So the modest fee that the Affordable Health Care Act will impose on people who choose not to have health insurance is a “tax,” according to a majority of Supreme Court justices. Hooray! That characterization made the Act pass constitutional muster even in the opinion of this very conservative Supreme Court.

There’s more good news. It’s a tax that hardly anyone will pay.

That’s because for the vast majority of Americans who don’t have employer health coverage, the government subsidies to buy insurance will be so large that it would be foolish not to buy insurance.

For starters, any family with income less than 133 percent of the poverty line (that means all families of four with incomes of $30,000 or less) will be eligible to sign up for free coverage under Medicaid.

Above that level of income, the government will provide cash subsidies to buy insurance, starting at almost 100 percent of the cost and gradually phasing down. But the subsidies won’t disappear for a family of four until its income exceeds about $90,000.

For example, a family of four earning $50,000 that buys health insurance will get a government subsidy equal to 60-70 percent of the cost of the premiums.

Because of these large subsidies to buy insurance, it’s estimated that the new “tax” on those who fail to get health insurance will apply to less than 3 percent of all households. So don’t worry. You’re almost certainly not one of them.

Nonsensical Claim of Largest Tax Increase in History

Some opponents of the health care reform law have taken to calling it the largest tax increase in history. The fee for not having health insurance would be, of course, relatively small, raising around $7 billion a year (just 0.03 percent of GDP) and increasing federal revenue by 0.15 percent (one sixth of one percent).

Even if you count all the tax increases in the health law, that still amounts to less than the tax increases President Reagan enacted from 1982 through 1983. When you subtract the tax cuts (the refundable credits to help families obtain health insurance and the tax credits for small businesses) the net effect of the law is to increase taxes by $653 billion over the next decade, which is about 0.3 percent of GDP. By way of comparison, from 1982 through 1983, President Reagan raised taxes by 1.8 percent of GDP. (And of course, there were much larger tax increases in our history, like the tax increase during World War II that equaled 14.8 percent of GDP.)

It’s also important to note that 95 percent of the tax increases in the health reform law apply to corporations (drug companies, medical device manufacturers, insurance companies) and married couples making over $250,000 and single people making over $200,000.

Health Reform Law Includes a Major Win for Tax Fairness

The tax increase on high-income individuals is particularly important because it reduces the bias in the tax code in favor of investment income and against income from work.

This provision, which was proposed in 2009 by Citizens for Tax Justice, reforms the Hospital Insurance (HI) tax that funds part of Medicare so that it’s more progressive and no longer exempts the income of people who live off their investments. The HI tax will effectively have a top rate of 3.8 percent that applies to both earnings and most investment income, and which only applies to taxpayers with incomes in excess of $250,000/$200,000.

This provision reduces, but does not eliminate, the ability of people who live off their investments to have a lower effective tax rate than people who live on earnings. It’s another reason why the health law is victory for middle-income working Americans.

Photo of Supreme Court via OZ in OH Creative Commons Attribution License 2.0

While Kansas recently repealed its only form of grocery tax relief (a credit for low-income families), West Virginia is moving in the opposite direction.  That state’s sales tax rate on groceries will drop by one percentage point starting on July 1 this year, and be repealed entirely midway through next year.

West Virginia revenue officials aren’t too enamored with any suggestion to increase the state’s already generous property tax breaks for senior citizens.  Using a $300,000 home as an example, the state’s deputy secretary of revenue explained how under today’s rules, a homeowner under 65 would pay $2,334 on that house while a homeowner over age 65 using the credit could pay as little as $764. Moreover, with the state’s eligible senior population expected to grow by 37 percent over the next decade, the cost of any tax breaks for older West Virginians is going to grow dramatically.

After much debate, South Carolina lawmakers appear to have come to an agreement on a regressive tax change that allows “pass-through” business income (which tends to go mainly to wealthy individuals rather than businesses) to be taxed at three percent instead of the five percent currently levied.

After the legislature overrode Governor John Lynch’s veto, New Hampshire became the latest state to adopt neo-vouchers: tax credits for corporations who contribute money to private school scholarship funds which end up diverting taxpayer dollars into corporate coffers.  In his veto message, the Governor wrote: "I believe that any tax credit program enacted by the Legislature must not weaken our public school system in New Hampshire, downshift additional costs on local communities or taxpayers, or allow private companies to determine where public school money will be spent.”

Tax experts asked by the Associated Press couldn’t find anything nice to say about Pennsylvania Governor Tom Corbett’s proposed $1.7 billion tax break for Shell Chemicals – the largest-ever financial incentive offered by the state – for the company to build an oil refinery. David Brunori from George Washington University said, “There's absolutely nothing good about what the governor is proposing" and a libertarian policy expert pointed out that government shouldn’t be covering the cost of risk for businesses through tax subsidies.

Politifact highlights an increasingly common complication for those who sign Grover Norquist’s “no tax” pledge.  On July 31, Georgia voters will decide on a referendum to increase the sales tax to fund transportation, a measure that’s backed by Republican Governor Nathan Deal.  But having signed Norquist’s no-new-taxes pledge, the Governor is struggling to justify supporting a “new tax” that he believes will benefit his state’s economy.

More evidence that Wisconsin’s tax structure is unfair: two of the state’s billionaires paid no state income taxes in 2010.

Here’s a compelling read by former Congressman Berkley Bedell of Iowa, championing the “ability to pay” principle of taxation that he says accounts for the Great Prosperity period in post-war America.

An investigative series in the Toledo Blade reveals the Ohio Finance Agency isn’t properly overseeing the state’s low-income housing tax credit program.  Many of the beneficiaries of the credits are “large corporations such as banks, insurance companies, and tech firms [that] receive tax breaks even as the low-income rental homes for which they received the credits fall apart.”

Iowa Governor Terry Branstad recently joined with a dozen other Republican governors in calling for Congress to pass a measure that would allow states to require the largest online retailers to collect sales taxes. In pushing for the measure, however, Republican governors are finding that their biggest roadblock is opposition from their own party in Congress, who perceive the measure as being a “tax increase.”

