Click here to watch and listen to speeches made at CTJ's 30th anniversary celebration.

On Wednesday, October 21, Citizens for Tax Justice was joined by lawmakers, progressive advocates, policy experts and labor leaders in celebrating its thirty years of fighting for tax fairness. The speakers included four current and former members of Congress and two journalists who've covered tax issues extensively for several years.

The first to speak, Senator Carl Levin of Michigan, told the crowd:

"CTJ is a voice for real fairness, for justice, in our tax system, a voice for those who believe in closing special-interest loopholes and enforcing compliance with the tax code. CTJ is there every day and every week, with detailed analysis of tax proposals, alternative ideas, and good suggestions.  Bob McIntyre, CTJ’s longtime and tireless leader, is one of its driving forces and a terrific public servant who has dedicated his life to tax justice. Washington would be a much poorer place and even more skewed to the powerful interests without Citizens for Tax Justice..."

Senator Levin went on to discuss the debate over financing health care reform. He called on his colleagues to consider the measure he and Rep. Lloyd Doggett of Texas have introduced (to crack down on tax havens) as a way to help pay for health care reform, and he also argued in favor of a surtax on high-income taxpayers.

"As we contemplate health-care reform, Congress needs to decide whether to put ourselves in a straight-jacket when it comes to revenues – and risk that health coverage remains unaffordable for many middle-class Americans. Or, will we do the right thing when it comes to taxes and healthcare, close some of these loopholes that allow people, for instance, to stash assets overseas or avoid taxes on massive investment earnings, and use the revenue to provide long overdue and badly needed health-care reform? Will we leave middle-class families locked out of affordable coverage while we refuse to consider a 'millionaire’s tax' on our wealthiest citizens?"

Senator Ron Wyden of Oregon discussed how roughly 10,000 tax breaks have been added to the tax code since the 1986 tax reform that swept away most loopholes. He spoke of the book Showdown at Gucci Gulch, which chronicles the battle over the 1986 tax reform, and said that CTJ director Bob McIntyre was the "sheriff" of that story.

"Twenty years ago," Wyden said, "after Bob got in there and cleaned up Dodge, Bill Bradley and Ronald Reagan came together and got all the credit." But for the next round of tax reform, Wyden predicted that CTJ would once again lead the charge against the special interest lobbyists who will attempt to protect their loopholes.

"We have the good fortune of knowing that Bob McIntyre and Citizens for Tax Justice are going to be on the side of the typical working person, the person without the lobbyist, and even though the odds-makers say it can't be done, we are going to get tax reform next Congress. We are going to start it now, we're going as far as we can, and with Bob in the lead, we are going to prosecute it until we go back to what we know makes sense, a fairer tax system, one that isn't rigged against the typical working person, and you're going to be leading the charge, Bob."

Representative Lloyd Doggett of Texas noted that his colleagues need to get serious about tax reform.

"Electing Barack Obama and a Democratic Congress, to be sure, does not assure us tax justice, it only assures us an opportunity to seek tax justice and to overcome the many entrenched interests who, each year, make our tax code more complex and more unjust. I have not perceived, in 33 months of Democratic control of Congress, much greater appetite on the part of my colleagues to go in and take on the major corporate tax breaks that are in the code than I did in Republican years. But I think we're not going backwards anymore, and if we have a concerted effort led through Citizens for Tax Justice, we have the chance to get after some of the most abusive practices in the code."

Rep. Doggett also criticized Congress's annual practice of enacting "tax extenders," which refer to extensions of tax cuts that are ostensibly temporary and are almost entirely targeted to business interests.

"Each year, corporate lobbyists who only reluctantly knock on the front door of Congress and say, 'Write my corporate client a big fat check,' do not have the slightest hesitancy to come to the side door of Congress and deplete our resources in order to accomplish the very same thing [through the tax code]. And they know once they've done that, they have an entitlement to come back, year after year, in the ritual that is called renewal of the 'extenders.'"

He went on to criticize other tax cuts that are promoted as ways to help the economy even though they are obvious give-aways to corporate interests and have no hope of helping the economy as a whole. The example he cited is the net operating loss (NOL) carryback provisions which are in the America Recovery and Reinvestment Act, and which several lawmakers now want to expand. He explained that "corporations that paid so little in the past now not only want to pay nothing, but to get a check back as if they were entitled to the Earned Income Tax Credit."

Former House Democratic Leader Dick Gephardt told the crowd that during every debate over taxes, "the only ally we had was this guy and this organization," meaning Bob McIntyre and Citizens for Tax Justice.

"And the commitment was always to a simple idea: fairness. What's fair for everyone and what's fair for ordinary Americans who don't have much of a voice in our country and in our capitol, certainly on tax matters, which are usually esoteric, complicated issues that nobody quite understands."

The Pulitzer Prize-winning journalist and author David Cay Johnston explained that, "with this little, tiny budget and a great entrepreneurial approach, Bob has found ways again and again to make issues come to life, to get people to understand fundamental unfairness and policies that are hurting the economy instead of helping, but are sold under a different guise... There are a whole host of people... who want to loot our pockets with the tax system or... rig the system. And on the other side, there's a handful of people led by Bob."

Finally, the author and journalist Jonathan Chait spoke of how he first encountered Bob McIntyre when both wrote for the American Prospect.

He also spoke of an episode that he believes shows the how much influence CTJ actually has and how much fear it inspires in its opponents. The episode took place in 1999, when the presidential campaign of George W. Bush told the Washington Post it could write an exclusive story about candidate Bush's tax plan only on the condition that the paper not show the plan to any outside experts before writing and publishing their story.

Amazingly, the Post agreed to these terms, and wrote a story about the tax plan that seemed to reinforce the image of Bush as a "compassionate conservative" that the campaign was trying to hard to project. Of course, CTJ did an analysis in the days following the publication of that article and showed that the Bush tax plan was very regressive and that there was nothing compassionate about it.

Chait said the incident is remarkable because the Bush campaign "crafted an entire media strategy around Citizens for Tax Justice. It was, 'Don't show this to Citizens for Tax Justice before we put it out or we're sunk.' And I think they were right."

Last year, Senator Carl Levin's Permanent Subcommittee on Investigations reviewed various studies on the fiscal impact of offshore tax evasion and concluded that the resulting loss of revenue annually is in the neighborhood of $100 billion. (Yes, that's $100 billion with a "b" -- every year.)

Senator Levin then introduced the Stop Tax Haven Abuse Act in the Senate, and Rep. Lloyd Doggett introduced the House version. This legislation makes several changes that would make it easier for the IRS to identify and prosecute Americans who illegally stash their income in countries commonly called tax havens, which essentially have no income taxes (or extremely low income taxes) and laws that prevent banks from revealing anything about their clients to the U.S. tax enforcement authorities. It also includes some steps that would prevent corporations from engaging in the most egregious offshore tax avoidance schemes using some of these same tax havens for their low or non-existent income taxes.

Many of us were disappointed when the Congressional Joint Committee on Taxation (JCT) made it's official estimate that the bill would raise less than $30 billion over an entire decade (since the ten-year cost of offshore tax evasion to law-abiding America is probably over a trillion dollars.)

But the low revenue "score" is not surprising. JCT has historically erred on the side of making very low revenue estimates for measures that enhance tax enforcement, since it's hard to predict how effective new enforcement measures will be. And for that matter, it's hard to know exactly how many people are engaging in offshore tax evasion and how much they're cheating. It could cost us less than $100 billion, it could cost more, but we don't know for sure. That's the nature of tax evasion -- the money is hidden from the government, so no one knows for sure how big the problem is.

