After a schedule packed with recovery measures, health care, financial reform and job creation, members of Congress are finally turning their attention to the Bush tax cuts, which expire at the end of this year. President Obama and Democratic leaders in Congress propose to extend the Bush tax cuts for all but the richest two percent of taxpayers, those who make over $250,000 a year (over $200,000 for unmarried taxpayers).

Rumors are flying that Republicans would block such legislation — meaning they would block tax cuts for 98 percent of taxpayers — because they oppose allowing them to expire for the richest two percent. That will have interesting consequences, given that a large majority of Americans think that the Bush tax cuts should expire at least for those who make over $250,000 a year.

Previously released figures from Citizens for Tax Justice show that the Republicans' approach to the Bush tax cuts would result in a $54,000 break, on average, for the richest one percent of taxpayers. (State-by-state figures are also included).

A new op-ed written by CTJ and appearing in several papers today explains that the very Senators who have blocked relatively small job creation measures (which economists agree are more effective than tax cuts) are the same Senators who want to increase the deficit by a trillion dollars in order to extend the Bush tax cuts for the rich.

Read the op-ed.

There are now several ways to follow the latest news about tax fairness from Citizens for Tax Justice.

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On Monday, Americans for a Fair Estate Tax, a coalition of faith-based groups, labor unions and progressive organizations that support a robust federal estate tax, sent to Senate offices a letter signed by seventy organizations, including CTJ, in support of the Responsible Estate Tax Act. This bill, which was introduced on June 24 by Senators Bernie Sanders, Sheldon Whitehouse, and Tom Harkin, would allow the estate tax to come back into effect with higher rates on the very biggest estates, which makes it a more progressive proposal than the one President Obama has put forward.

The 2001 tax legislation signed into law by President Bush gradually reduced the estate tax over several years until eliminating it entirely in 2010. Like all the Bush tax cuts, this repeal of the estate tax expires at the end of 2010, meaning the estate tax will return at pre-Bush levels if Congress does nothing. President Obama has proposed to make permanent the estate tax rules that were in effect in 2009, which would cut the estate tax in half (meaning it would cost half as much as full repeal). The Responsible Estate Tax Act would lose less revenue than Obama's proposal.

As we reported last week, United for a Fair Economy recently sponsored a teleconference in which several very wealthy Americans, including former Treasury Secretary Robert Rubin and Disney heiress Abigail Disney, urged Congress to restore the estate tax.

Democrats in the House of Representatives have introduced a bill that includes several provisions to crack down on abuses of foreign tax credits that had been included in H.R. 4213, the ill-fated jobs and "extenders" bill that Senate Republicans successfully blocked. The revenue would be used offset the cost of repealing a reporting requirement for businesses that was included in the health care reform law and which some business owners and lawmakers feel is too burdensome.

Meanwhile, the Senate is scheduled to take up a bill on Monday that would also use these provisions, mainly to help offset the costs of Medicaid funding for states and education funding to prevent teacher layoffs.

See the previous analyses from Citizens for Tax Justice that explain why these provisions to stop abuses of the foreign tax credit are good policy.

Key Provisions in H.R. 4213 Would Prevent Abuses of Foreign Tax Credits

Peter G. Peterson Institute's Misguided Defense of Offshore Tax Loopholes

Tax credit reform has been a hot topic in Missouri for a few years now – and for good reason.  To be blunt, the state has been dishing out enormous, and growing, sums of money via tax credits with little oversight or control.  For example, when your state accidentally spends $1 billion more on tax credits than it intended, there's clearly a problem.

But despite the immensity (and obviousness) or Missouri's tax credit problem, the legislature has proven itself incapable of enacting meaningful reform.  Proposals from the Governor and prominent legislators to cap, scale back, consolidate, or sunset tax credits have received considerable media attention, but have consistently fallen short of being enacted into law.  Most legislators, it seems, are happy to ignore the rampant inefficiency of Missouri's tax credits (and muddle through the state's ongoing budgetary debacle without addressing them), just so long as they don't have to risk upsetting the multitude of lobbyists working to preserve these special tax giveaways.

In order to grease the wheels for reform in 2011, Missouri Governor Jay Nixon has taken the unoriginal step of creating a “Tax Credit Review Commission” to provide recommendations for making each of the state's 61 tax credit programs more efficient.  The Commission's work will almost certainly generate additional discussion and interest in tax credit reform, and hopefully will provide some useful data and analysis as well.  But simply creating this Commission does not constitute reform.

While tax credit reviews (or tax expenditure reviews more broadly) do have their place, they should be conducted on an ongoing basis more akin to the kind of regular scrutiny directed toward ordinary spending programs.  Moreover, if such reviews are conducted, appointing a semi-random collection of 25 businessmen, education officials, labor representatives, and lawmakers to spearhead the effort is hardly ideal.

It's unclear, for example, why prominent employees of Enterprise Rent-A-Car and Hallmark Cards, Inc. are the best candidates to conduct “critical analyses” of Missouri's tax law.  Or even more strangely, why one of the Commission's co-chairs should be part of a group of developers that has directly benefited from Missouri's tax credits (as reported by State Tax Notes, subscription required).  Talk about a conflict of interest.

To be fair, the Commission's membership does include some tax credit “skeptics” as well.  Republican State Sen. Matt Bartle, for example, recently admitted that “it’s no secret that I have come to believe that many, many tax credits do not yield the benefit that was promised.”  But including voices from “both sides” doesn't mean the Commission's structure makes sense.  Real reform will require either forcing the legislature itself to regularly review these programs (such as by making use of sunset provisions, as is done in Oregon), or by handing responsibility for such reviews over to impartial, expert government analysts (as is done in Washington State).