In addition to getting in trouble with their own party, Republican governors are getting pushback from the anti-tax enforcer Grover Norquist, who argues that legislation allowing states to require online retailers to collect sales taxes is a tax increase because consumers will ultimately pay more in taxes. Republican Pennsylvania Governor Tom Corbett’s office defied Norquist, however, correctly arguing (subscription required) that collecting online sales taxes is “just enforcing existing laws” and not adding a new tax.  

The fact is that only retailers can collect sales taxes, but the Supreme Court ruled in the 1992 catalog sales case of Quill v. North Dakota that states can only require remote retailers – which includes online sellers – to collect the tax if they have a so-called physical presence in the state. This has left many states scrambling to cut piecemeal deals with major online retailers (notably Amazon.com) who may not have a physical presence in their state in order to collect at least some of those sales taxes.

The messiness of these deals has made Republican and Democratic governors realize that for practical purposes what is really needed is a federal solution, such as the Main Street Fairness act, to clear a path for states to enforce sales tax collection.

The growth in online shopping is staggering and it is costing states tens of millions a year in lost sales tax revenues.  Asking online retailers to do what brick and mortar stores do and collect sales tax (PDF) is just common sense. This new push by Republican governors to make it happen might just be the thing that makes the Quill ruling history, and brings sales tax law into the 21^st Century.

Months after cutting the state income tax for wealthy taxpayers, Idaho’s budget situation isn’t looking good.  The Associated Press reports that “earlier this year it looked like the state had sufficient revenue to provide a $36 million tax cut, as well as give state employees a 2 percent raise” but that surplus has already evaporated. In fact, there was never real consensus about the state’s revenue projections in the first place.

Kansas Governor Sam Brownback admits his radical tax cut package is a “real live experiment.”

The South Carolina House approved a measure to keep the state running if it doesn’t have a budget by July 1 when the new fiscal year begins.  The Senate and House are currently bickering over how to implement a (regressive) tax cut for so-called "small" business owners.

It’s back! New Jersey Assembly Democrats are once again planning to introduce a millionaire’s tax into the budget debate.  Proponents of the tax on the wealthiest New Jerseyans want to use the $800 million in revenue it would raise to boost funding to the state’s current property tax credit program for low and middle-income homeowners and renters.  Governor Chris Christie has already vetoed a millionaire’s tax twice. 

The clever folks at Together NC, a coalition of more than 120 organizations in North Carolina, held a Backwards Budget 5K race this week to “to shine a spotlight on the legislature’s backwards approach to the state budget.” 

California Governor Jerry Brown’s revenue raising initiative (which temporarily raises income taxes on the state’s wealthiest residents and increases the sales tax ¼ cent) has officially qualified for the state’s November ballot. Two additional tax measures will join Brown’s plan on the ballot: a rival income tax measure pushed by a billionaire lawyer to fund education and early childhood programs; and an initiative to increase business income tax revenues by implementing a mandatory single-sales factor (PDF backgrounder) formula.

The Pittsburgh Post-Gazette editorializes in favor of capping Pennsylvania’s “vendor discount,” a program (PDF) that allows retailers to legally pocket a portion of the sales taxes they collect in order to offset the costs associated with collecting the tax.  The Gazette explains that a handful of big companies are taking in over $1 million per year thanks to this “antiquated” giveaway.  Computerized bookkeeping takes the effort out of tax collecting and a cap would only impact the national chain stores who disproportionately benefit from the program.

A new report from the National Governors Association (NGA) and National Association of State Budget Officers (NASBO) explains that an uptick in revenues from modest economic growth is not enough to undo the damage from years of cuts to state governments during the recent economic downturn when revenues were underperforming.  According to NASBO, while state revenues are returning to pre-recession levels, spending is not, largely because lawmakers are being conservative – replenishing rainy day funds, for example – rather than restoring revenues to agencies that have been under-serving citizens for years.

Warnings of structural deficits at the state level predate the Great Recession. (See this PDF from the Center on Budget and Policy Priorities for an excellent overview.) They result from states failing to change their tax systems in a changing world – new kinds of economic activity, shifting demographics and a virtual epidemic of corporate and personal income tax cutting has left states congenitally unable to maintain the revenues they need when they need them.

And right now, with the cost of education and health care (the two biggest chunks of total state spending) growing faster than the economy and taking an ever growing bite out of budgets, states are facing a genuine crisis. In fact, the NGA/NASBO report notes that state spending on Medicaid continues to outpace all other spending and is projected to increase annually by 8.1 percent over the next 10 years.

As NGA Executive Director Dan Crippen explained to the Washington Post, this growth in expenditures without an injection of sufficient revenues means government leaders will have to choose which public services (schools, roads, police, etc.) get adequately funded, and which don’t. Again. And not only state programs: locally provided services that rely on state aid that have already seen devastating cuts in the past few years because of squeezed state budgets will continue to atrophy, too.

If state governments are to continue providing even just the same level of services to their citizens, they must modernize their revenue systems—and soon. As the Institute on Taxation and Economic Policy (ITEP) detailed in a 2011 report, state governments can and should make systemic changes such as expanding the state sales tax base to include services, eliminating tax loopholes (like those for capital gains) and ending corporate tax breaks that allow corporations to dodge taxes with accounting tricks.

States that continue to duck the issue and craft tax policy with short-term tweaks, political games and downright backward fixes will soon find that they are unable to fully fund basic services—even if an economic recovery improves revenues — and will be forced to cut more deeply into basic services, like keeping water clean and the courthouse staffed.

So the real news in this fiscal survey is actually an old story: without serious, substantial and responsible tax reform, revenues cannot keep pace with the needs of modern government.

Image from NGA report charts.

