A broad base is an essential element of a good tax system. Fulfilling the principles of "horizontal equity," and "economic neutrality," both depend upon the use of a broad tax base. Unfortunately, the temptation to carve out special tax breaks for politically popular causes, or for powerful constituencies, if often irresistible to lawmakers.

But efforts are currently underway in Michigan to undo some of these special tax breaks, and a tax reform commission in California is at least pretending to consider a reform that would help pave the way for a careful reconsideration of many of that state's tax breaks. Furthermore, policymakers in North Carolina have expressed a strong desire to return to the task of base-broadening this fall, even as efforts to include base-broadening revenue-raisers in this year's budget agreement seem to have failed.

Earlier this month, Michigan Governor Jennifer Granholm stated her desire to eliminate between $500 million and $1 billion in special tax breaks as a way to reduce the state's looming deficit. While accomplishing such a feat will inevitably involve an uphill political battle, Michiganders should be grateful that the Michigan League for Human Services (MLHS) is closely following the action. MLHS Chairman Lynn Jondahl hit the nail on the head when he urged lawmakers to ask themselves, in reference to the state's film tax credit, "Would you be willing to appropriate $6 million to MGM, say, to make this film in Michigan? We're paying you to do something in lieu of filling pot holes or funding mental health treatment. Which do we value more?"

In California, a tax reform commission that so far has shown interest mostly in cutting the progressive income tax is at least listening politely to a different idea. The so-called "blue proposal" currently before the commission, presented as a less regressive alternative to the much-ballyhooed flat-tax proposal supported by Governor Schwarzenegger, would require special tax breaks to be presented in the Governor's budget, saddled with a "sunset" provision, and evaluated based on their effectiveness in achieving their stated objectives. Of course, adopting this approach will amount to rearranging deck chairs on the Titanic if the commission acts on its apparent zeal for moving away from income taxes and towards regressive consumption taxes. And the "blue proposal" has its warts as well: provisions that would impose a spending cap and create a new "net receipts" tax in lieu of the current corporate income tax have progressives feeling, well, blue. But the tax-expenditure element of the "blue proposal" is a welcome dose of thoughtful policy at a time when California surely needs it.

Finally, in a recent development out of North Carolina, base-broadening appears to be off the agenda for the immediate future, though policymakers have expressed a strong interest in returning to the issue this fall. When they do return to the issue, they would be wise to review these recommendations, recently released from the North Carolina Budget and Tax Center, explaining how to broaden the state's tax base while simultaneously offsetting any potentially harmful effects on low- and moderate-income families.

Last week brought with it a flurry of news stories discussing the issue of how to pay for transportation infrastructure. This topic is never too far from the agenda in statehouses across the country, in large part because most states fund their infrastructures primarily with a fixed-rate gasoline tax (levied as a specific number of cents per gallon) which inevitably becomes inadequate over time as inflation erodes the value of that tax rate. What's more, with fuel efficiency becoming an increasingly important criterion in Americans' car-buying decisions, drivers are able to travel the same distance while purchasing less gasoline, and paying less in gasoline taxes.

With all this in mind, Mississippi's top transportation official last week publicly stated that the state's lawmakers need to increase their flat 18.5 cent per gallon gas tax rate. As evidence of this need, the official also noted that 25% of the state's bridges are deficient.

In a similar vein, one recent op-ed in Michigan called for increasing the state's gas tax and restructuring it to prevent it from continually losing its value due to inflation. Another op-ed ran in the same paper that day, this one written by the President of the Michigan Petroleum Association, insisting that the state eliminate the gas tax altogether and pay for the lost revenue with increased sales taxes. The most obvious flaw with this plan is that it would shift the responsibility for paying taxes away from long-distance commuters and those owners of heavier (and generally less fuel-efficient) vehicles -- despite the fact that these are precisely the people who benefit most from the government's provision of roads.

