You know a state has some problems when it claims it cannot even afford to conduct a study to determine whether its revenue system is adequate and effective. That's what happenedearlier this week in South Carolina, where it appeared that legislation to create a special panel to study the state's tax structure might get derailed. Lawmakers found it difficult to resolve the panel's membership and whether the costs associated with the panel (staffing, travel, etc.) could actually be paid for.

On Tuesday the legislature decided that the state could, in fact, afford to conduct a study to determine how it should raise revenue. Unfortunately, the effort is set to fail before it even begins. Ultimately both the House and Senate approved the creation of the 11-member board, but House Democrats won't be allowed to appoint a panel member. The panel is supposed to study the so-called "Fair Tax," a proposal that would eliminate state personal and corporate income taxes and replace that lost revenue with huge sales taxes shouldered primarily by low- and middle-income people. Incredibly, recent controversial changes to the state's property tax won't be discussed before the panel.

While the Wall Street Journal has been complaining (without cause) about Maryland's recent tax on millionaires, they neglected to mention what has happened to states who actually took their advice and implemented flat tax reforms. According to the editorial board of the WSJ, raising rates on top earners should cause them to flee the state in search of lower taxes, while instituting low and flat taxes should attract those same taxpayers. It seems recent developments in Utah have shown that this is simply not the case.

Last year, Utah replaced its dual income tax system with a five percent flat rate. Earlier this week, Utah legislators were informed that the state is in rough fiscal waters, according to a revenue update by the Tax Commission. Although almost all sources of tax revenue are down in the beehive state, the number one culprit is the state's income tax revenues, which have fallen nearly $300 million (to date).

According to Pat Jones, the senate minority leader, had the state not lowered its income tax rates to five percent, and not reduced certain sales taxes, Utah would have gained $360 million in revenue.

Meanwhile, education funds (whose primary source is income tax revenues) and general funds are collapsing. As the recession pushes states further and further into the red, key social services are being cut to bare bones so that middle- and low-income families bear the burden.

Barack Obama's fiscal policy platform as a presidential candidate was hardly a profile in courage, but he had his moments. This, however, was not one of them:

"For the first time in American history, [John McCain] wants to tax your health benefits. Apparently, Senator McCain doesn't think it's enough that your health premiums have doubled, he thinks you should have to pay taxes on them too. That's a $3.6 trillion tax increase on middle class families. That will eventually leave tens of millions of you paying higher taxes. That's his idea of change."

This was a fairly unprincipled thing to say, and begged the question: why shouldn't employer-paid health care be taxed? Obama never gave us an argument for this beyond the idea that it would be a "middle class" tax hike. In the end, you got the sense that he was saying this not because he believed it would be a bad idea to tax employer benefits, but because it was a good soundbite for him and allowed him to blur the distinction between the stereotypes of the tax-happy Dem and the tax-averse Republican.

One could hope that a year later, when the full extent of our fiscal crisis had become more apparent, the Obama administration would be able to quietly tiptoe away from this position. And Obama has indicated his openness to the idea of taxing employer paid health care like the income it is. But then along comes V-P Joe Biden on Meet the Press last Sunday:

MR. GREGORY: Will the president sign a bill that taxes healthcare benefits for employees?
VICE PRES. BIDEN: We made it clear we do not think that is the way to go. We think that is the wrong way to finance this legislation.
MR. GREGORY: So if the bill comes with that...
VICE PRES. BIDEN: But--no, no, no.
MR. GREGORY: ...the president wouldn't sign it?
VICE PRES. BIDEN: I didn't say that. I said when the bill is going to come, this is the most--this is going to be one of the most comprehensive changes in law since Medicare in the beginning. We'll have to see what the whole bill says. But we made it clear we do not believe you should be taxing, taxing the benefits that people receive through their employers now.

