California's special election this week came with no surprises. Just as the pre-election polling had predicted, California voters roundly rejected most of the ideas sent to them by their representatives -- save the proposition limiting pay increases for elected officials. The most important consequence of the vote was the defeat of a cap on state spending, hastily placed on the ballot as a means of securing the Republican votes needed to pass a budget with two-thirds legislative support.

The rejection of this cap, however, brings with it the early expiration of a variety of recently enacted, but temporary tax increases. Instead of expiring in early to mid 2013, those increases will now cease to exist in early to mid 2011. This development does deal a sizeable blow to California's fiscal outlook, though even with the full tax increases an immense budget deficit would have remained.

Talk over the last few days has focused largely on themassive cuts that will be needed to bring the state's budget into balance. Additionally, the state would like to borrow to fill much of the gap. It hopes to have its loans guaranteed by the federal government in order to avoid the consequences associated with lost confidence in California's ability to pay back those loans.

Unfortunately, at least as of today, responsible, broad-based, progressive tax increases appear to be off the table. With California's budget in shambles for the foreseeable future, however, it's hard to think that the opportunity for meaningful, revenue-raising tax reform is completely out of the question. Such reform, of course, should start with the elimination of the two-thirds requirement for enacting tax increases and passing budgets.

After years of relying on gimmicks and borrowing schemes to balance the state budget, Illinois elected officials are now signaling that they're prepared to think constructively and wisely about how to fill the state's $11.6 billion shortfall. Governor Pat Quinn, Cook County Assessor Jim Houlihan, and Senator James Meeks have each proposed tax reforms built around an increase in the state's personal income tax -- and have also proposed providing targeted income tax reductions for middle-income families.

Now ITEP has released its own tax reform proposal. In a new report, ITEP shows that an income tax rate increase, in combination with targeted tax credits, could raise $3.6 billion in new state revenues while actually cutting the overall taxes paid by the poorest sixty percent of Illinoisans.

There's good reason for this emphasis on income tax reform. The Illinois income tax is undeniably one of the lowest income taxes in the nation. Its 3 percent flat tax rate is the lowest top income tax rate in the U.S. And of the 41 states that levied broad-based income taxes in 2006 (the most current year for which data are available), only four states' income tax collections were lower, as a share of personal income, than Illinois.

For too long Illinois has chosen to balance its budget on the backs of low and middle income taxpayers. Progressive revenue-raising options (like those discussed in the ITEP report) that alter the income tax are key if Illinois lawmakers want to solve the state's budget crisis.

In the wake of the worst fiscal crisis in decades, several states -- most notably, New York and Hawaii -- have recently adopted income tax increases targeted at upper-income individuals and families. As the Center on Budget and Policy Priorities has documented, they may well be joined by several other states in the coming months as more lawmakers realize that this is the most responsible way to address budget shortfalls.

Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota. Yet, as ITEP observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (New York, New Jersey, and Connecticut) saw an upturn in the number of affluent taxpayers over the ten year period from 1997 to 2006. Guess it's hard to find the equivalent of Per Se or Le Bernardin in Sioux Falls!

For over two decades, Mississippi and Florida have bucked the national trend of increasing cigarette taxes. But now, staring down massive budget deficits, Mississippi Governor Haley Barbour recently signed a 50 cent-per-pack cigarette tax increase, and Florida Governor Charlie Crist appears ready to do the same with a $1 per pack hike. Given that each is a conservative governor with at least some national aspirations, the result is a bit surprising to say the least.

In the case of Governor Barbour, his approval was especially unexpected in light of his status as a former tobacco industry lobbyist. Governor Crist's support was likewise unanticipated, largely because he has signed pledges to oppose tax increases as both a Governor and as a candidate for federal office. Crist was careful to frame his support as entirely focused on the public health aspects of cigarette tax increases, though it's hard to believe that his desire to avoid forcing a special session to balance the budget had nothing to do with his decision. Thus is the responsibility of governing. Sometimes tax increases cannot be kept off the table.

A new report from Citizens for Tax Justice explains that Congress has several options to fund health care reform in a progressive way. The report was made public today by Citizens for Tax Justice (CTJ), the Service Employees International Union (SEIU), and Health Care for America Now (HCAN), at a press conference in which representatives of each group discussed the need to fund health care reform in a fair way.

