Call your Senators and tell them to stop putting multi-millionaire investment fund managers ahead of struggling families.

Call the Capitol switchboard at 202-224-3121 and ask to be connected to the Senators for your state.

Democrats in Congress are rushing to pass the jobs and "extenders" bill before the end of the week. This bill includes extensions of badly needed unemployment insurance and COBRA health benefits, TANF jobs and emergency funding, Medicaid funding for states and several other important measures. These are the type of measures that many economists, like Mark Zandi of Moody's Economy.com, believe will help stimulate the economy and speed up the recovery. The bill may be passed in the House this week.

Even if the bill passes the House, there may be a serious roadblock in the Senate. Some Democrats in the Senate may oppose or slow down this bill because it includes a provision to clamp down on a loophole allowing investment fund managers to earn hundreds of millions of dollars each year and yet pay taxes at a lower rate than their secretaries.

In other words, some Senate Democrats (and all or most Republicans) would allow unemployment and health benefits to expire for out-of-work families, and would allow jobs funding and Medicaid funding to expire, all to protect a loophole that allows multi-millionaires to pay taxes at lower rates than middle-income people. With every (or nearly every) Republican Senator guaranteed to vote against the bill, the Democrats are struggling to remain unified.

(See CTJ's recent report about the tax loophole-closers in the bill.)

If there was ever a time to call your Senators and give them hell, this is it.

The bill in question is H.R. 4213, the jobs and "extenders" bill. The loophole in question is the infamous "carried interest" loophole that allows wealthy fund managers to pretend that some of the compensation they receive in return for managing other people's money is capital gains. (See CTJ's recent report about carried interest.)

Compensation for work is almost always taxed at ordinary rates as high as 35 percent and subject to payroll taxes of around 15 percent. But this loophole allows the investment fund managers (who can earn hundreds of millions of dollars a year) to pretend that some of their compensation is capital gains, which is subject to an income tax rate of just 15 percent and is not subject to payroll taxes at all.

After the Bush tax cuts expire at the end of this year, the top tax rate for "ordinary" income (meaning income subject to ordinary income tax rates) will go from 35 percent to 39.6 percent and the top rate for capital gains will go from 15 percent to 20 percent. That means that if this loophole is not closed, investment fund managers will be able to cut their income taxes roughly in half from what they should be paying, and will still avoid payroll taxes.

Democratic leaders have already compromised on this issue. Instead of treating all carried interest as "ordinary" income (i.e. not capital gains) as previous House-passed bills would do, the current proposal would treat 75 percent of it as ordinary income.

Incredibly, this has not been enough for some Senators who want to further weaken the provision.

Keep in mind that this has nothing to do with changing the taxation of anything that can honestly be called investment income. The idea behind the tax preference for capital gains is that it encourages people to invest. This is nonsense for reasons we'll get into on another day, but it is the accepted wisdom among many lawmakers who don't have much time to think about economics. But even if we accept this premise, it does nothing to explain why this tax preference should be enjoyed by people who are not investing their own money but merely managing other people's money. That's what the carried interest loophole currently allows.

Five Senators (Scott Brown, Jeanne Shaheen, Bob Casey, Patty Murray, Mark Warner) signed a letter to Finance Committee Chairman Max Baucus asking to amend the provision to allow venture capital fund managers to continue to enjoy the loophole.

The basic idea is that venture capital firms create innovation and jobs, unlike some of the other types of investment managers (like hedge fund and buyout fund managers) and this type of investment needs to be encouraged. The letter does not explain why this calls for tax breaks allowing the people who manage the money (not the people putting up their own money) to pay taxes at lower rates than middle-income people.

It has also been rumored that the venture capital industry has put a great deal of effort into persuading the Senators from California, Barbara Boxer and Dianne Feinstein to resist the provision.

Senators Maria Cantwell, John Kerry and Robert Menendez have also voiced concerns. Kerry and Menendez have called for some sort of "compromise" so that investment fund managers do not have to entirely pay at ordinary rates on their carried interest. This could involve taxing a smaller portion of carried interest as ordinary income (taxing less than 75 percent of it as ordinary income).

Another idea being floated would allow for investment managers to continue to enjoy a loophole to the extent that the investments they manage are held for a certain number of years. The idea seems to be to reward "patient" capital rather than those trying to make a quick buck. But of course, this really has nothing to do with rewarding patient capital since it would benefit the people managing the money, not the people actually investing it. Even more alarmingly, it could actually delay certain investments if fund managers are encouraged to hold onto assets for a longer period of time than would otherwise make sense just to enjoy the tax break. Certain deals would be delayed, meaning this provision could actually slow down economic development and job creation.

Staffers for several other Democratic Senators also expressed concerns about the carried interest provision, which seems to mean that ALL Senators need to hear from their constituents on this issue.

