The "Center for Freedom and Prosperity," an organization that CTJ long ago dubbed the "Tax Cheaters' Lobby," has come out against new regulations proposed by the IRS to require banks to report interest paid to foreign account-holders. The Tax Cheaters Lobby claims that cracking down on tax evasion by foreigners and Americans posing as foreigners would break U.S. laws, cause a collapse of the American financial system, and result in kidnapping and deaths of people all over the world. A new report from CTJ addresses and refutes these incredible arguments.

Read the report.

During his State of the Union Address last week, President Obama called on Congress to "get rid of the loopholes" in the corporate tax and "use the savings to lower the corporate tax rate for the first time in 25 years — without adding to our deficit."

If the President means that all of the revenue raised by closing tax loopholes should be used to pay for a reduction in the corporate tax rate, then this is the wrong approach.

A report released earlier that day by Citizens for Tax Justice explains several reasons why corporate tax reform should be revenue-positive, not revenue-neutral. Despite what corporate CEO’s and many politicians claim, U.S. corporate taxes are already lower than the corporate taxes imposed by the countries that we compete with. Surveys show that most Americans want large corporations to pay more, not less, in taxes. The arguments lobbyists make to try to justify reducing U.S. corporate taxes — arguments related to “competitiveness” and alleged “double-taxation” of corporate income — don’t add up. The last major corporate tax reform, which was enacted under President Ronald Reagan at a time when corporate loopholes were out of control, as they are again today, resulted in a 34 percent net corporate tax increase.

House Budget Chairman Paul Ryan gave the Republican response to President Obama's State of the Union address, speaking at length about what he sees as the need for greater cuts in government spending.

Anyone interested in learning what sorts of changes Congressman Ryan has in mind can look to the detailed "Roadmap for America's Future" that he proposed last year.

Ryan's "Roadmap" would reduce Social Security benefits and partially privatize the program, replace Medicare and Medicaid with gradually declining subsidies for private health insurance, and dramatically slash other types of non-military spending.

CTJ's report on the tax proposals in Ryan's "Roadmap" found that they would raise taxes on average for the bottom 90 percent of taxpayers, slash taxes on average for the richest 10 percent of taxpayers, and lose $2 trillion over a decade.

Governors are in the midst of crafting their budget proposals for next year, and many state leaders continue to grapple with historic budget shortfalls due to lagging revenue recovery and a high demand for public services.  In 2009 and 2010, most states balanced their budgets with a mix of temporary and permanent tax increases, significant federal assistance, and spending cuts.  This year, state revenues continue to lag, many of the temporary tax increases are set to expire, and federal stimulus assistance will dry up, yet the need for quality education, safe communities, affordable health care, public transit and well-maintained roads has not diminished.

As the Tax Justice Digest has previously noted, so far this year we have seen mostly a slew of bad proposals from state leaders. Many states are offering tax breaks to corporations and wealthy households and refusing to consider new taxes, while choosing to cut state spending to historically low and damaging levels. A few governors, however, have recently bucked the cuts-only trend and have made it clear that taxes must be a part of the solution.
 
In Connecticut, newly elected Governor Dannel Malloy plans to address the state’s $3.7 billion budget shortfall with an almost equal share of spending cuts ($2 billion) and tax increases ($1.7 billion).   While the details of his tax plan will not be unveiled until February, he is likely to support eliminating a majority of the state’s sales tax exemptions as one part of his revenue raising plan.

Hawaii’s new governor, Neil Abercrombie, has also embraced the need to raise new revenues as part of a budget-fixing compromise.  Governor Abercrombie proposed raising $279 million, including taxes on soda, alcohol, and time-shares. Most significantly, Abercrombie would tax pension income (which is generally exempt from taxation currently) for taxpayers with incomes over $50,000, raising around $114 million a year.  He also supports eliminating the state deduction for state taxes, a smart reform measure that would raise $70 million a year.  

North Carolina lawmakers addressed their budget crisis in the previous two years in part with $1.3 billion in temporary taxes which are set to expire this year.  For months, Governor Bev Perdue opposed extending the taxes for another year despite a shortfall of nearly $4 billion.  She recently changed her tune, and is now considering including an extension of these temporary tax increases (a 1 cent sales tax increase and income tax surcharge on high-income households and corporations) in her budget proposal in order to stave off massive cuts to K-12 education.

We recently brought you news of policymakers in Illinois voting to temporarily increase their corporate and personal income tax rates. The state’s flat rate income tax will increase from 3 to 5 percent until 2015. In 2015 the income tax rate will fall to 3.75 percent, and in 2025 the rate will fall to 3.25 percent. Corporate income taxes were also increased from 4.8 percent to 7 percent until 2015, when the rate will drop to 5.25 percent. In 2025, the corporate income tax rate will fall back to 4.8 percent.
 
For tax justice advocates and other folks worried about the state’s fiscal solvency (lawmakers passed the tax package in order to help deal with a $15 billion deficit) the tax increase was welcome news. In a bit of a twist, some public officials and lobbying groups from other states seem elated by the legislation too and hope that businesses will leave Illinois for their state.
 
In fact, Wisconsin Governor Scott Walker issued a statement saying, “Wisconsin is open for business.  In these challenging economic times while Illinois is raising taxes, we are lowering them.  On my first day in office I called a special session of the legislature, not in order to raise taxes, but to open Wisconsin for business.”

