Are you feeling confused about the myriad revenue options being discussed to finance health care reform? What's the difference between the President's initial proposal to limit itemized deductions and Senator Jay Rockefeller's proposal, which is similar but would result in less of a tax increase? What exactly is the Medicare tax reform included in an amendment filed by Senator Debbie Stabenow, and how does it differ from a similar concept described by CTJ several months ago? How would a "millionaires' surcharge" differ from the surcharge included in the health care bill working its way through the House of Representatives and, for that matter, what is a surcharge?

All these questions are answered in a new report from Citizens for Tax Justice. After describing each of six progressive tax proposals, the report compares their revenue impact and compares their distributional effects nationally and state-by-state.

Read the report.

Yesterday a federal bankruptcy judge approved Sam Zell's Tribune Co. sale of the Chicago Cubs and Wrigley Field to the Ricketts family, of TD Ameritrade, for $845 million. Everyone, including the bankruptcy judge, is calling it a "sale" except Sam Zell and his tax advisors. They're calling it a "leveraged partnership transaction," wherein Zell will retain a 5% interest and avoid paying the tax on the sale. Reporter Allan Sloan called Zell out on the tax dodge in Tuesday's Washington Post.

The Zell structuring of the Cubs sale is just another example of why we need the "economic substance" doctrine in the tax code. The economic substance doctrine has been developed over the years by the courts to disallow losses or deductions that have no economic substance apart from their tax benefits. In other words, if the only reason someone would do a deal a certain way is to avoid taxes, then the court ignores it and looks at the real underlying transaction. Clearly, a court looking at the Zell deal would find that it was, in substance, a sale of the Cubs to the Ricketts family. And Zell would owe millions of dollars of tax on the deal.

Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. That's why there have been repeated calls for strengthening the doctrine's basis in statute, including in President Obama's budget proposal. Tax avoidance transactions rely upon the interaction of highly technical provisions of the Internal Revenue Code to produce a tax result not contemplated by Congress. In developing the tax laws, Congress cannot possibly foresee all the ways the rules might be abused.

But tax lawyers figure it out for their wealthy clients -- at fees upwards of $500 per hour. If the economic substance doctrine is codified, taxpayers would be required to show that a transaction had a substantial non-tax purpose and had real economic consequences apart from the federal tax benefits. It would give the IRS a way to fight any tax avoidance scheme, whether or not the law specifically addressed it.

The American Society of CPAs recently wrote a letter to the Assistant Treasury Secretary for Tax Policy, Michael Mundaca, arguing against the rule's enactment (subscription required). To be fair, the letter raised a few good points that should be considered in crafting the final legislation. The letter is nonetheless a study in how self-interest can cloud one's perception. The big accounting firms might have a little more trouble selling their tax shelter deals if an economic substance rule is enacted into law. The IRS would be able to quickly challenge the next abusive tax shelters that tax professionals are surely already dreaming up.

As we have reported in recent weeks, the IRS is taking much-needed action to crack down on Americans who hide their income in offshore tax havens to illegally evade their U.S. taxes. One of the biggest developments is a settlement with the Swiss bank UBS, under which it will hand over to the U.S. information about 4,450 of its American clients who may be evading U.S. taxes.

But the IRS is giving these possible tax evaders plenty of opportunities to avoid punishment. The IRS implemented the six-month IRS Offshore Income Reporting Initiative, which is a voluntary disclosure program for foreign financial accounts that started on March 23, 2009 and was supposed to end on September 23.

This week, just two days before the voluntary disclosure program was scheduled to end, the Internal Revenue Service pushed back the deadline until October 15, 2009. The IRS said it had received numerous pleas from tax practitioners and attorneys around the country to extend the program so that they would be able to deal with the last-minute rush of taxpayers wanting to disclose.

Don't think these tax cheats suddenly got religion and want to become virtuous taxpayers. By using the streamlined procedures of the voluntary disclosure program, taxpayers are able to limit their penalties and avoid criminal prosecution. See the previous CTJ report with more details and the IRS guidance. The IRS stressed that no more extensions would be granted.