No one has explained why making the people who manage investments pay taxes at the same rate as everyone else will discourage investment. The argument that is occasionally trotted out by the industry is that the people managing the money and investments will have to charge more for their services in response to a tax increase. This is simply not true. If they could charge more, they would already being doing that right now. And it's worth remembering that investment fund managers did not decide to charge less when their tax rates were reduced (in 1997 and 2003 when the capital gains rates were cut) so it's illogical to believe that they will charge more in response to a tax increase.

The only explanation for the Senate's resistance that readily comes to mind involves the campaign contributions that investment fund managers make. Senate Democrats are, frankly, in danger of creating an extremely unflattering impression of themselves as beholden to their wealthiest contributors.

Many who have been following this bill are extremely concerned that the Senate may not pass the bill this week, or may pass the bill after amending it to reduce the impact of the carried interest provision. An amended bill could be disastrous in that it might make it impossible for the two chambers to come to agreement and send a bill to the President before the Memorial Day recess.

And then there were seven.  With the enactment of a tax expenditure reporting requirement in Georgia late last week, only seven states in the entire country continue to refuse to publish a tax expenditure report — i.e. a report identifying the plethora of special breaks buried within these states’ tax codes.  For the record, the states that are continuing to drag their feet are: Alabama, Alaska, Indiana, Nevada, New Mexico, South Dakota, and Wyoming. 

But while the passage of this common sense reform in Georgia is truly exciting news, the version of the legislation that Governor Perdue ultimately signed was watered down significantly from the more robust requirement that had passed the Senate.  This chain of events mirrors recent developments in Virginia, where legislation that would have greatly enhanced that state’s existing tax expenditure report met a similar fate. 

In more encouraging news, however, legislation related to the disclosure of additional tax expenditure information in Massachusetts and Oklahoma seems to have a real chance of passage this year.

In Georgia, the major news is the Governor’s signing of SB 206 last Thursday.  While this would be great news in any state, it’s especially welcome in Georgia, where terrible tax policy has so far been the norm this year. 

SB 206 requires that the Governor’s budget include a tax expenditure report covering all taxes collected by the state’s Department of Revenue.  The report will include cost estimates for the previous, current, and future fiscal years, as well as information on where to find the tax expenditures in the state’s statutes, and the dates that each provision was enacted and implemented. 

Needless to say, this addition to the state’s budget document will greatly enhance lawmakers’ ability to make informed decisions about Georgia’s tax code. 

But as great as SB 206 is, the version that originally passed the Senate was even better.  Under that legislation, analyses of the purpose, effectiveness, distribution, and administrative issues surrounding each tax expenditure would have been required as well.  These requirements (which are, coincidentally, quite similar to those included in New Jersey’s recently enacted but poorly implemented legislation) would have bolstered the value of the report even further.

In Virginia, the story is fairly similar.  While Virginia does technically have a tax expenditure report, it focuses on only a small number of sales tax expenditures and leaves the vast majority of the state’s tax code completely unexamined.  Fortunately, the non-profit Commonwealth Institute has produced a report providing revenue estimates for many tax expenditures available in the state, but it’s long past time for the state to begin conducting such analyses itself.  HB355 — as originally introduced by Delegate David Englin — would have created an outstanding tax expenditure report that revealed not only each tax expenditure’s size, but also its effectiveness and distributional consequences. 

Unfortunately, the legislation was greatly watered down before arriving on the Governor’s desk.  While the legislation, which the Governor signed last month, will provide some additional information on corporate tax expenditures in the state, it lacks any requirement to disclose the names of companies receiving tax benefits, the number of jobs created as a result of the benefits, and other relevant performance information.  The details of HB355 can be found using the search bar on the Virginia General Assembly’s website.

The Massachusetts legislature, by contrast, recently passed legislation disclosing the names of corporate tax credit recipients.  While these names are already disclosed for many tax credits offered in the state, the Department of Revenue has resisted making such information public for those credits under its jurisdiction. 

While most business groups have predictably resisted the measure, the Medical Device Industry Council has basically shrugged its shoulders and admitted that it probably makes sense to disclose this information.  Unfortunately, a Senate provision that would have required the reporting of information regarding the jobs created by these credits was dropped before the legislation passed.

Finally, in Oklahoma, the House recently passed a measure requiring the identities of tax credit recipients to be posted on an existing website designed to disclose state spending information.  If ultimately enacted, the information will be made available in a useful, searchable format beginning in 2011.

Washington State has the most regressive tax structure in the country according to ITEP's recent Who Pays? report, which analyzed the tax structures of all fifty states. Not only does the state's tax structure hit low- and middle-income families the hardest, but it's also unsustainable because it doesn't generate enough revenue to fund public services.

The introduction of an income tax targeted at wealthy taxpayers would go a long way to solving both of these problems. Such a proposal is being touted by Bill Gates Sr. and a large coalition of groups promoting an initiative that, if put on November's ballot, would raise taxes on couples earning more than $400,000 ($200,000 for singles).

According to a recent poll from the University of Washington, the state's voters favor this tax reform by a 58 to 30 percent margin. If the initiative passes, Washington would join the vast majority of other states that have income taxes.

