"From some on the right, I expect we'll hear a different argument -– that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away.  The problem is that's what we did for eight years."  (Applause.)  "That's what helped us into this crisis.  It's what helped lead to these deficits.  We can't do it again."

President Obama spoke these words in his State of the Union address on Wednesday night, after pledging to enact an agenda that will create jobs and tackle our long-term budget deficit. He did a good job of explaining that the budget deficits that exist today are the result of deficit-financed tax cuts, two deficit-financed wars, and a major recession all occurring before he entered the White House.

But one has to wonder if President Obama is gently bearing left at a time when any sensible directions would call for a sharp left turn.

The Bush Tax Cuts

He remains committed to extending the Bush income tax cuts for the 98 percent of taxpayers who have adjusted gross income (AGI) below $250,000 (or below $200,000 for an unmarried taxpayer). The budget document released by the administration last year showed, in a convoluted way, that this would cost $1.88 trillion between now and 2019. His proposal to partially extend the Bush cut in the estate tax (making permanent the estate tax rules in effect in 2009) would cost another $576 billion over the same period, for a total of about $2.45 trillion.

The estimated costs of these proposals may be different in the budget to be released next week (since all the projections change at least somewhat in response to developments in the economy). But make no mistake, the cost of extending most of the Bush tax cuts far exceeds the savings the President hopes to achieve with his proposed spending freeze (which will actually cut spending if one accounts for inflation and other factors).

Cutting Non-Security Discretionary Programs

The administration is reported to believe $250 billion can be saved from the spending freeze, which would last three years but would not apply to national security, Medicare, Medicaid, or Social Security. The first problem is that these exempt categories of spending, along with interest payments on the national debt that cannot be avoided, make up 70 percent of the federal budget. Americans love to complain about wasteful government spending, but few realize that, once you eliminate those categories of spending that are very popular with the public, there's not a whole lot left to cut. The non-security discretionary spending that is left has come under increasing pressure in recent years since it's the only part of the budget lawmakers feel comfortable attacking.

The second problem is that cutting back spending when the economy may still be weak could prolong our downturn. Progressive observers have warned that the Roosevelt administration's decision to stop stimulating the economy and focus on deficit-reduction plunged the country back into a deeper depression in 1937.

For their part, administration officials have explained that they are not proposing an across-the-board freeze. Rather, they will identify particular types of spending that represent wasteful giveaways to special interests rather than public services that people depend upon.

Even if that's true (and the jury is still out on that), it's still peculiar that taxes aren't getting more attention. This is the third problem with the President's approach. The need for higher taxes is like an 800 pound elephant in the room that everyone is trying to ignore, even if they vaguely acknowledge that Bush's tax cuts got us into this mess. Does a family with an income of $190,000 really need every cent of their Bush tax cuts? Do families with $7 million in assets really need to be fully exempt from the estate tax? The President's tax proposals would have us believe so.

Steps in the Right Direction

The President certainly wants to move in the right direction, as was evident in various parts of his speech. He reiterated his proposal to charge a fee on risk-taking by the largest banks, which would raise $90 billion over a decade according to the administration. We've argued before that this is entirely reasonable. The institutions affected know they have an implicit guarantee from the government and are prone to put the entire economy at risk as a result. It makes sense to demand that they pay up in proportion to their risk-taking.

The President also reaffirmed his desire to do something about offshore profit-shifting by corporations. The proposals he made last year along these lines would raise $200 billion over a decade and would be extremely important, as we have explained in detail, in preventing U.S. corporations from shifting their profits to other countries.

Sometimes this shifting means companies actually move jobs and operations offshore, but other times it involves accounting gimmicks and transactions that exist only on paper. Either way, Americans lose tax revenue for no good reason other than that Congress is afraid to take on the lobbying power of multinational corporations.

America has a budget problem that is long-term in nature. The money we spend this year or next year to stimulate the economy has little impact on the long-term deficit. Reforming our tax system permanently, however, is an important part of the long-term solution.

On Tuesday, voters in Oregon made their voices heard, using the ballot box to tell their elected officials that they agreed with the legislature's decision in June of last year to raise taxes on businesses and the wealthy to help close the state’s yawning budget gap.  By a substantial margin, they approved Measure 66 – which will raise income tax rates for married filers with incomes over $250,000 – and Measure 67 – which will overhaul the state’s corporate minimum tax and create a new top corporate income tax rate.  

ITEP's distributional analyses of the plan's progressive impact, cited in analyses by the Oregon Center for Public Policy, helped to inform this important debate.

The vote marks the first time in more than 70 years that Oregon voters approved an income tax increase via the ballot, suggesting they understand the need for a balanced approach to addressing the state’s fiscal woes and setting a sound example for the many states facing similar difficulties.

With a victory of this magnitude comes a certain amount of momentum – and policymakers in Oregon have made clear that they intend to use it achieve further progressive reform.  The day after the vote, Governor Ted Kulongoski announced that his top priority for the upcoming legislative session is to put an end to “budgeting from crisis to crisis” and to change existing law so that future budget surpluses will be reserved in a rainy day fund rather than returned to corporate and individual taxpayers via so-called “kicker” rebates.

To learn more about Oregon’s unique “kicker” and the disastrous consequences it has for sound fiscal management, as well as for further perspective on the passage of Measures 66 and 67, visit the Oregon Center for Public Policy.

New polling out of Utah indicates that 53% of the state’s residents would rather their representatives raise taxes than cut state services.  Increases in the income tax, as well as additional taxes on tobacco, alcohol, coal, oil, and natural gas are all considered by Utahns to be preferable to additional state spending cuts.  Against this backdrop, Rep. Brian King is among a minority of legislators currently favoring an increase in the income tax.  Specifically, King’s plan would raise the tax rate paid by those earning more than $250,000 per year.

Although many Utah legislators remain opposed to tax hikes, even Utah’s largest business organization – the Salt Lake Chamber of Commerce – is supporting higher taxes in at least a limited form.  Specifically, the Chamber supports increasing the state’s fairly low cigarette tax rate, as well as hiking the state gasoline tax by ten cents per gallon.  The Chamber has, however, come out in opposition to Rep. King’s plan.