If you’re a state legislator, chances are good that you’ve spent the better part of the last twelve to eighteen months struggling to find options for bringing your state’s budget into balance.  Chances are equally good that, while you’d like to stop thinking about the subject, circumstances won’t allow it.  After all, some thirty-six states are expected to face budget deficits in fiscal year 2011, even after forty-eight states closed budget gaps totaling $168 billion for the current fiscal year.

In this context, then, state legislators will be forced to evaluate even more stringently each program funded by the public, whether through the regular appropriations process or via foregone tax collections.  One good place to start would be to reconsider the wisdom of offering subsidies through the tax code for the purposes of film, television, and other media productions.  As the Los Angeles Times reports this week, more than 40 states now provide tax credits or other tax reductions for such purposes, often at a very high cost to the state’s budget and just as frequently with little to no understanding of whether they are producing any real benefits for the state’s economy. 

For instance, Michigan is home to one of the most generous such subsidies in the nation: a credit equal to 42 percent of filmmakers’ production expenses, which could cost the state as much as $150 million next year.  Yet, as one Michigan Senator admitted to the Times, “We are still not sure what exactly our tax dollars are being spent on with these films…If we don’t know that, how can we justify it?”

Those states that do examine the uses to which scarce tax dollars are being put may not like what they find.  In Iowa this past week, three state officials – the Director and Deputy Director of the Department of Economic Development, as well as the manager of the Iowa Film Office – either resigned or were fired in the wake of reports that the state’s tax credit program was subject to serious abuses, including the purchase of two luxury automobiles that were not actually used in making in a movie but instead went to film executives.  Governor Chet Culver has temporarily suspended the program, which, by some estimates, could pay out more than $300 million in tax subsidies if it resumes.  For more on Iowa’s film tax credit and the need for greater transparency, visit the Iowa Fiscal Partnership.

Policymakers across the country are beginning to come to terms with the fact that the budgets they recently passed depended on revenue that may never materialize. The Mississippi Economic Policy Center (MEPC) reports that state revenue for the first two months of the fiscal year that started July 1 is already $31.5 million below projections. Governor Barbour, anticipating further reductions in available revenue, announced $171.9 million in cuts -- the vast majority of which are cuts to the state's education budget (this despite Education Week giving the state a D+ in terms of overall education in their Quality Counts report.)

In their latest budget brief, MEPC urges a balanced approach to solving the state's upcoming fiscal shortfall, "To rely solely on cuts would further hurt the economy... Furthermore, cuts – especially to the state’s educational systems - jeopardize the state’s ability to prepare its workforce to compete in today’s economy." We couldn't agree more.

Monday, the Ohio Supreme Court sided with a group that wants to put Governor Ted Strickland's proposal to install 17,500 slot machines at seven area horse tracks to a vote of the people in November 2010. This can't be welcome news to the Governor or his supporters who wanted to quickly implement the plan without such a vote and raise an estimated $933 million to balance the state's budget.

Despite the ruling, the Governor could order that the slot machines be placed anyway, but the political ramifications of moving before the vote could be unpredictable. The Akron Beacon Journal recently opined that the Court's ruling gives the Governor a second chance, and that "the opportunity the court has presented involves heading in a new direction, addressing the deficit in a simple and responsible way." 

There certainly are more responsible and progressive ways to address the deficit than relying on slots, a point that Policy Matters Ohio has been making for several years. For more dtails, see their timely report, A Step Toward Fiscal Balance: Options for Ohio's Income Tax.

In brighter news for Ohio's budget, the Ohio Supreme Court ruled last week that grocery stores were indeed responsible for paying the state's Commercial Activity Tax (CAT) despite language in the state's constitution which forbids taxing food.