New Jersey Governor Chris Christie’s administration launched a campaign to lure Illinois businesses to the Garden State. An ad recently placed in the (Springfield) State Journal Register reads "Had enough of outrageous tax increases? We're committed to fiscal responsibility and lower taxes." And, according to the St. Louis Post Dispatch, the Missouri Chamber of Commerce and Industry's website says: "(We're) looking at ways to position Missouri to take advantage of our neighboring state's economic misfortune." There is even a movement afoot in Indiana to lower their state corporate income tax to lure Illinois businesses.

Illinois Governor Quinn’s response to Christie’s campaign was pretty direct. He recently said, “I don’t know why anybody would listen to him [Governor Christie]. New Jersey’s way of balancing the budget is not to pay their pension payment, not to deliver on property tax relief that was promised, to fire teachers, to take an infrastructure project — building a tunnel that had already been started — and end it and have to pay money back to the federal government.”
 
Despite these efforts to lure Illinois businesses we haven’t seen businesses packing up their computers and moving to other states. The reason is simple: There is much more to business location decisions than a state’s tax rate.

The overall business climate, education of the work force, quality infrastructure, and a variety of other factors determine a corporation’s location. Let’s not forget that revenue generated from the tax increase won’t just be flushed down the toilet — the money raised will help to fund the social and physical infrastructure that businesses need to thrive, including police, fire protection, and education.

As Paul O’Neill, former Bush Treasury Secretary and Alcoa executive, put it: “I never made an investment decision based on the tax code...” As the president of the Illinois Chamber of Commerce said, “I do not think there's going to be some immediate exodus to Missouri. Businesses don't operate that way.” States can bicker back and forth about whose state has the best business climate, but focusing only on corporate and personal income tax rates is silly and shortsighted.

There’s a definite trend forming among conservative ideologues when it comes to exaggerating the effect of taxes on individuals’ decisions about where to live.  Maryland, New Jersey, and Oregon have all seen bogus claims of this type arise in the last year or two, and Illinois’ recent tax increases have sparked some empty chatter of a similar type.  Unfortunately, Rhode Island can now be added to that list as well.

The Ocean State Policy Institute (OSPI) recently released a report claiming that the estate tax is driving affluent Rhode Islanders from the state.  As Wall Street Journal blogger Robert Frank points out, however, there is very little evidence in the report to support this claim.

The most cited rebuttal to OSPI’s report was issued by the Rhode Island Poverty Institute.  In it, the Poverty Institute starts by making one obvious point that you’d never guess from reading the OSPI report alone: Both the state’s overall population, and the number of wealthy taxpayers contained within its borders, have grown in the last decade.

Moreover, the Poverty Institute points out that “only a handful of Rhode Island taxpayers will ever have an estate that is actually subject to an estate tax, making it highly unlikely that the average Rhode Islander moving to another state is doing so for this reason.”  In fact, Massachusetts, which also has an estate tax, is the favorite destination of outgoing Rhode Islanders.  Admittedly, a sizeable number of Rhode Islanders do move to Florida (which lacks an estate tax), but the same can be said for New Hampshire residents.  And New Hampshire, like Florida, has neither an estate tax nor a personal income tax.

Ultimately, any reasonable person is going to think about a lot more than their tax bill when deciding where to live.  Just don’t expect this fact to be acknowledged by the anti-tax crowd anytime soon.

Although it is less than a month into the New Year, the battles over New Jersey’s budget are still going as strong as ever.

The so-called “Back to Work” package of bills has already passed the New Jersey legislature and is awaiting Governor Chris Christie’s signature.

As New Jersey Policy Perspective explained in their January 24th Monday Minute, six poorly conceived tax breaks constitute over $568 million of the package, including a change in the deduction of net operating losses, restoration of film tax credits, and tax credits for historic preservation.

One especially poorly conceived part of the package will shift the state to the "single sales factor" method of calculating multistate corporations' tax liabilities. This measure would result in an estimated $215 million loss of revenue while providing no benefit to corporations that do all their business in New Jersey. It would also create serious economic distortions resulting in many businesses in New Jersey facing higher tax rates.

While showering corporations with over $800 million in tax breaks, Christie is still resisting any effort to reinstate the ‘millionaire’s tax’, which would increase the marginal tax rate on income over $500,000 by 2%.

One needle of good news in the haystack of proposals by Christie is his decision to restore the state's property tax rebate. About 600,000 senior citizens and disabled individuals lost out when Christie decided to stop the rebate program last year. While details of the new proposal are still unclear, it apparently would restore credit to some of these taxpayers.

Although Christie extolled the virtues of cutting taxes for the wealthy and cutting spending during his State of the State Address, he largely failed to mention that his policies are already having devastating effects. Municipalities are finding it difficult to perform basic functions like snow removal. Massive service cuts are hitting cities like Camden, which was forced to slash half its police force.

As Charles Wowkanech, president of the New Jersey AFL-CIO put it, what Christie does not understand is that “cuts in school aid, municipal aid and property tax rebates” constitute a real “tax increase for working families.”

Faced with huge budget deficits, many state lawmakers are eyeing dangerous short-sighted budget cuts that threaten to gut essential services and state infrastructure.  In response, dedicated advocacy organizations, service providers, religious communities, concerned citizens, and professional associations have formed coalitions in more than 35 states to battle for smart fiscal policies that will protect core services and ensure that states have the resources to meet current and future needs. 

Here’s a brief overview of the newest of these coalitions:

In Georgia, the coalition 2020 Georgia officially launched on January 18th to promote a balanced approach to their budget that adequately addresses the long-term needs of the state instead of pursuing damaging cuts to services that can hurt the state’s economy.  The coalition consists of a wide variety of partners, including AARP, the League of Women Voters of Georgia, and the Georgia Public Health Association.  2020 Georgia hopes to maintain smart investments in education, public safety, health, and the environment.

