The details of last week's settlement of the U.S. government's case against Swiss mega-bank UBS, which is accused of helping wealthy Americans hide their incomes from the IRS, were released on Wednesday. Under the agreement, UBS will disclose information regarding approximately 4,450 American taxpayers with current or former accounts at UBS. In exchange, the U.S. government will withdraw its legal action to compel UBS to disclose all of its 52,000 American customers. A related agreement with the Swiss government will provide a new treaty process to facilitate the release of the information.

This is both good news and bad news for law-abiding Americans who pay their taxes and who are tired of subsidizing those who don't. The good news is that the 4,450 Americans' accounts at one point in time totaled $18 billion in assets, approximately 90% of the estimated $20 billion in American-owned accounts at UBS. So, the IRS is perhaps going to be able to catch most of the tax-cheating, at least in dollar terms.

The IRS will use this information to investigate the offshore accounts of those 4,450 taxpayers, with hopes of collecting back taxes, interest, civil and possibly criminal penalties if those accounts have not been previously reported to the IRS.

Of course the bad news is that the 4,450 names expected to be released to the IRS make up less than 10% of the estimated 52,000 American-owned accounts. Without 100% disclosure, American taxpayers may in the future be tempted to play the "audit lottery," assuming they have only a 10% chance of getting caught.

Another piece of bad news is that the criteria used to select the UBS account holders to be disclosed to the IRS will not be released. But there is a strong indication that the size of the account has some importance. Taxpayers might avoid this danger in the future by spreading their offshore funds among several accounts and numerous banks so that they can "fly under the radar."

What also seems like bad news is that under the settlement, UBS will pay no civil penalties. It has already paid $780 million in criminal penalties for the actions of certain bank employees facilitating illegal tax evasion.

What's even more alarming is that the IRS will withdraw its "Notice of Default" that was issued to UBS for violating the agreement it entered into with the U.S. government. This agreement, which made UBS a "Qualified Intermediary" or "QI," is one that foreign banks enter into with the U.S. in order to get favorable treatment in return for complying with certain reporting standards. Given that UBS bankers came into the U.S. to solicit illegal business from Americans with the express purpose of helping them evade taxes, it's hard to believe UBS is not in default of such an agreement. If this egregious behavior can't get a bank kicked out of the QI program, what in the world can?

So the settlement certainly does not mean that the offshore tax evasion problem is resolved. If anything, it shows how badly we need legislation to deal with the problem, since there are apparently limits to how far the U.S. government will go, using existing laws, to crack down.

Fortunately, members of Congress seem to understand this. Senator Carl Levin, sponsor of the Stop Tax Haven Abuse Act, said in a statement that, "The UBS settlement is at most a modest advance in the effort to end bank secrecy abuses, tax haven bank misconduct, and the tax haven drain on the U.S. treasury. It will take a long time before we know whether this settlement will produce meaningful gains due to treaty procedures which are complex, depend upon the Swiss government to carry out, and open the door to potentially lengthy appeals."

In case you are starting to feel sorry for all those wealthy taxpayers who might go to prison because the Swiss bank where they hid their money (UBS) is about to turn them over to the IRS, rest assured that they will avoid prison if they have any common sense whatsoever. That's because the IRS is temporarily allowing Americans who've hidden their income in offshore accounts to come clean now and face almost no chance of prosecution.

In his statement on the UBS settlement (see related story), IRS Commissioner Doug Shulman reminded taxpayers that the six-month IRS Offshore Income Reporting Initiative, which started on March 23, 2009, will end on September 23. That gives taxpayers only five more weeks to come clean with the government about their offshore accounts.

As a Forbes columnist put it so well: "What's a wealthy tax cheat to do?" According to Commissioner Shulman, they'd better come in to the IRS and disclose their accounts voluntarily before the IRS gets their names some other way.

If taxpayers take advantage of the voluntary disclosure program, they must:
- pay six years of back taxes and interest on any unreported income;
- pay a 20%-25% penalty on those taxes;
- and pay a penalty of 20% of the highest balance of their offshore accounts during the past six years.

By doing so, offshore account owners will avoid much harsher penalties. For example, taxpayers would avoid the penalty for not filing a Foreign Bank Account Report (FBAR), which is 50% of the balance of the account every year, and the fraud penalty, which can be as much as 75% of the tax. In addition, voluntary disclosure will avoid criminal prosecution and possible prison terms.

Once a taxpayer's name is turned over by UBS, it is too late to take advantage of the voluntary disclosure program and "all bets are off." Also, the related agreement with the Swiss government would allow the IRS to get names of taxpayers using Swiss banks other than UBS when the pattern of facts and circumstances is similar to that of the UBS case.

Commissioner Shulman indicated that the IRS currently has no plans to extend the voluntary disclosure program beyond September 23. He urged anyone with undisclosed offshore accounts to contact their tax professional immediately. He noted that the agreement demonstrated that " the world of international taxes has dramatically changed, and people hiding assets and income offshore and from the IRS need to get right with the government now."

We've already told you that there are plenty of ways to pay for health care reform without burdening working families and without harming the economy. We've already told you why an overhaul of the health system is worth paying for. And we've told you about how opponents of reform in Congress are using different tactics, but have the same goals, as the opponents of reform who show up at town hall meetings to heckle and threaten lawmakers.

The only thing left to do is to make sure members of Congress actually get this message. Many members are finding that their town hall meetings are packed with supporters of reform. Of course, the media often prefers to write about the meetings that turn into shouting matches between right-wingers and main-stream constituents. But there are stories coming out of Arizona, Colorado, Florida, Georgia, Illinois, and New Mexico, to name just a few places, about town halls filled with people calmly explaining why health care must be reformed now.

We need to make sure more town hall meetings turn out like this, and we need to make sure that lawmakers get the message in every other way possible. Our friends at the Coalition on Human Needs suggest the following:

1. Call your Members of Congress toll-free, 1-888-245-0215. You'll be connected to the Capitol Switchboard; ask to speak to your Member's office. When connected, tell them you support health insurance reform.

