excess of $10 million.

Under current law, the estate tax is scheduled to disappear in 2010 and then reappear in 2011 at pre-2001 levels (meaning a $1 million per-spouse exemption and a top rate of 55 percent). President Obama's budget blueprint proposed to make permanent the 2009 rules which include an exemption of $3.5 million per spouse and a top rate of 45 percent.

The McDermott bill would index the exemptions for inflation and includes other significant changes. It would make the exemption portable (meaning that one spouse could also use the other spouse's exemption), and it would reunify the gift and estate taxes. (Under current law and the administration's proposal, the gift tax exemption would remain at $1 million.) The McDermott proposal would, importantly, bring back the credit for state estate taxes, which is a source of revenue for the states.

The Joint Committee on Taxation estimates that the McDermott proposal would cost $202.8 billion over ten years (compared to current law), about 20 percent less than the President's estate tax proposal, which is estimated to cost $256 billion over ten years.

Estate taxes affect less than one percent of Americans. In 2007, when the estate tax exemption was at the $2 million level that McDermott proposes to make permanent, only 0.7 percent of estates were liable for the tax.

Court Grants DOJ/IRS "John Doe" Summons for First Data Customers

Tax Day marked a small victory for law-abiding taxpayers who are tired of subsidizing those who evade their taxes. On April 15, the U.S. District Court for the District of Colorado granted the government permission to serve a "John Doe" summons on First Data Corporation. The Department of Justice (DOJ) had requested the summons in connection with an Internal Revenue Service (IRS) investigation of offshore tax evasion.

First Data, formerly part of American Express, is a payment card processor. It processes credit and debit card transactions for merchants and deposits the funds in merchant bank accounts. The IRS is seeking information on any merchants who have their payments directly deposited in an offshore bank account. It suspects that Americans with business in the U.S. are using payment card processors to send their income out of the country to tax havens, where it can go undetected (and untaxed) by the IRS.

The amount of tax revenue lost each year due to offshore tax evasion is estimated to be around $100 billion. Because of the tax havens' bank secrecy laws, it is almost impossible to get information on these accounts. The IRS usually can't get any answers from the foreign government unless it can identify a particular tax evader. But without knowledge of the offshore accounts, the IRS doesn't know who those taxpayers are. The ability to use a "John Doe" summons is critical to the agency's search for tax cheaters.

The IRS would have an easier time getting these summonses approved by courts if Congress adopts the "John Doe" Summons provisions of the Stop Tax Haven Abuse Act which was introduced by Sen. Carl Levin (D-Mich.) and Rep. Lloyd Doggett (D-Texas) last month. As tax haven legislation moves through Congress, we encourage lawmakers to be sure this provision is included.

This has been a tough couple of weeks for tax fairness advocates in the Show Me State. Yesterday, the Missouri House of Representatives passed House Bill 64, a regressive and costly piece of legislation that does three things. First, it raises the starting point for the 6 percent top income tax bracket from $9,000 to $50,000 of taxable income. Second, it raises the dependent exemption from $1,200 to $1,600. Third, HB 64 increases the deduction for federal income taxes paid from $10,000 for married couples ($5,000 for single filers) to $15,000 for married couples ($7,500 for singles).

See ITEP's fact sheet, which estimates that this legislation would cost $311 million in 2007 if it was in effect in that year. We expect the cost of the legislation to increase in future years as income grows.

Worse than the huge revenue loss is the regressive impact of the bill. About 88 percent of the benefits from these three tax changes would go to the wealthiest 40 percent of Missourians.

But this week was a demonstration of responsible lawmaking compared to what went on in the Missouri Capitol last week, when the notorious, so-called "fair" tax reared its ugly head and passed the House of Representatives. Advocates expect the bill will go before the Senate Ways and Means Committee next week. The ridiculously named legislation would replace the state's individual and corporate income taxes with sales tax revenue generated from a massive base expansion (including adding food and prescription drugs back to the sales tax base) in a supposedly revenue neutral way.

When advocating in favor of the bill, legislators pointed to Tennessee as an example of a state that reaps benefits from not having much of an income tax. Clearly lawmakers haven't investigated many quality of life indicators in the Volunteer State. For example, Tennessee ranks 6th in infant mortality rates, 9th in percent of children living in poverty, and 4th in percent of senior citizens living in poverty. It's pretty obvious that income tax elimination isn't guaranteed to create a high quality of life. The one thing that income tax elimination is guaranteed to create is a more regressive and unfair tax structure. To read more about this legislation, see the Missouri Budget Project's brief.

