In January, Louisiana lawmakers will be hearing a lot about exactly how big that state's transportation funding shortfall is, as a committee releases the findings of a long-term study of this problem. But House Transportation Committee Vice-Chairman Hollis Downs (R) gave a sneak preview yesterday.

Louisiana needs $750 million per year in new revenue to address road and bridge needs, the vice-chairman of the House Transportation Committee said Monday.

To put this in context, Louisiana raises a bit less than this annually from its entire gasoline tax right now. So if the money were all coming from own-source gas tax revenues, Louisiana would have to more than double its gas tax to meet its needs.

Of course, the state's transportation funding doesn't really work that way. The feds kick in a fair amount, and state vehicle fees, tolls and general fund revenue fill in the gaps. But the size of the annual gap still should give pause to any Louisiana lawmakers who think they've got a budget surplus.

This week Hawaii Governor Linda Lingle released the outline of her budget proposal for next year. It's not a pretty picture: the two most prominent tax policy changes in the Lingle plan are a money grab from county governments and a money grab from... the future.

It's true: following up on a similar threat last year, the state would simply stop allocating revenue from the "Transient Accomodations Tax," as the Hawaii hotel tax is known, to counties. The law says that just under half of all TAT revenues should be allocated to the counties. Under the Lingle plan, the state would simply not do that next year, and would instead keep the money to help balance the state budget. Of course, this would leave counties with a budgetary hole of their own, which they'd have to patch by either hiking property taxes or cutting spending. A great deal for the state, and it's only a bad deal for those Hawaii residents who live within a county. Which is to say, all of them.

House Ways and Means Chairwoman Donna Mercado Kim thinks this is actually a pretty good policy. How, you ask? Here's the money quote:

It's a re-occurring pot of money, which is good.

That's right. Once you've taken the counties' lunch money in one year, you can go right back and do it again as long as you want! This isn't really what advocates of sustainable taxation have in mind when they urge states to find recurring (as opposed to one-time) revenue sources...

The second half of the Lingle budget's tax plan amounts to sending an IOU to next year's budget. Under Lingle's proposal, any income tax refunds due as a result of April filings wouldn't be paid until after the next fiscal year begins on July 1. That way, these refunds don't count towards this year's budget. Who are the losers under this plan? Well, anyone who's owed a refund when they file their 2009 taxes, since these guys will basically be asked to give an interest-free loan to the state until July 1. And more fundamentally, whichever legislators are around to deal with the mess during the next fiscal year, since really all this move does is to put part of this year's budget deficit in a box and mail it to next year.

Not the most inspirational stuff.

The U.S. House of Representatives adjourned for the year on Wednesday while the Senate hustles to finish legislation on health care. As of this writing, an array of major tax issues are still to be resolved in the next several days or when Congress returns in 2010:

Health Care Reform

On November 7, the House passed its health care bill, (H.R. 3962), which includes a public option. The largest revenue-raising provision in the House health bill is a surcharge of 5.4 percent on adjusted gross incomes over $1 million (or over $500,000 for unmarried individuals).

(See CTJ's previous analysis and state-by-state estimates of the surcharge in the House health care bill.)

The Senate is still working to pass a health care bill, and some reports claim that the chamber could be working on Christmas Eve to accomplish it. While there is a clear majority of Senators willing to support a public option, the rules allowing 41 Senators to filibuster legislation have encouraged a few conservative Democrats to join Republicans in blocking a public option.

While some details remain to be worked out, a majority of Senators seems to have settled on certain revenue-raising provisions to help pay for health care reform. The largest revenue-raiser in the still-developing Senate bill is an excise tax on high-cost health insurance plans. This excise tax is controversial because many analysts conclude that these plans are not particularly generous in the benefits they provide and they are not necessarily enjoyed by high-income workers. Rather, the high costs are often the result of insurers charging more to cover a work force that is older than average or that has high health risks.

(See CTJ's previous analysis concluding that the Senate's proposed excise tax on high-cost health insurance is less progressive than the surcharge in the House health care bill.)

One revenue-raiser in the Senate proposal that is progressive is an increase in the Medicare payroll tax rate on earnings over $250,000 (or over $200,000 for an unmarried individual).

While this tax increase would only affect those who can afford to pay more, an even better proposal would reform the Medicare tax so that it no longer exempts investment income. This idea was included in an amendment that was filed by Senator Debbie Stabenow during the Finance Committee markup, but was not acted on. Such an amendment may be offered when health care reform is debated on the Senate floor.

Job Creation

On December 8, President Obama announced several proposals to create jobs. His best ideas involve direct spending by the federal government (including extending aid to unemployed and low-income people and aid to state and local governments, among other things). His worst ideas involve tax cuts (including eliminating capital gains taxes on small business investment and providing a tax credit for payroll expansion).

(See CTJ's previous discussion of President Obama's job creation proposals and ways to stimulate the economy.)

The House approved a $154 billion jobs bill, as part of a regular appropriations bill (H.R. 2847), before adjourning this week, and thankfully, it focuses on direct spending. One of the few tax cuts included is a provision to remove the earnings requirement (currently set at $3,000) for the refundable portion of the Child Tax Credit, ensuring that low-income families with children can benefit from it. The Senate is not expected to take up jobs legislation until sometime next year.

