This week, the United States Congress and President Obama gave us another reason to be proud that we are Americans. On Tuesday, the President signed into law a major health care overhaul. Yesterday, the House and Senate both approved a second bill that completes the job.

Events like this — the creation of Social Security, the passage of the Civil Rights Act, the first manned visit to the moon, comprehensive health care reform — don't happen very often. We feel privileged and awed to belong to a generation that has witnessed this sort of change.

There is work ahead to ensure that the health care reform is implemented properly and improved upon. And the reform itself must be protected from opponents who already call for its repeal.

But in the years to come, we will look back and remember this as the time when our health care system stopped being a black spot on the nation's conscience and started to grow into another reason to love this country. 

This legislation to extend health insurance to 32 million Americans and protect Americans who already have insurance from the industry's abuses was nearly thwarted by several disputes over issues both real and imaginary, and some of these disputes were over taxes.
 
For thirty years, Citizens for Tax Justice has argued that the Americans who benefit the most from the educated workforce, infrastructure, stability and other public goods provided by government are those Americans who have made fortunes in this dynamic country. It is entirely reasonable that the richest Americans pay taxes at higher effective rates, particularly to finance concerted action to resolve the problems that threaten to unravel our society.

Over the last several years, lawmakers have moved dangerously far from that ideal. The tax cuts enacted during the previous administration went disproportionately to the wealthy investor class. The massive bailout for financial institutions enacted under the previous administration only seemed to shovel more benefits to the same wealthy investor class.

When it came time for Congress to consider how to finance health care reform, progressives demanded that the wealthy pay their fair share. Congress answered that call by reforming the Medicare tax, the one significant tax that we already have to pay for health care. It will be transformed from a regressive tax to a progressive tax that no longer exempts the income of wealthy investors.

The new health care legislation has many imperfections, and yet it undeniably is a vast improvement over the status quo. Tax policy is not the centerpiece of this reform, but disputes over tax policy could have sunk it altogether.

We applaud the House and Senate for working through these disputes and putting the public interest above special interests.

We hope that the lawmakers who supported reform like the way success feels. We hope that members of Congress realize that they're good at making history, and they should do it more often.

Read about How Health Care Was Reformed (and Financed Partly with a Progressive Tax)

The House and Senate yesterday approved the final piece of the historic health care reform that will extend health insurance to 32 million Americans currently uninsured and prevent health insurers from discriminating against people with pre-existing conditions and capping benefits when people are sick. The legislation will also make it easier for small businesses to provide affordable health coverage without locking workers into employer-provided plans that they will lose if they switch jobs.

The bill passed by both chambers yesterday was the smaller "corrections" bill that made several fixes to the larger bill that the House approved on Sunday and that the Senate approved on Christmas Eve. The President signed the larger bill into law on Tuesday.

The corrections bill increased the number of Americans receiving subsidies to make health care affordable and removed some "sweetheart" deals that individual Senators demanded in the larger bill and later came to regret. The corrections bill also scaled back an excise tax on high-cost employer-provided health insurance while adding an expansion of the Medicare tax.

The debate over how to finance health care reform went through several tumultuous stages over the past year. From the start, lawmakers wanted to finance the reform with savings from within the health care system as much as possible, but it was clear that other revenue sources would be needed.This was one of the key sticking points for many lawmakers.

Progressive Action on Revenue for Health Care Reform

In May of last year, CTJ first presented some ideas about how Congress could finance health care reform in a progressive way. All changes made to the tax code in the previous eight years under President George W. Bush had disproportionately benefited the wealthiest Americans. The bailout for the financial industry seemed to reward Wall Street for its mismanagement, at the expense of ordinary taxpayers. It was time for the wealthy investor class to pay their fair share to help fix America's broken health care system.

We worked for several months with a broad coalition of policy advocates, think-tanks, faith-based groups and labor unions to bring progressive financing options 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.

One of the progressive revenue measures that we championed would reform the Medicare tax so that it is more progressive and no longer exempts investment income.

CTJ worked to significantly modify another revenue measure, the excise tax on high-cost employer-provided health insurance plans. We pointed out that this tax, in the form originally proposed, would affect more middle-income taxpayers than most people realized and would actually make the tax system less progressive overall.

Eventually, the excise tax on high-cost employer-provided plans was scaled back to a reasonable level and Congress adopted the proposal to reform the Medicare tax. But the path to this success was not an easy one.

Attempts at Bipartisanship

It's difficult to remember this now, but a year ago lawmakers and their aides, particularly in the Senate, seemed to honestly believe that a bipartisan agreement on health care reform was possible if enough compromises were made. Democrats were negotiating with Republicans. And not just the Republicans that are often considered "moderates" like Olympia Snowe (R-ME) and Chuck Grassley (R-IA), the ranking Republican on the Senate Finance Committee. Democrats even negotiated with Mike Enzi (R-WY), an unabashed conservative and the ranking Republican on another relevant committee.

