This week, efforts to crack down on offshore tax evasion and illegal flows of money were stymied by the U.S.'s own tax haven, Delaware. The Financial Secrecy Index ranks Delaware as the world's number one secrecy jurisdiction and this week one of the state's Senators fought to maintain its ranking.

Last year, Senators Levin, Grassley, and McCaskill introduced a bill (S. 569) to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed. A summary of the bill's provisions can be found here. The Senate Homeland Security and Government Affairs Committee (HSGAC) had scheduled a markup of the bill this week, but that was postponed when an alternative bill was proposed by Sen. Carper (D-DE). In addition to other problems, Carper's bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being. This would defeat the whole purpose of the bill.

In hearings last year on S. 569, Senator Levin told of a single Utah company that had been engaged in suspicious wire transfers of $150 million. When Immigrations and Custom Enforcement (ICE) investigated, they discovered a web of over 800 companies formed in all 50 states, all controlled by the same Panamanian entities involved "in a massive shell game in which U.S. companies were being used to disguise the movement of funds and mask suspicious activity." The Utah company had been set up by a Delaware corporation, and the investigation hit a dead end when ICE was unable to discover who the beneficial owners of the corporations actually were.

Or, take the case of Viktor Bout, which Senator Levin described in another hearing last year. Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists.

As Senator Levin explained:

In July 2009, Romania filed a formal request with the United States for the names of [Bout's] company’s owners and other information.  But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.

Shell companies — as they are called because they don't do any real business — are used for all kinds of illegal purposes, including laundering money from illegal activities and financing terrorists. They are also used extensively for tax evasion. S. 569 would help law enforcement authorities combat these illegal activities and many law enforcement agencies have voiced support for the bill.

Sen. Carper is obviously concerned about his state's ability to maintain its status as the incorporation capital. But that can hardly take priority over addressing criminal activities and threats to national security. Let's hope his colleagues on HSGAC are less myopic than he is.

President Obama wants to sign a jobs bill into law. The majority of members of the House and Senate want the same thing. So do the two million out-of-work Americans who will have lost their unemployment benefits by July because of Congress's inaction. Not to mention the millions of Americans who will see public services like education and public safety slashed because their states have to make up shortfalls in Medicaid funding. And then there are the mainstream economists who conclude that some deficit-spending on measures that pump money immediately into the economy and create jobs are entirely justified when unemployment is hovering around ten percent. In the face of all this, a minority of 42 Senators has managed to block legislative action.

Congress has fought a months-long battle over the bill, H.R. 4213, which includes an extension of emergency unemployment benefits and Medicaid funding to states, two spending measures that economist Mark Zandi has argued are the most effective way to stimulate the economy. These measures result in immediate spending, which leads to a boost in consumer demand, and the retention or creation of jobs to produce the goods and services needed to meet that demand.

The bill also includes a collection of provisions that extend short-term tax breaks for business that Congress enacts every year or so. Members of Congress and Hill staffers often call these the "tax extenders." CTJ has criticized the tax extenders for years. But, we support them this year because they are coupled with provisions that would offset their costs by clamping down on unfair tax loopholes. This is a major step forward for Congress. See CTJ's many reports on these loophole-closing provisions.

To their credit, Democratic leaders have tried every conceivable tactic to win over the so-called "moderates" who are blocking the bill.

For example, the House passed legislation three times to completely eliminate the infamous "carried interest" loophole that allows certain wealthy investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate. This time, the House scaled back its provision to close this loophole, and Democratic leaders in the Senate scaled the provision back multiple times in their versions of the bill. Eliminating this loophole, which was proposed by the Obama administration, was estimated to raise about $24 billion over a decade. Democratic leaders in the Senate whittled that down to $13.6 billion. The provision is not so much a loophole-closer any more as a loophole-reducer.

Other compromises made to secure votes were even more alarming. The most recent proposal would have taken over $9 billion of unspent funds from the recovery act that are supposed to be used for food stamps to help offset the costs of this bill. This is preposterous. Food stamps are one of the most effective types of stimulus, along with unemployment insurance benefits and fiscal aid to states, according to Mark Zandi.

The country needs the Senate to pass, some way or another, a jobs bill. Sadly, Democrat Ben Nelson and the 41 Republican Senators have the ability, under the Senate's bizarre rules, to stop that from happening.

Bills moving through the California legislature would make it much easier to determine whether California’s special tax breaks — costing billions of dollars annually — are worth the trouble.  Specifically, the Assembly would require that the names of publicly traded corporations, and the amounts they received in specific tax breaks, be made publicly available on a searchable website.  The Senate, in turn, is seeking to create a new job creation reporting requirement, and to require that new tax credits include specific, measurable goals and sunset dates.  Business groups have predictably lined up in opposition to these bills.

Movement in the California Senate

In passing SB 1272, the Senate found that “The Legislature should apply the same level of review and performance measure that it applies to spending programs to tax preference programs, including tax credits.”  In order to help make this ideal a reality, SB 1272 requires that each new credit be created with defined goals, as well as performance measures for evaluating the credit’s success in achieving those goals.  The bill also requires that data collection requirements be attached to each new tax credit in order to make such evaluations possible. Finally, in a move similar to one recently taken by Oregon, the bill would require each new tax credit to sunset after seven years. 

SB 1391 has a slightly more narrow focus than SB 1272, requiring any entity claiming a job creation tax credit to report on the number of jobs created as a result of the credit. 

Both SB 1272 and SB 1391 have passed the Senate, and will receive hearings in front of the Assembly Committee on Revenue and Taxation next Monday (June 28).

Movement in the California Assembly

On the Assembly side, AB 2666 would create a requirement that the names and amounts of tax credits received by publicly traded companies be made available on a searchable website.  The bill states that this website would be created with the goal of increasing “public awareness of the amount and scope of tax expenditures for businesses in this state.” 

Work of CTJ Cited

Interestingly, in order to demonstrate the potential value of publicly-available, company-specific tax data, the official bill analysis cites the enormous impact that CTJ’s analyses of SEC data had in bringing about federal tax reform: “Robert McIntyre, working at Citizens for Tax Justice combed through the financial reports of the nation's largest companies and found that 128 of the 250 largest U.S firms paid no federal corporate income tax in at least one year between 1981 and 1983 (17 paid no tax in all three).  The resulting furor pushed Congress to enact the Tax Reform Act of 1986.” 

