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.

A new report by the Georgia Budget and Policy Institute (GBPI), Advancing Georgia's 1930s Tax System to the Modern Day, puts forth recommendations for tax reform that will help the state raise enough money to meet its growing needs, bring the revenue system in line with the 21st century economy, and improve fairness if adopted.

The report was delivered to the 11 members of the 2010 Special Council on Tax Reform and Fairness for Georgians who met for a second time this week.  The Council is charged with providing recommendations to the state legislature in January 2011 when the General Assembly meets to amend the fiscal year 2011 budget and create the FY 2012 budget.  The GBPI provides the Tax Council with a set of reform recommendations including:

- Lowering the state sales tax rate and simultaneously broadening the tax base to mirror 21st century spending habits.
- Modernizing income tax brackets, rates, and standard deductions to better reflect current income levels.
- Creating an earned income tax credit (EITC) to offset the highly regressive sales taxes for the state's lowest earners.
- Scaling down tax preferences, both for individuals and corporations, to avoid shifting taxes onto fewer individuals and businesses as they do now.
- Closing corporate loopholes and updating the corporate net worth tax to prevent profitable corporations from avoiding paying their fair share.
- Updating cigarette and motor fuel excise tax rates.

Using data from the Institute on Taxation and Economic Policy's Microsimulation Tax Model, the report provides beginning revenue estimates and distributions among income groups to demonstrate how recommended combined tax reforms would improve fairness while also enhancing adequacy. An overview of similar actions taken by other states, as well as potential federal tax changes, are also included in the report.
 
As the Tax Council members embark on numerous “fact-finding” sessions across the state later this month, they should start by giving the GBPI report a serious look.

We’re in the heart of sales tax holiday season now.  Despite cooler heads prevailing in DC and Georgia, where sales tax holidays have been scrapped due to gloomy budget projections, Massachusetts and North Carolina have recently decided to move ahead with their holidays, and Illinois has decided to join the party for the first time.

By now, you may be familiar with all the reasons why sales tax holidays are a bad idea (read this ITEP policy brief if you’re not).  Aside from those groups with a vested interest in the holidays (e.g. retailers looking for free advertising, politicians looking to build their anti-tax credentials, and confused parents thinking these things actually save them money), just about everyone seems to agree that sales tax holidays are a worthless political gimmick.  Stateline pointed out last week that analysts as varied as those at Citizens for Tax Justice and the Tax Foundation have come to an agreement on this point.

But as long as sales tax holidays remain popular enough to remain impervious to most state budget crises, we might as well take a moment to marvel at some of their more glaring absurdities.  For example, this year, Massachusetts’ sales tax holiday will apply to alcohol.  College students in the state clearly have quite an effective lobbying presence in Boston.  Interestingly, neither tobacco nor meals will be included in the holiday.

In Illinois, which doesn’t have any experience with sales tax holidays, one columnist speculates that his wife isn’t alone in erroneously believing that the back-to-school holiday applies only to children’s clothes.  Indeed, adult clothes are included as well; as are aprons and athletic supporters.  Work gloves, however, will still be subject to tax.  You’d think that the Illinois Department of Revenue already has enough on its plate without having to worry about such minutia.

Finally, in South Carolina, it looks like the state’s Tax Realignment Commission is going to recommend quite a few changes to the state’s tax holidays.  For starters, the state’s bizarre post-Thanksgiving tax holiday on guns has to go, according to the Commission.  And changes could be in store for the August holiday as well.  The State reports that if the Commission gets its way, “this could be the last year to get your wedding gown, baby clothes, pocketbooks and adult diapers at a discount on back-to-school tax-free weekend.”  Interestingly, the South Carolina representative who first introduced the sales tax holiday idea actually agrees, claiming that he wanted only the holiday to apply to stereotypical “back to school” purchases – that is, things other than wedding gowns and adult diapers.