But even the little bit of revenue that the Levin-Doggett bill would officially raise over a decade seems to be too much for some members of both parties in Congress. Yesterday, the chairmen of the two tax-writing committees, Rep. Charles Rangel and Senator Max Baucus, introduced their own bill to crack down on tax havens (officially called the Foreign Account Tax Compliance Act), which will only raise $8.5 billion over ten years according to JCT.

The Baucus-Rangel bill does include important measures to require more reporting of foreign bank accounts and foreign assets and closing loopholes, and most of these provisions are in the Levin-Doggett bill. But Baucus and Rangel unfortunately left out some key provisions that are in the Levin-Doggett bill, which accounts for a large part of the difference in the revenue "scores" for the two bills.

Presumptions Against Americans Who Use Tax Havens

For example, the Levin-Doggett bill includes a list of countries that meet its definition of an "offshore secrecy jurisdiction," which is generally what we would call a tax haven. The Treasury would be authorized to remove countries from or add countries to the list as circumstances change. In tax evasion cases concerning accounts or assets in one of the listed countries, the IRS would be allowed three presumptions. (This means there would be three things that the IRS would not have to prove in court when prosecuting these cases, so the burden of proof would shift to the defendant.)

The first presumption would be that a U.S. taxpayer who “formed, transferred assets to, was a beneficiary of, or received money or property” from an offshore entity is in control of that entity. For example, this rule would prevent U.S. taxpayers from claiming that the trustee (usually a foreign person or entity) of their offshore trust is not permitted by the trust document to send money back to the U.S. to pay creditors (including the IRS).

The second presumption is that funds or other property received from offshore are taxable income, and funds or other property transferred offshore have not yet been taxed. The taxpayer will have to prove that the funds aren’t taxable income, or else pay the tax. The third presumption is that a financial account in a foreign country controlled by a U.S. taxpayer has a large enough balance ($10,000) that it must be reported to the IRS.

Special Enforcement Measures

Another set of provisions that are in the Levin-Doggett bill but not in the Baucus-Rangel bill would add to existing Treasury authority to impose special requirements on U.S. financial institutions. Under the Patriot Act, Treasury can impose a range of requirements on U.S. financial institutions dealing with certain entities -- from requiring greater information reporting to prohibiting opening accounts. The Patriot Act’s provisions are aimed at combating money laundering. The Levin-Doggett bill would extend that authority to allow Treasury to use those tools against foreign jurisdictions or financial institutions that are “impeding U.S. tax enforcement.” It would also add an additional tool to the Treasury’s arsenal: it would allow Treasury to prohibit U.S. financial institutions from accepting credit card transactions involving a designated foreign jurisdiction or financial institution.

Treatment of Foreign Corporations Managed and Controlled in the U.S. as U.S. Corporations

Yet another provision that is in the Levin-Doggett bill but not the Baucus-Rangel bill would treat foreign corporations as U.S. domestic corporations for tax purposes if 1) the corporation is publicly traded or has aggregate gross assets of $50 million or more, AND 2) its management and control occurs primarily in the U.S.

This provision of the bill deals with a certain type of tax avoidance rather than tax evasion, meaning a practice that may be technically legal even though it's an abuse of the tax system. The provision is particularly aimed at hedge funds and investment management businesses that are structured as foreign entities, although their key decision-makers live and work in the U.S. As Sen. Levin put it in his statement, “It is unacceptable that such companies utilize U.S. offices, personnel, laws, and markets to make their money, but then stiff Uncle Sam and offload their tax burden onto competitors who play by the rules.”

Less Robust Crackdown on Tax Havens Means Less Revenue

These provisions, which are some of the most important in the Levin-Doggett bill but which are not in the Baucus-Rangel bill, would raise $9 billion over ten years according to JCT. There may be many things that make Congressional leaders uncomfortable with these provisions, but surely one major factor is that it would require them to take on financial institutions that have subsidiaries in tax havens.

Economic Substance

There are other provisions included in the Levin-Doggett bill, but not the Baucus-Rangel bill, such as a provision codifying the “economic substance doctrine” in the Internal Revenue Code. The doctrine has been developed over the years by courts to disallow losses or deductions that have no economic substance apart from their tax benefits. Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. The bill would put the economic substance doctrine into the tax law, thereby disallowing losses, deductions, or credits arising from “tax avoidance transactions,” for example, where the present value of the tax savings far exceeds the present value of the pre-tax profits.

This particular provision was probably left out of Baucus and Rangel's bill simply because they want to use this as a revenue-raiser for other purposes, since it has already been attached to several bills.

The Path Ahead

The introduction of Baucus and Rangel's bill, the Foreign Account Tax Compliance Act, is certainly a positive development because it means Congress might finally be ready to do something about those who cheat on their taxes at the expense of the rest of us. But Congress tends to take on a controversial issue only once every decade (or longer) so if the legislation that is finally enacted is too weak to make a difference, we're stuck with it for a while. That's why the Baucus-Rangel bill will need to be amended in committee or on the floor of the House and Senate to incorporate some of the best elements of the Levin-Doggett bill.

Can’t we all just get along? 

Proponents of progressive taxation in Illinois might be wondering just that after listening to the main candidates for the Democratic nomination for Governor – incumbent Governor Pat Quinn and Comptroller Dan Hynes – criticize each other’s income tax plans over the past two months. 

As ITEP explains in its most recent report, both plans are progressive, as they would both require more affluent Illinoisans to contribute larger shares of their incomes to maintaining public services than individuals and families struggling to make ends meet. 

Sure, of the two plans, the one offered by Comptroller Hynes may be fairer, but it may also be less well-suited to meeting Illinois’ current and future revenue needs than the plan put forward by Governor Quinn in March.  The Hynes plan's only change to the income tax would be the creation of a graduated rate structure that would impose higher tax rates on upper-income taxpayers, an approach to taxation that is currently barred by the Illinois Constitution. 

Getting the Hynes plan off the drawing board and into the tax code could thus take several years, even though there is a clear need for additional revenue now. (The state's budget deficit for the upcoming fiscal year is projected to be $12 billion.)  What’s more, while the Comptroller asserts that his income tax plan would generate as much as $5.5 billion, ITEP estimates that it would yield only about $2.2 billion if in effect in 2011. 

Consequently, as ITEP suggests in its report, what is needed is an approach that combines the principal elements of both plans – the immediacy of the Quinn plan coupled with the fundamental reform embodied in the Hynes plan. 

If Illinois were to enact this spring an increase in its single income tax rate to 4.5 percent and to triple its personal and dependent exemptions – as Governor Quinn proposed earlier this year – it could generate roughly $1 billion for FY10.

Those changes could then serve as a bridge to a graduated rate structure, a bridge that could be removed once that new structure is in place.  As the ITEP report points out, adopting a graduated rate structure ranging from 3 to 7.5 percent, while leaving in place the higher personal exemptions recommended by the Governor, could ultimately generate in excess of $4 billion annually, while reducing taxes for nearly three out of every five Illinois taxpayers. 

Last week, the New Hampshire House of Representatives Committee on Ways and Means held a two-day information session for its members and other interested legislators on the state’s revenue structure, its ability to finance public services, and its relationship with the state’s economy. 

