As the Senate begins to debate its budget resolution for fiscal year 2011, one issue that will be debated fiercely is what exactly should be done about the expiring Bush tax cuts. After the debate over the budget resolution is over, Congress must then decide what actual legislation to pass in order to make permanent or extend some portion of these tax cuts.
 
Citizens for Tax Justice has new national and state-by-state figures showing that the Congressional Republicans' approach to extending the Bush tax cuts would result in higher taxes for the poor and middle class, and far lower taxes for the rich, compared to President Obama's approach.
 
Read the new report and state-by-state fact sheets.
 
The tax cuts enacted under President George W. Bush, and the modifications of those tax cuts enacted under President Obama last year, all expire at the end of 2010. Over the next few months, Congress will decide which parts of these tax cuts should be made permanent, and which parts should be allowed to expire as scheduled.
 
Congressional Republicans and the President agree that the tax cuts enacted under Bush should be made permanent for 98 percent of taxpayers. Beyond that, they have mapped out dramatically different approaches.
 
The Congressional Republicans would make permanent the Bush tax cuts for the richest two percent as well, and they would NOT make permanent the modifications of the tax cuts that were included in the recovery act that President Obama signed into law last year.

President Obama would do the opposite. He would allow the tax cuts for wealthy to expire and would make permanent those modifications of the Bush tax cuts in the recovery act, which expand the Child Tax Credit and the Earned Income Tax Credit for working families.

A new report from Citizens for Tax Justice examines the amount of government "spending" done through the tax code in the form of special breaks and loopholes known as tax expenditures. The figures in the report illustrate that tax expenditures are a significant portion of federal spending and cannot be ignored as Congress addresses the budget deficit.

Read the report.

A simple example of a tax expenditure might be a break that Congress enacts in the corporate tax, giving a particular group of companies a benefit totaling $10 billion. The effect is the same as if Congress simply provided a subsidy through direct expenditures of $10 billion for those companies. Either way, the companies are $10 billion richer and there is $10 billion less to fund public services. In other words, other taxpayers who did not receive the special break have to pay for it through increased taxes or reduced public services.

Members of Congress often focus on discretionary expenditures, not because they make up most government spending but because they are politically easier to limit. In fact, the figures in this report show that discretionary expenditures are less significant than tax expenditures in many spending categories. The other problem with fixating on discretionary expenditures is the fact that most of them are for defense — and yet calls for capping discretionary expenditures are always limited to “non-defense” spending.

The Coalition on Human Needs is circulating a sign-on letter for organizations in support President Obama's proposals to make permanent some of provisions in the recovery act that expand refundable tax credits to help working families.

If you are authorized to sign on behalf of an organization, please sign your group onto this letter to preserve and build upon tax credits for low-income children, working families, and students.  The deadline is Friday, April 30.

Read the letter. 

Sign the letter. 

CHN is seeking local, state, and national organizations to sign this letter, which will be sent to every Representative and Senator in Congress.  Congregations, service providers, labor, civil rights, social action, policy, and advocacy groups are all asked to join the letter. PLEASE SHARE THIS INFORMATION WITH OTHERS IN YOUR STATE.  

Poverty and hardship are rising across the nation.  Tax credits can help families buy what they need, protecting children and boosting the economy too.  The Child Tax Credit, Earned Income Tax Credit, and American Opportunity Tax Credit (for low-income college students) can make a real difference in providing income to millions of families.  But if Congress does not act, these tax credits will expire.  

Why it matters:  A family with two children with a parent working full-time at the minimum wage now receives about $1,750 from the Child Tax Credit.  If the current tax credit law expires, this low-income family will lose $1,500 — and receive only $250.  If the law expires, families with 3 or more children will lose up to $629 in their Earned Income Tax Credit.  And, if the law expires, low-income students will lose up to $1,000 to help with their college expenses.

At a time when unemployment is high, and near depression levels among people with little education, in communities of color, and in some urban and rural areas, this is no time to drastically reduce the help low-income tax credits provide.

The voices of local, state, and national organizations are needed to show Congress very strong support for preserving and improving these tax credits.  Please add your voice by signing this letter — and forward this request to other organizations.