Read the report.

The report describes several options that would accomplish three objectives simultaneously. First, they would raise a significant amount of revenue, more than a trillion dollars over a decade. Second, they would simplify the tax code, since they involve eliminating special deductions and loopholes and moving closer to taxing various types of income received by individuals in the same way. Third, they would ensure that the federal income tax continues to be a progressive tax. Almost all of the new revenue would be paid by taxpayers with adjusted gross income (AGI) above $200,000 for singles and above $250,000 for married couples, in keeping with President Obama's approach to tax policy.

Politicians and pundits have lately written or spoken of the "difficult choices" and "sacrifices" that will be necessary if the United States is to find a way to fund health care reform in a fiscally responsible way. Some have suggested new taxes on health insurance premiums. A few have even proposed a highly regressive national sales tax, or its cousin, a value-added tax. In fact, however, there are straightforward ways to raise revenue that will not be overly burdensome for taxpayers and which will not harm the economy. They involve eliminating or reducing several subsidies and preferences provided in the federal tax code to the wealthiest and most powerful among us. Combined with savings in the existing health care system, these measures could raise enough revenue to adequately fund health care reform.

Americans may not know the details of every tax break enjoyed by corporations or wealthy individuals, but they might be particularly keen to focus on them after providing Wall Street (and thus the richest people in America) the biggest taxpayer-funded bailout in history.

After propping up major corporations and their CEOs and shareholders, Congress might find it reasonable to make the following deal. Main Street is paying to make Wall Street healthy. Wall Street, when it is healthy, will return the favor.

Read the report.

On May 11, the Treasury Department released its "Green Book" containing new details of the tax changes included in the President's fiscal year 2010 budget proposal. In addition to extending the Bush tax cuts for all but the richest Americans and making permanent many of the tax cuts in the recently enacted economic recovery act, the President would also make many changes that would raise revenue by closing loopholes, blocking tax avoidance schemes and making the tax code more progressive.

A new report from Citizens for Tax Justice examines and describes the significant revenue-raising provisions that are sure to be debated fiercely in the months to come.

Read the report.

Governor Concedes Supply-Side Tax Cuts Are Not Workable, But Still Insists He Likes Them

Georgia's Governor Sonny Perdue ended a month of speculation this week when he decided to veto a capital gains tax cut -- but seemed to equivocate on the outrageous claim that capital gains tax cuts can actually result in increased revenue.

As reported here, the Georgia legislature in early April passed a budget for fiscal year 2010 that included a major tax cut for the wealthy (an exclusion for long-term capital gains income). The proposal was roundly criticized by opinion leaders in the state, including the Atlanta Journal Constitution and the Macon Telegraph, because the vast majority of the benefits would go to the richest state residents and because of its potential revenue impact during a state budget crisis.

Uncertainty surrounded the outcome because it was unclear what Governor Perdue, a proponent of "supply-side" tax cuts, would decide. Supply-side economics is a school of thought associated with conservative politicians (but not many mainstream economists) that tax cuts for investment or for those who invest can yield huge increases in economic growth. Most incredibly of all, this resulting economic growth is often argued to result in so much new tax revenue that the tax cut can be cost-free or can even lead to increased revenues. Proponents of this idea believe that cuts in the capital gains tax are especially likely to lead to increased revenues.

On Monday, the Governor issued a veto statement saying that, "While some argue these tax reductions will ultimately generate more revenue, the constitutional restraint of a balanced budget prevents policymakers the luxury of time to allow that growth to overcome the short-term loss of revenue." In other words, the Governor seemed to imply that cutting taxes on capital gains income could actually result in increased revenue, but the increased revenue simply would not come soon enough to meet the requirement that the state budget be balanced each year. To make clear that he was not opposed to such tax cuts in principle he added, "Should the General Assembly choose to enact a budget next session that incorporates the estimated revenue reductions caused by large tax cuts, I would entertain such cuts at that time."

The Governor should be thanked for vetoing a regressive and irresponsible tax cut in the middle of a budget crisis, but he should be called to task for entertaining the absurd idea that tax cuts (of any sort) can actually lead to increased revenues.

