On Monday, the White House released its health care reform proposal, bringing together the elements of the health bills already approved by the House and Senate. The proposal is the result of months of negotiations between Democratic leaders in the House and Senate and is an attempt by the President to nudge the chambers along towards agreement.

One of the disagreements between the House and Senate has been over how to finance the reform. Both chambers would rely partly on savings from within existing government health programs and partly on new revenue measures. The largest revenue-raiser in the House version is a high-income surcharge on millionaires, while the largest revenue-raiser in the Senate version is an excise tax of 40 percent on insurance companies for each high-cost benefits plan they provide.

Analyses from CTJ concluded that the House surcharge is very progressive and, despite claims to the contrary, would have no noticeable impact on small businesses. The Senate's excise tax, on the other hand, would impose costs that would be passed on to many middle-income families, and would make the overall tax system less progressive than it is now.

Before the Senate approved its bill on Christmas Eve, the excise tax was softened somewhat, and another revenue-raiser was added: an increase in the Medicare tax by 0.9 percent for wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. While this made the bill more progressive overall, there were still rumblings, particularly in the House, about the potential impact of the excise tax for high-cost health insurance plans.

President Obama's Proposal

The President's proposal has resolved this issue to a significant degree by further softening the excise tax for high-cost health insurance and adding another element to the Medicare tax. The Medicare tax would now apply to investment income, which is currently exempt.

In other words, the Medicare tax would be expanded in two ways. First, an additional 0.9 percent would apply to wages in excess of $200,000 for unmarried taxpayers and $250,000 for married couples. Second, the existing 2.9 percent Medicare tax would apply to investment income for the first time (but only for taxpayers with adjusted gross income above $200,000/$250,000).

Citizens for Tax Justice is currently working to produce estimates of the impact of this change, but given that only the richest two percent have incomes over the $200,000/$250,000 threshold, this is obviously a tax increase that does not affect low- or middle-income people at all.

Why the Medicare Tax Needs to Be Reformed

Starting in May of last year, Citizens for Tax Justice worked 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. Early on, CTJ pointed out that while lawmakers scrambled to find revenue to finance health care reform, they were ignoring a huge hole in the one large tax we already have to finance health care.

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, or others 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. Under the President's proposal, everyone will contribute towards the health of the nation, and the tax system will be fairer overall.

Senate Republicans blocked action on aid for millions of unemployed Americans this week, and threatened to continue to do so unless Congress acts on a completely unrelated matter: the federal tax on the estates of millionaires.

The Need for Help for the Unemployed

Congress has an opportunity to help families hardest hit by the recession while at the same time increasing consumer demand, which in turn will increase the number of businesses that are hiring. The Congressional Budget Office has found that extending unemployment benefits is one of the most effective ways to increase consumer demand (i.e., create jobs), making it attractive from the standpoint of economic policy as well as compassion for struggling Americans. (There are 6 job-seekers for every open position right now.)

By the end of February, 1.1 million people are scheduled to lose their UI benefits, and another 2.7 million are scheduled to lose them by the end of March. Senate Democrats hoped to move by unanimous consent to extend UI benefits and COBRA health care benefits for out-of-work Americans for 30 days, to tide them over until a longer-term extension can make its way through Congress.

Help for the Unemployed Held Hostage for Tax Cuts for Millionaires

Senate Republicans denied the unanimous consent request to pass an extension of UI and COBRA. The objection was raised by Senator Jim Bunning (R-KY) over the source of funding. But the measure is apparently also being held hostage by Senators wanting to give multi-millionaires a break on the estate tax.

The tax law passed under President Bush in 2001 gradually repealed the estate tax over several years until making it completely disappear this year. But, since the Bush tax cuts expire at the end of 2010, the estate tax will return in 2011 in its pre-Bush form (with the tax exempting the first $1 million in assets, per spouse, and a top estate tax rate of 55 percent).

House Democrats decided last year that a million dollars just isn't what it used to be, and passed a bill that would permanently increase the exemption and lower the rate, but not let the estate tax disappear in 2010. (Technically, they passed a permanent extension of the estate tax rules in effect in 2009, with a $3.5 million per-spouse exemption and a top rate of 45 percent.) But the Senate failed to act on the measure.
 