Congress will act on extending tax cuts for the middle class, and must also decide about tax cuts for the rich and for business interests.  Please make sure they remember the millions of low-income families who need help the most — and whose help provides the biggest economic boost.

Will Georgia earn the dubious reputation of passing the most misguided state tax changes of 2010? With the state's legislative session coming to a close, Peach State lawmakers are building an impressive body of work. After sending the governor bills that will cut the capital gains tax by 50 percent and exempt all retirement income for better-off seniors, the legislature this week is moving to take away the state's sole refundable low-income credit and authorize a statewide sales tax increase.

As a new ITEP report shows, the net impact of these changes would be to make the state's already-unfair tax system dramatically more unfair. The ITEP report shows that the current tax system actually redistributes income away from low-income families into the pockets of the best-off taxpayers — and that the proposed changes would make this inequity even worse.     

State policymakers don't always get the advice they need to make informed policy decisions. Not so in Oklahoma, where a recent Oklahoma Policy Institute report presents lawmakers with a detailed list of the tax giveaways embedded in Oklahoma's tax system, suggests a set of principles for evaluating these loopholes, and urges the state to evaluate each of these "tax expenditures" as part of their budget-balancing process. The editorial board of The Oklahoman this week laudably expressed a similar view, calling for lawmakers to find "sensible new sources of revenues." Specifically, the board has embraced capping or eliminating any tax credits that are ineffective in accomplishing their intended purposes, which is exactly what OK Policy's report recommends.
 
The Oklahoman's position here is quite sensible, and represents a welcome reprieve from the all too common, yet irrational practice of addressing budget shortfalls by taking the knife to valuable spending programs, while giving the kid-glove treatment to spending that is done through the tax code. But The Oklahoman falls flat when given the chance to apply this important principle to one of the odder tax giveaways in the state's toolbox, a state income tax deduction for state income taxes. They complain that the state’s top income tax rate of 5.5 percent is “uncomfortably high,” and that any proposal that would affect upper-income taxpayers should therefore be rejected. But rejecting a tax base-broadener because the rates are too high is getting it exactly backwards. Tax Policy 101 says if you want to avoid increasing tax rates, you should make sure your tax base is sufficiently broad. Leaving aside the very contestable notion that a 5.5 percent top rate is "uncomfortably high", the fact is that eliminating the state income tax deduction would strengthen the Oklahoma income tax base in a way that would make it a more efficient revenue-raiser, and would reduce the likelihood that lawmakers will be forced to hike rates down the line.
 
The Oklahoman's unwillingness to see this basic inconsistency between principle and practice is all the more maddening because OK Policy has recently shown that eliminating this tax break could raise substantial revenues at little cost to low- and middle-income families, and because one other state, New Mexico, eliminated an identical tax break to help balance their budget earlier this year.
 
If The Oklahoman’s editorial board really wants to see “ineffective” tax breaks eliminated, it should become one of the most fervent supporters of eliminating an illogical state tax break that exists only because the state happens to have built its income tax rules on top of those in place at the federal level.

Conservative pundits and media outlets have seized upon an estimate that 47 percent of taxpayers owe no federal income tax for 2009. This statistic has morphed into the claim by conservatives that “47 percent of all Americans don’t pay any taxes.”

The conservative pundits are wrong. It’s true that many taxpayers don’t pay federal income taxes, but they still pay federal payroll taxes (and some federal excise taxes) and also pay state and local taxes. Most of these other taxes are regressive, meaning they take a larger share of a poor or middle-class family’s income than they take from a rich family. This largely offsets the progressivity of the federal income tax.

A new report from CTJ estimates that the share of total taxes (federal state and local taxes) paid by taxpayers in each income group is quite similar to the share of total income received by each income group in 2009.

Read the report.

The tea partiers are sure to make their voices heard (loudly) today. There are plenty of things you can do to let Congress know that fairness doesn't mean continuing the Bush policies of slashing taxes for wealthy individuals and corporations. Here are examples of what you can do:

1. Sign a petition circulated by Wealth for the Common Good calling on Congress to end the Bush-era tax cuts for wealthy Americans.

2. Call your members of Congress using a toll-free number provided by Bread for the World and tell them to make permanent the improvements President Obama made in the Child Tax Credit and EITC for low-income families.