In unusually difficult times like these, one of the most responsible decisions a policymaker can make is to keep all revenue options on the table. Unfortunately for residents of Minnesota and Hawaii, their governors have approached the current crisis with exactly the opposite mentality. Governor Tim Pawlenty of Minnesota and Governor Linda Lingle of Hawaii have clung to the "no new taxes" mantra in recent months, despite the passage of responsible revenue-raising packages by the legislature of each state. Prominent in each of those packages were progressive income tax hikes.

In Hawaii, despite the Governor's veto, as well as her repeated assertions that any tax increase would be economically damaging for the state, the legislature managed to pass the revenue package over the Governor's stubborn opposition. The bill raises income taxes on single Hawaii residents earning over $150,000 per year, and married couples earning over $300,000.

Minnesota thus far has not been so lucky. Less than a week ago, Governor Pawlenty vetoed a tax package (based on the House and Senate bills we described last week) containing progressive income tax increases. So far that veto has held up, as proponents of the bill appear to be just a few votes shy of an override. Deeper cuts in public services or increased borrowing (the preferred solution of the Governor) may be turned to next in order to win wider support for the package.

Earlier this week, Washington Governor Christine Gregoire signed into a law a measure providing a 40 percent reduction in the state's business & occupation (B&O) tax for newspapers. Thousands of barrels of ink, millions of column inches, and billions of bytes have been expended in recent months lamenting the state of the newspaper industry, as newspapers such as the Boston Globe (and its parent, the New York Times) struggle to cope with -- or, in the case of the Seattle Post-Intelligencer and the Rocky Mountain News, are completely overwhelmed by -- advertising revenue losses and consumers' preferences for information that they can access any time and any place.

Given this long-term transition from one media platform to another, it's hard to see what this measure will accomplish, other than the waste of tax revenue. After all, if Governor Gregoire and other officials in Washington are concerned about the possibility of an ill-informed populace, why not use the funds lost to the tax cut to forestall cuts to schools or to improve government transparency still further?

In the end, the inefficiency of this tax subsidy will probably only be matched by the irony it has achieved. As at least one observer has already noted, the Seattle Times, one of the subsidy's principal beneficiaries, offered the following editorial solution to the state's budget woes earlier this year: "Efficiency will be the watchword. Lawmakers will have to find numerous savings and new, less expensive ways to do business." Apparently, that advice extends only so far.

It's safe to assume that there will be a special legislative session in Kentucky this summer. After all, the Blue Grass state is expected to face a billion dollar shortfall for the fiscal year starting July 1. Governor Beshear claims

he hasn't committed to calling back the legislature or decided what topic he would even select for a special session, but everyone knows a shortfall this large isn't going away without further action. So a flurry of proposals are being discussed from progressive income tax reform to increased gambling and even the so-called "fair tax."

The infamous "fair tax" legislation, which proponents are pushing all over the country, would eliminate corporate and individual income taxes, replace the lost revenue with increased sales taxes on a wide range of services, and eliminate most current sales tax exemptions. Before going too far down this path,

Kentucky legislators should take a moment to look at how that same proposal has faired in other states just this year.

Missouri, "fair tax" legislation passed the House of Representatives but went nowhere in the Senate. An ITEP analysis found that this proposal would raise taxes on middle-income Missourians and require a much higher sales tax rate than advertised.

A similar fate is expected in South Carolina where similar legislation has been introduced in the House. Advocates in South Carolina are hopeful that the legislation won't get very far.

Kentucky lawmakers should quickly jump off the failed "fair tax" bandwagon and instead look for ways to improve their state's tax structure while also increasing state revenue.

A big tax fairness gain in Georgia today: after thinking on it for a few weeks, Governor Sonny Perdue has decided to veto legislation that would have cut the state's income tax on capital gains. The proposed tax cut, which the legislature had approved at the same time as a bill ending state funding for a property tax credit for homeowners, would have done little or nothing for most middle- and low-income Georgians. Viewed in combination with the property tax legislation, moreover, the combined effect would have been a tax hike on middle-income folks and a tax cut at the top! ITEP's analysis has details.

Opponents of the capital gains cut argued that the cap gains cut was essentially being paid for by the repeal of the homeowner property tax credit. While this isn't technically true, it is essentially correct: the legislature made the politically-odd choice to repeal a popular homeowner tax break not because they wanted people throwing bricks thru their windows, but because they needed the money to balance the budget. And they needed more money because of their zeal for cutting cap gains taxes.