ITEP was one of three national organizations invited to participate and offered its views on the shortcomings of the current system.  In particular, ITEP's Jeff McLynch discussed the consequences that New Hampshire’s imbalanced tax system has for both individual taxpayers and for the state’s budget. (The Granite State and Alaska are the only two states to levy neither a sales tax nor a broad-based income tax.) McLynch explained that adopting an income tax would help not only to mitigate the inequities that low- and moderate-income residents now face but also to address the state’s long-standing structural deficit. 

The purpose of the session was straightforward enough. Legislators nationwide regularly meet to receive testimony from analysts and constituents alike on topics ranging from agriculture to zero-based budgeting. But some opponents of sound and fair taxation reacted as though it were one part of a much larger conspiracy, leading to a couple dozen protestors outside the session and a volley of press releases decrying the involvement of groups from outside the state in the days leading up to the event. 

Indeed, as the Concord Monitor noted, “The committee was careful to ensure that the representatives of both sides of the issue had a chance to air their views. That didn't quiet critics who treat the state's unfair tax structure like previous generations treated suicide, cancer and divorce, something that should not be discussed in public.  But silence allows ignorance to prevail and problems to worsen.” 

To learn more about the various perspectives presented at the session, visit the Ways and Means Committee website.

The problem is simple – and it’s also one that’s being faced by most states around the country.  South Dakota’s gas tax has been levied at a rate of 24 cents per gallon for close to a decade.  With inflation and improving vehicle fuel efficiency eroding the value of that tax, the state is now facing a shortfall of transportation revenues.  As a result, South Dakota has grown increasingly incapable of paying for routine road maintenance, much less improvements to its transportation system. 

Thankfully, the South Dakota Joint Transportation Committee took the obviously needed, but politically difficult step of approving a bill that would raise the gas tax, among other transportation-related revenue sources.

Specifically, the committee approved a bill raising the gas tax by 10 cents (to be phased-in by 2012), and increasing the vehicle sales excise tax from 3% to 4% (also to be phased-in by 2012).  Annual vehicle registration fees would also be increased, and heavier vehicles would be required to pay more in fees.

The plan is both straightforward and effective, and its broad outlines should be examined by the multitude of other states facing dwindling transportation revenue streams.  The downside to the plan is its regressivity.  Should the bill become law, lower- and moderate-income families can be expected to pay a disproportionate share of their incomes in tax as a result of these tax and fee increases.  For this reason, South Dakota should consider providing some offsetting relief to low-income families, similar to what it already does with the state’s grocery tax via its low-income refund program.  In states with EITCs or other low-income credits, the options for providing low-income relief to offset the regressivity of gas tax and fee hikes are even more straightforward.

With legislative sessions starting in just a few months, advocates and the press are weighing in on the options available to cash-strapped states. Kentucky lawmakers are urged to find a real solution to the state's fiscal woes. Idaho's Governor is suddenly open to delaying an improvement in an important tax justice tool. Maryland advocates urge a balanced approach to this year's budget, Arizona researchers offer insight into the cost of previous tax cuts, and Ohio lawmakers rethink their own previously enacted tax cuts.

Kentucky

Late last week, Kentucky's Lexington-Herald Leader published an editorial urging lawmakers to reform that state's tax code, saying "Our representatives and senators turned to a 'smoke and mirrors' approach to budgeting because they simply lacked the backbone to do the right thing: Pass the kind of real tax reform that could provide state government with a stable, sustainable revenue base." They fear that during this session lawmakers will continue to cut important programs instead of fixing the state's revenue stream. The paper warns the lawmakers appear to be on track to continue "robbing Peter to pay Paul...Only this time, Peter is a schoolchild."

Idaho

Tax fairness advocates in Idaho may be facing a similar uphill battle. Governor Butch Otter, once a strong proponent of the state's grocery tax credit (which helps to offset the state's sales tax on food), has now left the door open for delaying an increase in the credit amount in order to save the state $15.5 million. Of course, now is precisely the wrong time to delay such an important credit specifically targeted to help offset the state's regressive sales tax on food. While it's important to keep all options on the table, during this time of fiscal upheaval delaying the increase in this credit is an option that should be quickly dismissed.

Maryland

Recently the Maryland Budget and Tax Policy Institute released a paper urging lawmakers to approach the state's budget woes in a balanced way. The report makes a strong case against a cuts-only budget. "An all-cuts budget solution would sacrifice too many of the things that make Maryland such a great state." The report goes on to offer a list of concrete revenue-raising options available to lawmakers interested in preserving the state's education, health, and transportation programs.

Arizona

Arizona's budget woes are dire. A new report from the Arizona Children's Action Alliance describes the state's budget crater, which is projected to be $1.5 billion for FY10 and $2.5 billion in FY11. The report is useful for any Arizona advocate interested in understanding the impact that previous rounds of tax cuts have had on the resources available to fund public services. It explains "why any [budget] package that results in further net loss to the state general fund endangers the common benefits that Arizona counts on." The report goes on to offer ten reasons why the state should freeze and reverse the harmful tax cuts from recent years.

Ohio

Last week, the Ohio House of Representatives voted to suspend the state's scheduled income tax rate reductions for two years to help plug a budget hole. Governor Ted Strickland congratulated members of the House, saying they "acted quickly, courageously and responsibly to protect Ohio schools from devastating cuts while reducing their own pay in solidarity with struggling Ohio families and businesses." Now the legislation moves to the state's Republican controlled Senate. Let's hope lawmakers there follow in the House's footsteps and put the needs of Ohio first.

President Obama’s Economic Recovery Advisory Board (PERAB) recently requested ideas from the public about how the federal tax system could be reformed. The comments submitted by Citizens for Tax Justice yesterday begin "We want a fairer, simpler tax code that raises enough money to pay for public services and promotes economic prosperity for all Americans. Our current tax system falls far short of achieving these goals."

The comments note that:

- On the revenue side, even after the current recession ends, we can expect to be funding about a quarter of all non-Social Security spending with borrowed money (including amounts borrowed from the Social Security trust fund).

- As for simplicity and fairness, well, both parties have been guilty of using the tax code to promote a vast array of favored activities. One result is that taxpayers with similar incomes can be treated wildly differently depending on how they make their money or how they spend it.

- In fact, our current tax system allows many of our biggest and most profitable corporations to pay little or no tax.

The rest of the comments lay out principles for solving these problems.

Read CTJ's Suggested Principles for Tax Reform (2 pages)

Pennsylvania finally has a budget, just 101 days late.  But unfortunately, the budget doesn’t include the broad-based income tax increase that Governor Ed Rendell had supported.  And while Governor Rendell was able to convince legislators of the need for new revenue, the revenue sources that were selected leave much to be desired.

One major revenue source, for example, is a $190 million tax amnesty.  Tax amnesties are shortsighted and unfair – as we explained just a few weeks back.

Other revenue is projected to come from the legalization of poker, roulette, and other table games.  Given the seemingly endless delays surrounding the implementation of slot machine gambling in Pennsylvania, it’ll be interesting to see how long it takes before the first hand of poker is played.  The state’s Gaming Control Board is already on the record as saying it will need at least six to nine months just to prepare to regulate these new games. 

Given that significant gambling operations already exist nearby in New Jersey and West Virginia (and could soon be coming to Ohio), Pennsylvania shouldn’t be counting on its gambling expansion to produce much in the way of tourism.  And if casino industry lobbyists have it their way, and the current $20 million license fee is slashed to just $10 million, the $200 million revenue estimate attached to table gaming should be expected to plummet as well.  We wrote about the folly of gambling as a revenue source a few weeks back.