Once again, though, the question is: why take this position? Is there a principle behind it?
There's an easily-stated and compelling rationale for the opposite stance, treating employer-paid health care as taxable income: as Citizens for Tax Justice noted in a 1996 report, it's hard to see "why a person who pays cash for insurance should be taxed more heavily than another person who gets insurance as a fringe benefit (and accepts lower cash wages)."

Put more concretely, if worker A earns $50,000 a year and buys her own health insurance, while worker B gets $45,000 of salary and $5,000 of employer-paid health insurance, the two workers' incomes should be thought of as basically identical. But our tax system gives a preference to the worker who's accepted some of her income in the form of employer-provided health insurance.

The fact that Obama and Biden aren't making principled arguments the other way doesn't mean such arguments don't exist, of course. The best argument I've heard against undoing this tax preference has to do with the inequities between similarly situated workers that would result. Two workers for competing firms in the same industry can have very different health care premiums, depending entirely on how old and frail their co-workers are. The quality of care they personally receive can be identical-- they can even go to the same doctor--but one's employer-paid health premiums will be higher because his co-workers are more likely to be sick.

Under this scenario, taxing employer-provided health benefits could result in the same sort of tax inequity we see in the current system. To which the most obvious response is that these inequities would certainly be less widespread than the inequities of the current system. Add to this that taxing employer-paid health benefits would provide a clear incentive for employers to offer more competitively priced benefits and this argument (which, to be clear, Biden has not even made) becomes not at all compelling.

A variety of other arguments can be made that should give us pause before rushing into paring back the existing tax break: some have to do with equity, while others have to do with the potential administrative difficulty of valuing health benefits for tax purposes. Howard Gleckman summarizes some of these arguments here, in a thoughtful read.

But at the end of the day, the most compelling argument either way is an old and simple one borrowed from the 1986 Tax Reform Act: income is income. Whether it's capital gains or pensions or unemployment benefits, the presumption should be that all types of income are taxed in the same way. Failing to do so introduces economic distortions, encouraging employers to pay their workers in the form of more lightly-taxed forms of income. Those who benefit most from these distortions will yell loudest when they're taken away-- but that shouldn't blind us to the fact that it was wrong to enact them in the first place.

Two New "Studies" from a Right-Wing Foundation Say the Estate Tax Causes the Rich to Stop Working and Spend Away Their Millions

Read the Report

Read the Two-Page Summary

A new report from CTJ examines a duo of new "studies" claiming that repeal of the estate tax is crucial to our economy. The studies, which were commissioned by a foundation established to promote repeal of the estate tax, use one-sided analysis to produce the conclusions that their funders desire.

One study, released a few months ago by Douglas Holtz-Eakin and Cameron Smith, claims that repealing the federal estate tax would create 1.5 million jobs. The other, by Stephen Entin, claims that repealing the estate tax would actually result in increased federal revenue, not to mention higher gross domestic product (GDP).

The CTJ report finds that the "studies" have several fatal flaws. For example, the authors model the impact of taxes on the economy by considering the alleged costs of taxes but ignore the benefits. The benefits of taxes - the public services like roads, schools, law enforcement, national defense and other services that taxes make possible - are simply ignored. Since the authors assume that tax dollars are collected and then simply disappear, of course they can come to no other conclusion but that taxes (including the estate tax) are a drain on the economy!

Other flaws in these studies involve the illogical assumptions they make about how people respond to the estate tax. At one point Holtz-Eakin and Smith explain that the estate tax might cause a wealthy entrepreneur to "buy an around-the-world cruise" instead of investing his money.

But most estate taxes are paid on estates worth over $5 million, and 40 percent of estate taxes are paid on estate worth over $10 million. Let's say you had this sort of money and you wanted to keep your wealth from being taxed by the federal government. What would you do? You can't put it in stocks or bonds or even a savings account. You can't buy fancy houses, because they would become part of your estate. Even if you buy expensive cars or yachts, those would be part of your estate as well (even if they lose some of their value before you die).