The CAT functions like a gross receipts tax. The Ohio Grocers Association challenged the tax's constitutionality, arguing that the tax is, in fact, a tax on food because it is calculated from the gross receipts of grocery stores. But Justice Maureen O'Connor disagreed. She wrote in the majority opinion, "When the CAT's practical operation is considered, it becomes evident that it is what it purports to be: a permissible tax on the privilege of doing business, not a proscribed tax upon the sale or purchase of food."

The Court's ruling means that the cash-strapped state can keep $350 million in CAT revenue it has already collected from grocers and can expect another $370 million over the next two years.

And then there was one.  A full eleven weeks after the start of its fiscal year, Pennsylvania remains the only state in the union without a budget, as members of the legislative leadership and Governor Ed Rendell continue to negotiate the details of what is shaping up to be a roughly $28 billion spending plan.  (Yes, we know Michigan doesn’t have a budget either, but its fiscal year doesn’t start until next month.)

Still, given what is known about the latest iteration of the Legislature’s proposed FY 2010 budget, perhaps it is better that policymakers do not rush forward to enact it.  The Pennsylvania Budget and Policy Center (PBPC) has expressed concerns that the proposal “postpones Pennsylvania’s budget problems rather than solves them” because it relies on “overly optimistic revenue projections and one-time revenue sources.” These are concerns that Governor Rendell seems to share, at least in part. One example of the wishful thinking in the proposal is its reliance on gambling revenue, which has lately proved to be an unpredictable revenue source for many states. (See last week’s Digest article on gambling revenues.) Even worse, as other observers have noted, the proposed budget depends heavily on reductions in important public services, such as pre-kindergarten and after-school programs, as well as neo-natal care.

To be sure, Pennsylvania is not alone in facing serious budget problems.  However, unlike their counterparts in nearby New York, New Jersey, and Delaware, legislators in the Keystone State have refused to countenance an increase in broad-based taxes, such as the income tax increase put forward by Governor Rendell earlier in the year.  Little wonder, then, that they have to resort to spending cuts, questionable revenue estimates, and one-time sources of funding to try to bring the state’s books into balance.

For more on Pennsylvania’s fiscal crisis and on meaningful reforms the state could enact to generate additional revenue, visit PBPC’s informative web site.

The Rhode Island Department of Revenue recently released its second annual "Tax Credit and Incentive Report," providing the names, addresses, and size of tax breaks received by Rhode Island businesses under six major tax incentive programs.  This report provides a valuable, and unusually detailed look at where over $82 million in state tax subsidies went during the 2009 fiscal year.  CVS, for example, benefited from over $12 million in special tax subsidies over a twelve month period, while the producers of the "Brotherhood" TV series raked in more than $5 million.  More states would benefit by sharing this type of information with their residents.

But while the "Tax Credit and Incentive Report" does provide a valuable source of raw data for Rhode Island residents and policymakers, the Department of Revenue has regrettably dragged its feet in implementing Phases Two and Three of Rhode Island's broader tax incentive accountability program.  Phase Two, which was supposed to have been completed in October 2008, will eventually detail the degree to which state tax incentives have met the job creation, wage, and benefit objectives for which they were created.  The Rhode Island Poverty Institute has rightly pointed out that "it is impossible to judge the usefulness of these tax credits without the information required in Phase Two of the law." 

Phase Three, which also has yet to be implemented, will require adding the tax credit information released by the Department of Revenue to the state's budget, so that these programs can be considered on a more equal footing with traditional spending programs and subsidies.

Oklahoma also recently made some headlines related to its tax incentive programs.  Last spring, the Oklahoma legislature approved new investment tax credits as a means of attracting Mercury Marine, a boat engine manufacturer, to the state.  Recently, Mercury Marine announced that despite the tax credits, it will be moving a significant number of jobs from Oklahoma to Wisconsin.  Since the legislation authorizing the tax credits explicitly allowed for the state to recover those credits in the event that something along these lines occurred prior to 2012, the company has agreed to refund the credits, with interest.  By tying the credits to some measure of performance on the part of Mercury Marine, Oklahoma was able to avoid a situation where the company could simply take the credits and run. 