Pennsylvania also chose to increase its cigarette tax, lease state forests to natural gas exploration companies, impose a new tax on Medicaid managed-care organizations, and re-direct some current cigarette tax and gambling revenues into the state’s general fund.

Overall, it’s a pretty disappointing revenue package.  There are a few bright spots, however. The scheduled phase-out of the business capital stock and franchise tax was delayed (now is hardly the time to be cutting taxes), the state’s film tax credit was temporarily cut back, and the rainy day fund was wisely tapped.

All in all, it’s certainly a good thing that Pennsylvania chose not to address its budget shortfall with spending cuts alone…but the deal that was reached leaves more than a little room for improvement.

Dell’s decision to close its Winston-Salem North Carolina factory provides one of the most visible examples to date of the failure of state and local tax subsidies as a tool of economic growth.  The subsidy given to Dell to open this factory was valued at over $300 million, and was described by Good Jobs First's Greg LeRoy as one of the highest ratios of subsidy – to – private investment ever received.  Be sure to read this blog post from Good Jobs First for some insights on this important story.  This closure is sure to have a significant impact on the nationwide debate over economic development subsidies.

It’s official. Come this January, voters in Oregon will decide, via ballot initiative, whether to keep in place two major tax reforms – one raising the income taxes paid by wealthy Oregonians and the other increasing the taxes paid by large corporations – that were adopted in July to help close the state’s yawning budget gap. 

While the initiative’s backers (that is, the anti-tax activists favoring repeal) assert that the pair of reforms will damage Oregon’s economy, a recent report by the state’s Legislative Revenue Office finds that using spending cuts to make up for the $733 million in revenue that would be lost if the reforms were repealed would actually be worse for the state’s economic prospects. 

This conclusion is echoed in a letter signed by three dozen Oregon economists, who argue that the Legislature’s efforts to “balance budget cuts with tax increases targeted on corporations and high-income Oregonians while maximizing receipt of federal dollars to fill a $4 billion shortfall was, from an economic perspective, a prudent course of action.” 

Moreover, a study released earlier this week by the Oregon Center for Public Policy reveals that, while the recent reforms were extremely progressive in nature, they will still leave the very richest Oregonians paying less in state and local taxes, relative to their incomes, than poor and middle-income residents.

For more on the very different attitudes some affluent Oregonians have towards recent tax reforms, see this revealing piece from Oregon Public Broadcasting.

One tax break, three companies, $281 million in lost revenue. 

That’s one of the key findings of a recent analysis, conducted by the Massachusetts Department of Revenue (DOR), of a provision included in the Commonwealth’s corporate tax reform legislation in 2008.  As the Massachusetts Budget and Policy Center (MBPC) explains, the provision, added under questionable circumstances during legislative debates, was designed to ”give a new tax break to companies ‘if book-tax differences … result in an increase to a net deferred tax liability or decrease to a net deferred tax asset for any taxpayer affected by this section.’” 

Yet, as the MBPC points out, at the time the provision was added to the legislation, there was no publicly available explanation of what it would cost or any description of the policy goals it was intended to achieve.  The DOR’s analysis finally puts some numbers to those expected costs:  over the next seven years, 128 corporations will realize tax reductions totaling $535 million due to the provision, with over half -- $281 million – going to just a trio of companies. 

Needless to say, given Massachusetts financial woes, the DOR’s report has some legislators rethinking the wisdom of this particular feature of the tax code.

After some delay, Ohio Governor Ted Strickland is moving in the right direction regarding the need to raise revenue to fill the state's budget gap in a progressive way. The Governor has proposed temporarily repealing the last year of a five-year, 21 percent income-tax cut approved in 2005.

However, Policy Matters Ohio this week issued a report (utilizing analyses from ITEP) which urges policymakers to go even farther. The report makes the argument for repealing a year of the tax cuts and also reinstating the state's previous tax bracket of 7.5 percent for taxable income over $200,000. The report also urges lawmakers to consider introducing an 8.5 percent bracket for Ohioans with taxable income over $500,000.  According to ITEP estimates, this measure is estimated to increase revenues by $950 million in 2009 alone.

The paper makes a strong case for hiking taxes on upper-income taxpayers because "affluent Americans have benefited far more from economic growth in recent decades than those lower down on the income ladder...High-income Ohioans are most able to pay additional taxes -- and the revenue is badly needed." We couldn't have said it better ourselves.

Kansas Secretary of Revenue Joan Wagnon gave a keynote speech last week at Wichita State University where she said that her staff calculated that without the tax cuts and exemptions passed by the legislature since 1995, Kansas would have $1 billion more in revenue this year. And that, interestingly is the amount of the state's expected shortfall for fiscal year 2010. Wagnon went on to say, "It's hard to get that lesson across that you can't keep doing tax cuts and waiting for it to produce more revenue, because at this point, it's producing less revenue."

Wagnon hopes that this staggering figure will be at the forefront of legislators' minds as they are approached to pass various tax exemptions this coming session. Her office has prepared a 21 question piece designed to help legislators evaluate exemptions. State officials across the country could learn from Wagnon when she says, "It just seems so obvious to me that in a time of crisis, you don't give away your revenues."

The fifth and final Congressional committee with jurisdiction over health care reform is poised to approve its version of reform next week, bringing the nation a step closer to a goal that has eluded lawmakers and Presidents for a century. The Senate Finance Committee bill would increase the number of Americans with health insurance from 83 percent to 94 percent and will not increase the budget deficit, according to the Congressional Budget Office.

Three committees in the House of Representatives and the Senate Health, Education, Labor and Pensions (HELP) Committee have all approved health care reform bills. Approval of a bill by the Senate Finance Committee will be an important breakthrough, partly because it is the most conservative of the five committees.

After the Finance Committee approves its bill, the next step will be for Senate leaders and the chairmen of the HELP and Finance Committees to combine the two versions into a bill that will be brought to a vote on the Senate floor. A similar process is currently taking place in the House, where leaders need to combine the three committee bills into one that can be passed on the House floor.

Dispute in the Senate Over Taxing Health Care Benefits and other Revenue-Raisers

The Senate Finance bill includes an excise tax on insurance companies equal to 40 percent of any premiums they charge over certain thresholds ($8,000 for plans for individuals and $21,000 for plans for families). The idea behind this tax is to discourage the use of high-cost health insurance plans, often called "Cadillac plans." As we've reported before, there is a dispute over whether expensive plans really represent over-consumption of health care or merely represent people with greater health risks being charged more for insurance.

Some adjustments were made to the excise tax during the Finance Committee markup. One raises the premium thresholds for the excise tax for people in high-risk jobs and people over age 55. (The thresholds would be $1,850 higher for individuals and $5,000 higher for families.)

The initial proposal from the Finance Committee's chairman, Max Baucus (D-MT) would have required people to obtain health insurance unless there was no policy available that cost less than 10 percent of their adjusted gross income (AGI). One amendment adopted in committee lowered that threshold to 8 percent of AGI. The penalties for individuals without health insurance were also changed to be lower and phased in over time, so that the bill now would create maximum penalties of $200 in 2014, gradually rising to $750 in 2017.

