The count is in: the recently-ended Louisiana tax amnesty brought in $303 million in revenue for the state.
The lion's share of the money-- $277 million-- was paid by delinquent businesses, with individuals ponying up the remaining $26 million.
This result raises three interesting policy questions.
1) Was the amnesty, taken on its own, a good deal for the state? Amnesties are often driven by the need to get revenue immediately at any cost, and all too often the result is that states agree to give up all penalties and interest if delinquent taxpayers just pay the original balance. The problem with this, of course, is that the delinquent taxpayers are essentially getting an interest-free loan, and the state is not getting what they're legally due. In this particular case, the deal apparently was that if you settled up in full, you got to keep half of the interest that was due. This is less costly than what a lot of states have done. It still does, however, carry a cost to the state. Verdict: Could have been worse.
2) What to do with the money? More than half is going to shore up specific funds: the rainy day fund and a "coastal fund." The rest, more controversially, is going to pay for health care. If this is controversial, it's because it's using what is arguably a one-shot revenue inflow to pay for what is clearly an ongoing expenditure. Put another way, finding a dollar bill under the cushions of your couch can help buy you dinner tonight, but then it won't help you tomorrow night. Gov. Jindal is arguing explicitly that at least some of this revenue should be thought of as ongoing, because they're bringing taxpayers back into the system. But the official verdict will come from the Revenue Estimating Conference. Verdict: thumbs up for shoring up rainy day fund, but don't pat yourself on the back for solving the health care funding problem just yet.
3) What are the implications for successful enforcement of the tax laws? A main argument against amnesties is that if folks know they're coming, they'll be less afraid to avoid taxes in the first place. This will be a problem if Louisiana continues to do amnesties, but is not clearly so yet. The really interesting question is what you can infer from the huge different between the amount raised from businesses ($277M) and the amount paid by individuals ($26M). Does this mean that businesses are cheating more? Alternative plausible explanations: businesses pay proportionally more of Louisiana taxes to begin with than do individuals (although this really can't explain the huge difference), or that the individuals who owe the most aren't taking advantage of the amnesty simply because they can't afford to, even with half the interest given back.
The $303 million yield of this amnesty will certainly help the fiscal situation in the short run. But Louisiana policymakers should take this opportunity to think strategically about what this success means for future amnesties-- and, more importantly, what it tells them about where they need to focus their normal enforcement efforts.
November 2009 Archives
This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.” The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy. The response has been overwhelming.
In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners. It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift. And it helps explain why the state is having trouble keeping up with funding needs for its most vital services. The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”
In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax. Currently, Michigan is among a minority of states levying a flat rate income tax.
Media in Virginia also explained the study’s importance. The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving. A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”
In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.” The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”
In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.” The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.” Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall. Can they also be considered low-tax states for poor families? Far from it.”
Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana. Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.
On Wednesday night, Senate Majority Leader Harry Reid (D-NV) released his health care bill, which is a combination of the health bills approved by the Senate Finance Committee and the Senate Health, Education Labor and Pensions (HELP) Committee. The excise tax on high-cost insurance plans is scaled back a bit from the version included in the Finance bill, probably because Senator Reid heard from health experts and unions who pointed out that plans have high costs sometimes simply because they serve an older workforce or a workforce with more health risks.
One revenue-raising provision that Reid included that had not been in any health bill so far is his proposal to increase the Medicare payroll tax rate (from 1.45 percent to 1.95 percent) for those earning over $200,000, or over $250,000 for married couples. This provision may be inspired by a proposal Citizens for Tax Justice made in May to reform the Medicare tax. CTJ joined forces over the summer with dozens of non-profits, faith-based groups, unions and other members of a coalition called Rebuild and Renew America Now (RRAN) to promote this and other progressive revenue options to help finance health care reform.
But CTJ's proposal would reform the Medicare tax by raising the rate for those with adjusted gross income above $200,000/$250,000 and by expanding the tax so that it applies to investment income as well as wages. The second part of that proposal -- changing the Medicare tax so that it no longer exempts investment income -- is the more significant reform of the two, and we hope it will be added to the health bill as a floor amendment.
To understand why the Medicare tax should apply to investment income, it helps to remember that there are some Americans, most of whom are extremely wealthy, who live entirely off of their investments. A person who lives off his or her investments pays no Medicare taxes. But they can still be eligible for Medicare benefits as long as they worked about ten years (usually) and thus paid Medicare taxes during that time.