So far, the Republicans in control of Utah’s House, Senate, and Governor’s office have virtually ruled out tax increases, with the possible exception of a cigarette tax hike.  One state senator responded to the idea of tax increases by saying that “We're down so far in revenue ... down $1 billion dollars, that the tax increases that would be required to bring us up to where we were before would be so staggering that people who are advocating that don't understand how far we are."  Clearly, however, the same logic applies to state spending cuts, which were the primary vehicle used to close the state’s budget gap last year.  Utah’s situation is begging for a more balanced approach – a fact that Utahns appear to have recognized.

At a press conference late last week, a group of nearly twenty progressive New Mexico legislators released their budget balancing proposal.  Among the most notable components of the proposal is a roll-back in personal income tax cuts (including those for capital gains) that were enacted in 2003.  The group also proposed higher income taxes targeted specifically at upper-income New Mexicans (defined as earning roughly $150,000 - $200,000 or more) and enacting combined reporting.  The group is also pushing for the state to take steps to apply the sales tax to additional purchases made over the Internet.  Finally, the proposal included familiar calls for higher taxes on cigarettes and soft drinks.

While Governor Bill Richardson has laudably acknowledged that the state must raise taxes to close its budget shortfall, he has so far fought efforts to roll back the tax cuts he enacted in 2003. He has also opposed efforts to impose higher taxes on upper-income New Mexicans, or to take additional steps to tax purchases made over the Internet. 

But rather than put forth a plan of his own, the Governor has expressed an interest in letting the legislature work out the details of a potential increase in state taxes.  This fact should hearten those progressive lawmakers who have proposed exactly the type of bold, progressive reforms New Mexico needs to overcome its current budgetary shortfalls.  Ideas like those advocated by this group of legislators should not be kept off the table.

Since advocates of a national sales tax first unveiled their "Fair Tax" plan more than a decade ago, the most durable (and unfortunate) feature of this debate has been that its advocates have persisted in using misleading estimates of what the sales tax rate would have to be under their regressive scheme. The bill's authors routinely describe it as a 23 percent tax, but ITEP's widely-cited analysis has shown that, in fact, the national sales tax rate would almost certainly have to be somewhere north of 40 or even 50 percent.
 
Now this debate is playing out again at the state level, where the Missouri House has shown more than a polite interest in a plan that would repeal the state's personal and corporate income taxes and state sales tax, and create a new sales tax on virtually everything individuals buy, from new homes to your monthly rent to health care to day care. The plan's sponsors claim that it would raise enough revenue to pay for a gigantic sales tax rebate designed to offset the sales tax on spending up to the federal poverty line, while leaving the total revenue collected unchanged. According to the bill's sponsors, this could all be accomplished at the low, low sales tax rate of 5.1 percent.
 
House members liked this idea enough last year to actually pass a similar bill – even though the official fiscal note indicated that the numbers just didn't add up. Cooler heads ultimately prevailed in the Senate.

Now the idea is back, and its sponsors still insist that a 5.1 percent universal consumption tax can pay for a rebate and repeal of the personal and corporate income taxes.

But a new ITEP analysis shows that, in fact, the state sales tax would have to be more than 11 percent in order to make such a plan revenue-neutral – and the result would be a disaster for tax fairness.

ITEP's analysis, submitted as testimony before a House committee on Wednesday, shows that the poorest ninety-five percent of the income distribution would see a tax increase under this plan, while the very best-off five percent of Missourians would see a substantial tax cut. For more on this issue, visit the Missouri Budget Project.

At the start of World War II, the British government designed a poster with the words "Keep Calm and Carry On," to motivate the public during trying times. Perhaps they'd be getting this poster out again if a minority of their non-representational House of Lords found a way to halt any and all legislation during a health care crisis. Fortunately for the clear-thinking Brits, they decided long-ago that having a simple majority of elected legislators approve a bill was a sensible and democratic way to legislate.

On our side of the pond, Senate Republicans voted in lockstep against the health care bill approved by the chamber on Christmas Eve. It will be difficult to pass another health care bill in the Senate. Under the chamber's current rules, the Republicans only need 41 votes to filibuster a bill, and they appear to have obtained that 41st vote with the election of Scott Brown as the new U.S. Senator from Massachusetts.

The House, which had already passed a bill that most advocates find superior, may not have the votes to pass the Senate bill as it is, according to Speaker Nancy Pelosi. Of course, that's presumably because the Senate bill does not do as much to make health care affordable and because the Senate's main revenue-raiser is an excise tax on insurance companies offering high-cost benefit plans, which is less progressive than the high-income surcharge in the House bill.

There is a simple way around this logjam. The House and Senate seemed to be on the brink of agreeing to a final health care bill. Whatever changes would be needed to make the Senate bill look more like that final agreement can probably be passed through the "budget reconciliation" process.

That's the process that the Senate uses from time to time to pass legislation by majority vote (meaning 51 votes are needed instead of 60). One would think that all legislation would be passed this way. The reconciliation process was originally created in the 1970s to fast-track bills that would help balance the budget, but since then has been used for all sorts of legislation. (President Bush and the Republican-led Congress used it to cut taxes and increase the budget deficit.)

Reconciliation can only be used to pass legislation that has a quantifiable budgetary impact, and many parts of health care reform might not meet that standard. But Congress does not have to pass an entire health care bill using reconciliation. It could just use reconciliation to pass those changes that are needed to make the Senate bill look more like the final bill that the Democratic leadership has been negotiating. And these changes, according to our sources, would meet the standard of having a budgetary impact.

So, the Senate could pass a reconciliation bill to improve the original bill they passed on Christmas Eve, and then the House could pass the original Senate bill and the reconciliation bill almost simultaneously.

Some Senators have historically been hostile to reconciliation, claiming that it's unfair to change the rules to pass legislation. This argument is incoherent and bizarre. We are quite confident that passing a law with a majority vote in the House, a majority vote in the Senate, and the President's signature (that's approval from three separately elected institutions) is a sufficiently democratic process that no one should feel that their rights have been trampled.