Be sure to visit Good Jobs First for more on tax incentive best practices such as these.

When someone demands that Congress abolish the federal income tax, we typically consider that a fairly extreme position. But then again, we don't run in the same circles as Georgia gubernatorial candidate John Oxendine, who feels that his peers in the anti-tax community are too wishy-washy if they don't also call for a repeal of state income taxes. 

He recently said, "I think it's very hypocritical for state officials to be running around bad mouthing the federal government for having an income tax when the state of Georgia does the same [thing]. As governor, I want to get rid of the state income tax." Oxendine thinks that states like Georgia must lead the way and eliminate their state income taxes.

In Georgia, inadequate tax revenue is a threat to justice -- quite literally, in the sense that the state is not able to carry out the basic administration of justice through its court system. As the Wall Street Journal reports, "the wheels of justice in Georgia are grinding more slowly each day" because "Cuts in spending for the state court system have led to fewer court dates available for hearings and trials, creating a growing backlog of cases."

Now, just three months into the state's fiscal year, already under-funded state agencies are being asked to cut another 5 percent from their 2010 budget. Now is likely not the time to eliminate the state's largest source of revenue.

Former Ohio Congressman John Kasich is running for Ohio Governor and is also promising to repeal the state's income tax. However, the severity of Ohio's budget situation has apparently provoked some caution. The Columbus Dispatch recently reported "Kasich also said that the state's dire budget situation would make it difficult to begin phasing out the state income tax in his first term." He apparently assumes that the state's current budget crisis is the last the state will ever face, freeing it to abolish a major source of revenue in the future.

Of course, abolishing a state's income tax is a terrible idea even in times of surplus because income taxes are fairer than any other type of revenue source. A recent ITEP report makes this point in analyzing a recent proposal in Missouri to eliminate corporate and individual income taxes and replace the revenue with an enormously expanded sales tax. The Missouri proposal (which was not enacted) would have effectively slashed state taxes for wealthy residents while sending the bill to working families who spend most of their income purchasing necessities.  

The good news from President Obama's address to Congress last week was that it included a clear explanation of how health care reform will improve our lives and juxtaposed the benefits of more affordable and efficient health care against other more costly initiatives.

"Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration."

President Barack Obama, Address to Joint Session of Congress, September 9, 2009

A recent report from Citizens for Tax Justice finds that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010). Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats' health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019).

President Obama said during his address to Congress that his health care plan would cost a little less than the House plan, at "around $900 billion over ten years."

As the President said, even the Bush tax cuts "for the wealthiest few" cost more than his health care plan. The direct cost of the tax cuts for just the richest five percent of taxpayers over the 2001-2010 period is $979 billion. (The cost is even greater if one includes interest payments that resulted because the Bush tax cuts were deficit-financed. 

But there is no obvious reason why the cost of health care reform needs to be less than what has been proposed in the House. There is reason to fear that "moderate" lawmakers will continue to negotiate the overall cost downward to some level chosen entirely arbitrarily, and the result will be fewer resources to make health care truly affordable for everyone.

Part of the problem is that the revenue measures that some lawmakers are considering are not substantial enough. The President suggested in his speech that insurance companies be taxed for each plan they offer that exceeds a certain premium level. Senate Finance Chairman Max Baucus has included a similar proposal in his recently released plan, which would require insurers to pay a tax of 35 percent of the portion of the premium exceeding $8,000 for singles and $21,000 for families for any plan.

There's no official estimate of how much revenue this would raise, but the available information indicates that it would be a great deal less than the $543 billion raised by the surcharge on high-income taxpayers included in the House Democrats' proposal. 

Congress and the White House can find ample revenue by turning to some of the progressive revenue options analyzed by Citizens for Tax Justice, including the surcharge in the House health care legislation. Other progressive options include the President's previous proposal to limit the benefits of itemized deductions for the wealthy and reforming the Medicare tax so that it no longer exempts people who live off their investments.