Georgia is the latest state to formally join the tax reform debate with the creation of the Special Council on Tax Reform and Fairness.  The 11-member Council, which met for the first time this week, has been charged with conducting  a comprehensive study of the current state and local tax system and must offer a set of final recommendations for modernizing the system to state lawmakers by January for an up or down vote.

The goals of the Council are still a bit vague, but by all accounts it is certain the members will pay special attention to closing loopholes, expanding sales taxes to services, restoring the sales tax on groceries, and lowering personal and corporate income taxes.  The Council’s Chairman, A.D. Frazier, announced this week that the members plan to seek input from constituents and stakeholders through a series of statewide meetings and will accept comments via the Council’s website.

Georgia’s House Speaker, David Ralston, who is not on the Council, asked members this week to create a tax system that is “more stable, more fair, more flat, and more job-friendly.”  

The Council should be concerned with increasing stability, fairness, and jobs, but flattening the tax system, particularly the personal income tax, has nothing to do with those goals.   ITEP’s 2009 report, Who Pays?, found that the poorest Georgia families pay an average of 11.4 percent of their income in Georgia taxes, twice as high as the 5.7 percent of income that the very best-off 1 percent of Georgians must pay.  While this upside-down pattern is common in state tax systems, Georgia is somewhat more unfair than the typical state due to its relatively flat income tax structure and reliance on the sales tax. And, as ITEP has already noted, legislation enacted this year would only make this worse.

The Georgia Budget and Policy Institute (GBPI) and ITEP will be monitoring the Council meetings throughout the summer and fall.  When asked about the direction the Council should follow, GBPI’s Deputy Director Sarah Beth Gehl, said she hopes “the council members will consider the tax system from all perspectives, including how it affects low- and moderate-income Georgians and its effect on funding for essential services.  This shouldn't be an exercise in who can protect their special-interest tax break or carve out a new one."

Back-to-school time is just around the corner and with that comes the annual debate about sales tax holidays. States offering sales tax holidays typically won't collect sales tax for a specific number of days on items considered to be back-to-school items like school supplies, clothes, or even shoes. Of course, sales tax holidays do nothing to offset the regressivity of the sales tax the rest of the year, they are an administrative headache, costly for state governments, and very low-income people usually don't have the flexibility to shift their spending to take advantage of the holiday.

Despite recent headlines like "Illinois: Our very own Greece?" Governor Quinn signed legislation that allows the state to offer its first ever sales tax holiday for a ten day period in early August. The holiday is projected to cost the state between $20 and $67 million, which the state could certainly use right about now. It's hard to understand how offering this sales tax holiday is good fiscal policy.

In brighter news, Georgia is not having a sales tax-free holiday weekend this year. In a state facing its own budget crunch, the Speaker of the House said earlier this year, "What I hear Georgians say is they’d rather have their classroom teachers in the classroom teaching than have that sales [tax] holiday." This move is likely to save the state about $12 million.

Among the dozens of bills and a $17.9 billion budget signed into law by Georgia Governor Perdue on Tuesday is a law eliminating low-income tax credits for hundreds of thousands of individuals in Georgia — cutting the size of the credit overall by about two-thirds. The legislation signed by Gov. Perdue did not, however, include the 50 percent reduction in the tax on long-term capital gains that was passed by the state’s legislature for the second year in a row.

Specifically, Governor Perdue approved the legislature’s decision to eliminate the “refundability” of the state’s low-income tax credit.  As a result, those low-income Georgians hit hard by sales, excise, and property taxes will no longer be able to receive refunds through the income tax system to offset these burdens.  

Overall, this change amounts to a $20 million tax increase on those in Georgia who are suffering most, and least able to pay during the current recession.  A recent ITEP analysis of this change to the low-income credit shows that 61 percent of the tax hike will fall on the poorest 20 percent of Georgia individuals and families—a group with incomes averaging $9,700 a year—and that virtually all of the tax hike will be paid by the poorest 40 percent of Georgians.

