How sad. Here’s one story among many about state officials hoping today’s Mega Millions lottery winner is in their state, because, Wow!, that would be some revenue windfall!  Rhode Island’s budget, for example, is currently $117 million in the red, and the $23 million tax bill on a lotto winner would help pay for some affordable housing.

This is what it’s come to: 43 states now sponsor legalized gambling in the form of a lottery in order to boost revenues and then drool over the prospect of collecting more taxes from the winner.  Each state taxes winnings differently, of course, but any of the 42 states participating in today’s Mega Million game stand to gain some revenues.

This is no way to balance a budget. For one thing, if consumers spend disposable income on lotto tickets, they are forgoing other purchases – purchases that would be subject to a sales tax.  So in the end, lotto may prove to be a revenue wash.

For another thing, it becomes a case of diminishing returns as neighboring states introduce new and better lotto games. Then, states either lose business to another state or hit a ceiling for how many lotto tickets a population can buy. That is, as a revenue source, it’s a short or medium term quick fix but not a long term solution. Kind of like winning the lottery.

And did we mention that gambling is addictive, winning is unlikely and it’s not at all in the public’s interest for a government to actively encourage and promote it?

Real public servants level with their constituents about state budget needs. In states like Maryland, California and Washington, courageous lawmakers are doing the right thing and raising revenues the honest way – with taxes.

Whatever comes of rumors that Governor Haley might face tax fraud charges, a modified income tax cut has passed out of South Carolina’s House Ways and Means Committee. Perhpas due to ITEP’s analysis, which found that the poorest South Carolinians would see their taxes increased under the legislation, it was modified to at least spare the poorest South Carolinians from new taxes.

Check out yesterday’s post from the Wisconsin Budget Project showing that diminishing revenues are a "purple problem" because taxes keep getting cut no matter who's in power.

The personal income tax has been under threat of repeal for most of this year in Oklahoma, but the Oklahoman reported yesterday that the Chair of the House Taxation and Revenue Committee says it’s unlikely full repeal will come to fruition.  A cut in the top tax rate, however, still appears likely so they’re still buying the economic snake oil.

Here is a commonsense editorial from the Kansas City Star advocating for the taxing internet purchases and the streamlined sales tax agreement.  

This week, Progressive Maryland came out with their compromise plan designed to bridge the gap between the personal income tax increases passed by the state House and Senate.  The plan was analyzed with the help of the Institute on Taxation and Economic Policy (ITEP), and would raise needed revenues while actually reducing the unfairness of the state’s regressive tax system.

Given all the talk lately about the richest one percent and the other 99 percent, it’s surprising that more attention has not been focused on one federal tax that truly does target the richest one percent: the federal estate tax.

A coalition of organizations, including Citizens for Tax Justice, has sent a letter to Congress urging lawmakers to enact Congressman Jim McDermott’s Sensible Estate Tax Act, or, alternatively, to simply allow the estate tax cuts in effect now to expire at the end of this year.

The tax cuts enacted under President Bush included a provision that gradually reduced the estate tax over several years until repealing it entirely in 2010. As part of the “compromise” legislation that President Obama signed to extend the Bush tax cuts for two years, only a very scaled back version of the estate tax was allowed to come back for 2011 and 2012. If Congress does nothing, the estate tax cuts will expire at the end of this year and the pre-Bush estate tax rules will come back into effect.

And that would be just fine with us. Despite common misconceptions that the estate tax affects a lot of Americans, only the value of estates exceeding $1 million ($2 million for married couples) would be subject to the tax, and usually larger amounts can be passed on without tax because of breaks that reduce the tax (like deductions for charitable bequests and special breaks for family businesses and farms).

The other sensible option would be for Congress to enact Congressman McDermott’s bill, which would allow the overall structure of the pre-Bush estate tax rules to come back into effect, but would simplify the rules and make them a little more generous to families who might be affected by the tax. (For example, the McDermott bill would index for inflation the exemptions that keep the estate tax from affecting most of us.)

As the letter to Congress explains, under either approach, the estate tax would affect the richest one percent of Americans, those who have benefited more than anyone else from the public investments that create and sustain a prosperous society.

For more details, see the related press release.

Photo of Congressman Jim McDermott via SEIU Health Creative Commons Attribution License 2.0

Kansas Governor Sam Brownback laid down a legislative marker at the beginning of year, promising to cut and eventually eliminate the state’s personal income tax. Since then, state lawmakers have debated a number of approaches to changing the state’s tax laws that have been, to varying degrees, in line with the Governor’s own deeply flawed plan. The House and Senate each recently passed their own tax plans, and a conference committee began meeting this week in effort to reconcile them into legislation the Governor would sign. 

The Institute on Taxation and Economic Policy (ITEP) has analyzed both plans and finds that both would give gradually larger tax cuts, as a percentage of income, to Kansans higher up the income ladder while actually raising taxes on filers further down.

Each also creates a massive gap in the state’s revenues. The full analysis is here.

On Monday, the Congressional Progressive Caucus (CPC) released its budget proposal, which would allow the expiration of a much larger portion of the Bush tax cuts than would expire under President Obama’s plan.

The CPC budget plan, which Citizens for Tax Justice and other organizations helped prepare, would also

—  end the tax preference for capital gains and stock dividends,

— enact the higher income tax rates for millionaires that were proposed by Congresswoman Jan Schakowsky,

— enact the President’s proposal to limit the value of tax deductions and exclusions to 28 cents for each dollar deducted or excluded,

—  end the rule allowing corporations to “defer” U.S. taxes on their offshore profits,

—  close tax loopholes for oil and gas companies,

—  enact a financial crisis responsibility fee (a bank tax).

These are just some of the reforms included in the CPC budget plan that make sense as tax policy and as ways to address the budget deficit.