A new report from Citizens for Tax Justice explains that the new jobs and "extenders" bill released by the chairmen of the House and Senate tax-writing committees on Thursday contains several long-overdue provisions to close tax loopholes. The bill (H.R. 4213) takes aims at corporations that shift profits offshore, investment fund managers who use the "carried interest" loophole to pay lower tax rates than their secretaries, and business people who use the "John Edwards" loophole to avoid their Social Security and Medicare taxes.

Many people are more familiar with the important spending provisions in the bill geared to speed up the economic recovery, including an extension of unemployment insurance and COBRA health care benefits for the unemployed, Medicaid funding for states, TANF jobs and emergency funding for states and other measures that will help boost the economy.

The tax loophole-closing provisions are used to offset the costs of extending several small tax breaks. The spending portion is mostly considered emergency spending that does not have to be paid for under Congress's budget procedures because it is temporary and necessary to prevent the economy from drifting back towards recession. (The Center on Budget and Policy Priorities explains why the spending portions of the bill are economically necessary and fiscally sound.)

Call your lawmakers now and urge them to vote in favor of H.R. 4213. Visit the website for Jobs for America Now, which makes it extremely easy for you to make a toll-free call to your lawmakers to support this bill.

Arlen Specter, a long-time U.S. Senator for Pennsylvania who recently switched from the Republican party to the Democratic party, lost his primary battle on Tuesday against Representative Joe Sestak.

Since 1995, Senator Specter introduced legislation to create a federal “flat tax” in every session of Congress, including this session.  This single-rate tax would replace the existing progressive personal income tax, as well as the corporate income tax and estate tax.

A recent report from Citizens for Tax Justice found that Specter's proposal would cut taxes for the richest five percent of taxpayers and raise taxes for everyone else.

The Specter plan was 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.”

Sestak will go on to face Republican Pat Toomey, a former Representative and a former president of the right-wing Club for Growth.

On Wednesday, CTJ joined Americans for a Fair Estate Tax to voice opposition to an estate tax proposal that would benefit only the families with the largest 1 in 400 estates. In a strongly-worded letter, AFET said a reduction in the estate tax should not even be on Congress's agenda, much less be a priority.

News began to leak last week that a bipartisan group of Senators, including Senate Finance Committee Chairman Max Baucus (D-MT), Ranking Member Charles Grassley (R-Iowa), Blanche Lincoln (D-AR), and Jon Kyl (R-AZ) were negotiating a deal to weaken the estate tax even beyond the 2009 parameters that the president wants to make permanent. The deal would have eventually exempted up to $10 million per couple from the estate tax.

The proposed estate tax rules would cost the country billions of dollars per year, but a phase-in of the changes and other budget gimmicks, such as a prepayment option, would have masked the cost in the ten-year budget window that is counted when lawmakers consider legislation. A detailed report of the proposal can be found here.

News reports on Thursday indicated that the deal had begun to unravel. We hope the Senate will now turn its attention back to legislation creating jobs and helping ordinary Americans who are still struggling in this economic downturn.

Arizona’s 1 percentage point sales tax rate hike won approval from voters on Tuesday, telling us a lot about rightwing claims regarding the alleged “anti-tax,” “anti-government” nature of the American people.  In a state described by the Los Angeles Times as “famously tax-averse,” the overwhelming support received by this tax hike truly does “[run] counter to a common national narrative about 2010 being a sharply anti-tax year,” as Pew’s Stateline publication explained earlier this week.

The hike will take effect on June 1, and will raise Arizona’s state-level sales tax rate from 5.6% to 6.6% for the next three years.  The higher rate is expected to generate about $1 billion per year in revenue, and will prevent the need for so-called “contingency spending cuts” of a similar magnitude in K-12 education, universities, public safety, health care, and services for the disabled.  

But while the sales tax hike is far preferable to the devastating cuts that would have been required in its absence, it is also far from the ideal progressive solution.  Arizona policymakers should not overlook the fact that the state’s newly increased sales tax rate will exacerbate the unfairness of a state tax system that was recently ranked by ITEP as the 7th most regressive in the entire nation.  In a state where the poorest residents already pay over two and a half times as much of their income in state and local taxes as the richest 1%, the need for additional tax relief for the state’s poor has just become even more dire.  Future changes to the Arizona tax code should be guided first and foremost with this thought in mind.

Sonny Perdue is enjoying his last year as the Governor of Georgia and all signs indicate that he's going out with a bang that, depending on how he uses his veto pen, could have enormous implications for Georgia's tax system and revenue stream for years to come. The Governor has already signed legislation that removes retirement income from the income tax base and repeals the state portion of the property tax. Tax and budget fairness advocates are watching to see what action he'll take on a capital gains tax cut and a proposal that would eliminate the refundable portion of a low-income tax credit.