So, let's suppose you live and do business in a state that faces a $3 billion budget deficit in the coming fiscal year, by far one of the largest in the nation. Imagine as well that your Governor recently took the responsible, if albeit vague, step of calling for a temporary tax increase to generate a $1 billion per year to address that deficit. What to do? Well, if you are the Arizona Chamber of Commerce, as the price of your fealty, you demand not just a tax cut, but multiple tax cuts. And not just any tax cuts, but tax cuts that benefit the very wealthiest state residents and the very largest of businesses.

Sound farfetched? Well, according to the Arizona Republic, it isn't. Just last week, the Republic reported that the Chamber had indicated it would support a sales tax increase, but only if "lawmakers [eliminate] the property-equalization tax and [take] steps to reduce the corporate income tax rate and capital gains taxes." In other words, the Chamber is fine with working Arizonans paying higher taxes, but only if its members get to pay lower taxes in exchange. Who could possibly object to that?

It's probably not often that they are mentioned in the same breath, but both Hawaii and Vermont took steps this week towards using progressive tax increases to help close anticipated budget gaps. In the Aloha State, the Legislature approved a measure that, among other changes, would raise income tax rates for married couples with incomes over $300,000 (and for single people with incomes above $150,000). Governor Linda Lingle has already threatened a veto, but the Legislature may have the votes needed for an override.

The road ahead is a little less certain in the Green Mountain State. The House earlier this month passed legislation to raise additional revenue and the Senate is on the verge of doing so, but substantial differences will have to be resolved before any bill reaches the Governor's desk. The centerpiece of the House's approach is a temporary income tax surcharge that would last three years and that would raise rates by one-tenth of a percentage point for lower-income Vermonters and by one-half a percentage point for upper-income residents. Conversely, the Senate seeks to reduce income tax rates and to generate revenue for the state budget by boosting alcohol and tobacco taxes.

Hawaii and Vermont do share at least one thing in common -- a major flaw in their tax codes in the form of preferences for capital gains income. To date, Hawaii legislators have chosen to leave this flaw in place. Vermont's Senators would pare it back, but use the revenue resulting from such an improvement to reduce income tax rates, particularly for upper income taxpayers. Yet, as recent columns in the Honolulu Star Bulletin and Burlington Free Press observe, both states could improve tax fairness and their fiscal outlooks by repealing those preferences and devoting the funds directly towards deficit reduction rather than further tax cuts. For more on state tax preferences for capital gains income, see this report from ITEP.

A new report from the Georgia Budget and Policy Institute highlights the shocking decision on the part of Georgia legislators to actually cut taxes in the face of an immense budget deficit. According to the report's analysis of official state fiscal notes, if the Governor signs all tax bills passed by the legislature, state revenues will fall by $116 million in fiscal 2010, and by over $1.2 billion in fiscal 2012.

The bill with the biggest cost includes a pricey and regressive exclusion for 50% of all long-term capital gains income, analyzed by ITEP earlier this month. In addition, a $1,800 tax credit for home buyers, as well as a dozen other tax cuts would dig the state deeper into debt if approved by the Governor.

A new report from Policy Matters Ohio offers a wealth of information on the benefits of enacting a state level EITC. Over twenty states already offer such a credit, though as the report points out, Ohio policymakers in recent years have instead focused on providing "extensive reductions in tax payments for higher-earning taxpayers." The report includes data on the use of the federal EITC in Ohio, data on the breakdown by district of benefits from a state EITC, and a distributional analysis from ITEP.

The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report. For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers. Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions. Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions. Shockingly, the CBPP found that nine states publish no tax expenditure report at all. Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue. All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.

On April 9, Missourians lost a steadfast leader for tax justice, while advocates for progressive taxes across the country lost a colleague whose energy and devotion to her principles were second to none. Pat Martin founded and continued to lead Missourians for Tax Justice up until her death. She was active in economic and social justice issues for most of her life and was integral in the fight to remove food from the state sales tax base. Her resolve and dedication were often tested in Missouri's difficult political landscape, but Pat never let the situation get her down. Instead, she fought even harder and asked others to do the same. Pat expected much of those she worked with and even more of herself in the pursuit of justice. We will certainly miss working with her. It's been said of Pat's death that "Missourians have lost a bright light" and so have we. Read more about Pat's remarkable life here.