Almost all Americans have collected a paycheck for at least ten years before they retire, but some are lucky enough to drop out of the workforce before retirement and collect stock dividends, capital gains, interest and profits from businesses they own a stake in. It's likely that even Paris Hilton will do enough television work and other types of work to become eligible for Medicare -- but she could also spend a whole lot of years not working and not paying the Medicare tax.
Some economists have pointed out that increasing the Medicare tax on wages alone, as Senator Reid proposes, is a problematic idea because it encourages the wealthy to find ways to convert their work income into investment income. This fear may be a little overblown, since Reid's proposal is a mere 0.5 percent tax increase on wages. And the methods that can be used to convert wages into investment income are somewhat limited. (Compensation in the form of stock or stock options is already subject to the Medicare tax, for example.)
But it's true that Senator Reid's proposal does nothing to address the disadvantage our tax system creates for income from work relative to income from wealth. Income from wealth is not subject to the Medicare or Social Security payroll taxes and some income from wealth (like capital gains and stock dividends) is subject to special, low rates in the regular income tax that have no justification.
Expanding the part of the Medicare tax that is paid by individuals (which is currently the 1.45 percent payroll tax paid by employees) to investment income would reduce this unfairness while providing more revenue for health care. And it would do so by closing a gap in the one major health care tax we already have.
At a hearing before the House Budget Committee this past Tuesday, the OMB’s Chief Performance Officer, Jeffrey Zients, expressed his full support for the basic proposal laid out in a report by Citizens for Tax Justice last week – namely, that the multitude of spending programs buried within our nation’s tax code need to be reviewed.
During his questioning of Mr. Zients, Representative Lloyd Doggett said that he was “encouraged by the comments in the President’s budget that ‘programs will … not be measured in isolation, but assessed in the context of other programs that are serving the same population or meeting the same goals.’” At the same time, however, Mr. Doggett explained that “I don’t see how you can evaluate … [for example] Pell grants, Perkins loans, and work study, without evaluating and comparing them with a rather substantial tax reduction … the higher education tax credit that I authored. … But I don’t see OMB doing anything on that.”
In response, Mr. Zients stated: “I totally agree with the horizontal approach, in that the tax expenditure side should be part of that along with the [spending] programs that we were talking about. So, 100% agreement there.” In addition, while admitting that tax expenditures had not yet been a focus during his brief tenure at OMB, Mr. Zients promised to make them a priority moving forward.
This statement from the OMB’s top performance official represents a major departure from the delays within the Executive Branch to which we’ve become accustomed. Over sixteen years ago, the legislative history behind the Government Performance and Results Act (GPRA) made clear that Congress wanted the Executive Branch’s performance review efforts to include the evaluation of tax expenditures. And for nearly fourteen years, the President’s budget has identified tax expenditure review as a “significant challenge” that should be addressed in the near future.
Both Mr. Zients and Mr. Doggett should be commended for recognizing the flaw in OMB’s narrow focus on only direct spending programs. The omission of tax expenditures from review is hardly a small issue – in total, the federal government actually “spends” more via special tax breaks than it does through the entire discretionary spending budget. Continuing to exclude these programs from review would cripple the ability of President Obama’s OMB to accurately gauge government performance.
For more detail on the need for tax expenditure review, the federal government’s past efforts toward creating a review system, and the potential issues associated with creating such a system, be sure to read the CTJ report: Judging Tax Expenditures.
Alabama’s tax system has long been among the least fair in the nation. Indeed, the latest edition of ITEP’s flagship publication, Who Pays?, indicates that it is the tenth most regressive tax system among the fifty states, as it forces low- and middle-income residents to pay effective tax rates that are roughly twice that faced by the very wealthy.
The sources of such inequities are readily apparent. Alabama is one of just a handful of states that continue to tax groceries, an exceedingly regressive approach to generating revenue. It is also one of just a few states that offer an unlimited deduction, as part of its state income tax, for the federal income taxes that Alabamians pay. Since upper-income individuals and families tend to pay more in federal income taxes, they, by definition, reap the largest windfalls from this deduction, thus subverting the progressive intent of the federal income tax. Repealing both these policies would go a long way towards achieving greater tax fairness in Alabama.