2. Attend an event held by your U.S. Representative and/or Senators and write a letter to the editor about the meeting.

Here's a list of town hall events: http://chn.org/pdf/2009/HealthTownHallsAug09.pdf.
(We strongly suggest you call your Member's office to confirm the time and location before setting out for the meeting. Call too if you don't see details for an event near you).

You can use these sample letters to the editor to write to your local paper about the event: http://chn.org/pdf/2009/TownHallLTE.pdf.

It's one thing for the federal government to allow a one-time amnesty for Americans who've hid their income from the IRS in offshore accounts. (See related story.) The "stick" is effective (prison) and the "carrot" is not overly generous (since these Americans will pay taxes, interest, and penalties).

But lately several states are providing their own tax amnesties that are very different and very misguided. According to a recent article in State Tax Notes (subscription required), the thirteen state tax amnesties already conducted or promised this year ties the 2002 record for most amnesties offered in one year.  Assuming that DC Mayor Adrian Fenty signs the budget (which contains a tax amnesty) that was recently passed by the DC Council, that record will be broken.  Pennsylvania and Michigan, however, still have a chance to avoid adding to the list of states enacting these short-sighted measures. Amnesties have been proposed within each state's legislature.

As we've argued before, allowing delinquent taxpayers to pay the taxes they owe with little or no penalty is unfair to those diligent taxpayers who paid their taxes on time.

This unfairness is compounded greatly if the interest owed on the late tax bill is reduced, or even waived entirely, as was done this year in Delaware.  Waiving the interest owed on late tax bills essentially means that delinquent taxpayers are granted an interest-free loan by the state, for no reason other than the fact that the state is now desperately in need of money. Had all taxpayers been aware of the possibility of this interest-free loan, the rate of noncompliance would undoubtedly have skyrocketed. 

Repeatedly offering amnesties, as is increasingly becoming the norm, harms the ability of states to enforce their tax laws.  With record numbers of tax amnesties having been offered in the last seven years, delinquent taxpayers can usually assume that they'll be offered an easy way out eventually -- if only they're patient enough.  As one revenue official from Kansas recently put it, "if you have amnesties too often, you're literally training taxpayers not to pay."

Last Thursday, as an economic consulting firm released a report finding that the Michigan Earned Income Tax Credit (EITC) "generates positive benefits for residents in Michigan," sources close to the state's governor revealed that she had decided to cut that very tax credit.

The federal EITC was created in 1975 and expanded several times since then, including in 1986 by President Reagan, who called it the “the best anti-poverty, the best pro-family, the best job-creation measure to come out of Congress.” Over the years, many states have created their own EITCs to supplement the federal one, and a great deal of research shows that these state EITCs are a good investment.

Governor Jennifer Granholm's proposal to balance the state's budget includes a reduction in the state's EITC from 20 to 15 percent of the federal credit. This proposal can't even be described as penny wise and pound foolish, because it's going to cause unnecessary pain immediately. The new report from Anderson Economic Group finds that "the Michigan EITC reduces poverty and increases income by an average of 3% for those who receive the tax credit...the EITC generates positive economic benefits for residents in Michigan." The report goes on to say that if monies used to fund the state EITC were used elsewhere, the funds "would not be distributed so widely in the state or used as productively as putting money into the hands of families that then spend this money in their communities."

The EITC cut is only one component of the Governor's proposal. She would also solve the state's budget shortfall by expanding the sales tax base to entertainment services including tickets to concerts and athletic events, increasing the state's cigarette tax, and levying a penny sales tax on the purchase of bottled water. Expanding the state's sales tax to include more services is a smart plan, but cutting the EITC at a time when many Michigan families are struggling is a terrible one.

South Dakota Democratic Gubernatorial candidate Ron Volesky recently came out in support of enacting a corporate income tax.  Since corporate income taxes are widely believed to fall most heavily on wealthy shareholders, enacting such a tax in South Dakota could add a useful bit of progressivity to a state tax system desperately in need of it.  At present, South Dakota lacks both a personal, and corporate, income tax.

Volesky appears interested in using much of the revenue from a new corporate income tax to increase funding for education.  He also has expressed an interest in using those revenues to provide property tax relief, or to eliminate the state sales tax on necessities such as food, clothing, and utilities.

Unfortunately, Democratic front-runner Scott Heidepriem, while reportedly "interested in hearing [Volesky's] theory," has stated that he remains opposed to the idea.  From a purely political standpoint, this is unsurprising. 

An income tax of any kind hasn't been seriously discussed in South Dakota since the 1970's, after a number of Democratic legislators who voted in favor of an ill-fated personal income tax plan lost their re-election bids.

But an awful lot of time has passed since the 1970s, and the world looks a lot different now. Volesky should be commended for taking this sensible, yet controversial position. It's time for South Dakota lawmakers to give the income tax a second look.

Arizona lawmakers voted this week to permanently eliminate the state's property tax. If signed into law by Governor Jan Brewer, the revenue loss to the state is expected to be about $250 million. This is the worst time in recent memory to cut taxes, given Arizona's shortfall of more than $3 billion.

Even worse, this cut represents a leap backward for social justice advocates. As this article explains, "The tax was designed to more evenly spread the burden of funding public schools in local communities." 

In states where education is mainly funded through local property taxes, poor districts often must levy much higher property taxes than wealthier districts in order to adequately fund schools. A state property tax applies a uniform property tax rate to all taxing districts, making school funding more equitable.

Repealing this tax won't spell the end of state aid to poorer school districts in Arizona -- but it will certainly make it harder to ensure equitable school funding in the long-run.

To put this measure in context, the Arizona legislature's response to its fiscal situation has become increasingly unsound lately. One budget-balancing idea gaining support among legislative leaders: selling and then leasing back state government property in what one leader approvingly refers to as "taking out a mortgage." Never mind that this approach to personal finance didn't work out so well for many Arizona homeowners in the last couple of years.

It's a time-honored, if puzzling, tradition. Elected officials pledge to put everything on the table in a relentless quest for tax reform -- except for a handful of tax breaks that they personally hold near and dear. New Mexico Governor Bill Richardson is the latest leader to pull this disheartening stunt.