The "Think Progress" blog is already arguing that Perdue's decision constitutes a repudiation of supply-side policy. This is wishful thinking, or else just a rhetorical cheap shot. Perdue's veto message says pretty clearly (to my eyes) not that capital gains tax cuts don't work, but that they take more than one year to work:

Georgia is constitutionally required to maintain a balanced budget: for every dollar in decreased revenue, we must correspondingly cut expenditures. We cannot deficit spend as the federal government does, even if those deficits generate economic growth in the long term.

In other words, in a deficit environment, when the goal for the state has to be to make things balance in the current year, he's saying it's impossible to push a tax cut unless you can pay for it immediately. Cap gains tax cuts will still grow the economy, he's saying-- it's just that the growth will happen outside the single-year budgetary window. National anti-taxers don't need to get nervous-- Perdue is not rejecting supply-side principles. He's simply operating within a political framework that doesn't recognize that sometimes supply-side policies need a big canvas to work on in order to be effective. A reeaalllly big canvas.

Having said that, I'll take the outcome. The cap gains bill was a real threat to the income tax (and to the fairness of the tax system), and repealing the property tax break is hardly all bad. Of course, using the lost revenues to enact a new "circuit breaker" property tax break would be a great thing. But the important first step is to recognize that the existing property tax credit is a big, fat, untargeted, unaffordable thing, and the legislature has done that.

But it's not over-- the cap gains fight, after all, is NEVER really over. Secretary of State Karen Handel (who clearly has no interest at all in higher office) had this to say:

While I appreciate the Governor's position that the tax cuts included in the bill would have made balancing our state budget even more difficult, I believe that the economic benefits to our state would have outweighed these concerns.
Now is the time for us to cut taxes in order to help grow jobs and ignite our economy.

Taken at face value, Handel is saying one of two things here: either (1) Perdue is wrong because the cap gains cuts actually would have grown revenue immediately, offsetting the revenue loss, or (2) silly budget deficit rules don't matter and we can ignore them. Neither position speak well for Handel's abilities to manage a budget if she ever decides she'd like to hold a higher office than she currently does

Another feather in the cap for the Georgia Budget and Policy Institute, which got editorial attenion statewide for its criticisms of the capital gains cut.

On May 4, President Obama proposed several measures to address overseas tax avoidance and tax evasion. As explained in two new reports from Citizens for Tax Justice, these proposals are steps in the right direction but could be stronger.

For example, the President proposes to limit the rules allowing corporations to "defer" their U.S. taxes on foreign income, but he would largely exempt technology and pharmaceutical companies from even the weak limits he proposes, instead of simply repealing "deferral" altogether. He proposes sensible steps to reduce abuses of the foreign tax credit and the "check-the-box" rules that allow multinational corporations to cause their subsidiaries' income to "disappear." His proposals to crack down on the use of secret accounts in offshore tax havens are also positive steps but could be stronger.

Read the two new reports:

Obama's Proposals to Address Offshore Tax Abuses Are a Good Start, but More Is Needed

Myths and Facts about Offshore Tax Abuses

Staring down a $6.4 billion deficit, Minnesota legislators last week decided that tax increases would have to be included in any plan to balance the budget.

In the Senate, SF 2074 increases income tax rates across the board, but also adds a new top rate on income over $250,000 per year for married couples. On top of that, the Senate bill also prevents those owning multiple homes from taking the mortgage interest deduction for interest paid on their second home.

The House plan, HF 2323 is a bit more ambitious in its pursuit of true tax reform. Like the Senate plan, the House adds a new top rate as well -- in this case on income over $300,000 for married couples. In addition, the House converts costly and poorly targeted deductions for mortgage interest and charitable giving into tax credits that should be accessible to a wider range of Minnesota families. The bill also repeals the credit for child/dependent care costs, but does add a refundable per-child tax credit. Furthermore, the House bill ends the exclusion for interest received from state/local bonds, eliminates the deduction for real and personal property taxes, and ends a variety of education tax preferences. From a tax simplification standpoint, the bill earns high marks. As the Minnesota Budget Project put it, "the House bill wipes the tax expenditure slate mostly clean."