AB 2666 has already passed the Assembly, and is currently making its way through the Senate.

Business Lobby Does As Expected

Predictably, business groups in the state have already lined up in opposition to these good-government measures.  Four groups have chosen to officially oppose all three bills: the California Chamber of Commerce, California Manufacturers and Technology Association, California Aerospace Technology Association, and TechAmerica.  A slew of other business groups — including the Bankers Association and Retailers Association — have come out in opposition to at least one of the bills.  The fight to enact SB 1272, SB 1391, and AB 2666 into law will no doubt involve a tough uphill battle against these powerful special interests.

You can find information on each of these bills on the California legislature’s website.

North Carolina’s state Senate has gone to bat for big business by voting to eliminate an important incentive for companies to pay their fair share of corporate income taxes.

North Carolina remains in the minority of states that levy corporate income taxes but do not require corporations to file a combined tax return for all of their affiliates, a requirement called "combined reporting" by policymakers. The lack of combined reporting leaves the state vulnerable to various income shifting strategies used by large, multi-state corporations.  However, since 1941, North Carolina’s Department of Revenue (DOR) has had the authority to (at its discretion) force affiliated corporations to file combined returns.  In recent years, due to major court decisions affirming this authority and engaged leaders at the DOR, they have used this power aggressively, and successfully, to seek out corporate tax dodgers and hold them accountable for the true tax they owe.  

Last year alone, DOR’s ramped up corporate tax compliance efforts brought in more than $400 million ($150 million was budgeted) and the governor, Senate, and House’s FY10-11 budget proposals are counting on DOR to bring in another $110 million this year.

But the North Carolina Senate’s budget proposal also strips DOR of another tool that has allowed for their success, the 25 percent “large tax deficiency” penalty.  The penalty works like this: If the new tax liability determined from combining returns is more than 25% of the original tax paid, corporations may have to pay a penalty equal to 25% of the difference on top of the new tax they owe. 

North Carolina’s Revenue Secretary, Ken Lay, says that without this penalty, multi-state corporations would continue to engage in tax avoidance strategies, playing the “audit lottery” and taking a chance on hiding their income.  The DOR uses the penalty to incentivize companies that owe back taxes to settle quickly and, as a reward for doing the right thing, DOR will waive the penalty. 

They need this “stick” because without it their compliance efforts will fail to produce meaningful results and certainly will not yield the $110 million budgeted for collecting unpaid taxes.
 
Whether or not to strip this authority is at the center of North Carolina’s final budget negotiations between the Senate and House.  The provision was not included in the House’s budget proposal.

Sen. Dan Clodfelter, a Democrat and chair of the Senate’s finance committee, is leading the charge against DOR.  He thinks removing the penalty is “only fair” because businesses should not be punished for not anticipating a DOR audit that would result in different tax liability from a combined versus separate entity reporting practice. Other proponents claim that those forced to pay the penalty were “well-intentioned” and “had no way of knowing the department would disagree with its tax return years later.”
 
Secretary Lay disagrees and says that DOR focuses on pursuing cases in which businesses are believed to be intentionally hiding income through complex tax avoidance schemes commonly used by large, multi-state corporations. When DOR determines a corporation did not purposefully abuse its separate entity filing status to hide income, the penalty is waived.
 
With few exceptions, big corporations are fully aware when they're dodging their tax responsibility.  They frequently hire large accounting firms who tout tax avoidance schemes and promise them substantial tax savings. And in two recent high-profile court cases in North Carolina against Wal-Mart and Food Lion, the evidence was clear that the two companies restructured their operations with the intention to reduce their taxes in the state and elsewhere.  

Even North Carolina’s major newspapers have joined this debate on what would seem to be an unusually technical issue.  Sen. Clodfelter’s hometown paper called the Senate’s proposal to “ease corporate taxes” a” bad idea” and the Raleigh News and Observer suggested big businesses’ campaign contributions may be behind the Senate’s efforts to eliminate “tax enforcement policies that are both fair and rigorous.”

As the North Carolina Budget and Tax Center recommends, the obvious solution to address Sen. Clodfelter’s concerns would be to enact mandatory combined reporting.  Mandatory combined reporting would not only prevent tax-dodging and level the playing field between large, multi-state corporations and smaller, in-state businesses, but it would also offer clear guidance on the correct way to report income and business activity that occurred in North Carolina.

New Jersey Republican Governor Chris Christie’s proposed constitutional amendment capping property tax growth at 2.5% is as misguided as it is hypocritical.  The plan comes on the heels of Christie’s suspension of property tax relief for homeowners with incomes less than $70,000 and for 600,000 senior citizens. It also follows more than $800 million in cuts in state aid to local governments. The proposed property tax cap would do more damage to local governments’ ability to provide basic services like public safety and education.

The Governor's Proposed Cap on Property Tax Increases
    
While still in the process of wreaking havoc on the New Jersey budget, Christie is proposing a constitutional amendment that would create a 2.5% cap on the increase in the property tax levied by municipalities, school districts and counties, as well as a 2.5% cap on spending for state programs. After approval by the legislature, the proposal would have to be approved in a ballot referendum in November.

The proposal would allow an increase beyond the 2.5% cap only if the resulting revenue was used on debt service payments or approved by local referendum. Christie's proposed property tax cap would replace an existing 4% cap, which includes several additional exceptions.

If Christie’s goal was truly to hold down property taxes for typical New Jersey residents, he would not have vetoed the continuation of a 2% millionaire surtax. The revenue from that tax would have funded the restoration of $635 million in property tax rebates for more than 600,000 seniors and people with disabilities. The veto, which Democrats failed to override this week, suggests that Christie is more concerned with providing tax breaks for the wealthy than providing property tax relief for those who need it most.

Making matters worse, Christie's budget cuts over $800 million in state aid to local governments. The cuts will force local governments who depend primarily on property taxes to raise even more revenue to close the gap created by the cuts.

A Democratic Alternative
    
Signaling some willingness to compromise, Democratic Senate President Stephen Sweeney has proposed a 2.9% cap coupled with a continuation of existing exceptions to the cap. Defending his proposal, Sweeney points out that the existing 4% cap has already worked and has reduced average annual property tax increases from 7% to 3.3%.

Sweeney's measure is also different from the Governor's in that it would be a statute rather than a constitutional amendment, meaning the state legislature would decide on the policy change rather than voters this November.   