New Analysis Finds GOP Approach to Bush Tax Cuts would Give Richest One Percent of Americans $50,660 Per Year More and Give Poorest 20 Percent $150 Less on Average than Obama’s Approach

Citizens for Tax Justice Compares the Two Approaches to Extending Some or All of the Bush Tax Cuts, Nationally and State-by-State

Washington, DC – Middle-income and low-income Americans would pay somewhat more in taxes under the Congressional Republicans’ approach to extending the Bush tax cuts than they would under President Obama’s approach, while high-income Americans would pay far less under the Republican approach, according to a new analysis from the Institute on Taxation and Economic Policy (ITEP) and Citizens for Tax Justice (CTJ).

Under the President’s approach, in 2013, the poorest 20 percent of Americans would receive an average tax cut of $270 while the richest one percent would get an average tax cut of $20,130.  Under the Congressional Republicans’ approach, the poorest 20 percent of Americans would receive an average tax cut of $120 while the richest one percent would receive an average cut of $70,790.

The Bush tax cuts extension outlined by the President would cost one trillion dollars less over 10 years than would making all the Bush tax cuts permanent, as the GOP proposes.

“Both President Obama and Congressional Republicans have proposed to extend far too many of these unaffordable tax cuts,” said Robert S. McIntyre, director of Citizens for Tax Justice.  “But if we have to choose between the Congressional Republicans’ and President Obama’s approach, the President’s proposal is fairer and more responsible.”

The national and state reports are all available at: www.ctj.org/bushtaxcuts2012.php.

The term “Bush tax cuts” refers to income tax cuts and estate tax cuts enacted in 2001 and 2003 and extended several times since then.  In 2009, President Obama expanded some parts of these tax cuts that benefit low income and working families.  In December of 2010, the President and Congress agreed to extend all of these tax cuts through the end of 2012.

Republicans in Congress have indicated that they would extend all of the tax cuts first enacted in 2001 and 2003, but not the 2009 expansions for lower income families. President Obama wants to extend the 2001 and 2003 tax cuts only for the first $250,000 a married couple makes annually, or the first $200,000 a single person makes. Obama also wants to extend the 2009 expansions.

The findings from CTJ and ITEP also show:

• Of the tax cuts going to Americans, under Obama’s approach, three percent would go to the poorest 20 percent of Americans, 9.9 percent would go to the middle 20 percent and 11.4 percent would go to the richest one percent.

• Of the tax cuts going to Americans, under the Congressional Republicans’ approach, one percent would go to the poorest 20 percent of Americans, 7.4 percent would go to the middle 20 percent of Americans and 31.8 percent would go to the richest one percent of Americans.

CTJ and ITEP are also releasing state-specific versions of this report showing the specific distribution of the benefits, and amounts of tax cuts, from each approach in each of the fifty states and the District of Columbia.  All the reports are at www.ctj.org/bushtaxcuts2012.php.

The report also addresses the economic effects of tax cuts versus direct government spending and cites Moody Analytics research concluding that government spending is more stimulative by a factor of five or more than tax cuts.

#####

 Citizens for Tax Justice (CTJ), founded in 1979, is a 501 (c)(4) public interest research and advocacy organization focusing on federal, state and local tax policies and their impact upon our nation ( www.ctj.org).

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a 501 (c)(3) non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy (www.itepnet.org).

• The Detroit News’ editorial board recently criticized a plan to cut Michigan’s personal income tax rates which, despite its hefty $800 million price tag, managed to pass the state’s House.  The editors called it risky election year pandering.

• Oregon is launching a pilot program to figure out how road and bridge repairs will be funded when cars no longer run on gasoline and drivers no longer pay the gas tax.  One possible solution is a tax directly on miles traveled rather than gallons consumed, but the last time the state tested that out, it “didn’t sit well with the public” because the GPS-like technology made people worry the government would be spying on them.

• Rhode Island Governor Lincoln Chafee signed a state budget that includes a small foray into sales tax base expansion.  Starting July 1, taxi and limo rides and pet grooming services will be subject to the state’s seven percent sales tax rate, as will clothing and shoes costing more than $250.

• The Associated Press offers a smart analysis of tensions within state Republican parties and their impact on a variety of state legislative activities, including tax policy debates. Written by a senior AP reporter in Missouri, it reveals (among other things) that moderate Republicans played a role in thwarting some of the more conservative members’ plans.

New Jersey and Ohio don’t have much in common when it comes to their gambling industries.  New Jersey’s Atlantic City is home to a dozen different casinos, the oldest of which has been in operation for over three decades.  Ohio, on the other hand, only legalized casino gambling in 2009, and its first two casinos opened barely a month ago.

But despite their differing backgrounds, all signs from both states are pointing to the same thing: legalized gambling isn’t the revenue miracle that lawmakers often promise.

In New Jersey, a brand new mega-casino called Revel is already a disappointment.  Even with the opening of Revel’s 2,500 slot machines, 120 table games, 1,800 rooms, and 14 restaurants, Atlantic City’s gambling revenues are down nearly 10 percent overall compared to a year ago.

And the explanation from gambling industry analysts (and anyone else who’s been paying attention)? Market saturation. With casinos popping up across the country, gamblers no longer need to travel to distant gambling destinations, and states that rely on casino revenue are increasingly raising that money from their own residents rather than pulling in the coveted out-of-state dollar.

In Ohio, meanwhile, recent reports indicate that the state’s new casinos will cut deeply into the casino revenues in Indiana, Michigan, Pennsylvania, and West Virginia.  Even so, a recent survey by the Cincinnati Enquirer found little optimism among Ohio’s local governments when it comes to the gambling revenues they expect to collect. “Everybody thinks it’s going to fix the world, and it isn’t … I have a hard time believing we have so many people around there that have this kind of money to throw into casinos,” says one county official. According to another, “This is all a big shell game … We’re not really getting anything. All the new money we’re getting is going to be offset by cuts in [state aid].” And in Ohio, the state cuts to cities and counties continue to mount.

For more on the empty promise of gambling revenue, read this policy brief (PDF) from the Institute on Taxation and Economic Policy (ITEP).