Estate Tax

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 set the estate tax to gradually shrink until disappearing altogether in 2010. But, like all the Bush tax cuts, this estate tax cut expires at the end of 2010, meaning the estate tax will reappear in 2011 at the pre-Bush levels if Congress simply does nothing.

Families who have several million dollars to leave to the next generation have benefited the most from the infrastructure, educated workforce, stability and other public goods that taxes make possible. So it's entirely reasonable that these families pay a tax on the transfer of their enormous estates from one generation to the next, particularly since the majority of the value in these estates is capital gains income that has never been taxed.

One might be tempted to think that allowing the estate tax to disappear would be fine if it reappears at the pre-Bush levels in 2010. Unfortunately, the one-year repeal of the estate tax could tempt some lawmakers to make that repeal permanent, or might tempt them to allow only a very scaled back version of the estate tax to reappear in 2011.

So the House of Representatives approved a compromise that would make permanent the estate tax rules in effect in 2009. This would partially preserve the Bush cut in the estate tax, but prevent the tax from disappearing in 2010.

(See CTJ's previous analysis of the estate tax legislation, along with state-by-state figures showing how few estates are actually subject to the tax.)

Key Democratic Senators indicated that they did not want to make permanent the 2009 rules because -- incredibly -- they were interested in reducing the estate tax even more. Democratic leaders in the Senate attempted but failed to get agreement in the chamber to pass a one-year extension of the 2009 rules, which would prevent the estate tax from disappearing in 2010 and allow Congress to debate a permanent solution as part of the broader tax debate that must happen before the Bush tax cuts expire at the end of next year.

Pathetically, the Senate failed last week to prevent the one-year repeal, which they had known was coming ever since the Bush cut in the estate tax was enacted back in 2001. Democratic leaders in the Senate say they will enact the one-year extension of the 2009 estate tax rules retroactively in 2010. While retroactive tax increases may not be the ideal way to do things, this approach should not cause any problems since tax planners have known for years that Congress was likely to act to prevent this one-year disappearance of the estate tax.

Corporate Tax Breaks (aka "Tax Extenders")

On December 9, the House approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress.

(See our previous article on H.R. 4213 explaining the points made in the letter.)

Democratic leaders in the Senate want to pass the tax extenders retroactively early in 2010. One problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. As we've explained before, this is an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes.

In a move that helps the banking giant Citigroup, the IRS issued a notice last Friday granting TARP recipients an exception to the restrictions on using losses of acquired companies to reduce future taxes.

The limitations (known as Sec. 382 limitations) are meant to restrict a company from using the Net Operating Losses (NOLs) of companies it buys to reduce its own taxable income in the future. Sec. 382 was clearly never meant to apply to a situation in which the government acquires and then sells stock in a company, but rather was meant to prevent taxpayers from buying companies purely as tax shelters.
 
Sec. 382 generally limits the use of NOLs when there is a more-than-50% change in the ownership of a company. The IRS issued a ruling last May that any ownership by the government would not count towards an ownership change. Last Friday's notice expanded that exception to include any shares sold to the public by the government.
 
This notice particularly helps Citigroup since Treasury is planning to sell its stake in Citigroup to the public. This exception will allow Citigroup to avoid the Sec. 382 limitations and be able to use its NOLs against future taxable income.
 
Some commentators have noted that this will increase the cost of the federal bailout for TARP recipients, taking additional money out of the pockets of ordinary taxpayers. But if the government's bailout has, as most economists believe, avoided a much more serious recession, most Americans are probably still better off.
 
Unlike the previous administration's infamous "Wells Fargo ruling," the IRS has the authority to issue this notice under the provisions of the 2008 Emergency Economic Stability Act and the 2009 American Recovery and Reinvestment  Act. One of lawmakers' objections to the Wells Fargo ruling was that it applied only to a specific industry, but this new notice applies to all TARP recipients.

Our crystal ball tells us that Georgia legislators will spend a lot of time in the new year debating property taxes. The Atlanta Journal Constitution has responsibly studied this issue with several in-depth articles that dig through property tax data and look to nationally respected experts for their opinions.

This week, Senate Majority Leader Chip Rogers recently revealed portions of the reform package that is expected from the Senate committee he chairs. The proposed reforms include: overhauling the appeals process and prohibiting county assessors from setting a property's value higher than the sales price. The latter proposal would likely deal a tremendous financial hit to local governments, given the housing downturn.

In slightly brighter news, there doesn't seem to be much political will to actually eliminate the property tax altogether despite proposals put forward in recent years by prominent politicians, including former Speaker of the House Glenn Richardson. Stay tuned...

The Ohio House and Senate passed a bill last night that would delay the last phase of a gradual income tax reduction enacted under the previous governor, which lowered the state's income tax rates by 20% over five years. The current governor, Ted Strickland, proposed this measure in the fall. Despite support from the Ohio Chamber of Commerce and other business groups, the fate of Governor Strickland's proposal was still up in the air until yesterday.

This stand-off made the education community pretty nervous. If a resolution wasn't reached by December 31, that could have meant harmful cuts to fill the state's $851 million shortfall.

The deal finally reached in the Senate will delay the income tax rate reductions and also create a pilot program that will ideally reduce the cost of state-funded construction programs.  Governor Strickland is expected to sign the legislation.