Last week, Governor Perdue made good on a campaign promise to entirely remove retirement income from the tax base for seniors. Georgia seniors already enjoy some of the highest exemptions in the country on retirement income. Fully exempting this income, especially as the boomer population ages, means that the cost of this legislation will only grow in the future.

But even if one can (for some reason) ignore the fiscal implications, the fairness implications are eye-popping. Under this legislation, income seniors receive from work would continue to be taxed the same as before. If you're a senior who can't afford to retire, you still get taxed on most of your income (seniors would still get the existing $4,000 exemption on earnings). But if you can afford to retire, your income is not taxed. The most basic principle of tax fairness — that taxes should be based on ability to pay — seems to have disappeared in Georgia.

The Governor also signed a law that completely eliminates the state portion of property taxes. The Georgia Budget and Policy Institute estimates that this cut alone will cost the state $63 million in 2013, with the cost increasing each year.

Once again, the idea that taxes should be based on ability to pay would justify very different measures. For example, if policymakers are truly concerned about the impact that property taxes are having on the state's most vulnerable residents, they should just institute a property tax circuit breaker, rather than eliminating the tax altogether.

Governor Perdue may not be done yet. Two new bills currently sitting on the Governor's desk would be even more regressive.

The first one is HB 1023, the so-called JOBS Act, which would allow individuals to exclude 50 percent of their capital gains from their income when the state's rainy day fund reaches $1 billion. An ITEP analysis found that "low- and middle-income families would see virtually no benefit from the new exclusion for capital gains." In fact, those Georgians who would benefit from this tax change are overwhelmingly in the top five percent of the income distribution.

Second, the Governor will decide whether to remove the refundable portion of the state's Low Income Tax Credit (LITC). Currently, the credit is available to Georgians with incomes less than $20,000, and if the filer's tax credit is larger then their tax bill, then they get a small refund of between $5 and $26 dollars (or more, depending on family size).

As Laura Lester from the Atlanta Community Food Bank wrote in the Atlanta Journal Constitution, "While eliminating the refundable portion of the LITC may appear to be a simple line-item adjustment, the result will increase the tax burden on those who struggle most in the current economy. This will have consequences well beyond the budget. The current recession has reduced work hours and wages for hundreds of thousands of Georgians, and the LITC helps to ease this hardship and stabilize incomes."

Slashing a tax credit for low-income families while offering enormous tax cuts for the wealthy investor class seems like a strategy to confirm the most cartoonish stereotype of right-wing lawmakers that can be imagined. Let's hope this is not the legacy Governor Perdue prefers to leave for his state.

Late last year we described Kentucky Governor Steve Beshear's misguided resistance to reforming the state's tax system. Instead of offering real leadership and addressing the serious flaws of the state's tax structure, Governor Beshear took a dramatic and short-sighted stance against any tax increases to assist in balancing the state's budget. It's unfortunate, but unsurprising that he continues to hold this position leading up to the Special Session starting May 24. (The legislature adjourned its regular session on April 15 without a budget).

Kentucky isn't a state where the tax system just needs a little tweaking. In a recent report, ITEP found that the state's revenue system "is simultaneously insufficient, as it fails to produce enough revenue to fund the public services on which Kentuckians rely, and inequitable, requiring low- and moderate-income residents to pay more in taxes relative to their incomes than wealthier individuals and families."

The two-year budget that is expected to pass in the special session contains no fundamental tax reform. Instead, it relies heavily on across-the-board spending cuts of 3.5 percent for the first year and 4.5 percent in the second year. Many are quick to add that the spending cuts aren't as deep for select areas of spending, including K-12 education, higher education, Medicaid and some areas of public safety, as if this makes a cuts-only budget more acceptable.

No doubt the choices facing Kentucky lawmakers are difficult and complex. But they have made their own jobs enormously more complicated and difficult by taking taxes completely off the table for the special session. The cutting has only begun.

Former President Bill Clinton Endorses Regressive US National Sales Tax at Billionaire’s Conference, Recites Bogus Claim about Sales Tax Helping US Trade

Former President Bill Clinton recently endorsed enactment of a regressive U.S. national sales tax — a.k.a. a value-added tax or VAT. In doing so, he parroted a long-discredited argument that a sales tax would curb imports into the United State and encourage exports.

Clinton made his remarks in an interview at an April 28, 2010 conference sponsored by the Peterson Institute for International Economics, one of many organizations founded by Peter G. Peterson, a billionaire investment banker who has long advocated big cuts in Social Security and lower taxes on capital gains (i.e., on himself).

According to Clinton, “the one thing that blue collar America should like about [a sales tax] is it’s good for exports and it in effect, it doesn’t allow quite so much subsidy of imports — when other countries subsidize their production for export at least they get slapped with a value-added tax when it comes in here.”

Clinton seems to have failed to notice a critical flaw in his argument.

It’s true, as Clinton says, that American consumers would pay a U.S. national sales tax when they buy imported products. But that’s no help to U.S. manufacturers. After all, Americans would have to pay the same sales tax when they buy products made in the USA. How does that give an advantage to U.S.-made goods?