The Senate Budget Committee chairman, Kent Conrad, a traditional foe of reconciliation, seems to agree with us now.

The path ahead is clear. Keep calm and carry on.

This coming Tuesday, January 26, Oregonians will vote on two ballot initiatives, Measure 66 and Measure 67, that will decide the fate of major tax legislation initially approved in June of last year.  

A “yes” vote will affirm the decision by legislators and Governor Ted Kulongoski to take a balanced approach to addressing the state’s gaping budget deficit. This approach will increase the taxes paid by the very wealthiest Oregonians and by the state’s largest and most profitable businesses.

As the Oregon Center for Public Policy documents, if voters fail to pass Measures 66 and 67, even deeper cuts to vital services like education and health care will have to be made.  In the words of one news account, “shuttered prisons, eliminated programs for the sick and needy, increased tuition and fewer instructors on crowded university campuses” would be just some of the ramifications if Measures 66 and 67 go down to defeat.

While passage of Measures 66 and 67 would help forestall further spending reductions and make Oregon’s tax system less regressive, it is also important to keep in mind what passage would not do.  As Joe Cortright, a senior fellow at the Brookings Institution and president of Impresa, a Portland, Oregon-based economic consulting firm explains, passage of Measures 66 and 67 would not have the “job killing” impact that some opponents have disingenuously claimed. Rather, he concludes that “Given [Oregon’s] current economic straits, cutting public services would be far worse for the economy than these modest tax changes. Oregonians who are concerned about jobs should vote yes on Measures 66 and 67.”

For more on Measures 66 and 67, visit the Oregon Center for Public Policy as well as the Vote Yes for Oregon Coalition and Tax Fairness Oregon.

While the current holder of the office may still be in denial about the best ways to deal with his state’s continued fiscal woes, it now appears that most of the major gubernatorial candidates in Rhode Island support an idea whose time has come. Most would repeal – or at the very least, suspend further changes in – the state’s alternative flat income tax.  

As the Rhode Island Poverty Institute explains, the alternative flat tax was originally enacted in 2006 and gives Rhode Island taxpayers two choices. The first choice is using all available deductions and exemptions and paying taxes using a set of graduated rates that range from 3.75 percent to 9.9 percent or. The second choice is applying a single flat rate to federal adjusted gross income with no exemptions or deductions.  For tax year 2009, the flat rate is 6.5 percent, but it is scheduled to fall to 5.5 percent by tax year 2011.  

At present, only about 9,000 taxpayers choose to use the alternative flat-tax approach, but virtually all of them are among Rhode Island’s wealthiest taxpayers and all of them, by definition, see an enormous reduction in taxes by using the alternative approach.  In other words, repealing the flat tax would not only generate significant revenue for the Rhode Island budget – as much as $53 million according to the Providence Journal – but would also improve tax fairness substantially.

Here’s hoping that Rhode Island doesn’t have to wait until it has a new governor to see such a change made.

The Indiana legislature gave final approval this week to a measure asking Indiana voters whether the property tax caps enacted less than two years ago should be enshrined in the state’s constitution.  Embedding these caps in the constitution is a radical step. They were only fully phased-in less than a month ago, so the full effect of these provisions has yet to be seen.  Moreover, despite the large amount of uncertainty surrounding the caps, available evidence already suggests that less well-off renters will be among those most hurt by the caps, while homeowners with highly-valued homes will receive enormous benefits.

The property tax cap amendment (which is already permanent law, regardless of whether voters decide to amend the state’s constitution) works by limiting property taxes to 1%, 2%, or 3% of assessed value, depending on the type of property in question.  Homeowners receive the benefit of the generous 1% cap, while rental units and farms will benefit from the less helpful 2% cap.  Other properties’ tax bills (e.g. businesses) will be capped at 3%.

A number of aspects of Indiana’s new tax cap regime are troublesome from a tax fairness perspective.  Since renters are generally less well-off than their home-owning neighbors, their higher cap is reason for concern. The 1% cap for homeowners is not helpful to owners of less expensive homes since they already benefit from a pair of large homestead deductions offered by the state. Instead, only those Hoosiers with very expensive homes (who may in fact be paying more than 1% of their property’s value in tax), are expected to benefit most from the caps. 

Finally, since some of the cost of these recent changes to the property tax was offset by a regressive sales tax increase, renters and lower-income homeowners can expect to pay more in taxes overall.

Inserting this problematic policy into the state’s constitution will only compound its shortcomings.  Specifically, as the head of the Indiana Association of Cities and Towns (IACT) put it: “This action will forever tie the hands of future General Assemblies to react to any unforeseen economic reality and put a level of specificity into our Constitution that is completely unprecedented.”

Nonetheless, politics made passage of the caps by the legislature almost inevitable.  As one Republican mayor in the state explained, "It's the same old political trick bag. It's typical that the 150 [state] legislators sit there and put a cap on property taxes and get to sit there and look good, when we're the ones taking all the heat, having to cut services."

At present, available polling indicates that the caps are popular among Indiana voters.  November is a long way away, however, leaving plenty of time for Indiana voters to become informed about the shortcomings of these caps.

New details have just surfaced regarding the deal between South Carolina and Boeing that we discussed in the Digest last week.  It turns out that the subsidy package Boeing was able to extract from the state’s taxpayers will be at least twice as large as was first reported.  In total, over $900 million will be given to Boeing. 

Put another way, the state will be giving Boeing an “incentive package” large enough to cover the entire cost of building its plant, with at least $150 million in benefits left over. 

State residents should keep this package in mind the next time South Carolina lawmakers proclaim the virtues of “free markets” and “limited government” as part of their anti-tax platform.

In May of last year, Citizens for Tax Justice proposed several progressive options to raise revenue to finance health care reform. Our favorite idea was to close a gap in the one big tax for health care that we already have, the Medicare payroll tax. The Medicare payroll tax is a 2.9 percent tax on earnings, half of which is nominally paid by employers while the other half is nominally paid by workers. (Economists agree that workers ultimately pay the employer half as well, in the form of reduced wages or benefits.) We noted that this existing tax for health care completely exempts people who live off of investment income.