Earlier this week, with the state facing a $400 million deficit, Richardson expressed his willingness to repeal various tax loopholes to help balance the budget. Unfortunately, Richardson continues to oppose closing one of the most unfair tax giveaways in the state's tax code: a 50% exclusion for capital gains income that he pushed through in 2003. He also dismisses the idea of reforming the state's $80 million film production tax credit.

This guidance doesn't leave lawmakers with a lot of sensible options for reform. They should ignore their governor altogether and look for answers in a new report from New Mexico Voices for Children, which presents a more open-minded menu of revenue-raising options that could help make the state's tax system simpler and fairer. These options include repealing the capital gains break, enacting combined reporting for corporate income taxes, and repealing income tax rate cuts enacted in 2003.

When New Mexico lawmakers convene for a special budget-balancing session this fall, the Voices for Children report will serve as a much better template for solutions than Richardson's half-hearted gesture towards loophole-closing.

Americans take pride in the fact that their country provides incredible opportunities for people from all backgrounds. But those opportunities, and our very idea of what it means to live in America, are threatened when we cannot provide for our basic health needs.

One out of three of us have gone without health insurance at some point over the last two years. Thousands of Americans file for bankruptcy every day, and medical expenses contribute to about two thirds of these bankruptcies. Tens of thousands of Americans die each year as a result of not having health insurance. And to top it all off, we actually pay more per capita than other developed countries for our health care!

The facts make clear that the status quo is unacceptable and unconscionable. But those who are heavily invested in the current health care system and those with extreme anti-government views are not engaging us with facts. Instead, right-wing politicians, media personalities and extremist organizations are peddling lies about what health care reform will accomplish and are encouraging their vocal supporters to shout down any public figure who wants to discuss the facts.

(See our take on the extremists that have shown up to shout down members of Congress at town hall meetings.)

It's Time to Fight

Citizens for Tax Justice has worked for several months with other advocacy groups, faith-based organizations, service providers and unions to educate lawmakers and the public about progressive ways to pay for health care reform. (See our state-by-state figures on various proposals to pay for reform.) The efforts of this coalition, Rebuild and Renew America Now (RRAN) and the efforts of health care advocates will be for nothing if the small minority of extremists is allowed to shut down any rational discussion of reform.

Here are some suggestions from our friends at the Coalition on Human Needs on how you can fight for health care reform:

1) Attend a meeting held by your U.S. Representative and/or Senators. Let them know you support comprehensive health care reform!
Here's a list of meetings:  http://chn.org/pdf/2009/HealthTownHallsAug09.pdf
[Note:  It is strongly suggested that you call your member's office to confirm meeting details.]

2) Call your Member of Congress, if he/she is on one of the three House committees that approved health care legislation. 
Here's a list of all Committee members and how they voted: http://chn.org/pdf/2009/HR3200Committeevotes.pdf
Thank them if they voted in favor; express disappointment if they didn't.  You can use this toll-free number to be connected to the Capitol Switchboard:  1-888-245-0215.

Fortunately, you won't be alone in supporting reform. Plenty of the town hall meetings held by lawmakers have been friendly, calm affairs. At one recent meeting, a Republican Congressman even told the crowd that he was leaning towards voting for the health care reform legislation in the House!

On August 12, the U.S. government and Swiss banking giant UBS announced that they had reached an agreement settling the dispute over whether the Internal Revenue Service can enforce a "John Doe summons" against the bank. The summons would have required UBS to turn over information on its 52,000 U.S. customers.

In a statement issued the same day, IRS Commissioner Doug Shulman said that the details of the agreement would not be available until after the Swiss government has signed the agreement, possibly as early as next week. But rumors have it that the IRS will get only a fraction of the information sought, perhaps on just 8,000 to 10,000 accounts.

Anything less than full disclosure of all U.S. customers is unacceptable. A federal court agreed with the IRS that there was a reasonable basis for concluding that the 52,000 includes people evading their U.S. taxes. The case against UBS exposed especially egregious behavior by the bank's employees. They came to the U.S. soliciting illegal business from U.S. citizens, and helped Americans hide their income and assets from the IRS by setting up accounts in the name of foreign shell companies. These private bankers committed crimes on U.S. soil, with the full knowledge and support of the bank's management. UBS should not be allowed to hide behind arguments about Swiss sovereignty or the country's bank secrecy rules.

If the agreement does not provide for full disclosure, it sets a terrible precedent for future investigations. Some Americans will continue to evade taxes by using offshore financial institutions and hope that, when the bank gets prosecuted, their names will be among the 80% that aren't turned over to the IRS.

Foreign governments and financial institutions should not be able to facilitate the evasion of U.S. taxes by its citizens.

When your state is more than $8 billion in the red over the next two years and has gone more than a month into the current fiscal year without enacting a budget, it’s hard to see how political intransigence gets the bills paid.  Just ask Connecticut Governor Jodi Rell.  After months of opposing needed tax increases, she has begun meeting with Senate President Donald Williams and House Speaker Christopher Donovan to try to craft a plan to bring revenues and expenditures into balance.  These discussions are private and have excluded members of her own party.

The meetings come after the Governor finally capitulated at the end of July and put forward a revised budget proposal that included some tax increases, including a 10 percent surcharge on the corporate income tax over the next 2 years. 

Still, the Governor’s tax proposals come up short – both in terms of adequacy and equity – when compared to those offered by the General Assembly.  The Assembly’s plan would reportedly generate $1.8 billion over the next two years, with two-thirds of that amount arising from increases in the state’s income tax for families with incomes in excess of $500,000.

The consequences of relying more heavily on spending cuts than on tax increases were well documented in a letter several elected officials, including members of the state’s Congressional delegation, sent to the Governor this week.  It points out that, under the Governor’s recommended budget, the entire staff of the Office of the Child Advocate would be eliminated, leaving the state without an independent entity to ensure the safety of children in the state’s care.

For more on the Connecticut’s ongoing budget debate, see Connecticut Voices for Children’s web site.

Oregon Governor Ted Kulongoski recently signed legislation requiring the "sunset" (or forced expiration) of most tax credits offered by the state.  Tax credits related to the environment, agriculture, or business will expire at the end of 2011, if new legislation is not enacted.  Education, housing, and community service related credits will cease to exist after 2013, without legislative action.  The same goes for credits dealing with medical care, child care, and families after 2015.