If all goes well, the Commission's work will hopefully spur reform not only of specific tax credit programs, but also of the broader systems in which lawmakers deal with these programs on an ongoing basis.  And if the latter type of reform is implemented well, the need for band-aids like the “Tax Credit Review Commissions” should be greatly reduced in the future.

South Carolina's Taxation Realignment Commission  (TRAC) was established over a year ago and has been meeting since September. Commissioners were charged with studying the tax structure with these instructions: "The goal of TRAC, and ultimately of the state’s tax structure, is creation of a system that enhances the state’s reputation as a '…optimum competitor in efforts to attract business and individuals to locate, live, work and invest…' in South Carolina."

The Commission has spent much of its time studying sales tax exemptions. Last week the Commissioners approved a proposal that would eliminate a series of sales tax exemptions including those for electricity and water, and would also expand the sales tax (albeit at a reduced rate) to include groceries and prescription drugs. The Commission's proposal includes a reduction in the overall sales tax rate so that the net fiscal impact of the base broadening measures is revenue-neutral.

A broad-base, low-rate tax is often good policy, but applying the tax to so many basic necessities is cause for alarm. As ITEP noted last week, "It's hard to find items that you could tax that would have more of a regressive impact than groceries and utilities."

The revenue-neutral nature of the proposal is also cause for concern. John Rouff from South Carolina Fair Share recently addressed that issue, saying, "Revenue neutrality is not what we need today. We have a state that is facing a dire economic crisis."

The Commission is expected to make a final decision in September about whether to send the proposal to the Legislature for their approval.

When the budget hole is big and deep it makes sense to stop digging it bigger and deeper, right? Apparently not, according to some Massachusetts lawmakers. The state House of Representatives has approved a bill that would reduce the tax on capital gains income for start-ups.

We agree with Noah Berger of the Massachusetts Budget and Policy Center, who says, “There is very little evidence of what they would do to help the economy, and they are fairly costly over the long run. The basic question is whether it is worth making cuts in other parts of government, like education or local aid, in order to pay for the new corporate tax cuts.’’

Georgia is the latest state to formally join the tax reform debate with the creation of the Special Council on Tax Reform and Fairness.  The 11-member Council, which met for the first time this week, has been charged with conducting  a comprehensive study of the current state and local tax system and must offer a set of final recommendations for modernizing the system to state lawmakers by January for an up or down vote.

The goals of the Council are still a bit vague, but by all accounts it is certain the members will pay special attention to closing loopholes, expanding sales taxes to services, restoring the sales tax on groceries, and lowering personal and corporate income taxes.  The Council’s Chairman, A.D. Frazier, announced this week that the members plan to seek input from constituents and stakeholders through a series of statewide meetings and will accept comments via the Council’s website.

Georgia’s House Speaker, David Ralston, who is not on the Council, asked members this week to create a tax system that is “more stable, more fair, more flat, and more job-friendly.”  

The Council should be concerned with increasing stability, fairness, and jobs, but flattening the tax system, particularly the personal income tax, has nothing to do with those goals.   ITEP’s 2009 report, Who Pays?, found that the poorest Georgia families pay an average of 11.4 percent of their income in Georgia taxes, twice as high as the 5.7 percent of income that the very best-off 1 percent of Georgians must pay.  While this upside-down pattern is common in state tax systems, Georgia is somewhat more unfair than the typical state due to its relatively flat income tax structure and reliance on the sales tax. And, as ITEP has already noted, legislation enacted this year would only make this worse.

The Georgia Budget and Policy Institute (GBPI) and ITEP will be monitoring the Council meetings throughout the summer and fall.  When asked about the direction the Council should follow, GBPI’s Deputy Director Sarah Beth Gehl, said she hopes “the council members will consider the tax system from all perspectives, including how it affects low- and moderate-income Georgians and its effect on funding for essential services.  This shouldn't be an exercise in who can protect their special-interest tax break or carve out a new one."

With less than two weeks to go before setting the record for lateness in completing its budget, Democratic Governor David Paterson called the New York state legislature into special session on Wednesday in order to close the remaining $1.5 billion budget deficit.

The New York legislature has struggled for months to close the $9.2 billion budget gap, working well past the initial budget deadline of April 1st. In order to finish the budget and push his own initiatives, Gov. Paterson has vowed to continue to keep up the special sessions until the budget is done, even if it means pursuing court orders to enforce participation.

The Governor is pushing for a new tax on sugary drinks, tuition increases for state colleges, allowing grocery stores to sell wine, and property tax caps that have already been rejected by the Assembly.

On July 1, 2010, the New York State Assembly passed an alternative revenue measure to close the budget gap. The bill raises revenue primarily through suspending the sales tax exemption on clothes and footwear under $110 from October to March, deferring business tax credits, reducing itemized deductions for those with an adjusted gross income above $10 million, and by limiting the STAR property tax exemption program to those with incomes under $500,000.

The Senate, on the other hand, left for the July 4th holiday weekend without having passed the revenue part of the budget. The roadblock stopping the passage of the bill is two Democratic lawmakers who oppose the effort to allow state colleges to adjust their tuition. With the legislature back in session, Gov. Paterson is hoping the Senate will take a second look at proposals that have failed so far in the Assembly, using the divide to create a competing revenue proposal in the Senate that is closer to his plan. On Thursday, Gov. Paterson met with lawmakers to come up with a compromise on the issue of state college tuition in hopes of finally finishing the budget. 

New York is not the only state stuck in budget gridlock. In California, legislators are going into their fifth week of the new fiscal year without a spending plan.

The organization New Yorkers for Fiscal Fairness has put out a useful outline of the measures that the New York legislature should consider in dealing with the current budget gap and in making future budgets.

After days of wall-to-wall media coverage of its grotesquely misleading, edited clip of USDA official Shirley Sherrod speaking about race, Andrew Breitbart’s blog Big Government is targeting Citizens for Tax Justice.