Imagine someone who does not have to work because he or she collects capital gains, stock dividends, interest, rents, royalties, S corporation income or some other type of investment income. This individual does not have to pay any payroll tax (Medicare tax or Social Security tax) on this income. Eligibility for Medicare is still possible upon reaching age 65 as long as he or she worked (and thus paid the Medicare payroll tax on earnings) for about ten years at some point in the past.

By the time she reaches age 65, even Paris Hilton may have appeared on television and in other venues enough to have worked a full ten years (and thus be eligible for Medicare). But something tells us that there will be a whole lot of years when she did not work and didn't have to pay a cent towards Medicare.

CTJ's Proposal to Reform the Medicare Tax

Our initial proposal was to make the individual portion of the Medicare tax (the 1.45 percent nominally paid by workers) apply to investment income as well as wages, and then introduce a second, higher rate for singles with income over $200,000 and couples with income over $250,000. In other words, the Medicare tax would become a health care tax that would apply to all income, and the portion paid by individuals would have two rates, 1.45 percent and 2.5 percent. Employers would still only pay 1.45 percent on earnings of their employees. And we also proposed an exemption of $50,000 for seniors ($100,000 for married seniors).

CTJ worked for several months with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options like this to the attention of members of Congress. State-based groups released reports with state-specific figures while national organizations educated lawmakers about progressive financing options and dispelled the myths that were manufactured to block any increase in revenues.

Lawmakers Seek Medicare Tax Reform

Some version of the Medicare tax reform proposal might end up in the final health care reform legislation.

As lawmakers became interested in different variations of this proposal, we analyzed several versions of it, one of which was included in an amendment filed by Senator Debbie Stabenow (D-MI) during a committee markup. The provision that eventually becomes law might be similar to our original proposal. The health care bill approved by the Senate on Christmas Eve included a provision to increase the individual portion of the Medicare payroll tax on earnings from 1.45 percent to 2.35 percent for those above the $200,000/$250,000 threshold. This was estimated to raise about $87 billion over the first ten years after enactment.

Now there is talk that the final bill might include that and also apply the individual portion of the Medicare tax (apparently at a rate of 2.35 percent) to investment income for those taxpayers above the $200,000/$250,000 threshold. The current incarnation entirely exempts all pension income and Social Security benefits.

One tax expert mistakenly told the LA Times that this proposal "could hit some of the elderly who are relying on savings to get by." If the expansion of the Medicare tax only applies (as seems likely) to incomes over $200,000 for singles and $250,000 for married couples, we would hardly call that a tax increase on people who are just "getting by." Only around 2.1 percent of all taxpayers will have adjusted gross income (AGI) above that threshold next year.

What Congress Might Do with the Revenue

The additional revenue that results from extending the Medicare tax to investment income could be used to address two complaints that many Democrats in the House have about the bill approved by the Senate. The first is that the Senate bill's subsidies are not sufficient to make health care affordable for low-income people, as explained in a recent report from the Center on Budget and Policy Priorities.

The second complaint against the Senate bill is that it relies too much on an excise tax on health insurance companies offering high-cost benefit plans. As explained in a report from CTJ, this excise tax is not particularly progressive. Health insurance plans are often high-cost just because a company's workforce is older, more female, or engaged in a riskier activity like mining.

The best case scenario is that many people, including a lot of middle-income people, who currently have high-cost plans will see a portion of those health benefits replaced by wages. That's not as good a deal as you might think, since wages are subject to both the income tax and the payroll tax, while health care benefits are currently tax-free.

And the usual criticism of tax deductions -- that they are worth more to a rich person in the 35 percent bracket than a middle-class person in the 25 percent bracket -- does not apply as much in this case. As the CTJ report explains, if tax-free compensation (like employer-provided health care) is turned into taxable income, rich folks get a break on one of the taxes that would otherwise apply. Taxable earnings are subject to the income tax, the Medicare payroll tax and the Social Security payroll tax, but for the last one there's a limit on how much wages are subject to it.

As of this writing, Congressional leaders are trying to finish up lengthy talks with the President at the White House, and there seems to be an agreement to limit the excise tax on high-cost health insurance plans.

The Faux-Populist CTJ Called "The False Messiah" in 1994

The Washington Post has been embroiled in a scandal concerning its publication on December 31 of a story written by the Fiscal Times, a news organization funded by Peter G. Peterson, the out-spoken and obscenely wealthy deficit-hawk. Peterson, of course, happens to favor a particular approach to deficit-reduction, including cuts to Social Security and Medicare and a commission that can make it easier for Congress to enact such cuts without much debate. Policy analysts and commentators have slammed the Washington Post and Peterson, who seems to favor tax cuts for investment income despite his obsession with budget deficits.

We cannot resist pointing out that CTJ complained about Peterson long before it became fashionable. Read CTJ director Robert McIntyre's take-down of Peterson, written in 1994, and the detailed back-and-forth between the two that follows.

Peterson, a cabinet secretary under President Nixon, has written books and given talks for years about taming budget deficits. His audience probably shrank during the fiscally responsible era at the end of the Clinton administration. But of course, deficits came back under President George W. Bush. And now, the man CTJ called a "false messiah" seems to be enjoying a second coming.

The Ill-Advised Budget Commission Idea

The headline of the Washington Post story in question is "Support Grows for Tackling Nation's Debt." The proposal described in the article was put forth by the chairman and ranking member of the Senate Budget Committee, Kent Conrad (D-ND) and Judd Gregg (R-NH), to create a commission that would make recommendations on how to tackle the budget deficit and put those recommendations on a fast-track to enactment with no committee hearings and no amendments.

Sources tell us that, contrary to the article's headline, there is little support in Congress for this particular commission proposal. And with good reason. One budget expert recently explained to a group of advocates that it only makes sense to create such a commission when Congress has made a decision but can't settle on the details. But it makes no sense to say a commission is needed to settle fundamental questions like how much money the government should spend and how revenue should be collected. Those are questions that elected lawmakers should be able to decide.