Of course, the plan is not necessarily to allow all these tax breaks to expire, but instead to provide the legislature with an impetus for taking a closer look at these provisions.  Ideally, after a closer look, state lawmakers will then be able to more objectively decide whether renewing them is worth the cost.

This reexamination can be thought of as an attempt to mirror the reviews that occur when agricultural, housing, education, and other types of ordinary spending programs are reconsidered during the appropriations process.  Since tax credits oftentimes are enacted with fairly specific goals, a review of their merits could be quite pointed, and potentially very useful.

This is particularly important in Oregon, where any law increasing taxes (and that includes any law repealing a tax credit) usually requires a supermajority vote of three fifths of the state house and senate. So once a tax credit is enacted, it might be around forever if it doesn't have an expiration date.

But the reform signed by the Governor does not go far enough because there are many other types of tax subsidies (subsidies provided through the state's tax system) that do not take the form of credits, and these are not affected by the new law. For example, the state's home mortgage interest deduction is arguably due for an overhaul, but this new law does not provide state legislators with any impetus to review such targeted tax deductions.

It's nice to see lawmakers acknowledge that they need to pay more attention to the money they're doling out through the tax code, but this reform could be much stronger.

A little over a year ago, we told you about a ridiculous law in South Carolina that provided for a sales tax "holiday" on purchases of handguns, rifles, and shotguns (later ruled unconstitutional for technical reasons, though only after the holiday had already taken place).  Little did we know then that the idea would actually catch on.  Louisiana enacted a similar "holiday" last month, upping the ante by exempting not only handguns, rifles, and shotguns, but also bows, crossbows, hunting knives, arrows, ammunition, rifle scopes, holsters, and much more.  Unbelievably, the idea is reportedly receiving attention in Texas and Kentucky as well.

The Louisiana holiday is scheduled to occur each year on the first consecutive Friday through Sunday in September.  During that weekend, neither state nor local sales taxes will be collected on a variety of items the legislature has declared worthy of being included in its "Second Amendment Holiday." 

But it's not hard to imagine how many of those exemptions will pose serious administrative problems.  With some exempt items, such as tree stands, there seems to be little room for confusion.  In other cases however, the state has decided to exempt a variety of multi-purpose items based on whether they were designed, marketed, or even simply purchased for use while hunting (e.g. some items must be designed with hunting in mind, while others need only be purchased by somebody with the intent to hunt).  Items falling into this category include off-road vehicles, animal feed, boots, bags, binoculars, chairs, belts, and various types of camouflage clothing. 

Apparently, according to this list of tax-exempt items, you can look at a bird through tax-free binoculars, but only if you intend to kill it.  Ensuring that these items are really purchased by individuals with "Second Amendment" intentions will no doubt prove impossible.

The bill's official fiscal note hints at a further complication involved with this holiday.  Specifically, it explains that the state will pay retailers $25 for each cash register they re-program to calculate "Second Amendment" items as being tax-free.  On top of that, the state will pay $25 more when the register is re-programmed, back to normal, at the end of the holiday.  Official estimates are that it could cost Louisiana taxpayers up to $100,000 to help retailers make the necessary modifications.  Since the holiday is only expected to result in $263,000 per year in tax savings, this $100,000 cost is not a trivial concern.  And keep in mind, Louisiana taxpayers not purchasing weapons will be helping to pay this $100,000 tab to benefit their soon-to-be well-armed neighbors.

The inevitably complicated nature of sales tax holidays is just one of their many flaws -- as explained in this ITEP Policy Brief.  But despite all their problems, at least typical "back-to-school" sales tax holidays can be interpreted as a misguided attempt to make life easier for families with school-age children.  When it comes to these "Second Amendment Holidays," however, it's hard to see what exactly lawmakers are trying to gain, other than a pat on the back from the NRA.

For several decades, the American economy has shifted from producing consumer goods to providing services. As a result, states that tax the purchase of goods but not the purchase of services will increasingly find themselves unable to raise the revenue needed to support public services.

The Center on Budget and Policy Priorities released a report this week that explains why states should expand their sales tax bases to include services. The report offers various reasons why taxing services is a good policy prescription including: increased short- and long-term revenues, the potential for less volatility in the sales tax, and the potential for more administrative compliance.

A helpful discussion of the pros and cons of taxing business-to-business services is also included. Advocates interested in knowing how much revenue could potentially be raised from expanding the sales tax base to include services will also find the state-by-state estimates included in the paper very informative.

Two states, Washington and Maine, will consider ballot proposals this fall that are similar in concept to the disastrous "Taxpayer Bill of Rights," or TABOR, that Colorado enacted in 1992 to limit tax increases and cap spending by the state government.

This week, Washington State officials released their estimate of the fiscal impact from Initiative 1033, which will be on the November ballot. The Washington State Budget and Policy Center says I-1033 "would impose strict spending limits on state and local governments resulting in sharp reductions in public investments in education, community devel­opment, health care, and economic security. By restricting resources, I-1033 would dramatically weaken the state’s ability to fund important public priorities and would dimin­ish the quality of life for all Washingtonians."

The state's Office of Financial Management agrees and says, "The initiative reduces state general fund revenues that support education; social, health and environmental services; and general government activities by an estimated $5.9 billion by 2015." (This doesn't include the estimated loss of nearly $700 million for counties and $2.1 billion for cities by 2015 that would result if I-1033 is approved.) Voters in Washington would be wise get all the facts before voting in favor of this heavy-handed and unnecessary proposal.

A similarly draconian initiative will be put before the voters in Maine this fall.  Last week, Secretary of State Matt Dunlap approved the so-called TABOR II for inclusion on the November ballot.  The initiative largely reprises an earlier effort – rejected by voters in 2006 – to impose severe limits on state spending and taxes, limits that could become more constraining with each successive economic downturn.   A new and excellent report from the Maine Center for Economic Policy reviews the dangers of the current initiative and concludes that what was bad in 2006 has only gotten worse with time.  Legislators and other public leaders agree.

To learn about how you can help stop TABOR II in Maine, visit Maine Can Do Better.