More news coverage of the transportation issue came out of South Dakota last week, where a committee of legislators is currently in search of additional revenue to plug the hole created by predictably sluggish gas tax revenues. While some have expressed an interest in raising the gas tax, others have suggested replacing it entirely with hugely increased licensing fees. But licensing fees are not as capable as the gas tax in charging frequent and long-distance drivers for the roads they use.

The best way to ensure that those drivers pay for the roads they use, however, is to simply levy a tax on each mile they drive (known as a "vehicle miles traveled" tax, or VMT). While the idea has yet to be implemented in practice in the U.S., recent coverage of a pilot project involving 1,500 drivers in New Mexico shows that such a tax is a very real possibility in the future. Basically, a small computer is installed in each car which keeps track of the number of miles driven. That information is then reported to the tax collection agency, and the driver is sent a bill.

This method avoids the scenario in which drivers of vehicles of similar weights (which produce similar wear-and-tear on any given road) can end up with vastly different gas tax bills due differences in fuel efficiency. Interestingly, this new study is examining a system that would allow the computer to know which state somebody is driving in, so that the correct amount of tax can be paid to the correct state. Unsurprisingly, despite the public finance appeal of this method, privacy concerns remain a major obstacle to implementation.

New numbers out of Michigan show that sixty percent of registered voters support ditching the state's 4.35% flat rate income tax, and moving toward a graduated rate system that imposes higher tax rates on wealthier Michiganians. These numbers are virtually unchanged from when a similar poll was conducted two years ago. As the Michigan League for Human Services (MLHS) recently noted, enacting this popular reform would do much to remedy the state's structural deficit since the current flat rate system is incapable of "capturing the growth in income that has been occurring among the state's higher income taxpayers". Unfortunately, since Michigan unwisely enshrined the flat tax standard in its constitution, such a reform would require a constitutional amendment. These recent polls make clear, however, that such an amendment would be well received.

Other good news from Michigan comes in the form of a recent flurry of interest in reforming the state's numerous costly and ineffective tax breaks for businesses. This discussion comes on the heels of a lengthy report, commissioned by the Michigan Education Association and the National Education Association, which analyzes in detail a number of these special tax breaks. This report represents a positive first step forward in implementing a better system for keeping track of these hidden giveaways. As the report notes, "unfortunately, there exists no comprehensive assessment of the effectiveness of Michigan's tax incentive programs." In the future, having government itself undertake such studies could pay enormous dividends in the form of enhanced transparency.

Unsurprisingly, the report found a number of these programs to be wildly ineffective. Chief among the most wasteful programs is the state's film tax credit, recently lambasted in this op-ed. Unfortunately, the same poll mentioned above also found significant support among Michiganians for this program. Hopefully with the release of this new study, residents will take the time to give that opinion a second thought.

In search of a revenue stream to pay for replacing the increasingly unpopular surcharge on the Michigan Business Tax, Governor Granholm last week came out in support of a more progressive, graduated rate income tax. Moving away from the state's flat tax would require a constitutional amendment, and probably a fierce battle, but it would be well worth the fight. As the ITEP Policy Brief on progressive income taxation explains, this change would add sustainability, as well as progressivity, to Michigan's tax code.

The state of Michigan continues to fall on hard times economically. The Center on Budget and Policy Priorities estimates that the state's budget gap for FY 2009 is $472 million (nearly 5 percent of the state's general revenue fund), the automobile industry is on the verge of bankruptcy and the state's infrastructure isn't adequate to support the needs of Michigan residents. Last week the infrastructure issue was addressed head-on by the release of the Transportation Funding Task Force's report.

The blunt report sums up Michigan's infrastructure problems this way: "Michigan is approaching a crisis of infrastructure funding caused by steady erosion of purchasing power, continued inflation in materials costs, and a decline in fuel-tax revenues due to spikes in gas prices, reduced travel and a slow economy. The decline in revenues, and a corresponding increase in demand for travel alternatives, has exposed the inherent structural problems with the current means of transportation finance."

