Washington State's infamous anti-taxer, Tim Eyman, is up to his usual shenanigans. Initiative 1033 was approved by the Secretary of State's office last week and will appear on the ballot this fall. If approved, this sweeping "measure would limit the growth rate of state, county, and city general fund revenue, not including new voter-approved revenue, to inflation and population growth. Excess revenue collected above these limits would be used to reduce property taxes." The Washington State Budget and Policy Center points out that the real impact of I-1033 would be to constrict government's ability to provide for the needs of residents, increase the current deficit, and exacerbate the impact of economic downturns. Watch the Budget and Policy Center's slide show on the substantial flaws of the ballot initiative.

As the New York Times reported earlier this month, California's tax incentive for film production - a loss of $100 million in exceptionally revenue scarce tax revenue - seems likely to escape the budget cutting axe, despite the state's mammoth deficit. Meanwhile, Utah's Film Commission Director Marshall Moore recently leapt to the defense of his state's tax giveaway for movies and television.

Lawmakers in both states should think again. A new and detailed evaluation of Massachusetts' film tax credit should lead policymakers across the country to ask whether they are getting their money's worth from such incentives. Between 2006 and 2008, the Commonwealth paid out a total of $166 million in film tax credits. According to the report, the new revenue resulting from film production activity was just $26 million.

The report further notes that "feature films, television series, commercials, and documentaries produced in the Commonwealth" between 2006 and 2008 generated roughly 3,200 full time equivalent jobs. But approximately 60 percent of those jobs were held by non-residents, while over 80 percent of the wages paid on film productions accrued to employees living out of state. (The full report is available here.)

Connecticut Voices for Children highlights many of the same problems in its recent and valuable analysis of that state's film tax credit.

Charged with finding a revenue neutral way to reduce the volatility of California's revenue stream, the "Commission on the 21st Century Economy" recently expanded the scope of its study, and announced its plans to seek an extension until the end of September. This extension (the second sought by the Commission) comes after a successful bid by Commissioner Fred Keeley to add a variety of more progressive options to the discussion. The options to be discussed include: retaining the state's progressive income tax, removing Prop 13 limitations on commercial property tax bills, expanding the sales tax to include services while lowering the sales tax rate, taxing carbon based fuels, and making more careful use of a rainy day fund, especially in regard to capital gains revenue. Keeley's goal is to offer solutions to the state's volatile budgetary situation that don't involve gutting the state's progressive income tax.

This delay of the Commission's recommendations means that California legislators will not be receiving any advice from the Commission during this legislative session. This is an unfortunate development, as the legislature is clearly in need of some guidance. California lawmakers recently unveiled a plan to balance the budget by gutting the state's education programs, while refusing to increase any taxes.

Of all Keeley's proposals, the removal of Prop 13 limitations on commercial property taxes has received particular attention as of late, including an LA Times column detailing some of its abuses as well as its high cost.

Corporate lobbyists in Sacramento could be dealt another blow soon. An effort is underway to repeal by ballot (in November 2010) the billions in corporate tax breaks passed by California legislators over the course of the past ten months.

The Obstructionists Are Wrong Telling the Rich to Pay their Fair Share Will NOT Destroy Small Businesses

Read CTJ's new fact sheet: House Surcharge Proposal Unlikely to Have Noticeable Impact on Small Businesses

Sign-on Letter for National Organizations in Support of the Proposed Surcharge to Fund Health Care

Throughout the debate over health care reform, Citizens for Tax Justice and other organizations working within the Rebuild and Renew America Now (RRAN) coalition have suggested a variety of ways to eliminate or limit loopholes and preferences in the tax code. These changes would make our tax system more rational and also raise revenue to partially finance the health care overhaul. Some lawmakers object to any proposals that would impact special interests. Some even rise to defend groups that do not really have anything to fear (like the few non-profits that seem to think contributions will decline if itemized deductions are limited for the rich).

So Democratic leaders in the House of Representatives proposed to leave untouched the various loopholes and preferences in the tax code and simply ask the rich to finally pay their fair share in a more straightforward way. The leaders of the three House committees with jurisdiction over health care proposed a surcharge on adjusted gross income above $350,000 (or $280,000 for single taxpayers) with three graduated rates. Health care legislation including the surcharge has been approved by the Ways and Means Committee and the Education and Labor Committee, and is still being debated in the Energy and Commerce Committee.