By now everyone knows that right-wing organizations such as "FreedomWorks," "Americans for Prosperity," and "Conservatives for Patients Rights," have organized a campaign to send hecklers to town hall meetings held by any member of Congress who might possibly vote in favor of a health care reform bill. This campaign has been boosted by right-wing media personalities like Rush Limbaugh and Lou Dobbs, who have encouraged their followers to show up at town hall meetings to shout down lawmakers.

The anti-reform protesters, whose main goal seems to be shutting down any public discussion on the topic of reform, have even admitted in some cases that they are not constituents of the lawmakers they are heckling. In other cases, those town hall protesters who claim to be merely “just a mom from a few blocks away” and “not affiliated with any political party” have turned out to be Republican party officials.

Conservatives at Town Halls, Conservatives in Congress: Same Goals, Different Methods

Now, one cannot simply assume that conservative members of Congress are just as crazed and extreme as the anti-government ideologues showing up at these town hall meetings with the intent to shut them down. Members of Congress, after all, have an image of sobriety to maintain (which is hard to do when you're hanging your opponents in effigy or making death threats against them).

So conservatives in Congress have taken a different approach to accomplish the same goal (killing reform). Instead of shutting down the discussion, conservative lawmakers want the discussion to continue... forever.

Many members of Congress have given up on the willingness of Republicans to truly change how the health insurance industry operates, but one exception is the chairman of the Senate Finance Committee, Max Baucus (D-MT). His negotiations with two other Democrats and three Republicans (the so-called "gang of six") have moved very, very slowly.

While Baucus has said he wants a bill to at least be made public by September 15, his ranking member, Charles Grassley (R-IA) has said he doesn't see the rush (after he already refused to agree to anything before the August recess).

The Rush to Compromise

Some Senate Democrats continue the rush to compromise away key elements of health care reform, even though there is little indication that this will win over their Republican colleagues. Particularly alarming are statements from certain Democratic Senators that a Senate health care reform bill will have no new taxes on individuals at all. Revenue will come from savings (which makes sense to the extent that it's possible) and from charging an excise tax on insurance companies for plans that exceed a certain cost level.

The idea that any revenue-raiser is going to be embraced by conservative members of the Senate seems a little naive to say the least. And one has to worry about the logic being employed. If the only "politically viable" taxes are those enjoying unanimous support and affection, then it's difficult to see how Congress can do anything that costs money.

So-Called Centrists Don't Seem Promising

To gauge the chances that the bipartisan approach will be successful, let's consider the three Republicans who are part of the "gang of six."

We have Senator Grassley of Iowa. He recently held up a chart on the Senate floor with a children's book drawing of a dragon to illustrate the "Debt and Deficit Dragon," and then held up another chart illustrating a character he called "Sur Taxalot." He then rambled on about how "the surtax is a large, heavy, painful weapon, and lethal to America's job engine, the goose that laid the golden egg," and said that Sur Taxalot "does nothing to slow the dragon's exponential growth."

It's hard to decide what's more objectionable: conflating numerous bedtime stories, fables and metaphors into a couple sentences, or regurgitating myths about the effects of the House's proposed surcharge on small business -- myths that have already been discredited.

Then we have Senator Mike Enzi (R-WY). In addition to being a member of the Finance Committee, he's also the ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee (you know, the Senate committee that actually approved a health care bill). During the HELP debate, Enzi offered countless amendments that essentially contradicted the most fundamental goals of reform. It's perhaps unfortunate that no Republicans could bring themselves to vote for the bill that the HELP committee eventually approved, but it would be far more unfortunate if the committee had approved no bill at all.

Then there is Olympia Snowe of Maine, who is something of an enigma. She is thought of as the quintessential centrist in the Senate. She voted against one of the key components of the Bush tax cuts, the 2003 law that slashed taxes on capital gains and dividends. But she has supported plenty of regressive tax cuts (like the proposed repeal of the estate tax) and managed to get a failing grade on CTJ's Congressional Tax Report Card covering the years of Republican control. (Grassley and Enzi each received scores of zero percent.)

Compromise with Those Who Oppose Reform?

The bottom line is that the conservatives in the Senate are likely to be about as helpful as the conservatives rushing to lawmakers' town hall meetings to shout and harass. The former hope to stretch the health care debate into infinity while the latter hope to prevent the discussion from happening, but the goal -- stopping health care reform -- seems to be the same.

Some of the so-called centrists are fundamentally opposed to progressive taxation just as they are fundamentally opposed to health care reform. Compromising on either the tax provisions or the health reform provisions may therefore prove pointless.

Environmentalists have their eyes on the Senate, where Majority Leader Harry Reid has given several committees a September 28 deadline to mark up climate change legislation. The legislation is expected to include a "cap-and-trade" program, in which 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 House of Representatives passed its version (H.R. 2454, the American Clean Energy and Security Act of 2009) in June. It's clear that America needs to act to reduce the greenhouse gases that contribute to climate change. But it's equally clear that the Senate could do better than the House did in addressing this problem.

President Obama 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 for free. The overall amount of allowances would be capped and reduced each year. 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 House cap-and-trade bill only auctions off 15 percent of the allowances, and the revenue raised would help offset the costs for the poorest fifth of families. So 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. Unfortunately, there are many reasons why this is an inefficient way to protect consumers.

The Senate might repeat the House's mistakes. One of the Senate committees with partial jurisdiction over the legislation will be the Finance Committee, whose chairman (Max Baucus of Montana) recently told Congressional Quarterly that the Senate would probably not allocate the emissions allowances all that differently than the House bill does.

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 likely result of the House-passed bill) or be redirected back to consumers.

The Senate could accomplish the latter by auctioning off more than 15 percent of the allowances and using the revenue to offset the increased energy costs more effectively for both low- and middle-income families. The Center on Budget and Policy Priorities 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.

The Senate might not just repeat the House's mistakes. They might even add a few of their own. Baucus told the Daily Tax Report that “Congress could use the money from auctioning allowances to cut taxes: by cutting marginal rates, by cutting capital gains rates, by cutting payroll taxes. Or we could do all of the above.”