New Data from Citizens for Tax Justice Shows that Many Survey Respondents Saying Income Taxes Are Too High Will Pay No Income Taxes for 2008

A recent Gallup poll found that 61 percent of respondents felt that the federal income tax they will have to pay this year is "fair." When asked about the specific amount of federal income taxes they pay, just over half felt they pay the right amount or too little.

Fewer than half of those polled said they thought their federal income taxes are "too high." It appears, however, that some of these respondents are basing their answers on the right-wing, anti-tax propaganda they've heard rather than their own income tax liability. A new report from Citizens for Tax Justice finds that many of the respondents who say they pay too much are likely to owe no federal income taxes at all, suggesting that education about the tax system could change their views.

Read the report.

The U.S. PIRG Education Fund released a report today that explores the impact of tax havens, the countries commonly used by unscrupulous individuals and corporations to hide their income from the IRS to evade taxes. The report discusses the estimated $100 billion annual cost to U.S. taxpayers and estimates the amount of additional taxes residents of each state must pay to make up the loss. Some specific examples of companies that seem to make ample use of tax havens are given, including Citigroup, Bank of America and Morgan Stanley and others.

Read the U.S. PIRG report.

New Data from Citizens for Tax Justice Shows that the U.S. Tax System Is Not as Progressive as You Think

Many politicians, pundits and media outlets have recently claimed that the richest one percent of American taxpayers are providing a hugely disproportionate share of the tax revenue we need to fund public services. New data from Citizens for Tax Justice show that this simply is not true. CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2008.

- The total federal, state and local effective tax rate for the richest one percent of Americans (30.9 percent) is only slightly higher than the average effective tax rate for the remaining 99 percent of Americans (29.4 percent).

- From the middle-income ranges upward, total effective tax rates are virtually flat across income groups.

Read the fact sheet.

A new report from Citizens for Tax Justice answers many of the questions that are frequently asked about taxes during this time of year and clears up the old myths that are still accepted by many as fact. Here is just a sample of some of the questions that are answered:

Question: Does President Obama plan on raising our taxes?

Question: There might be cyclical downturns and upturns in the economy that no one can control, but don't tax cuts help us climb out of downturns a little faster?

Question: What are "tax havens" and why are some people in an uproar over them?

Question: What does it matter to me if someone else is hiding their income from the IRS?

Read the report.

Last Friday, the Georgia General Assembly passed a budget for fiscal year 2010 that includes a major tax cut for the wealthy (an exclusion for long-term capital gains income) and a substantial tax increase for the middle-class (eliminating a state-funded property tax relief program). A new report from ITEP concludes that if this proposal was fully implemented in 2008, the poorest 95 percent of Georgia taxpayers would pay, on average, higher state taxes than they do now.

The proposed capital gains tax break would allow investors to exclude 50 percent of their long term capital gains income from the state income tax when fully implemented in 2012. If the capital gains tax cut had been fully implemented in tax year 2008, Georgia residents would have seen a total tax cut of about $340 million, and the very richest 1 percent would receive an incredible 77 percent of that. (For more on flaws of capital gains tax breaks at the state level, see ITEP's report A Capital Idea.)

The property tax increase used to offset the costs would eliminate the Homeowner Tax Relief Grant (HTRG). Through the grant, the state of Georgia currently pays most property taxes on the first $8,000 of a Georgia homestead's assessed value. Since Georgia homes are assessed for tax purposes at 40 percent of their market value, this is equivalent to exempting $20,000 of a home's market value from property taxes.

While there are certainly flaws with any homestead exemption, there are plenty of alternatives for making property tax relief fairer. For example, a property tax circuit breaker can ensure that, for homeowners and renters earning below certain income levels, property taxes do not exceed a certain share of a family's income. (For more on the benefits of property tax circuit breakers, see ITEP's policy brief.)

The repeal of the Homeowner Tax Relief Grant should, in theory, have given lawmakers an important opportunity to rethink its approach to property tax relief. But the budget plan squanders most of the tax savings from HTRG repeal on a poorly-conceived long-term capital gains tax cut for a small number of the wealthiest Georgians. Governor Sonny Perdue should know that approving these changes would amount to a blatant shifting of state taxes from the rich to the middle-class.

The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on April 2. The Coalition on Human Needs is asking people who care about reforming health care, improving education and reducing poverty to thank their members of the House and Senate if they voted in favor of the budget resolutions that passed. (The House passed its budget by a vote of 233-196, and the Senate passed its version by 55-43.)