Bogus Research Fails to Make Poorly Targeted Tax Break Look Like Good Policy

Christie claims that the property tax cap will force local governments to become more efficient by consolidating and working out shared service agreements. This logic was bolstered by a Manhattan Institute report, which argued that the measure on which the New Jersey law is based was a success in Massachusetts.

The Center on Budget and Policy Priorities (CBPP) has since thoroughly debunked the Manhattan Institute report by outlining its many absurdities, like its implication educational spending and test score differences are explained by property tax caps and not just with specific state policies. Another recent report by CBPP explains that the Massachusetts tax reform model Christie is hoping to follow is already causing dramatic inequalities between districts, placing an unfair tax burden on low- and middle-income families, and debilitating local government services.

The inherent problem with hard property tax caps is that they have proven time and again to be poorly targeted and have severely limited the ability of local governments to meet the basic needs of local residents. If Christie’s goal is to force local governments to consolidate and become more efficient, he could work directly toward this goal rather than relying on rigid property tax caps to bankrupt localities into cooperation. In addition, if his goal is to provide property tax relief, he could provide more of precisely the targeted tax relief that his budget eliminates.

Some Bad Ideas Are Contagious

Unfortunately, New Jersey is not the only state debating a new property tax cap. New York Governor Patterson is also floating a property tax cap of his own, although it would exclude school property taxes.

The time for the New Jersey property tax cap debate is quickly ticking away as the measure must be approved by July 7th for it to be on to the ballot in November. Complicating matters further for Christie, the proposal must also garner the support of a significant number of Democrats as the measure requires a three fifths majority in the Democrat-dominated state legislature. With Democratic support leaning toward Sweeney’s proposal and Christie’s rejection of it, the debate over the proposal will certainly intensify. Hopefully, the Democratic majority will hold strong and block the Governor's proposal.

The three candidates vying to be the Democratic candidate for Minnesota Governor are former Senator Mark Dayton, former Congressman Matt Entenza, and current House Speaker Margaret Anderson Kelliher. The candidates aren't likely to go negative during the primary, but the myriad of fiscal issues facing the state are anything but positive.

As the Minnesota Budget Project (MBP) reports in an analysis released just last week, the 2010 legislative session ended with "many opportunities lost." Elected officials didn't use a balanced approach to solving the state's budget shortfall, instead relying on spending cuts and various stop-gap measures that did not include revenue-raisers. They certainly did no favors for future lawmakers. MBP writes, "Because of heavy reliance on one-time spending cuts and timing shifts, these budget decisions did not make progress on reducing the future budget shortfall, leaving a profoundly difficult problem for the next legislature and governor to tackle next year. "

Voters will go to the polls on August 10 and it appears that all three of the Democratic candidates believe that new revenue will be necessary in order to deal with the state's budget. This is, of course, welcome news for Minnesotans compared to the "no new taxes" rhetoric of current Governor Tim Pawlenty.

If Dayton, Kelliher, or Entenza are elected in November they will be forced to address many issues. But the one that perhaps looms largest is the state's fiscal future. All three candidates have their own proposals.

Dayton has said, "I would raise $4 billion by making the richest Minnesotans, the [top] 10 percent, pay their fair share of taxes." Kelliher also wants to raise taxes on the wealthy, but is looking to only raise about $600 million from taxing the best off. Entenza critiques Dayton's tax increase by saying that the proposal is too strong, "I think some of the business consequences of that are something we don't want to look at." However, he does hint at supporting some type of temporary tax surcharge and taxing internet sales.

As the Senate continues a seemingly endless debate over H.R. 4213, the jobs and "tax extenders" bill, business lobbyists, right-leaning economists and politicians have had more time to shape their arguments in defense of the tax loopholes that the bill would pare back.

To offset the costs of the tax breaks included in the bill, three types of loopholes would be restricted. They include the "carried interest" loophole that allows certain investment fund managers to treat their compensation as capital gains and thus enjoy a lower tax rate, the "John Edwards" loophole allowing people with "S corporations" to avoid payroll taxes, and abuses of the foreign tax credit by U.S.-based multinational corporations.

The debate over the "carried interest" loophole has received the most attention, and CTJ has responded to some of the outlandish arguments made in its defense.

More recently, Senator Olympia Snowe (R-ME) has voiced her opposition to the provisions regarding "S corporations," and filed an amendment to strip them from the bill. A recent report from CTJ explains that this amendment should be rejected because the loophole in question allows people to underestimate the extent to which their income is wages, meaning they avoid payroll taxes.

The report also explains that the main effect of the provisions in H.R. 4213 regarding S corporations would probably be on Medicare taxes. The new health care reform law actually applies Medicare taxes to most non-retirement income, but there is a bizarre exception left for certain non-wage income from S corporations. H.R. 4213 would not even eliminate this exception entirely but would merely target those taxpayers who are most obviously manipulating the tax rules to avoid paying the Medicare tax. This seems like the least Congress could do.

The provisions in H.R. 4213 that prevent abuses of the foreign tax credit have also received more attention lately. A new report from CTJ responds to criticisms of these provisions made by the Peterson Institute's Gary Hufbauer and Theodore Moran.

The purpose of the foreign tax credit is to ensure that American individuals and corporations are not double-taxed on income that they earn in other countries. Hufbauer and Moran seem to acknowledge — and endorse — the common practice of corporations using credits in excess of what is necessary to avoid double-taxation. In these instances, corporations are really using the credit to lower their U.S. taxes on their U.S. income. Or, put another way, it means the credit is being used to subsidize foreign countries by helping U.S. corporations pay their foreign taxes.

Surely, everyone should agree that this is not the purpose of the foreign tax credit. But without the reforms included in H.R. 4213, these practices will continue, and we will have missed an important opportunity to make our tax system fairer and more rational.

On Monday, New Jersey Democrats will attempt to override Governor Christie’s veto of a bill that would have temporarily restored New Jersey’s millionaire’s tax, an income tax surcharge on the state’s wealthiest residents who make up less than half of one percent of the state’s taxpayers. 

As promised, Governor Christie vetoed the millionaire’s tax moments after it was approved last month, sticking to his vow to veto any tax increase that was sent to his desk.  Supporters of the millionaire’s tax want to use the $637 million it would raise to fund property tax rebates for older adults and disabled residents that were cut from Christie’s $29.3 billion budget proposal.