Several Senators have expressed interest in offering amendments on the Senate floor that would do more to make health care affordable for working families. The costs of any such amendment must be offset by revenue-raising provisions. Some of the revenue-raising provisions that were discussed among Finance Committee members and which could be proposed as amendments on the floor were recently analyzed by Citizens for Tax Justice. They include reforming the Medicare tax so that it no longer exempts investment income and limiting itemized deductions for very wealthy taxpayers, among others.

Other issues not related to taxes could receive more attention over the next couple weeks. For example, the Finance Committee bill is the only of the five bills that does not include a public option, which most health experts believe will reduce the overall costs of health care reform.

More Progressive Revenue Provision in House Bill

The revenue-raiser in the House bill is a graduated surcharge on adjusted gross incomes above $280,000 for singles and $350,000 for married couples. There has been some talk of changing the surcharge so that it only applies to AGI above $500,000 for singles and $1 million for married couples. This change is unnecessary, and CTJ has calculated that it would reduce the revenue from the surcharge by over 18 percent. (These variations on the surcharge are also analyzed in CTJ's recent report on revenue options for health care.)

Anyone who has ever wondered about the extent of corporate tax avoidance in Maryland need wonder no longer: a new analysis from the state’s Bureau of Revenue Estimates (BRE) suggests that it is quite substantial.  The analysis, mandated by law two years ago, answers some very important questions: if Maryland had used combined reporting as part of its corporate income tax in 2006, how much more revenue would the state have collected and how would it have affected the taxes paid by certain businesses and industries? 

Combined reporting, as this ITEP issue brief explains, is the single most effective means of curbing corporate tax avoidance available to state policymakers. Given the degree of corporate tax avoidance at the state level, its adoption should, overall, be expected to generate significant amounts of additional tax revenue. This is true even if some corporations, due to varying levels of profitability among their subsidiaries, end up paying less in taxes.

Not surprisingly, that is what the BRE’s analysis finds.  Had combined reporting been part of Maryland’s tax code in 2006, the state, on net, would have collected as much as $170 million in additional revenue, an amount equivalent to nearly 20 percent of total corporate income tax collections that year. 

What’s more, as a related analysis from the Maryland Budget and Tax Policy Institute (MBTPI) points out, it is typically larger businesses that would pay additional taxes under combined reporting.  The data released by the BRE indicate that as much as 70 percent of corporations with incomes over $25 million would have owed higher taxes in 2006 had combined reporting been in effect.

To be sure, the BRE’s analysis goes to great lengths to emphasize that, given current economic conditions and other factors, Maryland would not immediately realize $170 million in new revenue if the Assembly and the Governor were to enact combined reporting legislation tomorrow or next week – and you can be certain that opponents of combined reporting will strive to make the same point. 

Still, as the MBTPI argues, there’s no time like the present for action.  Combined reporting is not some new or risky gambit. The majority of states that have corporate income taxes now use it. (Some have used combined reporting for over sixty years.) Nor will waiting longer to adopt it help address Maryland’s long-term fiscal problems.  Fortunately, it appears that some Maryland legislators, such as Senator Paul Pinsky, may be ready to take up the issue once the Assembly reconvenes next year.

New Jersey gubernatorial hopeful Chris Christie has promised the following if elected: property tax cuts, across-the-board income tax cuts, corporate tax cuts, and tax cuts for small businesses.  Like a true politician, Christie has chosen to avoid upsetting any specific voters by refusing to outline the unavoidably severe cuts in state services that would be required to finance his tax-cutting spree.  Instead, he has simply stated that everything, aside from police funding, should be on the table.  Like most states, New Jersey will be staring down a large budget gap for the foreseeable future (projected at about $6 billion or more for FY11).  Closing this gap alone (without raising taxes) would require a 20% cut in the state budget.  Piling Christie’s tax cuts on top of that gap would raise that percentage significantly.

Somewhat encouragingly, voters are beginning to question Christie’s ability to deliver tax cuts during these dire budgetary times.  In an attempt to side-step these growing questions at a recent gubernatorial debate, Christie compared his current situation to the one he faced as a U.S. attorney:  “When I said I was going to combat public corruption, no one asked me exactly how [I was] going to do it … They said, ‘Do it. Let’s see if you can.’”  But you can’t blame the voters for being just a bit skeptical.  The fact is, if Christie explained “how” he was going to do it, he’d probably lose more than a few votes.

In addition to the general fund fantasies Christie seems to be concocting, he also has some interesting ideas regarding transportation funding.  In discussing the state’s deteriorating transportation infrastructure, Independent candidate Christopher Daggett admitted that gas tax increases or toll increases will be needed.  When Christie attempted to bash this idea, Daggett fired back, “It’s easy to criticize when you have no plan of your own. The tooth fairy’s not going to solve this problem.”

In addition to taking a realistic position on transportation, Daggett should also be commended for his willingness to offer specifics regarding his property tax plan.  In order to pay for a 25% cut in property taxes, Daggett has proposed expanding the state’s sales tax to include services.  Such a move would modernize an outdated tax, and would ensure the sales tax’s long-run sustainability.

Finally, while incumbent Jon Corzine has been relatively tight-lipped regarding his future plans for the state’s tax system, he has shown some real leadership by refusing to take the childish no-tax pledge that many observers have been attempting to force onto him.  Moreover, it’s important not to forget that Corzine has already shown an ability to make the tough choices in his decision to take a balanced approach (both raising taxes and cutting spending) during the most recent round of budget negotiations.

Michigan lawmakers are currently operating under a temporary budget that should last until the end of the month. But K-12 education funding wasn't included in this temporary measure and Michigan's budget director said that a K-12 budget had to be signed by tomorrow if the state was going to make payments to local school districts. The state's Department of Education released a statement Monday saying that without a state budget, they can't get federal funds that help pay for special education and programs that benefit students living in low-income districts.

At around midnight on Thursday, lawmakers approved a K-12 education budget that reduces spending by $165 per pupil rather than the proposed $218. The Senate voted to pay for the increased education spending by freezing the state's Earned Income Tax Credit (EITC) at 10 percent of the federal credit (the credit was scheduled to increase to 20%) and reducing the state's film tax credit. The Governor is expected to sign the K-12 budget into law. But the fate of these revenue raising provisions isn't certain in the House, which won't meet again until Tuesday.

Instead of chopping away at one of the most successful anti-poverty programs in the country during a recession, the EITC, lawmakers should turn to eliminating some of the special tax breaks that Michiganders over the age of 65 enjoy. Late last week Brian Dickerson, a columnist for the Detroit Free Press, wrote, "I'm not convinced that Michigan needs to start kicking senior citizens out of their hospital beds. But we should certainly tax some of them more heavily, especially if we want their grandchildren to inherit a viable state."

The Michigan League of Human Services recently released a brief which raised the insightful question: Can the state really afford the generosity offered the elderly through the state's tax code? Read the brief here. Estimates are that preferences cost the state well over $650 million annually and the cost will likely increase as the population ages.

As more shocking details continue to surface regarding Iowa’s rampantly abused film tax credit, lawmakers have begun giving increasingly serious attention to the issue of how to better oversee all the special subsidies contained within the state’s tax code.

A recent review of the credit by a team of accountants revealed a plethora of abuses, including incomplete records, altered contracts, unqualified expenditures, illegitimate labor expenses, deferred payments, advertising irregularities, nonproduction expenses, nepotism, inaccurate credit calculation, erroneous awards, broker fees, and pass-through business abuses.