(See our previous analysis and data on how the surcharge and other proposals would impact people in each state).

Well, it turns out that some members of Congress don't like this idea either. Most of those objecting to the surcharge are simply opposed to the type of comprehensive health care reform that will rein in insurance companies by forcing them to compete with a public plan and barring them from discriminating against the sick.

But some lawmakers who object to the surcharge may be confused about its potential impacts on small business. Twenty-two House Democrats, mostly freshman, signed a letter sent to House Speaker Nancy Pelosi last week claiming that the surcharge would hurt small businesses.

They're wrong. As a new fact sheet from Citizens for Tax Justice explains, everything you're hearing about small businesses from opponents of the surcharge is incorrect.

As CTJ explains:

1. Only about one in one-hundred taxpayers are rich enough to be subject to the surcharge.
2. The surcharge would be paid mainly by the richest one percent of taxpayers and would amount to less over the next decade than this group received from the Bush tax cuts over the previous decade.
3. Only a tiny fraction of small business owners would pay the surcharge.
4. Even for those few small business owners who would pay the surcharge, the surcharge would have no effect on their hiring decisions.
5. The health care reform that will be funded by the surcharge will make it cheaper to hire workers.

The RRAN coalition is urging national organizations to sign a letter in support of the surcharge by COB Wednesday. The signatures are being collected online by the Coalition on Human Needs. (Remember, you should only sign this letter if you are authorized to sign on behalf of a national organization.) A pdf of the letter with the list of organizations signed on so far can be found here.

After much debate, Illinois Governor Pat Quinn signed a budget last week. Despite Governor Quinn initially advocating for an income tax increase to help balance the state's $11.6 billion shortfall, the budget that passed didn't include a tax hike and instead relied heavily on borrowing, delaying payment to vendors and spending cuts. The Senate voted 45-10 for the key funding piece of the budget, while the House supported it 90-22. Despite this disappointing news, Senate President John Cullerton has said that his "primary purpose" starting next year is an overhaul of the state's tax structure. Here's hoping Senator Cullerton gets some inspiration from ITEP's recent report: Ready, Set, Reform: How the Income Tax Can Help Make the Illinois Tax System Fairer and More Sustainable.

The three committees in the U.S. House of Representatives that share jurisdiction over health care are expected to release a bill today that will include a surcharge on high-income families to help finance health care reform. Based on the details that have been made public so far by the Ways and Means Committee, Citizens for Tax Justice has estimated the national and state-by-state impacts of the surcharge and incorporated this information into reports that are being released by several state-based organizations.

CTJ finds that the surcharge would be paid by the richest 1.3 percent of taxpayers nation-wide. The percentage of taxpayers impacted varies by state, but not by much. The state with the largest percentage of taxpayers affected is Connecticut, where 2.8 percent would pay the surcharge. The state with the lowest percentage of taxpayers affected is West Virginia, where only 0.5 percent of taxpayers would pay the surcharge.

You can find this analysis, as well as CTJ's other recent work on health care financing options, here: http://www.ctj.orgpayingforhealthcare.htm

CTJ is a member of the coalition of organizations called Rebuild and Renew America Now (RRAN), which has been working for several months to educate lawmakers and the public about progressive options for financing health care reform. Besides a surcharge, another option that RRAN has focused on is the President's proposal to limit itemized deductions for high-income families. Another is the proposal formulated by CTJ to reform the Medicare tax so that it applies to the income of wealthy investors the same way it applies to the wages and salaries of workers. CTJ's Medicare tax proposal has been a topic of discussion among some members of the Senate who are reported to be considering it as one of their revenue measures to finance health care reform.

Meanwhile, state-based organizations have released reports on these proposals in Indiana, New Jersey, New Mexico, West Virginia, Wisconsin and several other states last week and this week. This follows the release last week of a statement of principles signed by over 600 national, state and local organizations from every state in support of a progressive approach to financing health care reform and other major initiatives.