Breitbart’s bizarre and extraordinary claim is that CTJ, ACORN, The New York Times, the Center for American Progress and a group called Clean Energy Works (of which we were previously unaware) are colluding to deceive the public about tax policies affecting oil and gas companies.  

Breitbart’s argument goes something like this. On July 3, the New York Times published an article saying that oil and gas companies get a whole lot of tax breaks. Then on July 9, CTJ published a report saying that oil and gas companies get a whole lot of tax breaks. Also on July 9, Clean Energy Works sent someone a strategy memo saying that the public needs to know that oil and gas companies get a whole lot of tax breaks.

As Breitbart sees it, surely this can be no coincidence! It doesn’t seem to occur to him that the tax breaks available for fossil fuel production have grown so outrageous — at a time when the world is concerned about carbon emissions and climate change — that hardly a week goes by without somebody somewhere criticizing them. Heck, even President George W. Bush criticized them.

To fill out the conspiracy a little more, Breitbart assumes that any organization that is associated with any of CTJ’s 21 board members, and any progressive organization with an employee cited in the New York Times article, is also involved in this coordinated plan to deceive the public.

Finally, Breitbart is simply wrong about the tax loopholes in question. He writes:

“The same day that Di Martino [of Clean Energy Works] released his memo, Citizens for Tax Justice (CTJ) released their own defective and dishonest hit piece, titled “What Oil and Gas Companies Extract from the American Public.”   The tax breaks referred to by Di Martino and the CTJ memo, in reality, are the same credits that every American company receives for taxes paid overseas to foreign governments on income earned abroad.”

Wrong. The CTJ report titled What Oil and Gas Companies Extract—from the American Public discusses the top 5 tax loopholes enjoyed by oil and gas companies. These breaks are not “the same credits that every American company receives for taxes paid overseas to foreign governments,” which seems to refer to the foreign tax credit. One of the five loopholes our report criticizes allows oil and gas companies to take the foreign tax credit for what are really royalties (not taxes) paid to foreign governments.

The other four loopholes discussed in the report are not related to the foreign tax credit. They include the deduction for “intangible” costs of exploring and developing oil and gas sources, “percentage depletion” for oil and gas properties, Congress’s decision to redefine “manufacturing” so that oil and gas companies can receive a deduction for domestic manufacturing, and another break for writing off the costs of searching for oil.

Now it’s true that there are some huge problems with the international tax system generally and it’s true that we are more than happy to use the energy industry as an example of those problems, even though they are not confined to the energy industry. CTJ’s recent report on oil drilling and taxes uses the example of Transocean to illustrate the problems with corporate inversions, transfer pricing schemes, and payroll tax avoidance, since Transocean has exploited all three. But this report makes clear that Transocean is just one example of many types of companies that are abusing the rules in these ways.

And, to be fair (although it’s not clear why we should be fair to Andrew Breitbart) the New York Times article did discuss both problems — tax breaks that are specific to oil and gas companies and tax avoidance schemes that are not limited to any particular type of company. But that doesn’t change the fact that oil and gas companies are particularly adept at finding ways to get out of paying their fair share to maintain the society that makes their enormous profits possible.

Given Breitbart’s track record, we’re not particularly surprised that we're being attacked by the blog Big Government. As Franklin D. Roosevelt once said, "I ask you to judge me by the enemies I have made."

A group of small business owners and investors released a report on offshore tax havens this week and launched a campaign to put an end to the tax avoidance that they facilitate.

The group, Business and Investors Against Tax Haven Abuse, explains that tax havens provide an unfair advantage to large chain retailers and financial companies over locally-owned retailers and community banks. Target, Best Buy, Citigroup, Goldman Sachs and other well-known corporations are able to shift profits to their subsidiaries in places like the Cayman Islands (where they do little or no actual business) to reduce or eliminate their U.S. taxes. Independent "mom and pop" retailers are at a huge disadvantage just because they don't have subsidiaries set up in foreign countries solely to reduce their taxes.

It's not just independent and locally-owned businesses that suffer. All honest taxpayers are being cheated, the report explains, because the huge U.S. multinational corporations that use tax havens are actually doing most or all of their actual business in the U.S., meaning they are benefiting from the American education system, legal system, highways and other types of infrastructure even though they are not doing their part to pay for these public goods and services.

A particularly interesting part of the report explains how tax havens also helped facilitate shady financial dealings that contributed to the financial collapse. It cites reports that Goldman Sachs was using subsidiaries in the Cayman Islands when it "peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst."

For too long, lawmakers have responded to efforts to end offshore tax avoidance as some sort of wild attack on the free market. Now that business people themselves are sounding the alarm, lawmakers should listen.

Several extremely wealthy Americans — those whose estates would likely be subject to the estate tax — have spoken out against Congress's failure to prevent the estate tax from disappearing this year. During a Wednesday teleconference sponsored by United for a Fair Economy, some very wealthy folks, including former Treasury Secretary Robert Rubin and Disney heiress Abigail Disney, urged Congress to restore the estate tax.

In his remarks, Rubin noted that "our country is on an unsustainable fiscal path" and that estate tax revenues could be used "to fund deficit reduction, additional public investment, or added assistance to those affected by the economic crisis." Billionaire hedge fund manager Julian Robertson said the economic and moral case for an estate tax was simple, calling on Congress to get the country's "house in order" and bringing the deficit down, which means tax increases. The fairest way to do that, Robertson said, is to tax "the least deserving recipients of wealth, which are the inheritors."

Following the death July 13 of Yankees owner George Steinbrenner, media reports have commented on the fact that the billionaire's heirs would be able to inherit the team free of estate tax. (The federal tax on the estates of millionaires has been repealed for one year in 2010.) Several stories have contrasted that result with the heirs of Miami Dolphins owner Joe Robbie and Chicago Cubs owner P.K. Wrigley, whose heirs reportedly sold the teams in order to pay the estate tax.