3. Participate in the Tax Wall Street Day of Action organized by Jobs with Justice. Their website includes a list to help you find an event near you.

Find more events and information about Tax Day.

Since the passage of the 1986 Tax Reform Act, federal tax law has given state lawmakers a clear incentive to rely on income taxes, instead of sales taxes, to fund public investments. This is because state income taxes can be written off by federal taxpayers who itemize their deductions, and sales taxes generally cannot. Even with temporary legislation in place that does allow a sales tax deduction, states that rely heavily on sales taxes — and not at all on income taxes — are essentially choosing to ignore what amounts to a federal "matching grant" for states that rely heavily on progressive income taxes.

A new joint report from ITEP and United for a Fair Economy's Tax Fairness Organizing Collaborative quantifies the cost of this choice in seven states that currently have no broad-based income tax — and that make up the gap by leaning heavily on the sales tax. The report shows that collectively, these seven states could reduce the federal taxes paid by their residents by $1.7 billion a year if they enacted a revenue-neutral reform that replaces sales tax revenue with a flat-rate income tax, and that the same states could save their residents $5.5 billion a year in federal taxes by enacting a similarly revenue-neutral shift to a graduated-rate progressive income tax.

Read the report.

The 2009 federal income taxes that come due on April 15 have been cut for nearly all working Americans, including Americans at all income levels, by the Recovery Act signed by President
Obama last year. But no one seems to be aware of this. Recent polls indicate that the vast majority of Americans think that the President either raised taxes or left them the same for 2009.

CTJ has new state-specific reports that aim to clear up this widespread misunderstanding. They show that the President cut taxes for working people at all income levels for 2009 and they show who was helped by each individual tax break.

Read the fact sheet and report for your state.

Americans know that taxes are necessary to fund the services government provides like roads, schools, and social security. We contribute so that our country can build and maintain the necessary infrastructure and public goods and provide a safety net for all of us. At the same time, Americans think that the wealthiest among us aren't paying their fair share.

And yet those who support the previous administration's policies of slashing taxes for the rich will be very effective in making their voices heard on Tax Day. They have a message that sounds appealing (usually involving lower taxes with no negative repercussions) and a network of supporters with plenty of cash to amplify their message.

The following list describes how you can cut through the nonsense and stand up for tax fairness this April 15.

CTJ: Obama Cut Taxes for 98 Percent of Working Americans
CTJ has a new fact sheet showing that President Obama has cut taxes for 98 percent of working Americans in 2009. State-by-state reports are included. Polls show that the vast majority of people think that Obama either raised their taxes or left them the same for 2009, and these publications aim to clear up that widespread misunderstanding. 

US PIRG: How Much Tax Havens Cost Ordinary Americans
The U.S. Public Interest Research Group reminds taxpayers that, while we do our duty and file our taxes, there are corporations and individuals out there who shirk this responsibility by using offshore tax haven countries to hide assets. On April 15, U.S. PIRG is sponsoring post office demonstrations and releasing a new report Tax Shell Game: What Do Tax Dodgers Cost You? They are encouraging folks to send in post cards to their Members of Congress to send a message to Washington that the American people deserve a better system.

Jobs with Justice: Tax Wall Street Day of Action
Jobs with Justice is organizing a Tax Wall Street Day of Action on April 15th. They are calling on supporters to deliver letters to national banks and collect petition signatures at local post offices as Americans stop by to mail their tax returns. The petition will ask Congress to tax Wall Street speculation.

UFE: Take the Tax Fairness Pledge
United for a Fair Economy has created the Responsible Wealth Tax Fairness Pledge where you can estimate your savings from the Bush tax cuts and pledge them to an organization that works for tax fairness. By the end of 2010 the Bush tax cuts will have cost more than $2.5 trillion in revenue that could have been used for critical investments in education, infrastructure or to reduce the deficit.

Are You Tired of the Tea Party? Join the Other 95%
President Obama cut taxes for 95 percent of working Americans (or 98 percent, if you count AMT relief) in 2009. But only 12 percent know it. Join the "other 95 percent" and say "Thanks for our tax cut, President Obama."

Or Join the Coffee Party
Tired of the tempest in a teapot, Coffee Party USA was started to encourage folks to "get together and drink cappuccino and have real political dialogue with substance and compassion." You can join the movement or start your local chapter here. Their motto: Wake Up and Stand Up.