Unlike the Senate plan, the House does include a variety of significant tax increases on cigarettes and alcohol in its bill. While such increases are usually among the easiest to enact politically, it's important to remember that they are also among the most regressive. Progressive offsets, such as an enhanced EITC, could help temper this regressivity.

For the Minnesota Budget Project's roundup of the House bill, click here. For the Senate bill, click here.

Like just about every other state in the nation, Louisiana faces a serious budget deficit, one that some analysts believe could reach as much as $2 billion (almost one-fifth of its general fund budget) in the coming year. Unlike other states, though, Louisiana has an option for closing a substantial portion of that gap that would not entail cutting spending below current levels or raising taxes above what people currently pay.

What is this seemingly "free lunch"? Well, policymakers in Louisiana could significantly shrink the projected deficit by cancelling -- or at the very least, suspending -- the substantial tax cuts that have been enacted over the last two years but that have yet to take effect. In July 2007, Louisiana adopted a change in its personal income tax that will ultimately allow some Louisianans to reduce their incomes for state tax purposes by the full difference between their federal itemized deductions and their federal standard deduction (often referred to as "excess itemized deductions"). That change was to be implemented in three stages, with the final stage scheduled to occur this year.

In June 2008, the state made another change to the income tax, expanding the bottom tax bracket so that more of people's incomes would be taxed at a rate of 2 percent instead of the top rate of 4 percent. While this latter change was far more significant in size, it was also delayed in effect; Louisiana residents won't see any change in tax withholding until July.

Repealing these cuts -- or delaying them, as Lieutenant Governor Mitch Landrieu recently advocated -- would bring in at least $350 million more in tax revenue each year than is now expected, yet the level of taxes Louisianans would pay would stay exactly the same as it is today.

For more about Louisiana's budget situation, visit the Louisiana Budget Project's web site.

In recent months, New York has enacted -- and numerous other states, such as Connecticut, New Jersey, Minnesota, and Hawaii have debated -- an increase in the income taxes paid by wealthier residents as a means of responding to the current fiscal crisis. Recognizing a good idea when he sees it, DC Councilman Jim Graham has put forward a plan to raise the top tax rate in the District to 8.9 percent, but only for those taxpayers with incomes above $500,000.

An informative new report from the DC Fiscal Policy Institute (DCFPI) details the merits of the plan and concludes that, "[b]ecause it would raise revenues progressively, without adversely affecting low-income residents, the Equitable Income Tax Act is a reasonable approach to boosting revenue in this challenging budget year." DCFPI offers numerous other resources for those interested in following local tax and budget debates, in particular its FY10 Budget Toolkit.

As we've discussed in recent digest articles, this year saw a flurry of activity in the debate over state deductions for federal income taxes paid. Presently, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they have the greater ability to pay. Proposals to reform the deduction for federal income taxes paid in Alabama and Iowa came up short this year, but state lawmakers are vowing to bring up the issue again next year.

Removing the sales tax on food and offsetting the revenue loss by phasing out the deduction for federal income taxes paid for wealthier Alabamians was the number one priority for Democratic lawmakers, but this week the House came up just one vote shy of the three-fifths needed to debate a bill before the state's budget passes. The bill's sponsor, Representative John Knight, has vowed to bring up the bill again next year and says, "I consider this an economic incentive package for working families of this state."

Lawmakers in Iowa proposed to completely eliminate the deduction and use the revenue generated to fund a reduction in state tax rates. The debate over the proposal was quite heated. According the Des Moines Register, "The debate included a rowdy public hearing where hundreds of Iowans -- most of whom opposed the plan -- were escorted from the House chambers by Iowa State Patrol troopers after they persisted in booing, hissing and applauding speakers." Despite support from the House Speaker Pat Murphy and Senate Majority Leader Michael Gronstal, the legislation didn't have enough support and ultimately wasn't debated in either the House or the Senate. Senator Gronstal is predicting that the legislation will be introduced again next year, saying, "There are times when issues are right but they're not ripe."

Approval Marks a Major Step Towards Enacting President's Agenda

On Wednesday, both the House and Senate approved a Congressional budget resolution for fiscal year 2010 that paves the way for several of the President's major initiatives. The resolution allows Congress to make new investments in education and clean energy and puts in place procedures that will make it easier for Congress to enact comprehensive health care reform. It also allows Congress to extend the Bush tax cuts for all but the richest Americans.