Ending the tax preference for capital gains and stock dividends and simply taxing all income at the same rates is key to tax reform. (See a related post.) Ending “deferral” in the corporate income tax is a major reform necessary to end the tax incentives for U.S. corporations to shift jobs and profits overseas.

While President Obama’s budget plan would allow only the top two income tax rates to revert to their pre-Bush levels, the CPC budget would eventually allow some other rates to return to their pre-Bush levels.

There are currently six income tax brackets, and President Obama’s plan would allow the top two rates (the 35 and 33 percent rates) to return to their pre-Bush levels. The CPC budget would go further because it would (eventually) also allow the 28 and 25 percent rates to return to their pre-Bush levels, in 2017 and 2019, respectively.

This is more responsible than President Obama’s approach, which would extend 78 percent of the Bush tax cuts. Despite being more fair and responsible than extending all the Bush tax cuts, Obama’s approach would still manage to give significant tax cuts to the richest one percent and richest five percent.

A budget resolution held out as a “centrist” alternative to the Ryan budget plan is claimed to be based on the recommendations of the President’s fiscal commission (often called the Simpson-Bowles commission, after its co-chairs) but actually maintains the regressive capital gains break that would have been eliminated under the commission’s plan.

A recent report from CTJ finds that ending the tax preference for capital gains would raise more than half a trillion dollars over a decade and that 80 percent of the resulting tax increase would be borne by the richest one percent of taxpayers.

The plan proposed by the Simpson-Bowles commission in 2010 to reduce the budget deficit offered several alternatives to reform the tax code, all of which would eliminate the tax preference for capital gains. There is, in fact, a note under the table on page 29 of the commission’s plan saying each alternative, regardless of rates, “taxes capital gains and dividends as ordinary income.”

In stark contrast, the so-called centrist budget resolution that was introduced Monday specifically calls for "lowering individual and corporate income tax rates across-the-board with the top rate reduced to between 23 and 29 percent unless the top rate must be higher than 29 percent to offset preferential treatment for capital gains." (Italics added.)

The co-sponsors of this resolution include Reps. Jim Cooper (D-TN) Steve LaTourette (R-OH), Kurt Schrader (D-OR), Charlie Bass (R-NH), Mike Quigley (D-IL) and Tom Reed (R-NY).

Tax Reform Requires Taxing All Income at the Same Rates — as Reagan’s Did

It is virtually impossible for Congress to pass a fundamental tax reform that sweeps away tax loopholes and tax subsidies, and does so in a progressive way, without eliminating the tax subsidy that is most targeted to the rich — the capital gains tax preference.

The last major tax reform, signed into law by President Reagan in 1986, did exactly this, resulting in a personal income tax that applied the same rates to all types of income. This greatly simplified taxes and eliminated the incentive to engage in tax shelters to convert other types of income into capital gains in order to take advantage of lower income tax rates.

Simpson-Bowles Plan Was Poor Policy Even Before House “Centrists” Inserted Capital Gains Tax Preference

Even though it would have ended the capital gains tax preference, the Simpson-Bowles commission’s plan was deeply flawed and unfair for many other reasons. Chief among them, it relied on spending cuts to meet two-thirds of its deficit-reduction goal and relied on new revenue to meet just one third of that goal.

When the Simpson-Bowles plan was made public, CTJ criticized the fact that it would close tax loopholes and tax subsidies but would use most of the resulting revenue savings to reduce tax rates rather than reducing the budget deficit (which was the point of the commission, after all).

Another major problem with the plan is its call for a “territorial” tax system, which the “centrist” House budget resolution echoes. A “territorial” tax system is a euphemism for exempting the offshore profits of U.S. corporations from the corporate income tax.

Photo of Barack Obama meeting with Alan Simpsons and Erskine Bowles via White House Creative Commons Attribution License 2.0

On Wednesday, the House Ways and Means Committee approved a bill that House Majority Leader Eric Cantor (R-VA) introduced last week: the “Small Business Tax Cut Act.”  As it stands right now, a lot of truly small businesses would not actually qualify for the deduction it offers, for 20 percent of “small business” income.

Think of a mom-and-pop mail-order business or the local shoe repair shop where you see the owners working hard every day, but no other employees. Because the bill caps the deduction at 50 percent of the wages paid to non-owners, many family businesses won’t qualify because their only employees are family members who are owners.

While the legislation caps the amount of the deduction (at half of non-employee payroll), there is no limitation on the type or amount of income that business can have. So highly profitable operations like Oprah Winfrey’s production company or the Trump Tower Sales & Leasing office would both qualify for the deduction simply because they have fewer than 500 employees on payroll.

Who else would qualify? Professional sports teams (including teams owned by Mitt Romney’s friends) with their multi-million-dollar salaries to non-owner players. So would private equity firms, hedge funds, and other “small businesses” with income in the millions, or even billions, of dollars, along with most of the top law and lobbying firms inside the Beltway and elsewhere.

The bill is currently projected to cost $45.9 billion in its first year – but its benefits are not at all clear. So far it seems that in Rep. Cantor’s dictionary, “small business” is defined as “my rich friends.”

The Tulsa World takes a look at the growing list of reasons to oppose an income tax cut in Oklahoma, including arguments being made by education groups, businesses, retirees, real estate developers and lawmakers themselves.  As the World puts it, basic public services already “haven't been protected for years and as a result are decimated by recent cutbacks. Protecting them should mean restoring some funding, but that's not how tax-cutters see things.”

The Maryland House and Senate have each passed budgets containing progressive personal income tax increases that roughly hew to the Governor’s original blueprint.  As the Maryland Budget and Tax Policy Institute points out, the Senate plan raises more revenue from across the board increases, while the House plan raises less and targets the state’s highest-income residents.  The differences between these two plans will be worked out in the days ahead.