For some time now, Representative John Knight has championed legislation that would do just that – and he appears ready to put forward such a measure in the fast-approaching 2010 legislative session as well. In addition to removing groceries from the sales tax base and eliminating the deduction for federal income taxes paid, the Knight proposal could also raise the level of income at which families begin to pay income taxes in the state, a change that would also help to make Alabama’s tax system more fair. To learn more about the proposal and about tax and budget matters in Alabama, visit Alabama Arise Citizens’ Policy Project.
Arizona currently faces a roughly $2 billion budget deficit in the current fiscal year, with agencies such as the Department of Revenue on the verge of depleting all available funding. Yet, as they have done multiple times over the past five months, state legislators have once more proven unable to craft a comprehensive and balanced solution to the problem before them. As the Arizona Republic reports, the Senate Republican leadership yet again fell one vote short of passing a plan that, among other things, would slash $300 million in funding from K-12 education and social services. Senate leadership failed to win a single Democratic vote – and thus to generate a majority for its latest budget plan – in large measure because it continues to refuse to consider any options for generating additional tax revenue. As Sen. Ken Cheuvront argued, “there … needs to be a two-pronged approach … As we make those cuts, we also have to look at raising revenues.”
There is certainly support in some quarters for that sort of balanced approach. The mayors of Chandler, Gilbert, Mesa, and Tempe – who collectively represent roughly a sixth of Arizona’s population – recently came together to express support for revamping the state’s tax system and to urge state lawmakers to avoid pushing the state’s budget difficulties onto municipalities. In addition, the Arizona Budget Coalition, which includes SEIU, the Arizona Education Association, and the Children’s Action Alliance (CAA), this week announced its own set of alternatives to the plan backed by legislative leadership; among those alternatives are an increase in the state’s sales tax rate and modifications to the state’s controversial tuition tax credits.
To learn more about the role that tax cuts have played in creating Arizona’s budget crisis, read this helpful report from the CAA.
Read ITEP's New Report: Who Pays? A Distributional Analysis of Tax Systems in All 50 States
By an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy, according to a new study by the Institute on Taxation & Economic Policy (ITEP).
“In the coming months, lawmakers across the nation will be forced to make difficult decisions about budget-balancing tax changes—which makes it vital to understand who is hit hardest by state and local taxes right now,” said Matthew Gardner, lead author of the study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. “The harsh reality is that most states require their poor and middle-income taxpayers to pay the most taxes as a share of income.”
Nationwide, the study found that middle- and low-income non-elderly families pay much higher shares of their income in state and local taxes than do the very well-off:
-- The average state and local tax rate on the best-off one percent of families is 6.4 percent before accounting for the tax savings from federal itemized deductions. After the federal offset, the effective tax rate on the best off one percent is a mere 5.2 percent.
-- The average tax rate on families in the middle 20 percent of the income spectrum is 9.7 percent before the federal offset and 9.4 percent after—almost twice the effective rate that the richest people pay.
-- The average tax rate on the poorest 20 percent of families is the highest of all. At 10.9 percent, it is more than double the effective rate on the very wealthy.
“Fairness is in the eye of the beholder.” noted Gardner. “But virtually anyone would agree that this upside-down approach to state and local taxes is astonishingly inequitable.”
The “Terrible Ten” Most Regressive Tax Systems
Ten states—Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada, and Alabama—are particularly regressive. These “Terrible Ten” states ask poor families—those in the bottom 20% of the income scale—to pay almost six times as much of their earnings in taxes as do the wealthy. Middle income families in these states pay up to three-and-a-half times as high a share of their income as the wealthiest families. “Virtually every state has a regressive tax system,” noted Gardner. “But these ten states stand out for the extraordinary degree to which they have shifted the cost of funding public investments to their very poorest residents.”
The report identifies several factors that make these states more regressive than others:
-- The most regressive states generally either do not levy an income tax, or levy the tax at a flat rate;
-- These states typically have an especially high reliance on regressive sales and excise taxes;
-- These states usually do not allow targeted low-income tax credits such as the Earned Income Tax Credit; these tax credits are especially effective in reducing state tax unfairness.
“For lawmakers seeking to make their tax systems less unfair, there is an obvious strategy available,” noted Gardner. “Shifting state and local revenues away from sales and excise taxes, and towards the progressive personal income tax, will make tax systems fairer for low- and middle income families. Conversely, states that choose to balance their budgets by further increasing the general sales tax or cigarette taxes will make their tax systems even more unbalanced and unfair.”