It did not work. After being heavily involved in health care negotiations, Senator Grassley abruptly changed his tune. He held up a chart on the Senate floor one day with a children's book drawing of a dragon to illustrate the "Debt and Deficit Dragon," and then held up another chart illustrating a character he called "Sur Taxalot." He then rambled on about how "the surtax [included in the House health bill] is a large, heavy, painful weapon, and lethal to America's job engine, the goose that laid the golden egg," and said that Sur Taxalot "does nothing to slow the dragon's exponential growth."

Then Senator Enzi, during a committee markup, offered countless amendments that essentially contradicted the most fundamental goals of reform.

Meanwhile, the grassroots base of the conservative movement made it clear that they could not be appeased by anything other than a continuation of the status quo. Right-wing organizations such as "FreedomWorks," "Americans for Prosperity," and "Conservatives for Patients Rights," organized a campaign to send hecklers to town hall meetings held by any member of Congress who might possibly vote in favor of any health care reform bill.

The anti-reform protesters, whose main goal seemed to be shutting down any public discussion on the topic of reform, even admitted in some cases that they were not constituents of the lawmakers they were heckling. In other cases, those town hall protesters who claimed to be merely “just a mom from a few blocks away” and “not affiliated with any political party” turned out to be Republican party officials.

Congress Moves Forward and then Stops

By the fall, the battle lines were clearly drawn. On September 9, the President made a special address to Congress and told lawmakers that his health care objectives could be accomplished for less money than was spent on the Iraq and Afghanistan wars and less money than was lost due to the Bush tax cuts for the wealthy.

A day earlier, CTJ had released figures showing that the Bush tax cuts actually cost two and a half times as much as the House Democrats' health care plan. The figures showed that the President was right. The Bush tax cuts for the richest 5 percent alone cost more than the $900 billion price tag that President Obama put on health reform.

In early November, the House approved a health reform bill that included a surcharge on adjusted gross income (AGI) above $1 million for married couples and AGI over $500,000 for unmarried taxpayers. Only one Republican in the House voted for the bill.

On Christmas Eve, the Senate passed its own health care bill, and this one included the version of the excise tax on high-cost employer-provided health plans that CTJ found problematic. In addition to having less progressive revenue provisions, the Senate bill was also less bold in terms of how it reformed health care. For example, unlike the House bill, the Senate bill did not have a "public option," a government-sponsored health plan that could compete with private insurers.

The bizarre rules of the Senate usually require 60 out of 100 votes to pass legislation. Since Democrats had exactly 60 seats in the Senate, every member of the caucus had to vote for the bill for it to pass.

The House and Senate seemed to be on their way, with the help of the White House, to working out the differences between the two bills. The public option was, unfortunately, lost. The high-income surcharge in the House-passed bill was also out. But the excise tax on employer-provided health plans would be scaled back to a reasonable level and the Medicare tax reform would be included.

Then in January the Democrats lost their 60th vote in the Senate when Scott Brown won the Massachusetts Senate seat formerly held by the late Ted Kennedy.

Pro-Reform Lawmakers Stop Panicking and Start Making History

After a period of hysteria among the members of Congress who supported health care reform, a strategy was devised to finish the job even though the Senate now had only 59 members who supported reform.

First the House would pass the Senate bill, which the President would sign into law. To complete this step, the House passed the Senate bill on Sunday while anti-reform protesters swarmed the Capitol in an attempt to intimidate and harass lawmakers. The President signed this bill into law on Tuesday.

Then Congress needed to pass the various amendments that would make the health reform look like the compromise that the House and Senate were moving towards before the Senate lost its 60th vote for reform. These amendments would all be included in a second bill that the Senate would pass through the "budget reconciliation" process. Reconciliation is simply a procedure to allow the Senate to pass legislation that has some impact on the federal budget picture with a simple majority of votes.

Despite their howls of protest against this procedure, the Republicans had actually used it to enact the Bush tax cuts (which actually worsened the fiscal outlook by running up huge deficits) and several other measures.

The "corrections" bill was passed by the Senate on Thursday using the budget reconciliation process and then was passed by the House later that evening. After this long, tortured journey, the dream that has eluded progressive Americans for a century is now a reality.

So who exactly are these "Tea Party" folks who have been protesting health care reform? We leave it to others to report on their more shocking behavior. But we'll consider the concept of "TEA" (taxed enough already) that seems to drive their world view.
 
David Frum (the scholar recently fired from the American Enterprise Institute for excessive honesty) sent interns into the tea party crowd to ask them some questions about taxes.
 
The accuracy of their responses was pretty dismal. When asked how much a family earning $50,000 a year pays in federal income taxes, the average answer was about $10,000. What's the real answer? After deducting the standard deduction and personal exemptions, a family of four owes only $1,965 in federal income taxes.
 
When asked whether federal taxes are higher, lower, or the same since President Obama took office, more than two-thirds of the group thought they were higher. The reality is that they are lower by every measure. For that working family, last year's stimulus bill reduced their federal income tax by $800.
 