Under the proposal approved by the House, fewer than one percent of deaths would result in estate tax liability. Apparently that's too many for Senators Jon Kyl (R-AZ) and Senator Chuck Grassley (R-Iowa), who have wanted to repeal the estate tax for years and now hope that they can at least reduce it much further than the Democrats want. They have indicated that, until a deal is reached on the estate tax, they will block passage of the UI and COBRA extension. On Feb 24, Kyl, a long-time leader against the estate tax, said that Republicans will block consideration of the legislation unless they get "a path forward fairly soon" to voting on a measure to permanently weaken the estate tax.

Bizarrely, Senator Bunning blocked the unanimous consent motion for the $10.3 billion, 30-day UI and COBRA extension, saying he wanted the costs somehow offset, even while his Republican colleagues press for an estate tax measure that will cost hundreds of billions of dollars, with no hope of being offset.

Kyl and Grassley tried to cut a deal earlier this month with Senate Finance Committee Chairman Max Baucus (D-MT) to get a fast track for the estate tax vote in exchange for votes on a jobs bill, but Majority Leader Harry Reid (D-NV) rejected the package and put together a jobs bill of his own. That pared-down bill passed the Senate on Wednesday, including $16 billion in tax cuts for employers who hire new workers.
 
Another wrinkle is that Grassley and Kyl have reportedly been in discussions with Senator Maria Cantwell (D-WA) who has proposed to allow multi-millionaires to prepay their estate tax at a lower rate. This is clearly a accounting gimmick designed to mask the true cost of the estate tax change. It would bring some money into the Treasury during the 10-year budget window that Congress focuses on, but lose huge amounts of revenue in years after that. United for a Fair Economy has objected to the proposal in a letter to Senator Cantwell. Washington residents are urged to sign on to the letter.

Coalition Calls for More Robust Estate Tax than Approved by House Democrats

Congress needs to move in a different direction on the estate tax. Americans for a Fair Estate Tax, a coalition of organizations including Citizens for Tax Justice, has issued a call for an estate tax that exempts no more than $2 million in assets per spouse, and taxes the taxable portion of estates at a rate of at least 45 percent, with an additional 10 percent on assets in excess of $10 million. Only about 0.7 percent of deaths resulted in estate tax liability in recent years when the per-spouse exemption was set at $2 million.

Cutting the estate tax any more than this — particularly when Congress seems to have so much trouble helping the Americans who are struggling the most — would prove that Congress really does have its priorities completely backwards.

Washington Governor Chris Gregoire signed a bill this Wednesday that temporarily suspends the state’s supermajority requirement for raising taxes.  By preventing the minority Republicans in either chamber from blocking budget proposals that rely on both revenue increases and spending cuts, this move almost certainly paves the way for what will be a more balanced approach to filling the state’s budget gap. 

The House, Senate, and Governor have all released budget proposals in recent days that would do precisely that, though each could go much farther in the degree to which it relies on additional revenues.  The Senate proposal, for example, relies on new revenues to fill just 10% of the state’s budget gap, while the Governor’s proposal would use revenues to fill barely 7%.

The Senate proposal, released on Tuesday, would eliminate or curtail a number of special tax breaks, raise the cigarette tax, and temporarily hike the sales tax by 0.3 percentage points.  In order to offset the inevitably regressive effects of the sales and cigarette tax hikes, the proposal would finally provide the funding needed to activate the state’s EITC (called the “Working Families Tax Rebate”), which was originally enacted in 2008.

Like the Senate proposal, the Governor’s proposal also identifies an array of tax breaks for elimination or reduction, though it targets fewer breaks than the Senate version.  The Governor would also increase the cigarette tax, raise the hazardous substance tax, and generate additional revenue from taxing bottled water, carbonated beverages, candy, and gum.

The House is expected to release the details of its budget proposal today.  That proposal was not yet available at the time of this writing, but it is expected to include both spending cuts and tax increases.  For more details on the House proposal once it’s released, be sure to check the Washington State Budget and Policy Center’s blog, “Schmudget.”