Click here to see how your Representative and Senators voted. If any of them voted in favor, click here to send them a note thanking them.

The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both resolutions assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it.

On certain key issues (like the estate tax) the Senate made some poor choices that will hopefully not be reflected in the final budget resolution the House and Senate will have to approve sometime after they return from their recess on April 20. For more details, see last week's Digest articles on the federal budget.

As we approach April 15th, one complaint we often hear is that Americans who work hard and become successful have to pay over a third of their income in federal income taxes. But a recent report from the Internal Revenue Service (IRS) shows that this is not remotely true.

As a new CTJ fact sheet explains, the IRS data show that the federal income tax rates paid by the highest-income Americans have dropped substantially since 2000, largely due to cuts in the tax rates on capital gains and dividends pushed through by the Bush Administration. While income from work (salaries and wages) is subject to rates as high as 35 percent, income from investments (long-term capital gains and stock dividends) is taxed at only 15 percent.

The IRS report shows that in 2006 (the latest year for which data are available), the 400 richest income tax filers paid just 17.2 percent of their adjusted gross income (AGI) in federal income taxes. That is down from 22.3 percent in 2000, and is less than half of the top statutory income tax rate of 35 percent.

Read the CTJ fact sheet.

Earlier this week, the National Women's Law Center released the April 2009 update to its report, "Making Care Less Taxing," which describes available state and federal child tax credits and dependent care tax credits, analyzes how these credits help families, and discusses how they can be best designed.

The Center has been instrumental in providing information to help federal and state lawmakers find ways to support families and devotes this annual report to the often forgotten role that tax policy plays.

The report includes information on changes made to state and federal child and dependent care credits in 2008, including:

- Previously legislated changes to existing child and dependent care tax provisions in Oklahoma, Georgia and Louisiana that took effect for tax year 2008;
- Changes to the definition of "qualifying child" that affect the federal child and dependent care credit; and
- Highlights of new IRS regulations on the definition of "custodial parent" as it relates to separated or divorced parents who claim the federal child and dependent tax credit.

The National Women's Law Center also has resources for parents, advocates and service providers about the tax credits available for families at the federal level and in every state.

Washington state legislators, struggling to fill a huge budget gap, are officially considering the enactment of an income tax. The tax would only apply to "high earners", specifically those with income of over $500,000 for single filers, and over $1 million for married couples. Although the tax would be a mere 1% and would affect only a tiny fraction of state residents, the Governor has come out in opposition to the idea.

Nonetheless, talk of raising revenue in a progressive manner is especially encouraging coming from Washington state, where the idea of enacting an income tax has traditionally been greeted with hostility. As numerouseconomists have pointed out, raising taxes on more fortunate state residents is the best way to prevent cuts in the state services needed most during an economic downturn. Washington joins Illinois,Wisconsin,New York, Connecticut, and Delaware as states where progressive income tax increases have received serious attention.

For more on this topic, see the Economic Opportunity Institute's recent op-ed on "high incomes" taxes.

Some good news for proponents of sound state corporate income taxes: Florida may be on its way to shoring up its corporate levy and to putting an end to some egregious tax avoidance schemes. Earlier this month, the Senate Commerce Committee approved a measure to institute combined reporting of corporate income for tax purposes. As an ITEP policy brief on this topic explains, combined reporting is the single most effective option available to state lawmakers for preventing corporations from shifting income out of Florida and into states where they will not be taxed.

As a recent report from the FloridaCenter for Fiscal and Economic Policy documents, the need for combined reporting is clear. Florida loses in excess of $375 million per year to the sort of legal and accounting ploys that combined reporting would prevent.

While passage of the measure is not assured, Florida could join Wisconsin as the second state to adopt combined reporting this year. Senate President Jeff Atwater has expressed support for this critical reform and public interest groups like the League of Women Voters are actively promoting it.

Who knew Georgia lawmakers were such fans of the property tax? Only a year after giving serious consideration to a plan that would have repealed most local property taxes in the state, the state General Assembly has ratified, and sent to Governor Perdue, a budget plan that would provide a 50% exclusion for capital gains taxes that's estimated to cost north of $340 million a year, and pay for it by eliminating the state's $20,000 property tax homestead exemption (technically $8,000 of assessed value, but Georgia homes are valued at 40% of market value for tax purposes).

Paring back the property tax break, known as the Homeowner Tax Relief Grant or HTRG, isn't the dumbest idea you'll hear this week, but that's primarily because the capital gains plan takes that coveted spot.

