The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.

The vast majority of the attention given to the Bush tax cuts has been focused on changes in top marginal rates, the treatment of capital gains income, and the estate tax.  But another, less visible component of those cuts has been gradually making itemized deductions more unfair and expensive over the last five years.  Since the vast majority of states offering itemized deductions base their rules on what is done at the federal level, this change has also resulted in state governments offering an ever-growing, regressive tax cut that they clearly cannot afford. 

In an attempt to encourage states to reverse the effects of this costly and inequitable development, the Institute on Taxation and Economic Policy (ITEP) this week released a new report, "Writing Off" Tax Giveaways, that examines five options for reforming state itemized deductions in order to reduce their cost and regressivity, with an eye toward helping states balance their budgets.

Thirty-one states and the District of Columbia currently allow itemized deductions.  The remaining states either lack an income tax entirely, or have simply chosen not to make itemized deductions a part of their income tax — as Rhode Island decided to do just this year.  In 2010, for the first time in two decades, twenty-six states plus DC will not limit these deductions for their wealthiest residents in any way, due to the federal government's repeal of the "Pease" phase-out (so named for its original Congressional sponsor).  This is an unfortunate development as itemized deductions, even with the Pease phase-out, were already most generous to the nation's wealthiest families.

"Writing Off" Tax Giveaways examines five specific reform options for each of the thirty-one states offering itemized deductions (state-specific results are available in the appendix of the report or in these convenient, state-specific fact sheets).

The most comprehensive option considered in the report is the complete repeal of itemized deductions, accompanied by a substantial increase in the standard deduction.  By pairing these two tax changes, only a very small minority of taxpayers in each state would face a tax increase under this option, while a much larger share would actually see their taxes reduced overall.  This option would raise substantial revenue with which to help states balance their budgets.

Another reform option examined by the report would place a cap on the total value of itemized deductions.  Vermont and New York already do this with some of their deductions, while Hawaii legislators attempted to enact a comprehensive cap earlier this year, only to be thwarted by Governor Linda Lingle's veto.  This proposal would increase taxes on only those few wealthy taxpayers currently claiming itemized deductions in excess of $40,000 per year (or $20,000 for single taxpayers).

Converting itemized deductions into a credit, as has been done in Wisconsin and Utah, is also analyzed by the report.  This option would reduce the "upside down" nature of itemized deductions by preventing wealthier taxpayers in states levying a graduated rate income tax from receiving more benefit per dollar of deduction than lower- and middle-income taxpayers.  Like outright repeal, this proposal would raise significant revenue, and would result in far more taxpayers seeing tax cuts than would see tax increases.

Finally, two options for phasing-out deductions for high-income earners are examined.  One option simply reinstates the federal Pease phase-out, while another analyzes the effects of a modified phase-out design.  These options would raise the least revenue of the five options examined, but should be most familiar to lawmakers because of their experience with the federal Pease provision.

Read the full report.

California's annual budget crisis continues unabated this week. Almost two months into fiscal year 2011, the state legislature still has not enacted a budget. Democratic leaders in the state Assembly and Senate recently offered a joint budget-balancing plan that "spreads the pain" between spending cuts and tax increases, but this plan has received only lukewarm support. Part of the problem, as noted in a recent California Budget Project analysis, is that the tax increases in the Democratic plan would impose virtually no tax hikes on the best-off Californians. This is an especially odd choice given that the wealthiest Californians have enjoyed substantial growth in real incomes at a time when middle-class incomes have been stagnant.

Senate President Pro Tem Darrell Steinberg, one of the architects of the plan, explains this free-pass for the wealthiest Californians as a response to the misleading claim, expressed frequently by Governor Arnold Schwarzenegger, that California's tax system is already too volatile due to its reliance on the capital gains income realized by the best-off taxpayers. Yet as the nonpartisan Legislative Analyst's Office has found, reducing volatility by making the income tax less progressive will almost certainly have an unfortunate tradeoff: reducing the long-term growth (and sustainability) of state revenues.