As we reported last tax day, misconceptions about the level of federal income taxes are particularly common among those with anti-tax views.

Despite a lack of data to support their claims, some lawmakers and business groups continue to insist that extending Maryland’s 0.75 percentage point income tax rate hike on incomes over $1 million has caused an exodus of millionaires from the state.  To help clear things up, this week ITEP released a two-page brief explaining why evidence surrounding a similar policy in New Jersey does not provide support for this claim (despite many assertions to the contrary), and testified before the Maryland Senate Budget and Tax Committee on the merits of extending the “millionaires’ tax.”

In 2004, New Jersey implemented a 2.5 percentage point increase in the top tax rate on incomes over $500,000, frequently called the “half millionaires’ tax.”  Opponents of the Maryland “millionaires’ tax” have recently begun to portray the New Jersey experience as a horribly failed experiment in order to discredit any attempts at extending Maryland’s version of the tax.

In response, ITEP's brief looks specifically at two academic studies that have recently been touted as evidence against the New Jersey policy. One study was published by Boston College, the other by Princeton University.  The Boston College (BC) study, in particular, has recently become a favorite among opponents of Maryland’s “millionaires’ tax.”  But while the BC study does show that $70 billion in wealth left the state over the 2004 to 2008 period, it makes absolutely no attempt to focus its analysis on that small subset of New Jerseyans actually affected by the “half millionaires’ tax,” and does not mention taxes even once as a potential contributing factor.

The Princeton study, in contrast, actually does attempt to evaluate the “half-millionaires’ tax,” and finds that its effect in driving people from the state was “small.”  It goes on to conclude that “if the New Jersey experience is any guide, Maryland’s ‘millionaires’ tax’ is likely to generate substantial revenues and very little out-migration.”  Oddly, these straightforward findings never seem to find their way into the talking points used by the anti-taxers.  Simply put, opponents of the “millionaires’ tax,” unhappy with the results of the Princeton study, have turned toward the infinitely less relevant BC study to create the appearance that the facts are on their side.

ITEP also relayed the facts behind the “millionaires’ tax” to the Maryland Senate Budget and Tax Committee in testimony it gave this past Tuesday.  In addition to refuting claims that the “millionaires’ tax” has resulted in an exodus among the rich, the testimony also explains how the “millionaires’ tax” reduces the unfairness inherent in Maryland’s tax system, and how the tax results in a sizeable federal tax cut for millionaires, as they are able to write-off the tax increase as a federal itemized deduction.

Read ITEP’s Brief on the New Jersey Migration Studies’ Relevance (or Lack Thereof) to Maryland.

Read ITEP’s Testimony on Extending the Maryland “Millionaires’ Tax”.

A few weeks back, we wrote of the New Mexico legislature’s approval of $200 million in tax increases to help close the state’s $600 million budget gap.  While the plan included both progressive and regressive components, it was regressive overall.  Governor Richardson on Wednesday removed one of the most regressive components of the plan — a local sales tax on groceries — through the use of his line-item veto authority.

While the Governor’s veto does improve the state budget’s fairness overall, it also places New Mexico on less stable financial footing in the months ahead.  Furthermore, to make up for some of the revenue lost by repealing the tax on groceries, the Governor chose to eliminate a small low-income credit included in the legislature’s plan.  This development is very unfortunate, as the tax package still increases the rate of the state’s sales tax (known as the “Gross Receipts Tax” (GRT) in New Mexico) in a way that will result in substantially higher taxes for those families who would have benefited from the credit.

In a bit of good news, however, the Governor chose to leave intact the legislature’s repeal of the deduction for state income taxes.  This bizarre, circular deduction is now offered in only seven other states — Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont — and should be looked at by all of these states as a potential source of much-needed revenue.  The Georgia Budget and Policy Institute (GBPI) released a report earlier this month using ITEP data that explains why this tax break should be eliminated.

Georgia's Republican leaders, facing a deficit pinch, want to save $20 million a year by eliminating the refundability on the Low Income Credit offered on the state's income tax forms. (This is an alternative to a state EITC, and gives a per-person credit up to $26 for each low-income Georgia family member.)

ITEP estimates that making the credit nonrefundable would take away about three-quarters of the value of this credit, and that most of the tax hike would fall on the poorest 20 percent of Georgians.

As it happens, Georgia's current tax system offers an important reminder of why refundability is such an important feature in low-income tax credits. The poorest 20 percent of Georgians pay an average of 11.7 percent of their income in Georgia state and local taxes — and taxes other than the income tax represent 11.2 percent. (The personal income tax on this group averages 0.5 percent of their income.) This means that lawmakers seeking to make the state's tax system somewhat less regressive can only do so through tax credits that can be applied against not only the income tax, but against sales and excise taxes as well.