As for exports from the U.S., well, obviously Americans wouldn’t pay a U.S. sales tax on products sold abroad (i.e., Americans won’t be taxed on products they don’t buy). But that doesn’t help U.S. exports. How could it? (Meanwhile, foreign customers pay whatever sales taxes their own governments impose, whether the products are American-made, made in their own countries, or elsewhere.)

The bottom line is that a national sales tax would have no effect, positive or negative, on U.S. exports or imports.

As the congressional Joint Committee on Taxation put it in a report back in 1991, “even though imports are subject to tax, U.S. buyers’ choice between imported and domestically produced [goods] is not altered. Similarly, foreign consumers’ choice between goods produced in the U.S. and goods produced in their own country is not altered even though U.S.-produced goods [aren’t subject to U.S. sales tax] when exported.”

Think of it this way: Chinese companies export hundreds of billions of dollars a year in products to the United States. If the products are sold in California, customers will pay a sales tax of as much as 10 percent. Of course, they’ll pay the same sales tax if they buy products made in the United States. Conversely, Delaware has no sales tax, so Delaware customers pay no sales tax on either Chinese or American products. Is California at a competitive advantage versus Delaware because it has a steep sales tax? Of course not.

Everyone agrees that a national sales tax, like state and local sales taxes, would be hugely regressive, hitting the poor and the middle class hard, and the rich very lightly. Clinton knows this, and he does vaguely suggest implausible “adjustments in the other tax bills to make it — to keep the progressivity of our tax system.” But ultimately, his message to middle- and low-income Americans is simple and harsh: suck it up. “It’s a big leap,” Clinton said. “But if you look at it, people in Europe — just like any other sales tax — they just get used to payin’ it.”

By the way, in the same report cited above, the Joint Committee on Taxation noted that “providing a realistic number of employees to administer a U.S. VAT could mean a near-doubling of the size of the IRS.” That’s an extraordinary amount of added paperwork, complexity and bureaucracy. For what? A more regressive tax system?

We don’t need and shouldn’t tolerate a new and grossly unfair sales tax, whose alleged benefits to U.S. trade are nonexistent. Instead, we should attack the budget deficit by making our tax system fairer, in particular by closing unwarranted and hugely costly income tax loopholes that unjustly favor big corporations and the wealthy. Bill Clinton ought to know better.

Read the report.

As Congress prepares to take up legislation to boost small business job creation in the following weeks, some lawmakers argue that the legislation must extend parts of the Bush tax cuts that benefit the very rich.

Two ideas along these lines are being discussed. One is to extend income tax reductions for the very rich, at least for taxpayers who can be somehow classified as “small business” taxpayers. The second is to eliminate most of the federal tax on the estates of millionaires. As the new CTJ report explains, both of these proposals would allow the rich to continue to enjoy most of the tax cuts they received under President Bush while doing nothing to create or protect jobs.

Extending income tax cuts for small business owners is unlikely to boost job creation because:

— President Obama has already pledged to extend the Bush income tax cuts for 98 percent of taxpayers. Only 3 to 5 percent of small business owners are wealthy enough to lose some of their tax cuts under President Obama’s proposal.

— Hiring decisions are generally not based on federal income taxes, but are based on whether or not there is demand for the goods or services that a business provides.

— Economists and analysts, including those at the non-partisan Congressional Budget Office, have concluded that extending income tax cuts would be the least effective of several policy options to create jobs.

— Enacting a “carve-out” or special break for “small businesses” would simply encourage all rich taxpayers to disguise their income as “small business” income.

Cutting the estate tax is also unlikely to boost job creation because:

— An even smaller percentage of small businesses would be affected by the federal estate tax under President Obama’s proposal.

— Those few small businesses affected by the estate tax already enjoy special breaks that make it more manageable for closely held businesses and farms.

— It is very unlikely that the estate tax causes millionaires (the only people affected by it) to work less or invest less and therefore create fewer jobs. If anything, the estate tax could have the opposite effect.

Read the report.

Congress may be ready to close the "carried interest" loophole, which allows wealthy investment fund managers to pay taxes at lower rates than middle-income people.

As a new report from CTJ explains, carried interest is the share of profits that investors pay to compensate certain people for managing their money. The investment managers who receive carried interest have been allowed to pretend that this compensation represents profits on money they have invested themselves, thus entitling them to pay taxes at the low capital gains rate of 15 percent rather than the regular rate of 35 percent that other highly compensated workers pay.

Three times the House has voted to close the “carried interest” loophole and three times the Senate has failed to pass the provision. The latest version of the loophole closer was included in the “tax extenders,” a bill that extends expiring tax breaks, which was approved by the House on December 9. The Senate left the carried interest provision out of its version of the extenders bill, which they passed on March 10, and instead offset the costs of the tax breaks with a provision closing the “black liquor” loophole. However, that provision wound up in the final healthcare package, leaving the Senate extenders bill without enough revenue to cover the costs.