IPS: More About the Way the World Is
The Institute for Policy Studies offers an analysis of the federal income tax system that seems more like two different systems: one for the wealthy and powerful and another one for the rest of us. Their paper includes analyses of the "flat tax," the national debt, and the myths about tax cuts for the wealthy allegedly spurring the economy.

CBPP on the Tax Foundation Tax Freedom Day Report: If Only We Were Rich
The Center on Budget and Policy Priorities has published a report refuting the oft-quoted numbers from the Tax Foundation about how many days people work each year just to pay their federal income taxes. As CBPP points out, the analysis is heavily skewed by the amount of income tax paid by the wealthy. Eighty percent of U.S. households pay tax at a lower rate than the Tax Foundation's estimated "average" federal obligation.

Wealth for the Common Good: Shifting Responsibility
Wealth for the Common Good has released a report Shifting Reponsibility: How 50 Years of Tax Cuts Have Benefited America's Wealthiest Taxpayers detailing how America's highest earners have seen their taxes drop by as much as two-thirds over the last 50 years. The trend of "asking less from those with more" has contributed to perhaps the greatest income inequality the U.S. has ever seen. The report calls for various measures to mitigate this dangerous trend and restore revenue to the federal treasury.

NPP: Where Did Your 2009 Federal Income Tax Dollars Go?
The National Priorities Project has released a report Where Do Your Tax Dollars Go - Tax Day 2010 showing how federal tax dollars were spent in 2009. Out of every dollar, 26.5 cents goes for military-related spending, 13.6 cents goes to pay interest on the debt, and only 2 cents goes towards education.

CAP: Why Cutting Discretionary Spending Won't Solve Our Budget Imbalance
The Center for American Progress has developed an interactive pie chart to help you learn about the federal government's discretionary spending, including whether cuts in those programs will really help reduce the federal deficit. Look at What is Non-Defense Discretionary Spending here.

UFE: How Will the States Close Their Budget Gaps?
United for a Fair Economy's Tax Fairness Organizing Collaborative just published a report Solutions that Work for Main Street: Progressive Guidelines for Closing Recessionary State Budget Gaps."  The report identifies pragmatic principles for closing state budget gaps in ways that enhance economic recovery, ongoing stability, and more widely shared prosperity. Also see their report Leaving Money on the Table showing that residents in states that rely heavily on the sales tax instead of an income tax pay much more federal income taxes as a result.

CTJ: Don't Believe the Hype About the Rich Paying All the Taxes
On Tax Day, you'll hear anti-tax people say that the rich are paying a disproportionate share of taxes. They're wrong. When you look at the tax system as a whole, including federal, local, and state income, payroll, excise, and sales taxes, the system is just barely progressive. A CTJ analysis shows that when you include those taxes, effective tax rates are almost flat.

Is progressive state tax reform "class warfare?" Alabama Representative Mac Gipson thinks so.  House Bill 1 is a revenue-neutral "tax shift" that would eliminate the state grocery tax and fully pay for it by paring back an income tax giveaway for the best-off taxpayers.  As House members prepared last week for a floor debate over HB 1, Gipson sputtered, "the whole bill is a redistribution of wealth."

In response to this claim, an ITEP report released earlier this week shows that in fact, the Alabama tax system does redistribute income -- but in exactly the opposite way from what Gipson appears to believe. A regressive tax system actually redistributes income from the poor to the rich -- and Alabama's tax system is one of the most egregious examples of this "Robin Hood in reverse" approach to taxation.
 
The ITEP report shows that the best-off Alabamians enjoy 19.6 percent of statewide income -- but only pay 11.5 percent of the Alabama taxes falling on Alabamians. Conversely, the poorest 80 percent of Alabamians earned 41 percent of statewide income -- but paid 54 percent of Alabama taxes.
 
The result? A tax system that actively shifts wealth away from low- and middle-income families to the best off. The top 1 percent of Alabamians enjoy 19.6 percent of income before taxes -- and 20.2 percent of the income after taxes. By contrast, the middle 20 percent of Alabamans have 11.4 percent of statewide income before tax, and 11.1 percent of the income after tax.
 
