The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.

A new report by the Georgia Budget and Policy Institute (GBPI), Advancing Georgia's 1930s Tax System to the Modern Day, puts forth recommendations for tax reform that will help the state raise enough money to meet its growing needs, bring the revenue system in line with the 21st century economy, and improve fairness if adopted.

The report was delivered to the 11 members of the 2010 Special Council on Tax Reform and Fairness for Georgians who met for a second time this week.  The Council is charged with providing recommendations to the state legislature in January 2011 when the General Assembly meets to amend the fiscal year 2011 budget and create the FY 2012 budget.  The GBPI provides the Tax Council with a set of reform recommendations including:

- Lowering the state sales tax rate and simultaneously broadening the tax base to mirror 21st century spending habits.
- Modernizing income tax brackets, rates, and standard deductions to better reflect current income levels.
- Creating an earned income tax credit (EITC) to offset the highly regressive sales taxes for the state's lowest earners.
- Scaling down tax preferences, both for individuals and corporations, to avoid shifting taxes onto fewer individuals and businesses as they do now.
- Closing corporate loopholes and updating the corporate net worth tax to prevent profitable corporations from avoiding paying their fair share.
- Updating cigarette and motor fuel excise tax rates.

Using data from the Institute on Taxation and Economic Policy's Microsimulation Tax Model, the report provides beginning revenue estimates and distributions among income groups to demonstrate how recommended combined tax reforms would improve fairness while also enhancing adequacy. An overview of similar actions taken by other states, as well as potential federal tax changes, are also included in the report.
 
As the Tax Council members embark on numerous “fact-finding” sessions across the state later this month, they should start by giving the GBPI report a serious look.

Ohio is facing a multi-billion dollar shortfall in its next biennial budget. Perhaps it comes as no surprise that, in this election year, current lawmakers aren't falling all over themselves to give specific details about how they would fill this gigantic hole. The aim of the Ohio Budget Planning and Management Commission is to offer "a strategy for balancing the state budget for fiscal years 2012 and 2013." This week, Policy Matters Ohio (PMO) submitted a lengthy report to the Commission offering detailed information on one of the reasons the state is in crisis — mainly the 2005 tax overhaul which slashed income tax rates and eliminated two major business taxes. PMO estimates that these changes alone cost the state $2.1 billion annually. This report should be required reading for the Commissioners and other lawmakers who want to understand why Ohio's budget is on shaky ground.

Lawmakers in the other 49 states should see Ohio's experience as a warning and not rely on the flawed hope that drastically reducing tax revenue will somehow jumpstart a state's economy. PMO says in their report to the Ohio Budget Planning and Management Commission, "the tax cuts have not proven to be the magic potion for Ohio’s economy. Key measures of economic performance show the opposite: Ohio’s economy has produced relatively fewer jobs, fewer manufacturing jobs, less overall output and lower personal income growth than the country as a whole since the tax overhaul was approved in June 2005. Ohio’s share of the nation’s jobs has shrunk since then from 4.06 percent to 3.87 percent."

We hope the Commission follows the recommendations noted in this report "that we revitalize the income tax, in particular for high earners, and restore revenue from business taxes to levels that existed prior to the 2005 tax changes. This would still leave the business share well below where it was 30 years ago. Ohio’s tax system should be overhauled to produce the revenue we need for public services and investments that support our economic success and maintain our quality of life."

BACKWARDS BOEHNER

House Minority Leader Says that Loophole-Closing Provisions in Jobs Bill Would Push Jobs Offshore — When the Exact Opposite Is True

Speaking before business leaders in Cleveland on Tuesday, House Republican Leader John Boehner proposed a five-point "plan" to help the economy that mainly consisted of continuing George W. Bush's tax and spending policies, not enacting any new reforms, and firing the President Obama's economic advisers. He also claimed that deviating from the Bush tax policies would hurt small businesses, which has already been refuted by CTJ and other experts.

Near the beginning of his speech, Boehner said that the $26 billion jobs bill recently enacted, H.R. 1586, "is funded by a new tax hike that makes it more expensive to create jobs in the United States and less expensive to create jobs overseas."

That is literally the opposite of what the tax provisions in H.R 1586 do. The provisions in this jobs bill close existing loopholes that, to use Mr. Boehner's words, "make it more expensive to create jobs in the United States and less expensive to create jobs overseas."