Refundable Credits Still OK for Corporations, but Not Families

While the refundability of Georgia’s low-income tax credit has been eliminated, this same feature of many of Georgia’s corporate tax credits will remain intact. As a report by the Georgia Budget and Policy Institute (GBPI) points out, the refundable portion of corporate tax credits provided by the state are actually similar in cost to the recently repealed refundable portion of the low-income credit.  It’s more than a little surprising, to say the least, that Georgia’s lawmakers believe low-income individuals to be less worthy of tax breaks than corporations.

Governor Vetoes Capital Gains Cut

Fortunately for Georgia residents, Governor Perdue vetoed for the second time an effort by Republican legislative leaders to cut capital gains taxes by an estimated $340 million.  According to an ITEP analysis, 77 percent of the tax reductions resulting from this change would have gone to the richest 1 percent of taxpayers in the state, while the 80 percent of taxpayers earning less than $76,000 per year would have received just 1 percent of the overall capital gains tax break.

Proponents of the capital gains tax break touted the effort as a sort of economic and jobs stimulus legislation, despite the consensus that exists among a wide array of economists that capital gains tax cuts are among the least effective stimulus efforts and have no connection to long-term growth.

As ITEP’s recent report “Who Pays?” points out, the poorest fifth of families in Georgia already pay nearly twice as much in taxes as a percentage of their income as the top 1 percent of Georgians. The legislature’s clear desire to shower the wealthy in additional tax breaks while forcing low-income Georgians to pick up the tab would only make this stark regressivity even worse.

Instead of continuing down this road, Georgia lawmakers could make their budget fairer and more sustainable by passing reforms like repealing the deduction for state income taxes along with a whole variety of reforms.

In an Atlanta Journal-Constitution op-ed, Kathy Floyd of AARP Georgia sums up our feelings about the budget this year by saying, frankly, “Georgia deserved better.”

And then there were seven.  With the enactment of a tax expenditure reporting requirement in Georgia late last week, only seven states in the entire country continue to refuse to publish a tax expenditure report — i.e. a report identifying the plethora of special breaks buried within these states’ tax codes.  For the record, the states that are continuing to drag their feet are: Alabama, Alaska, Indiana, Nevada, New Mexico, South Dakota, and Wyoming. 

But while the passage of this common sense reform in Georgia is truly exciting news, the version of the legislation that Governor Perdue ultimately signed was watered down significantly from the more robust requirement that had passed the Senate.  This chain of events mirrors recent developments in Virginia, where legislation that would have greatly enhanced that state’s existing tax expenditure report met a similar fate. 

In more encouraging news, however, legislation related to the disclosure of additional tax expenditure information in Massachusetts and Oklahoma seems to have a real chance of passage this year.

In Georgia, the major news is the Governor’s signing of SB 206 last Thursday.  While this would be great news in any state, it’s especially welcome in Georgia, where terrible tax policy has so far been the norm this year. 

SB 206 requires that the Governor’s budget include a tax expenditure report covering all taxes collected by the state’s Department of Revenue.  The report will include cost estimates for the previous, current, and future fiscal years, as well as information on where to find the tax expenditures in the state’s statutes, and the dates that each provision was enacted and implemented. 

Needless to say, this addition to the state’s budget document will greatly enhance lawmakers’ ability to make informed decisions about Georgia’s tax code. 

But as great as SB 206 is, the version that originally passed the Senate was even better.  Under that legislation, analyses of the purpose, effectiveness, distribution, and administrative issues surrounding each tax expenditure would have been required as well.  These requirements (which are, coincidentally, quite similar to those included in New Jersey’s recently enacted but poorly implemented legislation) would have bolstered the value of the report even further.