There is also a dispute among experts about whether or not taxing insurance companies is good policy. Analysts generally agree that, in effect, the tax would be passed on to employers and employees who have the high-cost plans, often called "Cadillac plans" because they're considered to be so generous. So the effect would be the same as a cap on the exclusion for employer-provided health benefits. 

A report from the Center on Budget and Policy Priorities concludes that this will bring down health care costs in a reasonable way, in addition to raising revenue. But some analysts, such as Karen Pollitz at Georgetown University's Health Policy Institute, believe that those with the more expensive plans are not receiving more generous benefits, but merely pay higher premiums because they are employed by companies that have an older workforce or workforce that faces greater health risks. Pollitz argues that "the whole notion of Cadillac plans is kind of a made-up notion."

Either way, Congress should turn to the most progressive revenue options possible, particularly given the shift in income towards the very rich over the past several years and given how much tax cuts have been targeted towards the rich since 2001. The high-income surcharge and the other proposals CTJ has analyzed over the past several months meet that standard.

Earlier this month, Governor Jan Brewer vetoed legislation repealing Arizona’s statewide property tax, which would have compounded the state's fiscal woes at a cost of $250 million annually. Her veto was both socially just and fiscally prudent, since the statewide property tax was designed to make school funding more equitable.  

But Arizona still has a long road to travel before it reaches the fiscal high ground.  A new analysis from the Joint Legislative Budget Committee indicates that the state continues to face a budget deficit of close to $1 billion in the current fiscal year, despite enormous cuts to public services that have been enacted recently. 

Governor Brewer would like to put a sales tax increase before the voters, which would certainly help to close this gap. Unfortunately, that is unlikely to happen this year because the legislature has so far refused to act on this proposal. 

For a governor who claims to support progressive taxation, Michigan Governor Jennifer Granholm sure has a funny way of showing it.  Her recently released budget proposal would raise revenue by slashing the EITC while hiking taxes on tobacco, liquor licenses, and bottled water.  Her budget would also prevent the personal exemption from increasing as a result of inflation indexing, would levy a tax on vending machine purchases, would (very modestly) scale back the state's film tax credit, and would attempt to expand the sales tax to include a few more services -- such as live events and landscaping.  And to top things off, the Governor would use some of the money raised by these hikes to lower taxes paid by business -- specifically, by phasing out the Michigan Business Tax surcharge.

Overall, this package of tax changes is almost guaranteed to be grossly regressive.  Admittedly, the Governor is working within some pretty restrictive guidelines, established both by her own short-sighted campaign promises, and by the state's constitutional prohibition on creating a graduated rate income tax.  But a look at the types of solutions proposed by the Michigan League for Human Services (MILHS) is enough to show that there are better approaches to addressing Michigan’s recurring budget deficits.  Take a look at this recent statement from the MILHS outlining the ways in which "vulnerable people and the working poor are being asked to sacrifice to balance the budget" under Governor Granholm's proposal.

There’s a lot that can go wrong when a state turns to legalized gambling as a source of revenue.  This is a fact that Kentucky, Pennsylvania, and others should keep in mind during their continuing efforts to push for expanded gambling as a solution to their budget woes

For starters, a poor economy, opposition by local residents, legal challenges, and a number of other factors can delay the opening of newly legal gambling establishments.  And without functioning gambling venues, there’s no money for the state.  Recent stories out of Maryland and Pennsylvania demonstrate the very real nature of this threat.  Additionally, recent polling done in Illinois suggests that opposition to gambling at the local level – fueled in part, no doubt, by the Not-In-My-Back-Yard (NIMBY) syndrome – could cause similar delays there.  And legal challenges in Ohio indicate that the Buckeye state could be in for delays in gambling implementation as well.