In fact, these loopholes can result in U.S. corporations enjoying a negative effective tax rate on their offshore investment income. This creates a strong incentive for U.S. corporations to shift profits offshore, either through accounting gimmicks or by moving actual operations and jobs offshore.

The Foreign Tax Credit

The loopholes that were shut down relate to the foreign tax credit, which U.S. taxpayers take against their U.S. taxes for any foreign taxes they pay. The idea is that if an American earns some income in, say, the U.K. and pays taxes to the U.K. on that income, he or she should not have to pay all of the applicable U.S. taxes on that income also. In other words, the foreign tax credit is meant to avoid double-taxation of Americans' foreign income. U.S. corporations use the foreign tax credit for income they generate abroad, but the problem is that many have found ways to take foreign tax credits in excess of what they need to avoid double-taxation.

For example, U.S. corporations don't even have to pay U.S. taxes on any of their foreign income until they bring that income back to the U.S. (until they "repatriate" that income), which in many cases they never will. But many have found ways to take foreign tax credits on this foreign income — even though it's not even taxed in the U.S. Obviously, this has nothing to do with avoiding double-taxation.

This means the foreign tax credits are being used to reduce the corporations' U.S. taxes on its U.S. income. The corporations are taking more foreign tax credits than they even need to wipe out their U.S. taxes on that foreign income. This also means the offshore profits are effectively subject to a negative rate of taxation in the U.S.

It's hard to imagine a stronger incentive to shift investments — and in some cases, actual jobs — offshore. This incentive to shift investments offshore has been greatly reduced by H.R. 1586, the law Boehner criticizes.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

The corporate community has been remarkably effective at confusing everyone about this issue, partly because so few people understand it. Even the Peter G. Peterson Institute, named after and funded by the man who has become famous for lecturing America on budget deficits, issued a report opposed to the provisions that close these loopholes in the foreign tax credit. (See CTJ's response to the Peterson Institute.)

The Jobs Bill, H.R. 1586

The law that Congressman Boehner is criticizing, H.R. 1586, the Education Jobs and Medicaid Assistance Act, provides $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. The non-partisan Congressional Budget Office (CBO) has found that aid to states is one of the most effective measures to create jobs. (The income tax cuts that Boehner endorses, particularly income tax cuts for the rich, are the least effective measures for creating jobs, according to CBO's findings.)

Since the bill included the most effective possible job creation measures and offset the costs by closing tax loopholes that encourage U.S. corporations to shift profits and jobs offshore, it's about as close as Congress ever comes to a win-win proposal. We're glad that President Obama has signed it into law.

With Congress out of Washington for the August recess, more and more reporters and opinion makers are turning their attention to the enormous decisions on tax policy that await lawmakers when they return.

Anti-Tax Lawmakers Ignoring Public Opinion

The public supports President Obama's approach to the Bush tax cuts. A new CNN poll finds that only 31 percent of respondents think that Congress should extend the Bush tax cuts for the very rich as well as everyone else. This is in keeping with previous polls with similar results.

The main justification given by anti-tax lawmakers and activists for ignoring public opinion on this matter is that higher taxes on the rich, they claim, will hurt business investment and therefore hurt job creation. But a growing chorus of analysts agree that allowing the Bush tax cuts to expire for the rich will not harm the economy.

Anti-Tax Lawmakers Ignoring Rational, Informed Economic Analysis

For example, Allan Sloan, senior editor for Fortune and a columnist for the Washington Post, writes that "From the start of the income tax through 2003, dividends were taxed as regular income, and capital gains were treated far less favorably than now. Somehow both the republic and the financial markets survived. They'll survive higher rates, too."

Sloan provides a refreshingly calm approach to a subject that sends many people into hysterics: the impact of taxes on investment.

For example, he points out that the 2003 tax cut bill signed by President Bush "set dividend taxes for the high-bracket crowd at preferential rates for the first time and brought the rate on long-term capital gains to its lowest point since 1941, according to the tax publishing firm CCH. But that didn't exactly result in a bull market. According to Wilshire Associates, whose numbers I'm using throughout this column, the U.S. stock market rose only 14.6 percent from the May 5, 2003, tax cut through Obama's election on Nov. 4, 2008... That price gain, about 2.5 percent a year compounded, was less than half the historical rate."