Those media reports say that the Robbie and Wrigley heirs had to sell the teams in order to pay the estate tax. But that isn't the real story.

To start, the sale of the Miami Dolphins had more to do with family infighting than taxes. Owner Joe Robbie left control of his estate (and the team) to three of his nine children. Not surprisingly, the other six didn't like how things were being run and filed a multi-million dollar lawsuit against the the executors. They reached a settlement designed to keep the team in the family "well into the 21st century," but the agreement soon fell apart and the heirs agreed to sell the team and split the proceeds.

The sale of the Cubs was not something that the heirs of owner P.K. Wrigley had to do. Four years after he died in 1977, the heirs sold the team, and this is usually reported as something they had to do to pay the estate tax. But there were any number of ways they could have paid the tax. The sale of the team raised only $20.5 million. The estate tax liability was estimated at $40 million which means that there was a net taxable estate of at least about $75 million. There were obviously other assets that could have been sold to pay the estate tax. The heirs chose to sell the team rather than any of the other estate assets, including any of their stock in the W. R. Wrigley, Jr. Company, the famous maker of chewing gum. (The company was acquired by Mars, Inc. for $23 billion in 2008, so we can bet the Wrigleys did pretty well.)

Remember that if a closely-held company (i.e., a company owned and run by members of the same family) makes up more than 35 percent of an estate, the tax code allows the related estate tax to be paid over 14 years. No heirs need ever sell the family business to pay the estate tax. In both of these cases, while the estate tax was a consideration, the teams were sold primarily for other reasons. The Wrigley and Robbie stories keep being trotted out mostly as a way for estate planners to scare their potential customers.

News reports that the Steinbrenner family has narrowly escaped a possible sale of the team to pay the estate tax are greatly exaggerated. The Steinbrenner estate, valued at $1.1 billion obviously has lots of assets with which to pay any tax. The estate probably also has the option of paying the tax over 14 years. So even if the estate tax is reinstated retroactively, we think it's safe to say the Steinbrenner family can keep the team if it wants to. Yankee fans can breathe a sigh of relief (or regret).

“Tax expenditures,” or special tax breaks targeted at particular activities or parties, are in desperate need of reform.  In a report released by CTJ last November we explained how the current political climate, as well as dysfunctional procedural rules in Congress, have created a situation in which lawmakers have become much too willing to rely on tax breaks to accomplish their favored goals.  Fortunately, a bill introduced by Rep. Mike Quigley (D-IL) just last week seeks to rein in some of the most destructive tendencies toward excessive tax breaks by counteracting the unwarranted advantages that tax breaks enjoy in the policymaking process.

While the first half of HR 5752 deals with general budget process reforms, it's the latter half of the bill with which CTJ is most interested.  Among the tax expenditure reforms contained in this part of the bill is a requirement that all tax expenditures be reviewed by CBO at least every four years.  Those reviews would result in a recommendation to Congress regarding what should be done with each tax expenditure, and in doing so would use many of the same criteria contained in the recently proposed “tax extenders study."  This requirement somewhat resembles a proposal put forth in CTJ's November 2009 report that the Executive Branch conduct these reviews as part of their regular assessments of government performance.

HR 5752 also seeks to encourage lawmakers to make use of these CBO reviews, and of a variety of other improvements in tax expenditure data required by the bill.  Specifically, HR 5752 would require that the tax-writing committees in both the House and Senate hold public hearings on the findings released by CBO.  The Treasury Department and OMB would also be required to provide comments on the reviews. 

More importantly, HR 5752 requires that any effort to enact a new tax expenditure (or enlarge an existing one) include a provision that would eliminate the tax expenditure at a point 10 years in the future.  This sunset requirement would eliminate the “auto-pilot” feature enjoyed by many tax breaks by requiring lawmakers to periodically reconsider whether these policies are effective, and to vote on whether or not to continue them.  While a 10-year sunset provision isn't the same thing as requiring regular reauthorization and reappropriation — as is done with discretionary spending — it is a meaningful step toward leveling the playing field between these two types of policies.

Another one of HR 5752's more important components is a requirement that bills enacting or expanding a tax expenditure receive approval not only from the tax-writing committee, but from the relevant subject-matter committee as well.  Under HR 5752, for example, the House Ways & Means Committee would no longer be given sole jurisdiction over the plethora of tax breaks given to energy companies.  Any bill seeking to expand upon such breaks would also have to receive approval from the House Committee on Energy and Commerce before being brought to the floor of the House.  By allowing other relevant committees a say in measures related to their specific areas of policy, the power of the tax-writing committees to legislate on almost any issue imaginable could be scaled back by HR 5752.

For more on HR 5752, see this release from Rep. Quigley's office.  And to see a comparison of tax expenditures and other spending programs in various policy areas, be sure to see this April report from CTJ.

On July 14, Douglas Holtz-Eakin, chief economic adviser for John McCain’s presidential campaign and former director of the Congressional Budget Office, gave written and oral testimony to the Senate Finance Committee concerning the Bush tax cuts. Because these tax cuts expire at the end of 2010, Congress must decide which portions of them to extend or make permanent, and which portions should expire as scheduled.

Holtz-Eakin argued for permanently extending the Bush income tax cuts for the rich, while dropping expansions in the Earned Income Tax Credit and Child Credit that benefit working class people. He also oddly asserted that raising revenue will not reduce deficits. He went on to repeat some common misconceptions about businesses and their reaction to tax rates.

The overall thrust of Holtz-Eakin’s testimony was that taxes need to be lower on the rich (to encourage them to work, save and invest) and higher on the poor (to encourage them to work).

A new report from Citizens for Tax Justice explains that, to make his case, Holtz-Eakin endorsed several myths about the Bush tax cuts.