You would have to spend your entire estate on caviar or cruises or cocaine or something that won't be around after you die. It's unclear whether anyone can eat away, cruise away, or snort up their nose $5 million. (We won't go so far as to say it's impossible.)

Read the Report

Read the Two-Page Summary

All eyes are on Congress as members of key committees discuss a comprehensive health care reform package. The President has asked to have a bill on his desk by October 1. This week the Senate Health, Education, Labor and Pensions Committee released its draft plan on the same day that House committee chairmen briefed House Democrats on key features of their plan. Both of those plans are long on details about reforming the health care system, but short on ways to pay for it. For now, Congressional committees are focusing on the features of the plan itself and putting off the discussion of the financing.

The Senate Finance Committee, which will have to tackle the financing, in May released a 41-page list of far-ranging options for financing health care reform which included changing the tax exclusion on employer-provided health benefits, raising excise taxes on alcohol, and imposing excise taxes on sugar-sweetened drinks. Earlier this month, the non-partisan Joint Committee on Taxation (JCT) provided lawmakers with revenue estimates for certain financing options currently being discussed.

The President is still talking about his budget proposals for financing health care reform, including limiting the value of itemized deductions for higher-income taxpayers to 28 percent, which would raise revenue in a more progressive manner than the other options listed in the Finance Committee document. (See the CTJ report describing this and other revenue proposals in the President's budget.)

As the bills wind their way through Congress, organizations in the Rebuild and Renew America Now (RRAN) coalition are reminding lawmakers that there are many progressive ways to raise revenue to fund health care and other initiatives. Besides the President's revenue proposals, several additional options are described in CTJ's May 21 report on health care financing.

For example, one option is to expand the Medicare tax to apply to all income (with an exemption for seniors), whereas today it only applies to wages and salaries. This proposal does not complicate the tax code the way many other proposals would and it raises revenue with a tax already in place to fund health care. It is also more progressive than many other options being considered.

Representatives of RRAN member organizations are meeting with lawmakers and their staff to discuss progressive revenue-raisers like this.

Organizations that want to sign RRAN's two-page statement of principles on progressive revenue sources can go to the Coalition on Human Needs website or simply click here. For more information about the coalition visit www.rebuildandrenew.org.

A column by Kevin Hassett on Bloomberg.com this week suggested that if President Obama's international tax policy proposals are enacted, Microsoft will move out of the country.

Actually, quite the opposite is true. The President's proposals would reduce the perverse incentives in our tax code that currently reward companies for moving plants, profits, and people offshore. If they are enacted, Microsoft would have less, not more, reason to leave. The President's proposals would limit multinational companies' ability to reduce their U.S. tax by using deductions and tax credits attributable to their foreign income before the foreign income is taxed. The proposals would require matching of the income and deductions. (See the CTJ report explaining the President's international tax proposals.)

Hassett's assertions were based on Microsoft CEO Steve Ballmer's comments last week while in Washington, that "it makes U.S. jobs more expensive...we're better off taking lots of people and moving them out of the U.S." This strikes us as a lot of hot air designed to scare Americans and their lawmakers.

In support of his argument against changing the tax rules, Hassett also cites a study that shows for every 10 dollars U.S. companies invest offshore, their investment in the U.S. increases by about two dollars, and that foreign investment is therefore good for the U.S.

We might begin by pointing out that every ten dollars that U.S. companies invest in the U.S. result in at least, well, ten dollars of investment in the U.S. But this is largely beside the point. Many of the administration's proposals really address corporate tax avoidance practices that involve investments that only exist on paper anyway (think of Citigroup and its 90 subsidiaries in the Cayman Islands, which cannot possibly be conducting much real business). These are practices that serve only to reduce the U.S. taxes that corporations pay on the profits that are really generated in the U.S.

And as far as incentives to genuinely move real operations offshore, the current system of allowing tax deferral on foreign income encourages that. The President's proposals would begin to reduce that incentive (we wish they'd go farther).