• Last night’s Washington Gubernatorial debate did not answer the call  to shift their focus to the state’s broken revenue system.  Instead, the Republican candidate, Attorney General Rob McKenna said that the Democrats “just keep insisting we need higher taxes.”  Whoever wins, they will have to contend with the fact that Washington State has the most regressive tax structure in the nation.

• Last week we reported on public scrutiny of a $336 million “small business” tax break in North Carolina that is, in fact, going to benefit some of the state’s wealthiest individuals. Yesterday, Senate Republicans - torn between public outrage and affluent constituents - successfully wiggled out from under having to vote on a measure to modify it so it targets truly small businesses, as intended.  

• New Hampshire voters will go to the polls in November to decide whether the state’s lack of a personal income tax should be enshrined in the constitution. In better news, the state’s lawmakers heeded the advice of the New Hampshire Fiscal Policy Institute and defeated a constitutional amendment requiring a supermajority to pass any tax or fee increase.

• Here’s an interesting read on the economic development impact of the arts. A new study contends that not only do the arts make Nebraska (for example) a better place to live, but they also contribute to state and local coffers to the tune of $18 million. For more on the impact of the arts in other states check out the study, Arts & Economic Prosperity IV.

 

School vouchers are always controversial, but a front-page story in the New York Times describes how at least eight states have embarked on a quiet strategy of back-door vouchers which divert taxpayer money through tax rebates to private donors. While two states allow individuals to exploit this tax break, most are structured as corporate tax breaks.  So they are like conventional vouchers, except minus the accountability, and offering a special tax shelter for corporate profits.

You’d think you can’t make this stuff up, but somebody did.  

Sometimes called “neo-vouchers,” (PDF) the system involves corporate tax credits being doled out to businesses that contribute money to private-school scholarship funds. At their worst, they allow profitable corporations to actually make money from these contributions (they also get a write-off for charitable contributions on top of the dollar-for-dollar tax break match), reducing their income taxes by more than they actually contributed to schools.  And of course, this funnels needed public school funds (and those are taxpayer dollars) to private schools that often aren’t even subject to the same educational standards as a state’s public schools.

This trend is especially troubling now because elementary and secondary school funding already faces a perfect storm: the bursting of the home-value bubble is depressing property tax collections nationwide, and the end of stimulus-related federal aid to states has further constrained education funding. And as the Times documents, these tax credits cum vouchers are often poorly designed and subject to little oversight: some states don’t require the private schools receiving these scholarships to administer the same achievement tests as public schools, while others have no mechanism for directing scholarships to needy families. In fact, there is anecdotal evidence that some students benefitting from the scholarships would have attended these private schools anyway—which means their parents are being paid, by other taxpayers in their state, to do what they were planning to do anyway. 

Why, at a time when adequately funding K-12 education has been so difficult for states, are lawmakers in these states so cheerful about directly siphoning tax revenue away from cash-starved public schools through these “neo-vouchers?” Maybe because they think that tax breaks aren’t the same thing as direct government spending? One source tells the Times, “there are private dollars coming from a private individual and going to a private foundation. It drives the N.E.A. completely off the wall because they can’t say this is government funding.”  Another piece similarly argues that “[v]ouchers and tax-credits vary in important ways. Both programs enable students to attend public or private schools of their parents’ choice, but unlike tax-credit scholarships, vouchers are publicly funded, paid for with government appropriations.”

But these statements are both ludicrous.  When a state government provides tax breaks for corporate contributions to private schools, the effect on state budgets is exactly the same as if the government had spent the money directly. It’s “government funding” either way. The critical difference is that tax breaks typically involve less oversight and public debate than dilrect spending, even as they divert public resources away from families still enrolled in underfunded public schools.

Some advocates of these tax giveaways have argued that this approach actually saves money, because the per-pupil cost of educating children in the private schools receiving the scholarships is lower than the per-pupil cost of public schools. Yet as a helpful new analysis from the National Education Policy Center shows, this claim assumes that the credit allows parents to move their children from public schools to private schools—and there is no evidence that it is having that effect.

And on top of all this, neo-vouchers are an actual money-maker for corporations. Remember, the system offers not only dollar-for-dollar state tax credits for contributions, but the ability of corporations to write off charitable contributions on their federal tax forms.  Companies can actually make a profit from these tax giveaways, collecting more in federal and state tax breaks than they actually spent on the contribution! And Florida’s credit, which was expanded by lawmakers earlier this year, is now the single most expensive (PDF) corporate tax credit allowed by the state, at $72 million a year.

So far, despite growing scrutiny of these perverse tax breaks in Georgia (PDF) and other states, lawmakers in New Jersey and North Carolina (details) appear undeterred and are poised to enact similar plans.

Photo of North Carolina Private School Students via  Harris Walker Creative Commons Attribution License 2.0

North Dakota voters hit the polls yesterday and overwhelmingly (76 percent) said No to Measure 2, a proposal to eliminate -- and constitutionally ban into perpetuity -- their property taxes.

Among those against the measure, the state’s tax commissioner opposed it on the grounds it was fiscally unsustainable, and the state’s League of Cities opposed it for undermining local control over revenues and budgets.

Spearheading the measure was a group called Empower the Taxpayer, ET for short.  Proponents regularly cited North Dakota’s recent energy boom and the surplus of oil revenue it has created as one reason the state could afford to get rid of such a reliable revenue source – which constitutes roughly a quarter of all state revenues.  We note, however, that ET’s director said, “We started this movement before the oil boom…. This isn’t about being flush with oil money.”  

It is true that, thanks in large part to the state’s energy boom, North Dakota was the only state to weather the economic recession without taking a hit to its revenues.  But the oil and gas making the state rich today will run out one day, and banning property taxes would have undoubtedly made North Dakota more vulnerable when that happens, leaving the state unable to fund even the most basic level of services in future “bust” years.  In the end, voters recognized it was unwise to permanently eliminate a relatively stable revenue source in favor of a highly volatile and unsustainable one.