Read the report.

A Washington Post editorial earlier this week declared, "Senate Republicans, committed as they are to preventing the debt from mounting further, can't approve an extension of unemployment benefits because it would cost $35 billion. But they are untroubled by the notion of digging the hole $678 billion deeper by extending President Bush's tax cuts for the wealthiest Americans."

Well, that's a little unfair, because Congressional Republicans actually want to increase the deficit by a full trillion dollars by extending the Bush tax cuts for the wealthy.

The $678 billion is just the cost of making the Bush income tax cuts for the richest two percent of taxpayers permanent. (President Obama and Republicans agree that they should be made permanent for the other 98 percent.) Republicans have also been pushing for years to make permanent Bush's repeal of the federal tax on the estates of millionaires. This would add over $300 billion during the first decade when its costs would be fully felt, compared to Obama's more restrained (but still awfully generous) proposal to cut the estate tax.

As the Post explains, Senate Republican Whip Jon Kyl recently said that the cost of new spending should be offset, but the revenue loss from tax cuts should not. According to Talking Points Memo, Republican Senator Judd Gregg explained that new government spending is "growing the government" and therefore should be offset, presumably with cuts in spending, but tax cuts should not be offset.

Of course, deficit-financed tax cuts have to be paid for one day, and that could be done through tax hikes. Congressional Republicans might believe that Congress will be forced to shrink government when revenues decline, but that obviously didn't happen after the Bush tax cuts were enacted.

Senate Republicans Bring Back Supply-Side Economics

But the real prize for articulating their position goes to Senate Republican Leader Mitch McConnell. When asked about this, he replied, "That's been the majority Republican view for some time, that there's no evidence whatsoever that the Bush tax cuts actually diminished revenue. They increased revenue, because of the vibrancy of these tax cuts in the economy."

That's right. The most powerful Republican alive believes that when Congress cuts taxes, the result is that revenues increase.

This is the extreme version of "supply-side economics." The basic idea behind this school of thought is that tax cuts can change incentives to invest so much that they result in huge economic growth, which results in increased incomes and therefore increased income tax payments that more than make up for the loss of tax revenue resulting directly from the tax cuts.

CTJ has already explored in great detail the empirical evidence against this idea, the people who promote it anyway, and the fiscal disasters that have resulted.

But don't take our word for it. President George W. Bush's own Treasury also concluded that tax cuts do not increase revenue or come close to paying for themselves.

Douglas Holtz-Eakin Contradicts McConnell

So have the Republicans obtained some new support for supply-side economics since then? Apparently not, since the Republican witness at Wednesday's Finance Committee hearing on the Bush tax cuts conceded that they did not pay for themselves.

Douglas Holtz-Eakin, former director of the Congressional Budget Office and an adviser to the presidential campaign of John McCain testified at the hearing in favor of making permanent all the Bush tax cuts (including those for the richest taxpayers). According to his written testimony (which he paraphrased during the hearing), making the tax cuts permanent would have a positive economic effect that would reduce the direct cost of the tax cuts by 22 percent.

We have no idea how he came to that figure. But Holtz-Eakin is the closest thing the Republicans have to a reasonable and credible economist who will promote their views. (Even though we think he's wrong about most of what he says, as we explained in the previous article.) Since Holtz-Eakin is the best economist the Republicans have on their side, one would think that Senator McConnell would get on the same page.

Yankees owner George Steinbrenner died last week, leaving a fortune estimated at $1.1 billion. He is the fourth billionaire to die this year — the only year since 1916 when there has not been a federal estate tax (it's currently scheduled to return in 2011). So even if the Yankees don't repeat as World Series champs, it's a very profitable year for the Steinbrenner family.

The opportunity to die without one's estate being taxed may disappear soon, however, as Congress appears finally ready to address the issue. On June 24, Senators Sanders (I-VT), Harkin (D-IA) and Whitehouse (D-RI) introduced estate tax legislation that would make permanent the $3.5 million exemption that was effective in 2009, with a progressive rate structure that would tax the taxable portion of estates over $10 million at 50 percent, over $50 million at 55 percent, and over $500 million at 65 percent. Yesterday, Congresswoman Linda Sanchez (D-CA) introduced the House version of this bill.

Earlier this week Senators Lincoln (D-AR) and Kyl (R-AZ) introduced their own estate tax legislation, which would reduce the rate to 35 percent and raise the exemption to $5 million ($10 million for couples).

Meanwhile, in the House, Representatives Thompson (D-CA) and Salazar (D-CO) have introduced estate tax legislation that would completely exempt farmland and would raise the exclusion for conservation easements to $5 million from its current $500,000. (See a report on all the reasons why this is a terrible idea.) One of the most alarming results would be that wealthy people start investing in farmland as never before, which could drive up prices for land and hurt genuine family farmers.

The Lincoln-Kyl proposal has been referred to the Senate Finance Committee with the pending small business jobs bill. Finance would need to find $80 billion in revenue offsets to cover the increased cost of their proposal compared to extending the rules in effect in 2009 (which is what President Obama proposes). Senators Lincoln and Kyl mask the true cost of their proposal by phasing in the cut in the estate tax over several years, meaning the $80 billion figure is misleadingly small.

With all the competing proposals and the lack of any clear consensus, it's anybody's guess where the estate tax will finally end up. But the estate tax holiday will soon be over.

Earlier this month the Louisiana Budget Project released a report on state income tax cuts that says "Louisiana’s fiscal chickens are coming home to roost." Put in a less entertaining way, Louisiana simply doesn't have enough revenue to meet the needs of Louisianans and this is likely to be the case for many years to come unless lawmakers act quickly.

One reason for the state's woes is the legislation enacted in 2007 and 2008 that repealed important parts of a 2002 tax reform, commonly referred to as the Stelly plan, after its sponsor, Rep. Vic Stelly. The plan eliminated the state sales tax on utilities, food, and medicine and imposed tax increases on the better-off. The package was initially revenue-neutral, but over time it would have created more revenue for the state.