As noted above, the likelihood of enacting the revenue increases contained in these plans has been greatly improved as a result of Washington lawmakers’ decision to temporarily suspend the portion of Initiative 960 that requires a supermajority vote in both houses in order to raise taxes.  I-960 was passed by voters in 2007, long before they could possibly have realized how dire the budgetary situation would be just a few years later as a result of the national recession.  Notably, the suspension of I-960 has opened up a great opportunity not only for Washington to tackle its budget shortfall in a more balanced fashion, but also to close a number of tax loopholes and special interest tax breaks that have been unduly protected by the supermajority requirement against “tax increases” over the past few years.

For more on the Washington State debates as they develop, you can follow the work being done at the Washington State Budget and Policy Center, and the Economic Opportunity Institute.  Notably, both organizations have released additional options for raising revenue (here and here) that could be used to further mitigate some of the deep cuts still being contemplated by lawmakers.

Illinois Governor Pat Quinn reminded Illinoisans this week of the need for a tax increase by previewing a drastically reduced spending plan that would cut deeply into education, public safety, and human services while still failing to fill the state’s budget gap.  On Wednesday, Governor Quinn made clear that he plans to again push for a state income tax increase, though he has promised to make some refinements to the version he advocated last year.

During the FY10 budget debates last year, the Governor attempted to secure support for a progressive tax hike that would raise the state’s flat income tax rate while also increasing the personal exemption.  This plan represented a fair and practical solution, given the state’s constitutional restrictions on levying a graduated rate income tax.  While the Senate did pass a bill that both raised the state’s income tax and expanded the sales tax base, the push for tax reform died in the Illinois House where lawmakers insisted on using spending cuts and borrowing to ease the state’s budget shortfall.

But the lack of sustainable tax increases last year has only made Illinois’ current budget situation that much worse.  Illinois now has what is perhaps the worst fiscal situation of any state in the entire country.  As Ralph Martire of the Center for Tax and Budget Accountability put it earlier this week, "Any elected official or candidate who says you can solve this without a tax increase is either incredibly math-impaired or intentionally deceiving voters."

Given the dire situation of the Illinois budget, even the Civic Federation, a traditionally anti-tax, business-oriented group, has recently come to acknowledge the absolute necessity of raising the state’s individual and corporate income taxes.  While the group still considers such increases “distasteful,” it has finally realized, as have many Illinoisans, that the spending cuts alone cannot fix the state’s problems.

For more on tax reform in Illinois, be sure to read this recent ITEP report examining both short- and long-term strategies for improving the Illinois tax system.

Citizens for Tax Justice has a new report on the "flat tax" proposal introduced in each session of Congress since 1995 by Senator Arlen Specter of Pennsylvania. This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

The Specter plan is based on the “Flat Tax” first proposed in a 1983 book by Robert Hall and Alvin Rabushka. The Flat-Tax authors wrote that it “will be a tremendous boon to the economic elite” and also admitted that “it is an obvious mathematical law that lower taxes on the successful will have to be made up by higher taxes on average people.”

Our analysis of the Specter plan confirms this is true. We find that Senator Specter’s flat tax will result in:

- Enormous tax cuts for the richest five percent of taxpayers, including an average tax cut of $209,562 for the richest one percent in 2010.

- Tax hikes for all other income groups. The bottom 95 percent of taxpayers would pay an average of $2,887 more in federal taxes in 2010.

- Low-income Americans would lose the refundable credits that they receive under the current income tax.

- The form of income that mostly flows to the wealthy — investment income — would be exempt from the personal income component of the flat tax, while all compensation for work, including wages and even employer-provided health care benefits, would be taxed.

- There would be little simplification in taxes for the majority of Americans.

Read the report.

New data from the IRS show that in 2007 the richest 400 taxpayers in America increased their incomes by 31 percent over the previous year, increased their share of total income in America, and paid an even lower effective tax rate than ever before.

Writing for Tax Analysts, David Cay Johnston finds that the average income of the richest 400 grew from $263.3 million in 2006 to $344.8 million in 2007. Meanwhile, their effective income tax rate fell from 17.17 percent in 2006 to 16.62 percent in 2007.

As usual, a major cause of the low effective tax rates is the preferential rate for capital gains and stock dividends, which are taxed at a top rate of 15 percent instead of the top rate of 35 percent that applies to other income for the very rich. Capital gains made up 66.3 percent of income for the top 400 in 2007, up from 62.8 percent in 2006.