The North Dakota property tax repeal failure is the latest in a line of unsuccessful attempts this year to repeal, reduce or phase out major state taxes.  Its advocates have vowed to fight another day but for now, it goes to show that just as Americans want federal taxes to support government services, they also value strong schools, safe communities, accessible health care, and well maintained roads over tax cuts in the states they call home.

Photo of North Dakota Oil Field via Porchlife Creative Commons Attribution License 2.0

• North Dakotans go to the ballot box today to decide the fate of their state’s property tax.  If it passes, it won’t be good news. Stay tuned.

• It looks like New Jersey Governor Chris Christie has agreed to abandon his tax cut plan (which cut income taxes and favored the wealthy) in support of a Senate alternative (which limits property tax credits to homeowners and renters with incomes under $250,000).  Still, some Senators are saying any tax cut at this time is “insanity” and will attempt to stop the compromise.

• Voodoo economics is alive and well in Tennessee.  Gov. Haslam continues to insist  that the state’s recent phase out of the inheritance tax is actually going to increase tax revenue for the state, citing  research from Arthur Laffer – that has been thoroughly debunked by the Institute on Taxation and Economic Policy (ITEP) and seriously questioned by other researchers.

• ITEP responds to an unusually biased opinion piece and sets the record straight about the Illinois and California tax systems . See ITEP’s letter in the Chicago Tribune.

• Cutting taxes has consequences.  When Ohio’s estate tax expires, local governments will be forced to make up the $6.1 million annual difference.  One local government official said, “Losing the estate tax is basically a police car” for his town.

Political gamesmanship is on full display in the tax policy debates happening in Michigan.  Last Wednesday, the state House passed a tiny, temporary income tax cut that would kick in a month before voters head to the polls in November.  This after paying for a $1.6 billion business tax cut last year with a $1.4 billion individual tax hike which falls most heavily (PDF) on Michigan’s poorest taxpayers.

Do Lansing politicians really think that temporarily cutting the state’s flat tax rate a fraction, from 4.35 to 4.32 percent, is going to make voters forget their recklessness? Here’s how the Associated Press is reporting on the plan:

A few dollars in savings doesn’t make a big difference for Mark Lankin, a machine operator who lives in the Detroit suburb of Ferndale. He said he’d rather see more money go to fixing roads.  “I don’t think a lot of normal people would miss $10 … if that money could go to something more useful,’’ said Lankin, 53, who described himself as politically independent. “If you didn’t have it in your hands, it really wouldn’t matter.’’

The token tax cut was also panned in a Detroit Free Press editorial:

“Some people have more money under their couch cushions than the amount the Legislature intends to give back to Michigan taxpayers this year…. The point is that a $103-million tax cut, which might allow an individual taxpayer to buy an extra can of name-brand soup every other week, is a decent chunk of change when it's aggregated and put to work for everyone in Michigan.

They’re right. An analysis by the Institute on Taxation and Economic Policy (ITEP) showed that a family of four earning $25,000, for example, would see just three percent of last year’s tax hike offset by this election year stunt.  But if used in a more thoughtful way, that money could do a lot of good, as the Detroit Free Press’ impressive list of alternatives showed.

All this criticism apparently got to House lawmakers, but rather than drop the tax cutting charade, they decided to up the ante.  On Thursday, they proposed a much more expensive proposal that would drop the state’s flat income tax rate to 3.9 percent.  Unlike their previous plan, it certainly can’t be accused of being “token” relief, but that doesn’t make it good policy.  And lest anyone think they were serious policy makers, these legislators even designed the cut to phase in slowly, so they wouldn’t face any tough decisions about what public services to eviscerate in order to pay for it.

ITEP will soon complete a full analysis of this newest plan, but two things are already clear.  First, Michigan can’t afford to pile a personal income tax cut on top of the massive business tax cuts enacted last year unless the corporate income tax is increased.  And second, if lawmakers do insist on providing individual tax relief, there are much fairer and more affordable options for doing so, like boosting the Earned Income Tax Credit (EITC), as recommended by the Michigan League for Human Services.

Massachusetts taxpayers now have a better idea of where $171 million of their tax dollars are going.  Thanks to legislation enacted in 2010, the state’s Department of Revenue just issued its first-ever report identifying recipients of so-called economic development tax credits.  The biggest winner in 2011 was Columbia Pictures, which received $11.6 million Bay State tax dollars for a movie that, ironically, depicts a teacher trying to raise money for his under-funded public school.

Then there’s the fraudulent use of film tax credits, which is a whole other thing!

Revenue to fund bridge repairs is falling short in Oklahoma, so Governor Mary Fallin signed a bill this week that takes money away from education and other general fund services to cover the costs.  The move follows similar actions taken last year in Nebraska, Utah and Wisconsin (and almost in Virginia).  Oklahoma has gone 25 years without raising its gas tax—the state’s traditional source of transportation revenue.  That’s longer than any state except Alaska.

Calling all Kentuckians! Here’s a chance to make your pitch for tax fairness to the Blue Ribbon Tax Commission, which holds public hearings through the summer.

Late in North Carolina’s legislative session last summer, lawmakers quietly passed a $336 million tax cut – one of the largest tax cuts the state has seen in the past decade.  Originally intended to target “small businesses” – defined as those with less than $850,000 in annual revenue – the final legislation removed the cap and exempted the first $50,000 of pass-through income for any size pass-through business. That’s a roughly $3,500 tax break that is now available to law firm partners, doctors, dentists, and in some cases the same lawmakers who passed the legislation.

An article in the Raleigh News and Observer this week finally shone some light on this expensive and ill-targeted tax break, and illustrates the provision’s effect with examples like this:

"…lawyers who are equity partners at Womble Carlyle Sandridge & Rice, the state’s largest law firm, will each receive that tax break for income they earned in North Carolina. The Winston-Salem based firm brought in $279 million in 2011, and generated profits equal to $590,000 per partner, according to The American Lawyer, a trade publication.”