This great editorial in the Lincoln Journal-Register (Nebraska) calls the newly formed Open Sky Policy Institute “an informed new voice” in Nebraska’s public policy debates. The editorial also shares some of the Institute’s numbers (compliments of ITEP) making the case that “the number of dollars the tax cut would put into the pockets of higher-income Nebraskans dwarfed the amount that would go to low- and middle-income Nebraskans” under a plan the governor has proposed.

The Tax Policy Center (TPC) recently published figures showing that for the vast majority of taxpayers, Obama’s proposal to extend most of the Bush tax cuts would provide benefits that far exceed the tax increases he proposes. Just 6.5 percent of taxpayers would pay more in taxes in 2013, even by a very broad definition of “tax increase.” However, several news stories cited a separate set of figures published by TPC showing that if you put aside Obama’s proposed extension of most of the Bush tax cuts, 27.3 percent of taxpayers would pay more in 2013 under Obama’s tax proposals. This figure has caused some confusion and is, frankly, misleading.

First, the Bush tax cuts do expire at the end of 2012 under current law, so any extension of those tax cuts are, in fact, new tax cuts that reduce what Americans will pay. (Remember, Congress decided during the Bush years and again in 2010 to temporarily cut taxes, but never decided to permanently cut taxes.)

Second, the tax increases that Obama does propose would be trivial for most taxpayers. The relevant tax increases involve proposals to close tax loopholes for corporations and other businesses. Some middle-income and low-income taxpayers own stocks in corporations or interest in businesses that might be affected, but the effects would be trivial for those who are not rich. So, to take an example, when President Obama proposes to close tax loopholes for oil companies, TPC attributes the resulting tax increase to stockholders, a group than includes some middle-income or even a few low-income people. (It is nonetheless true that most corporate stocks and business assets are owned by high-income people, who would therefore bear most of the tax increase.) 

For example, if you look at TPC’s figures that ignore Obama’s proposed extension of the Bush tax cuts, you see that 26.4 percent of those taxpayers in the middle fifth of the income distribution would get a “tax increase” in 2013 — but the average tax increase for this 26.4 percent is just $70. Note that the average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $40 — and again, this would happen only if one ignores the extension of most of the Bush tax cuts.

For the vast majority of taxpayers, the benefits of Obama’s proposed extension of most of the Bush tax cuts are much larger than any indirect tax increases they would face from closing business tax loopholes. If you look at TPC’s figures that do include Obama’s proposed extension of most of the Bush tax cuts, you see that only 4.2 percent of those taxpayers in the middle fifth of the income distribution would face a tax increase, and the average tax increase for this 4.2 percent is only $76. (These would be people who don’t benefit from the extension of the Bush tax cuts, but do own a small amount of corporate stock.) The average tax change for all taxpayers in the middle fifth of the income distribution would be a tax cut of $1,133.

Two Sources of Confusion: Baselines and Small, Indirect Tax Increases

So the first part of the confusion stems from the fact that TPC publishes figures in two different ways. To use wonky terms, TPC provides one set of figures that compares the effects of Obama’s tax proposals to the “current law baseline,” which means, well, what the current law actually says is going to happen. And current law says the Bush tax cuts expire at the end of 2012. TPC provides a separate set of figures that compare Obama’s tax proposals to a “current policy baseline,” a hypothetical scenario that assumes that all of the Bush tax cuts are made permanent, even though that has never actually happened. (It’s unclear why we should use the term “current policy” to describe proposals that some lawmakers want to enact, but which Congress has not enacted.)

The second part of the confusion stems from the fact that TPC assumes that closing tax loopholes for multinational corporations, oil companies and other businesses will result in indirect tax increases on the owners of these businesses, which, to a very small extent, includes a few moderate-income taxpayers. These indirect tax effects may be real, but most people don’t think that this as a reason to leave in place tax loopholes for major profitable corporations and other businesses.

House Budget Committee Chairman Paul Ryan has introduced a budget plan that, if implemented, would reduce revenues so significantly that they would be inadequate to pay for the federal spending under the Reagan administration, let alone the spending required in the years ahead.  The Ryan budget would provide income tax cuts for millionaires averaging at least $187,000 in 2014. The plan would also reduce corporate income taxes and would increase the (already considerable) incentives for corporations to shift profits and jobs overseas.

Each of these three problems is described in detail in a new report from Citizens for Tax Justice. Read the full report.

Large majorities of Americans, including small business owners, want profitable corporations to pay their fair share in taxes, but none of the major proposals in Washington would make that happen.  They will close some loopholes while creating others and, meantime, leave the amount of revenues U.S. companies contribute just about where it is now – at an historic low.

Why the disconnect between public opinion and political action? Could it be because 98 percent of the sitting members of Congress have accepted campaign donations from the country’s most aggressive, successful tax avoiding corporations?

Citizens for Tax Justice and U.S. PIRG’s new report Loopholes for Sale pursues the intersection of corporate campaign contributions to members of Congress and the absence of Congressional action to close corporate tax loopholes and raise additional revenue from corporate taxes.

Loopholes for Sale details how thirty major, profitable corporations (a.k.a. the Dirty Thirty) with a collective federal income tax bill of negative $10.6 billion have made Congressional campaign contributions totaling $41 million over four election cycles. This includes PAC contributions to 524 current members of Congress.