The Democrats probably won't secure enough votes to override the veto, but a poll released this week from the Quinnipiac University Polling Institute shows their constituents have their backs.  According to the poll, 61 percent of New Jerseyans think Governor Christie should have approved the millionaire’s tax.

As we wrote earlier in the spring, there is glaring hypocrisy in Christie using his anti-tax pledge to justify his veto of the millionaire’s tax.  While Christie has no appetite for tax increases on the wealthiest New Jerseyans, he continues to support a reduction in the Earned Income Tax Credit (EITC) for hard-working low-income taxpayers (which amounts to a tax increase) and increases in fees in addition to his proposed suspension of property tax rebates for older adults and the disabled.  And, his more than $1.2 billion cuts in aid to local governments and school districts will more than likely force local leaders to increase property taxes — the very taxes he claims he wants to “control”.  

Assemblyman Gordon Johnson said it best recently: "New Jerseyans are going to need a thesaurus to decipher all the ways Governor Christie’s administration is trying to insist their budget plan doesn’t increase taxes on senior citizens and working-class New Jerseyans.  Call them what they may, this budget would mean this simple fact — senior citizens, the middle class and the poor are about to pay significantly more while the wealthy enjoy a nice tax cut."

Film tax credits have received a lot of attention in recent days.  Just as Virginia Governor Bob McDonnell was signing the state’s first film tax credit into law, stories out of Iowa and New Jersey, as well as a New York Times article about film credits in Michigan, Texas, Pennsylvania and Utah, provided quite a few good reasons to be skeptical of these credits.

On Monday, Virginia Gov. Bob McDonnell excitedly signed into law the state’s new film tax credit, with sitcom star Tim Reid (from “WKRP in Cincinnati,” “Sister Sister,” and “That 70’s Show”) there to celebrate.  In order to justify enacting this giveaway for the film industry while Virginians are having to make due with reduced state services, Gov. McDonnell made the asinine claim the credit would produce a 1400% return on investment.  Economists everywhere have no doubt been laughing ever since.

Meanwhile, in New Jersey, fellow 2009 gubernatorial election winner Chris Christie took exactly the opposite approach in vowing to eliminate the state’s film credit in order to help balance the state’s budget.  While Christie clearly had his priorities dead wrong in choosing not to extend the state’s income tax surcharge on millionaires (61% of voters favor the surcharge), he has certainly hit the nail on the head when it comes to this wasteful giveaway.  Not even the cast of “Law and Order: Special Victims Unit” appears to have been able to sway him.

Stories this week from the Des Moines Register and New York Times provide some very timely evidence regarding the wisdom of Christie’s approach, as well as the folly of McDonnell’s.  In Iowa, the Register reports that new criminal charges have been filed in the state’s ongoing film tax credit scandal.  Specifically, three moviemakers have been charged with inflating the value of their expenses in order to increase their take from the state’s film credit program.  A $225 broom, $900 stepladder, and 16,000% markup on lighting equipment are among the bogus expenses claimed by the filmmakers. 

The steady drumbeat of discouraging news surrounding Iowa’s film tax credit makes clear that Virginia is facing an uphill battle when it comes to policing this program.

The New York Times this week explored a more specific attribute of state film tax credits: the steps states are taking to prevent movies they dislike from receiving taxpayer dollars.  In Michigan, a sequel to a cannibalism-themed horror movie that was supported by state film tax credits was rejected for subsidy this time around because the state’s film commissioner determined that “this film is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light.”  Michigan is by no means alone in enforcing this standard.  Films made in Pennsylvania can be denied tax credits if the movie in question does not “tend to foster a positive image” of the state. 

Texas possesses a similar requirement, which apparently was used to prevent the makers of a film about the Waco raid from even applying for film tax credits. 

And in Utah, the state’s Film Commission director admitted to withholding credits from films that he wouldn’t feel comfortable taking the governor to see. Whether or not this rule of thumb varies with the theatrical tastes of the governor in office at the time remains to be seen.  Upon reading the Times story, one blogger with the Baltimore Sun went so far as to argue that these provisions show that “states want propaganda from filmmakers.”  They certainly beg the question: If state taxpayers subsidize the film industry, is it inevitable that state governments will censor movies before they're made?

The Arizona Republic this week ran an excellent article detailing just how wrong anti-tax legislators were in assuming that their constituents would oppose a tax hike.  A temporary sales tax hike that barely made it out of the legislature earlier this year was approved by voters last month by an overwhelming 64-36% margin.  The measure also enjoyed solid majorities in many of the districts held by lawmakers that opposed sending this measure to the ballot.

One year after the Republican Chair of the House Appropriations Committee confidently declared that “Republicans in my district don’t want a tax increase,” State Rep. John Kavanagh’s District 8 joined the overwhelming majority of Arizonans in supporting the hike.  Similarly, District 22, represented by Republican Senator Thayer Verschoor — who headed the campaign in opposition to the sales tax — voted strongly in favor of the tax as well.  Notably, District 22 is also home to two other Republican representatives that voted against allowing their constituents to a chance to decide on the sales tax hike.  When all was said and done, every county in the state except for Mohave voted in support of the increase.

Without a doubt, the approval of this hike — despite its flaws — was both an enormous victory for the people of Arizona, and a sharp condemnation of the rabidly anti-tax nature of the state’s elected officials.  Fred Solop of Northern Arizona University stated the obvious when he said that legislators’ claims that “we need to take a different tack with the state economy, cut back spending and programs” were in fact not “aligned with the values of Arizona voters.” 

Lattie Coor, formerly the president of Arizona State University, underscored this point further by noting that last year only 10% of Arizonans felt that their lawmakers represented them, and that "to find such a substantial variance between what voters actually did on a proposition before them … and the vote of their elected representatives, underscores the disconnect between citizens and elected officials.” 

Once again, this episode makes clear that the anti-tax attitudes of politicians should never be mistaken for actual anti-tax sentiment among Americans.

Even though the gubernatorial general election season in California is less than two weeks old, the rhetoric between the candidates on fiscal and tax policy is already taking a turn for the worse. Republican candidate Meg Whitman’s campaign is trying to turn a 2 cent gas tax hike in 1981 into “a record of higher and higher taxes, more and more spending.” Statements like this by Whitman about Democratic candidate Jerry Brown’s record and California’s fiscal history are both misleading and betray a troubling lack of nuance in understanding California’s serious budget issues.  