In Sloan's view, the ups and downs of the stock market have little if anything to do with tax rates. He goes on to say, "Since Obama's election, the market has been very good. In fact, the market's 10.4 percent rise during Obama's first 100 days in office bested tax-cutting Ronald Reagan (a 4 percent gain for his first 100 days) and George W. Bush (a 2.3 percent loss for the equivalent period)."

Higher taxes on the very rich will not reduce their investment in stocks and bonds and also will not reduce their investments in their own businesses that they actively operate (as we have explained elsewhere).

When it comes to job creation, the non-partisan Congressional Budget Office agrees that the other measures that have been discussed in Congress (like aid to state and local governments and extended unemployment benefits) are many times more effective than income tax cuts for the rich.

California's annual budget crisis continues unabated this week. Almost two months into fiscal year 2011, the state legislature still has not enacted a budget. Democratic leaders in the state Assembly and Senate recently offered a joint budget-balancing plan that "spreads the pain" between spending cuts and tax increases, but this plan has received only lukewarm support. Part of the problem, as noted in a recent California Budget Project analysis, is that the tax increases in the Democratic plan would impose virtually no tax hikes on the best-off Californians. This is an especially odd choice given that the wealthiest Californians have enjoyed substantial growth in real incomes at a time when middle-class incomes have been stagnant.

Senate President Pro Tem Darrell Steinberg, one of the architects of the plan, explains this free-pass for the wealthiest Californians as a response to the misleading claim, expressed frequently by Governor Arnold Schwarzenegger, that California's tax system is already too volatile due to its reliance on the capital gains income realized by the best-off taxpayers. Yet as the nonpartisan Legislative Analyst's Office has found, reducing volatility by making the income tax less progressive will almost certainly have an unfortunate tradeoff: reducing the long-term growth (and sustainability) of state revenues.

At a time when the state faces a $19 billion deficit that shows no signs of disappearing in the future, hamstringing long-term revenue growth isn't the first solution to this problem one would think of. As we've noted in the past, making state tax systems less volatile can't be the primary goal of a state tax system. Long-term sustainability should be the main goal — and a progressive income tax, coupled with prudent fiscal management of a meaningful rainy day fund, is a sensible tool for achieving this goal.

It's encouraging that the South Carolina Taxation Realignment Commission (TRAC) is interested in broadening the state sales tax base and lowering the overall tax rate.  Nonetheless, testimony submitted by ITEP late last week makes clear that the specific proposal being considered by the Commission is seriously flawed in at least two ways.

The first flaw is what ITEP describes in its testimony as a "worrying focus on taxing the 'necessities' that represent a large share of low-income families’ spending."  While low-income families will be helped by the lower overall sales tax rate proposed by the TRAC, the new taxes those families will face on groceries, residential utilities, and prescription drugs may outweigh the benefits they see from the lower rate.  Lessening the impact of this change through the enactment of a state EITC or some other type of tax credit is of vital importance if South Carolina is to avoid pushing its impoverished residents deeper into poverty.

The second flaw relates to the TRAC's insistence that its proposal be revenue neutral.  South Carolina tax revenues — like those in most states — have taken a serious blow as a result of the economic recession.  Large-scale tax base-broadening of the type being discussed by TRAC would raise more than enough revenue to substantially lower the sales tax rate while simultaneously bolstering the state's weakened revenue streams. 

Refusing to pursue this latter goal would be a serious mistake.  And moreover, as ITEP's testimony points out, estimating the amount of revenue that can be raised by taxing a slew of previously untaxed purchases is much easier said than done.  As a result, it will be very difficult for lawmakers to know precisely what tax rate would be needed to ensure true revenue neutrality.  At the very least, this difficulty should encourage a more cautious approach to revenue neutrality than what the TRAC appears interested in pursuing.

A dramatic showdown over taxes has been building in the gubernatorial election in Minnesota. The candidates running in the Democratic-Farmer-Labor Party (DFL) primary said they would support tax increases, especially bold stances in a state where the current governor is Tim Pawlenty. After all, presidential hopeful Pawlenty has repeatedly refused to raise taxes.