These 30 tax dodging companies specifically targeted the leadership of both political parties, and members of the tax writing committees in the House and Senate. Top recipients of their largesse since the 2006 campaign have been:

1- House Minority Whip Steny Hoyer (D-MD) - $379,850.00
2- Speaker of the House John Boehner (R-OH) - $336,5000.00
3- House Majority Leader Eric Cantor (R-VA) – $320,900.00
4- Senator Roy Blunt (R-MO)Former House Minority Whip 2003-08) – $220,500.00
5- Senate Minority Leader Mitch McConnell (R-KY) - $177,001.00

These companies – including GE, Boeing, Honeywell and FedEx—also gave disproportionately to members of the tax writing committees, including $3.1 million to current members of the House Ways and Means Committee and $1.9 million to members of the Senate Finance Committee.

The “pervasiveness of that money across party lines speaks volumes about why major proposals to close corporate loopholes have not even come up for a vote,” says US PIRG’s Dan Smith.

So if the public is so clearly supportive of closing corporate tax loopholes and making corporations pay more than they currently are, why aren’t our elected officials moving forward on corporate tax reform? This report, along with our earlier Representation with Taxation on corporate lobbying expenditures, exposes how part of the answer may be found by taking a hard look at the way some of America’s largest companies translate wealth into influence.

Indiana’s inheritance tax will soon be no more.  Under a bill signed by Governor Mitch Daniels this week, the state inheritance tax will be gradually eliminated over the next decade.  Of course, this will further benefit the state’s wealthiest taxpayers even as the state’s poorest residents already pay an effective state and local tax rate more than twice that paid by the rich.  

Connecticut lawmakers are seriously considering capping the state’s gasoline tax rate, due to the political pressures created by high gas prices.  A permanent cap, as some lawmakers prefer, would be extremely poor policy because it would flat line the gas tax as a revenue source for years to come.  A temporary cap would be preferable, but the best solution would be one that ITEP recommended for North Carolina last summer: design a cap that limits volatility. This protects consumers from price spikes and stabilizes state budgets without undermining a key source of revenue.

A new ITEP analysis finds that under a South Carolina House Republican plan, poor South Carolinians would see their income tax increase while wealthy taxpayers would pay less. The effect on individual taxpayers in any bracket are not substantial, but the revenue implications for the state are enormous and depend on the working poor to pick up the tab. The Ruoff Group policy shop does a nice job here of explaining why the plan is neither flat nor fair, as its advocates claim.

An outstanding news analysis in the Cincinnati Inquirer describes Ohio Governor John Kasich’s longstanding desire to eliminate the personal income tax altogether, and his current (failing) effort to pay for it with a fracking tax. The story cites a wide range of policy sources, including ITEP’s report debunking the myth that states without income taxes do better, and concludes that low income taxes alone do not make for stronger economies.

On Monday, Apple™ announced that it will distribute tens of billions of its cash holdings as dividends to shareholders, ending speculation over how the company will use the large pile of cash it has been sitting on. CFO Peter Oppenheimer went out of his way to point out that the dividends would be paid entirely from Apple’s U.S. cash, which means the $54 billion Apple has stashed in foreign countries will stay there. Oppenheimer explained that “repatriating cash from overseas would result in significant tax consequences under U.S. law.”

He’s not kidding! CTJ has estimated that Apple has paid a tax rate of just over three percent on this stash of “foreign” earnings, a clear indicator that much of this cash is likely parked in offshore tax havens and has never been taxed by any government. If Apple brought this cash back to the U.S., they’d likely pay something close to the 35 percent corporate tax rate that the law prescribes. The resulting $17 billion tax payment would be more than double the $8.3 billion in federal taxes that Apple has paid on its $83 billion in worldwide profits – over the last 11 years.

Apple is part of the Win America Coalition that’s been lobbying hard for a repatriation holiday (a.k.a. tax amnesty) which would allow them to bring back those unrepatriated profits at a super-low tax rate. But that would only encourage U.S. multinational corporations to shift even more profits offshore in anticipation of the next holiday.

Apple’s CFO was astonishingly blunt: “we do not want to incur the tax cost.”  Rather than shirking its basic obligation to help pay for the public goods that contribute to its extraordinary success, Apple’s executives might want to “think different” about its tax dodging ways before its devoted consumers start thinking differently about their favorite high-tech brand.

Photo of Apple Logo via Marko Pako Creative Commons Attribution License 2.0

A new report from the Political Economy Research Institute at UMass Amherst examines the research on potential responses to states raising taxes on wealthy households.  They conclude that while it can lead to tax planning changes among the more affluent, a permanent reasonable tax increase will improve a state’s revenue picture and, contrary to conventional wisdom, will not cause wealthy residents to flee to lower tax states.

Legislation pending in Maryland would require the state to evaluate whether its tax credits are achieving the goals for which they were enacted.  The vast majority of states still have no system in place for determining the costs and benefits of tax credits.  As in Oregon, the legislation would use sunset provisions (or expiration dates) to force lawmakers to review the evaluations before allocating more funds.  The Institute on Taxation and Economic Policy (ITEP) has a policy brief on accountability in tax credits and testified in support of a similar bill in Rhode Island last year.

The grassroots group Alabama Arise is getting positive news coverage for a rally they organized in Montgomery last week calling on lawmakers to exempt groceries from the sales tax and replace the revenue by eliminating a tax break that primarily benefits the wealthiest Alabamians.

In response to Ohio Governor John Kasich’s proposal to cut income taxes (paid for by increased taxes on gas mining) Policy Matters Ohio released a brief showing that Ohioans in the top one percent would get an annual tax cut of about $2,300 while middle income Ohioans ($32,000 to $49,000) would only get about $42.  Meantime, the powerful House Finance Chairman, Rep. Ron Amstutz, is postponing action on the Governor’s proposal, saying, “the more the members of our caucus have learned about this particular proposal, the more concerned I’ve become that there are key questions that cannot be sufficiently answered and resolved within the available legislative time frame.”