Senate Finance Committee Chairman Max Baucus indicated last week that “carried interest will probably be part of the offsets.” That released a flurry of lobbying activity by taxpayers trying to hold onto their favored status.

Read the report.

As discussed in the previous article, Congress may close the "carried interest" loophole to help pay for the "tax extenders," which are provisions extending several expiring tax breaks that mostly benefit business. Another measure that Congress may also use to help pay for the tax extenders is a provision that would stop corporations from manipulating tax treaties between the U.S. and other countries to avoid withholding taxes before shifting their income into a tax haven.

U.S. subsidiaries of foreign corporations don’t have to pay withholding taxes on passive income if they are based in a country that has a treaty with the U.S. allowing that country to have the sole taxing power. But corporations based (on paper at least) in a non-treaty country can shift profits from a U.S. subsidiary to another subsidiary in a treaty country and then shift them to the parent corporation in the non-treaty country, ensuring that they are never taxed.

Congress may adopt a provision (which was originally proposed by Rep. Lloyd Doggett of Texas) that would simply impose the withholding tax that would apply if the payment was made directly to the parent company in the non-treaty country in that situation. This would prevent treaty shopping and raise $7.7 billion over ten years.

Read CTJ's 2007 report explaining the proposal when it was proposed by Rep. Doggett.

On Tuesday, the Senate Finance Committee completed a series of hearings on the President's proposal to raise $90 billion with a fee on risky assets held by the 50 biggest financial institutions to ensure repayment of bailout funds. One of the best explanations of why Congress should impose such a fee was provided by Douglas Elliott, a Brookings Institution scholar and a former investment banker.

Some opponents of the fee have argued that it will be ultimately paid by all taxpayers because banks will pass it on to customers. Elliott responds that even if the fee is partially passed on, the taxpayers who pay the most (those who do the most business with banks) would be the taxpayers who benefit the most from the bailout. (The cost of borrowing for these taxpayers would be much greater if the government had allowed the financial system to collapse.) Elliott also points out that the fee would be equal to just two percent of the banks' income plus compensation, and would equal just 0.1 percent of assets.

Other opponents have questioned why such a fee should be imposed on some banks that have already paid back their bailout funds or those who received no funds. As for those who have paid back their funds, Elliott points out that the benefits they received are much greater than the exact dollar amount that was given to them directly.

"The aid that was provided was generally priced well below what the private market would have charged for the same risk," he explained, adding that "merely paying off the aid under the terms required does not come close to fully compensating taxpayers for the risks they successfully took to restore the economy."

And really all financial institutions benefited regardless of what they received directly. "[T]rillions of dollars of value had been destroyed on securities and loans, much of it in the hands of the institutions which would be paying this fee," Elliott explained.

"Failure of the government to act in the extraordinary manner that it did would have allowed a further meltdown that would have destroyed trillions of dollars more in value. The industry should be extremely grateful for this aid, instead of minimizing the nature of the help in order to avoid a relatively trivial fee."

Florida is projected to have a $6 billion shortfall for FY2011. Given this deep financial hole it would probably make sense for lawmakers to investigate ways of raising taxes.

Instead, the Florida legislature has voted unanimously (115 to 0 in the House and 39 to 0 in the Senate) to increase existing tax credits and create some brand new ones. Governor Crist is expected to sign the bill into law.

The tax credits are even more audacious than what we've become accustomed to seeing from the more conservative state legislatures. The crown jewel of the package is a new tax credit that caps the sales tax on yacht purchases to $18,000. Keep in mind that the sales tax would not exceed $18,000 unless the cost of the yacht was greater than $300,000. In other words, this is a tax credit that benefits only those who purchase a yacht worth more than $300,000.

The package includes other gems, like credits for film and TV production. The total cost of the package of credits is estimated to be around $200 million over three years.

But given how difficult it can be to project the cost of tax expenditures (government subsidies provided through the tax code), that cost could easily be much more. As we reported last week, a recent State Auditor report in Missouri found that credits in that state unexpectedly cost an additional $1.1 billion (above and beyond what was originally projected) between FY2005 and FY2009.

Surely, there are better ways for the state to spend hundreds of millions of dollars, but it's likely that the yacht construction, film and television and other favored industries would disagree.

Minnesota Governor Tim Pawlenty is at it again.  Like most states, Minnesota continues to face a sizeable budget gap as a result of the economic recession.  In response, for the second year in a row, the state’s legislature passed a progressive tax increase aimed at mitigating the need to cut the state’s vital services.  Also for the second year in a row, however, Governor Pawlenty has decided to veto that package.

The plan put forth by the Minnesota legislature would have created a new top income tax rate on incomes over $200,000 for married couples, and over $113,100 for single filers.  The bracket, had it been enacted, would have expired in 2013 if the state’s budgetary situation had improved to the extent specified in the legislation.  Overall, a mere 15% of the state’s budget gap would have been filled via the income tax hike, with most of the remainder being handled through spending cuts pushed by the Governor. 