Does the "cap-and-trade" bill (H.R. 2454, the American Clean Energy and Security Act of 2009) passed out of the House of Representatives in June do enough to protect consumers, or is it too riddled with give-aways to corporate America to be worth enacting? The question of how much the legislation does to protect consumers is a complicated one, but two things are certain. First, if this Congress fails to enact climate change legislation (even imperfect legislation) the consequences could be terrible. Second, when the Senate takes up climate change in September, it will have an opportunity to significantly improve the legislation, as explained by recent reports from the Center on Budget and Policy Priorities.

What the Recent House-Passed Bill Would Do

Under H.R. 2454, companies would need to have allowances to emit greenhouse gases, and the amount of allowances would be capped at a level that would decline for several years. The total level of emissions allowed in 2050 would be only 17 percent of the amount emitted in 2005.

The right to pollute would therefore become scarce, as its supply would decrease, and when the supply of anything decreases, its price generally goes up. Energy from oil, gas or coal and any products made or transported in ways that involve oil, gas or coal would therefore become more expensive. For consumers, the effects of a cap-and-trade system would be similar to those of a carbon tax. The question is whether the extra cash paid by consumers will go towards increased corporate profits or be routed back to the consumers.

For this reason, the President proposed in his first budget that Congress create a cap-and-trade system in which ALL of the emissions allowances are auctioned off to companies rather than given away freely. The revenue raised could be largely used, the President reasoned, for a refundable tax credit that would offset the impact of the resulting higher energy costs for low- and middle-income families.

The bill passed out of the House at the end of June only auctions off 15 percent of the allowances, and the revenue raised would help offset the costs for the poorest fifth of families.

Free Allowances for Utilities -- in Return for Promise to Pass Savings on to Consumers

85 percent of the allowances would not be auctioned off, but neither would they be doled out for free to corporations (not all of them anyway). There would be strings attached for some. For example, local utility companies would initially get almost half of the allowances, but in return they would be required to pass savings onto consumers.

There are many reasons why this is an inefficient way to protect consumers. If it doesn't work, Congress could feel pressure in the future to clamp down on the utilities until it does work. But even if utilities pass savings onto their customers, they would be split between their residential customers and their business customers. As one of the Center on Budget reports explains, the Congressional Budget Office finds that most of the savings for businesses would go to the stockholders, who are very disproportionately among the wealthy.

Better Protection for the Poor

The provisions to shield the poorest fifth of families from the resulting increased energy costs are stronger. An agency within the Energy Department would determine what the average increase in energy costs would be for a family of a given size, after accounting for the offset in costs that will (in theory) be provided by the utilities.

Most families with incomes at 150 percent of the official poverty line or lower would receive a monthly energy refund based on this calculation. Families participating in certain programs (like food stamps) would be automatically enrolled. The monthly refund would usually be delivered through the Electronic Benefit Transfer (EBT) cards that states already use to deliver food stamps and other benefits, further streamlining the administration of the refund.

Since poor working-age adults without children typically do not participate in these other programs or even have a EBT card, they would be helped by an increase in the (very meager) maximum Earned Income Tax Credit (EITC) available for childless adults.

What the Senate Should Do

The increased costs that middle-income families would see if the House bill becomes law are not gigantic ($235 a year according to the Congressional Budget Office). But Congress needs to decide whether the increased prices paid for energy should go largely towards corporate profits (which seems to be the potential result of the House-passed bill) or be redirected back to consumers.

The obvious way to make the latter happen would be to auction off more than 15 percent of the allowances and use the revenue to offset the increased energy costs more effectively for both low- and middle-income families. The Center on Budget points out that refundable tax credits, combined with more use of EBT cards, would be an effective way to deliver the necessary energy refund to the vast majority of low- and middle-income families.

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And this would make for better environmental policy anyway. Families would clearly see the costs of energy rising and have an incentive to curb their energy consumption, even though their total purchasing power would be unchanged.

The Maryland Business Tax Reform Commission met last Thursday specifically to discuss trends in business taxation across the country. During the meeting ITEP offered testimony regarding the wide variety of options policymakers have when seeking to reform their business taxes.

For example, in the past several years, a handful of states, including Ohio and Texas, have completely changed how they tax businesses operating within their boundaries. Other states like California have modified their basic apportionment formulas, while still more continue to offer a variety of tax credits and inducements with the aim of luring or retaining employers.