The Treasury Department has recently issued rulings that to allow a newly bailed out General Motors to avoid part of the 1986 tax reform that is supposed to prevent abusive tax shelters.

Many years ago, Congress enacted rules to keep companies from trafficking in net operating losses (NOLs). Profitable companies were buying companies with NOLs and using the NOLs to offset their income, reducing or completely eliminating their tax liability. In many cases ability to use the NOLs was the only valuable asset the loss company owned. So Congress added Internal Revenue Code Section 382 to limit the amount of NOL "carryforwards" that companies can use when there is a change in ownership of more than 50 percent.

Under the General Motors restructuring, the federal government will own about 60 percent of the stock of the new GM. Generally that would mean that the ability to use the NOLs would be strictly limited (a small portion would be allowable each year). But the Treasury Department has issued a series of rulings that will allow GM to use the NOLs. The rulings basically treat the U.S. government as never having been a shareholder. So if things start looking up for the troubled automaker and the government is able to share some of its stake in the company, the GM stock will be significantly more valuable to a potential investor because of the NOLs that will save GM taxes in the future. Net operating losses can be carried forward 20 years to offset taxable income. They can also be carried back two years, but GM has not posted a profit since 2004.

Wisconsin is facing the largest budget shortfall in state history. This week, debate started in the General Assembly on ways to fill the expected $6.6 billion gap . Only $1.6 billion of the state's shortfall was predicted just last month, demonstrating how quickly the fiscal situation has deteriorated.

The budget proposal being debated uses a combination of spending cuts and tax increases to balance the books and is based on the plan passed by the Joint Finance Committee in late May. The Joint Finance Committee's budget bill included cigarette tax increases, reductions in the state's capital gains exclusion from 60 percent of net capital gains income to 40 percent, and a new top income bracket for "very high" income earners. For a complete summary of the Joint Finance Committee's proposals, see the helpful report from the Wisconsin Council on Children and Families.

Legislative leaders seem confident a budget will be passed before the start of the new fiscal year on July 1. The first hurdle is for Democrats who control the Assembly by a slim margin (52-46) to rally the 50 votes they need to pass their proposed budget.

But even if Wisconsin lawmakers resolve this shortfall, their fiscal challenges are not over. They learned Tuesday from the Legislative Fiscal Bureau that the state will likely face a $2.2 billion shortfall by the middle of 2013.

This weekend thousands of advocates for the wildly misnamed "Fair Tax" are expected to descend on Columbia, Missouri and hear from the likes of Neal Boortz and Joe Wurzelbacher, better known as "Joe the Plumber." We don't expect that this rally will inform Missourians that the proposal to eliminate corporate and individual income taxes and replace that revenue with sales taxes is likely to raise taxes on the poorest 95 percent of Missourians. Nor are attendees likely to learn that the sales tax rate necessary to make this a revenue neutral change isn't 5.11 percent (as often claimed), but a combined state and local tax rate of 12.5 percent.

Organizers of events like this have a difficult time acknowledging the real impact of the "Fair Tax" and instead focus on "simplicity" and the theoretical fairness of a sales tax. Luckily the press has delved a bit deeper into the issue and are pointing out the flaws in their proposal. For more on Missouri's so-called "Fair Tax" proposal, read ITEP's report.

Late last week, California Governor Arnold Schwarzenegger, in a meeting with the editorial board of the Sacramento Bee, floated the idea of adopting a flat tax with a rate of 15 percent as part of a major overhaul of the state's tax system. While it is unclear which taxes the Governor would replace with such a levy, what is clear is that "flat tax" proposals are a bad idea.

As CTJ Executive Director Bob McIntyre made plain in his testimony before the California Commission on the 21st Century Economy recently, a "flat tax" almost certainly means that poorer taxpayers would be asked to contribute more to government finances and that wealthier taxpayers would be required to put far less into state coffers than they do now.

For a more productive approach to reforming California's tax system (and addressing the state's fiscal woes), see this recent commentary by Jean Ross, head of the California Budget Project.