In Virginia, the story is fairly similar.  While Virginia does technically have a tax expenditure report, it focuses on only a small number of sales tax expenditures and leaves the vast majority of the state’s tax code completely unexamined.  Fortunately, the non-profit Commonwealth Institute has produced a report providing revenue estimates for many tax expenditures available in the state, but it’s long past time for the state to begin conducting such analyses itself.  HB355 — as originally introduced by Delegate David Englin — would have created an outstanding tax expenditure report that revealed not only each tax expenditure’s size, but also its effectiveness and distributional consequences. 

Unfortunately, the legislation was greatly watered down before arriving on the Governor’s desk.  While the legislation, which the Governor signed last month, will provide some additional information on corporate tax expenditures in the state, it lacks any requirement to disclose the names of companies receiving tax benefits, the number of jobs created as a result of the benefits, and other relevant performance information.  The details of HB355 can be found using the search bar on the Virginia General Assembly’s website.

The Massachusetts legislature, by contrast, recently passed legislation disclosing the names of corporate tax credit recipients.  While these names are already disclosed for many tax credits offered in the state, the Department of Revenue has resisted making such information public for those credits under its jurisdiction. 

While most business groups have predictably resisted the measure, the Medical Device Industry Council has basically shrugged its shoulders and admitted that it probably makes sense to disclose this information.  Unfortunately, a Senate provision that would have required the reporting of information regarding the jobs created by these credits was dropped before the legislation passed.

Finally, in Oklahoma, the House recently passed a measure requiring the identities of tax credit recipients to be posted on an existing website designed to disclose state spending information.  If ultimately enacted, the information will be made available in a useful, searchable format beginning in 2011.

Sonny Perdue is enjoying his last year as the Governor of Georgia and all signs indicate that he's going out with a bang that, depending on how he uses his veto pen, could have enormous implications for Georgia's tax system and revenue stream for years to come. The Governor has already signed legislation that removes retirement income from the income tax base and repeals the state portion of the property tax. Tax and budget fairness advocates are watching to see what action he'll take on a capital gains tax cut and a proposal that would eliminate the refundable portion of a low-income tax credit.

Last week, Governor Perdue made good on a campaign promise to entirely remove retirement income from the tax base for seniors. Georgia seniors already enjoy some of the highest exemptions in the country on retirement income. Fully exempting this income, especially as the boomer population ages, means that the cost of this legislation will only grow in the future.

But even if one can (for some reason) ignore the fiscal implications, the fairness implications are eye-popping. Under this legislation, income seniors receive from work would continue to be taxed the same as before. If you're a senior who can't afford to retire, you still get taxed on most of your income (seniors would still get the existing $4,000 exemption on earnings). But if you can afford to retire, your income is not taxed. The most basic principle of tax fairness — that taxes should be based on ability to pay — seems to have disappeared in Georgia.

The Governor also signed a law that completely eliminates the state portion of property taxes. The Georgia Budget and Policy Institute estimates that this cut alone will cost the state $63 million in 2013, with the cost increasing each year.

Once again, the idea that taxes should be based on ability to pay would justify very different measures. For example, if policymakers are truly concerned about the impact that property taxes are having on the state's most vulnerable residents, they should just institute a property tax circuit breaker, rather than eliminating the tax altogether.

Governor Perdue may not be done yet. Two new bills currently sitting on the Governor's desk would be even more regressive.

The first one is HB 1023, the so-called JOBS Act, which would allow individuals to exclude 50 percent of their capital gains from their income when the state's rainy day fund reaches $1 billion. An ITEP analysis found that "low- and middle-income families would see virtually no benefit from the new exclusion for capital gains." In fact, those Georgians who would benefit from this tax change are overwhelmingly in the top five percent of the income distribution.

Second, the Governor will decide whether to remove the refundable portion of the state's Low Income Tax Credit (LITC). Currently, the credit is available to Georgians with incomes less than $20,000, and if the filer's tax credit is larger then their tax bill, then they get a small refund of between $5 and $26 dollars (or more, depending on family size).