The budget resolution allows for about $3.5 trillion in federal spending in fiscal year 2010 and includes important tax and spending provisions related to years after that. It is not a law and is not binding, but puts in place caps on the spending that Congress appropriates each year, sets targets for tax and spending changes and includes certain procedural changes that make it more likely Congress will meet these goals.

Tax Cuts Extended for All but the Rich

For example, the budget resolution allows Congress to reduce revenues by a certain amount by extending the Bush income tax cuts. It is understood that the amount of revenue-reduction allowed would be sufficient to extend the Bush tax cuts for those with incomes below $250,000. It also allows for Congress to reduce revenues by preventing the Alternative Minimum Tax (AMT) from expanding as it is scheduled to under current law. Similarly, it allows Congress to extend the estate tax rules in effect in 2009 instead of allowing the estate tax to revert to the rules put in place during the Clinton years, before Bush's cuts in the estate tax were enacted.

The resolution allows for Congress to enact these tax cuts without finding new revenue to pay for them -- on one condition, which is that Congress enacts a statutory pay-as-you-go (PAYGO) rule that will (in theory) prevent Congress from enacting any more legislation that will increase the deficit. That means that any additional tax cuts (say, an extension of the Making Work Pay Credit that was enacted for two years as part of the economic stimulus package) would have to be combined with revenue-raising provisions to offset the costs.

Predictably, allies of former President George W. Bush have expressed horror that Democratic leaders and President Obama wish to extend the Bush tax cuts for 97.5 percent of Americans rather than 100 percent. The Democrats and the President would allow the Bush tax cuts to expire for singles with incomes over $200,000 and married couples with incomes over $250,000 (which make up roughly the richest 2.5 percent of taxpayers).

For their part, House Republicans used the budget debate to demonstrate to the public just how lopsided the tax code would be if their goals were ever realized and just how much government would have to shrink because of the revenue losses that would result. Earlier this month, the ranking Republican on the House Budget Committee presented his tax and spending plan which would cut and privatize Medicare, convert Medicaid into limited block grants to states, repeal the recently enacted economic stimulus law and deeply cut the relatively small amount of government spending devoted to non-military, non-mandatory programs.

Citizens for Tax Justice published a report concluding that under this GOP plan, over a third of taxpayers, mostly low- and middle-income families, would pay more in taxes than they would under the House Democratic plan in 2010, while the richest one percent of taxpayers would pay $75,000 less, on average.

Final Budget Leaves Out the Senate's Outrageous Estate Tax Cut

Progressives scored a victory when Democratic leaders agreed to exclude from the final budget an amendment adopted by the Senate during its budget debate on April 2 which would slash the estate tax to benefit multi-millionaires. 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." His common sense view carried the day as negotiators hammered out the final resolution.

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 in March 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 in 2010. The Center on Budget and Policy Priorities released a report finding that about 99.7 percent of estates would be untouched by the tax under this proposal.

Incredibly, 51 Senators voted in favor of the 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 called for a $10 million exemption for married couples and a 35 percent rate.

Taking Steps Towards Enacting the President's Priorities

Progressives scored another victory in the area of health care. House and Senate leaders decided to include in the final budget resolution a mechanism known as "reconciliation" which will allow the Senate to enact health care reform and higher education loan changes with a simple majority vote.

The practice of filibustering legislation in the Senate has, over the years, turned into a default rule that three fifths the Senate's members must agree to pass a bill. This means that legislation supported by Senators representing a majority of Americans is often blocked. Many advocates fear that this is exactly what could happen to health care reform and many other of the President's important initiatives.

Reconciliation is a way around this obstacle. A budget resolution can include reconciliation instructions specifying that committees will pass legislation that can then pass the full House and Senate under a streamlined process. In the Senate, that streamlined process means that the bill can be passed with just 51 votes.

The particular version of reconciliation included in this budget is optional, meaning Democratic leaders will resort to using it only if bipartisan consensus proves elusive.

Several Republican Senators, and some Democratic Senators, have taken the view that majority rule is undemocratic, and have called reconciliation a partisan ploy to "ram through" the President's agenda. (The idea of the Senate moving too quickly is a little hard for any Hill observer to understand.) More importantly, enacting health care reform will require Congress to raise a great deal of revenue, and finding a large bipartisan majority for that might be a challenge.