At a time when the state faces a $19 billion deficit that shows no signs of disappearing in the future, hamstringing long-term revenue growth isn't the first solution to this problem one would think of. As we've noted in the past, making state tax systems less volatile can't be the primary goal of a state tax system. Long-term sustainability should be the main goal — and a progressive income tax, coupled with prudent fiscal management of a meaningful rainy day fund, is a sensible tool for achieving this goal.

Efforts are underway in a variety of states to give voters the opportunity to change their state's tax structure for the better. Advocates are laying the ground work for tax reform in Colorado. Tax justice advocates in Arizona can celebrate that a Proposition 13-like initiative didn't garner enough signatures to be placed on the ballot. California voters will get the chance to repeal various corporate tax loopholes while Washington is closer than ever before to introducing a personal income tax.

In Colorado, folks are thinking about the 2012 ballot already. Representatives of the Colorado Fiscal Policy Institute (CFPI) have filed two initiatives that are currently being reviewed to determine if they abide by the state's "single subject" per initiative rule. According to The Denver Post, "the measures also call for reducing the state sales tax but taxing services as well as goods, changing the income-tax system to a graduated system and making a tax credit for low-income workers permanent." Specifically the proposal would change Colorado's flat rate income tax into a graduated system with a least five brackets. Carol Hedges with CFPI recently said of the initiatives that "the overriding objective is to have our tax system more appropriately matched with economic realities."

Arizonans swerved and missed the tax policy equivalent of a Mack truck slamming into them when it was announced that "Prop. 13 Arizona" failed to garner enough signatures to qualify for the 2010 ballot. The proposal was modeled after California's Proposition 13. The measure would have rolled back the assessed value of property sold before 2004 to 2003 levels, limited property value increases, and taken away voters' rights to override levy limits. This is the second time that the proposal failed to garner enough signatures. For more on capping assessed value, see ITEP's primer on the subject.

In November, California voters will get to vote on the Repeal Corporate Tax Loopholes Act. The measure, if passed, would eliminate several business tax breaks enacted in 2008 and 2009. They include elective single sales factor, tax credit sharing, and net operating loss carrybacks. For more details on these tax breaks, see California Budget Project's Budget Brief on this issue. Perhaps more upsetting than these tax breaks actually passing is the way they were passed. Initially, according to the California Budget Bites Blog, these tax deals were of the "dark-of-night" variety. Now Californians themselves will decide if these costly corporate tax breaks should remain the law of the land.

Washingtonians are closer than they have ever been to establishing a personal income tax. Washington has repeatedly been named by ITEP as the state with the most regressive tax structure largely because of their high reliance on sales taxes and absence of a personal income tax. Initiative 1098 introduces an income tax that has two brackets targeted at high income Washingtonians, reduces the state property tax, and reforms the business and occupation tax. Supporters of the initiative this week turned in well over the 241,000 signatures required to get on the ballot. It appears that Washingtonians will have an exciting and historic opportunity to reform their state's tax structure this fall.

Bills moving through the California legislature would make it much easier to determine whether California’s special tax breaks — costing billions of dollars annually — are worth the trouble.  Specifically, the Assembly would require that the names of publicly traded corporations, and the amounts they received in specific tax breaks, be made publicly available on a searchable website.  The Senate, in turn, is seeking to create a new job creation reporting requirement, and to require that new tax credits include specific, measurable goals and sunset dates.  Business groups have predictably lined up in opposition to these bills.

Movement in the California Senate

In passing SB 1272, the Senate found that “The Legislature should apply the same level of review and performance measure that it applies to spending programs to tax preference programs, including tax credits.”  In order to help make this ideal a reality, SB 1272 requires that each new credit be created with defined goals, as well as performance measures for evaluating the credit’s success in achieving those goals.  The bill also requires that data collection requirements be attached to each new tax credit in order to make such evaluations possible. Finally, in a move similar to one recently taken by Oregon, the bill would require each new tax credit to sunset after seven years. 

SB 1391 has a slightly more narrow focus than SB 1272, requiring any entity claiming a job creation tax credit to report on the number of jobs created as a result of the credit. 