A recent ITEP report gives the skinny on why state capital gains tax breaks are a misguided tax strategy in general, and the arguments presented therein all apply to Georgia. But there's an extra layer of absurdity to this strategy in the Peach State-- Georgia already allows a very generous capital gains break, and it's targeted to the group most lawmakers would say most need capital gains breaks: the elderly.

In 2008, a Georgia taxpayer aged 62 or older can deduct $35,000 of "retirement income" from her taxable income. This can include pension benefits, but can also include a full $35,000 of capital gains. This is on top of the regular exemptions and deductions available to all Georgians, mind you. And a married couple, both of whom are over 61, can deduct $70,000 of retirement income.

Bottom line is that it's fairly hard to be a senior in Georgia and pay any capital gains tax at all. So who benefits from the cap gains cut included in the budget? Very rich people. And not that many of them. A new ITEP analysis released today shows that 77 percent of the benefits from the capital gains proposal would go to the wealthiest 1 percent of families, and that the poorest 80 percent of the state's income distribution would collectively see less than 1 percent of the tax cuts.

The second-dumbest component of the Georgia plan is repealing the HTRG. Done correctly, this would be an OK move: smarter people than I have argued correctly that there are better approaches to targeted property tax relief than a state-funded homestead exemption, and that a targeted "circuit breaker" credit could provide more relief to fixed-income homeowners and renters at a lower cost than the HTRG.

But the legislature's action last week doesn't count as "done correctly." They've simply pulled the rug out from under local governments, forcing them all to choose either to continue to provide the homeowner exemption at their own expense or else increase property taxes on most Georgia homeowners.

Getting to this point in the budget process took a lot of difficult and painful decisions-- which makes it all the more crazy that the HTRG got yanked to pay for something as frivolous as a capital gains tax cut.

The good news is that the budget is not yet law, because Governor Perdue hasn't signed it. And there's some indication that he's concerned about the fiscal implications of the cap gains cut. Here's hoping he throws some cold water on the legislature's drunken tax-cutting binge.

The chart above probably answers the question asked by the title of this post. But we're getting ahead of ourselves.

If there was an "endangered species list" for tax policies, the federal estate tax would have been on it for the past fifteen years, starting when the anti-tax gang cleverly re-labelled it the "death tax." The gradual repeal legislation (which would be phased in between 2001 and 2010) passed at the behest of President Bush in 2001 didn't help matters, of course. But for those of us who think the estate tax plays a vital rule in preventing the concentration of economic (and, as important, political) power in the hands of a few elites, it was heartening to see the Congressional tax writing committees taken over by Democrats, and then to see the White House occupied by Barack Obama. The policy question, it seemed to most sensible folks, was how much (if any) of the Bush tax cuts that had already taken effect would be allowed to remain. The cuts that had not yet taken effect when Obama took office, of course, would never take place.

So how did we get here, with a Democratic Senate approving more estate tax cuts?

It was bad enough when Obama, even as a presidential candidate, signaled that he thought the best "reform" option for the estate tax was to make permanent most of the Bush administration's cuts in the estate tax rates. As a December 2008 Citizens for Tax Justice analysis of Obama's plan noted,

President-elect Barack Obama has proposed a change that would prevent the estate tax from disappearing in 2010, but which would also unnecessarily cut the estate tax below the level itwould reach in years after 2010 if Congress simply does nothing.

Put another way, Obama's first estate-tax-related act as President was not to reject the Bush administration's estate tax cuts, but to allow even more of them to take effect at the beginning of 2009. Even estate tax proponents whose reform ambitions were limited to "first, do no harm" were disappointed by this stance.

And now, at at time when the federal government faces deficits unrivalled since World War 2, Democratic Senator Blanche Lincoln is actively arguing that Obama's cuts aren't enough. The Lincoln proposal would drop the top estate tax rate to 35 percent and exempt the first $10 million of an estate's value from tax.

For Lincoln to view this as a priority, she has to somehow think that the 2009 rules Obama has allowed to take effect-- which exempt the first $7 million of a married couple's property from tax and then apply a rate structure with a top rate of 45 percent-- are just too onerous.

One has to ask the question: who are these guys with estates worth over $7 million that she's so worried about?

A look at the history of Arkansas estate tax collections (that's the chart at the beginning of this post, reprinted below) gives a hint. For much of the last 20 years, Arkansas estate tax collections have been pretty flat, hovering between $10 and $30 million a year. But in fiscal 1996, the state collected just under $120 million in estate taxes. While the state is (understandably) not telling what the source of the single-year bump was, it's generally understood to have been largely due to the death of Wal-Mart co-founder "Bud" Walton in 1995.