That is, because it’s a structured as a pass-through firm, the partners report its profits and pay its taxes. The proponents of the tax cut argue (as usual) that it will spur private-sector job creation- close to 4,000 jobs over the next two years, according to a study they cite.  But as the article points out, the cost of the tax break is equivalent to 6,400 state employee positions.  You do the math there. As Gary Hancock, a lobbyist interviewed for the article, said:

 "...it makes no sense to provide a tax break – particularly to those who don’t need it – while cutting teachers and other public employees who perform needed services…As a general proposition, tax breaks for the wealthy while we are starving public schools and public services is bad government.”

The News and Observer story was cited in a scathing editorial from the Charlotte Observer which had this to say:

“When many of the people being helped by a tax break end up criticizing it, questioning it or refusing comment on it, something’s badly amiss. N.C. lawmakers in the Republican-dominated General Assembly should take note of this reaction to a tax break they gave to businesses in last year’s legislative session…. At a time when lawmakers are slashing funding for schools, law enforcement and other vital services, a perk for those who don’t need it is misguided and feels callous."

The Observer editorial characterizes the state’s current tax system as “inadequate, outdated and unfair” and in need of real reform. We concur. And given the enterprising journalism and good policy analysis available, it’s time to get that process started.

If it wanted to, the United States Congress could easily solve the government’s long term fiscal gap by doing what it does best: nothing.

According to a new report from the non-partisan Congressional Budget Office (CBO), the United States federal government debt is projected to peak in 2015 and then drop substantially over the coming decades, all by itself if Congress can just sit on its hands and stop handing out tax breaks to individuals and corporations.

Unfortunately, Republicans are bent on extending all of the Bush tax cuts, which the CBO found earlier this year will add $5.4 trillion to the debt in the next decade alone.

And the Democrats proposals aren’t much better. President Obama’s proposal to extend the tax cuts for the first $250,000 a family makes and the first $200,000 a single person makes would actually result in an extension of 78% of the Bush tax cuts and would cost $3.5 trillion in the next decade. (This is still preferable to House Democratic Leader Nancy Pelosi’s proposal to extend the tax cuts for the first $1 million of income a family makes.)

Congress should, however, increase the budget deficit temporarily if the result will be greater economic growth. But extending the Bush tax cuts would provide very little boost in economic output (compared to proven measures like increased unemployment insurance, food stamps or other types of spending programs).

What Really Would Drive Us Off a Fiscal Cliff

The CBO looked at a few scenarios, including one called the “extend alternative fiscal scenario,” in which Congress extends tax cuts and repeals spending cuts. The result of this one would be the federal debt spiraling out of control, indefinitely. In contrast, CBO’s “baseline scenario,” the scenario in which Congress does nothing, leads to our public debt stabilizing (and slightly falling) after 2015.

Now, there are several people and organizations who’ve made a fetish of reducing the deficit and that focus on spending cuts as the path to a balanced budget. One of the most famous, of course, is Pete Peterson, who runs a foundation, organizes national tours and subsidizes the Committee for a Responsible Federal Budget all in the name of his definition of fiscal responsibility, which means cutting Social Security and Medicare, for starters.  Peterson recently contributed an astonishing $458 million to his own foundation, and hosted a recent Fiscal Summit which featured Bill Clinton, John Boehner, Tim Geithner, Paul Ryan and more journalists than we want to think about.

And indeed, much of the media has accepted this distorted vision of our fiscal situation. Consider  a recent news headline about the same CBO report: “US Risks Fiscal Crisis Without Budget Changes, CBO Says.” The CBO actually said the exact opposite.

Wisconsin Governor Scott Walker survived yesterday’s recall attempt. Walker has often been described as courageous by his supporters, like New Jersey Governor Chris Christie, South Carolina Governor Nikki Haley and  Senator Ron Johnson and by ideological allies like David Denholm and Gary Bauer. 

Walker seems to think of himself as courageous, too. In his victory speech he reprised a theme he’s struck before, in which he becomes the bearer of a legacy that dates back to the founding fathers and “men and women of courage” throughout history “who stood up and decided it was more important to look out for the future of their children and their grandchildren than their own political futures.”  He stops just short of calling himself one such “leader of courage” but it’s clear that’s what he’s getting at.

And how does he display this courage? By picking on people nowhere near his own size.  People like the state’s working poor whose low wages can’t support a family and who rely on the Earned Income Tax Credit to make up some of the difference.  Walker cut that.  He also cut medical programs and property tax credits that the state’s poor and elderly depend on.

This is courage?

The state’s most influential, on the other hand, got all kinds of perks from their governor, like a widely abused tax loophole for corporations and a nice tax break on capital gains for investors.

Since when does it take courage to pander to people in power?

Walker has made consistently bad choices about who wins and who loses in Wisconsin, and his all out assault on public sector workers is just one part of that.

It seems unlikely that the post-election, temporary change in the state’s Senate will slow Walker’s relentless pursuit of his boilerplate conservative agenda, which he admitted has been frenetic.

Governor Walker fancies himself some kind of hero taking on powerful forces at great personal cost, but it’s well documented that the powerful forces are actually some of Walker’s biggest fans. Call it what you will, but you can’t call it courage.

In November 2010, Washington State voters reached an unfortunate verdict and passed Initiative 1053, a law which mandates that the legislature assemble a two-thirds “supermajority” for any legislation deemed to raise taxes.

These supermajority requirements are not only anti-democratic but make sustainable and fair tax reform difficult because they, in effect, require legislators to enlarge one tax loophole in order to diminish or eliminate another. That’s right: in this upside down world, closing a loophole is a tax increase, so you have to create a new one or cut a tax to offset any that you close.  In short, majority-plus requirements like Washington’s provide yet another incentive for politicians to convolute the tax code with special interest giveaways.

Until, that is, a judge decides such a law is not just dumb, but unconstitutional. And in a bit of good news, Washington State’s legislative supermajority requirement for raising taxes and closing tax loopholes was recently struck down by a superior court judge for “[violating] the simple majority provision” of the state constitution.