Both SB 1272 and SB 1391 have passed the Senate, and will receive hearings in front of the Assembly Committee on Revenue and Taxation next Monday (June 28).

Movement in the California Assembly

On the Assembly side, AB 2666 would create a requirement that the names and amounts of tax credits received by publicly traded companies be made available on a searchable website.  The bill states that this website would be created with the goal of increasing “public awareness of the amount and scope of tax expenditures for businesses in this state.” 

Work of CTJ Cited

Interestingly, in order to demonstrate the potential value of publicly-available, company-specific tax data, the official bill analysis cites the enormous impact that CTJ’s analyses of SEC data had in bringing about federal tax reform: “Robert McIntyre, working at Citizens for Tax Justice combed through the financial reports of the nation's largest companies and found that 128 of the 250 largest U.S firms paid no federal corporate income tax in at least one year between 1981 and 1983 (17 paid no tax in all three).  The resulting furor pushed Congress to enact the Tax Reform Act of 1986.” 

AB 2666 has already passed the Assembly, and is currently making its way through the Senate.

Business Lobby Does As Expected

Predictably, business groups in the state have already lined up in opposition to these good-government measures.  Four groups have chosen to officially oppose all three bills: the California Chamber of Commerce, California Manufacturers and Technology Association, California Aerospace Technology Association, and TechAmerica.  A slew of other business groups — including the Bankers Association and Retailers Association — have come out in opposition to at least one of the bills.  The fight to enact SB 1272, SB 1391, and AB 2666 into law will no doubt involve a tough uphill battle against these powerful special interests.

You can find information on each of these bills on the California legislature’s website.

Even though the gubernatorial general election season in California is less than two weeks old, the rhetoric between the candidates on fiscal and tax policy is already taking a turn for the worse. Republican candidate Meg Whitman’s campaign is trying to turn a 2 cent gas tax hike in 1981 into “a record of higher and higher taxes, more and more spending.” Statements like this by Whitman about Democratic candidate Jerry Brown’s record and California’s fiscal history are both misleading and betray a troubling lack of nuance in understanding California’s serious budget issues.  

Even before Brown had officially announced his candidacy for Governor in March, Republican gubernatorial nominee Meg Whitman had already fired an opening shot attacking Brown’s public service record in California. In a document entitled “A Voter’s Guide to Jerry Brown,” Whitman attempts to portray Brown as a "fiscal failure" during his time as governor, mayor and attorney general.

Not surprisingly, Whitman’s "voter’s guide" places much of Jerry Brown’s record out of context and ignores the reality of California’s fiscal history. For example, the document attacks Brown for approving a 2 cent increase in the gas tax as governor in 1981. What the guide and Whitman fail to mention is that this tax increase had the support of almost half of State House Republicans and was designed to fix a $2.5 billion deficit in transportation funding.

In an op-ed on June 6th in the San Diego Union Tribune, Brown defended his fiscal record, writing that during his term taxes were reduced by $4 billion overall. Whitman’s campaign attacked again by pointing out his opposition to Proposition 13 and quoting a 1992 New York Times article which said that he had turned a budget surplus into a more than $1 billion deficit. Showing how campaign rhetoric can be both misleading and contradictory, the Whitman campaign excludes the proceeding line of the same New York Times article which states that the nearly $7 billion dollars in cuts due to Proposition 13, which Whitman supports and accuses Brown of opposing, were a major cause of the fiscal problems.

As Dan Walters of the Sacramento Bee observed in a recent op-ed, “In a rational world, Whitman wouldn't be criticizing Brown for raising the gas tax but for cutting state taxes in 1978 as he and the Legislature simultaneously assumed billions of dollars of new financial burden for schools and local government because of Proposition 13's property tax cut.”

Whitman simplistically assumes that all spending and taxes are bad.  In fact, Brown’s bipartisan increase in the gas tax to meet the transportation needs of California citizens was an attempt by a governor to achieve a responsible balance in the budget.  