Despite the targeted, temporary, and modest nature of the hike, Governor Pawlenty repeated the same tired line regarding the “job-killing” aspects of the tax. 

Unfortunately, Pawlenty demonstrated no such hesitation to tax hikes when he very recently agreed to raise taxes on low-income families via a reduction in the renter’s credit and the elimination of the state’s gas tax credit.

Despite the conservative mantra that all tax hikes harm the economy, current economic theory suggests that reductions in state spending are actually likely to do more harm to a state’s economy than targeted tax hikes. 

Wayne Cox, director of the Minnesota Citizens for Tax Justice, recently explained this point in the context of the Governor’s veto: “Last year state economist Tom Stinson described Pawlenty’s cuts-only solution as the one that would reduce jobs the most. Pawlenty appears to be the one with the hearing problem. … Governor Pawlenty has taken his nine-iron to Minnesota’s jobs again.”

Following Governor Mark Parkinson’s lead, the Kansas legislature voted Tuesday to increase the state’s sales tax rate from 5.3% to 6.3%.  Beginning in July of 2013, the increase will be scaled back to 5.7%.  While this outcome is a disappointment relative to the sales tax base broadening discussed prior to the start of the session, the legislature should be applauded for including two progressive offsets aimed at mitigating the impact of the sales tax hike on the state’s most vulnerable families.

Over the Fiscal Year 2011-2015 period, the legislature’s plan returns about 5% of the revenue gained from the sales tax hike to the state’s lower-income families via a modest expansion of the state’s food sales tax rebate program and an increase in the state’s Earned Income Tax Credit (EITC) from 17% to 18% of the federal credit. 

Unfortunately, while the increases in the sales tax rate and sales tax rebate are permanent, the EITC expansion will lapse in December of 2012.  Given that low-income Kansans pay a larger percentage of their income in tax than anyone else in the state, lawmakers should consider making the EITC expansion permanent when the time comes to revisit this issue.

At least two points bear mentioning in reference to Kansas’ approach to its budget deficit.  First, while the state should be applauded for taking a balanced approach that relies on both revenue increases and spending cuts, the state could have filled its budget gap by enhancing the progressivity of its income tax, which would have fewer consequences for low- and middle-income families.  States without income taxes can be at least partially forgiven for relying on regressive taxes to raise revenue quickly during a recession, but Kansas already has an income tax in place and should have used this tool more directly to raise revenue in an equitable manner.

Second, if Kansas lawmakers were (unwisely) committed to avoiding an income tax increase, revenue could have been generated from the sales tax more efficiently by eliminating unwise exemptions, rather than raising the rate.  A recent survey by the Federation of Tax Administrators focusing on 168 potentially taxable services found that less than half of these services are taxed within Kansas’ borders.  Lawmakers should have taken the advice of the state’s Secretary of Revenue, as well as some of their own colleagues, and reformed the sales tax base, rather than simply raising the rate of a very imperfect tax.

A recent report from the Missouri State Auditor’s Office reveals that the actual amount spent by Missouri on tax credit programs far exceeds the amount that policymakers, relying on official fiscal notes, expected to spend.  By comparing the original fiscal notes of 15 of Missouri’s largest tax credit programs to their actual costs, the State Auditor discovered that during the fiscal year 2005 through 2009 period, over $1.1 billion was spent on these credits beyond what had been projected. 

This was made possible, of course, by the fact that many of Missouri’s tax credits are essentially open-ended entitlement programs.  This is in sharp contrast to most other types of spending in the state, which are prohibited from exceeding the amount specified during the appropriations process.

The table on page 8 of the State Auditor’s study provides the gory details on how this over-spending occurred.  For example, while the fiscal note attached to the Historic Preservation credit led policymakers to believe that the state would devote roughly $71 million in state resources to this cause over the 2005-2009 period, the actual cost came in closer to $637 million — nearly 800% more than expected. 

To take another example, the state’s Brownfield Remediation/Demolition credit came it at over 2500% over budget (no, that’s not a typo) — costing a full $93 million, rather than the measly $3.5 million that was projected in the state fiscal note.

To be clear, these discrepancies are not so much a criticism of the accuracy of Missouri’s fiscal notes as they are an indictment of the budgetary mechanisms in place for dealing with such estimation errors.  Creating a new program from scratch will always bring with it enormous uncertainties; the responsibility of those who govern is to ensure that they have the tools in place for dealing with these uncertainties. 

As the State Auditor’s Office notes in its report, greater use of annual caps on tax credits, cumulative caps on credits, sunset provisions, and improvements in existing procedures for analyzing the benefits of tax credits could all greatly enhance the state’s ability to finally bring this unpredictable (and massive) spending back under control.

In addition to the report’s recommendations and its evaluation of the actual vs. projected size of tax credits, its discussion of a few tax credits that are already subjected to the appropriations process provides reason for hope among those who would like to see tax expenditures and direct expenditures put on a more even footing (pp. 10). 

