So-called sales tax holidays, normally two- or three-day events that encourage shoppers to purchase back-to-school items tax-free, are bad policy for a variety of reasons. The holidays are poorly targeted, costly, and lull legislators into thinking that they've done something substantial to help reduce the regressivity of sales taxes.

The bottom line is that given the choice between targeted sales tax reform that takes into account one's ability to pay and a three-day sales tax holiday, lawmakers should always opt for targeted reform.

Last weekend a handful of states from Alabama to New Mexico held their sales tax holidays. (The Federation of Tax Administrators keeps a complete list of holidays here.) But because of the recent economic downturn, some legislators and economists are questioning the wisdom of not collecting sales taxes a few days a year.

Former chairman of South Carolina's Board of Economic Advisors Harry Miley certainly has his doubts about the effectiveness of sales tax holidays. He says that shoppers don't need incentives to go back-to-school shopping, and the cost to the state is quite high. He says, "The idea of a tax holiday for essential items doesn’t make any sense to me." For more on why sales tax holidays aren't all they are cracked up to be, see ITEP's Policy Brief.

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.

The Center on Budget and Policy Priorities recently released a very useful report summarizing tax expenditure reporting practices in the states, as well as methods for improving a typical state's tax expenditure report. For those unfamiliar with the term, a "tax expenditure" is essentially a special tax break designed to encourage a particular activity or reward a particular group of taxpayers. Although tax expenditures can in some cases be an effective means of accomplishing worthwhile goals, they are also frequently enacted only to satisfy a particular political constituency, or to allow policymakers to "take action" on an issue while simultaneously being able to reap the political benefits associated with cutting taxes.

Tax expenditure reports are the primary means by which states (and the federal government) keep track of these provisions. Unfortunately, most if not all of these reports are plagued by a variety of inadequacies, such as failing to consider entire groups of tax expenditures, or not providing frequent and accurate revenue estimates for these often costly provisions. Shockingly, the CBPP found that nine states publish no tax expenditure report at all. Those nine states Alabama, Alaska, Georgia, Indiana, Nevada, New Jersey, New Mexico, South Dakota, and Wyoming, undoubtedly have the most work to do on this issue. All states, however, have substantial room for improvement in their tax expenditure reporting practices.

For a brief overview of tax expenditure reports and the tax expenditure concept more generally, check out this ITEP Policy Brief.

As state policymakers craft their budgets for the upcoming fiscal year, they must confront a pair of daunting challenges, one fiscal, the other economic. The budget outlook for the states is, at present, the most dire in several decades. In this context, then, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families struggling to make ends meet nor additional distortions in the economy as a whole.

For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.

This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)

Read the report.

Despite their obvious unfairness, tax amnesties are a tool frequently used by states during tough budgetary times. By waiving late fees and sometimes reducing the interest rate charged on overdue taxes, state policymakers can provide their state with a quick band-aid fix without having to make the much harder choice of raising taxes or cutting valued services. But penalizing similar taxpayers at different rates dependent only upon whether they decide to pay up during an amnesty period is plainly unfair. The problems associated with amnesties become even worse, however, as soon as a state establishes a habit of repeatedly offering amnesties during tough economic times.

With the possibility of another amnesty always on the horizon, delinquent taxpayers will think twice before settling their debts with the state during normal times, and at normal penalty rates. Creating multiple sets of penalties (one for normal times, and one, lower penalty when budgets shortfalls are projected) therefore reduces fairness by penalizing similar taxpayers differently based only on the timing of their payment, and can also reduce the effectiveness of enforcement efforts and the tax system broadly. These effects can continue long after the most recent amnesty period ends. (Note that this is very similar to the argument against allowing corporations to "repatriate" their profits to the U.S. at a lower rate, a proposal which was recently rejected at the federal level).

Despite the obvious problems, Maryland and New Mexico are both considering legislation to once again provide temporary tax amnesty programs some time in the coming months. New Mexico last provided an amnesty less than a decade ago, while Maryland's last amnesty came in 2001. After that 2001 amnesty, the Maryland comptroller's office noted that "repeated use of amnesties is likely to create cynicism among law-abiding taxpayers, and lessen the need for voluntary compliance with state tax laws, which is vital for our system of taxation". Should another amnesty be offered less than a decade after the 2001 amnesty, growth in taxpayer cynicism seems unavoidable, especially in light of the fact that a similar program offered in 1987 in the state was billed as a "once-in-a-lifetime" opportunity for delinquent payers.

Without a doubt, the momentum in favor of such programs is strong. Alabama is already in the mist of an amnesty period (the state last offered an amnesty in 1984). Massachusetts is currently in the process of deciding upon a date for its amnesty program (Massachusetts last provided amnesty in 2003). Connecticut's program is already slated to take effect on May 1st (Connecticut's last amnesty took place in 2002). And Oklahoma just recently closed its most recent amnesty period, just seven years after its 2002 amnesty.

In this environment, it is extremely important for state policymakers to not only oppose more amnesties, but also to convincingly state that another amnesty will not be offered any time in the near future. For states looking to responsibly close their tax gaps, stepping-up enforcement spending is often a route that can produce sizeable returns, and is undoubtedly much more fair than trying to get something for nothing by arbitrarily waiving penalties in an effort to boost voluntary "compliance". For more specific alternatives to the tax amnesty approach, take a look at these recent enforcement recommendations from Oregon's Department of Revenue.