In Texas, a wide coalition of organizations have created Texas Forward, a group that hopes to spur continued investment in vital public services instead of devastating budget cuts.  Texas Forward believes that smart investment now can prevent future generations from shouldering the burden of the lasting damage caused by disinvesting in services during this time of financial need.  Recently, Texas Forward urged state lawmakers to seek new revenue sources and federal funding to minimize the impact of the projected $24 billion deficit.

In Iowa, the Coalition for a Better Iowa was formed with the express mission “to maintain and strengthen high quality public services and structures that promote thriving communities and prosperity for all Iowans.”  The Coalition for a Better Iowa includes organizations representing children, seniors, human service providers, environmental organizations, and politically engaged citizens.  The coalition is committed to creating a balanced solution to the budget shortfalls while protecting vital services and investing sustainably in the state’s future.

In Montana, a group called the Partnership for Montana’s Future offers an extensive list of revenue-raising mechanisms to solve the state’s budge crisis.  The list has many specific proposals, generally categorized as collecting new revenue through improved tax compliance, closing tax loopholes, targeted tax increases, and other miscellaneous options.  The coalition consists of a wide variety of health, education, environmental, labor, and policy organizations.

In Pennsylvania, Better Choices for Pennsylvania is a coalition of health, education, labor, and religious organizations that recognize that all Pennsylvanians benefit from the services and infrastructure provided by state government.  Like the other coalitions featured, Better Choices for Pennsylvania refutes the proposition that deep tax cuts can solve the state’s budget problems.  Instead, BCP is pushing for closing special tax breaks and loopholes.  The coalition believes that helping working families through hard times will put the state in a better position towards long-term financial stability.

In Michigan, the revenue coalition, A Better Michigan Future recently issued a press release reviewing Governor Snyder’s budget proposal.  The group supports smart revenue-raising tactics like eliminating redundant and wasteful loopholes and modernizing the state sales tax to reflect the changing marketplace.

While not a new coalition, North Carolina’s revenue coalition, Together NC, recently launched a web ad.  The ad is meant to remind North Carolinians about the smart budget choices the state has made in the past that allowed it to prosper and spur citizens to take action to protect their state from falling behind (or, as the ad says, to keep North Carolina from becoming its neighbor to the south).

If you have a lot of investments or savings, your mailbox is starting to fill up (or will soon fill up) with copies of all those forms that your bank, your employer, and your brokerage firm send to the Internal Revenue Service to report the income paid to you last year. Banks are required to report the amount of interest paid on deposit accounts. Right now, they are only required to file those reports on U.S. and Canadian account holders.

On January 6, the Internal Revenue Service (IRS) proposed new rules (REG-146097-09) requiring banks to report interest paid to nonresident foreign individuals just as they report interest on U.S. citizens and residents. The IRS will use this information to respond to foreign governments' requests for information about their citizens' U.S. income.

As the IRS stated in its notice, we have seen in the last few years "a growing global consensus" about how important it is for countries to cooperate in exchanging tax information to protect their tax revenues and catch tax cheats. Many significant agreements have been reached recently, including eliminating the use of bank secrecy laws as a reason for refusing to share information.

The new reporting rules will also help the IRS catch U.S. tax cheats that are currently avoiding the reporting rules by posing as foreigners.

On the same day the proposed regulations were announced, the Center for Freedom and Prosperity, which CTJ long ago dubbed the "Tax Cheaters' Lobby," came out against the new rules and promised to lead the fight to "derail or kill this misguided regulation." The Tax Cheaters' Lobby works hard to preserve tax havens and the ability of wealthy people to hide their assets and avoid paying their taxes.

CTJ, on the other hand, applauds the IRS for taking this important step against tax evasion by citizens of all countries.

In recent weeks, tax commissions in Georgia and Vermont issued reports recommending a major overhaul of their states' tax systems.  The recommendations share many things in common, including sensible proposals to broaden the bases of major taxes and to make the changes revenue-neutral. In fact, when ITEP staff testified before each of these commissions over the last year, our testimony highlighted the importance of base-broadening as a first step towards sustainable tax reform. However, it’s clear that only one commission was concerned about the general welfare of its low-income taxpayers while the other seemed to have little interest in ensuring that a major tax overhaul doesn't disproportionately impact working families.  

Georgia’s Special Council on Tax Reform Releases Recommendations

Earlier this month Georgia’s Special Council on Tax Reform released its recommendations for how Georgia’s tax structure should be changed. CTJ has been following the Council's work closely over the past few months.  

As anticipated, the recommendations are quite sweeping and deal with every major tax the state levies.  Among the recommendations are broadening the income tax base by repealing the state’s generous pension exclusion and broadening the sales tax base by including more services and groceries. The Council also recommends replacing the state’s progressive income tax with a flat 4 percent rate, increasing the corporate income tax rate and increasing the cigarette tax. (Read the Council’s full recommendations.)

Unfortunately, no thought was given to how these sweeping changes impact low and middle-class working families. Broadening tax bases is sound tax policy, but base-broadening must be coupled with targeted measures to ensure that the brunt of this tax modernization isn’t borne by the most vulnerable.

Vermont’s Tax Commission Releases Final Report

On the heels of Georgia, Vermont’s Blue Ribbon Tax Structure Commission released its final report last week after more than a year of review, research, outreach and discussion about the state’s tax system.  The report offers a clear path forward for Vermont to “strengthen its tax system for the 21st century” which means “questioning critically every assumption in the tax system.” 

If enacted as a comprehensive package, which Commission members have requested lawmakers to consider, the recommendations would indeed make the state’s tax system more sustainable, adequate, and fair over the long run. 