Furthermore, another table in the report interestingly reveals that the vast majority of tax credits are not in fact administered by the Department of Revenue (pp. 6).  This information certainly bolsters the case of those in Missouri who would argue that many of these programs are little more than undercover spending disguised as “tax cuts.”

ITEP, CTJ, and dozens if not hundreds of other organizations have argued for years that a well-designed sales tax should apply to nearly all retail sales, including both goods and services. We have shifted over the years from an economy in which most people sell goods to an economy in which most people sell services. Taxing only the sale of goods is an antiquated and inadequate approach for any state or local government to take.

So why don't all states with sales taxes expand them to apply to services? The answer has nothing to do with what's good policy and has everything to do with politics. Pretty much every business that provides a service can conjure up some argument as to why this particular service is vital to the health and happiness of the state's residents, and from there will argue that a tax (no matter how minimal) will destroy their ability to provide this service.

The most recent example comes from Washington, DC. The DC yoga lobby flexed their political muscle yesterday, urging yoga consumers (apparently known as yogis) across the District of Columbia to oppose expanding the District’s sales tax base to include yoga services and gym memberships.  The “DC Yogis Against the Yoga Tax” — which appears to be a coalition of yoga studios, teachers, and consumers — argues in their boilerplate letter to the Council that “most yogis and gym members are middle income-ers who've simply made it a priority to invest in their health and well-being.  The DC Council should reward their behavior, and encourage more people to take responsibility similarly for their own well-being.” 

Their plea then subtly attempts to downplay the revenue that could be gained by a tax on yoga, implying that such a tax would encourage people to abandon yoga, and therefore result in losses in productivity, self-reliance, and basic human functioning — all of which would adversely impact DC’s coffers.

If you live in the District of Columbia, we suggest that you write to your council member to tell them you support this tax proposal, which is essentially just an attempt to expand the base of the sales tax.

For more information, the DC Fair Budget coalition has additional details on the proposed sales tax base expansion, as well as on fiscal 2011 revenue options more broadly.  Also see the DC Fiscal Policy Institute’s take on sales tax base expansion, and on the recent outcry from the yoga community.

DC's yoga lobby is not unique. Maryland’s recent attempt to tax a handful of services met similar obstacles.  After proposing a list of perfectly sensible expansions of the sales tax base, industry lobbyists skillfully removed their clients from the list, one-by-one, until only the computer services industry remained (and of course, in time, the computer services industry was eventually able to avoid taxation as well). 

During all of this, the circling of the Annapolis capital building by lawn care trucks provided one of the most memorable and oft-cited examples of the influence that special-interests can have in a tax policy debate. 

For more on the importance of taxing services, be sure to read this recent op-ed by Sharon Parks of the Michigan League for Human Services.  In it she explains the history and merits of taxing services in Michigan, and advocates strongly for the proposal put forth by Michigan Governor Jennifer Granholm to expand the state’s sales tax base to include a host of new services, and to return some of the revenue gained to Michiganders via a 0.5 percentage point decrease in the sales tax rate.

Late last month, Washingtonians for Education, Health, and Tax Relief filed a ballot initiative to reduce the state's structural deficit and reduce the unfairness of the state's tax structure. One of the lead organizers of the effort to get Initiative 1077 on the ballot and approved by voters is Bill Gates, Sr.

Gates wrote in a recent Seattle Times op-ed, "I hope you will join me in supporting real tax reform to benefit the middle class and small business in Washington state, while making a much-needed investment in our schools and health systems. It's an idea whose time has finally come."

According to a fact sheet from the Economic Opportunity Institute, the initiative would:

• Introduce an income tax on couples with incomes above $400,000 and singles over $200,000;
• Reduce the state portion of the property tax by 20%;
• Eliminate or reduce the Business and Occupation tax for many businesses by raising the small business credit from $420 to $4,800 per year;
• Dedicate net new revenues to education and health;
• Require regular reporting on how revenues are spent and require that future changes in the income tax be approved by a vote of the people.

ITEP's recent report, Who Pays?, which analyzed the impact of tax structures in all fifty states, found that yet again Washington has the most regressive tax structure in the country. Serious efforts in Washington to increase tax fairness should be welcome news to tax justice advocates everywhere.

The Minnesota Budget Project (MBP) recently updated their policy brief, Revenue-Raising Options to Help Solve Minnesota's Budget Deficit. According to MBP, "Minnesota faces a weak economy, daunting state deficits and some very tough choices." The state's February economic forecasts show an expected budget deficit for the fiscal year 2012-13 biennium of $7 billion.  

However, this grim news doesn't mean that policymakers are without options. In fact, the policy brief explains that their options include enacting a 10 percent income tax surcharge, creating new income tax brackets, modernizing the sales tax, and eliminating various business tax preferences. Minnesota lawmakers should follow in the footsteps of other states facing tough economic times and use a balanced approach of spending cuts and tax increases to fill the state's shortfall, rather than relying entirely on cuts in public services.