ITEP's remarks specifically focused on one particular trend: the move to require combined reporting of a corporate group's nation-wide income to state tax authorities. Under combined reporting, a multi-state corporation calculates its income for tax purposes by adding together the income of all its subsidiaries -- without regard to their location -- into one total. That total is then apportioned to the state using the combined apportionment factors of the entities that comprise the corporation.

Without this reform, corporations can use various accounting tricks and sham transactions (which exist only on paper) to shift profits into a state that has no corporate income tax. Simply put, combined reporting represents the most comprehensive option available to states seeking to halt the erosion of their corporate tax bases and to curtail corporate tax avoidance.

Since 2004, seven states have adopted combined reporting. In fact, a majority of the states that levy a corporate income tax of some kind now use this approach to determining the tax liabilities of multi-state businesses. Read ITEP's testimony here on the importance of combined reporting and the gains experienced by states that have enacted the measure.

As the current recession pulls revenues down in states across the country, legislatures find themselves between a rock and a hard place, or at least that's how the situation is often presented. Sometimes budget crises are portrayed as a choice between several horrific alternatives. (Cut healthcare for low income children or programs for the elderly?)

So you would think that every state facing such cuts would use federal stimulus funds to avoid them, right? Wrong. Federal stimulus aid to states is explicitly intended to protect essential services such as health care and education, but a recent article in Business Week explains that some states are using this money to indirectly finance tax incentives for businesses. In some cases it has been suggested that tax cuts for corporations may actually threaten states' eligibility for these funds!

In an interview for the article, Greg LeRoy of Good Jobs First notes that, "When a cash-strapped state is giving out an enormous tax package and also getting federal money, the left hand, in this case the incentives, is connected to the right."

Economic research has shown that if tax incentives to businesses are financed by cuts in spending on essential services and infrastructure, the costs may far outweigh the benefits. Corporate tax breaks (like this one in North Carolina, worth almost $70 million) don't produce anywhere near enough economic benefits to offset their costs. Even worse, most are simply handouts to companies who would have invested anyway.

These giveaways are expensive and clearly contribute to declining revenues. On the other hand, research suggests that the benefits of public services are likely more important than tax costs as determinants of business location. Instead of lining the pockets of large corporations, states should be engaging in pro-growth policies that ensure low- and middle-income families don't bear the full brunt of the current economic storm.

For more on costly corporate subsidies, check out Good Jobs First.

Did tax avoidance schemes contribute to the tragic subway crash in the nation's capitol on June 22? For us to know for sure, the District's transit agency should make public the details of leasing agreements it entered into purely to facilitate tax avoidance.

The Washington Metropolitan Area Transit Authority (WMATA or "Metro") has, like many other transit agencies, engaged in so-called sale-in, lease-out (SILO) deals with financial institutions that don't actually have any real substance and do not change anyone's behavior -- except perhaps that Metro was obligated to keep train cars in service longer than was advisable.

Here's how SILOs work. When a company buys assets like equipment, it takes depreciation deductions over a period of years to reduce its taxable income. Cities and transit agencies are not subject to federal income tax, so they can't use the deductions. A SILO basically allows transit agencies to sell the benefits of those deductions, which they cannot use anyway, to a private investor. A city or transit agency sells assets such as train cars to a private investor (usually a bank). The sale gives the city immediate cash for other investments. The bank, which now "owns" the train cars and can take depreciation deductions, "leases" the train cars back to the city. So the investor gets depreciation deductions on the equipment and deductions for interest, if it borrowed money to make the purchase. The city gets the cash it was paid for the train cars, which exceeds the lease payments it must make.

But notice that the deal has no economic substance whatsoever. The train cars obviously never are possessed by the bank, which is in no way involved in operating mass transit systems. Both the transit agency and the bank are in the exact same position as they were before the deal, except they've made some money by manipulating the tax code in a way that Congress obviously never intended, at a cost to U.S. taxpayers. In 2004 alone, SILO deals were estimated to cost the Treasury $4.4 billion.

Metro has $889.1 million of these deals in place. In a statement that the agency has recently backed away from, Metro told federal inspectors in 2006 that it could not retire its 1000 Series Rohr railcars (which are suspected of being a significant contributor to the deaths and injuries) because "tax-advantaged leases" required that the cars be kept in service "at least until the end of 2014. The National Transportation Safety Board had previously recommended that the 1000 series cars be retired or retrofitted, after its investigation of a 2004 crash.