The tax shift proposed in HB 1 has been seen before in Alabama: Rep. John Knight has annually sponsored a similar bill for much of the past decade. And Alabama media outlets, laudably, are now familiar enough with the proposal to understand that it would be a major step forward for the state. The state's largest newspaper, the Birmingham News, editorialized strongly in favor of the bill on Thursday, and the second-largest state paper had a virtually identical view.

Unfortunately, editorial boards can't vote on the floor of the House: while more house members voted for it than against it, the 54-to-42 vote was not enough to achieve the three-fifths majority needed for passage, likely signaling the end of the road for progressive tax reform legislation in Alabama this year.

National Organizations Urged to Join Statement

Americans for a Fair Estate Tax, a coalition of public interest organizations, has released a new statement calling on Congress to preserve a robust estate tax to help ensure that the federal government has the revenue to fund public services that working people depend on.

The statement calls upon Congress to exempt no more than $2 million per-spouse from the estate tax, and tax the taxable portion of estates (the portion in excess of the exemptions and deductions) at no less than 45 percent. It also calls for an additional 10 percent tax on the taxable portion of estates exceeding $10 million.

The tax cut law signed by President Bush in 2001 gradually shrank the estate tax over the course of several years before making it disappear altogether in 2010. But, like all the Bush tax cuts, this cut in the estate tax expires at the end of 2010, meaning the pre-Bush rules would come back into effect if Congress does nothing.

The intention of President Bush and his supporters was to avoid discussion of the true costs of permanent repeal of the estate tax at the time the law was voted on, and to set up a situation in 2010 in which some lawmakers could be pressured into making the repeal permanent.

Last year, the House of Representatives approved a bill that would meet Bush halfway, meaning it would lose about half as much revenue as permanent, full repeal. The House bill would permanently set the per-spouse exemption at $3.5 million and the top estate tax rate at 45 percent. Americans for a Fair Estate Tax (AFET) is calling on Congress to preserve more of the estate tax by setting the per-spouse exemption at $2 million and applying an additional ten percent tax to particularly massive estates.

As the Bush estate tax cut phased in over several years, there was a period of years in which the exemption was temporarily set at $2 million per-spouse. Fewer than 1 percent of deaths resulted in estate tax liability during those years.

The AFET statement also calls on Congress to reinstate the credit for state estate and inheritance taxes, which was repealed in the 2001 law. This has been a blow to states with taxes tied to that credit at a time when their budgets are already in crisis.

If you are authorized to sign the statement on behalf of a national organization and wish to do so, please contact Steve Wamhoff at swamhoff (at) ctj.org.

The U.S. Chamber of Commerce recently said that it will not try to repeal the new health care reform law. Has big business seen the light?

No. Actually, the Chamber is still planning on spending $50 million to defeat lawmakers who voted in favor of reform. And they will work to shape regulations and try to repeal parts of the law that are not in the interest of big business, which presumably includes the health insurance industry. Which means it's hard to see what part of the new law the Chamber does NOT want to repeal.

Business groups are already taking aim at particular provisions. For example, the American Benefits Council is complaining that several large corporations must take write-downs ranging from $50 million to $1 billion on their financial statements because the health care reform law repealed a tax break enacted as part of the Medicare prescription drug law in 2003.

The tax break in question should never have been enacted. The prescription drug law subsidizes companies that provide prescription drug coverage for their retirees, ostensibly to prevent those retirees from shifting over to the government program. On top of this subsidy, the companies were also allowed to continue deducting the entire costs of the drug coverage, including the 28 percent subsidy paid by the government.

The health care reform law leaves in place those 28 percent subsidies but repeals the deductions. Telecommunications giant AT&T announced that it would take a $1 billion charge against its profits to reflect the likely future impact of this tax change. Verizon announced a $970 million charge, and other companies, including Exelon, 3M, Caterpillar and John Deere, announced charges in the millions or tens of millions.

But this is only because they're losing a tax break that was never really justified in the first place. The point of deductions is that they account for expenses that companies pay and that reduce their bottom line, i.e., reduce their profits, because profit is what is ultimately taxed. It makes no sense for a company to deduct a subsidy from the government because it does not reflect an expense paid by the company itself.