As Laura Lester from the Atlanta Community Food Bank wrote in the Atlanta Journal Constitution, "While eliminating the refundable portion of the LITC may appear to be a simple line-item adjustment, the result will increase the tax burden on those who struggle most in the current economy. This will have consequences well beyond the budget. The current recession has reduced work hours and wages for hundreds of thousands of Georgians, and the LITC helps to ease this hardship and stabilize incomes."

Slashing a tax credit for low-income families while offering enormous tax cuts for the wealthy investor class seems like a strategy to confirm the most cartoonish stereotype of right-wing lawmakers that can be imagined. Let's hope this is not the legacy Governor Perdue prefers to leave for his state.

Will Georgia earn the dubious reputation of passing the most misguided state tax changes of 2010? With the state's legislative session coming to a close, Peach State lawmakers are building an impressive body of work. After sending the governor bills that will cut the capital gains tax by 50 percent and exempt all retirement income for better-off seniors, the legislature this week is moving to take away the state's sole refundable low-income credit and authorize a statewide sales tax increase.

As a new ITEP report shows, the net impact of these changes would be to make the state's already-unfair tax system dramatically more unfair. The ITEP report shows that the current tax system actually redistributes income away from low-income families into the pockets of the best-off taxpayers — and that the proposed changes would make this inequity even worse.     

This week the Oklahoma Policy Institute released a report urging, among other things, that one of the state’s more ridiculous tax breaks be eliminated — specifically, the state income tax deduction for state income taxes.  This deduction was created not as a result of careful consideration and debate among Oklahoma policymakers, but rather as an accidental side-effect of the state’s “coupling” to federal income tax rules.  And as the New Mexico Legislative Finance Committee politely points out, while the deduction may make some sense at the federal level, the rationale for providing it at the state level is “less clear.”

Citing figures provided by ITEP, the Oklahoma Policy Institute notes that only one out of four Oklahomans would be affected by eliminating this deduction, and roughly 58% of the overall tax hike would be borne by those richest 5% of Oklahomans.  This is a predictable result of the deduction only being available to itemizers.  In total, the state could collect an additional $118 million in revenue each year by eliminating the deduction — revenue that could go a long way toward preserving important public services.

State income tax deductions for state income taxes have been receiving a growing amount of attention.  Last year, Vermont limited its deduction to a maximum of $5,000, while just last week New Mexico Governor Bill Richardson signed a budget eliminating his state’s deduction entirely.  The Georgia Budget and Policy Institute (GBPI) also highlighted the benefits of eliminating this deduction in a policy brief released just a few weeks ago.

In total, seven states currently offer this deduction: Arizona, Georgia, Hawaii, Louisiana, Oklahoma, Rhode Island, and Vermont.  Eliminating the deduction in each of these states is long overdue.

Georgia's Republican leaders, facing a deficit pinch, want to save $20 million a year by eliminating the refundability on the Low Income Credit offered on the state's income tax forms. (This is an alternative to a state EITC, and gives a per-person credit up to $26 for each low-income Georgia family member.)

ITEP estimates that making the credit nonrefundable would take away about three-quarters of the value of this credit, and that most of the tax hike would fall on the poorest 20 percent of Georgians.

As it happens, Georgia's current tax system offers an important reminder of why refundability is such an important feature in low-income tax credits. The poorest 20 percent of Georgians pay an average of 11.7 percent of their income in Georgia state and local taxes — and taxes other than the income tax represent 11.2 percent. (The personal income tax on this group averages 0.5 percent of their income.) This means that lawmakers seeking to make the state's tax system somewhat less regressive can only do so through tax credits that can be applied against not only the income tax, but against sales and excise taxes as well.

A new report from the Georgia Budget and Policy Institute (GBPI) points out that many of the recipients of the refundable Low Income Credit are seniors, and suggests that if lawmakers are intent on balancing the state's budget on the backs of seniors, a more sensible approach would be to reduce the state's very generous retirement income exclusion, which allows seniors at all income levels to enjoy $35,000 (per spouse) of retirement income tax-free. Reducing this cap from $35,000 to $32,000 would raise just as much money as the Low Income Credit proposal, without affecting a single fixed-income senior.