The Public Assets Institute issued a statement on the report, saying it “was badly needed and long overdue…a  good first step in strengthening our revenue system so it can support the essential public services that all Vermonters deserve.”

The recommended income tax changes include basing Vermont’s taxes on federal adjusted gross income (AGI) and eliminating itemized and standard deductions.

The personal exemption would be replaced with a $350 non-refundable per-filer credit, plus an additional $150 for each spouse or dependent, which is capped at $800 and only available to taxpayers with AGI below $125,000.

The revenue gained from broadening the income tax base would be used to lower income tax rates.

The Commission recommended expanding the sales tax to most consumer-purchased services in order to bring their sales tax in line with current consumer patterns which favor services rather than goods.  They also suggested that all consumer-based sales tax exemptions should be eliminated with the exception of food and prescription drugs.  The revenue gained from broadening the sales tax base would be used to lower the sales tax rate from 6 percent to 4.5 percent.

Additionally, the Commission wants more scrutiny of the state’s tax expenditures and called for the state to develop the capacity to conduct tax incidence studies to better inform policymakers on tax policy changes.

One criticism of the Commission is that their recommendations were revenue-neutral, meaning the changes would not increase or decrease current state revenues.  Given that Vermont must fill a $150 million budget gap next fiscal year, some advocates and lawmakers have suggested that the plan should raise some new revenue, at least temporarily, to fill the gap. 

The good news, however, is that if taken as a comprehensive package, the recommended changes would maintain the state’s reliance on a progressive income tax and would use revenue gained from broadening the sales tax base to lower the sales tax rate rather than moving to a greater reliance on consumption-based taxes.

Commission members asked state leaders to give serious consideration to their findings and recommendations. There is a good chance their request will be answered, because Vermont policymakers are making tax reform a priority during this legislative session.

Republican lawmakers in four states — Wisconsin, Maine, New York, and Hawaii — are seeking to amend their state constitutions to require a two-thirds supermajority vote in each legislative chamber in order to raise taxes.  Each of these proposals would reduce the ability of these states to provide an adequate level of public services, and would make it significantly more difficult to enact real tax reform that wipes out wasteful tax deductions, exemptions, and credits.

These supermajority requirements would mean that even if state lawmakers representing 65 percent of a state's residents in both chambers, and the governor, all support a revenue increase, it still would not become law.

Besides being blatantly anti-democratic, the supermajority requirement to raise taxes would be particularly damaging during difficult economic times.  State revenues inevitably decline when the economy weakens, and dealing effectively with the resulting revenue shortfall requires a balanced approach relying on both higher taxes and cuts in state services.  A supermajority requirement would make striking this balance far more difficult.

Less obvious is the impact that supermajority requirements have on states’ abilities to reform their tax systems.  As CTJ has explained in the past, state supermajority requirements are one of the most important factors in biasing lawmakers toward pursuing their favorite policy goals via the tax code.  Supermajority requirements make it impossible for a simple majority of legislators to close a tax loophole unless they enlarge another loophole or lower tax rates in order to offset the resulting revenue gain. 

State lawmakers are well aware of the bias that already exists in favor of continuing tax breaks, and have begun crafting their favorite initiatives (e.g. energy subsidies, job-creation incentives, etc.) in the form of tax breaks in order to take advantage of this fact.  The result is the overly complicated, inefficient, and pork-laden tax codes you see in almost every state today.

Maine and Wisconsin are the only two states in the country that flipped from entirely Democratic control to entirely Republican control in last November’s election.  It’s no coincidence that these are also the two states most seriously considering a supermajority requirement.  In both cases, it took almost no time at all for Republicans to realize that a constitutional amendment of this type could allow them to continue implementing their anti-tax agendas long after they’ve been voted out of office.

In New York, a supermajority amendment has already passed the state Senate (along with an extremely ill-advised cap on state spending), though it’s likely to be greeted much less enthusiastically in the Democrat-led Assembly.  The proposal would also have to pass in the next legislature (which convenes two years from now), and be approved by voters before it would become a part of the state’s constitution.

Of the four states where supermajority amendments are being debated, Hawaii’s is by far the least likely to gain traction.  The Hawaii House’s 8 Republican legislators (out of a 51 person chamber) have floated the idea and encouraged the majority Democrats to fold it into their platform.  In a great example of Aloha Spirit, the Republicans have even been nice enough to insist that “Our caucus isn’t saying we need the credit.  What we’re saying is, we need the result.”  Hopefully, Hawaii Democrats — like the lawmakers in the other three states considering these amendments — will politely brush this proposal aside.

Like many states, Ohio is experiencing the perfect storm. The Buckeye State has seen its revenues plummet while the need for government programs and services has increased. As a result of the November elections, Republicans took control of the Governor’s mansion and the House of Representatives, and added to their majority in the Senate. The new Governor and a “handful” of House Republicans have vowed to not raise taxes, even though the state is facing a multi-billion dollar shortfall.

A broad coalition of thirty organizations called One Ohio Now has come together to trumpet a message about the need for both tax increases and spending cuts instead of just relying on cuts alone to solve the state’s fiscal crisis.

In a recent press conference, Col Owens with Legal Aid of Southwest Ohio said, “We think in several months, particularly after the budget hits the table and people begin to understand very well what the problems are... that people will be coming to this conclusion with us."

According to the St. Louis Post-Dispatch, the push to pass so-called “Fair Tax” proposals in Missouri is "gaining steam" as billionaire Rex Sinquefield and his organization, Let Voters Decide, work to get these proposals on the ballot next year.  The goal is to use the threat of ballot initiatives to press lawmakers to pass “Fair Tax” legislation.