Of course, Ohio isn't out of the woods yet. As Policy Matters Ohio's Research Director, Zach Schiller, says, "While this fills the hole for now, we have a gigantic, yawning gap ahead in the next budget. Even just continuing this, we would have billions of dollars in additional cuts and revenue needed."

On Tuesday, President Obama put forth ideas, some good and some not as good, to create jobs. The more misguided proposals involve using the tax code to reward businesses, while the best ideas involve direct spending.

For example, he proposed the elimination of capital gains taxes for small business investment and an extension of the break that lets small businesses immediately deduct (expense) a larger amount of their capital investments.

The capital gains break is particularly problematic. If this provision works as existing similar capital gains breaks work, it would mean that anyone who buys an interest in a company that qualifies as a "small business" within a certain time period can hold onto that interest for as long as they like -- say, 20 years or longer -- and then sell it without paying any tax on the gain.

Of course, no investor knows whether or not a small company will grow and last that long. The company could go out of business in a couple years. Or the company could be Microsoft.

But, more to the point, it's not obvious that this would help a small business today to create jobs. Investors don't want to put their money in a venture unless they think there is some demand for the goods or services that would be produced. So, what's needed now to create jobs is a boost in demand for goods and services. Investors would respond by creating or expanding business, meaning they would hire more people to work more hours. Business owners only expand like this if they can profit, and that resulting profit is what causes stocks to become more valuable, which is what causes shareholders to have capital gains.  

The President's capital gains proposal gets this all backwards by aiming a tax cut at the very end of that process, at the capital gains, and assuming that demand will materialize on its own as long as a tax cut encourages an increase in the supply of capital. At risk of drawing an alarming comparison, the proposal is, well, supply-side in its logic.

The President also says he wants to work with Congress to "create a tax incentive to encourage small businesses to add and keep employees."  This could be a mediocre idea or a bad idea, depending on exactly what he's thinking.

If he's thinking of a payroll tax holiday, this could, in theory, produce some increase in demand if it means that workers who pay less in payroll taxes will spend the increase in their take-home pay. But to the extent that they save the extra money, it doesn't produce the boost in demand that is needed right now.

If the "tax incentive" the President is thinking about is a tax credit that goes to businesses for creating jobs, that could be even more problematic. There has been a lot of talk about giving businesses a credit for the amount by which they expand their payroll, and even making the credit refundable so that companies that are not currently profitable can benefit from it. Like the capital gains tax break, this proposal would do little to boost demand. But that's only the beginning of the problems.

Another problem is that it raises the question of how to treat new companies. Would they get the credit, and how would it be calculated since all their jobs are new? If they get the credit, what's to stop someone from liquidating their existing company and starting a new company that is different in name only?  Perhaps more alarming is the fact that a lot of companies will create more jobs anyway, so a lot of the revenue would be a reward to firms for doing something they would have done even without the tax break.

A proposal that has been recently promoted by the Economic Policy Institute argues that even if one takes these problems into account, a well-designed tax credit can create jobs in a cost-effective way. Even if only a fraction of the jobs created are the result of the credit, the authors figure that five million jobs could be created over two years, at a total cost of about $5,400 per full-time job (or full-time job equivalent) created as a result of the credit.

Given the many questionable assumptions needed to come to this conclusion, we think a much surer bet for job creation would be plain old government spending. Thankfully, direct spending by the government was also included in the proposals the President discussed.

For example, he mentioned extending aid to unemployed and low-income people as well aid to states. This type of government spending would result in increased consumption (and therefore increased demand for goods and services) almost immediately.

As a recent report from the Center on Budget and Policy Priorities explains, aid to states is particularly important right now, because state governments are already planning their budgets for fiscal year 2011, when most of the aid they received in the recovery act is supposed to end. There's usually a lag between an economic recovery and state governments' recovery of their revenue streams, so a lot of states will be cutting services and staff even if the economy is expected to improve in 2011.

Federal aid to state and local governments that allows them to save jobs that they are about the eliminate provides an immediate and clear benefit. It maintains the income that the otherwise eliminated state and local government employees will spend, which boosts demand for goods and services above where it would be if the federal government did not provide this aid.

The President is right that Congress cannot improve our economy by focusing single-mindedly on the budget deficit. The federal government needs to provide the conditions for job creation. Let's hope that this effort doesn't get diverted into a tax-cutting spree that makes good sound bites without addressing our underlying economic problems.

 

On December 9, the U.S. House of Representatives approved H.R. 4213, which would extend a series of tax cuts (mostly breaks for business) but would offset the costs by closing the infamous "carried interest" loophole for buyout fund managers and by cracking down on offshore tax cheats.

The bill would also require the Joint Committee on Taxation (JCT) to issue reports evaluating these tax cuts before the end of next year, when Congress is likely to act on them again. Congress would receive these reports at the same time it is trying to decide which of the Bush tax cuts should be extended, what to do with the President's tax reform proposals, and how to balance the federal budget. In this context, it is hoped that the reports will prod some lawmakers to take a more critical look at corporate tax breaks before extending them again.

CTJ joined the AFL-CIO, SEIU, AFSCME and eight national non-profits in signing a letter in support of H.R. 4213 for these reasons.

The provisions extending the tax cuts (often called the "tax extenders") are enacted by Congress every year or so. CTJ and other analysts have often criticized the tax extenders as corporate pork routed through the tax code.