Implications for State Budget Battles in 2010
“In the coming months, many states’ lawmakers will convene to deal with fiscal shortfalls even worse than those they faced last year,” Gardner said. “Lawmakers may choose to close these budget gaps in the same way that they have done all too often in the past—through regressive tax hikes. Or they may decide instead to ask wealthier families to pay tax rates more commensurate with their incomes. In either case, the path that states choose in the upcoming year will have a major impact on the wellbeing of their citizens—and on the fairness of state and local taxes.”
Momentum for health care reform continues to build following the passage on Saturday in the House of Representatives of H.R. 3962, the most sweeping health care legislation in decades. The House bill includes a surcharge of 5.4 percent on adjusted gross income (AGI) above $1 million for married couples and $500,000 for singles. As CTJ's new report explains, our calculations confirm statements from the House Ways and Means Committee that this would affect only the richest 0.3 percent of taxpayers in 2011, the first year the surcharge would take effect.
Meanwhile, press reports indicate that Democratic leaders in the Senate are considering changing the Medicare tax as a way to help finance health care reform. It's unclear exactly what is being contemplated, but one option seems to be reforming the Medicare tax so that it no longer exempts investment income. This is one of the revenue proposals that has been championed by CTJ for the past several months.
We currently have one major tax for health care, the Medicare tax, and it applies only to wages and salaries. People who live off their stock dividends, capital gains, interest and other types of investment income contribute nothing to it. What's worse is that the people who have most of this investment income are the wealthiest among us. CTJ and many other organizations have argued that one sound way to raise revenue is to reduce the many ways we subsidize investment income through the tax code.
Another option that Democratic Senate leaders are considering would leave the Medicare tax as a tax on wages and salaries only, but would increaes the rate for those who earn more than $250,000 a year. This would also be a sound, progressive way to raise revenue. But it would be less preferrable, since it would actually increase the disparity between how we tax income from work and how we tax income from wealth.
A new report from Citizens for Tax Justice explains why it’s time for the federal government to finally follow through on its long-unfulfilled promise to evaluate the usefulness of special tax breaks.
Does the research and experimentation tax credit, for example, actually encourage research? Or does it simply enrich high-tech firms? Does the mortgage interest deduction increase homeownership, or does it only reward people who would have purchased homes anyway? Shockingly, these types of fundamental policy questions have not been addressed in any type of systematic and transparent fashion by our government.
In total, the federal government spends over $1 trillion each year on programs it administers via the tax code – i.e. “tax expenditures.” To put that in perspective, annual spending on tax expenditures is actually slightly larger than the entire discretionary spending budget (i.e. the portion of federal spending that Congress must approve each year).
The lack of scrutiny directed toward tax expenditures first gained attention in the late 1960’s when an official listing of tax expenditures was finally produced in an effort to highlight these programs’ size and importance. In 1993, Congress indicated a desire to take this concept one step further by suggesting that the performance of tax expenditures be regularly reviewed. Soon after this, the Executive Branch did make some slow progress toward reviewing tax expenditures before effectively abandoning the idea soon after the start of the Bush Administration.
CTJ's new report makes the case for resuming these efforts toward the creation of a tax expenditure review system. Among the reasons for moving forward on this issue now are:
- Tax expenditures, whether measured as a share of GDP or as a share of income taxes, have increased immensely over the past twenty years.
- Restoring fiscal sustainability will be nearly impossible without a closer look at the more than $1 trillion spent annually via the tax code.
- Creating a new “cross-program” performance review framework, of the type advocated by President Obama, will require the review of tax expenditures.
- Tax expenditure review fits perfectly into President Obama’s agenda to improve government transparency.
- A new dataset, described by the OMB as permitting “more extensive, and better, analyses of many tax provisions” will become available in the very near future.
- State efforts on the tax expenditure review front have provided the federal government with some powerful lessons from which to draw in creating a review system.
Read the summary of the report from a state-level perspective.
A new report from Citizens for Tax Justice makes the case for a “performance review” system designed to evaluate the effectiveness of special tax breaks in achieving their stated goals. While CTJ's report primarily focuses on the importance of such a system at the federal level, most of its findings are equally applicable to the states.