To take just one of these ridiculous ideas, the preferential rates that already exist for capital gains and dividends already cost us around $100 billion a year and the vast majority of the benefits go to the richest one percent of taxpayers. Let's hope Senator Baucus sees that relief for consumers is more important than showering more special breaks on wealthy investors.

On July 30, Rep. Jim McDermott (D-WA), along with six cosponsors, introduced the Taxpayer Responsibility, Accountability, and Consistency Act (H.R. 3408) which is aimed at stopping the misclassification of employees as independent contractors.

For each worker that a company "employs," it must withhold income and payroll taxes, pay benefits and unemployment insurance, and comply with labor laws. But companies do not have these expenses when they use "independent contractors" rather than "employees." Independent contractors are themselves responsible for paying the employer half of payroll taxes, as well as the employee half, and they generally don't receive other benefits like health insurance from companies that hire them.

As a result, some employers intentionally misclassify workers as "independent contractors" to avoid these costs.

It's unclear exactly how much misclassifying employees costs the U.S. Treasury. In theory, it would not matter to the Treasury whether payroll taxes are entirely paid by workers (as is the case for independent contractors) or half paid by employers (as is the case for employees) but the reality is that workers misclassified as independent contractors may be unable to shoulder the payroll taxes and are often unaware of this responsibility until the taxes are due. Or the income to independent contractors is simply not reported at all. 

A Government Accountability Office (GAO) report issued earlier this year found that only 8 percent of small businesses with assets under $10 million submitted 1099-MISC forms that are due whenever independent contractors are used. It seems pretty unlikely that only 8 percent of those companies are really hiring independent contractors. When income is not reported to the IRS by a third party, the income is correctly reported only 46 percent of the time.

Many employers use a loophole created by Sec. 530 of the Revenue Act of 1978 which is commonly referred to as "Sec. 530 relief." It allows employers to classify workers as independent contractors if they have historically done so, or if it is the industry practice. H.R. 3408 would repeal Sec. 530 and replace it with a new test which would be more difficult to meet. The old "Sec. 530 relief" would continue to be available for one year after the new bill is enacted.

Despite single party control of both the legislative and executive branches of government, the Grand Canyon State has now been without a complete fiscal year 2010 budget for more than 40 days.  The delay has arisen largely because legislative leadership has continued to insist that tax-cutting dogma trump fiscal reality. More specifically, they have demanded that Governor Jan Brewer’s proposal to increase the sales tax on a temporary basis be paired with a permanent plan to reduce personal and corporate income taxes, along with property taxes, by $650 million per year.  To this point, their demands have foundered in the Senate, as the final vote needed to approve such a pairing has proved elusive.

A new gambit, devised in consultation with Grover Norquist, may provide the required votes within the next few days. It would separate the sales tax hike from the other tax changes, thus requiring two separate votes and thus potentially drawing new supporters to each element.  However packaged, the combination of a temporary tax hike and permanent tax reduction will have the same result over the long-run:  inadequate revenue and a greater share of the responsibility for taxes shifted onto working Arizonans.

Earlier this year, policymakers in Oregon enacted both temporary and permanent changes in the state’s tax system to help close an enormous budget gap and, by extension, provide funding for vital services like education, health care, and public safety.  Among the changes are an increase in the personal income tax rate on income in excess of $250,000, new limitations on the personal income tax deduction for federal taxes paid, reforms to the state’s corporate minimum tax, and an increase in the top corporate income tax rate.

Yet, due to quirks in Oregon’s legislative process, opponents of these changes have an opportunity to put them before the voters for approval via referendum.  Not surprisingly, representatives of big business and a who’s who of anti-tax organizations are attempting to take full advantage of that opportunity.  Groups such as Associated General Contractors of America, Associated Oregon Industries, and Common Sense for Oregon have all already given tens of thousands of dollars to the referendum effort, which must collect over 55,000 signatures by September 25.  If they do, then the changes will be put before the voters in January. 

While corporate interests will almost certainly go to great lengths to stop these changes from taking effect, it will ultimately be the voters who decide -- and, for now, it appears that they understand the need for additional revenue generated in a progressive fashion.  Polling conducted by Grove Insight and released by the Oregon Center for Public Policy indicates that 62 percent of likely voters would back the changes enacted by the legislature, with just 26 percent opposed.

For more on the recent changes in tax policy and on the referendum fight, visit the Defend Oregon Coalition.

As in most places around the country, the District of Columbia recently concluded debates over how to close its budget deficit.

Council member Jim Graham proposed what was perhaps the best idea of the debates -- a modest income tax increase on incomes over a half million dollars.  As Ed Lazere, Executive Director of the DC Fiscal Policy Institute (DCFPI) recently stated, "If you are thinking about how to balance the budget while sparing the local economy, there is a pretty good consensus among economists that raising taxes among high-income folks is probably the best way to go, because it does not tend to affect their consumption."

Ultimately, however, Graham's proposal failed to gain support, and the city instead decided to increase sales, cigarette, and gas taxes, in addition to dramatically cutting spending.  While some kind of tax increase was undoubtedly necessary, the particular increases chosen by the council will disproportionately impact low-income families.  The same can be said of some of the city's spending cuts.  For example, Temporary Assistance for Needy Families (TANF) was modestly reduced under the new budget, though much larger proposed cuts in the program were avoided.  Education was hit especially hard -- to the tune of $30 million.

Fortunately, in addition to revenue raisers and spending cuts just described, the District also decided to require "combined reporting" of corporate income for tax purposes.  This measure should provide some additional revenue for the city, while also improving the fairness of the District's corporate income tax.

As the DCFPI points out, some of the cuts made by the council could have been mitigated if federal restrictions on the city's use of its rainy day fund were relaxed.  The DCFPI has a wealth of information on the DC budget debates on their website.

So-called sales tax holidays, normally two- or three-day events that encourage shoppers to purchase back-to-school items tax-free, are bad policy for a variety of reasons. The holidays are poorly targeted, costly, and lull legislators into thinking that they've done something substantial to help reduce the regressivity of sales taxes.

The bottom line is that given the choice between targeted sales tax reform that takes into account one's ability to pay and a three-day sales tax holiday, lawmakers should always opt for targeted reform.