With recent polls showing Brown and Whitman locked in a dead heat and the recent failure of lawmakers to pass a budget, this is only the beginning of what will become an even more heated debate in the gubernatorial campaign over California’s budget.

During last year’s seemingly endless debate over how to close California’s budget gap, lawmakers inexplicably enacted a corporate tax cut that will cost the state $900 million in fiscal year 2011, and at least $2 billion each year thereafter.  But under recently released plans put forth by the leadership of both the Assembly and the Senate, this tax cut — known as “single sales factor,” or SSF — would very sensibly be delayed in order to avoid digging the state’s already enormous budget hole even deeper. 

Governor Schwarzenegger, predictably, has put forward an alternative plan that would not delay the phase-in of this tax cut, nor would it increase revenues in any other significant way.  Instead, the Governor’s plan would rely on severe cuts in education, child care, and support for the disabled, as well as the complete elimination of the state’s welfare program. 

According to UC Berkeley researchers, if these cuts were enacted (which is, fortunately, very unlikely) somewhere in the neighborhood of 330,000 jobs would be lost, increasing the state’s unemployment rate by about 1.8 percentage points.

Under the Senate plan, recent income tax rate increases and a reduction in the dependent care credit would be extended beyond this December in order to help fill the state’s budget gap.  License fees, alcohol taxes, and tobacco taxes would also increase.  The Assembly, by contrast, would rely primarily on borrowing, but would pay off this borrowing over time with an oil severance tax.

The one thing both chambers seem ready to agree on, though, is that the SSF phase-in should be delayed.  In a nutshell, the optional SSF tax cut enacted last year will allow large multi-state companies to chose whether or not they would like to ignore the amount of property they own in California, and the amount of payroll paid to Californians, when calculating the share of their income subject to California taxes.  Instead, if the company elects to take advantage of SSF, only the location of sales made by the company will be considered.  Since small California corporations make most if not all of their sales inside the state, this cut will provide little if any benefit to those businesses. 

ITEP’s policy brief on the subject explains the pitfalls of SSF in more detail.  It’s worth noting here, though, that California’s optional SSF is even costlier than the more common mandatory SSF, which does not allow companies the option of choosing between two different apportionment methods.

The Sacramento Bee reported this week that “the Legislature's budget analyst, Mac Taylor, argues cogently that shifting to a single-sales factor should be delayed to 2013 and be made mandatory.”  We would argue instead that SSF should be abandoned entirely, but Mr. Taylor’s alternative is undoubtedly far superior to allowing this corporate giveaway to decimate California’s budget during the coming fiscal year.

This week, the Institute on Taxation and Economic Policy (ITEP), in partnership with state groups in forty-one states, released the 3rd edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.”  The report found that, by an overwhelming margin, most states tax their middle- and low-income families far more heavily than the wealthy.  The response has been overwhelming.

In Michigan, The Detroit Free Press hit the nail on the head: “There’s nothing even remotely fair about the state’s heaviest tax burden falling on its least wealthy earners.  It’s also horrible public policy, given the hard hit that middle and lower incomes are taking in the state’s brutal economic shift.  And it helps explain why the state is having trouble keeping up with funding needs for its most vital services.  The study provides important context for the debate about how to fix Michigan’s finances and shows how far the state really has to go before any cries of ‘unfairness’ to wealthy earners can be taken seriously.”

In addition, the Governor’s office in Michigan responded by reiterating Gov. Granholm’s support for a graduated income tax.  Currently, Michigan is among a minority of states levying a flat rate income tax.

Media in Virginia also explained the study’s importance.  The Augusta Free Press noted: “If you believe the partisan rhetoric, it’s the wealthy who bear the tax burden, and who are deserving of tax breaks to get the economy moving.  A new report by the Institute on Taxation and Economic Policy and the Virginia Organizing Project puts the rhetoric in a new light.”

In reference to Tennessee’s rank among the “Terrible Ten” most regressive state tax systems in the nation, The Commercial Appeal ran the headline: “A Terrible Decision.”  The “terrible decision” to which the Appeal is referring is the choice by Tennessee policymakers to forgo enacting a broad-based income tax by instead “[paying] the state’s bills by imposing the country’s largest combination of state and local sales taxes and maintaining the sales tax on food.”