For example, when Congress decided it needed to close some military bases several years ago, it faced the obvious problem that no Senator wanted to recommend the closure of a base in his or her state. So Congress reasonably decided to create a commission to study the matter and draw up a list, and then the House and Senate would simply vote up or down, with no committee hearings or amendments.

But it's a far different situation when Congress has not decided some very fundamental issues and is trying to send the controversy to someone else. How much money should the government spend? What programs need to be cut to fit within a budget? Should Social Security and Medicare be cut? How? How much should we collect in taxes? What sorts of taxes should we have? These seem, quite frankly, like the sort of questions that lawmakers are elected to deal with.

The Washington Post Scandal

But none of this is what made the Washington Post story scandalous. The scandal is that the Post published the story as a piece of objective reporting even though it was written by an organization that almost certainly has an ideological bent on the subject matter. The article quotes the Concord Coalition without noting that it, too, receives funding from the foundation Peterson established in 2008 to spread his message. And it cites a report from the Peterson-Pew Commission on Budget Reform, which is partially named after the same Peter G. Peterson, although this is not noted.

The Post's Ombudsman, Andrew Alexander, laid out the evidence against his paper but concluded nonetheless that the Post was not publishing propaganda as news. But no matter how you look at it, the degree to which certain ideas make their way into the public dialogue seems to have a lot more to do with who has a fortune to spend than the soundness of the ideas themselves.

In his recent “Condition of the State Address,” Iowa Governor Chet Culver identified tax credit reform as one of his “top legislative and budget priorities for the 2010 session.”  Specifically, the Governor urged the legislature to act on the recommendations just released by a panel charged with evaluating both the state’s tax credits, and the mechanisms in place for monitoring those credits.  In addition to recommending the outright elimination of eight tax credits, and the addition of a means-test to another credit, the panel produced a number of good-government recommendations that set the stage for the upcoming legislative session.

The panel recommended, among other things:

- Subjecting all business-related tax credits to an annual $185 million cap and scheduling them to sunset in five years;
- Eliminating the “transferability” for all tax credits (i.e. preventing firms from selling their tax credits);
- Ending the refundability of the state’s research activities credit;
- Requiring the state’s revenue estimates to include analyses of the types and amounts of tax credits claimed, in order to produce a more complete picture of the state’s budgetary situation.

Implementing the panel’s recommendations would save the state $55 million in FY2011, and $106 million in FY2012.  This fact alone should be enough to spur lawmakers in cash-strapped Iowa to give the recommendations some serious consideration.  

Be sure to visit the Iowa Fiscal Partnership’s website to stay up-to-date on the upcoming debates on this issue.

Until this week, New Jersey was one of just nine states refusing to publish a tax expenditure report – i.e. a listing and measurement of the special tax breaks offered in the state.  Such reports greatly enhance the transparency of state budgets by allowing policymakers and the public to see how the tax system is being used to accomplish various policy objectives. 

Now, with Governor Jon Corzine’s signing of A. 2139 this past Tuesday, New Jersey will finally begin to make use of this extremely valuable tool.  Beginning with Governor-elect Chris Christie’s FY2011 budget, to be released in March, the New Jersey Governor’s budget proposal now must include a tax expenditure report.  The report must be updated each year, and is required to include quite a few very useful pieces of information.

The report must, among other things:

(1) List each state tax expenditure and its objective;
(2) Estimate the revenue lost as a result of the expenditure (for the previous, current, and upcoming fiscal years);
(3) Analyze the groups of persons, corporations, and other entities benefiting from the expenditure;
(4) Evaluate the effect of the expenditure on tax fairness;
(5) Discuss the associated administrative costs;
(6) Determine whether each tax expenditure has been effective in achieving its purpose.

The last criterion listed above is of particular importance.  Evaluations of tax expenditure effectiveness are extremely valuable since these programs so often escape scrutiny in the ordinary budgeting and policy processes.  Such evaluation can be quite daunting, however, and the Governor’s upcoming tax expenditure report should be carefully scrutinized in order to ensure that these evaluations are sufficiently rigorous.  One example of the types of criteria that could be used in a rigorous tax expenditure evaluation can be found in the study mandated by the “tax extenders” package that recently passed the U.S. House of Representatives.  For more on the importance of tax expenditure evaluations, and the components of a useful evaluation, see CTJ’s November 2009 report, Judging Tax Expenditures.

Ultimately, New Jersey’s addition to the list of states releasing tax expenditure reports means that only eight states now fail to produce such a report.  Those states are: Alabama, Alaska, Georgia, Indiana, Nevada, New Mexico, South Dakota, and Wyoming.  Each of these states should follow New Jersey’s lead.

The details of an extremely generous subsidy package given by South Carolina to Boeing, Inc. have rightly garnered a lot of attention.  The entire package is valued at around $450 million, and will require the cash-strapped state to borrow $270 million in order to help fund the construction of Boeing’s new facility in North Charleston. Among other things, the package would assess Boeing’s in-state property at a mere 4% of its value for property tax purposes (a fact that may irk other industrial taxpayers who are assessed at a 10.5% rate), promises the company that its tax rate won’t rise during the next 30 years, and allows the company to retain half of what it ultimately does “pay” in property taxes, if it uses the money for site improvements.  

But an extremely detailed study of tax incentives in Pennsylvania, released by Good Jobs First this week, should cause South Carolina policymakers to think twice about their “smokestack chasing” ways.  The report explains, among other things, that state tax bills are generally of little importance in company location decisions, and rarely can such breaks encourage a company to be truly loyal to a state and its workforce (as demonstrated recently in North Carolina).  As a result, selectively reducing taxes for certain companies in order to attract them to a state is a “low-impact but high cost” strategy.  Instead, Good Jobs First provides a number of recommendations for encouraging economic growth in much more sophisticated ways – such as improving workforce training policies, or taking targeted, careful steps to maximize the growth potential of young, small, and local businesses.

The full study can be found here.