As if the concurrent fiscal and economic crises weren't enough to handle on their own, many states also face the challenges posed by crumbling transportation infrastructure, the result of decades of neglect and underfunding. Recently, lawmakers in Oregon decided to find a way to address deteriorating bridges and overcrowded roadways, with the Legislature passing a $300 million transportation package that, by some estimates, will produce 40,000 new jobs over the next ten years.

Unfortunately, the financing mechanisms contained in the measure -- principally, a 6 cent increase in the gas tax scheduled for 2011 and increases in a variety of registration, title, and other fees -- will fall most heavily on low- and middle-income families, precisely those Oregonians bearing the brunt of the state's economic crisis.

A new report from the Oregon Center for Public Policy outlines one approach for easing the impact the transportation package will have on low-wage workers -- an increase in the state's version of the Earned Income Tax Credit. You can read the report in its entirety here.

Last week, we told you about North Carolina Governor Beverly Perdue becoming more realistic about the need for tax increases to balance her state's projected $4.5 billion shortfall. Earlier this year the state's Senate Finance Committee released their Tax Modernization and Simplification Plan that includes broadening the state's sales tax base, moving toward an adjusted gross income base for purposes of calculating state income taxes, and lowering the state's income tax rates. (For a complete analysis of the Senate proposal see this informative brief from the North Carolina Budget and Tax Center.)

Now there's more good news. This week the House Finance Committee passed their own proposal which included increasing sales and income taxes, and also broadening the sales tax base to include services. No doubt, North Carolina lawmakers are making difficult decisions about budget priorities, but having tax increases on the table makes their jobs much easier.

Citizens for Tax Justice (CTJ) has joined forces with a broad coalition of organizations called Rebuild and Renew America Now (RRAN) to promote a simple message: Congress has a whole lot of options to raise revenue to pay for health care reform and other initiatives without unfairly impacting low- or middle-income people and without harming the economy.

These progressive revenue options include both the tax changes included in President Obama's fiscal year 2010 budget proposals as well as additional options formulated in a recent report by CTJ and endorsed by Health Care for America Now (HCAN) and the Service Employees International Union (SEIU). (See CTJ's report on the President's tax proposals and CTJ's report on additional revenue options to fund health care reform.)

RRAN is a coalition that engaged in education, communications and lobbying efforts in support of the President's budget and other progressive initiatives earlier this year and has mobilized advocates and activists all over the country. Many of the organizations involved are usually focused on particular public services or progressive reforms, but have realized that all public services and reforms are in danger if Congress can't bring itself to raise the revenue needed to pay for them.

RRAN has invited organizations (both national organizations and state organizations) to sign onto its two-page statement of principles for this new campaign for progressive revenue options. Signing does not commit an organization to do anything (although all are also encouraged to become active in RRAN's activities) but simply states support for efforts to pay for initiatives in progressive ways. Anyone who is authorized to sign on behalf of an organization can visit the website of the Coalition on Human Needs (CHN) or simply click here.

The statement lists three broad principles to guide Congress's efforts to find revenue:

1. Adequacy. The federal tax system should raise sufficient revenue over time to meet our shared priorities and invest in our common future.

2. Fairness. Tax preferences that overwhelmingly benefit the wealthy and corporations should be eliminated, and individuals and businesses should contribute their fair share of taxes, based on ability to pay.

3. Responsibility. We should not saddle future generations with unsustainable levels of debt.

The statement also lists examples of the kinds of tax policies RRAN supports:

• raising revenues from upper-income households;
• assessing a significant tax on large estates;
• reducing abuses among corporations and individuals who shelter income in offshore tax evasion or avoidance schemes;
• closing financial industry, oil and gas, and other inefficient corporate loopholes; and
• reducing tax preferences for unearned as opposed to earned income.