The report finds, "The revenue loss caused by the Stelly rollbacks, coupled with the impact of the national economic downturn and shortfalls in mineral revenues, leave Louisiana with insufficient revenues to maintain services at current levels at a time of growing needs." LANO estimates, with ITEP's help, that if the Stelly provisions hadn't been repealed, the state might not have faced a budget shortfall in 2010.

Back-to-school time is just around the corner and with that comes the annual debate about sales tax holidays. States offering sales tax holidays typically won't collect sales tax for a specific number of days on items considered to be back-to-school items like school supplies, clothes, or even shoes. Of course, sales tax holidays do nothing to offset the regressivity of the sales tax the rest of the year, they are an administrative headache, costly for state governments, and very low-income people usually don't have the flexibility to shift their spending to take advantage of the holiday.

Despite recent headlines like "Illinois: Our very own Greece?" Governor Quinn signed legislation that allows the state to offer its first ever sales tax holiday for a ten day period in early August. The holiday is projected to cost the state between $20 and $67 million, which the state could certainly use right about now. It's hard to understand how offering this sales tax holiday is good fiscal policy.

In brighter news, Georgia is not having a sales tax-free holiday weekend this year. In a state facing its own budget crunch, the Speaker of the House said earlier this year, "What I hear Georgians say is they’d rather have their classroom teachers in the classroom teaching than have that sales [tax] holiday." This move is likely to save the state about $12 million.

Despite continued fiscal woes that have forced states to cut billions of dollars in spending on education, health care, transportation, and public safety, North Carolina and Missouri became the latest states to pass expensive tax breaks in the hopes of luring, or retaining, business. 

Unfortunately, there is no evidence that these unaffordable tax breaks will lead to economic recovery and job creation.  The University of North Carolina’s Center for Competitive Economies recently surveyed companies to determine the importance and effectiveness of economic development incentives on their location decisions. Availability of a skilled workforce, quality infrastructure, and presence of community colleges and universities ranked much higher than special tax breaks (13th on the list).  Time and time again, research has shown that the most effective growth strategy for states is investing in education and public infrastructure, not special tax breaks for corporations.

During the final hours of North Carolina’s legislative session last week, state lawmakers passed a pair of bills that extended, expanded and created new incentives for specified industries and companies at a cost of more than $275 million over the next 5 years.  The most costly change was an expansion of the state’s refundable film production tax credit which raised the maximum amount of the credit that can be taken from $7.5 million to $20 million.  New credits were created for video game developers and businesses who locate in eco-friendly industrial parks.  Lawmakers also extended a tax credit program known as Article 3J that legislative staff and University of North Carolina researchers have found to be ineffective at job creation, and as recently as this spring they recommended it should be eliminated altogether.
 
The second bill was developed with specific corporations in mind (although they were not named in the legislation and have still not been publicly disclosed). Commerce officials say these corporations are considering North Carolina as a finalist for their new facilities and incentives were needed to “clinch the deal”.  The legislation grants special sales tax exemptions on electricity and machinery to two data centers, a turbine manufacturing facility, and a paper mill.  Recent news reports suggest such “struggling” corporations as Microsoft (working under the code name “Project Deacon”) and Fidelity are likely to be the parties to benefit from the special rules for the new data centers. 

Proponents of the tax breaks suggested they were needed for North Carolina to remain competitive and to spur economic recovery and job creation.  Yet, no industry listed in the second package will be required to meet a targeted employment level.  

Earlier this week in a special session called by Governor Nixon, Missouri lawmakers passed a $150 million incentives package for Ford Motor Company and its suppliers.  Without the incentives, lawmakers claimed Ford would close its assembly plant in Claycomo and 4,000 jobs would be lost.  But, there’s no guarantee that Ford will stay even with the special treatment and attention it received from Missouri lawmakers.  The special tax break was paid for by cutting pensions for newly hired state employees.

On July 1st, Representative Bill Delahunt (D-MA) introduced the Main Street Fairness Act, the latest legislative attempt to close the unfair tax loophole that has let internet companies off the hook for tens of billions in unpaid sales taxes.

With so many states facing severe budget deficits, state governments are desperate to collect the unpaid sales taxes on purchases from out-of-state internet and catalogue retailers. According to the definitive study by researchers at the University of Tennessee, the loss in sales tax revenues due to the loophole allowing internet and catalogue retailers to avoid sales taxes could range anywhere from $8.6 to $9.92 billion in 2010 and could shoot up to nearly $34 billion from 2010 to 2012. The NCSL provides a useful interactive map highlighting the revenue loss due to the loophole in each state. Unfortunately, the loss will only increase going forward as internet sales continue to become a larger and larger portion of total sales.

Delahunt’s legislation would fix the loophole by allowing states that join the Streamlined Sales and Use Tax Agreement to collect sales tax and use taxes on out-of-state retailers. Joining the agreement entails simplifying and standardizing state sales and use tax codes in order to make the system less unwieldy for out-of-state retailers. Already 23 states are part of the agreement, with many more taking steps toward standardization. In addition, the bill would exempt many small businesses and provide some funds to help with the cost of compliance.

For decades, state governments have been trying to collect sales taxes from these retailers. A 1992 Supreme Court ruling in Quill v. North Dakota made the task almost impossible by preventing state governments from requiring sellers to collect sales taxes unless the seller has a physical presence in the state. The Court ruled that states can require companies without physical presence within their borders to collect sales taxes only if given permission by a law enacted by Congress. Delahunt's bill would provide that permission.