In his decision, Judge Bryce Heller stated that the framers of the Washington constitution were well aware of supermajority rules (they required them to amend or repeal voter-passed initiatives, for example), and therefore the simple majority rule on tax and other legislation was intended by those framers and can, therefore, only be changed with an amendment to the state constitution. 

State Attorney General Rob McKenna (and now Republican candidate for governor), who defended the initiative in court, pledged to appeal the decision directly to the state Supreme Court.

Aside from the legal questions at issue in this case, several organizations have recently pointed out the damaging fiscal effects of supermajority requirements. The lawmakers and education organizations that brought the suit are concerned that the law prevents a majority of lawmakers from sufficiently funding state services such as education and transportation. They also point out a state Supreme Court’s ruling from last year concluding that Washington State is not, in fact, meeting its constitutional obligation to fully fund basic public education.

Moreover, as the Washington State Budget & Policy Center wrote prior to the ruling, Initiative 1053 has prolonged the state’s recession “by forcing unnecessarily deep cuts to health care, education, and other job-creating investments.” The Center reports that the state’s budget has been cut by more than $10.6 billion over the past three years.

The DC based Center on Budget and Policy Priorities lays out how supermajority rules also force lawmakers to raise fees, tuition and other revenue devices not covered by the law, as well as depress capital investments (investors are less willing to buy bonds from states with such requirements). Furthermore, with so few votes necessary to dictate legislative outcomes—for example, the Washington rule required the objection of only 17 senators to derail any bill—supermajority laws “increase the power of extremists and special interests” who can hold hostage even popular legislation.

It’s all very common sense that the supermajority requirement be struck down. (One setback to this case might result from a recent vote in the state legislature that was politically designed to “prove” a supermajority can be achieved on tax issues. It’s complicated and you can read more about it here.)  With the AG’s appeal, the state Supreme Court will be taking up the case, and both sides are hoping for swift action: the plaintiffs want to see more funding for schools and see the democratic process restored, while the law’s opponents want to get on with the task of shackling the Evergreen State’s government.

Former President Bill Clinton told CNBC that extending all the Bush tax cuts past their scheduled expiration at the end of the year “is probably the best thing to do right now” to help Congress and the country “avoid the fiscal cliff” of expiring tax cuts and scheduled spending cuts. The former policy-wonk-in-chief did not endorse extending the cuts permanently, but said “I don't have any problem with extending all of it now, including the current spending level.”

This is not helpful.

The term “fiscal cliff” sounds scary and implies a situation in which the budget deficit will dramatically worsen if no one intervenes.  But the undeniable fact is it would dramatically improve if Congress simply does nothing – and stops extending the tax cuts! In fact, the CBO has published yet another report indicating that the federal budget deficit would stabilize if not for the budget-busting legislation that most observers expect Congress to enact when it extends all kinds of tax breaks into 2013.  And the report confirms that the measure that would add the most to the deficit would be an extension of the Bush tax cuts.

Of course, it’s entirely true that Congress should set aside concerns about the budget deficit for the time-being and focus on job creation.  The thing is, this focus should lead to increasing federal spending, and NOT to tax cuts. As is often noted, most economists agree that spending measures would do more to stimulate job creation than making the Bush tax cuts permanent.

For example, the widely respected economist (and former adviser to John McCain) Mark Zandi has concluded that for every dollar of revenue the federal government would lose from making permanent the Bush income tax cuts, U.S. economic output would increase by only 35 cents. On the other hand, this private sector economist finds that for every dollar the federal government spends on increased food stamps, work share programs, or unemployment benefits, U.S. economic output would increase by $1.71, $1.64, and $1.55 respectively. Versus 35 cents. Tax cuts don’t work; spending does.

Extending the Bush tax cuts is not about protecting a fragile economy. At its worst, it’s about an ideology that most Americans reject, and at best, it’s passing the buck and kicking the can down the road and every other idiom we have for short-sighted and irresponsible fiscal behavior. Anyone with the clout, credibility and smarts of Bill Clinton knows that and should be making an unambiguous call for these disastrous tax breaks to expire, once and for all, at the end of this year.

(Photo courtesy PBS.org.)

Americans are living in communities with fewer teachers, firefighters and police officers.  They are facing larger class sizes, reduced trash pickup and less access to parks and libraries. That’s the gloomy conclusion of a new report from the Pew Charitable Trusts’ American Cities Project that acutely, painfully details the severe budget cuts local governments have made in response to declining revenues and their increasingly curtailed capacity to raise the revenues they need to keep things running.

While some local governments have responded to what Pew calls the “local squeeze” by raising property tax rates, the report notes that state lawmakers are forcing localities to make tough decisions and cuts by imposing restrictions on the growth of local property taxes. Nearly all states (46) have property tax restrictions (limiting a property’s assessed value or tax rate, for example) that prevent municipalities from even considering raising additional revenue to mitigate painful budget cuts.

Property tax revenue and aid from state governments together make up more than half of all local government funds, and they are declining – in tandem – for the first time since 1980. State aid to local governments declined by $12.6 billion in 2010, and would have fallen further if not for the infusion of federal stimulus funding. Even so, 37 states still had to cut aid to local school districts in 2011-2012.

In the past, recession-induced revenue declines have been buffered by a steady flow of property tax revenue. But with the housing market collapse and epidemic foreclosures, property tax revenue declined by $11.9 billion in 2010 (the first real drop in property tax revenue since 1995) and then by a further $14.6 billion in 2011.

As a result of diminished funds, reports Pew, localities are cutting back on some of government’s most basic services; New York State is one example of what the current struggle looks like, Minnesota is another. In total, local governments cut half a million public sector jobs between September 2008 and December 2011. Half of these jobs came from the education sector in the form of teachers, guidance counselors and support staff. It’s been noted that these local workforce reductions offset modest private sector job growth and have contributed to stubbornly high national unemployment rates.