Talk about wrong priorities.  Earlier this month the Idaho House of Representatives approved a bill that hands the state’s wealthiest 1 percent a tax cut of about $2,600, while giving more than 80 percent of Idaho families precisely nothing.

In a new analysis, the Institute on Taxation and Economic Policy (ITEP) estimates that over half of the plan’s benefits would flow to the richest one percent of taxpayers, and four-fifths of the benefits would go to the best-off five percent of Idaho residents.

While it might seem like a bill stacked so blatantly in favor of the wealthy would be a tough sell in an election year, it actually has a real chance of passage.  The bill passed the House by a convincing 49-20 margin, it’s a top priority of Governor Butch Otter, and the state’s business lobbyists are tickled pink, referring to the cut as “manna from heaven.”

Fortunately, the plan does have some influential opponents.  The Chair of the House tax-writing committee complained about the long-term affordability of the plan, saying “That’s one-time money that we’re doing ongoing tax relief with…I don’t think it works.”  Meanwhile, the chair of the Senate’s tax committee is also cool to the idea, thanks in part to the very minimal (or even nonexistent) benefits it would provide to most families.

Supporters of the bill have predictably tried to rationalize its lopsided impact by claiming it will benefit the state’s economy, but as ITEP and Idaho-based analysts have pointed out, these claims amount to little more than a modern day snake oil sales pitch.

Oklahoma lawmakers are intent on taking an axe to the state’s only major progressive revenue source: the personal income tax.  Last week the Oklahoma House and Senate passed a variety of bills cutting or repealing the tax, and negotiations on a final package could begin in as little as two weeks.

As the Institute on Taxation and Economic Policy (ITEP) and the Oklahoma Policy Institute (OKPolicy) have pointed out, all of the proposals being considered would greatly increase the unfairness of Oklahoma’s tax code without benefiting the state’s economy.

But from a political perspective, perhaps the biggest obstacle standing in the way of Arthur Laffer’s agenda is how to pay for deep cuts to (or total elimination of) a tax that provides one-third of all state revenue.  Originally, lawmakers were optimistic that they could repeal special business tax breaks, breaks for senior citizens, and tax credits for the poor in order to partially fund a large cut in the state’s top tax rate.  But lobbyists representing senior citizens and businesses have talked many lawmakers out of that approach.  The more likely outcome now might be a slightly scaled-back package paid for with deep spending cuts and higher taxes on the poor.

The final outcome is far from certain, but it will likely be ugly as long as lawmakers continue to ignore the reality that income tax cuts won’t help the state’s economy, and that Oklahoma’s richest taxpayers already face an effective tax rate equal to just half of what the poor pay.

Photo of Oklahoma Capitol Dome via BJ McCray Creative Commons Attribution License 2.0

Nevada Governor Brian Sandoval campaigned on a promise of no-new-taxes but is breaking that promise (for a second time!) with his plan to balance the Silver State budget.  In an effort to avoid deep cuts in education, Sandoval is once again supporting an extension of temporary sales, payroll, and car taxes originally enacted in 2009.  Grover Norquist calls Sandoval the poster boy for why candidates can’t just promise no-new-taxes, they have to sign his pledge; in fact, Sandoval is a good example of why they shouldn’t.

We’ve already written that Arthur Laffer’s claims about economic growth and income tax repeal are fundamentally flawed and that in fact “high rate” income tax states are outperforming no-tax states. Now, three respected Oklahoma economists have come out in agreement, and are offering their own critique of Laffer’s findings. This is great news given that Laffer’s work has been so central to lawmakers’ efforts to eliminate the state income tax – the most progressive feature of any state’s tax system.

This week the Maryland Senate voted to raise personal income taxes in order to offset the anticipated "doomsday cuts" in public services that would otherwise have to occur.  An analysis from the Institute on Taxation and Economic Policy (ITEP) showed that the bill would be generally progressive.  And in yet another bit of good news, a late amendment to the bill would enhance its progressivity even more, as Marylanders earning more than a half-a-million dollars will no longer be able to take advantage of the state’s lower marginal rate brackets.

The Wichita Eagle editorial board is watching the Kansas House and Senate take up tax reform, and they are worried. While they’re glad some lawmakers are dubious about “the suspect advice of Reagan economist Arthur Laffer,” the governor’s advisor, they don’t like a House plan that “makes permanent the punishing budget cuts of the past few years to education, social services and other programs.” They opine that “tax reform needs to make fiscal sense and broadly benefit Kansans,” and conclude that with the various and competing proposals right now, it’s anybody’s guess if that will be the outcome.

One of the greatest sources of unfairness in our tax system is the preference for investment income. Specifically, the profits investors enjoy when they sell an asset for more than they paid to acquire it (capital gains) are usually taxed at lower rates than other types of income. One argument used to justify this policy is the claim that investors will stop buying and selling assets if the profits from these sales are taxed like other types of income. CTJ’s recent report on revenue options explains that this is untrue.

Most capital gains go to the richest one percent of taxpayers, leading people like Warren Buffett to criticize this tax preference for allowing some millionaires to pay lower effective tax rates than many taxpayers much further down the economic ladder.

So what’s stopping Congress from ending the tax preference for capital gains and simply taxing this income at the same rates as all other income? After all, President Ronald Reagan singed into law a tax reform that did exactly this. Is it such a radical proposal to bring back Reagan’s policy of taxing all income at the same rates?

One obstacle to ending the tax preference is misinformation about how revenue would be affected. The Wall Street Journal and other sources of anti-tax ideology claim that increasing tax rates on capital gains would not raise any revenue because investors would respond by selling fewer assets, meaning there would be fewer capital gains to tax.

Even the people who provide official revenue estimates for Congress — the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) — assume that this behavioral response exists, to a lesser but still significant degree.