Even before Brown had officially announced his candidacy for Governor in March, Republican gubernatorial nominee Meg Whitman had already fired an opening shot attacking Brown’s public service record in California. In a document entitled “A Voter’s Guide to Jerry Brown,” Whitman attempts to portray Brown as a "fiscal failure" during his time as governor, mayor and attorney general.

Not surprisingly, Whitman’s "voter’s guide" places much of Jerry Brown’s record out of context and ignores the reality of California’s fiscal history. For example, the document attacks Brown for approving a 2 cent increase in the gas tax as governor in 1981. What the guide and Whitman fail to mention is that this tax increase had the support of almost half of State House Republicans and was designed to fix a $2.5 billion deficit in transportation funding.

In an op-ed on June 6th in the San Diego Union Tribune, Brown defended his fiscal record, writing that during his term taxes were reduced by $4 billion overall. Whitman’s campaign attacked again by pointing out his opposition to Proposition 13 and quoting a 1992 New York Times article which said that he had turned a budget surplus into a more than $1 billion deficit. Showing how campaign rhetoric can be both misleading and contradictory, the Whitman campaign excludes the proceeding line of the same New York Times article which states that the nearly $7 billion dollars in cuts due to Proposition 13, which Whitman supports and accuses Brown of opposing, were a major cause of the fiscal problems.

As Dan Walters of the Sacramento Bee observed in a recent op-ed, “In a rational world, Whitman wouldn't be criticizing Brown for raising the gas tax but for cutting state taxes in 1978 as he and the Legislature simultaneously assumed billions of dollars of new financial burden for schools and local government because of Proposition 13's property tax cut.”

Whitman simplistically assumes that all spending and taxes are bad.  In fact, Brown’s bipartisan increase in the gas tax to meet the transportation needs of California citizens was an attempt by a governor to achieve a responsible balance in the budget.  

With recent polls showing Brown and Whitman locked in a dead heat and the recent failure of lawmakers to pass a budget, this is only the beginning of what will become an even more heated debate in the gubernatorial campaign over California’s budget.

Federal benefits for the long-term unemployed have been expired for over a week and the Senate still has not approved a bill (H.R. 4213) that would extend these and other vital measures. The bill also includes badly needed Medicaid funding for states and other provisions that would stimulate the economy. (See CTJ's recent reports on this legislation).

Call your Senators and urge them to vote for H.R. 4213.

Use this toll-free number provided by AFSCME to make your call: 888-340-6521

Part of the consternation among some Senators is that the spending provisions in the bill would add (modestly) to the deficit. Economists have explained that short-term deficit-financed spending measures can be used to effectively boost consumer demand, and thus job creation, during a recession, without adding to the long-term budget crisis.

Many of the Senators who have supported tax cuts that created long-term deficits (the kind of deficits that actually do lead away from fiscal sustainability) now oppose this bill out of their concern about "fiscal responsibility." Other Senators are more genuine in their concern about deficits but have wildly misplaced fears about a bill that has little, if anything, to do with our long-term budget situation.

A number of Senators are still concerned about the tax provisions in the bill. It includes an assortment of small tax cuts (mostly for business), which are often called the "tax extenders" by members of Congress and their staffs. While these tax breaks probably accomplish very little, the good news is that their cost would be offset with provisions that close unfair tax loopholes.

It's the Senators' devotion to maintaining these loopholes that is another factor slowing down progress on this bill.

Battle Continues Over "Carried Interest" Loophole for Investment Fund Managers

The most controversial tax provision would clamp down on the "carried interest" loophole, which allows investment fund managers to treat their earned income as capital gains and thus benefit from a much lower income tax rate. Over the past few weeks, some honest investment fund managers have spoken up to tell Congress that their loophole really is unjustified, and it was also reported that two Republican Senators favor closing the loophole.

The draft of the bill proposed by Senate Majority Leader Reid already watered down this reform a great deal (compared to the version that passed the House) by allowing the lower capital gains rate to continue to apply to a larger portion of carried interest. As a new report from the Center on Budget and Policy Priorities explains, the last thing Congress should do is weaken this provision any further.

Senators Defend the "John Edwards" Loophole

Another controversial reform would close the "John Edwards" loophole for "S corporations." Payroll taxes apply to wage income, but not other types of income. So, some people want to disguise their wage income as non-wage investment income to avoid payroll taxes. People who own S corporations have to determine (and tell the IRS) how much of their income is wage income and how much of it is other income, and of course there is a huge incentive to underestimate the amount that is wage income.

John Edwards famously played this trick by saying that his name was an asset and this asset, rather than his work, was generating most of the income of his S corporation.

Some Senators have expressed concern about the effect this reform would have on small businesses. But none have explained coherently why we should allow this type of scheme to continue.

Earlier this week, Maine voters approved a ballot measure that repeals an ambitious tax reform enacted in 2009 by the state legislature. The legislature’s plan would have reduced the state’s reliance on income taxes and increased its reliance on sales taxes in a way that was carefully calibrated to leave total tax collections unchanged (while cutting taxes on Maine residents and hiking taxes on tourists).

This tax reform plan had been placed on hold after a signature gathering campaign gave voters the opportunity to ratify or reject the legislature’s actions. Voters this week rejected the plan by a 61-39 margin—but don’t seem to have been aware that they were essentially voting to hike their own taxes by more than $50 million a year.

If it seems odd that Maine lawmakers would pass a revenue-neutral tax reform at a time of such budgetary turmoil, this is because the legislation’s sponsors had longer-term reform goals in mind. As in many other states, both the sales tax and income tax were riddled with loopholes that forced tax rates higher than they would otherwise need to be.  

The legislature’s reforms would have broadened the income tax base by repealing all itemized deductions, and broadened the sales tax base by eliminating exemptions for services from car repairs to laundromats to movie tickets. The tax increases from these base expansions were to be offset by reductions in the top income tax rate from 8.5 to 6.85 percent and the creation of a new refundable “household credit” designed to ensure that most Mainers would see net income tax cuts under the plan; state revenue officials estimated that 95 percent of Maine residents would have seen income tax cuts under this plan, and that 87 percent of residents would have seen net tax cuts even after the sales tax increases.