But H.R. 4213 is a major step in the right direction for the reasons spelled out in the letter to Congress. (See our previous article on H.R. 4213 for the points made in the letter.)

Prospects in the Senate are unclear. One problem is the full agenda the Senate has with health care reform.

Another problem is that the chairman of the Senate tax-writing committee, Max Baucus (D-MT) believes that the carried interest issue is “best dealt with in the context of an overall tax reform,” according to a spokesman. This is, frankly, an all-purpose excuse for legislators who want to avoid closing even the most unfair and outrageous loopholes. They know full well that comprehensive tax reform might not happen for decades. (The last one was in 1986, after all).

The carried interest loophole allows managers of private equity funds (a euphemistic term for buyout funds) to pay taxes at a lower rate than their secretaries. It involves using the tax subsidy (the special top rate of 15% for capital gains) that was intended for people who invest their own money. Whether or not the capital gains tax subsidy is justified is another matter. (We believe it's not.) But private equity fund managers are not investing their own money anyway. They're being paid to manage other people's money, but by calling their compensation "carried interest" they're able to pay income taxes at the low, capital gains rate.

The notion that Congress can tackle tax schemes this blatantly unfair only in the context of comprehensive tax reform (which apparently only comes once every 25 years, if even that often) is ridiculous. Advocates of tax fairness need to call upon the Senate to approve H.R. 4213 as it was written and approved by the House of Representatives. 

In the past three years, the cigarette tax has been hands-downs the most popular revenue-raising measure employed by state governments. This year alone, 14 states and the District of Columbia have increased their tobacco excise taxes. This trend is notable for two reasons. First, the cigarette tax is among the most regressive revenue sources used by states, falling disproportionately on the lowest-income families. Second, tobacco-tax advocates nationwide have emphasized the importance of using cigarette tax revenues to fund "smoking cessation" programs, designed to help at-risk populations quit smoking.

But, as a new report documents, the flood of new cigarette tax revenue is increasingly being diverted away from anti-cessation efforts, and is being used instead to patch budget deficits. The report, "A Broken Promise to our Children," finds that in fiscal year 2010, states will spend just 2.3 percent of their tobacco tax revenues on cessation efforts, and that states have cut their funding for cessation efforts by more than 15 percent in the past year alone. The report also finds that more than 40 states are funding tobacco prevention efforts at less than half of the levels recommended by the U.S. Centers for Disease Control and Prevention (CDC).

The report's findings confirm what many observers knew already: in many states, lawmakers are enacting cigarette tax hikes not for the laudable anti-smoking efforts promoted by the CDC and others, but because they view it as the easiest way to raise short-term revenues while papering over the disturbing long-term structural flaws in state tax systems. Requiring lawmakers to live up to their professed anti-smoking goals will also help to reveal the growing need for real, progressive tax reform at the state level.

By all accounts, Minnesota Governor Tim Pawlenty is more focused on his next career move than anything happening in Saint Paul. As his political ambitions rise, so does the state's budget deficit, which is now tallied at $1.2 billion for the current two-year budget period and $5.4 billion for the next biennium. The Governor has called the state's budget situation "significant but solvable" and once again vowed to fill the state's shortfall without raising taxes. At a time when Minnesotans are as dependent on government services as ever, it seems negligent to once again reduce the number of options that are available to lawmakers working to dig the state out of its budget hole.

And it gets worse.

Apparently, renewing one's "no new taxes pledge" doesn't win you enough brownie points with anti-taxers, so Pawlenty has also recently proposed a deeply flawed constitutional amendment which would limit state spending.

As the Minnesota Budget Project so aptly states, "his Spending Limit Amendment is an extreme and inflexible tool that takes decision-making power out of the hands of the people and their representatives." Where they've been enacted, these sorts of spending limits have had disastrous impacts on a state's ability to educate children and even repair roads.

In most states where proposals like this have been put before voters or legislative bodies, they have failed to actually pass. Let's hope that happens in Minnesota.

There isn't much in the world of state tax policy on which folks can agree, but surely most would say that someone's age shouldn't determine tax liability to the extent that it does in states like Michigan, which offers an exclusion upwards of $86,000 for married couples with qualifying pension and retirement income. All retired public employees (including teachers and government workers) enjoy a full income tax exclusion on those retirement benefits too. But the violation of horizontal equity is especially egregious when you consider that elderly workers earning wages actually have to pay taxes on their income.

Estimates are that ending this disparity could bring in about $700 million in revenue annually. The Michigan League for Human Services has been talking about these elderly preferences for awhile, asking the question, "Can Michigan afford such generosity?" As the state continues to grapple with budget shortfalls into the foreseeable future, the answer is an unequivocal no.

Well, no one could accuse Governor Steve Beshear of failing to take a position on tax reform in Kentucky.  Unfortunately for the citizens and businesses of the Bluegrass State, it’s the wrong position.  In recent weeks, the Governor has made plain his opposition to changing the state’s tax structure, arguing in an opinion piece in the Lexington Herald-Leader that “for many, …‘tax reform’ means raising broad-based taxes on some while lowering them on others….an approach [that] at this time could do immediate damage to the economy, to employment levels and to individual workers.”