The move is the latest by Sinquefield and his organization (who backed the disastrous Proposition A which passed last year) to force a highly regressive measure on Missourians. It should come as no surprise that Republicans in the state are seriously considering the proposal. As CTJ has noted before, you can "follow the money" and find that Rex Sinquefield donated significantly to statewide Republican candidates, including contributing $200,000 to Speaker Steve Tilley who ran unopposed for his seat.

The specific legislative proposals, HJR-56 and SJR-29, would essentially replace all of Missouri’s income taxes by both increasing the rate of the sales tax as well broadening the base of the sales tax so that it applies to services.

As the Institute on Taxation and Economic Policy (ITEP) demonstrated in its testimony to a Missouri Senate committee in January, the legislation would cut taxes only for the Top 5% of income earners in Missouri, while significantly hiking taxes on the other 95% of Missourians. This translates into a $154 average increase for the lowest 20% of taxpayers, with the average tax cut for the top 1% reaching over $25,000.

On top of all this, the Missouri Budget Project notes in a recent statement that if the proposed sales tax rate is capped at 7% as reported, then the plan would result in billions of dollars of lost revenue.

If the initiative passes, “critical programs that represent the state’s investment in its workforce, such as education, transportation, and health services would face further cuts, endangering the state’s economic recovery, ” according to the Missouri Budget Project's Executive Director, Amy Blouin.

Unfortunately, Missouri is not the only state to consider “Fair Tax” legislation. Kentucky State Representative Bill Farmer recently proposed to repeal the state's income taxes and increase the sales tax. Once again, ITEP has demonstrated how this proposal would also be highly regressive and fail to produce adequate revenue.

As many states consider dramatic overhauls to their tax systems, it is important to stay vigilant as various disastrous “Fair Tax” proposals, like those in Kentucky and Missouri, pop up throughout the country.

Some politicians in state capitals across the U.S. seem convinced that tax cuts for businesses and the wealthy are the best way to accelerate economic recovery. In two states, governors are proposing instead to cut taxes on groceries, which is a more effective, though not exactly flawless, way to help ordinary families. The tradeoff to any tax cut, of course, is unaffordable cuts to essential services including education, public safety, and health care.

In Wisconsin, state lawmakers agreed on a business tax cut that would add about $50 million to the budget deficit.  The Republican controlled legislature and newly elected Governor Scott Walker believe that the tax cuts will leave everybody with more money and leave the state with an improved economy.  Incredibly, Walker’s proposal rests on the assumption that the tax cuts will lure businesses away from Illinois, which recently saw an increase in its income tax, rather than fostering young, developing businesses. 

In Iowa, where a similar $300 million business tax cut is being discussed, critics of Governor Terry Branstad point out that essential social services are being axed in favor of pro-business policies.

In Arizona, Governor Jan Brewer is proposing to cut taxes on high-wage industries while further reducing funding for Medicaid, universities, community colleges, and K-12 education.  

Similar tax cuts are being proposed in New York, Washington, Michigan, Minnesota, and South Carolina. All of these plans prioritize tax breaks for business over providing essential services to those most affected by the economic downturn.  

The Governors of West Virginia and Arkansas have arrived at an entirely different tax-cutting proposal: reducing the sales tax on groceries.  Like lawmakers who support business tax cuts, Governors Tomblin and Beebe believe their brand of tax cuts will circulate quickly throughout the economy, providing necessary relief to the taxpaying public while stimulating the economy. 

Governor Mike Beebe of Arkansas wants to cut the sales tax on groceries by a half-cent and has said it is the only tax cut he will consider this year.  In West Virginia, Governor Earl Ray Tomblin wants to reduce the grocery sales tax from 3 to 2 cents and would ultimately like to see it eliminated entirely.

While the proposals to cut the sales tax on groceries are a welcome development compared to proposed tax cuts for businesses and the wealthy, there are still two problems with them. 

First and foremost, states are in dire need of revenue this year as they face the most significant budget challenge yet since the start of the recession.  Every dollar lost to a tax cut will have to be made up by an even deeper cut in spending. 

Second, reducing the sales tax on groceries is not the most targeted approach available to state leaders looking to support working families.  The poorest 40 percent of taxpayers typically receive only about 25 percent of the benefit from exempting groceries. The rest goes to wealthier taxpayers who can more easily afford to pay the sales tax on groceries. 

Enacting or increasing a refundable state Earned Income Tax Credit (EITC) or other low-income refundable credit would be a more affordable and better targeted alternative to ensure that tax cuts reach low- and middle-income working families.  Tax cuts that directly benefit low-wage workers are especially beneficial to the general economy because low-wage workers immediately spend their refunds out of necessity.  By pumping the money back into the economy, the tax cut goes further in stimulating the economy than tax cuts for the wealthy or businesses.

Instead of pursuing tax cuts for businesses and wealthy individuals, state lawmakers should be working to alleviate hardship on the most vulnerable.  Indeed, the governors in West Virginia and Arkansas may end up being much more efficient at helping their state economies rebound than the “business friendly" governors in Wisconsin and Iowa.

Ill-conceived tax ideas are coming out of statehouses and governors’ mansions at a faster rate than we’ve seen in quite a while.  Here’s a quick summary on recent proposals receiving serious consideration in Arizona, Florida, Idaho, Maine, Michigan, Minnesota, New Jersey, Ohio, and Wisconsin.