A new report from the Georgia Budget and Policy Institute (GBPI) points out that many of the recipients of the refundable Low Income Credit are seniors, and suggests that if lawmakers are intent on balancing the state's budget on the backs of seniors, a more sensible approach would be to reduce the state's very generous retirement income exclusion, which allows seniors at all income levels to enjoy $35,000 (per spouse) of retirement income tax-free. Reducing this cap from $35,000 to $32,000 would raise just as much money as the Low Income Credit proposal, without affecting a single fixed-income senior.

The report also makes some interesting points about refundable tax credits. For example, the state also offers refundable tax credits to corporations, and these cost the state about as much as the refundable credits for low-income families. As the report explains, "This raises the question of why refundable credits are appropriate for Georgia's corporate community but not residents with the lowest incomes."

Over the past several weeks, Democratic leaders in the House and Senate have pursued a strategy of enacting several small pieces of legislation to address joblessness. While lawmakers might find this strategy easier than passing one great big bill, it does make it a bit difficult for those of us who are trying to keep track of which tax provisions Congress has passed and which provisions are still being debated. A new report from CTJ simplifies this task by summarizing recent activity on jobs bills and describing each bill and the tax provisions included.

Read the report.

The Medicare tax reform proposal included in the President's proposal several weeks ago was slightly modified in the compromise health bill that was released by Democratic leaders in Congress yesterday.

The budget proposal made by newly elected New Jersey Governor Chris Christie this past Tuesday is full of painful cuts, terrible ideas, and glaring hypocrisy.  Christie has promised to veto any attempted extension of New Jersey’s income tax increases on high-income earners, and has instead put forth a plan that would that would balance the state’s budget on the backs of lower- and middle-income families.

Painful Cuts

The New York Times reports that Governor Christie’s budget would lay off 1,300 state workers, cut public school aid by over $800 million, and reduce aid to towns and cities by nearly $500 million.  Christie’s plan would also close multiple state psychiatric facilities, eliminate cash welfare assistance for the able-bodied, increase the costs of participating in the state’s prescription-drug program for the elderly and disabled, and cut state-financed school breakfasts and rental assistance programs.  Absent any significant revenue-raisers, serious cuts of this type will be required.

Terrible Ideas

On top of the immediate cuts Christie is proposing for the short-term, the Governor is also seeking — in at least two ways — to permanently hinder New Jersey’s ability to finance vital public services.  First, the Governor this week expressed his support for enshrining a property tax cap in the state’s constitution.  While the details of the cap are still a mystery, it would reportedly be modeled after Massachusetts’ ill-advised Proposition 2 ½.  Christie’s preferred cap, like Massachusetts’, would limit increases in property tax growth to 2.5 percent per year.

Governor Christie is seeking to constitutionally limit the power of New Jerseyans’ elected representatives in another way, by capping increases in state spending on “direct state services” by more than 2.5% per year.  Again, while the precise details of this plan have yet to be revealed, the indication seems to be that Christie would like to move New Jersey closer to a Colorado-style TABOR regime (which has devastated that state’s public services).

Glaring Hypocrisy

In addition to the massive spending cuts and tax/spending caps that Governor Christie proudly champions, the Governor’s budget also includes a variety of less-publicized components that may surprise you given the rhetoric Christie has used in recent days.  Specifically, Governor Christie this week proudly declared that “I was not sent here to approve tax increases; I was sent here to veto them … And mark my words, if a tax increase is sent to my desk, I will veto it.”  Elaborating upon these remarks, Christie explained his belief that any tax increase would “kill a job market already on life support.”

But despite the unwavering nature of Christie’s rhetoric, his actual budget raises taxes in a number of ways.  Low-income families would be the first target of Christie’s tax hikes, as the Governor has proposed slashing the state’s EITC by $45 million.  This proposal is particularly surprising given the EITC’s reputation as one of the best work-incentives on the books.  President Ronald Reagan went so far as to refer to the federal EITC program as “the best job creation measure to come out of Congress.”  For a Governor who claims to be so concerned about the “job killing” aspects of tax increases, an EITC cut is a very strange proposal to make.

While Christie’s proposed cut to the EITC may represent the most glaring inconsistency between the Governor’s anti-tax rhetoric and his actual proposals, it is not the only example.  Christie has also proposed raising taxes on hospitals and ambulatory care facilities by some $45 million.  Moreover, property taxes would rise under Governor Christie’s plan as a result of his proposed suspension of the state’s property tax rebate program — a proposal the New York Times has described as being in violation of his own campaign promises.  And finally, the Governor’s decision to cut local aid by nearly a half billion dollars should be seen for what it is — a decision to shift the onus for raising taxes to the local level.  Local governments will, very predictably, be forced to compensate for at least part of these cuts by raising taxes on New Jersey residents.  Christie will undoubtedly try hard to distance himself from these hikes, but they will ultimately be an unsurprising, and necessary, consequence of Christie’s own proposals.