To be sure, state policymakers face a very limited set of options in addressing budget shortfalls. They can either cut spending or raise taxes. (Governor Beshear touts gambling expansions in Kentucky as one additional approach, though that option, as other states have found in recent months, has its own shortcomings.)  Still, between spending cuts or tax increases, it’s the latter that are likely to have a less deleterious effect on economic growth, since they will not reduce consumer demand as extensively as spending cuts.

Fortunately, other voices within the state are speaking up in favor of modernizing Kentucky’s tax system.  As the Owensboro Messenger-Inquirer noted recently, “it makes no sense to close off options when the state is facing one of its largest budget shortfalls in history.” This is a common-sense view given that, as the paper further observes, “Kentucky's outdated tax system has left the state's revenue sources dried up, which makes this the right time to act on tax reform.”

For more on the challenges – and the choices – before Kentucky policymakers, see ITEP’s June 2009 report on the subject as well as resources from Kentucky Youth Advocates and Kentuckians for the Commonwealth.

Recent developments in Oregon and Massachusetts demonstrate how relying too heavily on tax breaks to accomplish policy goals can quickly cause things to get out of hand.  Policymakers in Maryland should heed these warnings when considering the Governor’s recent proposal to create new tax incentives for businesses, despite the state’s dire budgetary outlook.

In Oregon, the controversy involves the state’s Business Energy Tax Credit (BETC, or “Betsy”).  The BETC program is purportedly designed to encourage the growth of “green” energy companies in Oregon.  Under pressure from the Governor’s office, the Oregon Department of Energy is reported to have deliberately (and drastically) low-balled the cost-estimate attached to the BETC program.  This lower cost estimate allowed the program to be enacted with much less scrutiny than would otherwise have been the case.  Of course, if the program had instead been operated as a traditional spending program, its overall size would have been limited to whatever dollar amount the legislature decided it deserved during the appropriations process.

The Oregon credit has also taken heat in recent weeks for its lack of accountability – specifically, by providing benefits to businesses that have done little or anything to create jobs or improve the environment.  And moreover, because of the “transferability” of these credits, the program has also resulted in huge windfall benefits to businesses, including Walmart, that have made absolutely no attempt to promote the credit’s environmental goals.

In order to quell the outrange expressed by Oregonians at this blatant misuse of state resources, the Governor has since proposed, among other things, to cap the overall size of the BETC program and force the government to prioritize potential projects in order to bring the cost of the program beneath that cap.  It remains to be seen whether the Governor’s recommendations will be enough to salvage this so far disastrous program.

While Oregon’s recent experience with BETC provides anecdotal evidence of the danger of relying upon the tax code as a tool of economic development, evidence from Massachusetts provides an even more comprehensive picture of this problem.  The Massachusetts Budget and Policy Center’s (MBPC) recent analysis of economic development tax incentives shows that while traditional government “spending” has been forced downward by the economic recession, spending on business tax incentives has continued to rise sharply.  The 2.8% drop in FY10 appropriations, for example, contrasts sharply with a 4.2% increase in FY10 economic development tax breaks.  MBPC explains the cause of this asymmetry as follows:

“Tax expenditures are in many ways similar to direct appropriations. Both seek to achieve certain policy goals through the use of the state’s economic resources, and both have an effect on the state’s bottom line. A primary difference is that budget appropriations must be reauthorized by the Legislature each year, while tax expenditures remain in effect without the Legislature having to take action.  The effectiveness of these tax expenditures is rarely examined in any detail and very little data is available to analyze.”

In order to correct this bias in favor of special tax breaks, the MBPC proposes six reforms designed to shine a brighter light on these programs.  The first such reform, “provide information on the purpose and effectiveness of each tax expenditures,” mirrors a proposal made by CTJ just last month.

On the heels of this disappointing news from Oregon and Massachusetts comes a proposal from Maryland Governor Martin O’Malley to provide businesses with a $3,000 tax credit for each employee they hire.  While the Governor has thankfully proposed to cap the overall credit at $20 million, one can’t help but wonder whether another economic development tax break is really the best use of the state’s very scarce resources.

Earlier today, the House of Representatives passed its most recent version of the "Tax Extenders" package (H.R. 4213). The "tax extenders" consist of about 50 temporary tax provisions that, as their name suggests, need to be extended every 1-2 years to prevent their expiration. While multiple theories exist as to why these provisions aren't simply made permanent, it is clear that relatively little thought has been given to their effectiveness in promoting the multitude of goals for which they've been supposedly been enacted. The House bill seeks to remedy this problem by requiring that the Joint Committee on Taxation (JCT) conduct studies of each of these provisions using 10 different criteria explained in the bill's language. Addressing each of these 10 criteria would provide valuable insights into these provisions' worth. The full list is quoted below, though items #3, 4, 7, and 10 are of particular note:

(1) An explanation of the tax expenditure and any relevant economic, social, or other context under which it was first enacted.

(2) A description of the intended purpose of the tax expenditure.

(3) An analysis of the overall success of the tax expenditure in achieving such purpose, and evidence supporting such analysis.

(4) An analysis of the extent to which further extending the tax expenditure, or making it permanent, would contribute to achieving such purpose.

(5) A description of the direct and indirect beneficiaries of the tax expenditure, including identifying any unintended beneficiaries.

(6) An analysis of whether the tax expenditure is the most cost-effective method for achieving the purpose for which it was intended, and a description of any more cost-effective methods through which such purpose could be accomplished.