Federal transit officials encouraged these deals as a way to provide much-needed funds to transit agencies. But the Treasury Department fought them and, beginning in 2004, denied depreciation deductions for SILO deals.

Sarah Lawsky, a law professor at George Washington University, posted one of the many SILO agreements the Metro has entered. This agreement is available to the public because of a court settlement, but the other agreements are not. What details are in the other agreements is unclear, but Metro has said that the agreements did not bar it from replacing the cars and were not a factor.

But there's only one way we can know for sure. Metro should make the rest of the agreements public.

Last week brought with it a flurry of news stories discussing the issue of how to pay for transportation infrastructure. This topic is never too far from the agenda in statehouses across the country, in large part because most states fund their infrastructures primarily with a fixed-rate gasoline tax (levied as a specific number of cents per gallon) which inevitably becomes inadequate over time as inflation erodes the value of that tax rate. What's more, with fuel efficiency becoming an increasingly important criterion in Americans' car-buying decisions, drivers are able to travel the same distance while purchasing less gasoline, and paying less in gasoline taxes.

With all this in mind, Mississippi's top transportation official last week publicly stated that the state's lawmakers need to increase their flat 18.5 cent per gallon gas tax rate. As evidence of this need, the official also noted that 25% of the state's bridges are deficient.

In a similar vein, one recent op-ed in Michigan called for increasing the state's gas tax and restructuring it to prevent it from continually losing its value due to inflation. Another op-ed ran in the same paper that day, this one written by the President of the Michigan Petroleum Association, insisting that the state eliminate the gas tax altogether and pay for the lost revenue with increased sales taxes. The most obvious flaw with this plan is that it would shift the responsibility for paying taxes away from long-distance commuters and those owners of heavier (and generally less fuel-efficient) vehicles -- despite the fact that these are precisely the people who benefit most from the government's provision of roads.

More news coverage of the transportation issue came out of South Dakota last week, where a committee of legislators is currently in search of additional revenue to plug the hole created by predictably sluggish gas tax revenues. While some have expressed an interest in raising the gas tax, others have suggested replacing it entirely with hugely increased licensing fees. But licensing fees are not as capable as the gas tax in charging frequent and long-distance drivers for the roads they use.

The best way to ensure that those drivers pay for the roads they use, however, is to simply levy a tax on each mile they drive (known as a "vehicle miles traveled" tax, or VMT). While the idea has yet to be implemented in practice in the U.S., recent coverage of a pilot project involving 1,500 drivers in New Mexico shows that such a tax is a very real possibility in the future. Basically, a small computer is installed in each car which keeps track of the number of miles driven. That information is then reported to the tax collection agency, and the driver is sent a bill.

This method avoids the scenario in which drivers of vehicles of similar weights (which produce similar wear-and-tear on any given road) can end up with vastly different gas tax bills due differences in fuel efficiency. Interestingly, this new study is examining a system that would allow the computer to know which state somebody is driving in, so that the correct amount of tax can be paid to the correct state. Unsurprisingly, despite the public finance appeal of this method, privacy concerns remain a major obstacle to implementation.

The New York Times reports that many homeowners are appealing their property tax bills because their home values have dropped while their property taxes have actually increased. The article rightly concludes that these appeals can have a real impact on already struggling local governments. Jacqueline Byers from the National Association of Counties told the Times that 76 percent of large counties said that falling property tax revenue was significantly affecting their budgets.

Certainly it's a triple whammy to see your home's value fall while property taxes increase and incomes decline. The homeowner's predicament discussed in the article points directly to the inherent flaws in the property tax. Namely, property taxes aren't based on your ability to pay. If you lose your job or your investment income plummets, property tax bills are still due.

One way to ease the property tax burden for low and middle-income taxpayers is what is called a property tax "circuit breaker." The idea is simply to prevent the property tax bill from exceeding a certain percentage of the taxpayer's income. This property tax relief mechanism is one way to ensure that property taxes actually take into account a family's ability to pay. Read about the benefits of property tax circuit breakers ITEP's policy brief.