In January, New Jersey took an important step forward by enacting legislation that required it to finally join the vast majority of other states already producing “tax expenditure reports.”  These reports catalogue and measure the plethora of special tax breaks offered in a particular state, thereby providing policymakers with an invaluable tool for understanding the complex workings of their state’s tax code.  New Jersey’s first such report was issued earlier this month, and was advertised in Governor Christie’s budget as evidence of the Governor’s “commitment to transparency.”  Unfortunately, the report is a significant disappointment, and fails to even come close to living up to the basic legal minimum requirements established in the legislation the state enacted just two months earlier.

In some ways, the shortcomings of the state’s first tax expenditure report are unsurprising, and even forgivable.  As we pointed out when we first discussed the state’s new reporting requirement this past January, the legal requirements created for this report are quite daunting.  And with only two months to create the report, the state’s Department of Taxation can be forgiven for not being able to meet the full range of requirements.

What is less excusable, however, is the complete absence from the report of any indication regarding what information or other resources the Department would need to meet the state’s legal requirements, and what steps the Department plans to take to continue moving toward fulfilling these requirements in the future.  As things currently stand, the reader is left only to hope and wonder whether or not the Department possesses an interest, and capacity, for improving upon its current “bare bones” report in the years to come.

Looking specifically at the legal requirements, the report itself confesses that it fails to meet four of the seven requirements articulated in the law passed earlier this year.  Those four requirements are that the report:

(1) describe the objective of each State tax expenditure,

(2) determine whether each State tax expenditure has been effective in achieving the purpose for which the tax expenditure was enacted and currently serves, including an analysis of the persons, including corporations, individuals or other entities, benefitted by the expenditure,

(3) the effect of each State tax expenditure on the fairness and equity of the distribution of the tax burden, and

(4) the public and private costs of administering the State tax expenditures.

Presumably, the Department has at its disposable much of the information needed to produce the kinds of distributional analyses required by the third criterion above.  Adding these analyses to next year’s report would be the easiest way to maintain the state’s momentum toward greater transparency that was generated by the state’s new law.

The second criterion, by contrast, may be the hardest for the Department to fulfill.  Washington State is the only state that currently reviews the effectiveness of its tax expenditures on a systematic basis — and its experience makes clear that doing such reviews well requires a significant amount of effort.  New Jersey legislators should have done a better job outlining the types of criteria they would like to see used in conducting these evaluations, and should have provided the Department with the additional resources it will likely need to execute those reviews.  Clearly, the Department of Taxation and New Jersey’s elected officials have much work to do before the state’s tax expenditure report can be expected to live up to the requirements contained in state law.

Arizona's budget-balancing techniques have bordered on the comical in recent months. Lawmakers have enacted legislation that would help balance the current year's budget by selling off state buildings, including the state capitol — and then immediately leasing them back, providing a one-shot revenue boost for this year, and then actually worsening the state's budget deficit in every ensuing year as the state pays a variety of new landlords. As a "Daily Show" interview displayed horrifically, state lawmakers simply had no answer to the question "what happens next year?"

It's difficult to design a tax plan that will lose $2 trillion over a decade even while requiring 90 percent of taxpayers to pay more. But Congressman Paul Ryan has met that daunting challenge. A new CTJ report shows that Congressman Ryan's budget plan has nothing to do with balancing the budget, but has everything to do with creating a tax system that takes more from the poor and less from the rich.

If the extensive tax proposals in his plan were fully in effect in 2011:

• The federal government would collect $183 billion less in 2011 and more than $2 trillion less over a decade than it would if Congress adopted President Obama's tax proposals.
  
  
• Federal taxes would be lower for the richest ten percent, and higher for all other income groups, than they would be if President Obama's proposals were enacted.
  
  
• The bottom 80 percent of taxpayers would pay about $1,700 more, on average, than they would if President Obama's proposals were enacted.
  
  
• The richest one percent would pay about $211,300 less on average than they would if President Obama's proposals were enacted.
  
  
• The poorest 20 percent would pay 12.3 percent of their income more than what they would pay under the President's proposal, while the richest one percent would pay 15 percent of their income less than they would pay under the President's proposal.

Read the report.

Tax policy is an area in which two people can look at the exact same set of facts and come to exactly opposite conclusions. Take the American Enterprise Institute's latest assault on the Medicare tax reform that President Obama has included in his health care reform plan.

The President has adopted an idea that CTJ has championed for months, to change the Medicare tax so that it no longer exempts investment income and to make the tax more progressive. The President would raise the Medicare tax rate for earnings exceeding $200,000 for unmarried taxpayers and $250,000 for married taxpayers, and he would apply the existing 2.9 percent Medicare tax to investment income for those with adjusted gross income (AGI) above $200,000/$250,000.

CTJ's recent report on this proposal found that only 2.3 percent of taxpayers would be affected by this tax in 2014. (The tax would go into effect in 2013).

But that's no comfort to Alan D. Viard and Amy Roden, who argue against this tax reform in AEI's online journal. They write:

"Of course, the high-income cutoffs mean that the new Medicare tax wouldn’t apply to most American savers. But the savers hit by the tax are precisely the ones who provide the largest volume of funds to finance investment in our economy. In 2007, tax returns from households with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of all dividends, and a staggering 84 percent of all net capital gains. We can’t afford to discourage this group from investing in America’s future."