The victor in the DFL primary is former United States Senator Mark Dayton with 41 percent of the vote. Dayton doesn't mince words when it comes to his views on how to raise necessary funds for the state: "Read my lips, tax the rich. Minnesota’s wealthiest citizens pay only two-thirds of their fair share of state and local taxes. That’s wrong. As Governor, I will raise taxes on the rich of Minnesota, NOT on the rest of Minnesota." In a recent Star Tribune op-ed, Richard Miller, a retired Wells Fargo executive, commented, "Three governors have let what was a very fair tax system become grossly distorted in favor of those among us who are most able to fund the common good. Dayton is the only candidate telling us that the emperor has no clothes. We ought to listen to him before it gets even more embarrassing."

Dayton will face Republican candidate Tom Emmer, a former Representative in the Minnesota House, who strongly supports regressive tax policies. Emmer says "We need to reform our tax structure so it is based on what people consume and not on the wealth they generate." In November Minnesota voters will be offered a rare chance to vote for who they think should contribute more — the wealthy or the poor.

MR. GREGORY: ... I'm sorry, you're -- that -- you're not,
you're not being responsive to a specific point, which is how can you be for cutting the deficit and also cutting taxes, as well, when they're not paid for?

REP. BOEHNER: Listen, you can't raise taxes in the middle of a weak economy without risking the double-dip in this recession. President Obama's favorite Republican economist, Mark Zandi, came out several weeks ago and made it clear that raising taxes at this point in, in the economy is a very bad idea.

MR. GREGORY: But do you agree that tax cuts cannot be paid for...

REP. BOEHNER: You cannot balance the budget without a...

MR. GREGORY: But tax cuts are not paid for, is that correct?

REP. BOEHNER: I am not for raising taxes on the American people in a soft economy.

MR. GREGORY: That's not the question, Leader Boehner. The question...

REP. BOEHNER: And the people that the president wants to tax...

MR. GREGORY: ...is, are tax cuts paid for or not?

REP. BOEHNER: Listen, what you're trying to do is get into this Washington game and their funny accounting over there. You cannot get the economy going again by raising taxes on those people who we expect to create jobs in America and to get the economy going again. If we want to solve the budget problem, we've got to have a healthy economy and we have to get our arms around the runaway spending that's going on in Washington, D.C.

MR. GREGORY: I just want to clarify this. I mean, if you -- I'm relying on what Chairman Greenspan said. Maybe -- if you're accusing him of funny Washington games. He says that tax cuts that aren't paid for are not -- they are not cutting the deficit, that they are not actually paid for, it's borrowed money. And so do you believe tax cuts pay for themselves or not?

REP. BOEHNER: I do believe that we've got to get more money in the hands of small businesses and American families to get our economy going again, and the only way to get that economy going again is to do that and to get our arms around the spending.

MR. GREGORY: All right. [Moves on to another topic.]

So why was this exchange even worth HAVING?

On Thursday, Senate offices received a letter calling for the expiration of the Bush tax cuts for the rich from Americans for Responsible Taxes, and coalition of non-profits, labor unions, faith-based groups and think-tanks. The letter was signed by 50 organizations including Citizens for Tax Justice.

President Obama pledged to allow the Bush income tax cuts to expire for the two percent of taxpayers who have adjusted gross income in excess of $250,000 ($200,000 for unmarried taxpayers). Democratic leaders in the Senate have indicated that they want to vote in September to extend the Bush income tax cuts for everyone else (the other 98 percent of taxpayers). Many Republican Senators are expected to oppose any bill to extend the income tax cuts for 98 percent of taxpayers because they will demand that they be extended for the richest two percent as well.

A few Senate Democrats have indicated that they would support extending the income tax cuts even for the rich for some period of time, but it is unclear whether they would go so far as to vote against any bill that extends the tax cuts for "only" 98 percent of taxpayers. Because of the bizarre Senate practice of requiring 60 votes to enact any legislation, it is conceivable that the Republicans would be able to block an extension of the income tax cuts for 98 percent of taxpayers over their opposition to allowing tax cuts to expire for the richest two percent.

The letter from Americans for Responsible Taxes points out that public opinion and the opinion of economists and analysts at the Congressional Budget Office (CBO) and elsewhere are firmly in favor of allowing the tax cuts for the rich to expire. CBO analyzed several policy options to create jobs and found that income tax cuts generally would be the least effective, and that income tax cuts for the rich would be particularly ineffective.