For Joe Rinzel, Vice President for State Government Relations for the Retail Industry Leaders Association, the issue presented by the loophole is really about “fairness for both businesses and consumers.” As a brief by the Institute on Taxation and Economic Policy explains, the loophole is inherently unfair because it provides a distinct advantage to online retailers over community stores, which have to collect sales taxes. Compounding this, the failure to tax internet sales places a disproportionate burden on consumers who (for economic or other reasons) do not use the internet for shopping.

Despite the need for federal legislation, Mike Zapler reports that states are trying to act on their own. New York attempted to get around the Supreme Court Ruling by redefining what constitutes a physical presence in New York. Taking a different approach, Colorado passed a law requiring out-of-state retailers to provide the states with the names and items bought from residents. In both cases, the laws were immediately met with lawsuits from industry supporters.

The passage of Delahunt’s Main Street Fairness Act would serve to stop the harm done to ‘brick and mortar’ retailers by the ending the loophole while providing desperately needed revenue to state governments.

A new report from Citizens for Tax Justice describes the biggest tax subsidies enjoyed by oil and gas companies and explains that these subsidies do nothing to encourage energy independence or cleaner energy.

In the wake of the disastrous oil spill in the Gulf of Mexico, the public and the media have turned their attention to some of the subsidies provided through the tax code to BP, the corporation that leased the ill-fated Deepwater Horizon drilling platform. The truth is that oil and gas companies have for years received a bonanza of unjustified tax breaks that serve only to boost profits for their shareholders.

The oil and gas industry is also resisting any taxes that would allow it to pay for its own messes. One proposal under consideration by Congress is an increase in the tax used to fund the Oil Spill Liability Trust Fund, which is currently 8 cents per barrel. Another is reinstating the Superfund Tax which expired in 1995. Both proposals have been met with furious opposition by the petroleum industry, which has spent a reported $340 million on lobbyists in the last 2-1/2 years.

Demagoguery and the issue of illegal immigration are no strangers, so it's no real surprise to see a new report from the Federation for American Immigration Reform (FAIR) that makes extravagant claims about how much illegal immigrants cost US taxpayers each year. The report's headline — that nationwide, illegal immigrants cost $100 billion a year more in public services than they pay in federal, state and local taxes — has so far been deservedly ignored by pretty much everyone except a cadre of right-wing blogs and anti-immigrant electoral candidates. But it's worth briefly paying attention to, if only to appreciate the utter shoddiness of the research behind this headline.

As the Tax Foundation has already noted, the report appears to have misplaced $9 billion in immigrants' Social Security taxes through a single math error. But the mistakes keep on coming when you look at the state and local tax estimates in the report.

It would come as news to residents of most states to know that their spending on clothing, utilities, transportation, housing and food was completely exempt from sales taxes. Yet FAIR makes this simplifying (and transparently wrong) assumption about every state, and cheerfully asserts that a typical immigrant consumer ultimately finds only 10 percent of their spending subject to sales tax. The report also assumes that undocumented immigrants neither smoke nor drink nor drive cars. It also ignores business sales taxes, which generally represent more than a third of the sales taxes falling on consumers. 

The debate over US immigration policy already sheds more heat than light, and this week's FAIR report only makes this problem worse.

Efforts are underway in a variety of states to give voters the opportunity to change their state's tax structure for the better. Advocates are laying the ground work for tax reform in Colorado. Tax justice advocates in Arizona can celebrate that a Proposition 13-like initiative didn't garner enough signatures to be placed on the ballot. California voters will get the chance to repeal various corporate tax loopholes while Washington is closer than ever before to introducing a personal income tax.

In Colorado, folks are thinking about the 2012 ballot already. Representatives of the Colorado Fiscal Policy Institute (CFPI) have filed two initiatives that are currently being reviewed to determine if they abide by the state's "single subject" per initiative rule. According to The Denver Post, "the measures also call for reducing the state sales tax but taxing services as well as goods, changing the income-tax system to a graduated system and making a tax credit for low-income workers permanent." Specifically the proposal would change Colorado's flat rate income tax into a graduated system with a least five brackets. Carol Hedges with CFPI recently said of the initiatives that "the overriding objective is to have our tax system more appropriately matched with economic realities."

Arizonans swerved and missed the tax policy equivalent of a Mack truck slamming into them when it was announced that "Prop. 13 Arizona" failed to garner enough signatures to qualify for the 2010 ballot. The proposal was modeled after California's Proposition 13. The measure would have rolled back the assessed value of property sold before 2004 to 2003 levels, limited property value increases, and taken away voters' rights to override levy limits. This is the second time that the proposal failed to garner enough signatures. For more on capping assessed value, see ITEP's primer on the subject.

In November, California voters will get to vote on the Repeal Corporate Tax Loopholes Act. The measure, if passed, would eliminate several business tax breaks enacted in 2008 and 2009. They include elective single sales factor, tax credit sharing, and net operating loss carrybacks. For more details on these tax breaks, see California Budget Project's Budget Brief on this issue. Perhaps more upsetting than these tax breaks actually passing is the way they were passed. Initially, according to the California Budget Bites Blog, these tax deals were of the "dark-of-night" variety. Now Californians themselves will decide if these costly corporate tax breaks should remain the law of the land.

Washingtonians are closer than they have ever been to establishing a personal income tax. Washington has repeatedly been named by ITEP as the state with the most regressive tax structure largely because of their high reliance on sales taxes and absence of a personal income tax. Initiative 1098 introduces an income tax that has two brackets targeted at high income Washingtonians, reduces the state property tax, and reforms the business and occupation tax. Supporters of the initiative this week turned in well over the 241,000 signatures required to get on the ballot. It appears that Washingtonians will have an exciting and historic opportunity to reform their state's tax structure this fall.

Voters this November in a variety of states may have the opportunity to vote against anti-tax initiatives, as well. Right-wing activists were successful recently in gathering signatures for a handful of misguided anti-tax initiatives in Colorado, Massachusetts and Washington.  