Another non-partisan research institution that serves Congress, the Congressional Research Service (CRS), concluded in 2010 that JCT overestimates these behavioral responses and consequently underestimates how much revenue can be saved by allowing President Bush’s expansion of the capital gains preference to expire for the rich.

The recent report from CTJ on options to raise revenue explains why CRS is right and JCT is wrong. And why the Wall Street Journal is really, really wrong.

We don’t simply propose to allow Bush’s expansion of the capital gains preference to expire. We propose repealing the entire capital gains preference. We estimate that even if some behavioral responses do affect the revenue impact (meaning some investors do hold onto assets longer in response to the tax change) our proposal would still raise more than half a trillion dollars over a decade.

As our report explains, most of the ways in which investors respond to such a tax change are short-term responses. JCT seems to rely on research that confuses short-term responses for long-term responses. CRS points out that some studies from the last several years corrected for this mistake and found much smaller long-term behavioral responses.

See the CTJ report for more detail. As wonky and arcane as all this sounds, you can bet that the debate over capital gains tax changes and revenue will receive more attention as Congress starts talking about tax reform and about ways to get wealthy investors to pay their share.

The latest monthly statement by the Treasury Department contains a startling revelation: the amount that Treasury expects to collect in corporate taxes in 2012 has been slashed by more than 28 percent, from $333 down to $237 billion.

With such a dramatic revision, one might expect that lagging corporate profits or a sudden economic disruption is to blame. In reality however, corporate tax revenue continues to limp in spite of the fact that corporate profits have rebounded to record highs.

If corporate profits are not behind this $96 billion drop in expected corporate tax revenue, then what is?

The Wall Street Journal’s David Reilly suspects that there are two critical drivers: the offshoring of more profits through overseas entities by multi-national corporations; and the continuation of extravagant corporate tax breaks for accelerated depreciation of assets like equipment. Last month, the Congressional Budget Office (CBO) came to the same basic conclusion, explaining that corporate tax breaks and loopholes played an important role in driving the corporate tax rate to a 40 year low in 2011.

In order to prevent the continued decline of the corporate tax, Congress and the President should enact revenue-positive corporate tax reform, rather than their current revenue-neutral approach. Right now, political leaders of all stripes are proposing merely to eliminate some tax breaks but continue or even expand others and possibly reduce the statutory rate. With the federal deficit growing every day, asking profitable U.S. companies to pay something closer to the statutory tax rate is a reasonable (not to mention popular) approach.

Chart from is from the Wall Street article "U.S. Tax Haul Trails Profit Surge"

North Carolina’s two major newspapers, the Raleigh News and Observer and Charlotte Observer, published editorials in support of the state’s estate tax in the wake of a hearing last week called to eliminate it.  From the News and Observer: “The estate tax is hardly a burden on those few inheritors who have to pay it. It is a modest but valuable asset to government revenue, and there is nothing unfair about [it]."  And, from the Charlotte Observer: “Some Republicans support abolishing the federal estate tax. They should explain why the extremely wealthy should be able to avoid paying any taxes on unrealized capital gains.”

Washington State’s special legislative session started yesterday. The media is reporting that the session will be a contentious battle over how the state should close its $1 billion budget gap. (Hint: the answer’s in the Washington State Budget and Policy Center’s proposal to tax capital gains income. )

An article from The Miami Herald reveals some ugly details surrounding the $2.5 billion in business tax cuts just passed by the Florida legislature.  As the Herald points out, “those benefiting had plenty of lobbyists … AT&T, which has 74 Florida lobbyists, spent $1.68 million on lobbying last year, more than any other company.”  Not coincidentally, AT&T and Verizon – both champion tax dodgers – were among the biggest winners.  A last-minute amendment to the legislation could give the telecommunications industry a tax break as large as $300 million.

A great op-ed in the Kansas City Star asks why Governor Brownback wants taxes in Kansas to be like Texas, reminding Kansans that Texas ranks low in everything that really matters, from high school graduation rates to household income to crime.

Dolly Parton’s Dollywood Co. and Gaylord Entertainment Co. have struck a deal with Nashville, Tennessee Mayor Karl Dean that, if approved, would result in an estimated $5.4 million in property tax breaks for their planned water and snow park.  Ben Cunningham of the Nashville Tea Party was right to point out that the plan amounts to a “giveaway” to companies that plan to move to the city anyway and that it’s time to stop “giving in to this kind of corporate extortion.”

Photo of Dolly Parton via Eva Rinaldi Creative Commons Attribution License 2.0

Acknowledging he will likely “face accusations of engaging in class warfare,” Rhode Island Representative Scott Guthrie called on wealthy Ocean Staters to pay more in taxes this week to help close the state’s budget gap.

From the Representative’s press release:

“As the state budget deficit continues to loom large, for yet another year, one phrase continues to remain popular from elected officials – shared sacrifice,” said Representative Guthrie. “Well, I see municipalities sacrificing, as well as many of the residents of those communities. I see sacrifices from the poorest and neediest in Rhode Island, the results of continued trimming in the social services funding. What I don’t see is sacrifice from the wealthiest members of our society who could most easily afford to give a little more to help their many neighbors and fellow citizens who are suffering.

““Trickle down doesn’t work. We’ve tried it for years and all the benefits continue to trickle up.  We need a shift back to a more fair tax policy.”

Representative Guthrie filed four different bills offering four different scenarios for raising revenue. Each of them would add a fourth, temporary bracket to the state’s personal income tax and introduce a different marginal rate on income above different thresholds.  That is, the new one or two percent tax bracket would not apply to all income, only that income above either $250,000 or $500,000, depending on the proposal.