The Task Force outlined a menu of funding alternatives available including: increasing registration fees, adjusting the motor fuel tax, increasing the sales tax, and increasing the aviation fuel tax. Look here for the complete list. Anti-tax lawmakers will naturally balk at some of these options, but many others will be prodded by the budget crisis to consider options that had previously seemed politically difficult. They should delve deep into this report and focus on investing in Michigan's infrastructure. Task Force members rightly caution, "The one choice we cannot afford is to do nothing."

As was discussed in the Digest last week, despite (or perhaps because of) all the recent changes that have been made to the Michigan Business Tax (MBT), many businesses in the state are still unhappy with their tax bills. That frustration most recently materialized in the state senate in the form of two bills: one seeking to reduce, and one seeking to eliminate entirely, the annual surcharge imposed on the MBT. Both bills passed last Thursday. The surcharge was originally enacted to help fill the gap created by the repeal of the services tax.

Because of the fervor with which Michigan businesses have been voicing their displeasure with the surcharge, policymakers are now clamoring to appease them. But given the importance of government services to Michiganders, especially during these difficult economic times, it seems indisputable that the state should not begin cutting business taxes until other revenue streams are secured. Fortunately, Governor Granholm has said that she would only support reducing the surcharge on the condition that the lost revenues are offset with higher revenues from elsewhere.

Of course, a variety of good options exist for raising additional revenues in Michigan. At the top of that list should be an enhancement of the progressivity of the state's income tax, so that the rest of the state can begin to share in the enormous gains wealthy Michiganders have enjoyed in recent decades. Aside from that, a good starting point for policymakers would be a careful examination of this list, put together by the Michigan League for Human Services, of questionable tax exemptions, deductions, and credits.

For several years Michigan businesses lobbied hard for the elimination of the state's corporate tax and they ultimately proved victorious. Their efforts were so successful that the elimination of the Single Business Tax (SBT) was accelerated and the tax was eliminated two years early, despite the enormous two billion dollar hole that this would leave in the state's budget. When the SBT was on the chopping block business groups celebrated, but now some businesses are unhappy with the amount of taxes they pay even under the new Michigan Business Tax (MBT).

The legislative fight over a replacement tax was hard fought, but even many in the business community were realistic that the revenue had to be replaced. The Detroit Chamber of Commerce outlined guiding principles for the creation of a new revenue stream including these: "The state should proceed in a thoughtful and deliberate way. The state legislature and Governor must build consensus within the business community before adopting a new form of business taxation. Any replacement tax should not generate more business tax revenue than business taxes being replaced."

In July 2007, Governor Granholm signed legislation enacting the MBT, which includes a tax based on modified gross receipts and business income. While the Michigan Chamber of Commerce opposed the legislation, the Detroit Chamber ultimately endorsed the MBT. In 2007, Sarah Hubbard, vice president of government relations for the Detroit Regional Chamber, said the chamber supports the legislation and while the new MBT may not be perfect, "it provides the stability and certainty we need for economic development. I think philosophically this is a good bill. It rewards investment in Michigan."

Now fast forward. According to a survey by the Michigan Chamber of Commerce, businesses are up in arms about the MBT and nearly one-third of responding businesses saw their taxes more than double. What is a policymaker to do? The tax that businesses desperately wanted off the books is gone, the replacement tax that was endorsed by at least some businesses is on the books, and yet many still aren't satisfied. Perhaps this shows that businesses and legislators were too quick to accelerate the repeal of the SBT, especially given that a carefully studied alternative wasn't in place.

Property tax assessment limitations (caps on how much your home's value can increase for tax purposes in any given year) are again frustrating and confusing many homeowners. we've heard complaints in the past about such limits creating vastly different tax bills between neighbors, or about those limits creating inefficient incentives that discourage moving. Now we're beginning to hear complaints about those same limits resulting in tax increases even when home values are plummeting. An ITEP editorial published this week in The Detroit News explains why this new phenomenon is a predictable component of these limits, why ending the occurrence of tax increases in down-years (as has been proposed in Michigan) is a bad idea, and what states should do instead to provide a more reasoned and straightforward brand of property tax relief.