Colorado voters are going to have a congested ballot come November. Proposition 101 and Amendments 60 and 61 have all qualified for the ballot and would have an enormous impact on Coloradans' way of life. About these three proposals the Denver Post opines, "The operating language within each one is a virus that would cripple the ability of our local and state governments to provide the most basic of services — from building schools for our children to supplying clean water to our homes. Both Democratic and Republican politicians have joined leaders in business and community organizations to oppose the initiatives."

According to the Ballot Initiative Strategy Center: "Amendment 60 would overturn voters' decision to opt out of Colorado's TABOR limitations. The initiative also cuts property tax rates in half over a ten-year period. The statutory Proposition 101 would slash state and local revenues to the tune of $1.7 billion by reducing the state income tax, motor vehicle fees, and telecommunications fees." Amendment 61 would prohibit all levels and divisions of government from bonding, even if they previously had the authority to do so. These measures would have a disastrous impact on Coloradans' way of life.

The Boston Herald is reporting that an initiative proposing to reduce the Massachusetts sales tax from 6.25 to 3 percent is likely headed to the November ballot. The proposal would cost the state a jaw-dropping $2.4 billion annually. Proponents of the legislation delivered more than the required 11,099 signatures to the Secretary of State's office Wednesday. In somewhat brighter news, none of the four candidates for governor appear to support the initiative and have said that if it passes, deep cuts in state and local services would be all but guaranteed. Despite the regressive nature of the sales tax, it's important because slashing it would cripple Massachusetts' ability to provide for its residents.

Another initiative that reportedly has enough signatures to appear on the November ballot, backed by beer and wine wholesalers, would eliminate the new sales tax on alcohol.  Last year, state lawmakers removed the sales tax exemption on beer, wine and liquor and added them to the state’s sales tax base in order to raise $80 million for substance abuse programs.

Tim Eyman, Washington state's notorious anti-tax crusader, is up to his old, tired tricks again. Initiative 1053 would permanently re-establish the requirement for a two-thirds supermajority vote in the Legislature or a statewide popular vote in order to pass tax increases.  A similar measure won at the ballot in 2007, but that measure allowed the legislature to repeal the rules by a simple majority vote after two years.  Facing a $2.8 billion budget gap this year, Washington legislators suspended the requirement in February for 16 months to pass tax increases to mitigate cuts to vital state services.  If passed this initiative impairs the ability of Legislators to do what they were elected to do — legislate.

Eyman is also supportive of Initiative 1107, which would roll back the new state taxes on a variety of goods including soda, bottled water, and candy. (Advocates of both initiatives turned in over 700,000 signatures to see that these issues will be placed before the voters in November.) Of course sales taxes are regressive, but the cost of removing the sales tax from these items is pretty stark. According to the Children's Action Alliance, "The choice for us is clear, a few extra pennies or the loss of essential services for kids."

Not surprisingly, the main financial backer of Initiative 1107 is the American Beverage Association, which has reportedly spent more than $1 million on the ballot effort thus far.

Washington recently joined with 30 other states to tax candy. If you want to see how your state taxes candy, see Washington State Budget and Policy Center's handy map on the subject.

On Thursday, the New Jersey Senate voted 36-3 in favor of a deal between New Jersey Republican Governor Chris Christie and Democratic Senate President Stephen Sweeney to place a 2 percent cap on annual increases in property taxes. With Democratic Assembly Speaker Sheila Oliver signaling support and a vote set for Monday, the property tax cap will likely be signed into law shortly.

The passage of the property tax cap will systematically damage local governments' ability to provide basic public safety and education services. In testimony to the New Jersey Assembly, Rich Brown of the New Jersey Education Association noted that a hard cap would disproportionably harm poor and minority residents and would constitute a “racist cap.” Similarly, local fire fighter officials note that the property tax cap would certainly force layoffs and even cost lives.

The compromise is based on Christie’s proposal to put a constitutional amendment on the ballot which, if approved, would have placed a 2.5 percent cap on property tax increases. The measure allowed for increases beyond the 2.5 percent if the revenue went to debt service repayments or if the tax increase was approved by local referendum with a 60 percent majority vote.

As Citizens for Tax Justice has noted previously, Christie’s original proposal is as misguided as it is hypocritical. The proposal would not only harm local governments, but it comes on top of the $800 million in cuts in state aid to local governments. Had Christie truly wanted to provide property tax relief, he would not have cut off $635 million in property tax relief for 600,000 seniors and people with disabilities.

The Democratically controlled legislature countered Christie’s proposal with the passage of a statutory cap limiting property tax increases to 2.9 percent, but which left intact the wide range of existing exceptions.  

Although the Democrats' plan passed both chambers of the legislature, Christie signaled that he would veto the measure. Unfortunately, the Democratically controlled legislature was unable to override his veto and pass the Democratic plan. Similarly, Christie could not get the votes to support his plan for a constitutional amendment.

The impasse between the two sides was broken after days of tense negotiations, with both sides agreeing on the 2 percent cap with exceptions for rising health care costs, pension payments, debt service payments and capital expenditures, including new equipment and public works projects. The compromise also allows the cap to be overruled by a simple majority in a local referendum instead of the 60 percent Christie previously proposed. One final piece of the compromise is that local governments that raise taxes under the cap will be able to bank the difference for up to 3 years and then raise taxes higher in other years.

Even with the changes from Christie’s original plan, the new property tax cap will cripple local governments' ability to provide the basic services that residents require of them. Despite having significant majorities in the legislature, Democrats abandoned their much better property tax cap proposal in favor of a harmful compromise.

As five New Jersey mayors testified to the New Jersey Assembly, passing the tax cap before providing local officials the means to fix their fiscal problems is simply “putting the cart before the horse” and will place an unfair burden on local governments.