It seems that Congress really wanted to give these companies a larger subsidy than just the 28 percent, but decided that it would be easier to do so through the tax code. Whether or not larger subsidies were justified, it's generally poor policy to provide them through the tax code because it creates more tax complexity (causing corporations to pour more resources into figuring out how to lower their tax liability) and is less transparent. At least direct spending on subsidies for corporations show up as "costs" each year in government budget documents and are debated extensively by lawmakers. Corporate subsidies provided through the tax code, however, rarely receive this much attention.

It's also worth pointing out that the charges that the companies are announcing may sound like big numbers, but they're actually costs to the companies over many, many years. They reflect the costs of paying full taxes on those subsidies for retiree drug coverage over the course of the retirees' lives, which will be decades. They do NOT represent costs that they must pay this year.

Also, to the extent that the health care reform law provides any benefits to these companies, those are not going to show up on their financial statements today, which is another reason that they are a poor measure of how reform will affect them. Health and Human Services Secretary Kathleen Sebelius recently said that company executives she has communicated with "admit at the outset that what they will give up in terms of closing that kind of a loophole on tax benefits is well overcome by the kind of savings they're looking at with not only incentives for businesses to keep health insurance for their employees, but the kind of wellness and prevention efforts to lower costs in the long run."

Finally, it's entertaining to see conservatives tie themselves in knots as they try to defend the massive subsidies provided in the Medicare prescription drug law (enacted under President Bush) despite their supposedly "free market" philosophy. The Wall Street Journal, presumably, does not support government subsidies, but their opposition seems to melt when some part of the subsidy takes the form of a tax break.

The paper essentially argues that the subsidy and the tax break are justified because they actually save the government money by keeping retirees off of the Medicare prescription drug program. It may or may not be true that the 28 percent subsidy ends up saving the government money, but there is no reason to think that the double deduction, on top of that subsidy, does so, too. On the contrary, the Joint Committee on Taxation estimates that scrapping this unjustified tax break will save the government $4.5 billion from fiscal 2013 through fiscal 2019.

For many states, the fiscal picture for the next year remains cloudy at best. After years of painful spending cuts, how can states balance their budgets without further damaging essential public investments? A new report from United for a Fair Economy (UFE) lays out a few important guidelines for budget reform.

Among the more interesting recommendations: States shouldn't be afraid to meet spending needs by borrowing or drawing down their rainy day funds — but should do each in a straightforward and rational manner. This means that states seeking to adequately fund public investments that benefit future generations (such as transportation spending) shouldn't feel bad about issuing general obligation debt to fund these needs, ensuring that future generations will pay part of the cost of funding these investments. (Of course, lawmakers generally don't need any help shifting costs to future generations, but it's important to remember that there is, in some areas, a sound rationale for doing so.)

On rainy day funds, the report is a reminder that when the rainy days come, the funds should be used — and that damaging cuts to education and health care spending are a far worse result than depleting state reserves.

Responding to a recent report from the Pew Center for the States that generated hysterical headlines about unfunded state pension systems, the UFE report also notes that in the short run, unfunded long-term liabilities of the sort documented in the Pew report are a far better alternative than the loss of vital public services in the present day.

As the report reminds us, virtually every state could avoid damaging spending cuts through progressive tax reform focused on the state income tax — but these other tools should also be considered before resorting to further across-the-board spending cuts.

This week the Oklahoma Policy Institute released a report urging, among other things, that one of the state’s more ridiculous tax breaks be eliminated — specifically, the state income tax deduction for state income taxes.  This deduction was created not as a result of careful consideration and debate among Oklahoma policymakers, but rather as an accidental side-effect of the state’s “coupling” to federal income tax rules.  And as the New Mexico Legislative Finance Committee politely points out, while the deduction may make some sense at the federal level, the rationale for providing it at the state level is “less clear.”

Citing figures provided by ITEP, the Oklahoma Policy Institute notes that only one out of four Oklahomans would be affected by eliminating this deduction, and roughly 58% of the overall tax hike would be borne by those richest 5% of Oklahomans.  This is a predictable result of the deduction only being available to itemizers.  In total, the state could collect an additional $118 million in revenue each year by eliminating the deduction — revenue that could go a long way toward preserving important public services.