But even after a state manages to get its gambling operations up and running, the revenue stream produced by gambling may not be as lucrative as advertised.  A recent New York Times story details the degree to which gambling revenues (from casinos, racetracks, lotteries, etc) are disappointing states this year.  The most obvious culprit in this case is the slumping economy, though some experts believe that increasing competition for gamblers both between states, and within states – known as “market saturation” – may be at least partially to blame.  Worries about market saturation have been on full display in Ohio, where racetrack owners are on edge about the effect that casino legalization (to be voted on by Ohioans this November) could have in cutting into their profits.

In other cases, it may simply be the case that gambling just isn’t as popular as first expected.  The perceived need among many states to legalize slot machine gambling as a means of drawing gamblers back to struggling racetracks is evidence of this problem.  Unfortunately, the failure of this method in Indiana has drawn into question the wisdom of this revenue-raising strategy as well.

Other methods, such as loosening the restrictions on betting limits or alcohol sales (which were originally imposed to secure support for gambling from reluctant lawmakers) are being tried as well.

Ultimately, the fact is that gambling is far from a fiscal panacea for the states, and given the tendency for implementation delays, is exceedingly unlikely to result in much revenue to fix the current round of state budget shortfalls.  Take a look at this ITEP policy brief for more on the gambling issue.

Last Tuesday, Wisconsin Representative Cory Mason unveiled the Wisconsin Jobs Initiative to take advantage of a federal program proposed by President Obama to invest in technical colleges. Rep. Mason's proposal would raise the income tax on millionaires by one percentage point and is expected to raise $145 million annually and secure another $135 million in federal matching grants if the President's initiative is enacted. Mason said, "I want Wisconsin to be first in line for those grants."

If the state is able to raise the funds necessary and received the grant, it's worth noting that Wisconsin millionaires who pay more in taxes would likely not pay the full $145 million. Instead they would benefit from their ability to write off their state income taxes on their federal tax forms. (Read ITEP's brief on the federal offset.) 

This proposal would make the state's income tax more progressive, but some state lawmakers want to move in the opposite direction. Rep. Peter Barca and other legislators are championing a proposal that would partially repeal the recent reduction of the state's capital gains exclusion from 60 to 30 percent by allowing a 60 percent capital gains exclusion for assets held longer than five years under the guise of encouraging "businesses to make long term investments in the state." For more on why capital gains tax breaks aren't helpful in terms of economic development, read ITEP's report on the issue.

States policymakers across the country are looking to the future and anticipating another year of tough budget decisions about whether to cut services or increase taxes. Two recent pieces from research groups in Georgia and North Carolina make excellent points about the importance of considering tax increases and their impact on economic development.
 
Last week, the Macon Telegraph published an editorial by Alan Essig, Executive Director of the Georgia Budget and Policy Institute. Essig notes that there "is more to economic development policy than having the lowest tax rate. Economic development depends on, at the least, adequate public structures; without them, it is difficult to recruit and grow businesses in Georgia, no matter how low taxes are." Racing to the bottom in terms of tax rates is hardly the best economic development decision a state can make.
 
North Carolina legislators did take a balanced approach to filling their state's budget shortfall by passing both tax increases and budget cuts. Yet, this hasn't stopped anti-taxers from crying "job killing taxes." The North Carolina Budget and Policy Center recently released a report debunking the myth that state tax increases cause job losses. Read the Center's report, Wishful Thinking: Claims That State Tax Increases Cause Job Loss are Unfounded.

The Bush Tax Cuts for the Richest Five Percent Cost More than the President's Health Care Proposal

During his address to a joint session of Congress Wednesday night to explain his health care proposal, President Barack Obama noted that his plan would cost less than the Bush tax cuts for the wealthy, a fact demonstrated in a report released earlier this week by Citizens for Tax Justice.

"Add it all up, and the plan I'm proposing will cost around $900 billion over ten years - less than we have spent on the Iraq and Afghanistan wars, and less than the tax cuts for the wealthiest few Americans that Congress passed at the beginning of the previous administration."