Fortunately, there are some Michigan legislators that are already ahead of the curve when it comes to this issue. Two bills have been proposed this year with the goal of improving the state's circuit-breaker, though both have yet to advance.

Read the editorial.

As has been explained in previous Digest articles, Michigan property taxes are, on their face, behaving a bit strangely right now. Despite home values being on the decline in many parts of the state, property tax bills are actually increasing. This is one of many side-effects of the state's decade-old cap on increases in a home's taxable value.

This phenomenon has led both to a good deal of dissatisfaction among Michiganders, and to a proposal by two Michigan legislators that is intended to fix this problem. But despite the claims of the bill's sponsors (and the uncritical acceptance of those claims by the media), their proposal would do much more than simply "make sure that if a home's market value decreases, the property's taxable value will not increase". To understand why, it's necessary to look deeper into the mechanics of how Michigan's fairly convoluted property tax cap works.

Under the existing cap, if in any given year a home's assessed (market) value increases by more than the inflation rate or 5% (whichever is lower), then the lower of those two alternative measures is used in calculating the amount by which the home's taxable value can increase in that year. In short, this limitation is meant to ensure that property tax bills never jump by "too much" as a result of a leap in housing prices.

Until recently, home prices have been increasing much faster than limits set by the cap, meaning that the taxable value of many homes has been suppressed to a level far below their actual market values. But with the recent housing downturn, taxable values under Michigan's capped system are now being allowed to catch-up with the actual values of residents' homes, despite declines in those actual values.

Effectively, the agreement established by this cap says that, "We won't increase your tax bills very much in any given year, but this means we may in some cases end up increasing them by a little bit every year, regardless of what's going on with your property's actual value". The bill proposed in Michigan, ostensibly designed to block tax increases when home values decrease, would actually eliminate the second half of this agreement entirely -- "catch-up" periods in which your taxable value increases by more than your assessed value did would no longer be allowed. Instead, taxable value can never increase by more than assessed value in any given year, and if assessed value decreases, so does taxable value, regardless of how far below assessed value it currently stands.

Aside from starving state and local coffers, ending the "catch-up" component of the cap would further divorce the Michigan property tax from being a tax on the actual value of property, as all attempts to align taxable and market values would come to an end.

Got all that? If not, it's probably not your fault. Assessment caps are a notoriously complicated and side-effect plagued type of property tax relief. What makes more sense, as a large number of states already recognize, is enacting a property tax circuit-breaker that gives property tax relief to those whose incomes are lowest relative to their tax bills. This can provide a much simpler, less expensive, and more progressive solution. Michigan already has a circuit-breaker, and if lawmakers are interested in reducing their constituents' property taxes, divvying out relief through that program would be much preferable.

It's that time again. Right-wing activists, unable to convince lawmakers to gut their tax systems, are asking voters to do it themselves through the ballot. This update explains that ballot initiatives to enact regressive tax policies died in Michigan and Montana, but survived to secure spots on the ballot in Arizona, Florida, Massachusetts and Oregon.

The Good News: Two Regressive Proposals Did Not Make It onto the Ballot

Michigan "Fair "Tax": The Michigan Fair Tax proposal, a highly regressive measure that was anything but fair, failed to make it onto the November ballot. The proposal would have eliminated both the Michigan Business Tax and the personal income tax, raised the state sales tax to 9.75% and expanded it to include services, food, prescription drugs and out-of-pocket health care expenses.

Montana Property Tax Limitations: CI-99, a measure that would have capped property tax increases at no more than 1.5% annually, fell short of landing a spot on the Montana ballot. In addition to the limits on tax hikes, the proposal would have ensured that homes can only be reappraised when sold (as opposed to every seven years). Sound familiar? It looks like, at least this year, Montana averted the disastrous path followed by California's Proposition 13.