Finally, some have complained that reconciliation is only to be used for deficit-reduction, but this is entirely unconvincing because 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.

The So-Called "Fair Tax" Approved by Missouri House Would Raise Taxes for All Income Groups Except the Richest Five Percent

In the past month, the Missouri House of Representatives has acted like a spoiled child who really doesn't know what he wants. The esteemed body has voted to permanently reduce the state's income tax rates across the board by half of a percentage point (see ITEP's analysis of HCS for SB 71) and then separately voted to broaden the state's top income tax bracket and increase the costly and poorly targeted deduction for federal income taxes paid (see ITEP's analysis of HB 64).

Then, as if all that wasn't unfair or costly enough, the House decided to also approve the elimination of the individual and corporate income taxes altogether.

Yep, that's right, the full House of Representatives voted to simply eliminate a generator of roughly $5 billion and replace that revenue with a broad-based sales tax that exempts all business-to-business consumption.

Sound familiar? This legislation (HJR 36) is essentially the so-called "Fair Tax" proposal that anti-tax advocates have been pushing enthusiastically across the country. The Fair Tax proposal in Missouri, which would amend the state's constitution, would go before the voters if approved by the Senate.

Today ITEP joined in a release with the Missouri Budget Project highlighting analyses from both groups. ITEP's report concludes that HJR 36 would result in a net tax increase for all income groups except the richest 5 percent. It also finds that if the proposal is to be revenue-neutral (as proponents claim) and is to provide a rebate to Missourians (which they also promise), the new average state and local sales tax rate would have to be 12.5 percent. That's nearly double the 5.11 percent proponents of the bill claim, and it's at least a third more than the sales tax rates of neighboring states.

Missouri Budget Project's report finds that the additional sales taxes levied under HJR 36 would especially harm Missourians living on fixed incomes because they would apply to all services, including utilities, rent, medical care, food, prescription drugs, and child care -- most of which are things no other state makes subject to sales taxes.

Middle-income Georgians are still waiting for their Governor to decide whether to increase their property taxes and use the revenue to slash capital gains taxes for the rich. Legislation making both of these changes (HB 481 and HB 261) continues to sit on Governor Sonny Perdue's's desk even as it's roundly criticized by opinion leaders, including the Atlanta Journal Constitution and the Macon Telegraph.

The editorial boards of both papers cite ITEP's recent report on the legislation. The analysis describes the impact across income groups of eliminating a property tax relief program in combination with cutting taxes on capital gains income. The Atlanta Journal Constitution points out, "So who will see a boon from a capital gains tax break? A very wealthy few. People in the top 10 percent of the income spectrum own about 70 percent of taxable stocks. In its analysis of the capital gains tax break, the Washington-based Institute on Taxation and Economic Policy concluded that 77 percent of the tax cut would go to the very richest 1 percent of Georgians."

Sadly, bad news for the Georgia economy may be what it takes to convince the Governor that tax cuts for the rich, even if they are partially offset by tax increases on somebody else, are simply unaffordable. As Charles Richardson at the Macon Telegraph writes, "There is more bad news on the economic front. On May 7, the governor should get the revenue report for April. It is not expected to be good. March's numbers were down 14 percent. However, that dark cloud may hold a silver lining. The dismal income report may spur Gov. Perdue to veto HB 481 and HB 261. That would be fiscally prudent, and move the state closer to fiscal responsibility and away from ideological, get-out-the-vote rhetoric that is leading us to disaster."

Senate Votes to Include Offshore Transfers to Avoid Tax in Money Laundering Criminal Statute

On Tuesday the Senate passed the Fraud Enforcement and Recovery Act of 2009 (S. 386). The bill makes several amendments to the International Money Laudering Statute, including one which places steep criminal penalties on transfers of money offshore for the purpose of evading federal income tax or committing tax fraud.

Violators of the criminal statute would face a fine of up to $500,000 or twice the value of the funds transferred (whichever is greater), or imprisonment for up to twenty years, or both. The Internal Revenue Code already provides for criminal penalties for tax evasion but the penalties are much lower (a maximum fine of $100,000 and imprisonment for up to five years).

The House has its own version of the money laundering legislation, the Fight Fraud Act of 2009 (H.R. 1748), which has been approved by the House Judiciary Committee. It does not contain the tax provision.