Given this history, and given the recent track record of the Walton family in pushing for estate tax repeal, Lincoln's opposition to the estate tax becomes more understandable-- but still remains profoundly disappointing.

Does Lincoln really have such a chronic case of "tin ear" that she's willing to make a high-profile stand for further estate tax cuts in the era of Madoff/AIG bonuses/etc? Apparently so.

The U.S. House of Representatives and the U.S. Senate both approved budget resolutions on Thursday that move Congress a step closer to enacting President Obama's agenda, without being quite as bold or explicit as the budget outline released by the President in late February. Both resolutions would spend about $3.5 trillion in 2010 and include non-binding, but important, provisions affecting spending and revenues in years after that. As lawmakers from both chambers leave Washington for their spring recess, behind-the-scenes negotiations will likely pave the way for a House-Senate conference to take place upon their return to iron out the differences between the two resolutions. On some key issues like estate tax and health care, the House has made wiser choices that will hopefully be maintained in the final budget resolution.

The basic thrust of many of the tax policies embodied in the budget resolutions mirror the President's proposals. Both assume the extension of the Bush income tax cuts for everyone except taxpayers with incomes above $200,000 (or $250,000 for married couples). Taxpayers above these thresholds are affected by the top two income tax rates, which would revert to 36 and 39.6 percent. Both resolutions would extend the "AMT patch," a measure that increases the exemptions from the Alternative Minimum Tax to ensure that most taxpayers are not affected by it. (The chambers differ on the extent to which the costs of the AMT patch will have to be offset with revenue-raising measures in the future.)

The resolutions do not follow the President's proposals on certain issues. For example, President Obama proposed that the income tax cuts aimed at working families and included in the recently-enacted stimulus bill be made permanent. The resolutions would make some of these permanent, like the expansion in the child tax credit and the American Opportunity Tax Credit for higher education.

But they would not make permanent the Making Work Pay Credit, one of Obama's signature tax policies. Neither do they include any specific language to create a "cap and trade" program to reduce greenhouse gas emissions, which, in the President's proposal, would produce the revenue needed to offset the costs of the Making Work Pay Credit and other energy initiatives.

Similarly, the resolutions do not include language laying out how Congress will pay for health care reform. (The President's budget outline included a reduction in the benefits of itemized deductions for the rich to partially fund health care reform.)

None of this means that Congress will not act on these proposals of the President's. The resolution includes language allowing for deficit-neutral legislation in these areas without specifying how money will be spent or how it will be raised.

Congress's next important test involves settling the differences between the House and Senate resolutions. When it comes to revenues raised to pay for health care or revenues raised from the estate tax, hopefully the choices made by the House will be maintained in the final budget resolution. See the following Digest articles for more.

Estate Tax: Senate Approves a Break for Millionaires that Leader Reid Calls "So Stunning, So Outrageous"

 

 

Reconciliation for Health Care Reform: House Moves to Stop Senators' Obstruction of Measures with Majority Support

 

 

House GOP's Alternative Budget: Poor Pay More, Rich Pay Less, Stimulus Repealed and Government Shrinks

 

 

 

 

 

 

 

 

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax would disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton would come back into effect in 2011.

The budget resolutions passed out of the House and Senate budget committees last week both assumed that the estate tax rules in place in 2009 would be made permanent, meaning the Bush estate tax cut would be partially made permanent but the estate tax would not disappear entirely. The Center on Budget and Policy Priorities released a report this week finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted to approve an amendment offered by Senators Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) to cut the estate tax even more than this. The 2009 estate tax rules exempt the first $7 million of assets passed on by a married couple (as well as assets they leave to charity) and tax the rest at a rate of 45 percent. The Kyl-Lincoln amendment puts the Senate on record as supporting a $10 million exemption for married couples and a 35 percent rate.

Before the Senate approved this amendment, Majority Leader Harry Reid (D-NV) said, "It is so stunning, so outrageous that some would choose this hour of national crisis to push for an amendment to slash the estate tax for the super wealthy."

Remarkably, both the Republican Senators and the "moderate" Democratic Senators who voted for this expanded break for families with millions of dollars to pass on to their heirs were largely the same Senators who claim to be concerned about budget deficits and the costs of the President's proposals to help working families.