The Bad News: Other Regressive Tax Proposals ARE on the Ballot in November

Arizona Sales Tax Hike: On June 27, the Digest described the Arizona sales tax initiative which will be on the ballot in November. The proposal would hike the sales tax by one cent. The increased revenues would be directed toward a faltering transportation system. Arizona already has sales taxes bordering on 10% and a nearly flat income tax. As a result, its tax policy is already highly regressive and this initiative would make it more so.

Florida Tax Swap: In November voters will decide on Amendment 5, a 25% property tax cut and a 1 cent sales tax hike. The property tax cut would hit Florida's schools, already in shambles, the hardest. The Amendment would come at a cost of $9 billion in lost revenue and the subsequent sales tax increase would only produce about $4 billion, plunging the Sunshine State even further into debt and shifting the tax burden to lower-income Floridians.

Abolishing Massachusetts' Income Tax: In Massachusetts, voters will have the opportunity to decide on an initiative that would eliminate the state's income tax. Such irresponsible policy would cost the state $12 billion in lost revenue -- a whopping 40% of its budget. The price would be paid with teacher layoffs, school closings, cuts to higher education, worker training programs and health care services, and delays of road and bridge repairs.

Cutting Oregon's Income Tax for the Rich: Oregon voters will have the opportunity to vote on a measure that would drastically cut income taxes for its wealthiest taxpayers. The proposal would create an unlimited deduction on the state income tax form for federal income taxes paid.The state's general fund would lose about $4 billion over four years from the proposal. The general fund is used primarily for education, public safety, the justice system, human services (including health care, care for seniors and child protective services) and state parks. Meanwhile, the average tax cut for the top one percent of Oregon earners would be about $15,000. Those who fall among the middle 20% of earners would receive about $1 on average.

For once, there's some upbeat news when it comes to Proposition 13, though unfortunately it doesn't involve California. The Utah Revenue and Taxation Committee this week heard testimony on the merits of enacting a Proposition 13 style property tax cap in their state. With home values generally on the rise up until recently, Utahans have begun to express some frustration with the rising property tax bills coming out of their current fair-market-value assessment system. One knee-jerk way to prevent property tax bills from rising is to enact a law preventing taxable home values from increasing more than a certain amount in any year -- which one of the major provisions contained in Proposition 13 does. Unfortunately, the unintended consequences of such laws, including grave inequities between neighbors, huge windfalls for the rich, and the potential to slow the housing market, are less than desirable. These consequences have been discussed in more detail in earlier Digest pieces, and this ITEP policy brief.

Thankfully, the reaction to the idea in the Utah legislature has been notably unenthusiastic. But with the debate still very focused on concerns over the recent "sticker-shock" of rising property tax bills and the possibility of "taxing people out of their homes", at some point property tax reform is likely to come to the state. So far, that reform appears to be headed in the direction of forcing localities to vote any time the property tax is increased. Perhaps with some work on the part of policy advocates, a more progressive reform (such as a low-income property tax circuit-breaker) could arise out of the discontent in Utah.

Until then, Utahns can at least take comfort in the fact that with home values recently on the decline, their property tax bills can be expected to do the same. If the state were to enact a Proposition 13 style cap on assessment increases, that would by no means be guaranteed, as has been shown in Michigan.

With state budget shortfalls having recently become so prevalent, it has been interesting to watch how different states have chosen to address their budgetary woes. Fortunately, a collection of influential groups in Michigan, including the Michigan League for Human Services, is seeking to fill their state's budget gap with a combination of policy changes much better thought-out than the regressive band-aid fixes proposed in New Hampshire (cigarette tax hikes) or California (lottery revenues). The plan, proposed by the Michigan League for Human Services and backed by a slew of influential groups, proposes to raise roughly $400 million through a series of relatively small changes, each of which already gained approval at some point from either the Governor or the legislature in the 2005 or 2007 legislative session.