Arizona: Business tax breaks and property tax breaks are being pushed by the Arizona Chamber of Commerce, and legislative leaders are taking them seriously.  The specifics have yet to be worked out, but expect at a minimum to see tax subsidies ostensibly aimed at boosting business hiring and investment.  As the Center on Budget and Policy Priorities (CBPP) has explained, however, states cannot stimulate their economies by cutting taxes.

Florida: Newly elected Governor Rick Scott continues to insist that “the way to get the state back to work is to cut property taxes and phase-out the corporate income tax, and we’re going to get that done.”  The state’s enormous budget gap has caused Senate President Mike Haridopolos to approach the issue more cautiously, though he still claims that “if we see some opportunities for tax relief that we feel absolutely confident will create more jobs and actually grow the economy, we’re open to them.”  Haridopolos is also pushing a “Taxpayer Bill of Rights” (TABOR) proposal similar to the one that decimated Colorado’s education funding stream.

Idaho: Legislators in Idaho — including the House majority leader — are preparing to revive an idea they first proposed toward the end of last year’s session: slashing the state’s corporate income tax rate from 7.6 percent to 4.9 percent.  Idaho legislators are also discussing cutting the state’s top personal income tax rate from 7.8 percent to 4.9 percent.  Each of these changes would drastically reduce the amount of revenue available to pay for vital state services, though by proposing that these changes be phased-in gradually over the course of the next decade, legislators are hoping to avoid having to spend too much time thinking about what state services will eventually have to be cut.

Maine: State Tax Notes (subscription required) reports that the chairman of Maine’s Senate tax committee plans to make cutting the state’s personal income tax rate his top priority.  Unlike the tax reform package that Maine voters recently rejected, this cut would be paid for not by broadening the state’s tax base, but by cutting spending and hoping for strong revenue growth.  Maine’s legislators are also apparently contemplating a constitutional amendment that would require supermajority support in the legislature in order to raise taxes.  A supermajority requirement of this type would result not only in lower state services, but also in more tax loopholes.  This is because such a requirement would prevent a simple majority of legislators from eliminating a tax loophole unless they also enlarged another loophole or lowered tax rates in a way that resulted in no net revenue gain.

Michigan: House and Senate leadership on both sides of the aisle in Michigan have inexplicably come to an agreement that the state’s EITC should be cut.  It’s unclear why tax increases on low-income families have suddenly become so popular in Michigan.  If Governor Rick Snyder gets his way, some of the revenue generated by taxing low-income families will likely to be used to pay for his proposed $1.5 billion cut in state business taxes.

Minnesota: The Republican leaders of Minnesota’s state legislature made clear this week that business tax cuts will be one of their top priorities.  One Senate leader has proposed cutting the state’s corporate income tax rate in half by 2017 and freezing statewide taxes on business property.  Fortunately, Minnesota Governor Mark Dayton is likely to vigorously oppose these cuts.

New Jersey: Democratic legislators are seriously considering a move to single sales factor apportionment for their corporate income tax.  The bill has already cleared the relevant committee, and will move to the full Senate soon.  See ITEP’s policy brief criticizing the single sales factor for state corporate income taxes.

Ohio: Ohio’s House and Governor have declared repealing the state's estate tax to be a top priority.  Local governments receive a majority of the revenue generated by Ohio’s estate tax, and therefore oppose its repeal.  Ohio’s House leaders would also like to create a business tax credit for hiring new employees.

Wisconsin: Governor Scott Walker has proposed a variety of business tax breaks and, as in Maine, the creation of a supermajority requirement to raise taxes.  More bad ideas are almost certain to come from Wisconsin in the weeks ahead, as Governor Walker made clear during last year’s campaign that he supports the outright repeal of Wisconsin’s corporate income tax.

Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

Year after year, policy wonks, the media, and folks across the country have watched as Illinois balanced its budget with gimmicks and accounting tricks. This year the state faces a $15 billion budget gap, and policymakers in Springfield finally did the hard work of raising new revenue.

Wednesday morning, shortly before new legislators were to be sworn in, revenue-raising legislation was approved. The bill temporarily raises the state’s flat rate income tax from 3 to 5 percent until 2015. In 2015 the income tax rate will fall to 3.75 percent, and in 2025 the rate will fall to 3.25 percent. Corporate income taxes were also increased from 4.8 percent to 7 percent until 2015, when the rate will drop to 5.25 percent. In 2025, the corporate income tax rate will fall back to 4.8 percent.

The bill also included a strict spending cap which will mean that spending can’t increase by more than 2 percent in each of the next four years. As Governor Pat Quinn's budget director noted this week, imposing such a strict cap at a time when the state is struggling to pay overdue bills and unfunded pension obligations will almost certainly mean that state spending on all the core functions of government will not be allowed to grow at all over the next four years, which of course means that in real inflation-adjusted terms, state spending on everything from education to transportation to public safety will likely decline.

This is especially worrisome in light of a recent Center for Tax and Budget Accountability report noting that the real value of state spending has already fallen over the last fifteen years.

Illinois lawmakers should be applauded for passing this legislation. But the state is hardly out of the woods: this tax increase is expected to only fill about half of the state’s budget gap, meaning that the remaining budget hole will likely be closed exclusively through spending cuts.

The good news, as noted in a number of ITEP reports, is that when legislators find the political will to return to tax reform issues, they'll find the state has a wide variety of sensible revenue-raising (or fairness-enhancing) tax reform options at its disposal, including expanding the sales, income and corporate tax bases by eliminating unwarranted loopholes and expanding the state's relatively low Earned Income Tax Credit.