This list of abuses has caused Governor Chet Culver to wisely call for a comprehensive review of all Iowa tax credits.  While such a review is unlikely to turn up any abuses of the magnitude that took place under the film tax credit, it could potentially highlight credits that aren’t living up to the promises that were made when they were enacted.

By reviewing the effectiveness of these subsidy programs buried within the state’s tax code, Iowa could shine a bright light on an area of policy that typically receives much less scrutiny than direct spending programs, which must battle their way through the authorization and appropriations processes.  In fact, Iowa would benefit greatly from conducting reviews of its tax subsidies on a regular basis, rather than waiting for another political scandal to erupt.  Moreover, the state should consider expanding those reviews to include special deductions, exemptions, exclusions, deferrals, and preferential tax rates as well.  Tax credits aren’t the only means by which the state provides subsidies through its tax code.

In addition to Culver’s call for tax credit reviews, other lawmakers have begun asking for greater tax credit disclosure.  Rep. Clel Baudler, for instance, recently insisted that Iowa’s Department of Economic Development should “absolutely not” be able to “hide the specifics on the awards or grants they’re giving out.”  We certainly agree.

The issue of subsidy disclosure is one that Good Jobs First has been leading the charge on for years.  In addition, they’ve also recently posted an excellent piece on the history and effectiveness of film tax credits that’s worth a close look.

Earlier this week, the Georgia Supreme Court ruled in favor of the City of Columbus and against hotels.com, an online travel company (“OTCs”) that charges customers one rate for booking a hotel room but pays local governments a lodging tax based on cheaper, wholesale room rates.  The Court’s finding mirrors its decision in a case decided in June against Expedia.com.  In both instances, the Court held that the tax for which the OTCs were liable should be based on the retail room rate paid by their customers.

OTCs contract with local hotels to provide rooms for a discounted or wholesale rate.  When a customer books a room online, the OTC charges the customer a “marked-up” rate along with taxes and service fees.  Under Georgia law, municipalities may impose hotel occupancy and excise taxes on the furnishing of any room, lodging, or accommodation.  The Court noted that state law allows cities to impose a tax on the lodging charges actually collected. 

The high court’s decisions are binding across Georgia, so the two Columbus cases could affect other suits filed by governments seeking to collect the proper amount of lodging taxes from OTCs.  The cases have been remanded to the lower courts to determine how much money the online services owe in back taxes and penalties. 

Importantly, numerous other cities – including Houston, San Antonio, and Miami have sued or initiated administrative proceedings against OTCs, asserting that they owe back taxes on their price mark-ups.  While many cases have yet to be fully adjudicated, one other recent case yielded much the same verdict as Columbus’ suit against hotels.com.  In February, multiple OTCs, including Orbitz and Travelocity, were ordered to pay the city of Anaheim, California, $21 million in back taxes, fees and penalties related to the payment of hotel occupancy taxes.

Rulings such as these have motivated OTCs to seek enactment of federal legislation that would ban state and local taxation of hotel room rentals when booked by such a company.  However, as these rulings demonstrate, there is no justification for limiting the base for such a tax to the wholesale price of a hotel room, let alone eliminating taxation altogether.  Hotel taxes are consumption taxes, which should be measured by the value of the consumption to the customer.  Therefore, the tax should be imposed on the retail amount.  For more on this subject and on the OTC’s push for federal legislation, see this helpful report from the Center on Budget and Policy Priorities.

Senator Levin to Offer Tax Haven Legislation to Help Pay for Health Care Reform

This week, Senator Carl Levin of Michigan indicated that he will offer a measure to crack down on offshore tax evasion as a revenue-raiser to help pay for health care reform.

The Stop Tax Haven Abuse Act

The measure Senator Levin plans to offer is one he introduced earlier this year, along with four co-sponsors, as a stand-alone bill called the Stop Tax Haven Abuse Act (S.506). It would enact important new rules to deter offshore transactions designed to evade U.S. income tax.  Rep. Doggett introduced the same measure in the House the next day, with 59 co-sponsors (H.R. 1265). A description of the bill’s provisions is available here.

When the bill was originally introduced, Sen. Levin said “our bill provides powerful tools to end offshore tax haven and tax shelter abuses [which] contribute nearly $100 billion to the…annual tax gap.” Sen. Levin said, “With the financial crisis facing our country today and the long list of expenses we’re incurring to try to end that crisis, it is past time for taxes owing to the people’s Treasury to be collected.  And it is long past time for Congress to stop tax cheats from shifting their taxes onto the shoulders of honest Americans.

Paying for Health Care Reform with the Tax Haven Bill

A preliminary projection by the Joint Committee on Taxation estimates that the legislation would raise $29.8 billion in revenue over ten years. The ultimate amount of revenue may be many times that. Because these assets and income are not reported to the IRS, the true magnitude of the revenue loss is a mystery.

Attaching the Stop Tax Haven Abuse Act would be a progressive way to help pay for health care reform because it is generally wealthy Americans that are able to take advantage of tax havens. (See CTJ's additional suggestions for progressive ways to pay for health care reform.)

The Tax Haven Problem

It is estimated that the international tax gap — the amount of taxes American companies and wealthy Americans evade through offshore tax activities — is as much as $100 billion per year.

U.S. citizens and residents are taxed on all their income, whether it is earned here or abroad. If a foreign government also taxes the income, that tax may be credited against their U.S. tax.

Wealthy taxpayers are able to avoid paying U.S. taxes that they legally owe by moving assets and income offshore to what are known as “tax havens.”  Tax havens are offshore jurisdictions that have low or non-existent income taxes as well as bank secrecy laws that they use to justify being uncooperative with investigations by tax authorities from other countries. Evading U.S. income tax by using tax havens is illegal and U.S. citizens that do it are subject to civil and criminal penalties, including possible prison terms.

The U.S. government’s investigation of banking giant United Bank of Switzerland (UBS) revealed that as many as 52,000 accounts there are owned by Americans. That’s just one bank in one of the dozens of offshore financial centers. Several UBS account owners have already pled guilty to tax evasion.

The latest plea came Tuesday when a Seattle area man, a former sales manager for Boeing, appeared before the court in connection with his plea agreement. Roberto Cittadini faces possible criminal penalties of three years in prison and a maximum fine of $250,000. He has already agreed to a civil penalty for failure to file a Foreign Bank Account Report (FBAR) of up to one-half of the maximum balance of his offshore accounts which at one time contained as much as $1.9 million dollars. The great irony of this particular case is that since Boeing is a multi-billion dollar contractor for the U.S. government, part of Cittadini’s salary was paid by the U.S. government. He moved that money outside of the country to invest it and avoid paying U.S. income tax on the investment earnings.

In a major tactical retreat, the U.S. Chamber of Commerce, the National Federation of Independent Businesses and several other organizations that claim to represent the interests of business have announced that they will no longer push for repeal of the estate tax. They will, however, push for a plan that will gut the estate tax and that has received some support in the Senate.

The tax cuts enacted under President Bush in 2001 scheduled a gradual repeal of the estate tax, with the amount of assets exempted from the tax gradually increasing over a decade and the tax rate on estates gradually dropping until the estate tax will disappear entirely in 2010. Like almost all of the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning that rules scheduled under President Clinton will come back into effect in 2011. Many Republicans and some Democrats in the Senate have, in the past, supported permanently repealing the estate tax. 