Last weekend a handful of states from Alabama to New Mexico held their sales tax holidays. (The Federation of Tax Administrators keeps a complete list of holidays here.) But because of the recent economic downturn, some legislators and economists are questioning the wisdom of not collecting sales taxes a few days a year.

Former chairman of South Carolina's Board of Economic Advisors Harry Miley certainly has his doubts about the effectiveness of sales tax holidays. He says that shoppers don't need incentives to go back-to-school shopping, and the cost to the state is quite high. He says, "The idea of a tax holiday for essential items doesn’t make any sense to me." For more on why sales tax holidays aren't all they are cracked up to be, see ITEP's Policy Brief.

Governor Bev Perdue signed the budget passed by North Carolina's legislature last week. The compromise budget raises nearly $1 billion in needed revenue (about 23% of the state's budget shortfall for the fiscal year). While we can't describe all the revenue raisers as pleasingly progressive (the sales tax and various excise taxes were increased), legislators did opt for a progressive income tax surcharge targeted to upper income taxpayers instead of an across the board surcharge.

The North Carolina Budget and Tax Center identifies the silver lining of the budget agreement. First, new revenue was raised, and second, there is new momentum for comprehensive tax reform.

Read more about BTC's take on the compromise here.

Any company that makes a decision as to where they are going to be based on the tax rate is a company that won't be around very long. If you're down to that incremental margin you don't have a business.

As members of Congress return to their districts during the August recess, they are sure to be bombarded by anti-government activists claiming that small businesses will be hurt by health care reform.

In the House of Representatives, the three committees with jurisdiction have approved a bill. The Ways and Means Committee and the Labor and Education Committee each approved a health care reform bill several weeks ago while the Energy and Commerce Committee finally approved its version on Friday, just before adjourning for the August recess. The Energy and Commerce Committee was hung up over disagreements between the committee's more conservative "Blue Dog" Democrats and main-stream Democrats like chairman Henry Waxman.

In the Senate (which has one more week before starting its recess), one of the two committees with jurisdiction over health care reform has approved a bill while the other, the Senate Finance Committee, has not yet found the bipartisan agreement that Finance chairman Max Baucus hopes for.

The Surcharge and Small Businesses

There are several unwarranted complaints about how the House bill (H.R. 3200) would impact small business. One involves the high-income surcharge that would partially finance the overhaul. Opponents of health care reform have argued that the surcharge would reduce small businesses' incentives to hire workers.

CTJ has previously released a report showing that only 1.3 percent of taxpayers would even pay the surcharge in 2011. Of the taxpayers who can realistically be called "small business owners," only 4 to 5 percent would pay the surcharge.

More importantly, taxes don't reduce the amount of money a small business owner has to pay workers. A taxpayer's income for tax purposes does not even include any money that the taxpayer pays to someone else as wages or salaries. So the surcharge would have no effect on incentives to hire workers. And any business owner who needs to purchase equipment to expand will probably be able to write these purchases off under the special expensing breaks available to small businesses.

In other words, opposition to the surcharge has more to do with opposition to progressive taxes and little or nothing to do with small businesses.

"Pay-or-Play" Rules

Another small business-related complaint concerns the "pay-or-play" rules that would require companies to either offer health insurance to their employees or pay a penalty. Some complain that the proposed pay-or-play rules do not exempt enough small businesses and that the tax credits for small businesses that provide health insurance are not generous enough.

Under the bills approved by the House Ways and Means and Labor and Education Committees, companies would be required to provide health insurance meeting certain standards to their employees or they would be subject to a payroll tax of 8 percent. Companies with a total payroll of less than $250,000 would be exempt. The payroll tax would be phased in gradually for companies with a total payroll between $250,000 and $400,000.

The version approved Friday by the Energy and Commerce Committee would exempt companies with an annual payroll under $500,000 and the full 8 percent payroll tax would only apply to companies with annual payrolls above $750,000.

Last weekend, the President's Council of Economic Advisers (CEA) released a report showing that firms with less than $250,000 in total annual payroll accounted for 77 percent of all firms, and 13 percent of all private sector employment, in 2006. (The CEA report also shows, indirectly, that 75 percent of all private sector employment that year was in firms with total payroll of more than $1 million.) In other words, a significant portion of the labor force would be in companies that are exempt from the "pay-or-pay" rules under H.R. 3200, and it's not obvious that expanding that exemption is a good idea.

The CEA report also explains why small businesses have the most to gain from health care reform. Small businesses that offer coverage to their employees often pay high fees to brokers. They pay more for the fixed administrative costs of insurance companies since they have fewer employees to spread those costs over. They suffer from insurance companies' practices of charging higher premiums to entities that have a workforce with greater health needs (which can mean a single sick employee in the case of a true small business).

The bills approved in the House would allow small businesses to purchase insurance in an exchange where administrative costs would be driven down through competition (thanks to an efficient public plan that competes with private insurers). Discrimination based on health status would be prohibited.

The CEA report also points out that even small businesses that do not offer health insurance to their employees could be helped tremendously by the reform, since it includes subsidies to low- and middle-income families who buy health insurance on their own in the exchange. This will make many people more willing to work for a company that cannot afford to offer health insurance to its employees.

Will Business Associations Ever Be Happy?

In some cases, it is unclear what outcomes critics of the current proposal desire. The National Federation of Independent Business (NFIB) published ten reasons why it opposes H.R. 3200, and some of them contradict each other.

NFIB finds the payroll tax imposed on firms not offering health insurance to be unfair. "Payroll taxes are especially onerous," NFIB argues, "because they tax labor rather than profits. No matter how profitable or unprofitable a business might be, they are forced to pay this tax."

One would think NFIB would be happier with the surcharge. The surcharge is not aimed at businesses at all but at high-income individuals. For taxpayers who are small business owners, the surcharge would only apply to their profits, and even then it would only apply to the 4 or 5 percent of small business owners with enough profits to be impacted.

Sadly, NFIB cannot support this either, because "small businesses are struggling to find capital." (Never mind that equipment purchases by any true small business would probably qualify for small business expensing, as already explained.)