The Institute on Taxation and Economic Policy (ITEP) analyzed the representative’s proposals at the request of the Economic Progress Institute.  The two bills that increase the top marginal rate for taxpayers with taxable income greater than $250,000 would impact less than 2 percent of taxpayers.  The bills that increase the top marginal rate for taxpayers with taxable income greater than $500,000 would impact less than 1 percent of taxpayers. 

Representative Guthrie says that his proposals could bring in anywhere between $37.9 and $144 million in revenues for the two year period they are in effect, depending on which is implemented, or $20 to $70 million per year. His plans are outlined here.

• Rising gas prices are making some politicians in Maryland, Michigan, and Iowa back away from courageous proposals to raise their states’ long stagnant gas tax rates.  Rather than lose momentum, lawmakers can enact legislation now that will implement a gas tax rate increase when prices begin to come down.
• The Institute on Taxation and Economic Policy (ITEP) testified this week in front of Alaska’s Senate State Affairs Committee Regarding the Alaska Tax Break Transparency Act. The bill would mandate the state develop a tax expenditure report which would detail the tax breaks the state provides, along with the cost of each to taxpayers. Forty-five other states currently produce these reports which can ultimately help the public have a say in government spending.
• Following up on our earlier post about New Mexico Governor Susana Martinez’s opportunity to sign legislation instituting combined reporting, the Governor vetoed SB9. Supporters of the bill designed it as a first step in reforming the state’s corporate tax laws and leveling the playing field for small, in-state business.
• An Illinois Senate committee recently approved a new tax on strip clubs to help fund sexual assault prevention programs. This is the same state considering taxing ammunition to pay for medical trauma centers. Illinois has a history of bad budget gimmicks that are largely responsible for its current $9 billion deficit.

New Mexico Governor Susana Martinez has to decide Wednesday how to respond to mounting public pressure (including 5,000 signatures) to support a new corporate fair tax bill.  Supported by small business, it enacts combined reporting, which requires out-of-state companies to pay taxes on in-state profits, along with a slight drop in the corporate income tax for most profitable companies.  In the meantime, proponents remain committed and organized, check out http://ohsusana.org/.

The details of South Carolina House Republican tax proposals read like a How-Not-To guide for making the state’s tax structure more fair and equitable. Lawmakers there are proposing to eliminate the state’s corporate income tax, provide targeted tax breaks to manufacturers, lower taxes on business owners, and more.  But when is a plan crafted behind closed doors ever in the public’s interest?

Income tax cuts paid for by a new tax on fracking for natural gas may be on the horizon in Ohio. Governor Kasich took the notorious no-new-tax pledge and will likely have to defend his new fracking tax against the anti-tax crowd, while progressives would probably support a new tax on a lucrative (if controversial) industry but not the personal income tax cut. Kasich’s plan is a political hybrid and worth watching as fracking for gas becomes an issue in more states.

Our crystal ball predicts a refreshing battle in Maryland over tax increases in the coming weeks. Governor O’Malley, Senate leadership, and House leadership all recently unveiled their own proposals to raise taxes. The Governor proposed raising taxes on better-off taxpayers by reducing deductions and exemptions, and by increasing the gas tax.  The competing Senate plan would increase income taxes on nearly every Marylander, while the House plan would raise taxes on only the wealthiest taxpayers. Lawmakers in the Old Line State should be applauded for confronting these important issues and putting tax increases on the table rather than taking a cuts-only approach to the state’s $1 billion deficit.

Because legislators said it went too far, Nebraska’s Governor Heineman is revising his initial tax plan in cooperation with a the chair of the senate’s revenue committee. The compromise being developed by the Governor and Senator Abbie Cornett changes the governor’s original proposal in two positive ways: it preserves the state’s inheritance tax and it holds steady the corporate income tax rate.  The compromise plan, set for debate this week, still leaves in place income tax cuts that barely help those who need them most.

Photos of Governor Susana Martinwz and Governor Martin O'Malley via Albuquerque Public Schools and Third Way Creative Commons Attribution License 2.0

Recently, the Louisiana Legislative Auditor issued a report that found the cost of the corporate income and franchise tax credits for the state was a staggering $3 billion between 2005 and 2010. The total tax liability during that same time was just $5.4 billion, which means the state lost over half of its potential revenues because of these credits, but no one can show how the state benefitted.  In 2009, in fact, those credits were worth $685 million, which is about 78 percent of all taxes owed by businesses that year.  When 14 separate agencies are giving away three quarters of the state’s business tax revenue in a year and no one can say why, it's a problem.

Not surprisingly, the Auditor recommends better monitoring of these costly incentives to determine if they are effective. Here’s a primer on why and how to measure business tax breaks’ impact. Because, when states do bother to track the economic effects of so-called incentives, they find the business lobby’s promise may not be fulfilled.

The Louisiana report goes on: “If the legislature is interested in the return on investment for the state’s tax credits and other exemptions, the legislature may wish to consider adding this [monitoring] requirement to state law and requiring the appropriate state entities to formally track and report this information.”

We suggest that the legislature do more than just consider increased monitoring and tracking and instead put those mechanisms in place immediately. Taxpayers have a right to know if their tax dollars are being spent effectively. As the Legislative Auditor Daryl Purpera said of the current system, "It is not good business practice. You'd think we'd be monitoring those funds as best we can.”

You’d think. In fact, Louisiana is one of the states in our Corporate Tax Dodging in the Fifty States report that has failed to enact a single one of six basic business tax reforms and is failing on key transparency measures that would make it easier for ordinary taxpayers to know the ways in which they are subsidizing corporations.

General Electric Cites its “Deferred” (Not Yet Paid) Taxes and Taxes Paid to Foreign Governments, Offers No Evidence It Paid More in U.S. Corporate Income Taxes

In response to CTJ's recent finding that GE had an effective federal corporate income tax rate of just 2.3 percent over ten years, GE’s press office issued a short statement designed to divert attention from its tax-avoiding ways. GE has nothing to say to contradict the figures we cite from its own annual reports.