State income tax deductions for state income taxes have been receiving a growing amount of attention.  Last year, Vermont limited its deduction to a maximum of $5,000, while just last week New Mexico Governor Bill Richardson signed a budget eliminating his state’s deduction entirely.  The Georgia Budget and Policy Institute (GBPI) also highlighted the benefits of eliminating this deduction in a policy brief released just a few weeks ago.

In total, seven states currently offer this deduction: Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont.  Eliminating the deduction in each of these states is long overdue.

As a quick glance through the Digest's Arizona archives reveals, the Arizona budget debates over the past year have been an utter disaster.  Against this backdrop, the efforts of a group of Arizona hospitals to get a high-incomes tax increase onto the ballot are truly a sight for sore eyes.

The Arizona Hospital and Healthcare Association is preparing to file the paperwork needed to get a 1 percentage point increase in the state's top income tax rate onto the November ballot.  The increase would affect only a small group of fortunate Arizonans — those earning more than $150,000 per individual, or $300,000 per married couple.  The Association would like to see the additional revenue directed toward improving health care in the state. This is crucial for a state that recently repealed its Children's Health Insurance Program.

Across the nation, state lawmakers wary of further increasing their general sales tax rates are looking (sensibly) for ways of broadening the tax base in order to maximize their "bang for the buck" from the existing tax rates. As a recent New York Times survey documents, half a dozen states are thinking seriously about expanding their sales tax to include previously untaxed services, from haircuts to hot-air-balloon rides.

From a policy perspective, this approach is a slam dunk: a good first principle for sales tax design is that your sales tax liability should depend only on how much you spend — not on what you buy. However, proposals to tax services in Maryland and Michigan have recently run aground because of politics, not policy.

But there is a much more straightforward (and more politically viable) sales tax base broadening strategy that virtually every state can tap right now. Interestingly, even the Wall Street Journal found it difficult to argue against a growing effort by states to enforce collection of their "use tax" (a companion to the sales tax that is designed to apply to goods and services purchased in other states).

From a policy perspective, this is every bit as sensible as taxing services: if you buy a book, the sales tax should be the same whether you buy it in a store or on-line. But the politics are substantially more promising in this case: among the parties most aggrieved by the use tax loophole are small, "bricks and mortar" businesses that collect sales taxes on all their purchases and face a clear tax-based disadvantage compared to Amazon.com and other Internet-based retailers.

In the wake of recently passed legislation in Colorado designed to encourage more taxpayers to pay the use tax on their own, more states will likely seek to replicate Colorado's approach.

The following letter to the editor of the Wall Street Journal points out that their widely-cited op-ed on the Maryland "millionaires' tax" is both misleading and factually inaccurate.  The letter makes clear that the Journal's general interpretation of the Maryland "millionaires' tax" -- which it first began touting nearly one year ago -- is grossly distorted. Perhaps as a result, the letter went unpublished.

Your March 12 editorial, “Maryland’s Mobile Millionaires,” (Review & Outlook, March 12) states that “one-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008.” But this is simply wrong. The most recent data from the Maryland Comptroller’s office show that just 6.8% of Maryland’s 2007 millionaires have yet to file their 2008 returns, far below the 12.5% your “one-in-eight” figure implies. And as the Comptroller’s Office has reminded anyone who will listen, there are two reasons to be skeptical that even this 6.8% figure can be attributed to the state’s “millionaires’ tax.”

First, Marylanders—like all Americans—were quite mobile before the millionaire’s tax was introduced. In the seven years before the enactment of the tax hike in question, an average of 5.6 percent of Maryland’s millionaire filing population moved out from one year to the next—not that different from the 6.8 percent we’re seeing in 2008 so far. Moreover, there are quite sensible reasons why upper-income taxpayers would be late filing their 2008 taxes. As Maryland Comptroller Peter Franchot noted in a May 2009 letter, “It is possible that, with the economic turmoil experienced in the last half of 2008, the tax situations of many wealthy individuals are more complicated than usual, and a higher proportion will therefore use the filing extension than is typical.”  In other words, it’s far too soon to call these numbers final. It’s a shame that the Journal’s editorial board has jumped the gun on this once again.

Carl Davis

Institute on Taxation and Economic Policy