In Texas, The Dallas Morning News ran with the story as well, explaining that “Texas’ low-income residents bear heavier tax burdens than their counterparts in all but four other states.”  The Morning News article goes on to explain the study’s finding that “the media and elected officials often refer to states such as Texas as “low-tax” states without considering who benefits the most within those states.”  Quoting the ITEP study, the Morning News then points out that “No-income-tax states like Washington, Texas and Florida do, in fact, have average to low taxes overall.  Can they also be considered low-tax states for poor families?  Far from it.”

Talk of the study has quickly spread everywhere from Florida to Nevada, and from Maryland to Montana.  Over the coming months, policymakers will need to keep the findings of Who Pays? in mind if they are to fill their states’ budget gaps with responsible and fair revenue solutions.

A new report from Citizens for Tax Justice makes the case for a “performance review” system designed to evaluate the effectiveness of special tax breaks in achieving their stated goals. While CTJ's report primarily focuses on the importance of such a system at the federal level, most of its findings are equally applicable to the states.

The special breaks littered throughout state tax codes — or “tax expenditures,” as they are frequently called — are an enormous and often overlooked part of government’s operations.  Although the primary purpose of a tax system is to raise the revenue needed to pay for public services, every state, as well as the federal government, also uses its tax system to accomplish a variety of other policy goals. Encouraging job creation, subsidizing private industry research, and promoting homeownership are just a few of the countless ends pursued via special subsidies contained in state tax codes. Rather than having anything to do with fair or efficient tax policy, these tax credits, exemptions, and other provisions are actually much more akin to government spending programs — hence the term, “tax expenditures.”

A performance review system takes the commonsense step of asking whether these provisions are doing what policymakers intended of them. Under such a system, tax credits designed to encourage research and experimentation, for example, would be regularly examined to determine the amount of new research undertaken as a result of the credits. Shockingly, the vast majority of states, and the federal government, do not currently attempt to answer fundamental questions of this sort with any type of rigorous evaluation.

Among CTJ’s findings are:

— “Procedural biases,” such as the omission of tax expenditures from the authorization and appropriations processes, allow tax expenditures to slip by with a fraction of the scrutiny given to direct spending programs. State legislative systems requiring supermajority consent to “raise taxes” (or eliminate tax expenditures) are particularly biased in this regard.

— “Political biases,” such as the erroneous belief that government can take a “hands off” approach, or reduce its overall size by offering special tax breaks, also contribute to the current lack of oversight.

— A number of states have made strides in recent years to counteract these biases through performance reviews and other, similar means. Washington State’s efforts represent the most complete attempt at tax expenditure performance review yet to be undertaken in the United States. California, Delaware, Nevada, Oregon, and Rhode Island have also made attempts — with varying degrees of success — to enhance the level of scrutiny applied to their tax expenditures.

— The bleak state budgetary outlook makes the implementation of tax expenditure review all the more urgent. States, like the federal government, can no longer afford to deplete their resources with ill-advised and ineffective tax expenditures. By implementing a tax expenditure performance review system, states can pave the way for a reduction in tax expenditures by identifying those expenditures that are ineffective.

— A formal review system could also help to reconceptualize these provisions in the minds of policymakers, the media, and the public as spending-substitutes, rather than simply as tax cuts. This would further help reduce the rampant biases in favor of tax expenditure policy.

— The precise design of a tax expenditure review system is very important. States should be sure to include all taxes, and all tax expenditures within the scope of the review. Additionally, states should exercise care in selecting the criteria to be used in the reviews — Washington State’s criteria represent a good starting point from which to build. Other key design issues include choosing the appropriate body to conduct the reviews, timing the reviews to coincide with the budgeting process, allowing similar tax expenditures to be reviewed simultaneously, and attaching some type of “action-forcing” mechanism to the reviews so that policymakers must explicitly consider the reviews’ results.