(7) A description of any unintended effects of the tax expenditure that are useful in understanding the tax expenditure's overall value.

(8) An analysis of how the tax expenditure could be modified to better achieve its original purpose.

(9) A brief description of any interactions (actual or potential) with other tax expenditures or direct spending programs in the same or related budget function worthy of further study.

(10) A description of any unavailable information the staff of the Joint Committee on Taxation may need to complete a more thorough examination and analysis of the tax expenditure, and what must be done to make such information available.

The importance of Criteria #3, 4, and 7 should be obvious -- they attempt to directly address the core issue of these provision's value. But criteria #10 is also of great importance. If the JCT is unable to conduct a thorough study because of a lack of available data, how could lawmakers be expected to meaningfully evaluate these provisions' worth? If the mandate for this study is included in the final "Extenders" bill, any recommendations provided under criteria #10 should be taken very seriously.

Ultimately, the inclusion of this study in the final "Tax Extenders" package would help to pave the way for eliminating any "extenders" that are failing to live up to their original billing. This result should be especially welcome in 2010, when Congress is expected to consider tax reform more broadly in the context of the expiration of the Bush Tax Cuts. For this reason, the Senate should be sure to include this study in their version of the Extenders bill as well.

Finally, as somewhat of an aside, the criteria laid out in this proposed study may also be of use in contemplating a more fundamental overhaul of our government's "performance evaluation" infrastructure, as was proposed in a CTJ report just a few weeks ago.

For more on the Tax Extenders package in general, check out this coverage in CTJ's Tax Justice Digest.

Earlier today, the House of Representatives passed its most recent version of the "Tax Extenders" package (H.R. 4213). The "tax extenders" consist of about 50 temporary tax provisions that, as their name suggests, need to be extended every 1-2 years to prevent their expiration. While multiple theories exist as to why these provisions aren't simply made permanent, it is clear that relatively little thought has been given to their effectiveness in promoting the multitude of goals for which they've been supposedly been enacted. The House bill seeks to remedy this problem by requiring that the Joint Committee on Taxation (JCT) conduct studies of each of these provisions using 10 different criteria explained in the bill's language. Addressing each of these 10 criteria would provide valuable insights into these provisions' worth. The full list is quoted below, though items #3, 4, 7, and 10 are of particular note:

(1) An explanation of the tax expenditure and any relevant economic, social, or other context under which it was first enacted.

(2) A description of the intended purpose of the tax expenditure.

(3) An analysis of the overall success of the tax expenditure in achieving such purpose, and evidence supporting such analysis.

(4) An analysis of the extent to which further extending the tax expenditure, or making it permanent, would contribute to achieving such purpose.

(5) A description of the direct and indirect beneficiaries of the tax expenditure, including identifying any unintended beneficiaries.

(6) An analysis of whether the tax expenditure is the most cost-effective method for achieving the purpose for which it was intended, and a description of any more cost-effective methods through which such purpose could be accomplished.

(7) A description of any unintended effects of the tax expenditure that are useful in understanding the tax expenditure’s overall value.

(8) An analysis of how the tax expenditure could be modified to better achieve its original purpose.

(9) A brief description of any interactions (actual or potential) with other tax expenditures or direct spending programs in the same or related budget function worthy of further study.

(10) A description of any unavailable information the staff of the Joint Committee on Taxation may need to complete a more thorough examination and analysis of the tax expenditure, and what must be done to make such information available.

The importance of Criteria #3, 4, and 7 should be obvious -- they attempt to directly address the core issue of these provision's value. But criteria #10 is also of great importance. If the JCT is unable to conduct a thorough study because of a lack of available data, how could lawmakers be expected to meaningfully evaluate these provisions' worth? If the mandate for this study is included in the final "Extenders" bill, any recommendations provided under criteria #10 should be taken very seriously.

Ultimately, the inclusion of this study in the final "Tax Extenders" package would help to pave the way for eliminating any "extenders" that are failing to live up to their original billing. This result should be especially welcome in 2010, when Congress is expected to consider tax reform more broadly in the context of the expiration of the Bush Tax Cuts. For this reason, the Senate should be sure to include this study in their version of the Extenders bill as well.

Finally, as somewhat of an aside, the criteria laid out in this proposed study may also be of use in contemplating a more fundamental overhaul of our government's "performance evaluation" infrastructure, as was proposed in a CTJ report just a few weeks ago.

For more on the Tax Extenders package in general, check out this coverage in CTJ's Tax Justice Digest.

In Louisiana, the answer is probably "yes, they could."
An excellent editorial in the Daily Advocate notes that the ten lowest-property-tax counties in America in 2006-2008 (for residential property) were all in Louisiana. The main reason for this is pretty straightforward: every owner-occupied home in Louisiana receives an exemption for the first $75,000 of home value. In practice, this amount covers something close to half of all properties in the state.
The topic is being raised right now because there are active proposals to increase the homestead exemption. As the Advocate editorial correctly notes, the impact of this would be a

shift of tax burdens directly onto owners of business and commercial property. It also would shift more of the property tax burden onto renters, rather than homeowners; renters pay property taxes through their monthly checks to landlords, without benefit of a homestead exemption.