The data seem to highlight the need to allow the Bush tax cuts, which cut the top rate for capital gains and stock dividends to 15 percent, to expire as scheduled at the end of 2010.

The report released last week by Citizens for Tax Justice on the President's budget argued that Congress should at least allow the Bush tax cuts to expire for the rich (which Obama defines as married couples with incomes above $250,000 and unmarrieds with income above $200,000) and should enact at least as many revenue-raisers as the President proposes.

Minnesota Governor Tim Pawlenty released the details of his budget proposal this week.  If enacted, it would cut both health care and education funding by hundreds of millions of dollars, while actually reducing taxes for corporations and other businesses.

Among the tax cuts being pursued by Gov. Pawlenty are a 20% cut in corporate income taxes, a 20% tax exclusion for small businesses, a new investment tax credit, an expansion of the research tax credit, capital gains tax breaks for small business investments, and a slew of other tax incentives.  As the Minnesota Budget Project (MBP) has pointed out, the precise costs of these tax breaks are still unclear, and are likely to grow significantly over time.  The Governor has framed his proposal as a type of job-growth plan, though the massive cuts in state services needed to finance his unbalanced approach will inevitably result in additional layoffs.  

For more detailed analyses of the Governor’s proposal, be sure to follow the good work being done at the MBP’s blog: Minnesota Budget Bites.

State budget woes appear to be spurring an increasing amount of interest in re-examining state tax breaks.  The Governors of both Michigan and Idaho have taken steps to ramp up the scrutiny directed at their state’s tax breaks, while a new report out of Oklahoma and an editorial highlighting legislation in Georgia this week have urged similar actions.

In Michigan, the Detroit Free Press urged the adoption of Governor Granholm’s proposal to thoroughly analyze the merits of every tax break, and to saddle most breaks with sunset provisions that would force lawmakers to either debate and renew these breaks, or to let them expire.  This proposal would help to remedy the lack of scrutiny given to tax breaks because of their exclusion from the appropriations process.  Notably, the proposal’s use of sunsets as a mechanism for forcing review seems to resemble a law enacted in Oregon just last year.

In Georgia, the need for additional scrutiny of tax breaks is even more desperate.  Because the state lacks a tax expenditure report, Georgia lawmakers are not even aware of the full range and cost of special breaks that their tax system provides.  SB 206, which was endorsed by a Macon Telegraph editorial this week, would remedy this problem by finally requiring the creation of such a report.  The editorial rightly points out that the bill could be strengthened by requiring an analysis of each tax break’s effectiveness, but at this point, even simply producing a list of tax breaks and their costs would be a major step forward.  The Georgia Budget and Policy Institute has been pushing for the creation of such a report for many years.

Idaho governor Butch Otter has also shown some tentative interest in figuring out whether his state’s tax breaks are worth their cost.  While Governor Otter continues to hold out hope that the state’s revenues will rebound soon, he also recently directed the state’s Tax Commission to study sales tax exemptions in the event that closing some of those exemptions becomes necessary to fill the state’s budget gap next year.  If done carefully, the studies produced by the Tax Commission could provide a wealth of information on breaks that have so far received a relatively small amount of scrutiny.
    
The Oklahoma Policy Institute has also added to the progress being made on this issue with a new report outlining what should be done to scrutinize tax breaks in a systematic fashion.  Their report, titled “Let There Be Light: Making Oklahoma’s Tax Expenditures More Transparent and Accountable,” provides twelve specific recommendations for realizing this vision.  Among those recommendations are: improving the state’s existing tax expenditure report, sunsetting all tax incentives, requiring the extension of a sunsetting incentive to undergo a “performance review,” and developing a unified economic development budget.

A new report from Citizens for Tax Justice explores the tax proposals included in the federal budget outline that President Obama submitted to Congress on February 1. Like the budget he submitted last year, it is a vast improvement over the policies of the Bush years and continues to outline a progressive reform agenda.

But, also similar to last year, the President’s budget could be greatly improved with more aggressive policies to raise revenue. Over the coming decade, the President proposes to cut taxes by $3.5 trillion. We include in this figure the cost of extending most of the Bush tax cuts and relief from the Alternative Minimum Tax (AMT) as well as additional tax cuts that President Obama proposes.