— Tax expenditure reviews are necessary, though they may not be sufficient to correct for the biases in favor of tax expenditure policy. A tax expenditure performance review system can play a vital informational role either on its own, or alongside other, more aggressive tax expenditure control techniques such as sunset provisions or caps on tax expenditures’ total value.

Read the full report.

Read the 2-page summary.

Earlier this week, the Georgia Supreme Court ruled in favor of the City of Columbus and against hotels.com, an online travel company (“OTCs”) that charges customers one rate for booking a hotel room but pays local governments a lodging tax based on cheaper, wholesale room rates.  The Court’s finding mirrors its decision in a case decided in June against Expedia.com.  In both instances, the Court held that the tax for which the OTCs were liable should be based on the retail room rate paid by their customers.

OTCs contract with local hotels to provide rooms for a discounted or wholesale rate.  When a customer books a room online, the OTC charges the customer a “marked-up” rate along with taxes and service fees.  Under Georgia law, municipalities may impose hotel occupancy and excise taxes on the furnishing of any room, lodging, or accommodation.  The Court noted that state law allows cities to impose a tax on the lodging charges actually collected. 

The high court’s decisions are binding across Georgia, so the two Columbus cases could affect other suits filed by governments seeking to collect the proper amount of lodging taxes from OTCs.  The cases have been remanded to the lower courts to determine how much money the online services owe in back taxes and penalties. 

Importantly, numerous other cities – including Houston, San Antonio, and Miami have sued or initiated administrative proceedings against OTCs, asserting that they owe back taxes on their price mark-ups.  While many cases have yet to be fully adjudicated, one other recent case yielded much the same verdict as Columbus’ suit against hotels.com.  In February, multiple OTCs, including Orbitz and Travelocity, were ordered to pay the city of Anaheim, California, $21 million in back taxes, fees and penalties related to the payment of hotel occupancy taxes.

Rulings such as these have motivated OTCs to seek enactment of federal legislation that would ban state and local taxation of hotel room rentals when booked by such a company.  However, as these rulings demonstrate, there is no justification for limiting the base for such a tax to the wholesale price of a hotel room, let alone eliminating taxation altogether.  Hotel taxes are consumption taxes, which should be measured by the value of the consumption to the customer.  Therefore, the tax should be imposed on the retail amount.  For more on this subject and on the OTC’s push for federal legislation, see this helpful report from the Center on Budget and Policy Priorities.

After ten months of work, California’s “Commission on the 21st Century Economy” has finally released its recommendations for overhauling the California tax system.  The Commission has proposed to eliminate the corporate income tax, eliminate the sales tax, sharply reduce the progressivity of the individual income tax, and enact a new “business net receipts tax” (BNRT) that would function in many respects as a new, less transparent sales tax.  The income tax changes are especially appalling, as the Commission’s own presentation (see the last slide) concedes that taxpayers with incomes over $1 million would receive an average tax cut of over $109,000 per year, while those making under $50,000 would receive somewhere in the neighborhood of $3 annually from the plan.

Jean Ross with the California Budget Project (CBP) hit the nail on the head with her remark that the plan constitutes "a massive shift in ... financing public services from the wealthy and corporations to middle-income families [that] is nothing short of stunning."  Ross is by no means the only person displeased with the Commission’s plan.  Business groups, labor, and numerous tax experts have all already come out in opposition to major components of the report.  One LA Times columnist reacted to the magnitude of the outcry by stating: “Sure, you can't please everyone. That's a given on anything controversial. But come on! Maybe at least a few people?”  Fact is, there’s nothing here worth being pleased about.

Throughout the Commission’s deliberations, University of Connecticut law professor (and ITEP Board President) Richard Pomp has been a strong voice both for progressives and for anybody interested in good tax policy.  In a 21-page criticism of the Commission’s work, released earlier this month, Pomp decried the plan’s regressive income tax cuts, its elimination of the corporate income tax, and its reliance on a new, untested, and unstudied business net receipts tax (BNRT).  The purpose of the BNRT, notes Pomp, is to serve as a “non-transparent” consumption tax, meant to raise the revenue needed to finance the Commission’s income tax cuts, and allow the state to finally tax services while instead appearing to only tax California businesses.