For more information in the coming days, visit RRAN's website: www.rebuildandrenew.org

Tax reform hopes in Illinois were crushed (at least temporarily) on Sunday when the state House of Representatives rejected Governor Pat Quinn's proposal to increase the state income tax from 3 to 4.5 percent and the corporate tax from 4.8 to 5 percent in order to avoid a $7 billion budget cut. The 42-74 vote came a day after Senate Democrats led passage of a measure that would raise personal income taxes, boost the income tax from 3 to 5 percent and impose $1 billion in sales tax for the first time on many services. The House opted not to vote on the measure passed by the Senate.

Facing a midnight deadline, Illinois lawmakers instead passed a makeshift spending plan that provides for only 50 percent of the funding for state agencies laid out in Quinn's original budget and is not expected to last much more than 6 months. On Wednesday, State Senate President John Cullerton used a parliamentary maneuver to block the budget and hold it in the Senate. The action was considered mostly symbolic since Governor Quinn claims he won't sign the budget anyway because it does not solve the deficit problem.

Governor Quinn has stated before that he believes "in the tax based on the ability to pay: the income tax." Last month ITEP published its own report, agreeing with the governor's call for an income tax increase and recommending other reforms to help raise revenue and even out one of the most unfair tax systems in the nation.

Illinois lawmakers can continue this dance for only so much longer, since the budget currently in effect expires on June 30 and the state faces a deficit of $11.6 billion. Tax reform in Illinois is long overdue, but it remains to be seen whether or not lawmakers are serious about balancing the budget in time to avoid what one called an "apocalyptic series of funding cuts."

Who should pay to fix the billion dollar hole in Kentucky's budget? One group of lawmakers thinks low- and middle-income families, the same families hit hardest by the economic crisis, should foot the bill. Another group of lawmakers thinks that well-off families, the same families who have benefited the most from the tax-cutting sprees and the economic changes of the last several years, can afford to give something back. A new report from ITEP shows how different the two approaches are.

Both views were on display yesterday during a meeting of the Interim Joint Committee on Appropriations, where lawmakers discussed these two very different alternatives for solving the state's anticipated shortfall for the next fiscal year, now estimated to total $996 million.

HB 51 PHS would repeal Kentucky's personal and corporate income taxes as well as its limited liability entity tax, reduce the sales tax rate from 6.0 to 5.5 percent, and broaden the sales tax base to include a variety of services. Estimates show that in future years this legislation would actually cost the state money and make Kentucky's tax structure more regressive.

The other bill heard on Thursday, HB 223, would raise tax rates for well-to-do Kentuckians, create a new income tax credit based on the federal Earned Income Tax Credit (EITC), reinstate a version of Kentucky's estate tax, and also subject a variety of services to the sales tax. HB 223 would both increase state revenues and make the state's tax structure more progressive.

For more on these proposals, read ITEP's report, Tax Reform in Kentucky: Serious Problems, Stark Choices.

Like many state tax systems, Kentucky's currently faces two serious problems. The first -- and most immediate -- is that Kentucky's tax system is insufficient. It fails to produce enough revenue to fund the public services on which Kentuckians rely. The second problem, while less pressing, is arguably more persistent. Kentucky's tax system has long been inequitable, requiring low- and moderate-income residents to pay more in taxes relative to their incomes than wealthier individuals and families. In fact, in 2007, state and local taxes as a share of income were nearly twice as high for middle-class Kentucky taxpayers as they were for the most affluent.

Ideally, lawmakers would see this situation as an opportunity. Hearings like those conducted yesterday are steps in the right direction. However, it appears that Governor Beshear is turning his head away from discussions of comprehensive tax reform. When the special session scheduled to start June 15 begins, comprehensive tax reform isn't likely to be on the table. Instead, gambling, budget cuts, and federal stimulus dollars are likely to be on the legislative agenda. Precisely because Kentucky is facing such challenges, now is the time to reform the state's tax structure. HB 223 would certainly be a leap in the right direction.