Technically, the approach being discussed by President Obama and the Democrats would extend the reductions in income tax rates for all but the top two income tax brackets. Those top two brackets would be adjusted so that no one with AGI below $250,000 ($200,000 for unmarried taxpayers) would fall within them. Limits on personal exemptions and itemized deductions would also come back into effect for taxpayers above the $200,000/$250,000 threshold.

The letter also points out that even the richest two percent of taxpayers (those who would be affected by the top two income tax rates) would benefit from the extended rate reductions in the lower brackets, so even the richest two percent would not entirely lose their income tax cuts.

The main Republican talking point to justify extending the income tax cuts for the richest two percent appears to be that any other approach will harm small businesses. However, reports from Citizens for Tax Justice, the Center on Budget and Policy Priorities, and the CBO analysis mentioned above, all explain why income tax cuts for the rich would not help small businesses to expand and create jobs.

On Tuesday, CTJ participated in a press conference with reporters, along with House Majority Leader Steny Hoyer and the Center for American Progress, to discuss the House Republican Study Committee's so-called "Economic Freedom Act," H.R. 5029. Afterwards, CTJ was  misquoted as saying Congress would be "spinning its wheels" if it enacted this bill. What CTJ actually said, and what its new report on H.R. 5029 concludes, is much harsher than that.

The report finds that the plan would cost $7 trillion over a decade. If one adds the cost of extending the Bush tax cuts (which the sponsors of this plan clearly support) the cost would come to around $10 trillion over a decade. By the second year it's in effect, about 62 percent of the benefits would go to the richest 1 percent of taxpayers, and about three fourths would go to the richest 5 percent.

Read the report.

On Thursday, the Senate approved, by a vote of 61-39, H.R 1586, providing $26 billion to states to continue funding Medicaid programs and to avoid teacher layoffs. House Speaker Nancy Pelosi announced that she would bring her chamber back into session next week to approve the bill. 

The bill includes revenue-raising provisions to offset the $26 billion cost, including the set of provisions that would clamp down on abuses of the foreign tax credit and which were originally part of the ill-fated "tax extenders" bill (H.R. 4213). (Some other revenue-raising provisions included in the bill are not ideal.)

The foreign tax credit ensures that a U.S. individual or corporation with income generated in a foreign country is not double-taxed on that foreign income. These taxpayers are allowed a credit against their U.S. taxes for any foreign taxes they pay on the foreign income. The problem is that many corporations have found ways to receive foreign tax credits in excess of what would be necessary to avoid double-taxation.

Predictably, business associations representing multinational corporations oppose the provisions to prevent these abuses. A previous report from CTJ addressed their arguments, one of which focused on the provisions' supposed retroactivity (which is addressed by the version of the provisions in H.R. 1586). Another of the multinational corporate community's arguments was that the practices in question are necessary to keep U.S. corporations abroad competitive with foreign companies, which seems like an admission that the foreign tax credit is being used for more than just preventing double-taxation.

In June, the Peter G. Peterson Institute (funded by, and named after, the billionaire who is ostensibly concerned with the federal budget imbalance) released a remarkable report opposing the provisions to prevent abuses of the foreign tax credit. Another CTJ report responds to the Peterson Institute's arguments.

We’re in the heart of sales tax holiday season now.  Despite cooler heads prevailing in DC and Georgia, where sales tax holidays have been scrapped due to gloomy budget projections, Massachusetts and North Carolina have recently decided to move ahead with their holidays, and Illinois has decided to join the party for the first time.

By now, you may be familiar with all the reasons why sales tax holidays are a bad idea (read this ITEP policy brief if you’re not).  Aside from those groups with a vested interest in the holidays (e.g. retailers looking for free advertising, politicians looking to build their anti-tax credentials, and confused parents thinking these things actually save them money), just about everyone seems to agree that sales tax holidays are a worthless political gimmick.  Stateline pointed out last week that analysts as varied as those at Citizens for Tax Justice and the Tax Foundation have come to an agreement on this point.

But as long as sales tax holidays remain popular enough to remain impervious to most state budget crises, we might as well take a moment to marvel at some of their more glaring absurdities.  For example, this year, Massachusetts’ sales tax holiday will apply to alcohol.  College students in the state clearly have quite an effective lobbying presence in Boston.  Interestingly, neither tobacco nor meals will be included in the holiday.