This week, California Governor Jerry Brown recommended a five-year extension of temporary tax increases first enacted in 2009 and a reduction of a corporate tax break to help close a budget shortfall of more than $26 billion over the current and next fiscal years.  Governor Brown also proposed more than $12 billion in spending reductions, including deep cuts to health and human services and higher education.

The temporary tax increases, proposed for extension through 2015, include: a 0.25 percentage point personal income tax rate surcharge, a reduction in the amount of the dependent credit, a 1-cent increase in the state sales tax (maintaining the state sales tax rate at 7.25 percent), and a 0.5 percentage point increase in the Vehicle License Fee. 

Governor Brown also proposed raising close to $1 billion by changing a recent law which allows corporations to choose the method for apportioning their profits to California.  Under his plan, most corporations must use what is known as the single-sales factor apportionment formula.

The catch is that the Governor wants voters to make the decision in a special election this June on whether or not to accept the extension of the temporary tax increases.  If the taxes are rejected at the polls, California lawmakers will need to find at least an additional $9 billion in spending cuts.  But, before voters even get the chance to decide the fate of the state’s budget, Governor Brown must secure enough support from state lawmakers (a two-thirds majority is required) to get the extension on the ballot.  

The other hurdle? Californians were asked to support extending these very same taxes two years ago and the proposal was soundly defeated at the polls.  This time around Governor Brown is making the choice clear: either vote to approve the temporary taxes, or see a drastic reduction in K-12 spending which is held harmless in his current proposal.

A new online resource, Tax Credits for Working Families, was recently launched to highlight the importance of providing affordable and targeted assistance through refundable tax credits to the growing number of people and families living in poverty across the country.  Check out the website for links to research and state-level information on state refundable Earned Income Tax Credits, property tax circuit breakers, and child related credits.

The Kentucky Center for Economic Policy (KCEP), a new project of the Mountain Association for Community Economic Development, also launched its website this week.   The site features KCEP’s publications on fiscal policy issues in Kentucky focusing on the areas of budget and tax, workforce and economic development, and economic security.

On Wednesday, House Republicans voted to replace the chamber's "pay-as-you-go" or PAYGO rules with a new set of rules called "cut-as-you-go" that is based on the belief that government spending contributes to budget deficits but tax cuts, no matter how huge, do not.

CTJ sounded the alarm back in November, in an op-ed that explained how this would increase the (already significant) incentives for Congress to do all sorts of spending through the tax code at a time when lawmakers need to move in the opposite direction and close special tax breaks and loopholes.

PAYGO requires that the cost of any increase in mandatory spending or any new tax cuts be offset either with spending cuts or some sort of tax increase. Cut-as-you-go requires that the costs of increases in mandatory spending be paid for by cuts in other mandatory spending. Under cut-as-you-go, the House is not required to offset the cost of tax cuts, and it cannot offset the costs of increased spending by raising taxes.

Equally outrageous is that cut-as-you-go would allow the fast-track procedure known as "reconciliation" to approve tax cuts that increase the deficit. (Remember that reconciliation is the procedure that Republicans called a power grab when Democrats used it to enact part of health care reform.)

The reconciliation procedure was created to facilitate the enactment of laws that would help balance the budget, but in the early 2000s the rules were changed by the Republican Congress that went on to use reconciliation to increase the deficit with the Bush tax cuts. When Democrats took back Congress, they reinstated a more traditional PAYGO rule that barred the use of reconciliation for laws that increase the deficit.

It's important to remember that Republican lawmakers generally believe, or claim to believe, that tax cuts either pay for themselves or actually cause revenues to increase. Senate Republican Leader Mitch McConnell said over the summer, "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." This idea has been thoroughly debunked by every credible economist who has ever given it a moment of thought, and yet it remains at the heart of the Republican philosophy.

Cut-as-you-go also explicitly exempts any and all costs associated with the repeal of health care reform. Because the health care reform law reduced the deficit, the repeal of it would, of course, increase the deficit. In fact, the Congressional Budget Office just found that repeal will increase the budget deficit by $230 billion over the first decade and more in the years after that. The House GOP's cut-as-you-go rule allows the chamber to ignore this cost.

Of course, cut-as-you-go may have more symbolic and political importance than any real impact on what laws get passed. Just like PAYGO, cut-as-you-go will be waived by a House that doesn't want to be bound by it. Reconciliation matters mostly in the Senate, because it gets around the bizarre super-majority requirement in that chamber, and the Senate is controlled by Democrats. (In the House, bills always just need a simple majority of votes to pass.)

Also, when the Democrats controlled Congress, they put two types of PAYGO in place. One was in the procedural rules of each chamber, and the other was in law (statutory PAYGO). Cut-as-you-go only replaces PAYGO in the House rules and is not itself a law. Statutory PAYGO, which is unaffected, still requires the administration to automatically cut spending to offset any increases in mandatory spending or tax cuts that are not paid for.

But cut-as-you-go will make it incredibly easy for the House Republicans to approve huge tax cuts that seem, on the surface, appealing to the general public. Even if such tax cuts do not become law during this Congress, they present a huge problem for lawmakers who are trying to take responsible positions on taxes. House Republicans will have absolutely no incentive to tell the public what the real fiscal impact of these tax cuts will be. Cut-as-you-go will also make it much less likely that the House could approve even modest improvements in essential programs, since these improvements could not be funded by the elimination of tax loopholes (of which there are plenty).

Two weeks ago, while most people were headed home for the holidays, the Wall Street Journal put out an extremely misleading and factually inaccurate editorial suggesting that up to 10,000 wealthy Oregonians fled the state because of a recent tax increase.  Both ITEP and the Oregon Center for Public Policy (OCPP) quickly responded with information refuting this claim.