His budget would offset a portion of this cost with provisions that would raise $760 billion over a decade by limiting the benefits of itemized deductions for the wealthy, reforming the U.S. international tax system and enacting other reforms and loophole-closing measures.

The report concludes that the federal government should collect at least as much revenue as the President proposes in order to avoid larger budget deficits. There are two bare minimum requirements for Congress to achieve this. First, Congress must not extend any more of the Bush tax cuts than President Obama proposes to extend. Second, Congress must raise at least as much revenue as President Obama has proposed ($760 billion over ten years) through loophole-closers and new revenue measures.

Read the full report.

Late last year, CTJ published a report examining the lack of scrutiny directed toward tax expenditures, and the repeated promises to address this problem made by past Administrations.  Unfortunately, the President’s most recent budget proposal shows no signs of progress on this issue.  As CTJ points out in an op-ed in today’s Sacramento Bee: “for the second year in a row, the Obama administration has chosen [in its budget] to simply copy-and-paste the Bush administration’s language on this issue, complete with all the same promises about what will be done at some point over the ‘next few years.’”

Read the op-ed.

The New York Fiscal Policy Institute (FPI) released its twentieth annual budget briefing last week, including, among other things, a list of criticisms of Governor Paterson’s proposed property tax circuit breaker program.  This list serves as a useful checklist for good circuit breaker policy across the country.

Among the FPI’s criticisms of the Governor’s plan are that it:

- Excludes county and municipal property taxes, instead applying only to school property taxes;
- Attempts to provide some relief to a large group of taxpayers, rather than targeting meaningful benefits more toward households struggling to make ends meet;
- Excludes renters;
- Utilizes different income brackets for different regions of the state, thereby creating complications and inequities;
- Reduces the size of the tax credit for taxpayers in districts where the school tax levy has grown faster than inflation, while increasing it for those taxpayers whose levy has grown more slowly.

When property values inevitably rebound from the recent bursting of the housing bubble, property taxes will almost certainly become a hot button issue in the states once again.  Enacting a circuit breaker (or strengthening an existing one) is the best possible route for states to take when this occurs.  For more on circuit breakers, be sure to read ITEP’s policy brief.

Last week saw the conclusion to a bruising Democratic primary in the campaign for Illinois Governor. Both Democratic candidates, incumbent Governor Pat Quinn and Comptroller Dan Hynes, had plans for shoring up the state's long- and short-term fiscal crisis. Governor Quinn put forward a plan to raise the existing income tax rate of 3 percent to 4.5 percent and to increase the value of personal and dependent exemptions from $2,000 to $6,000. His plan would generate roughly $3 billion per year. Comptroller Hynes proposed a rate structure that would leave the present 3 percent rate in place for all taxpayers with incomes below $200,000 but that would impose rates ranging from 3.5 percent to 7.5 percent on incomes above that amount, with the highest rate applying solely to income in excess of $1 million.

A recent report from ITEP describes both candidates' income tax reform proposals and argues that a combination of the two plans would be ideal. Governor Quinn narrowly beat Hynes in the primary and, assuming he wins the election, there is real hope that fundamental tax reform in Illinois is not just possible, but likely.

Quinn and Hynes are not alone in their commitment to progressive tax policy. A bipartisan task force on Illinois property taxes recently recommended several policy options that could be combined with proposals that Quinn supports. The task force's recent report suggests rebalancing the state's revenue sources, consolidating government services and functions, and enhancing the circuit breaker program.

Mississippi's State Tax Commission recently reported that revenue collections for the month of January fell by 12.2% (the worst showing of the current fiscal year). That made January the 17th consecutive month of lower-than-expected revenues. In response to these figures, Governor Haley Barbour said, "I will soon be forced to look at whether additional cuts will be necessary in the current fiscal year beyond the $437 million in cuts already made."

Instead of looking to rely solely on cuts to vital services, Mississippi lawmakers should strike a balance between budget cuts and new revenue. In a recent Clarion Ledger column citing ITEP estimates,  Ed Sivak of the Mississippi Economic Policy Center makes the point that there are many ways that Mississippi could ease its fiscal shortfall by increasing taxes, such as a sales tax base expansion or modernizing the income tax.

At some point, Mississippi lawmakers must acknowledge that it's simply impossible to slash their way out of the state's fiscal crisis. They need to seriously consider the options Sivak discusses.