Cities and counties have attempted to balance budgets through other kinds of cuts that once seemed unthinkable. Some have reduced the school week from five to four days. Others have stopped paying police officers. One municipality cut garbage collection entirely. The full report provides numerous and specific accounts of how local governments and communities from Phoenix, Arizona to Foley, Minnesota to Harrisburg, Pennsylvania have been hurt by the “local squeeze.”

And for more on the revenue side of the equation, see “The ITEP Guide to Fair State and Local Taxes” and ITEP testimony to Congress on how federal tax reform could help or hurt state and local budgets.

• The Institute on Taxation and Economic Policy talks back to the Wall Street Journal about its failure to cover the consequences of the new Kansas tax bill for the state’s working poor.

• Tomorrow Wisconsin Governor Walker will face a recall election. What’s his record on taxes? Taking from the poor and giving to the rich. 

• North Dakota Tax Commissioner Cory Fong comes out against a radical ballot initiative that would do away with the state’s property tax. The Commissioner writes that Measure 2 is risky, and will be destabilizing for North Dakotans. The vote is on June 12.

• Louisiana’s legislature appears to be nearing adjournment now that the House approved a nearly $26 billion budget for the next fiscal year. The budget, now sitting on Governor Jindahl’s desk, includes $270 million in “one-time money” scavenged from various programs to balance the budget.

• Read this op-ed in the Chicago Sun-Times from the CEO of the National Retail Federation calling for fairly taxing Internet sales and pointing out that “modern software, allowing sales taxes to be calculated as quickly and easily as shipping costs, renders” any remaining objections a so-called Amazon Tax obsolete.

In another example of Representation Without Taxation, on Thursday the House Ways and Means Committee reported out a bill that would repeal the medical device excise tax that was enacted as part of the Affordable Care Act and scheduled to go into effect next year. This week it goes to the floor for a vote which, according to the Associated Press, is largely a political maneuver which allows the House GOP to look like they’re fighting for jobs while conveniently unraveling funding for the Democrats’ health care reform; GOP leader John Boehner concedes the latter himself.

The medical device industry successfully lobbied to cut the rate down on the proposed excise tax, and now they are lobbying to repeal the tax entirely, threatening job losses, reduced innovation and higher costs – the usual corporate response to the suggestion of a tax.

And as usual, most of their claims are unfounded, indeed “not credible,” as a Bloomberg analysis concluded. Bloomberg and others cite one fundamental flaw in the industry’s own analysis: it ignores the increased profits from boosted demand for their product that will be created by the health care reform law.

Another (familiar) ploy the industry is using is hiding behind small businesses, communities and entrepreneurs, but the truth is that about 85 percent of the tax will be paid by very large firms like Johnson & Johnson, GE Healthcare, and Medtronic. Of course, it’s no coincidence that Medtronic, with its $16 billion in revenues last year, is located in the congressional district of the House bill’s sponsor, Rep. Erik Paulsen (R-MN).

While many healthcare companies pay substantial federal income tax, there are companies working to repeal the excise tax that happen to be long-time tax dodgers. For example, General Electric, the parent company of GE Healthcare, has paid an average 2 percent federal income tax rate over the last ten years. Our recent Corporate Taxpayers and Corporate Tax Dodgers study showed medical giant Baxter International had a 2008-2010 average federal income tax rate of negative 7.1 percent.

Curiously, Abbott Laboratories, the seventh-largest medical device manufacturer, has 32 offshore tax haven subsidiaries. That might explain why the company reports that it makes a lot of money in foreign countries, but generates losses in the U.S. – even though half of its revenues are here. Boston Scientific’s SEC filings suggest a similar strategy.

The medical device industry, which has been floundering for reasons of its own making, is squealing about a modest tax it’s likely to pass along to customers anyway. Directing more of its budget to innovation rather than lobbying might be a better solution for them, and for America’s health care consumers.

Oklahoma Governor Mary Fallin admitted last week that she and her allies had failed in their efforts to roll back the state’s income tax this legislative session, despite high hopes among supply siders that the tax would be not only cut but entirely repealed.  As The Oklahoman explains, however, both voters and businesses recognized that reducing taxes would mean further cuts in education and public safety piled on top of those already inflicted in recent years.  Public opposition aside, however, it did seem all too possible that Arthur Laffer (the Governor’s tax advisor) and his colleagues’ pitch that shredding the tax code would lead to economic rebirth was going to be enough to get an income tax cut through the legislature.

Over a half dozen tax cut plans were given serious consideration this year in Oklahoma, most of which would have, in fact, raised taxes on low-income families by repealing important tax credits, and all of which would have tilted Oklahoma’s overall tax system even more heavily in favor of the wealthy.  Some of the proposals, like the modified version of Arthur Laffer’s plan pushed by Governor Fallin, would have repealed the income tax entirely.

In the final days of the session, it looked like lawmakers had come to an agreement on a comparatively modest plan to cut the top personal income tax rate from 5.25 to 4.8 percent, and then possibly to 4.5 percent a few years later.  Noticeably absent from the proposal, fortunately, was any repeal of low-income credits— likely due in part to analyses by the Institute on Taxation and Economic Policy (ITEP) showing that repealing these tax credits would mean a significant tax increase for a large number of the state’s most vulnerable residents.

Instead, lawmakers hoped to pay for their proposed rate cuts with a combination of spending cuts, repealing various business tax credits and eliminating a handful of tax breaks for individuals.  Even then, however, analyses by ITEP and the Oklahoma Tax Commission showed that a significant number of low- and middle-income Oklahomans would see their taxes rise under the plan.  And just as the state’s largest newspaper editorialized about these revelatory analyses, support evaporated in the state House of Representatives.

As the Oklahoma Policy Institute explained last week, “The failure of every tax cut proposal that was debated this session is a victory for Oklahoma… We know, however, that this is just a brief intermission in a long battle over the right tax policy for Oklahoma.  We need to look with renewed seriousness at our outdated tax system and do away with unnecessary tax preferences. And we must improve tax fairness and not allow middle- and low-income families to shoulder a larger share of the load.” 

(Photo from NPR State Impact)