President Barack Obama, Address to Joint Session of Congress, September 9, 2009

A recent report from Citizens for Tax Justice finds that the Bush tax cuts cost almost $2.5 trillion over the decade after they were first enacted (2001-2010). Preliminary estimates from the non-partisan Congressional Budget Office show that the House Democrats' health care reform legislation is projected to cost $1 trillion over the decade after it would be enacted (2010-2019). President Obama said during his address to Congress that his health care plan would cost a little less than the House plan, at "around $900 billion over ten years."

As the President said, even the Bush tax cuts "for the wealthiest few" cost more than his health care plan. The direct cost of the tax cuts for just the richest five percent of taxpayers over the 2001-2010 period is $979 billion. (The cost is even greater if one includes interest payments that resulted because the Bush tax cuts were deficit-financed.) In 2010, when all the Bush tax cuts are finally phased in completely, an incredible 52.5 percent of them will go to this wealthiest five percent of taxpayers.

Oddly, many of the lawmakers who claim to be concerned about the cost of the President's health care plan are the same lawmakers who supported the Bush tax cuts, despite their much greater costs.

Read the new report from Citizens for Tax Justice.
 
These figures make clear that costs cannot be the real concern of lawmakers who oppose health care reform and yet supported the Bush tax cuts. Their position seems to be that showering benefits on the wealthiest five percent of taxpayers and leaving the bill for future generations is preferable to making health care available for all at a much lower cost and paying that cost up front. That demonstrates a different set of priorities than most Americans have, but it doesn't demonstrate much concern about costs.

This week, governments around the world continued to turn up the heat on taxpayers who hide their income in offshore tax havens, as fallout from the settlement between the U.S. government and the Swiss mega-bank UBS continued.

Tax haven issues were prominent at the Organization for Economic Cooperation and Development (OECD) meeting earlier this week in Mexico City. The OECD has a monitoring program tasked with addressing offshore tax abuses, and its president-elect suggested a "system of sanctions" may be implemented against countries not living up to certain accepted standards for the exchange of tax information to catch tax evaders.

At the meeting, the Mexican finance minister urged the 70 delegations at the OECD meeting to look at other methods of tax evasion besides bank secrecy. For example, he noted that corporate dividends often escape taxation. He urged the representatives to include money laundering and other opaque financial practices in their investigations, especially in developing countries.

Countries that want to at least put some effort into preventing offshore tax evasion continue to sign tax information exchange agreements (TIEAs) with each other. Several new agreements were signed on the first day of the conference. Also that day, Austria, a long-time defender of bank secrecy, passed legislation allowing it to implement the new global tax standards after the European Investment Bank threatened to withdraw loans to Austria if it did not reform its bank secrecy laws.

In Switzerland last week, the government formally approved six of the 13 TIEAs that have been drafted with other countries. The agreement initialed with the U.S. in June was not approved, possibly because of the ongoing U.S. investigation of Swiss banking giant UBS.

UBS, the Swiss government, and the U.S. government reached agreements in the UBS case last month which anticipate that UBS will turn over approximately 4,450 names of account holders to the U.S. government. The U.S. government made its first formal request under the agreements and the first 500 names are to be provided within 90 days. The Connecticut attorney general has written Treasury and the IRS requesting that the names be provided to the state when they are received from the Swiss government so that his office can investigate whether state income taxes have also been evaded.

Noting the US/UBS agreement, last week a European Commission official stated that European Union members would expect the same cooperation from the Swiss. This week, the French minister of budget announced that the French government had compiled a list of 3,000 French-held Swiss bank accounts from audits and information provided by French banks on money transfers to tax havens. "Some are certainly tax evaders," he said.

Most local lawmakers are painfully aware that when state governments fail to solve their fiscal problems through revenue-raising tax reform, these problems tend to roll downhill to the local level. A new report from the National League of Cities confirms this. The report finds that many cities are looking to regressive revenue sources to make ends meet in 2009. The report, based on a survey of elected city officials around the nation, finds that 45 percent of cities plan to hike fees, 27 percent are creating new fees, and 25 percent plan to increase local property taxes in 2009.
 