So they fully agree with us that the sort of income they don't want Congress to tax predominately flows to the rich.

As a judge would say, the facts in this case are not in dispute.

What is in dispute is whether we have to avoid taxing the types of income that mostly flow to the wealthy in order to keep our economy running smoothly. AEI says yes, we need to have preferential rates in some taxes for these types of incomes (like the capital gains and dividends break in the income tax) and wholesale exemptions in other taxes (like the Medicare tax).   

We disagree. We have seen no evidence that the economy functions better when taxes on investment income are slashed or eliminated. Even when it comes to capital gains, which is where libertarians think they have their strongest case, there is no evidence that tax cuts have enhanced economic efficiency. Capital gains income certainly has fluctuated as a result of the ups and downs in the overall economy, and libertarians often attribute the upswings to tax cuts for capital gains. Sadly for them, capital gains realizations have, throughout the Bush years and today, been lower than they were at the end of the Clinton years, when the top rate for capital gains was higher.

Taxing investment income the same way that income from work is taxed is only fair. The President's Medicare tax reform is a step in the right direction. It would end the current exemption in the Medicare tax for investment income to help finance a health care reform that really will help our economy to function more efficiently.

The Senate approved a bill Wednesday that includes an extension of unemployment benefits and COBRA health benefits for unemployed workers through the end of the year, and a short-term extension of Medicaid funding for states and a Medicare "doc fix" (maintaining payments to doctors under Medicare).

The cost of this spending was not offset since it is considered emergency spending to stimulate the economy. But the costs of other provisions in the bill — extensions for $30 billion worth of business tax breaks often called the "tax extenders" — were offset. The biggest revenue-raiser used to offset this costs is a provision to close the "black liquor" loophole. This loophole allows paper-making companies using a carbon-rich by-product as fuel to use a tax credit that is supposed to encourage the use of environmentally-friendly alternative fuels.

But the "black liquor" provision may be used instead in the final health care reform bill. The health care reform bill approved by the House on November 7 of last year (H.R. 3962) included this revenue provision, and the President's recent proposal to bridge the differences between the House and Senate health bills also includes it.

There is another perfectly good revenue-raising provision that the Senate can use to offset most of the cost of the "tax extenders." The version of the tax extenders bill approved by the House on December 9 was supported by CTJ and several other progressive organizations because it included several good provisions, including one to close the infamous "carried interest" loophole. U.S. PIRG and CTJ issued a joint press release yesterday stating their disappointment that the Senate has not done the same.

The carried interest loophole allows billionaires managing hedge funds and buyout funds to pay taxes at a lower rate than middle-income workers. The House has passed legislation three separate times to close the carried interest loophole (including the recent House-passed extenders bill), and both of President Obama’s budget plans have proposed to close it. Senator Chuck Schumer (D-NY) was quoted in Congress Daily recently saying that closing the carried interest loophole is "on the table."

Until this loophole is closed, the compensation of these fund managers will continue to be taxed at a rate of 15 percent, the preferential rate for capital gains that is supposed to benefit people who invest their own money, not the people who manage it.

As the current economic storm continues to batter state budgets, policymakers in numerous states are continuing to talk of raising taxes to help mitigate cuts in state services.  In Maryland, lawmakers are debating an extension of the state’s temporary “millionaires’ tax,” while a new policy brief out of Georgia proposes to eliminate an unwise (and rare) deduction currently only offered in just seven other states — Arizona, Hawaii, Louisiana, Oklahoma, New Mexico, Rhode Island, and Vermont.

Maryland's legislature is currently considering whether to extend a temporary "millionaires’ tax" enacted as part of a major 2007 tax reform effort. ITEP staff testified Thursday at a hearing of the state House Ways and Means Committee. ITEP's testimony highlighted several important details, such as the fact that the millionaires’ tax modestly reduces the overall unfairness of Maryland's tax system. With the tax in place, low-income families still pay more of their income in Maryland taxes than millionaires must pay — and if the tax is repealed, this inequity will become even worse.

The testimony also explains why claims by anti-taxers that millionaires have fled the state in response to the millionaires’ tax are unfounded. As ITEP's analyses have shown, the primary cause of the decline in the number of Maryland millionaires in the past year is that they stopped being millionaires due to the recession.  The claim that the decline in the number of millionaires is due to the high income tax would be news to lawmakers in Utah (the only other state in which there is publicly available data on the change in the number of millionaires between 2007 and 2008). In the same year that Maryland lost 30 percent of their millionaires, Utah lost 60 percent of theirs. And while Maryland hiked their income tax on wealthy taxpayers the previous year, Utah cut theirs.