The report also makes some interesting points about refundable tax credits. For example, the state also offers refundable tax credits to corporations, and these cost the state about as much as the refundable credits for low-income families. As the report explains, "This raises the question of why refundable credits are appropriate for Georgia's corporate community but not residents with the lowest incomes."

As the current economic storm continues to batter state budgets, policymakers in numerous states are continuing to talk of raising taxes to help mitigate cuts in state services.  In Maryland, lawmakers are debating an extension of the state’s temporary “millionaires’ tax,” while a new policy brief out of Georgia proposes to eliminate an unwise (and rare) deduction currently only offered in just seven other states — Arizona, Hawaii, Louisiana, Oklahoma, New Mexico, Rhode Island, and Vermont.

Maryland's legislature is currently considering whether to extend a temporary "millionaires’ tax" enacted as part of a major 2007 tax reform effort. ITEP staff testified Thursday at a hearing of the state House Ways and Means Committee. ITEP's testimony highlighted several important details, such as the fact that the millionaires’ tax modestly reduces the overall unfairness of Maryland's tax system. With the tax in place, low-income families still pay more of their income in Maryland taxes than millionaires must pay — and if the tax is repealed, this inequity will become even worse.

The testimony also explains why claims by anti-taxers that millionaires have fled the state in response to the millionaires’ tax are unfounded. As ITEP's analyses have shown, the primary cause of the decline in the number of Maryland millionaires in the past year is that they stopped being millionaires due to the recession.  The claim that the decline in the number of millionaires is due to the high income tax would be news to lawmakers in Utah (the only other state in which there is publicly available data on the change in the number of millionaires between 2007 and 2008). In the same year that Maryland lost 30 percent of their millionaires, Utah lost 60 percent of theirs. And while Maryland hiked their income tax on wealthy taxpayers the previous year, Utah cut theirs.

In Georgia, some attention is beginning to be paid to a progressive idea passed by the New Mexico legislature just last week.  On Thursday, the Georgia Budget and Policy Institute (GBPI) released a brief explaining why the state’s deduction for state income taxes paid — which costs the state $450 million each year — should be eliminated to help fill the state’s budget gap.  The vast majority of states already disallow this deduction (which originates from federal tax rules) in order to avoid the bizarre, circular situation in which one’s state tax payment can be used to reduce their state taxes.  

Finally, a new report from the Center on Budget and Policy Priorities (CBPP) helps put these developments in Maryland and Georgia into perspective.  The report notes that states have increased taxes by a combined $32 billion during the current recession.  In total, thirty three states have raised taxes to help fill their budget gaps, with twenty two of those having enacted “significant” tax increases, meaning increases that total more than 1 percent of their total revenues.  The report’s appendices provide an excellent summary of the multitude of state tax changes that have been enacted during these difficult budgetary times.

State lawmakers in Kansas, Florida, Georgia, South Carolina, and at least ten other states have attempted to advance tax cuts — frequently targeted at businesses — as a means of stimulating their economies.  In response to these types of proposals, this week the Center on Budget and Policy Priorities (CBPP) released a short report pointing out the futility of attempting to stimulate state economies by cutting taxes. The report explains:

“State balanced-budget requirements prevent states from stimulating their economies by cutting taxes. If a state cuts a tax, it generally has to make an offsetting cut to expenditures for a program or service in order to maintain balance. This spending cut is likely to reduce demand in the state just as much as the reduction in taxes may stimulate demand.  It is at best a zero-sum game, where the gains in one area are offset by the losses in another.”

Against this backdrop, there is little question that the proposals described below (as well as the proposal described in the Minnesota story from a couple weeks back) are doomed to fail, despite their political popularity among some groups.