This isn't an argument that Louisiana's homestead exemption actually needs to be reduced. But it certainly makes a good case that further increases ought to be the last thing on state policymakers' minds at this time.

Citizens for Tax Justice and several other national organizations have come together to support passage of (H.R. 4213), which fairly and responsibly offsets the cost of the "tax extenders." The House of Representatives plans to vote on this bill as early as December 9.

Read the letter in support of H.R. 4213.

To be sure, many of these organizations question the efficacy and fairness of some of the "tax extenders," which are provisions that Congress enacts periodically to extend, for a year or so, various temporary tax breaks. But we nonetheless agree that the core revenue-raising provisions included in this legislation are important reforms to our tax system. We  support this bill for the following reasons:

H.R. 4213 would reverse Congress's tradition of increasing the budget deficit every year by extending "temporary" tax breaks without paying for them.

Unlike many previous "tax extenders" bills, this legislation includes revenue-raising provisions that would offset the costs of extending these tax breaks. Enacting corporate tax breaks (which make up the bulk of the "tax extenders") without paying for them contributes to our federal budget deficits and our national debt, which is borne by all Americans. The revenue-raising provisions in this bill prevent an increase in the deficit while also making the tax code fairer and more efficient.

H.R. 4213 would finally close the loophole for what private equity fund managers call "carried interest." (See CTJ's previous analyses of the carried interest loophole.)

A middle-income person typically pays income taxes as high as 25 percent plus payroll taxes. Private equity fund managers can receive millions of dollars (or even billions of dollars, during boom times) in compensation for their work, but by calling this income "carried interest," they pay only income taxes at a 15 percent rate.

The "carried interest" label essentially allows these fund managers to pretend that this income is a return on capital investments (and thus eligible for the exception in the income tax that subjects capital gains to an income tax rate of no more than 15 percent). This pretense clearly contradicts the will of Congress in creating the subsidy for capital gains, which was meant to reward those who invested their own money, not those who are simply being paid to manage other people's money.

H.R. 4213 also includes a proposal introduced by Finance Committee Chairman Max Baucus and Ways and Means Committee Chairman Charles Rangel to prevent wealthy Americans from cheating on their U.S. taxes by hiding their income in offshore tax havens. (See CTJ's analysis of tax haven legislation.)

While this proposal is not as strong as we would prefer, it would be an important step forward to ensure that all Americans pay their fair share in taxes. Middle-income Americans typically have few opportunities to hide their income from the IRS. But wealthy Americans have access to lawyers and accountants who help them hide their income in offshore tax havens. Tax havens are countries that have a very low income tax (or no income tax) and laws that prevent their banks from cooperating with IRS enforcement efforts.

While the vast majority of taxpayers at all income levels do the right thing and pay their fair share, a minority of wealthy Americans are engaging in these activities that are both illegal and unfair. The Baucus-Rangel proposal would create strong incentives for foreign banks to provide information that would help the IRS identify tax cheats without creating any significant burden on the banks or their honest customers.

H.R. 4213 requires that the Joint Committee on Taxation (JCT) conduct studies evaluating the "tax extenders" before the end of next year, when Congress is likely to act on them again. (See CTJ's report calling on Congress and the administration to conduct regular reviews of tax expenditures.)

Providing a special corporate tax break through the tax code has the exact same effect as providing a subsidy through direct spending. Unfortunately, lawmakers have made almost no attempt to evaluate or even think critically about the effectiveness of corporate tax breaks before extending them each year. This contrasts significantly with lawmakers' attitudes towards the discretionary spending that they grapple with annually.

JCT's reports of the effectiveness of tax breaks will at least provide Congress with a basis to judge whether or not these tax provisions are worth their costs. This is a common sense reform that is long overdue.

(Read CTJ's recent report on the House estate tax bill.)

On Thursday, the U.S. House of Representatives approved a bill (H.R. 4154) that would partially extend the Bush cut in the estate tax. H.R. 4154, introduced by Rep. Earl Pomeroy (D-ND), would make permanent the estate tax rules in effect in 2009, which would prevent the estate tax from disappearing in 2010 but which would still constitute a massive tax cut for millionaires in years after that.

The tax cut legislation enacted by President Bush and his allies in Congress in 2001 included a gradual reduction in the estate tax over several years followed by repeal of the estate tax in 2010. Like almost all of the Bush tax cuts, this one expires at the end of 2010, meaning the estate tax will reappear at pre-Bush levels if Congress does nothing.

Unfortunately, many observers believe Congress is not likely to simply allow the pre-Bush estate tax rules to come back into effect in 2011 (despite the obvious need for revenue). In fact, if the estate tax is allowed to disappear in 2010, lawmakers could be more tempted to make repeal permanent or to enact legislation that would allow only a very scaled back version of the estate tax to reappear in 2011.

In other words, the good thing about H.R. 4154 is that it could prevent a situation in which Congress would be tempted to enact an even more ludicrous tax cut for families with enormous estates.

The bad thing about H.R. 4154 is that it's a massive tax cut for the richest families in America. As CTJ's recent report points out, only 0.7 percent of the Americans who died in 2007 left an estate that was taxable. In 2009 that number will be far lower because the amount exempt from the estate tax has grown significantly under the changes scheduled in the 2001 law.