This week New Mexico policymakers adjourned their special legislative session, which focused on tax breaks for low- and middle-income residents. The Land of Enchantment is one of a handful of states that is not experiencing budget shortfalls. The state is actually enjoying surplus revenues generated because of the state's ability to produce oil and gas. However, the tax relief package that was ultimately approved by legislators amounted to about half of what Governor Bill Richardson requested. Recent budget projections show that the state's windfall is expected to decline from about $400 million to $200 million.

In fact, the Governor asked for an enormous temporary tax rebate package that had a $120 million price tag. The rebate package that became law was about $56 million. The one-time rebate is targeted to New Mexicans with AGI of less than $70,000 and is scheduled to arrive in mail boxes by Thanksgiving. He also requested about $58 million for children's health care, but the final legislation included only about $20 million. A portion of revenues was also put aside for highways. Kudos to New Mexico lawmakers for adjusting the package when revenue projections changed and for making the bulk of the package temporary and targeted.

States' collective fiscal outlook appears to be quite dim and could get even darker in the months ahead according to a report released this week by the National Conference of State Legislators (NCSL). The report notes that, in the aggregate, states experienced a $40 billion budget gap for fiscal year 2009, a chasm that has been bridged largely through reductions in spending.

Not every state's budget is shrouded in gloom, however. Some states derive significant revenue from severance taxes (taxes imposed on the extraction of natural resources like oil and natural gas) and have economies closely tied to these industries. These states, Louisiana, North Dakota, and Wyoming for example, are enjoying substantial budget surpluses.

Given the volatility of energy markets, these surpluses are likely a temporary phenomenon, but that hasn't stopped states from considering and enacting tax cuts that would permanently reduce revenue. Earlier this year, Louisiana briefly weighed the idea of repealing its income tax altogether, only to settle on an oh-so-modest annual cut of $300 million. North Dakota has not only revived its property tax debate from a few years ago, but may also place on this November's ballot a measure that would slash the personal income tax by 50 percent and the corporate income tax by 15 percent. In this context, a plan backed by West Virginia Republicans to completely exempt groceries from the state sales tax appears far more reasonable in scope - and would certainly help to improve the progressivity of the state's tax system. However, it would still likely leave the Mountain State with inadequate revenues once oil and gas prices come back to earth.

Perhaps the most responsible - and fair - approach to surpluses generated by skyrocketing severance tax revenue comes from New Mexico, where Governor Bill Richardson this past week put forward a proposal to dedicate the majority of the state's projected $400 million surplus to one-time tax rebates and to highway construction. Richardson's proposal does contain some permanent changes in tax law, such as an expansion of the state's working families tax credit, but they appear to be targeted towards those low- and moderate-income taxpayers who are facing the greatest challenges from the nationwide foreclosure crisis and from rising fuel and food prices.

New Mexico Governor Bill Richardson signed into law an Earned Income Tax Credit equal to 8 percent of the federal EITC. New Mexico becomes the 21st state to offer an EITC. Congratulations to New Mexico Voices for Children and the New Mexico Fiscal Policy Project for making the creation of the Working Families Tax Credit a Legislative Priority.

In other EITC news, the Institute on Taxation and Economic Policy (working with Nebraska Voices for Children) submitted testimony to the Nebraska Legislature's Revenue Committee and submitted several letters to local newspapers in favor of Legislative Bill 683, which would expand the state's refundable EITC from 8 percent to 15 percent of the federal credit. Tax reform and budget negotiations are continuing in Lincoln and it's unclear whether the EITC will be expanded. For more on the value of the Earned Income Tax Credit read ITEP's policy brief.

In a welcome trend, lawmakers and advocates in Connecticut, New Jersey, North Carolina, Nebraska, New Mexico, Montana, Hawaii, Utah, Ohio, and Iowa are considering enacting Earned Income Tax Credits ... or expanding existing EITCs. The federal EITC has been hailed by policymakers of all stripes as an especially effective tool for lifting working families out of poverty. At the state level, the EITC offers the additional benefit of helping to offset the regressive sales and property taxes that hit low-income families hardest. To find out more about whether EITC legislation is active in your state, check out the Hatcher Group's State EITC Online Resource Center.

This November, South Dakotans will vote on the latest too-good-to-be-true policy solution... Amendment D, a constitutional amendment that would change how property is assessed for tax purposes. In most states a property's taxable value depends on what its really worth. Amendment D would confuse matters by creating two different property tax systems. Property that is sold would be assessed based on its value at the time of the sale. Property that does not change hands would be assessed by rolling back its value to 2003 levels and then increasing growth by an arbitrary 3% or the rate of inflation.

The ideas driving Amendment D are nothing new. In fact, almost identical laws have passed in New Mexico, Florida and California. These laws created a situation where one home located next to an identical home could be assessed at twice the value of the adjacent home, merely because it was sold more recently. As this excellent letter to the editor points out, South Dakota currently has several measures in place to support homeowners when property taxes are due. An expansion of the current homestead credit or a property tax circuit breaker would help those most in need of assistance.

New Mexico Fiscal Policy Project Report: Undocumented Immigrants in New Mexico: State Tax Contributions and Fiscal Concerns

Contrary to popular belief, undocumented immigrants pay taxes and are not able to receive public benefits, except for K through 12 public education for their children and emergency health care.