Among the proposed list of reforms is the elimination of numerous unjustified sales tax exemptions. Vending machine snacks, international phone calls, and purchases made at prison stores are among the items that would be subject to the sales tax under the proposal. Another major component of the proposal would decouple state business depreciation rules from the federal rules, as was advocated in an earlier Digest piece.

While certainly not a comprehensive list of what could be done, the proposal is notable for its eclectic approach that simultaneously aims to improve efficiency and boost state revenues. States considering unimaginative hikes in consumption tax rates or damaging cuts in public services would do well to instead follow the lead of this proposal and seriously examine what kind of needed tweaks to their tax systems could boost revenues.

Not all property tax cuts are created equal. Though the intent is to shield homeowners from property tax hikes in times of strong growth in housing prices, it is the unintended consequences of caps on increases in a home's taxable value that have gained these measures attention in recent months.

By effectively limiting the amount by which one's tax bill can increase, these provisions primarily benefit those long-term residents whose taxable home values have been suppressed for the most years. Since this creates huge inequities in tax bills between neighbors who have lived in their homes for different amounts of time, Florida voters in January passed a "portability" measure that allows long-time homeowners to take their tax savings with them to a new home upon changing residences. This obviously does nothing to assist first-time homebuyers, or correct a host of other potential problems that states with such limits have been experiencing.

In Michigan, where housing prices have actually been on the decline, homeowners are continuing to see increases in their property taxes as previously suppressed "taxable values" are using the housing slump to catch up with actual "market values". This development, in addition to baffling and infuriating homeowners, provides an excellent illustration of exactly how convoluted these tax limits make the property tax system. In their poorly conceived attempt to keep property tax bills from getting "out of control", state legislators have created a system where the property tax barely resembles a tax on the actual value of property at all. Only under one of these ridiculous assessment-capped regimes could decreases in a home's market value lead to increases in a home's taxable value.

Conservative commentators frequently depict Hollywood as ridden with leftists, but the reality is that, when it comes to tax policy, the movie industry is no different from any other. Take recent legislative activity in Michigan and Georgia, for example. Michigan Governor Jennifer Granholm is on the verge of signing a bill that would, among other things, provide a refundable tax credit equal to 42 percent... 42 percent!... of a film production's costs. The Georgia Senate has adopted a measure - also expected to be signed into law - that will more than double that state's current film production credit.

Yet, as an important new report from the Massachusetts Department of Revenue (DoR) documents, states may receive precious little in return for these enormous investments. According to the report, Massachusetts will lose upwards of $140 million between 2006 and 2008 due to its film tax credit, but may receive only about $20 million in new revenue from the economic activity associated with the credit. What's more, as the report notes, "any estimate of the net economic and tax revenue impact of tax incentives needs to take into account the reduction in state government spending" associated with such credits. In such tight budgetary times, that "reduction in government spending" is sure to occur if policymakers keep trying to lure the latest blockbuster to their state.

All across the country property tax bills are coming due and outrage about the most unpopular tax is growing. Proposals for various types of property tax cuts, reforms, and relief abound.

In Michigan, legislators are proposing to limit property tax increases and make it easier for homeowners to appeal their assessments. In West Virginia lawmakers want to freeze property taxes for seniors, and also limit property tax increases for younger homeowners. Politicians in Utah are considering a broad range of options including changing school district funding from reliance on property taxes to sales taxes and increasing their state's circuit breaker credit. Property taxes tend to be the tax that everybody loves to hate. The tax comes due in a lump sum, it's usually difficult to understand, and often it's not based on one's ability to pay.

Lawmakers in these three states and others should investigate property tax credits that ensure that low-income folks aren't burdened by the tax. While it may be popular with constituents to discuss property tax cuts, it's vital that replacement revenue be identified as well.