NFIB's release also argues that the tax credits available for small businesses are not sufficiently generous. Since NFIB seems to oppose all taxes, it's unclear how they would pay for an expansion of the tax credits. Perhaps they feel that Congress should try harder to squeeze savings out of the pharmaceuticals, hospitals, insurance companies and other players in the health care system. When NFIB is ready to campaign for that, they will have our support.

On July 24, three organizations, Global Financial Integrity, the Tax Justice Network, and Citizens for Tax Justice, briefed Congressional Hill staff on proposals to crack down on offshore tax abuses. The speakers from the three organizations explained the types of offshore tax abuses that are costing Americans billions in tax revenue: tax evasion (which is illegal) by individuals and tax avoidance (which is not necessarily illegal) by corporations.

Speakers from Global Financial Integrity and the Tax Justice Network discussed developments related to offshore tax evasion and the ways in which some financial institutions facilitate it.

The strongest legislation proposed so far to crack down on offshore tax evasion is the tax haven bill introduced by Senator Carl Levin and Congressman Lloyd Doggett (S.506/H.R.1265). (See the letter that CTJ and several other organizations signed in support of this bill.) Congressman Doggett himself made a surprise appearance at the briefing and expressed his determination to keep pushing for action on the bill.

Speakers also explained that as the U.S. prods other governments to comply with our tax enforcement efforts, some respond that the U.S. itself is a tax haven for foreigners trying to escape paying taxes to their own governments. The problem is that certain U.S. states allow people to set up shell entities that can be used to hide income from whatever government they're supposed to be paying taxes to. The Incorporation Transparency and Law Enforcement Assistance Act, introduced by Senator Levin (S.569) would address this problem. (See a letter that Citizens for Tax Justice and other organizations signed in support of this legislation).

CTJ director Bob McIntyre discussed offshore tax avoidance by corporations. (See a summary of his remarks.)

Read CTJ's summary of pending legislation to address offshore tax evasion.

Read the complete materials from the briefing: Tax Evasion and Incorporation Transparency.

California now has a budget for the fiscal year that started almost a month ago. But for advocates of sustainable tax and spending policy, the hard times are only beginning. As a new report from the California Budget Project explains, lawmakers faced with a $23 billion shortfall chose to rely on spending cuts to close two thirds of the gap.  The list of cuts is grisly.  Health, education, child services, support for the disabled, and just about every other category of state spending will be slashed significantly.  The consequences for Californians are expected to be dire.

Astonishingly, the budget includes virtually no changes on the tax side of the ledger that can meaningfully be described as tax increases. While $3.5 billion of the current-year shortfall will be made up through tax changes, most of this revenue will be realized by accelerating collections rather than increasing the level of taxes. Specifically, $1.7 billion of the "new revenue" for fiscal year 2010 will be realized by accelerating personal income tax withholding so that more income tax will be withheld in the first half of the calendar year. This means, of course, that the legislature has just dug itself a $1.7 billion fiscal hole for the next fiscal year. Assembly Speaker Karen Bass, who's claiming that "in no way should this [budget] be misconstrued as kicking the can down the road,” must not have read this part of the budget agreement.

Bass -- and Governor Arnold Schwarzenegger, who boasted that the budget agreement "puts us on a path toward fiscal responsibility" -- must be equally unaware of a clever provision through which the state is closing $2 billion of the budget gap by forcing local governments to lend the state up to 8 percent of their property tax revenues in the upcoming fiscal year. The idea is that the state will pay back this loan, with interest, by the end of the 2013 fiscal year. In the short run, of course, this move will force local governments to make $2 billion worth of the hard decisions--cut spending or hike taxes and fees--that state lawmakers found themselves unable to deal with this year.

A broad base is an essential element of a good tax system. Fulfilling the principles of "horizontal equity," and "economic neutrality," both depend upon the use of a broad tax base. Unfortunately, the temptation to carve out special tax breaks for politically popular causes, or for powerful constituencies, if often irresistible to lawmakers.

But efforts are currently underway in Michigan to undo some of these special tax breaks, and a tax reform commission in California is at least pretending to consider a reform that would help pave the way for a careful reconsideration of many of that state's tax breaks. Furthermore, policymakers in North Carolina have expressed a strong desire to return to the task of base-broadening this fall, even as efforts to include base-broadening revenue-raisers in this year's budget agreement seem to have failed.

Earlier this month, Michigan Governor Jennifer Granholm stated her desire to eliminate between $500 million and $1 billion in special tax breaks as a way to reduce the state's looming deficit. While accomplishing such a feat will inevitably involve an uphill political battle, Michiganders should be grateful that the Michigan League for Human Services (MLHS) is closely following the action. MLHS Chairman Lynn Jondahl hit the nail on the head when he urged lawmakers to ask themselves, in reference to the state's film tax credit, "Would you be willing to appropriate $6 million to MGM, say, to make this film in Michigan? We're paying you to do something in lieu of filling pot holes or funding mental health treatment. Which do we value more?"

In California, a tax reform commission that so far has shown interest mostly in cutting the progressive income tax is at least listening politely to a different idea. The so-called "blue proposal" currently before the commission, presented as a less regressive alternative to the much-ballyhooed flat-tax proposal supported by Governor Schwarzenegger, would require special tax breaks to be presented in the Governor's budget, saddled with a "sunset" provision, and evaluated based on their effectiveness in achieving their stated objectives. Of course, adopting this approach will amount to rearranging deck chairs on the Titanic if the commission acts on its apparent zeal for moving away from income taxes and towards regressive consumption taxes. And the "blue proposal" has its warts as well: provisions that would impose a spending cap and create a new "net receipts" tax in lieu of the current corporate income tax have progressives feeling, well, blue. But the tax-expenditure element of the "blue proposal" is a welcome dose of thoughtful policy at a time when California surely needs it.

Finally, in a recent development out of North Carolina, base-broadening appears to be off the agenda for the immediate future, though policymakers have expressed a strong interest in returning to the issue this fall. When they do return to the issue, they would be wise to review these recommendations, recently released from the North Carolina Budget and Tax Center, explaining how to broaden the state's tax base while simultaneously offsetting any potentially harmful effects on low- and moderate-income families.