The Journal’s claim hinges on the fact that 10,000 fewer Oregonians were affected by a tax increase on incomes over $250,000 than the state’s Legislative Revenue Office (LRO) originally expected.  Armed with just this single piece of information, the Journal enthusiastically jumped to the conclusion than 10,000 wealthy Oregonians must have moved to states like Texas, which lack an income tax.  But as ITEP points out in its report, Oregon’s shortage of high-income filers was accompanied by an even larger surplus of filers lower down the income distribution.  This strongly suggests that wealthy Oregonians simply earned less income (due to the recession) than the LRO expected.  And indeed, the LRO made this point explicitly when it released the data that eventually sparked the Journal’s editorial.

The analyses produced by ITEP and the OCPP were subsequently picked up by The Providence Journal, The New Republic, the Center for Budget and Policy Priorities (CBPP), and numerous other outlets.

But the Wall Street Journal has continued to stick to its baseless narrative, publishing two letters to the editor echoing its claim about the damage done by Oregon’s tax increase.

If past experience is any guide, talk of tax-induced migration from Oregon isn’t likely to fade any time soon.  As ITEP reminds readers in its report, this most recent editorial very closely resembles a pair of editorials the Journal released in 2009 and 2010 claiming that Maryland’s millionaires had fled the state because of a similar tax increase.  Just as with this editorial, the Maryland editorials were both misleading and factually inaccurate, though they were still very influential in the debate over taxing high-income earners in Maryland and other states.  The steady stream of misinformation from the Journal isn’t likely to subside any time soon.

As explained elsewhere in this Digest, House Republicans just significantly weakened Congress’ already loose control over tax code spending — or “tax expenditures.”  But there was also significant good news for those of us seeking to better scrutinize the bevy of giveaways contained in our tax code.  On Tuesday, President Obama signed a bipartisan bill that, among other things, requires the Executive Branch to finally incorporate tax expenditures into its evaluations of the government’s performance.

Specifically, the legislation signed by President Obama (HR 2142) updates the Government Performance and Results Act of 1993 (GPRA).  As CTJ has explained before, one of the most significant problems with GPRA was that it did not require roughly $1 trillion in federal tax breaks, or “tax expenditures,” to be evaluated in terms of their success in fulfilling their intended purposes.  The legislative history of GPRA made clear that Congress wanted these programs evaluated, but the lack of a legal requirement to do so allowed past Administrations to drag their feet for nearly two decades.

HR 2142 touches on a wide range of performance issues.  But the requirement that tax expenditures (an area of the budget that rivals or even exceeds discretionary spending in size) be included in government performance evaluations is doubtless one of the most significant reforms contained in the new law.  Much work remains to be done, however, to ensure that this new requirement is implemented properly.

Unlike the Washington State performance review system and the systems typically discussed in other states, HR 2142 does not require a systematic look at every tax expenditure.  Rather, the new federal framework starts by requiring that the OMB and relevant federal agencies identify what goals they want to accomplish.  From there, they are required to identify the various government functions (including tax expenditures, spending programs, regulations, etc) that are designed to contribute toward those ends, and assess how effectively they are contributing to those goals.  And for certain “high priority” performance goals at risk of not being met, the OMB and agency officials will also be required to identify changes to tax expenditures and other programs that could improve government performance.

The main downside of this design is that it does not guarantee every tax expenditure will be evaluated.  It’s not at all hard to imagine how many tax expenditures could slip through the cracks if OMB and/or agency officials do not consider them closely related to the performance goals they have identified. 

But, while it’s too early to tell, this downside may be outweighed by the fact that this goal-based model looks at tax expenditures not in isolation, but alongside other policies, regulations, and agency activities aimed at achieving the same goals.  If implemented well, this new reform has the potential to add some much needed rationality to debates over whether to pursue certain goals through spending programs or tax breaks.

Like the federal and state governments, local governments are having a difficult time balancing budgets right now. One option is to close tax loopholes.

The Institute on Wisconsin’s Future recently released their report detailing how property tax exemptions are hurting local communities' ability to provide basic services. This helpful report urges a review of all 104 property tax exemptions currently on the books in Wisconsin.

While the authors admit, “There is no one silver bullet that repairs the entire system,” certainly we could all agree that “Property tax revenue is a major source of local operating funds. It is a time to be careful and efficient with this resource. It is time to close loopholes, be consistent and ensure that all groups pay their fair share.”

New Hampshire lawmakers reconvened this week in Concord and one of the top orders of business is closing a budget gap of hundreds of millions of dollars.

The New Hampshire Fiscal Policy Institute (NHFPI) suggests that the magnitude of the state’s fiscal challenges presents lawmakers an opportunity to examine and propose changes to the state’s tax system rather than simply slashing public services.  The group recently released a report that examines the state’s current tax structure and puts forth considerations for improvement.  The report finds two major shortcomings of New Hampshire’s current tax system: the responsibility for paying taxes falls disproportionately on low- and moderate-income households and the tax system does not generate an adequate amount of revenue to pay for the state’s essential public services.
 
Unfortunately, it appears that the GOP-controlled state legislature is poised to propose several tax cuts this year heavily tilted towards businesses and wealthy households that will only serve to make the system even more unfair and inadequate.

Using information from the NHFPI report, including Institute on Taxation and Economic Policy data, an editorial in the Concord Monitor argued against any proposal to cut taxes in a time of fiscal crisis, especially when the result would mean more cuts to core services and higher taxes on low-income households.
 
Moving forward, New Hampshire lawmakers should use the NHFPI report as a tool in determining meaningful policy responses to their state’s fiscal woes.