President Obama and Democratic leaders in the House and Senate support a compromise that would prevent the estate tax from disappearing in 2010, but which would also unnecessarily cut the estate tax below the level it would reach in years after 2010 if Congress simply does nothing. This compromise would essentially freeze in place the estate tax rules in effect in 2009, which exempt the first $3.5 million in estate assets (or $7 million in the case of a married couple) and tax the rest at a rate of 45 percent.

Citizens for Tax Justice has argued that even this policy amounts to an unwarranted cut in the estate tax. State-by-state figures from CTJ show that only 0.7 percent of the deaths that occurred in 2006 resulted in any estate tax liability in 2007. (Estate taxes are usually paid in the year after the year in which an individual dies.) 2006 was a year in which the estate tax exempted the first $2 million in estate assets (or $4 million in the case of a married couple). (A proposal put forward by Congressman Jim McDermott in April would make permanent adjustments to the estate tax without giving away as much revenue.)

The coalition of business groups that has been trying for years to permanently repeal the estate tax now says it supports a permanent estate tax that exempts the first $5 million in estate assets (or $10 million in the case of a married couple) and taxes the rest at a rate of 35 percent.

A budget amendment with these basic parameters was approved by 51 Senators in April, but was not included in the final budget resolution adopted by Congress. It's difficult to know if a majority of Senators would ever really support the enactment of such a policy. The budget amendment was to be deficit-neutral (which would be difficult to achieve) and several of the 51 Senators who voted in favor would likely oppose a cut in the estate tax if it increased the budget deficit.

Any legislation to change the estate tax would require 60 votes. Democratic leaders are hoping to round up that many votes to pass a bill that at least extends the 2009 estate tax rules for one year, through the end of 2010, to prevent the estate tax from disappearing for a year. Then, sometime during 2010, Congress could take up the question of what the estate tax should look like in the long-run while they take up the larger debate over which components of the Bush tax cuts to extend.

At least one anti-estate tax group, the American Family Business Institute, refused to change its position and still backs full repeal of the estate tax. The organization is apparently linked to the American Family Business Foundation, which issued two studies earlier this year that claimed to show how repeal of the estate tax was vital to economic growth. CTJ released a report in May that examined the methodological flaws and illogical assumptions that underpin these two studies.

The National Association of Realtors (NAR) and other groups representing the real estate industry have been a case study in special interest politics for some time. A quick glance a the Congressional Joint Committee on Taxation's tax expenditure report reveals that tax breaks related to housing cost over $100 billion a year, but that's not enough to satisfy NAR and its followers.

The Battles Over the "Carried Interest" Loophole

Two years ago, the Real Estate Roundtable (of which NAR is a member) hired Douglas Holtz-Eakin to defend the "carried interest" loophole, which basically allows those investing other people's money to pretend that they put up their own money, thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay. (CTJ released a fact sheet debunking Holtz-Eakin's arguments.) The Obama administration continues to support closing the carried interest loophole.

The Homebuyer's Credit

In the last year of the Bush administration, the real estate industry managed to get Congress to adopt, as part of the economic stimulus law enacted in 2008, a $7,500 homebuyer credit that taxpayers would have to pay back to the IRS. This, year, they persuaded Congress to upgrade that to a $8,000 homebuyer credit that does not have to be paid back and that is available to taxpayers under certain income limits if they purchase a home before the end of November of this year.  

The homebuyer tax credit was estimated at the time of enactment to have a cost of $6.6 billion, but is actually on track to cost more than twice that.

Since the economic crisis was caused by inflated home prices, it is not at all clear how subsidies provided through the tax code to boost home prices could possibly be good policy. 

Ted Gayer at the Brookings Institution has written that:

"The tax credit is very poorly targeted. Approximately 1.9 million buyers are expected to receive the credit, but more than 85 percent of these would have bought a home without the credit. This suggests a price tag of about $15 billion – which is twice what Congress intended – for approximately 350,000 additional home sales. At $43,000 per new home sale, this is a very expensive subsidy."

Perhaps most alarming is the possibility that the homebuyer credit could become another "tax extender," the term used by Congressional staff and lobbyists to describe tax breaks that are ostensibly in effect for only a year or two, but which everyone believes Congress will extend again and again. NAR is, of course, pushing for Congress to extend the homebuyer credit.

Health Care

Perhaps the worst example of special interests fighting to block the common good is the real estate industry's interference in Congress's attempts to reform health care. Early this year, the Obama administration proposed to limit the value of itemized deductions for wealthy taxpayers to 28 percent as a way to raise revenue that would partially fund health care reform. CTJ found that this would affect only the richest 1.3 percent of taxpayers and would merely reduce some of the unfairness that occurs when Congress subsidizes certain activities (like home ownership and charitable giving) through the tax code. NAR, naturally, would have none of it, since this proposal would curtail the savings received by high-income taxpayers when they claim the itemized deduction for home mortgage interest.

In fact, NAR recently has come out against a much more scaled back version of this proposal, which would merely cap itemized deductions at 35 percent.

Currently, the top income tax rate is 35 percent, so the richest Americans can save, at most, 35 cents for each dollar of itemized deductions they claim. But the Bush tax cuts, which lowered the top income tax rate from 39.6 percent to 35 percent, will expire at the end of 2010. That means that in 2011, under current law, each dollar of itemized deductions claimed by a very wealthy person could result in almost 40 cents of savings. Capping itemized deductions at 35 percent would therefore merely freeze in place their current value after the Bush tax cuts expire and rates go back up.

NAR recently issued a statement saying that it opposes even this scaled back proposal to limit itemized deductions and that it "rejects in the strongest possible terms any proposal that would limit the deductions for mortgage interest and real property taxes." NAR is unabashed in its defense of subsidies provided through the tax code for families in the top income tax bracket.

Do the Realtors Oppose the Bush Tax Cuts?

But if the realtors believe that the very rich should receive 39.6 cents for each dollar of itemized deductions they claim, that seems to imply that they think the top income tax rate should revert back to the pre-Bush level of 39.6 percent. Their position seems to be that it is unacceptable for the richest Americans to only save 35 cents for each dollar they claim in itemized deductions. The only way for that number to go back up from 35 to 39.6 is for President Bush's reduction in the top rate to expire. Surprisingly, NAR and CTJ seem to have one position in common, albeit for vastly different reasons.

Up until last week, Virginia gubernatorial candidate Creigh Deeds had attracted a lot of criticism for failing to take a position on raising taxes to fund transportation.  Now that criticism is old news, as Candidate Deeds has firmly stated: “I have voted for a number of mechanisms to fund transportation, including a gas tax. And [if elected Governor] I'll sign a bipartisan bill with a dedicated funding mechanism for transportation -- even if it includes new taxes.”  In contrast, Republican candidate Bob McDonnell has put forth a plan that has been rightly criticized by The Washington Post as relying on “wildly optimistic assumptions, brazen exaggerations, gauzy projections and far-off scenarios.”  McDonnell’s package consists of a hodge podge of proposals: some of which run counter to federal law, some of which are politically impossible, and some of which are attached to revenue estimates that can only be described as being “invented or, worse, an intentional distortion.”

Much of Virginia’s transportation problem stems from its inadequate gas tax.  Unlike sales taxes, which are collected as a percentage of an item’s purchase price, gasoline taxes are collected as a specific number of “cents per gallon.”  In Virginia, the gas tax has been at 17.5 cents per gallon of gasoline since 1987.