The plan was also motivated by a perception that tourists and part-year residents weren’t paying their fair share of the cost of funding public services. The plan would have increased the sales tax rate on certain items consumed primarily by non-residents, such as lodging and rental cars. This is the main reason why this revenue-neutral plan would have cut taxes on Maine residents by $50 million while increasing taxes on non-residents by a similar amount.

The good news for lawmakers is that because the plan was designed to be revenue-neutral, its rejection by voters won’t affect the state’s budget in the short run. But it’s likely that this failure will make budgeting more difficult for policymakers in the long run. Broadening tax bases by eliminating tax breaks makes a state’s revenue stream less volatile over time: a shortfall in consumer spending in one area can be offset by continued growth in another, and the result is a smoother, more predictable revenue stream.

From that perspective, this bill was a recipe for a more sustainable tax system. Unfortunately, many Mainers simply thought this was a referendum on whether the sales tax should apply to their movie tickets.

Federal and state lawmakers should study the example set by Hawaii during its most recent legislative session.  By reinstating the state’s expired estate tax, limiting itemized deductions for wealthy Hawaii residents, and increasing the state’s per-barrel tax on petroleum products, the solutions Hawaii found for its budget difficulties actually mirror some of the progressive revenue-raising ideas discussed at the federal level, and in other states.

Hawaii used to have a “pick-up” estate tax, meaning one that was tied to a credit in the federal estate tax, but that credit expired in 2005. So Hawaii lawmakers decided during this session to enact — over the Governor’s veto — an estate tax containing the same $3.5 million exemption that existed in 2009 federal law (see Hawaii HB2866).  With more than half the states, and the federal government, currently lacking an estate tax, this development is one that more than a few governments around the country should consider emulating.

In addition to Hawaii’s newly reinstated estate tax, lawmakers during this past session also voted to limit the sharply regressive nature of the state’s itemized deductions in an interesting way.  HB1907, which is expected to be signed by the Governor some time in the next month, will limit the maximum itemized deduction that can be claimed by the state’s wealthiest taxpayers.  Married couples earning over $300,000 per year, and single filers earning over $150,000, will be prevented from taking a total itemized deduction in excess of $50,000 (or $25,000 for single filers). 

To be sure, relative to the modest $4,000 standard deduction enjoyed by most low- and middle-income married couples in Hawaii (or the $2,000 standard deduction for single filers), itemized deductions in the state will remain quite generous.  Nonetheless, the proposal has roughly the same goals as President Obama’s proposal to limit these costly tax breaks by preventing wealthy taxpayers from applying them against any rate rate above 28%. 

Rhode Island and New Mexico have also taken steps to rein in itemized deductions this year, with Rhode Island eliminating them entirely, and New Mexico ending the itemized deduction for state income taxes paid.

Finally, even before the Deepwater Horizon spill made the case for taxing oil a political no-brainer, the Hawaii legislature overrode the Governor’s veto again in order to raise the state’s petroleum products tax by $1.50 per barrel.  The tax, included in HB2421, will raise much needed revenue for deficit-reduction and renewable energy initiatives.

Earlier this week, Rhode Island Governor Donald Carcieri signed legislation that significantly reforms the state’s personal income tax structure.  An ITEP analysis found that the bottom 95% of Rhode Islanders will see a net tax cut from the revenue-neutral reform, while the richest 5% will pay a slightly higher percentage of their income than under previous law. The problem is that this tax reform generates no new revenue to address the state's budget hole. 

Rhode Island lawmakers and the business community championed the reform as a means to make the state more competitive, convinced that lowering the marginal top rate will make the state more attractive to businesses.  While some of the motivations behind the reform are misguided, the end product has a lot to be said for it.  Starting on January 1, 2011, Rhode Island’s personal income tax will be simpler, more sustainable, and somewhat fairer as a result of the reform passed this week.

Elements of the Rhode Island Reform Package

Perhaps the most significant aspect of Rhode Island’s personal income tax reform is the full repeal of all itemized deductions coupled with a substantial increase in the standard deduction.  Itemized deductions are costly, “upside-down” subsidies with the greatest benefit going to the best-off taxpayers, offering little or no benefit for many middle- and low-income families.   The increased standard deduction along with the state’s personal exemption will phase out for taxpayers with taxable income between $175,000 and $195,000 and will not be available for those with taxable income above $195,000.  These changes alone will make Rhode Island’s income tax fairer and more sustainable over time.

To achieve their "competiveness" goal, lawmakers reduced the number of income tax brackets from five to three and lowered the top marginal rate from 9.9 percent to 5.99 percent.  They also eliminated the alternative flat tax method for calculating the income tax, which had been a windfall for the wealthiest residents in the state.

Dozens of special tax breaks and credits were also eliminated.   Only eight credits remain under the new law, including the state Earned Income Tax Credit and credits for child care and statewide property tax relief.  Much to the chagrin of many advocates, the movie and TV production, scholarship, and historic structure rehabilitation credits also remained intact.

Victory for Fairness and Simplicity, But What about Revenue?

Some proponents of tax reform argue that it should be done in a revenue-neutral manner, meaning it does not result in a net gain or loss of tax revenue. This is how Rhode Island's tax reform works. The cost of rate reductions is offset by reducing credits, deductions and loopholes. This will make the state’s income tax simpler, fairer and more predictable.  

Given the state's current budget difficulties, however, revenue-neutrality is an odd goal.   By not taking the opportunity through restructuring the income tax to raise additional state revenue, state lawmakers passed the tax-raising buck to local lawmakers. This is particularly true in light of a $165 million cut to school districts and municipal governments that will surely force tax increases at the local level in order to preserve investments in public education and other programs.  

In fact, the state budget cut to local governments all but ends the long-standing local car tax exemption program for low-valued cars.  In exchange for the cuts, the budget included a measure allowing municipalities to tax all but the first $500 in value of cars, whereas previous law had exempted the first $6,000 in value.  

This means that while low-income Rhode Islanders may see a slight decrease in their income tax from their state leaders’ reform efforts, they will likely also be paying more in local car taxes.  And, due to the sleight of hand state lawmakers pulled by ending their support for the exemption for low-valued cars, one could argue that on a whole, their tax reform “package” was not revenue neutral at all.

Among the dozens of bills and a $17.9 billion budget signed into law by Georgia Governor Perdue on Tuesday is a law eliminating low-income tax credits for hundreds of thousands of individuals in Georgia — cutting the size of the credit overall by about two-thirds. The legislation signed by Gov. Perdue did not, however, include the 50 percent reduction in the tax on long-term capital gains that was passed by the state’s legislature for the second year in a row.