Late last week, Pennsylvania legalized poker, blackjack, roulette, and other table games in an effort to fill the state’s budget hole without having to raise taxes.  Casino owners in the state have been waiting with great anticipation for this moment ever since slot machines were legalized in 2004.  Those owners also scored another win in that the new law allows them to make on-site loans to gamblers.  But with a plethora of gambling options already available next door in New Jersey and West Virginia – and more soon to come in Ohio and Maryland – Pennsylvanians shouldn’t be expecting their newly legal table games to bring in much in the way of tourism or new economic activity.

In this light, Governor Rendell’s continued insistence on a state income tax increase is very sensible.  If Pennsylvanians think that gambling will solve all their budget problems – they should think again.

Like their counterparts in most states, legislators in Maryland are expected to face some pretty rough sledding as they attempt to craft a balanced budget for the coming fiscal year.  As a result of the ongoing national recession, revenues have remained well below prior projections and the state now faces a budget shortfall of roughly $2 billion in FY 2011 alone.  Fortunately, as Neil Bergsman of the Maryland Budget and Tax Policy Institute pointed out this past week, legislators who recognize that revenue increases are an important part of a balanced approach to addressing budget deficits have multiple options available to them.  

Two of the most progressive of those options are the preservation of Maryland’s so-called “millionaires’ tax” and the implementation of combined reporting.  As ITEP explains in its latest report, to compensate for the loss of revenue arising from the repeal of a tax on computer services, Maryland enacted a temporary change in its income tax in 2008. That change, the so-called “millionaires’ tax,” created a new top income tax bracket with a rate of 6.25 percent applicable solely to taxable income over $1 million.  As ITEP observes, the change is slated to expire at the end of 2010, but preserving it would generate close to $100 million in annual revenue, while affecting fewer than 5,000 Marylanders each year.

Adopting combined reporting – as Texas, West Virginia, New York, Michigan, Massachusetts, and Wisconsin have all done within the last five years – would have a similarly salutary effect on Maryland’s long-term fiscal outlook. 

As this issue brief from ITEP argues, combined reporting represents the most comprehensive option available to states seeking to halt the erosion of their corporate tax bases and to curtail corporate tax avoidance. 

Indeed, a 2009 study by Maryland’s Office of the Comptroller suggested that the implementation of combined reporting in Maryland could yield as much as $100 million per year in additional revenue, simply by preventing large corporations from using legal and accounting maneuvers to shift income out of state.

Of note, according to the Maryland Gazette, Delegate Roger Manno has already introduced legislation that pairs these two options to help improve pension funding in the state.

If nothing else, 2009 certainly saw its share of movies featuring the undead – New Moon, Zombieland, and Daywalkers all spring to mind.  Now, that trend seems to be infecting state legislative debates, as tax policies or tax policy proposals thought to be dead seem to be springing back to life to terrorize unsuspecting citizenries.  

In Georgia last May, Governor Sonny Perdue rightly vetoed a measure that would have cut in half the taxes businesses and individuals pay on long-term capital gains, costing the state as much as $400 million per year, largely to the benefit of the most affluent of Georgians.  This past week, though, Lieutenant Governor Casey Cagle announced his intention to resurrect the measure in an attempt to spur economic growth.  

The undead are also threatening Vermont.  As part of its FY 2010 budget agreement, the Vermont Legislature enacted a variety of tax changes, including a reduction in the state’s capital gains exclusion from 40 percent of such income to an exclusion capped at $5,000.  While the Legislature was forced to enact such changes over the veto of Governor Jim Douglas, it’s worth noting that, as recently as 2008, the Governor had backed repealing the deduction outright and using the influx of revenue to reduce marginal tax rates, which the legislature did, to some degree, via the FY10 budget agreement.  Yet, in his State of the State address earlier this month, Governor Douglas proposed restoring that 40 percent exclusion to life.

Given the nation’s economic woes, it’s only natural for elected officials to seek ways to boost employment and to foster economic development.  Still, capital gains tax cuts are not the elixir of life for state economies.  As ITEP observed in its examination of state capital gains preferences last year, “extensive economic research demonstrates that there is little connection between lower taxes on capital gains and higher levels of economic growth, in either the short-run or the long-run.”

For more on tax and budget debates in Georgia and Vermont, visit the Georgia Budget and Policy Institute and the Public Assets Institute.

Just last year we brought you news of the misguided proposal that would have eliminated Missouri's personal and corporate income taxes and replace that revenue with an expanded sales tax. The proposal, called by some the "Fair Tax," would create a mega sales tax that would supposedly have a lower rate, but would be levied on everything from rent to child care and even food (which is currently not taxed through the state sales tax).

Last year, the plan passed the House of Representatives, but failed in the Senate, which was a really good thing given ITEP's findings that the legislation would have meant a net tax increase for all income groups except the richest 5 percent. We also found that if the proposal was really going to be revenue-neutral (as proponents claim) while also providing a rebate to Missourians (which they also promise), the new average state and local sales tax rate would have to be 12.5 percent. That's nearly double the 5.11 percent proponents of the bill claim, and it's at least a third more than the sales tax rates of neighboring states.

Despite damning evidence from both ITEP and the Missouri Budget Project, proponents of the "Fair Tax" are at it again. This week both opponents and proponents of the legislation testified in the Missouri Senate, including Dr. Arthur Laffer, a rabid anti-taxer, who reportedly said, "I mean, all taxes are bad." Keep your eyes peeled on this state tax battle, which is likely to receive a lot of attention nationally.

On Monday, Kansas Governor Mark Parkinson gave his State of the State speech, which included a proposal to temporarily increase the state sales tax by 1 percent to help fill a nearly $400 million budget shortfall. Governor Parkinson said, "I can't find $400 million that we can responsibly cut. If you can find responsible cuts, I'm open to looking at them. Let me repeat, as a person who is fiscally responsible, a person that has cut more money out of the Kansan budget than any Kansan in history, there isn't $400 million that we can responsibly cut."

Of course, lawmakers shouldn't forget the very good ideas floated by Secretary of Revenue Joan Wagnon. She has suggested a three-year moratorium on creating new sales tax exemptions and an examination of the effects of current sales tax exemptions. If enacted, her proposals would go a long way to both modernizing the state's tax structure and making it more stable. 