The report also asks local leaders what external factors are prompting these painful decisions. Not surprisingly, the leading culprit is the "health of [the] local economy" (identified by 77 percent of cities as a factor), but the second-highest ranking cause is cuts in state aid to local governments (50 percent). This isn't news to anyone in California, where the budget agreed upon last month relies on "borrowing" $2 billion in local tax revenue from local governments. But the NLC report should prompt observers in other states to ask whether their budget has been balanced on the backs of local governments.

How bad is Arizona’s budget situation?  Well, let’s put it this way:  the Daily Show may soon air a segment examining, in its own inimitable way, a proposal to sell, and then to lease back, a variety of state-owned property and buildings as a means of generating more than $700 million in the current fiscal year – and that proposal was just signed into law by Governor Jan Brewer.  Not only that, but that proposal was one of the few pieces of the budget that the Governor and the other members of her party, who happen to control both chambers of the Arizona legislature, could agree upon. 

The other seven bills that comprise the state’s fiscal year 2010 budget – none of which raise taxes and one of which would reduce them by some $250 million per year, a deficit of more than $3 billion notwithstanding – still await the Governor’s signature.  Hopefully, the Governor will continue to hold out for a ballot initiative that would temporarily raise the state’s sales tax to help address the state’s enormous revenue shortfall. Still, even if she succeeds and the initiative passes, a new analysis from the Joint Legislative Budget Committee indicates that budget deficits of more than $2 billion will return in FY 2012.

Not all of the tax policy news out of Arizona this week is bad, however.  A recent Arizona Republic expose found that the state’s school tuition organization tax credit not only failed to achieve its alleged goal of assisting low-income students, but also is vulnerable to rampant abuse by self-interested parents. In response, the second largest school tuition organization in the state, the Catholic Tuition Organization for the Diocese of Phoenix, announced that it would no longer allow donors to engage in one of the abusive practices in question, namely, specifying which students would receive the scholarship funded by the donor’s tax subsidized bequest.  (As the Republic found, less-than-scrupulous parents were coordinating with friends, family, and neighbors to name each other’s children as the beneficiaries of their tax-supported donations.)  Still, given that those taxpayers who claim the credit are far wealthier than most Arizonans, it may be time for the credit to be scrapped altogether

In his bid to be reelected Governor of Illinois, the incumbent Pat Quinn will face a primary challenge from Dan Hynes, the Illinois Comptroller. The two both see a need to move the state's tax system in a more progressive direction, but apparently disagree on how to get there.

Earlier this year, Governor Quinn championed an income tax increase plan which would have raised the state’s constitutionally mandated flat rate from 3 to 4.5 percent, while also increasing the state’s personal exemption from $2,000 to $6,000. Governor Quinn deserves credit for having the courage to talk about raising taxes in a progressive way, given the state’s recent reliance on one-time spending and severe budget cuts. The Governor was obviously aware that, because of constitutional restrictions, he didn't have the option of introducing a graduated income tax (which would have to be approved by the legislature and a vote of the people) and have it become law in time to help solve the state's nearly $12 billion budget shortfall.

Comptroller Hynes unveiled his extensive budget and tax plan on Wednesday citing support for instituting a graduated income tax on Illinoisans with incomes over $200,000. The Hynes plan also calls for various belt-tightening strategies, higher cigarette taxes, closing coporate loopholes, and some sales tax base broadening to include luxury services. It’s undoubtedly good news that the major candidates running for Governor both see the need for progressive income tax reform. 

But points of contention remain. Hynes is denying Quinn’s claim that "In 2004, [Hynes] opposed a graduated income tax. Maybe he's flipped and he's flopped over to our side.''  Hynes is countering that Quinn’s income tax proposal is a “regressive ... 50 percent tax hike on all Illinois families,” a claim that doesn’t hold up to analysis. Let’s hope that the candidates don’t continue to beat up on each other so much that the victim in the debate becomes income tax reform.