The actual consequence of the amendment is unclear for several reasons. First, the amendment was written to be "deficit-neutral," meaning that if Congress wants to pass actual legislation to cut the estate tax, they would have to find a way to raise enough revenue to replace those billions lost. Some of the Senators who voted for the amendment would oppose a cut in the estate tax if it is deficit-financed (which any estate tax cut is likely to be). Second, the Senate then adopted (by a vote of 56 to 43) a confusing amendment creating a point of order AGAINST any estate tax cut if the Senate did not also provide some new tax cut, costing the same amount of money, for people earning less than $100,000. Whether that condition could be met is an open question.

Sorting through this confusing jumble of stated intentions and caveats will hopefully become unnecessary. The conferees crafting the final budget resolution should leave out the Senate's ludicrous cut in the estate tax.

Unlike the Senate budget resolution, the House resolution includes "reconciliation" instructions that would protect a bill from the filibuster that can thwart legislation in the Senate even if it has majority support. It is understood that the reconciliation procedure would be used to enact health care reform.

Opponents of the President's agenda have been surprisingly effective at casting as unfair the procedure that would allow legislation to be enacted by a majority vote in both chambers. The media has in many cases uncritically quoted lawmakers who feel it would be partisan and divisive to allow the Senate to approve a bill with only 59 out of 100 members voting in favor.

Some have complained that reconciliation is only to be used for deficit-reduction, but these are largely the same members who voted in favor of reconciliation bills during the Bush years that actually increased the deficit by cutting taxes. Even putting that aside, it's not clear that the original purpose of reconciliation is any more important than the original purpose of the Senate filibuster, which was originally used only on rare occasions but has turned into a 60-vote requirement to pass any bill introduced in the Senate.

It's true that there are rules limiting what sorts of measures can be enacted through the reconciliation process. (Provisions that have no quantifiable budget impact in the next few years may be impossible to pass through reconciliation.) But the limits imposed by a potential filibuster may be greater. Whether health care reform happens at all hinges on whether or not Congress can raise the revenue to pay for it. Hopefully, bipartisan agreement can be found on how to do that. But Congressional leaders would be smart to leave themselves the option of reconciliation in case such consensus proves elusive.

When anti-tax activists and lawmakers complain that Congress and the President are pursuing policies that will cause taxes to be too high, the first question anyone should ask is: Compared to what? What exactly is the alternative to allowing the Bush tax cuts to end (at least for the rich) and finding new ways to raise revenue?

This week the House GOP showed us what the alternative is and it's frightening. On Wednesday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions approved by both chambers last night. His proposal is apparently an update of the plan that House GOP leaders introduced last week and is different in some key respects.

The revised House GOP budget plan would move towards cutting and privatizing Medicare, convert Medicaid into limited block grants to states, and even cut Social Security benefits for some retirees. The plan would deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs by refusing to adjust the budgets of these programs for inflation and population growth for five years. The House GOP plan would repeal the recently enacted economic stimulus law (the American Recovery and Reinvestment Act of 2009, or ARRA) a year before its expiration at the end of 2010.

A report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.

On March 31, the House Ways & Means Subcommittee on Select Revenue Measures held a hearing on Banking Secrecy Practices and Wealthy American Taxpayers. The hearing focused on withholding on U.S. source investment earnings received by foreign persons, the Qualified Intermediary (QI) program, tax treaties, and the amount and causes of non-compliance.

In his opening remarks, ranking member Pat Tieberi (R-Ohio) reminded everyone that tax evasion is a federal crime. Conviction on a federal tax evasion charge can lead to prison time. (Witness this week's sentencing of former KPMG partners involved in an abusive offshore tax avoidance scheme to terms up to 10-1/2 years.) Beyond a general agreement that crime is bad, there were no obvious signs of bipartisan consensus at the hearing.

IRS Commissioner Douglas Shulman testified that offshore tax evasion has the "unprecedented focus of the IRS" and that "pressure will only increase." He noted that the IRS last week, in advice to its examiners, set guidelines for penalties and interest for taxpayers that voluntarily disclose their offshore transactions. He said these guidelines will give taxpayers some certainty about what penalties they face. Shulman encouraged them to come clean before the IRS has them in its sights. If they don't, the penalties they face will be much higher.

Bob McIntyre, Director of CTJ and Michael McIntyre, a law professor at Wayne State University submitted written testimony for the record. They noted three important ways that wealthy Americans evade taxes on their investment income:
1) transferring assets to offshore tax havens with bank secrecy laws (avoiding IRS detection);
2) fraudulently taking advantage of the exemption for portfolio interest paid to foreign persons; and
3) posing as foreign persons and taking advantage of U.S. income tax treaties.