In Georgia, some attention is beginning to be paid to a progressive idea passed by the New Mexico legislature just last week.  On Thursday, the Georgia Budget and Policy Institute (GBPI) released a brief explaining why the state’s deduction for state income taxes paid — which costs the state $450 million each year — should be eliminated to help fill the state’s budget gap.  The vast majority of states already disallow this deduction (which originates from federal tax rules) in order to avoid the bizarre, circular situation in which one’s state tax payment can be used to reduce their state taxes.  

Finally, a new report from the Center on Budget and Policy Priorities (CBPP) helps put these developments in Maryland and Georgia into perspective.  The report notes that states have increased taxes by a combined $32 billion during the current recession.  In total, thirty three states have raised taxes to help fill their budget gaps, with twenty two of those having enacted “significant” tax increases, meaning increases that total more than 1 percent of their total revenues.  The report’s appendices provide an excellent summary of the multitude of state tax changes that have been enacted during these difficult budgetary times.

You don't know it, but you are probably a tax scofflaw-- because you haven't paid your "use tax." If you purchase, say, a stereo from a store in your state (and your state has a sales tax), you'll pay sales tax on that purchase. But when you buy the same stereo on-line from, say, Amazon.com, odds are that Amazon won't add sales tax to your purchase price. The laws of all sales tax states are quite clear on what is supposed to happen in this situation: you, as the purchaser, are supposed to pay the "use tax", which has exactly the same tax rates and tax base as the regular sales tax. But individual consumers purchasing items online very rarely pay the tax in this situation, and states typically make little effort to enforce it, as least with respect to household purchases (as opposed to business purchases).

If one wanted to make a short list of tax reforms that could lead to effective enforcement of the use tax, two things high on that list would be (a) that when a retailer in state X sells a sales-taxable item to a consumer in state Y, and does not collect sales tax on that item because they have no physical presence in state Y, then the retailer should have to remind the purchaser that they are legally required to pay the use tax, and (b) that under this same scenario, the retailer should have to alert state Y's Dept. of Revenue that these transactions took place.

This is precisely what Colorado did when it enacted House Bill 1193 earlier this year. The new law requires companies like Amazon, which has no physical presence in the state, to send a reminder to purchasers that they are supposed to pay the use tax. It also requires these companies to send an end-of-year statement to the state revenue department summarizing the value of untaxed sales to each customer. The law does NOT require Amazon to collect a dime of additional tax.

Earlier this week, Amazon responded to this law by dropping all its affiliates in the state of Colorado. (Affiliates are individuals or companies who put a link to Amazon on their own website, and earn a share of the take when customers click-through to buy things on Amazon's website.) As the Center on Budget and Policy Priorities' Michael Mazerov notes in a statement on Amazon's actions, this is a purely punitive action that has no relationship to the new law: the new reporting requirements under HB 1193 don't depend on whether a sale was made through a "click-through" affiliate, and even after dropping its affiliates, Amazon will still have to comply with the law. Amazon's actions can only be interpreted as a politically motivated attempt to rile up anti-tax sentiment sufficiently so that Colorado lawmakers will repeal the new law.
The use tax should be enforced by every state. Colorado's approach to doing so is sensible and fair, and does not impose substantial burdens on sellers like Amazon. By hitting its own affiliates in their wallets, Amazon is avoiding an open discussion of why they apparently believe the use tax should be repealed.

A new report from Citizens for Tax Justice examines the Medicare tax reform included in the health care plan recently put forward by President Obama. The report concludes that this reform would affect only 2.3 percent of taxpayers in 2014. The richest one percent would pay about 84 percent of the resulting tax increase, and the richest five percent would pay virtually all of the tax increase.

The report also discusses one flaw in the President's proposal: It would preserve what is often called the "John Edwards loophole," which is a scheme that some wealthy owners of "S corporations" use to avoid the Medicare tax.

Read the report.

The Senate finally passed a 30-day extension of unemployment insurance and health care benefits for the unemployed, but not before benefits had expired for hundreds of thousands of jobless Americans and thousands of others were furloughed from construction jobs as federal funding expired.  The legislation had been held up by Senator Jim Bunning (R-KY) who wanted to offset the costs of the bill, while other Republican Senators threatened to block the bill if they were not promised a vote on a measure to reduce the estate tax for millionaires. 
 
The President signed the 30-day extension into law on Tuesday evening, just hours after the bill had passed.

Senators then returned to legislation extending jobless benefits, as well as many expiring tax provisions, through the end of the year. The Senate took up a substitute amendment (S. Amdt 3336) for the House  "tax extenders" bill that was passed in December. The Senate version was expected to contain a reinstatement of the estate tax (which is temporarily repealed for 2010), but it was not included. However, many amendments to the bill are being offered and it's still unclear whether any will address the estate tax. President Obama and Democratic leaders want to reinstate the estate tax at the level in effect in 2009 (which was cut down about 50 percent from the pre-Bush level) while Senate Republicans and a few Senate Democrats wish to cut the estate tax even further.