On Tuesday, Florida Governor Charlie Crist used his State of the State address to voice his support for a 10-day sales tax holiday and a sizeable cut in corporate taxes.  The corporate tax cut Crist is seeking could include a one percent reduction in the state’s corporate tax rate.  Both of these proposals would force a reduction in state spending at the worst possible time.  And sales tax holidays, of course, have long been recognized by serious observers as little more than political gimmicks.

In Kansas, the state House of Representatives has passed an expansion of a tax break aimed at boosting employment in the state.  Of course, the revenue loss associated with expanding this break, were it to become law, would only make the legislature’s job of producing a balanced budget even more difficult.  And, as the CBPP explains quite well, the larger cuts in government services that would be needed to finance this cut would effectively cancel out any purported economic gains.

In Georgia, an op-ed by Sarah Beth Gehl of the Georgia Budget and Policy Institute (GBPI) points out the folly of another proposal that claims to offer help for the state’s economy.  Specifically, the proposal would eliminate the state’s corporate net worth tax.  As Gehl points out, “there is no evidence that ending this tax will incite businesses to come to Georgia.”

Some South Carolina lawmakers are making use of a similar logic, though their focus is on a somewhat longer-term initiative.  Their plan would phase-out the corporate income tax over the course of 20 years, with the hope of improving the state’s “economic competitiveness.”  An editorial published in The State this week points out the flaw in this plan:

“The theory is that the tax breaks will entice people to start and expand businesses and move jobs to South Carolina. ... But there's a limit to how much difference a lower tax can make when there's no market for a company's products or services. And the stimulative value is particularly questionable when the tax is relatively low to start with. That's why we never have been convinced that supply-side economics can work at the state level.”

State budget woes appear to be spurring an increasing amount of interest in re-examining state tax breaks.  The Governors of both Michigan and Idaho have taken steps to ramp up the scrutiny directed at their state’s tax breaks, while a new report out of Oklahoma and an editorial highlighting legislation in Georgia this week have urged similar actions.

In Michigan, the Detroit Free Press urged the adoption of Governor Granholm’s proposal to thoroughly analyze the merits of every tax break, and to saddle most breaks with sunset provisions that would force lawmakers to either debate and renew these breaks, or to let them expire.  This proposal would help to remedy the lack of scrutiny given to tax breaks because of their exclusion from the appropriations process.  Notably, the proposal’s use of sunsets as a mechanism for forcing review seems to resemble a law enacted in Oregon just last year.

In Georgia, the need for additional scrutiny of tax breaks is even more desperate.  Because the state lacks a tax expenditure report, Georgia lawmakers are not even aware of the full range and cost of special breaks that their tax system provides.  SB 206, which was endorsed by a Macon Telegraph editorial this week, would remedy this problem by finally requiring the creation of such a report.  The editorial rightly points out that the bill could be strengthened by requiring an analysis of each tax break’s effectiveness, but at this point, even simply producing a list of tax breaks and their costs would be a major step forward.  The Georgia Budget and Policy Institute has been pushing for the creation of such a report for many years.

Idaho governor Butch Otter has also shown some tentative interest in figuring out whether his state’s tax breaks are worth their cost.  While Governor Otter continues to hold out hope that the state’s revenues will rebound soon, he also recently directed the state’s Tax Commission to study sales tax exemptions in the event that closing some of those exemptions becomes necessary to fill the state’s budget gap next year.  If done carefully, the studies produced by the Tax Commission could provide a wealth of information on breaks that have so far received a relatively small amount of scrutiny.
    
The Oklahoma Policy Institute has also added to the progress being made on this issue with a new report outlining what should be done to scrutinize tax breaks in a systematic fashion.  Their report, titled “Let There Be Light: Making Oklahoma’s Tax Expenditures More Transparent and Accountable,” provides twelve specific recommendations for realizing this vision.  Among those recommendations are: improving the state’s existing tax expenditure report, sunsetting all tax incentives, requiring the extension of a sunsetting incentive to undergo a “performance review,” and developing a unified economic development budget.