In Illinois, which doesn’t have any experience with sales tax holidays, one columnist speculates that his wife isn’t alone in erroneously believing that the back-to-school holiday applies only to children’s clothes.  Indeed, adult clothes are included as well; as are aprons and athletic supporters.  Work gloves, however, will still be subject to tax.  You’d think that the Illinois Department of Revenue already has enough on its plate without having to worry about such minutia.

Finally, in South Carolina, it looks like the state’s Tax Realignment Commission is going to recommend quite a few changes to the state’s tax holidays.  For starters, the state’s bizarre post-Thanksgiving tax holiday on guns has to go, according to the Commission.  And changes could be in store for the August holiday as well.  The State reports that if the Commission gets its way, “this could be the last year to get your wedding gown, baby clothes, pocketbooks and adult diapers at a discount on back-to-school tax-free weekend.”  Interestingly, the South Carolina representative who first introduced the sales tax holiday idea actually agrees, claiming that he wanted only the holiday to apply to stereotypical “back to school” purchases – that is, things other than wedding gowns and adult diapers.

Nearly breaking the record for delay, the New York Senate passed the final piece of its budget on Tuesday night. The most significant components of the $1 billion-plus revenue measure are the elimination of the sales tax exemption on clothing and footwear below $110 and a temporary reduction in the itemized charitable contribution deduction for households with incomes above $10 million. The bill however did not include a measure which had been considered to change the taxation of out-of-state hedge fund managers.

The legislation, which passed 32 to 28 on party lines, also includes a series of smaller measures such as expanded tax breaks for film production, an increase in the taxation of video gambling, new rules allowing casinos to stay open later, and laws forcing online travel companies to collect sales taxes on hotel rooms. The measure did not, however, include a provision allowing State of New York University schools to raise tuition rates.

The change in the itemized charitable deduction would raise $100 million in revenue by reducing the deduction from 50% to 25% for households with incomes above $10 million for three years including 2010. This builds on a change enacted last year which completely eliminated the use of itemized deductions for households with incomes over $1 million except for allowing them to deduct a maximum of 50 percent of their charitable contributions.

The failure to keep the $50 million tax change affecting out-of-state hedge fund managers represents a “rare concession” (in the words of The Wall Street Journal) by the New York Legislature to the wealthiest income earners. The measure would have changed the law to tax the carried interest of out-of-state hedge fund managers at ordinary income rates rather than the lower capital gains rates. It ran into controversy as the managers met with Connecticut officials to show their alleged willingness to take their businesses out of New York.

Besides the larger budget passage, the New York Senate also approved two other bills with important budgetary impacts. The first would allow for across-the-board cuts in spending if federal Medicaid and education funding is not approved by Congress (which seemed more in doubt before the Senate approved it Thursday). More problematically, the Senate passed a 4% property tax cap, which, although relatively loose compared to the one passed in New Jersey, still represents bad policy. If passed by the New York Assembly, this measure would only provide poorly targeted tax cuts while restricting the flexibility of local government to raise the revenue needed to provide basic services.

In a move that should receive accolades from the tax justice community, New Jersey Governor Chris Christie recently vetoed legislation that would have put into place a tax credit for homebuyers. The legislation would have allowed tax credits of up to $15,000, or 5 percent of the home purchase price (whichever is less) for buyers of new or existing homes. The tax credit would have been available to anyone buying a new or existing home and no income caps would have applied.

The Governor said he vetoed the legislation because "the state simply can't afford it." The credit would have cost the state an estimated $100 million. The Governor expects that the state has a long road ahead in terms of fiscal solvency, saying that the state will "face long-standing, structural difficulties in its finances that require continued fiscal restraint and additional reforms." In his veto message he said, "This legislation will only briefly and artificially inflate home sales and consequently does not merit a $100 million revenue loss to the general fund."

A homebuyer's tax credit is poor policy at the state level just as it is at the federal level. As Citizens for Tax Justice noted during the debate over the federal credit, one problem with a tax incentive of this sort is that it goes to people who would have engaged in whatever activity Congress is trying to encourage (in this case, home purchases) even if the tax incentive was not available. And even if the homebuyer tax credit does prod some people to buy homes who otherwise would not, why is that something Congress wants to encourage? Isn’t over-consumption of housing, and the hugely inflated housing prices that resulted, what caused the recession?