In Washington State there are fewer buttons to press when it comes to revenue raisers (because the state lacks a broad-based income tax), but one option that is available to lawmakers is to increase and modernize the state's sales tax.

This week the Washington Budget and Policy Center released a report on this very topic. It includes a proposal to temporarily increase the sales tax rate, enlarge the base to include consumer services, and include candy, gum, and bakery products in the sales tax base.

Governor Christine Gregoire's budget proposals are frankly disappointing compared to the proposal put forward by the Budget and Policy Center. The Governor's proposal includes offering tax incentives to businesses, closing tax loopholes, service cuts and using federal dollars to help balance the state's budget.

President Obama has proposed a fee of 0.15 percent on the riskier assets held by the roughly 50 financial institutions that have more than $50 billion in holdings. The fee would be in place for at least ten years and the Administration estimates that it would collect around $90 billion over a decade. If the $700 billion distributed through the financial bailout (the Troubled Asset Relief Program, or TARP) is not entirely paid back by that time, then the fee would continue to be in effect for additional years.

The proposal might kill a whole flock of birds with one stone. Excessive risk-taking by the financial industry as a whole lead to a systemic meltdown. As a result, the banking system as a whole was failing, meaning businesses were unable to obtain credit, making it impossible for them to function. The bailout propped the banking system back up to avoid a deeper recession, but the distasteful side-effect is that the largest banks know full well that they are now considered "too big to fail."

So now the biggest banks have little incentive to avoid the sort of risk-taking that lead to the collapse. The implicit government guarantee gives them a special advantage that smaller banks don't have. The proposed fee would seem to address these problems at least to some extent, by reducing the incentive for risk-taking as well as the advantage that the largest banks have over smaller banks.

The bailout legislation (which was signed into law by George W. Bush, in case anyone forgot) includes a provision requiring the President to offer a proposal by 2013 for recouping any losses from the program.

Of course, Washington would not be Washington if special interests weren't ready to oppose any new tax or regulation. Jamie Dimon, chief executive of J.P. Morgan Chase said, "Using tax policy to punish people is a bad idea." He added, "All businesses tend to pass their costs on to customers."

Would banks really pass this fee on to their customers? Wouldn't they be constrained by the fact that customers could just go to a smaller bank that is not subject to the fee? And even if that happened, the worst imaginable result would be that the financial industry would be less dominated by institutions that are "too big to fail." What would be so terrible about that?

More to the point, the fee looks more like a regulation than a punishment. From this perspective, the only problem is that it's temporary. Why not permanently charge a fee on risk-taking by the large institutions that now seem to have an implicit guarantee that they'll be bailed out by the government if need be? From this perspective, it also becomes clear that the haggling over which banks have paid back their TARP funds is largely beside the point. The entire industry traded in explosives that blew up the economy when they stopped being careful.  

At the end of the day, it's hard to imagine that this fee would hurt banks at all. As one writer for the Wall Street Journal put it, "Paying out $10 billion a year is no sweat for an industry that, according to Goldman Sachs, made $250 billion in earnings before taxes and loan-loss provisions last year."

With all the talk about federal budget deficits and families hit hard by unemployment during this recession, you would think the last thing Congress would want is a tax cut for millionaires. So, it seemed a sure bet that Congress would prevent a massive one that was scheduled under the Bush administration from taking effect this year.

The 2001 tax cut law enacted by President George W. Bush and his allies in Congress gradually shrank the estate tax each year until eliminating it altogether in 2010. Like almost all the Bush tax cuts, this change expires at the end of 2010, meaning the estate tax will come back at pre-Bush levels in 2011 if Congress does nothing. But allowing the estate tax to disappear even for a year sets a terrible precedent.

Only a tiny fraction of families, those with gigantic fortunes, are impacted by the estate tax. They have benefited more than any other Americans from the educated workforce, infrastructure and stability that government provides and 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.

Democratic leaders always supported the estate tax and obviously had plenty of time to plan to repeal (or at least modify) Bush's estate tax break. The House did exactly that late last year when they passed a bill that would make permanent the estate tax rules in effect in 2009 (which is still a big break for families with big estates, compared to the pre-Bush rules).

Pathetically, the Senate failed to act.

That's right. There is no federal estate tax in effect right now. Some pundits have wondered if there will be an uptick this year in unexplained deaths of elderly wealthy people coinciding with visits from their children. We think an early death is more likely for the public services that will have to be cut to make up the lost revenue if repeal (or any proposal close to repeal) is made permanent. 

Call Congress Now!

United for a Fair Economy is providing a toll-free number and information that people can use to call their members of Congress and urge them to reinstate the estate tax. Every member of the House and Senate -- particularly those who claim to care about budget deficits -- needs to hear this message. Click here for information from UFE.

Southwest neighbors Arizona and New Mexico may share a common border, but news reports from each state this week make them look worlds apart.  

In Arizona, after refusing for months to support Governor Jan Brewer’s call for a temporary increase in the state’s sales tax, leading Republicans have put forward a tax plan of their own.  Unfortunately, rather than raising the revenue necessary to address the state’s staggering budget deficit of $4.4 billion (over the next 18 months), their plan would dramatically reduce personal and corporate income taxes, as well as the property taxes paid by businesses.

The backers of the plan claim that it would not worsen the state’s fiscal outlook, as the reductions would be phased in over a number of years. But that is precisely the approach the state followed over the course of the 1990s – a course of action that has put the state in its current predicament.  Moreover, while the plan apparently would not take effect until July 2011, the Joint Legislative Budget Committee has indicated for quite a while that Arizona's revenues are unlikely to return to their pre-recession levels before that time.

Meanwhile, in New Mexico, Governor Bill Richardson recommended raising taxes by $200 million (on a temporary basis) to help close the state's budget gap.  However, he appears to have left the details of which taxes to increase to the legislature and the Budget Balancing Task Force he appointed late last year. 

While the Task Force has an array of options before it, the best approach – the repeal of New Mexico’s tax break for capital gains income – has already been ruled out by the Governor. (This is no surprise, since Richardson was the break’s chief advocate when it was put into law in 2003.) Still, as ITEP found in its March 2009 report, “A Capital Idea,” capital gains tax breaks “deprive states of millions of dollars in needed funds, benefit almost exclusively the very wealthiest members of society, and fail to promote economic growth in the manner their proponents claim.”