Of course, given inflation, 17.5 cents today isn’t worth nearly what it was in the 1980s.  More specifically, in 1987, 17.5 cents had about the same purchasing power as 33 cents does today.  In other words, over the last 22 years, inflation has cut the real value of the gas tax by nearly 50%.  Add to that the downward pressure on gasoline sales brought about by increasing vehicle fuel-efficiency, and it’s clear why the state’s transportation infrastructure is in such dire straits.

In this light, Bob McDonnell’s transportation plan completely misses the mark.  His plan to turn Virginia’s interstates into toll roads will require approval from the federal government – something which is far from certain.  His promise to sell off the state’s liquor stores has been attached to a $500 million revenue estimate that has been thoroughly rebutted as being wildly unrealistic, especially given its assumption that $100 million in current liquor store profits will be siphoned away from “mental health, substance abuse and other human services” in favor of transportation.  Moreover, McDonnell’s pledge to redirect sales tax revenue away from schools and public safety, and toward transportation could be categorized as outrageous, were it not so politically unrealistic as to be laughable.

Adding to the absurdity, one of McDonnell’s recent campaign ads bragged that The Washington Post found his transportation plan to be deserving of credit for “the extent and specificity of its proposals.”  But “specificity” is of little value if the specifics don’t add up.  In fact, the same article that McDonnell cites in his campaign ad also included the following passage:

“Given [the] crisis in funding, and the centrality of transportation infrastructure to Virginia's economy, you'd think the candidates for governor would advance serious, plausible proposals -- and that they would include fresh revenue from new taxes or fees.  Unfortunately, former attorney general Robert F. McDonnell, the Republican, is pushing a plan that mostly rules out such revenue and that would deliver significant new funds for road-building only at the probable expense of the state's colleges, public schools, police departments, prisons and health programs… [In addition], unfortunately, the new revenue [McDonnell] identifies is one-time-only, many years distant or paltry.”

Next month, voters in two states will go to the ballot to decide whether to cap the growth in public budgets according to a formula based on the annual rate of population growth plus inflation. In Washington, the ballot initiative brought forward by anti-taxer Tim Eyman is called I-1033. Researchers at the Washington State Budget and Policy Center and the Colorado Fiscal Policy Institute refer to it as the "toxic twin" of Colorado's Taxpayer Bill of Rights (TABOR).  In Maine, the initiative, dubbed TABOR II, is more akin to an annoying younger brother (well, if that brother had the ability to wreak complete havoc with sound fiscal policy).  You can tell him to go away -- as Maine voters did in rejecting an earlier version of the initiative in 2006 -- but he unfortunately keeps coming back.
 
Colorado's experience makes it clear that arbitrary funding formulas are an ineffective way to run government, leading to devastating impacts on vital public services. In fact, Colorado voters chose to suspend TABOR in 2005, due to the effects it was having on education, transportation, and human services. 

The limits that I-1033 in Washington and TABOR II in Maine would impose are especially dangerous in light of the current recession.  Under these initiatives, funding caps would be the lesser of the previous year's cap or the previous year's actual funding levels.  As a result, during economic downturns, when revenues are especially low, the cap is permanently “ratcheted” down to lower levels.

As to the consequences that these initiatives would have if enacted, Washington State  Senator Rodney Tom was recently quoted in the New York Times as saying, "If I-1033 passes, I think we just all go home and bury our heads in the sand." 

As discouraging as that image may be, there are reasons to be hopeful.  The Maine Chamber of Commerce, which had initially backed TABOR II earlier this year (despite opposing its predecessor in 2006), recently withdrew its support, a clear sign that the measure goes too far even for business leaders.

For more on the impact of I-1033, see the Washington Budget and Policy Center's report “I-1033 Undermines Public Priorities.”   For more on Maine’s TABOR II, check out these resources from the Maine Center for Economic Policy or read the Center on Budget and Policy Priorities recent analysis.

After ten months of work, California’s “Commission on the 21st Century Economy” has finally released its recommendations for overhauling the California tax system.  The Commission has proposed to eliminate the corporate income tax, eliminate the sales tax, sharply reduce the progressivity of the individual income tax, and enact a new “business net receipts tax” (BNRT) that would function in many respects as a new, less transparent sales tax.  The income tax changes are especially appalling, as the Commission’s own presentation (see the last slide) concedes that taxpayers with incomes over $1 million would receive an average tax cut of over $109,000 per year, while those making under $50,000 would receive somewhere in the neighborhood of $3 annually from the plan.

Jean Ross with the California Budget Project (CBP) hit the nail on the head with her remark that the plan constitutes "a massive shift in ... financing public services from the wealthy and corporations to middle-income families [that] is nothing short of stunning."  Ross is by no means the only person displeased with the Commission’s plan.  Business groups, labor, and numerous tax experts have all already come out in opposition to major components of the report.  One LA Times columnist reacted to the magnitude of the outcry by stating: “Sure, you can't please everyone. That's a given on anything controversial. But come on! Maybe at least a few people?”  Fact is, there’s nothing here worth being pleased about.

Throughout the Commission’s deliberations, University of Connecticut law professor (and ITEP Board President) Richard Pomp has been a strong voice both for progressives and for anybody interested in good tax policy.  In a 21-page criticism of the Commission’s work, released earlier this month, Pomp decried the plan’s regressive income tax cuts, its elimination of the corporate income tax, and its reliance on a new, untested, and unstudied business net receipts tax (BNRT).  The purpose of the BNRT, notes Pomp, is to serve as a “non-transparent” consumption tax, meant to raise the revenue needed to finance the Commission’s income tax cuts, and allow the state to finally tax services while instead appearing to only tax California businesses.

Pomp has also written a statement on the Commission’s final package, which should be posted here at some point in the near future. To learn more, you can also listen to Jean Ross thoughts on the Commission's work.

Last week we told you about a ruling from the Ohio Supreme Court that put a roadblock in front of Governor Ted Strickland's plan to add video slot machines at horseracing tracks. We also argued that this presented an opportunity to instead make the state's revenue stream fairer and more sustainable.

On Wednesday, Governor Strickland took a step toward doing just that. He proposed postponing the last phase of the income tax rate reductions passed under the previous governor, which lowered the state's income tax rates by 20% over five years.

Policy Matters Ohio has said that the tax cuts haven't lived up to their promise of improving economic conditions for ordinary Ohioans. While a complete repeal of the Taft tax cuts would be ideal, Governor Strickland's proposal comes as welcome news.

Though it seems like most legislative sessions just ended after laborious budget battles, many lawmakers are looking to the future and one word is coming to mind -- grim. In many states, revenue isn't keeping up with projections. As a result, this week alone, lawmakers in Illinois, Mississippi, and Washington State have said revenue-raisers must be on the table.

Spending cuts have their consequences and there is only so much cutting that is possible or reasonable. A recent Peoria Journal Star editorial calls on lawmakers to respond to a report from the Commission on Government Forecasting and Accountability. The report discusses various revenue-raisers, including a sales tax base expansion. The Journal Star says, "This structural deficit is not going away by itself. To declare discussion about alternative revenue options DOA would just be foolish."

Meanwhile, lawmakers in Mississippi are likely to review lists of fee increases put together by state agencies to show how some revenue could be increased. 

In Washington, Governor Chris Gregoire earlier this week said that she would consider tax increases, saying that Washingtonians may have had their fill of cuts, "At some point, the people, I assume, don't want us to take any more spending cuts. I mean, I'm already hearing about, 'Why did you cut education?' Well, there weren't any options. We're without options.''