Specifically, Governor Perdue approved the legislature’s decision to eliminate the “refundability” of the state’s low-income tax credit.  As a result, those low-income Georgians hit hard by sales, excise, and property taxes will no longer be able to receive refunds through the income tax system to offset these burdens.  

Overall, this change amounts to a $20 million tax increase on those in Georgia who are suffering most, and least able to pay during the current recession.  A recent ITEP analysis of this change to the low-income credit shows that 61 percent of the tax hike will fall on the poorest 20 percent of Georgia individuals and families—a group with incomes averaging $9,700 a year—and that virtually all of the tax hike will be paid by the poorest 40 percent of Georgians.

Refundable Credits Still OK for Corporations, but Not Families

While the refundability of Georgia’s low-income tax credit has been eliminated, this same feature of many of Georgia’s corporate tax credits will remain intact. As a report by the Georgia Budget and Policy Institute (GBPI) points out, the refundable portion of corporate tax credits provided by the state are actually similar in cost to the recently repealed refundable portion of the low-income credit.  It’s more than a little surprising, to say the least, that Georgia’s lawmakers believe low-income individuals to be less worthy of tax breaks than corporations.

Governor Vetoes Capital Gains Cut

Fortunately for Georgia residents, Governor Perdue vetoed for the second time an effort by Republican legislative leaders to cut capital gains taxes by an estimated $340 million.  According to an ITEP analysis, 77 percent of the tax reductions resulting from this change would have gone to the richest 1 percent of taxpayers in the state, while the 80 percent of taxpayers earning less than $76,000 per year would have received just 1 percent of the overall capital gains tax break.

Proponents of the capital gains tax break touted the effort as a sort of economic and jobs stimulus legislation, despite the consensus that exists among a wide array of economists that capital gains tax cuts are among the least effective stimulus efforts and have no connection to long-term growth.

As ITEP’s recent report “Who Pays?” points out, the poorest fifth of families in Georgia already pay nearly twice as much in taxes as a percentage of their income as the top 1 percent of Georgians. The legislature’s clear desire to shower the wealthy in additional tax breaks while forcing low-income Georgians to pick up the tab would only make this stark regressivity even worse.

Instead of continuing down this road, Georgia lawmakers could make their budget fairer and more sustainable by passing reforms like repealing the deduction for state income taxes along with a whole variety of reforms.

In an Atlanta Journal-Constitution op-ed, Kathy Floyd of AARP Georgia sums up our feelings about the budget this year by saying, frankly, “Georgia deserved better.”

Call your Senators and tell them to close the "carried interest" loophole allowing multi-millionaires running investment funds to pay taxes at lower rates than their secretaries.

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

Public interest advocates, faith-based groups, labor unions and others continued their push this week to prod Congress to enact a jobs bill that extends unemployment insurance benefits, COBRA health benefits for unemployed individuals, Medicaid funding for states and other vital measures that would boost the economy. The House approved its bill (the latest version of H.R. 4213) only after severely weakening it by dropping COBRA and Medicaid funding, and the Senate left for the Memorial Day recess without acting on it.

Most of the spending provisions in the bill are considered emergency spending, and do not have to be paid for under Congress's budget procedures. The bill also includes provisions extending several temporary tax breaks (mostly for business), and these provisions are often called the "tax extenders." The costs of the tax extenders are offset with provisions that close unfair tax loopholes.

These loophole-closing provisions are among several factors that have slowed down progress on the bill. Unfortunately, some Senators seem reluctant to close even the most abusive tax loopholes.

Citizens for Tax Justice released a group of reports over the past few weeks about the tax loophole-closing provisions in the bill.

The American Jobs and Closing Tax Loopholes Act of 2010 (a.k.a. the “Extenders” Bill) Would Boost the Economy and Improve Tax Fairness
This report explains the three general types of loophole-closers in H.R. 4213, including provisions to end abuses of foreign tax credits, provisions to clamp down on the "carried interest" loophole, and provisions to end the "John Edwards" loophole for business people with "S corporations."

Senators Defend “Carried Interest” Loophole for Investment Fund Managers in the Name of the Poor, Minorities, Small Businesses and Cancer Patients!
This report debunks the outrageous arguments that investment fund managers have made in defense of the "carried interest" loophole.

Key Provisions in H.R. 4213 Would Prevent Abuse of Foreign Tax Credits
This report explains the provisions of H.R. 4213 that would make the U.S. international tax system fairer and more rational and cut down on corporations shifting profits offshore.

Some investment fund managers admit that there is no justification for the carried interest loophole, which allows a part of their compensation (their "carried interest") to be taxed at the low capital gains rate.

On May 18, talk show host Charlie Rose asked Jonathan Nelson, CEO of the private equity firm Providence Equity Partners, if he could "live with it" if Congress taxed his carried interest at ordinary rates instead of the low capital gains rate. Nelson responded, "We could live with it if they changed it overnight. Absolutely."

On May 29, Fred Wilson, a venture capitalist of a firm called Union Square Capital, wrote that his carried interest should be taxed as ordinary income because it's compensation for work rather than gain on an investment. "It is not fair or equitable to other recipients of fee income to give a special tax break to certain kinds of fees and not to others," he explains, before explaining other policy reasons for ending the loophole.

Bill Stanfill, founder of a Colorado-based venture capital firm called TrailHead Ventures, testified before the Ways and Means Committee in favor of closing the loophole back in 2007. He recently asked Senators in a letter (and in several meetings and phone calls), "Why should the 'bonus' (carried interest) earned by v.c.'s be taxed more favorably than the bonus of any other working person — whether teacher, salesperson, athlete or corporate manager?  Life can be unfair, but it does not follow that the government should institutionalize unfairness. Instead, it should level the playing field as much as possible."

Interestingly, even two Republican Senators have indicated that they have no use for the carried interest loophole. FDL News reports that Republican Senators Olympia Snowe and Susan Collins of Maine have indicated that they have no objection to closing the loophole.

Investment managers are now lobbying furiously to get what they are calling the "enterprise value" tax dropped from the carried interest loophole closer. This provision in the bill would treat gain from the sale of a carried interest (the partnership interest owned by the investment manager) as ordinary income instead of capital gains.
 