A new brief from the North Carolina Budget and Tax Center makes a strong case for increasing taxes to solve the state's budget crisis. The report rightly argues that economic times are so bad, resulting in such low revenue projections across the country, that policymakers aren't left with any other option but increasing taxes. In fact, the report finds that, "No state with a projected gap as large as North Carolina is attempting to balance its budget with spending cuts alone."

Apparently, Governor Beverly Perdue is coming around to this thinking too, saying that tax increases may be necessary to close the state's projected $4.5 billion shortfall which is equivalent to 20% of the state's budget. The outcome of the state's budget debate remains to be seen. But with Senate leaders and now apparently the Governor interested in raising taxes, perhaps it's not too much of a leap to predict that North Carolina will join with other states that have raised taxes to address dire shortfalls.

When a state government hands out cash to businesses, you'd think that the state's taxpayers would at least have a right to know who exactly they're subsidizing. This is especially true in Iowa, a state that offers businesses a research tax credit that is refundable -- meaning businesses actually get checks from the state when their credits exceed their tax liability. In 2006 alone, those checks cost the state nearly $44 million, with about 85% of that going to just 10 companies.

Last week, Iowa policymakers decided that their constituents might at least want to know where those millions are going. Governor Chet Culver signed a bill requiring that any business receiving a research credit check from the state of more than a half million dollars have its name made public.

Iowa is unusual in its generosity to businesses conducting (or claiming to conduct) research. Of the 38 states offering a research credit, only five actually pay businesses for conducting research even if their tax credit exceeds the amount of taxes they paid.

Despite the unusual generosity of the Iowa credit, one business industry representative had the gall to suggest that businesses may decide to conduct their research elsewhere as a result of the measure. The phrase "crying wolf" comes to mind.

But ultimately, the new Iowa law is little more than a baby step. It's hard to believe that Iowans are not also interested in knowing which businesses receive $100,000 or $200,000, for example, from the state for conducting research. Furthermore, even businesses not receiving refunds, but nonetheless benefiting from the research credit, are effectively being subsidized by the state and should be identified as well. And limiting the disclosure provision to only the research credit is also disappointing.

If Iowa really wants to improve government transparency, it should consider reporting on the jobs and other benefits created as a result of this and other subsidies -- as opposed to just offering the company's name. See this report from Good Jobs First for more on appropriate state subsidy disclosure practices.

It's no secret that California's budget situation is dire. With that in mind, the decision by California policymakers to enact three corporate income tax cuts over the past 9 months, costing the state as much as $2.5 billion annually, is nothing short of appalling. A recent report from the California Budget Project (CBP) explains these cuts, detailing especially how their benefits will be skewed toward a few of the largest corporations in the state.

The largest of the three provisions examined by the CBP allows corporations to use a "single sales factor" to determine how their profits are apportioned among different states for corporate income tax purposes. You can read the ITEP Policy Brief on single sales factor here. The CBP notes that this provision alone would cause $1.5 billion to flow from already depleted state coffers into the hands of large corporations. At least 80% of the benefits would go to big business, defined generously here as corporations with gross receipts over $1 billion annually.

The second provision is an allowance for "net operating loss carrybacks". This new measure could reduce state revenues by up to a half billion dollars annually. California is now among a minority of states offering this type of tax break. For more on this topic, see this recent report from the Center on Budget and Policy Priorities detailing why states with NOL carrybacks should eliminate them.

The final provision examined by CBP allows tax credits earned by one corporation to be given to related corporations. This is eventually expected to result in losses of up to $400 billion for the state. A lucky 0.03% of California corporations will enjoy nearly 90% of the benefits.

It's hard to believe that California policymakers considered these items to be a priority despite their state's current budget nightmare. Repealing these breaks is the obvious next step in trying to restore fiscal sanity to the state -- though it will by no means end the state's problems. For a more comprehensive solution, Californians should look toward the elimination of the supermajority requirement for tax increases, and the elimination of Prop 13. These ideas seem to be gaining increasing attention, as exemplified in this recent LA Times Business column.