The written testimony explores these problems, explaining how taxpayers are evading tax, and suggested several alternative solutions for addressing each one.

Few would envy the position most state lawmakers now find themselves in. Nearly every state is required to balance its budget each year and the vast majority of states face substantial budget deficits in the coming years. Those lawmakers will have to support either cuts in essential public services or increases in politically unpopular taxes -- and do so in the midst of a deepening recession.

Under these circumstances, the best way to eliminate state budget deficits is through tax increases on upper-income individuals and families, as such changes would reduce consumer demand the least. Three states in the northeast -- New York, Connecticut, and Delaware -- seem ready to do just that.

In the Empire State, Governor David Paterson and members of the legislative leadership this week reached agreement on a plan to close a $17.7 billion budget gap. The centerpiece of the plan is the addition of two new tax rates. A rate of 7.85 percent would apply to income in excess of $300,000 and a rate of 8.97 percent would apply to income above $500,000. While those changes would only be temporary in nature (lasting only through 2011) they are expected to bring in about $4 billion per year in revenue.

In the Nutmeg State, budget deficits are projected to total $8.7 billion over the next two years. In response, the Assembly's Finance Committee approved legislation that, among other changes, would add four new income tax brackets, with rates ranging from 6 percent to 7.95 percent, all affecting married Connecticuters with incomes over $250,000 annually (and single taxpayers with incomes above $132,500).

Finally, in the First State, Governor Jack Merkell has put forward a broad-ranging budget plan that would take the constructive step of raising Delaware's top income tax rate from 5.95 percent to 6.95 percent, the first income tax increase since 1974. Even though it would impose pay and benefit cuts on state employees and rely more heavily on gaming and excise tax revenue, this budget plan is a step forward on progressivity.

This week, Kentucky's legislative session ended without much in the way of progressive tax reform actually becoming law. Instead, policymakers voted during the 30-day session to approve a cigarette tax hike and remove the sales tax exemption on beer and liquor. But there is some hope that the session laid productive ground work for tax reform efforts next year. According to the Lexington Herald-Leader, tax overhaul discussions are on the horizon. At the moment, the choice seems to be between a bill that would eliminate the state's corporate and personal income taxes or a different bill that would introduce a state earned income tax credit (EITC), broaden the sales tax base to include services, and add new top income tax brackets. Legislators and policymakers interested in tax fairness should stay focused on passing a bill that includes an EITC and sales tax base expansion.

Over the last three years Utah's tax structure has undergone major changes. In 2007, the state instituted a dual tax system that included one graduated and one flat rate income tax. Then in 2008 the state eliminated the dual tax system and replaced it with a five percent flat rate with two nonrefundable credits: one for retirement income and one to replace deductions and exemptions for low-income taxpayers.

There was much grumbling at the time about the complexity of all these major tax changes happening over such a short span of time. That grumbling is getting louder. This week the Deseret News is reporting on several problems with the new flat tax structure. Apparently, the 2008 state withholding tables were miscalculated and, more alarmingly, some folks are seeing dramatic increases that they did not expect. As former Utah Tax Commission economist Doug Macdonald says, "We were told that only a few people would pay more. It was like selling a used car -- those pushing the change (to a flat-rate tax) only talked about the good parts of the car, not the bad parts." Clearly all that glitters isn't gold.

Yesterday, the ranking Republican on the U.S. House of Representatives' Budget Committee, Congressman Paul Ryan (R-Wisc.), released a budget plan which he argues is a more fiscally responsible alternative to the budget outline proposed by President Obama and the similar budget resolutions working their way through the House and Senate right now. His proposal is apparently an update on the plan that House GOP leaders introduced last week and is different in some key respects.

A new report from Citizens for Tax Justice compares the income tax proposals in the House GOP plan to the income tax proposals in the House Democratic plan in 2010, and finds that:

• Over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes under the House GOP plan than they would under the House Democratic plan in 2010.
• The richest one percent of taxpayers would pay $75,000 less, on average, in income taxes under the House GOP plan than they would under the Democratic plan in 2010.
• The income tax proposals in the House GOP plan, which is presented as a fiscally responsible alternative to the Democratic plan, would cost over $225 billion more than the Democratic plan's income tax policies in 2010 alone.

Read the report.