Pomp has also written a statement on the Commission’s final package, which should be posted here at some point in the near future. To learn more, you can also listen to Jean Ross thoughts on the Commission's work.

California now has a budget for the fiscal year that started almost a month ago. But for advocates of sustainable tax and spending policy, the hard times are only beginning. As a new report from the California Budget Project explains, lawmakers faced with a $23 billion shortfall chose to rely on spending cuts to close two thirds of the gap.  The list of cuts is grisly.  Health, education, child services, support for the disabled, and just about every other category of state spending will be slashed significantly.  The consequences for Californians are expected to be dire.

Astonishingly, the budget includes virtually no changes on the tax side of the ledger that can meaningfully be described as tax increases. While $3.5 billion of the current-year shortfall will be made up through tax changes, most of this revenue will be realized by accelerating collections rather than increasing the level of taxes. Specifically, $1.7 billion of the "new revenue" for fiscal year 2010 will be realized by accelerating personal income tax withholding so that more income tax will be withheld in the first half of the calendar year. This means, of course, that the legislature has just dug itself a $1.7 billion fiscal hole for the next fiscal year. Assembly Speaker Karen Bass, who's claiming that "in no way should this [budget] be misconstrued as kicking the can down the road,” must not have read this part of the budget agreement.

Bass -- and Governor Arnold Schwarzenegger, who boasted that the budget agreement "puts us on a path toward fiscal responsibility" -- must be equally unaware of a clever provision through which the state is closing $2 billion of the budget gap by forcing local governments to lend the state up to 8 percent of their property tax revenues in the upcoming fiscal year. The idea is that the state will pay back this loan, with interest, by the end of the 2013 fiscal year. In the short run, of course, this move will force local governments to make $2 billion worth of the hard decisions--cut spending or hike taxes and fees--that state lawmakers found themselves unable to deal with this year.

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.

Charged with finding a revenue neutral way to reduce the volatility of California's revenue stream, the "Commission on the 21st Century Economy" recently expanded the scope of its study, and announced its plans to seek an extension until the end of September. This extension (the second sought by the Commission) comes after a successful bid by Commissioner Fred Keeley to add a variety of more progressive options to the discussion. The options to be discussed include: retaining the state's progressive income tax, removing Prop 13 limitations on commercial property tax bills, expanding the sales tax to include services while lowering the sales tax rate, taxing carbon based fuels, and making more careful use of a rainy day fund, especially in regard to capital gains revenue. Keeley's goal is to offer solutions to the state's volatile budgetary situation that don't involve gutting the state's progressive income tax.

This delay of the Commission's recommendations means that California legislators will not be receiving any advice from the Commission during this legislative session. This is an unfortunate development, as the legislature is clearly in need of some guidance. California lawmakers recently unveiled a plan to balance the budget by gutting the state's education programs, while refusing to increase any taxes.

Of all Keeley's proposals, the removal of Prop 13 limitations on commercial property taxes has received particular attention as of late, including an LA Times column detailing some of its abuses as well as its high cost.

Corporate lobbyists in Sacramento could be dealt another blow soon. An effort is underway to repeal by ballot (in November 2010) the billions in corporate tax breaks passed by California legislators over the course of the past ten months.

Late last week, California Governor Arnold Schwarzenegger, in a meeting with the editorial board of the Sacramento Bee, floated the idea of adopting a flat tax with a rate of 15 percent as part of a major overhaul of the state's tax system. While it is unclear which taxes the Governor would replace with such a levy, what is clear is that "flat tax" proposals are a bad idea.

As CTJ Executive Director Bob McIntyre made plain in his testimony before the California Commission on the 21st Century Economy recently, a "flat tax" almost certainly means that poorer taxpayers would be asked to contribute more to government finances and that wealthier taxpayers would be required to put far less into state coffers than they do now.

For a more productive approach to reforming California's tax system (and addressing the state's fiscal woes), see this recent commentary by Jean Ross, head of the California Budget Project.