Like the House Democrats, the Senate Democrats plan to offset the cost of the "tax extenders," which is included in the long-term extension of UI and COBRA that they plan to vote on next week. The "tax extenders" are a group of supposedly temporary tax cuts that mostly go to business interests and that Congress extends each year, sometimes retroactively. The extenders themselves are questionable policy, but the fact that Congress wants to pay for them by closing loopholes is a positive development.

The Senate version of the extenders bill would close the "black liquor" loophole, which allows paper companies to take an alternative fuel tax credit for a long-used process that is not environmentally friendly.

The 2005 highway law includes a tax credit for fuel that is a mix of alternative fuel (cellulosic fuel, meaning fuel made from the non-edible parts of plants) and traditional fossil fuel. In 2007, this credit was extended to include fuel used for purposes like manufacturing.

The problem is that certain paper companies already have a process that involves a cellulosic fuel (“black liquor,” a by-product from the pulp-making process), albeit one that is carbon-rich and not something Congress would want to encourage for environmental reasons. These paper companies realized that they could qualify for this new credit if they added fossil fuel to the cellulosic fuel they were already using.

In other words, companies are actually getting paid to add diesel to a relatively dirty fuel that they were already using. This is obviously not what Congress intended when it enacted this tax credit. The Senate is right to close this loophole.

New Mexico's legislature held a short special session this week to deal with a $600 million budget deficit. On Wednesday, they sent Governor Bill Richardson a $200 million tax-increase package. About two-thirds of the tax hike consists of increases in the state's sales tax, known as the Gross Receipts Tax (GRT). The state GRT rate will increase by 1/8th of one cent from the current 5 percent, and local governments will be required to apply their sales taxes, which range as high as 2 percent, to groceries. The state will also boost GRT collections by $12 million by enforcing collection of the "use tax" on purchases from out-of-state vendors.

While each of these changes fall most heavily on low-income families, two other components of the revenue plan are progressive. First, the state will raise $60 million — about a third of the total package — by eliminating an unusual income tax break that bizarrely allows state itemizers to take their state income taxes as a deduction against their state income taxes. (Seven other states, including Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont, also allow this deduction, and could shore up their personal income tax by eliminating this tax break.) Second, lawmakers increased — by a modest $5 million — the value of an existing low-income refundable tax credit.

Even with these two progressive measures, the tax package overall will still make New Mexico’s tax system somewhat more regressive.  Thankfully, however, the plan represents an improvement over at least two of the earlier versions (the Senate plan, and the legislative leadership plan) that were found to be even more starkly regressive in ITEP analyses produced this week.

State lawmakers in Kansas, Florida, Georgia, South Carolina, and at least ten other states have attempted to advance tax cuts — frequently targeted at businesses — as a means of stimulating their economies.  In response to these types of proposals, this week the Center on Budget and Policy Priorities (CBPP) released a short report pointing out the futility of attempting to stimulate state economies by cutting taxes. The report explains:

“State balanced-budget requirements prevent states from stimulating their economies by cutting taxes. If a state cuts a tax, it generally has to make an offsetting cut to expenditures for a program or service in order to maintain balance. This spending cut is likely to reduce demand in the state just as much as the reduction in taxes may stimulate demand.  It is at best a zero-sum game, where the gains in one area are offset by the losses in another.”

Against this backdrop, there is little question that the proposals described below (as well as the proposal described in the Minnesota story from a couple weeks back) are doomed to fail, despite their political popularity among some groups.

On Tuesday, Florida Governor Charlie Crist used his State of the State address to voice his support for a 10-day sales tax holiday and a sizeable cut in corporate taxes.  The corporate tax cut Crist is seeking could include a one percent reduction in the state’s corporate tax rate.  Both of these proposals would force a reduction in state spending at the worst possible time.  And sales tax holidays, of course, have long been recognized by serious observers as little more than political gimmicks.

In Kansas, the state House of Representatives has passed an expansion of a tax break aimed at boosting employment in the state.  Of course, the revenue loss associated with expanding this break, were it to become law, would only make the legislature’s job of producing a balanced budget even more difficult.  And, as the CBPP explains quite well, the larger cuts in government services that would be needed to finance this cut would effectively cancel out any purported economic gains.

In Georgia, an op-ed by Sarah Beth Gehl of the Georgia Budget and Policy Institute (GBPI) points out the folly of another proposal that claims to offer help for the state’s economy.  Specifically, the proposal would eliminate the state’s corporate net worth tax.  As Gehl points out, “there is no evidence that ending this tax will incite businesses to come to Georgia.”

Some South Carolina lawmakers are making use of a similar logic, though their focus is on a somewhat longer-term initiative.  Their plan would phase-out the corporate income tax over the course of 20 years, with the hope of improving the state’s “economic competitiveness.”  An editorial published in The State this week points out the flaw in this plan:

“The theory is that the tax breaks will entice people to start and expand businesses and move jobs to South Carolina. ... But there's a limit to how much difference a lower tax can make when there's no market for a company's products or services. And the stimulative value is particularly questionable when the tax is relatively low to start with. That's why we never have been convinced that supply-side economics can work at the state level.”