For more on the fiscal crises in Arizona and New Mexico, visit Children’s Action Alliance and New Mexico Voices for Children.

Many states across the country have stood idly by while inflation and improving vehicle fuel efficiency have cut into their gas tax revenues, reducing their ability to build and maintain an adequate transportation network.  Fortunately, new developments in at least four states demonstrate an increasing level of interest in addressing the transportation problem head-on.

In Arkansas this week, a state panel created by the legislature endorsed increasing taxes on motor fuels, and taking steps to ensure that such taxes can provide a sustainable source of revenue over time.  Specifically, the panel expressed an interest in linking the tax rate to the annual “Construction Cost Index,” a measure of the inflation in construction commodity prices.  As the committee chairman explained, this method would provide a revenue stream better suited to helping the state maintain a consistent level of purchasing power over time. 

Wisely, the proposal would also ensure that fuel tax rates would not increase by more than 2 cents per gallon in any given year.  Such a limitation should help to prevent the types of political outcries that have surfaced in other states when indexed gas taxes have increased by large amounts in a single year.

In Texas, attention has begun to turn toward a vehicle-miles-traveled (VMT) tax which, as its name suggests, would tax drivers based on the number of miles they travel.  Such a tax is similar to a gas tax in that it makes the users of roadways pay for their continued maintenance.  VMT’s, however, are able to avoid some of the most serious long-run revenue problems associated with gas taxes, since their yield is not eroded as individuals switch to more fuel efficient vehicles.  But Texas Senator John Carona hit the nail on the head in his description of the VMT as an idea “far into the future and way ahead of its time.”  While states like Texas should begin studying this option now, they should also follow Carona’s lead in the meantime by embracing an increase in motor fuel tax rates to address the funding problem already at their doorsteps.

Nebraska legislators have also begun discussing the need for additional transportation dollars.  In a report outlining the testimony given at eight hearings conducted last fall by the Legislature’s Transportation and Telecommunications Committee, 31 separate options for raising transportation revenues are examined.  Among those options are an increase in the gas tax and indexing the tax either to inflation or directly to the costs associated with the continued maintenance and construction of the state’s transportation network.  As the report explains, “there was nearly unanimous support from all testifiers for some type of tax or fee increase to support the highway system.”  Committee Chairwoman and State Senator Deb Fischer expects to have a major highway-funding bill ready for the 2011 legislative session.

Finally, legislators in Kansas this week also pushed forward with proposals to enhance the sustainability and adequacy of their transportation revenue streams.  A joint House-Senate transportation committee advanced two options for raising motor fuel tax collections: (1) applying the state sales tax to fuel purchases and slightly lowering the ordinary fuel tax rate, and (2) raising the fuel tax rate and indexing it to inflation.  While either proposal would be a great improvement to Kansas' stagnant, flat cents-per-gallon gas tax, the inflation-indexed approach would provide a somewhat more predictable revenue stream since its yield would not be contingent upon the (often volatile) price of gasoline.

In addition to these four states, we have also highlighted stories out of South Dakota and Mississippi during the latter half of 2009 that indicated a similar interest in doing something constructive to enhance current transportation funding streams.  And more beneficial debate has occurred in a number of states where progressives have insisted on offsetting the regressive effects of transportation-related tax hikes by enhancing low-income refundable credits.

Virginia is one of the major exceptions to the trend toward a more rational transportation funding debate.  As the Washington Post explained in an editorial this week, “[Governor-elect Robert McDonnell’s] transportation plan, which ruled out new taxes, relied on made-up numbers and wishful thinking to arrive at its promise of new funding.”  Rather than acknowledging the futility of attempting to fund a 21st century transportation infrastructure with a gasoline tax that hasn’t been altered since 1987, McDonnell worked to repeatedly block attempts to raise the gas tax during his time in the state’s legislature. 

Following the leads of policymakers in Arkansas, Texas, Nebraska, Kansas, South Dakota, and Mississippi and keeping higher taxes on the table is absolutely essential to the construction and maintenance of an adequate transportation system.  As the Washington Post cynically suggests, new revenue is so desperately needed that McDonnell should even be forgiven if he has to rebrand new taxes as “user fees” in order to get around his irresponsible campaign promise not to raise taxes.

In at least three states, lawmakers are ignoring fiscal reality and advocating for cuts in one of the most progressive taxes levied by states -- the corporate income tax. The general consensus among experts is that most states aren't out of the woods yet when it comes to economic recovery. That means their budget gaps are going to be a problem for some time. Yet, legislators in Florida, Idaho, and Iowa are pushing the same old proposals to reduce state revenue in order to benefit corporations.

For example, Florida Governor and U.S. Senate hopeful Charlie Crist is crafting a plan that would cut the state's corporate income tax. Details remain sketchy, but he is quoted as saying that he'd "love" to reduce the tax "because I think it would help job stimulation."

Actually, any business person will tell you that he or she wants to hire workers whenever there is demand for their products. If no one is ready to buy orange juice, Tropicana is not going to create jobs regardless how many tax cuts Governor Crist throws at them. Further, there is ample evidence that corporate taxes aren't a major factor in business location decisions because those decisions are affected by numerous other factors. (For instance, Tropicana will not try growing oranges in Alaska just because Alaska offers a tax break.)

The corporate tax cut madness has popped up in other parts of the country. Idaho Representative Marv Hagedorn is proposing cutting both the personal and corporate income tax rates by a third. However, it appears that more sensible minds will prevail. The House Revenue and Tax Commmittee chairman calls the proposal "more political statements than they are reality. I just think it's a tough sell to say we're going to reduce somebody's taxes -- I don't care who it is -- when we're cutting programs left and right."

Cutting taxes is also a hot topic in the Republican primary for Iowa Governor, as the candidates attempt to outdo each other with little thought to the impact that their proposals will actually have on the services Iowans depend on. Two of the Republican candidates are reportedly open to the idea of completely eliminating the state's corporate income tax.