The special breaks littered throughout state tax codes — or “tax expenditures,” as they are frequently called — are an enormous and often overlooked part of government’s operations. Although the primary purpose of a tax system is to raise the revenue needed to pay for public services, every state, as well as the federal government, also uses its tax system to accomplish a variety of other policy goals. Encouraging job creation, subsidizing private industry research, and promoting homeownership are just a few of the countless ends pursued via special subsidies contained in state tax codes. Rather than having anything to do with fair or efficient tax policy, these tax credits, exemptions, and other provisions are actually much more akin to government spending programs — hence the term, “tax expenditures.”
A performance review system takes the commonsense step of asking whether these provisions are doing what policymakers intended of them. Under such a system, tax credits designed to encourage research and experimentation, for example, would be regularly examined to determine the amount of new research undertaken as a result of the credits. Shockingly, the vast majority of states, and the federal government, do not currently attempt to answer fundamental questions of this sort with any type of rigorous evaluation.
Among CTJ’s findings are:
— “Procedural biases,” such as the omission of tax expenditures from the authorization and appropriations processes, allow tax expenditures to slip by with a fraction of the scrutiny given to direct spending programs. State legislative systems requiring supermajority consent to “raise taxes” (or eliminate tax expenditures) are particularly biased in this regard.
— “Political biases,” such as the erroneous belief that government can take a “hands off” approach, or reduce its overall size by offering special tax breaks, also contribute to the current lack of oversight.
— A number of states have made strides in recent years to counteract these biases through performance reviews and other, similar means. Washington State’s efforts represent the most complete attempt at tax expenditure performance review yet to be undertaken in the United States. California, Delaware, Nevada, Oregon, and Rhode Island have also made attempts — with varying degrees of success — to enhance the level of scrutiny applied to their tax expenditures.
— The bleak state budgetary outlook makes the implementation of tax expenditure review all the more urgent. States, like the federal government, can no longer afford to deplete their resources with ill-advised and ineffective tax expenditures. By implementing a tax expenditure performance review system, states can pave the way for a reduction in tax expenditures by identifying those expenditures that are ineffective.
— A formal review system could also help to reconceptualize these provisions in the minds of policymakers, the media, and the public as spending-substitutes, rather than simply as tax cuts. This would further help reduce the rampant biases in favor of tax expenditure policy.
— The precise design of a tax expenditure review system is very important. States should be sure to include all taxes, and all tax expenditures within the scope of the review. Additionally, states should exercise care in selecting the criteria to be used in the reviews — Washington State’s criteria represent a good starting point from which to build. Other key design issues include choosing the appropriate body to conduct the reviews, timing the reviews to coincide with the budgeting process, allowing similar tax expenditures to be reviewed simultaneously, and attaching some type of “action-forcing” mechanism to the reviews so that policymakers must explicitly consider the reviews’ results.
— Tax expenditure reviews are necessary, though they may not be sufficient to correct for the biases in favor of tax expenditure policy. A tax expenditure performance review system can play a vital informational role either on its own, or alongside other, more aggressive tax expenditure control techniques such as sunset provisions or caps on tax expenditures’ total value.
On Tuesday, the Senate Committee on Foreign Relations considered proposed tax treaties with France, New Zealand, and Malta. CTJ director Robert McIntyre and Wayne State University law professor Michael McIntyre submitted written testimony to the Committee arguing that the treaties are based on standards that are widely recognized as obsolete and ineffective in catching offshore tax cheating. They point out that it makes no sense for the U.S. to wrap up major litigation over Switzerland's UBS and then enter into treaties with other countries that would not help us find the sort of cheating that took place in the UBS case.
Read the testimony.
On November 6, President Obama signed H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009, which provides a much-needed extension of unemployment benefits. Around 400,000 workers exhausted their unemployment benefits at the end of September and far more would have exhausted them by the end of this year without this extension. As a report from CTJ explains, it is still unfortunate that the price of providing this necessary help is tax breaks to corporations and to the housing industry.
Sadly, Congress did not think that helping the unemployed during the worst recession in decades was worthy enough to do without larding the bill up a bit with tax cuts. One is a tax cut that will benefit people who buy a residence and who would have done so whether or not a tax cut was offered to them. The second will essentially give unprofitable companies cash with no strings attached.
Read the report.