The 2009 estate tax rules, which the Pomeroy bill would make permanent, significantly reduce taxes for extremely wealthy families. These are the very families who benefit the most from the infrastructure, education, stability and other things that taxes pay for and which make it possible for some Americans to accumulate massive fortunes.

Congress must prevent the estate tax from disappearing in 2010 and also must set estate tax rules as close as possible to the pre-Bush estate tax rules. Many progressive lawmakers in the House decided that the Pomeroy bill is the best that can be hoped for. Now attention turns to the Senate, which must find time to enact legislation that will prevent the estate tax from disappearing and must overcome any temptation to cut the estate tax even more.

It’s a problem that’s common across many states. Too many exceptions are carved into state sales taxes, which consequently apply to far too narrow a range of purchases.  In large part, this is the predictable result of lawmakers’ desire to enact policies that allow them to claim they’ve cut taxes, while also being able to redirect resources toward their favorite activities or groups.

In Kansas, Secretary of Revenue Joan Wagnon has been leading the charge in encouraging more systematic thinking about the multitude of exemptions from the state’s sales tax.  Specifically, Wagnon has suggested a three-year moratorium on creating new sales tax exemptions, and an examination of the effects of current sales tax exemptions.  The idea has received notable support.  State Rep. Jim Ward, for example, has concurred with the proposal to more closely scrutinize these programs: "Without some criteria to balance the public good, it is very difficult [to ensure tax exemptions are warranted], and we haven't done a great job of it.”  One way to inject such criteria into the policy process in Kansas, and other states, would be to enact a “performance review” system of the type proposed in a recent CTJ report.

Sales tax exemptions can also come about as a result of historical accident.  Minnesota, like most states, exempts a huge number of personal services from taxation, largely because the state’s sales tax was created before the economy shifted to its current, more service-oriented nature.  Fortunately, recent press coverage from Minnesota shows a lot of interest among lawmakers, including gubernatorial candidates, in correcting this flaw in the state’s tax code.  For more on the folly of exempting services from the sales tax base, be sure to read this ITEP Policy Brief.

“Hello.  Bad Tax Ideas R Us.  How may I help you?”

“Well, good afternoon, Governor Carcieri.  Good to hear from you again.  What can I do for you?”

“You say you’re looking for a ‘game-changer’? Something that would ‘significantly alter Rhode Island’s tax structure and send a signal that the state wants to promote the growth of business’ and you want to know what we’ve got?”

“Well, how about slashing tax rates on capital gains? That one’s always popular.”

“What’s that?  Rhode Island tried that one already, it didn’t work, and the Legislature went back to taxing capital gains at the same rate as all other income?  I’m sorry to hear that.”

“Wait – didn’t your hand-picked Tax Policy Workgroup come up with a radical idea earlier this year to replace the corporate income tax with a tiered minimum tax?  Why not go with that? After all, the Workgroup spent over six months exploring various options and came up with that at the last minute.

“I beg your pardon?  The Legislature opposed that one as well?  Oh, I see.”

“OK, so how about replacing the corporate income tax with a business net receipts tax or BNRT?  It’s all the rage in California.”

“Yes, it’s true that one Commissioner – one of the leading state tax policy experts in the country – indicated that the BNRT ‘is fraught with economic disincentives’ that he feared would ‘harm California businesses.’”  Yes, I am aware that nine other well-respected tax experts earlier said that 'adoption of the BNRT at this stage would be highly imprudent.'  Yes, I know that the business community in California isn’t exactly thrilled with the idea either.  You can’t make an omelet without breaking some eggs, sir.”

“Well, think it over a bit and let me know what you decide.  I’m sure we can work something out.”

Michigan gubernatorial candidate State Representative Alma Wheeler Smith is calling for the restructuring of the state's tax structure. Michigan is one of a handful of states with a flat income tax, and its fiscal woes are infamous. Rep. Smith feels that now is the time for a complete restructuring of the state's tax system, including making Michigan's income tax graduated and lowering the state's sales tax rate while extending the sales tax base to include more services.

Representative Smith isn't the only person running for Governor who is turning to income tax reform in these difficult times. Both Democratic gubernatorial candidates in Illinois have also called for significant changes to the Illinois tax structure, including reforming their state's flat rate income tax. For more on Illinois Governor Pat Quinn and Comptroller Dan Hynes' tax reform plans, see ITEP's report. Progressive income taxes are an important tool for states struggling in this current economic downturn. Read more about the benefits in ITEP's Policy Brief on progressive income taxes.

Shoppers and state governments are both likely still recovering from "Black Friday" and especially "Cyber Monday," but for very different reasons. Consumers may be able to get great deals online, but state governments are losing necessary revenue. As the New York Times recently opined, "Online retailers who do not collect sales tax enjoy a significant and unfair advantage over rivals who must add the tax to their prices. They also cost the states billions of dollars a year in lost sales tax revenue -- money that cash-starved states cannot afford to forgo."

Wisconsin's Department of Revenue estimated that the state is losing $150 million a year on items sold online and this number is only likely to grow. Consumers are required to pay sales tax on items purchased online when they file their state income taxes. But in reality most consumers don't bother, and the U.S. Supreme Court has found that the constitution bars states from requiring most out-of-state catalog and online retailers from collecting sales taxes. But the court also said that Congress could step in to give states permission to do this, as explained in ITEP's Policy Brief on efforts to collect sales taxes on internet purchases.