The U.S. Chamber of Commerce threw its considerable weight behind the effort to strip this provision from the bill in a letter last week to members of the House. The Chamber's letter is very misleading — it sounds as though the provision will impact all sales of partnership interests, but, in fact, it affects only the manager's interest. A Wall Street Journal editorial is even more misleading, implying that the income of the investment manager will be taxed twice. This is a complete falsehood. Any partnership income that the manager gets increases his tax basis in his partnership interest which will reduce the gain realized on its ultimate sale.
 
This provision must stay in the bill. Otherwise, investment managers can easily avoid the ordinary rates by selling their "carried" partnership interest and paying capital gains taxes on that income. If they reinvest the sales proceeds back into the investment partnership, they have converted their carried interest into a qualified capital interest and will get capital gains treatment on all subsequent partnership income.

During last year’s seemingly endless debate over how to close California’s budget gap, lawmakers inexplicably enacted a corporate tax cut that will cost the state $900 million in fiscal year 2011, and at least $2 billion each year thereafter.  But under recently released plans put forth by the leadership of both the Assembly and the Senate, this tax cut — known as “single sales factor,” or SSF — would very sensibly be delayed in order to avoid digging the state’s already enormous budget hole even deeper. 

Governor Schwarzenegger, predictably, has put forward an alternative plan that would not delay the phase-in of this tax cut, nor would it increase revenues in any other significant way.  Instead, the Governor’s plan would rely on severe cuts in education, child care, and support for the disabled, as well as the complete elimination of the state’s welfare program. 

According to UC Berkeley researchers, if these cuts were enacted (which is, fortunately, very unlikely) somewhere in the neighborhood of 330,000 jobs would be lost, increasing the state’s unemployment rate by about 1.8 percentage points.

Under the Senate plan, recent income tax rate increases and a reduction in the dependent care credit would be extended beyond this December in order to help fill the state’s budget gap.  License fees, alcohol taxes, and tobacco taxes would also increase.  The Assembly, by contrast, would rely primarily on borrowing, but would pay off this borrowing over time with an oil severance tax.

The one thing both chambers seem ready to agree on, though, is that the SSF phase-in should be delayed.  In a nutshell, the optional SSF tax cut enacted last year will allow large multi-state companies to chose whether or not they would like to ignore the amount of property they own in California, and the amount of payroll paid to Californians, when calculating the share of their income subject to California taxes.  Instead, if the company elects to take advantage of SSF, only the location of sales made by the company will be considered.  Since small California corporations make most if not all of their sales inside the state, this cut will provide little if any benefit to those businesses. 

ITEP’s policy brief on the subject explains the pitfalls of SSF in more detail.  It’s worth noting here, though, that California’s optional SSF is even costlier than the more common mandatory SSF, which does not allow companies the option of choosing between two different apportionment methods.

The Sacramento Bee reported this week that “the Legislature's budget analyst, Mac Taylor, argues cogently that shifting to a single-sales factor should be delayed to 2013 and be made mandatory.”  We would argue instead that SSF should be abandoned entirely, but Mr. Taylor’s alternative is undoubtedly far superior to allowing this corporate giveaway to decimate California’s budget during the coming fiscal year.

On June 8th, residents of Maine are set to vote on whether or not to repeal the state’s first major tax reform in 40 years.
    
The referendum appears as Question 1 on the June 8th primary ballot. Voters will be asked, “Do you want to reject the new law that lowers Maine’s income tax and replaces that revenue by making changes to the sales tax?”
    
The bulk of the reform, passed by legislators last summer, involves broadening the sales tax base, while proportionally cutting income taxes to make the measure revenue neutral. In addition, the reform legislation includes several new tax credits and improves on current credits.
    
The reform will replace the current marginal income tax rates (2%, 4.5%, 7%, and 8.5%) with a flat tax rate of 6.5% of Maine taxable income. In addition, a .35% income tax surcharge will be applied to Maine taxable income in excess of $250,000.
    
To supplement an estimated $107 million in income tax cuts, the reform includes an expansion of the sales tax base to include more services, better reflecting the modern economy.  The broad categories that will be added to the base include: entertainment and recreation; installation, repair and maintenance; personal property services; transportation and courier services. The complete list of services is provided by the Maine Revenue Services.

It also includes a targeted increase in the sales tax rate on things such as lodging (except campgrounds) and prepared food from 7% to 8.5%.
    
The aim of the specific sales tax increases and base broadening is to shift some tax costs on to out-of-state tourists and visitors. The Maine Revenue Service estimates that about $25 million of the $53 million raised by the new sales taxes will be paid by visitors to the state.

The tax reform legislation also replaces standard and itemized deductions with a new refundable household credit. The household credit has a base amount of $700 for single taxpayers, $1,050 for heads of household taxpayers, $1,200 for married taxpayers filing jointly, and $600 for married taxpayers filing separately. The legislation also makes the current earned income tax credit refundable

Tax credits are distinct from deductions in that they reduce a person’s total tax liability rather than simply reducing their taxable income. What is meant by refundable tax credits is that the taxpayer will actually receive money back from the government if the credit exceeds their total income tax liability.

Maine’s shift toward refundable tax credits shows a significant advance in efforts to combat poverty and improve the state's tax system for low income individuals.  Moreover, the legislation improves access to the state’s circuit breaker program for low-income homeowners and renters
    
Other smaller income tax credits are a 5% charitable contributions credit in excess of $250,000 and a $60 credit for taxpayers aged 65 years or older.

Taken together, the new tax rates and credits will result in lower income taxes for some 95.6% of Maine residents and a refund for some 263,000 Maine households that are too poor to owe income taxes.

Looking forward, one further improvement on the tax reform legislation would be to restore the indexed income tax rates. Although the legislation includes broad tax cuts and smart refundable credits, more than 37% of the overall reduction in taxes benefits only the top 10% of income earners. If the income tax rate included some level of progressive indexing, the disproportionate tax cuts going to top earners could be spread more evenly to lower income earners.
    
In a time when political polarization is the norm, the tax reform legislation in Maine is exceptional in that it embodies the consensus from a wide variety of ideological groups, from the progressive Maine Center for Economic Policy to the conservative Maine State Chamber of Commerce.
    
If voters on Tuesday choose to keep the tax reform, it will be an important step forward for creating a better tax system for Maine.