A short report from CTJ responds to each of GE's claims and provides all of the numbers used to calculate GE's ten-year corporate income tax rate of 2.3 percent.

The Institute on Taxation and Economic Policy (ITEP) testified this week in favor of a bill that would reinstate Maryland’s recently expired “millionaires’ tax.”  As ITEP explains in its testimony, the millionaires’ tax would make the state’s regressive tax system slightly less unfair.  And despite predictable claims from the anti-tax crowd, there’s no reason to think that the tax would harm the state’s economy.

Confirming our fears, it looks like Idaho lawmakers’ plan to cut taxes for the wealthiest and businesses in Idaho is moving forward. Legislation to reduce the top income tax rate passed out of the House Revenue and Taxation Committee.  In more bad Idaho news, it will not be joining the ranks of states with an Amazon tax this year as the bill failed to gain enough support.

It’s only March, yet Sales Tax Holiday season is already rearing its head. Alabama Governor Robert Bentley supports a “storm gear” holiday in advance of tornado season.  Lawmakers in Georgia are combining a sales tax holiday (bad idea) with a proposal to require online retailers to start collecting sales taxes from Peach State e-shoppers (good idea) in an effort “to kill any talk that a tax increase is afoot.”  And, Florida House members have already approved another year of a back to school tax holiday planned for August. 

ITEP’s Who Pays study was cited in an Associated Press article about heroic efforts to start taxing capital gains and other reforms in Washington State.  Because Washington has no personal or corporate income tax, and instead relies heavily on sales taxes, it has the most regressive tax system in the country.  At a press conference this week in support of the capital gains tax, Rep. Laurie Jinkins said, “Our fundamental problem in this state, in terms of revenue long term, has to do with fairness, adequacy of resources and stability of the resources that we bring into this state.”

After CTJ released its report last week criticizing the President's corporate tax reform "framework" for not raising revenue and leaving key questions unanswered, CTJ staff spent a couple days speaking out about the framework.

Bob McIntyre, CTJ's director, explained on Reuters TV why corporate tax reform is needed, how GE, Google and other companies get unwarranted breaks and why the President needs a better plan.

Rebecca Wilkins, CTJ's Senior Counsel for federal tax policy, spoke on C-SPAN about the President's framework and the need for real reform. Wilkins said that "the administration is leaving a lot of money on the table, and we think there's a lot of room to raise revenue from corporate tax reform."

Steve Wamhoff, CTJ's Legislative Director, wrote in U.S. News and World Report's "Debate Club" that the President's framework “does not include what should be the main goal of reform—raising revenue to fund public investments and address the budget deficit.”

While poll after poll has long confirmed the overwhelming public support for progressive taxation in principle and increased tax revenues for deficit reduction, some polls that pop up every so often seem to contradict these results. Below we deconstruct two common errors seen in recent polls.

Marginal vs. Effective Tax Rates

Some survey questions fail to distinguish between marginal and effective tax rates. A marginal tax rate is the percentage of the last dollar of income received (by a given taxpayer) that will be paid in taxes. An effective rate is the total amount of taxes a person pays as a percentage of his or her entire income.

For example, when we say a person is in the “25 percent income tax bracket” that means that (generally) 25 percent of the last dollar of income received by that person will go towards federal income taxes. This person has a marginal income tax rate of 25 percent. But his effective income rate might only be around 15 percent or less. That’s because some of his income is taxed at lower rates and because some of his income is not included in taxable income at all (because of deductions).

The recent poll from The Hill is a case study in how conflating the marginal and effective tax rate can create bogus poll results. The Hill survey asks what the respondent believes is the most appropriate “top tax rate” for families earning $250,000 or more and corporations, and then lists out percentage options.

The problem is that the survey does not clearly distinguish whether the “top rate” being discussed is the effective or marginal top rate. In their coverage of the poll, The Hill reports that about three-quarters of likely voters support lower taxes on corporations and wealthy individuals, which just doesn’t sync with what the majority of current polling tells us.  The Center for American Progress’s Seth Hanlon explains why.  He points out that if respondents believed that the ‘top rate’ mentioned in the survey was meant to indicate the effective rate, then most respondents actually came out in favor of higher taxes. For example 67 percent of the respondents favored a 25 percent or higher rate on corporations, which, according to one important measure, is more than twice the current effective rate.

Cutting  Government vs. Cutting Specific Programs

Some misleading polls in recent years have concluded that the public prefers spending cuts over tax increases as the best method to decrease the deficit. The most recent example is an AP-GFK poll, which found that 56 percent of people prefer cutting government services, compared to just 31 percent who support tax increases.

As Citizens for Justice explained last year while examining a New York Times-CBS News poll, these questions are misleading because they ask about cutting “government services” more generally, rather than allowing the respondent to consider specific program spending cuts. When faced with a choice between vague service cuts and taxes, it’s not surprising that the public favors cutting spending because it’s not clear how they might lose out. Americans are famously wary of government spending, but ask them if they’re willing to cut, say, Medicare, the answer is a resounding ‘No!’.

When faced with specific choices, tax increases actually become one of the most popular ways to reduce the deficit. For example, a May 2011 Pew Research Poll which gave respondents a list of specific spending cuts and tax increases, found that two-thirds of the public favored raising income taxes on those making over $250,000 and raising the payroll tax cap, whereas nearly 60 percent opposed raising the Social Security retirement age and 73 percent opposed reducing funding to states for roads and education.

Next time you see news about a poll and it doesn’t sound right, it’s worth taking a look at the actual questions. The way they are worded makes the difference between good and bad polling.