Hawaii News


States Can Make Tax Systems Fairer By Expanding or Enacting EITC


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On the heels of state Earned Income Tax Credit (EITC) expansions in Iowa, Maryland, and Minnesota and heated debates in Illinois and Ohio about their own credit expansions,  the Institute on Taxation and Economic Policy released a new report today, Improving Tax Fairness with a State Earned Income Tax Credit, which shows that expanding or enacting a refundable state EITC is one of the most effective and targeted ways for states to improve tax fairness.

It comes as no surprise to working families that most state’s tax systems are fundamentally unfair.  In fact, most low- and middle-income workers pay more of their income in state and local taxes than the highest income earners. Across the country, the lowest 20 percent of taxpayers pay an average effective state and local tax rate of 11.1 percent, nearly double the 5.6 percent tax rate paid by the top 1 percent of taxpayers.  But taxpayers don’t have to accept this fundamental unfairness and should look to the EITC.

Twenty-five states and the District of Columbia already have some version of a state EITC. Most state EITCs are based on some percentage of the federal EITC. The federal EITC was introduced in 1975 and provides targeted tax reductions to low-income workers to reward work and boost income. By all accounts, the federal EITC has been wildly successful, increasing workforce participation and helping 6.5 million Americans escape poverty in 2012, including 3.3 million children.

As discussed in the ITEP report, state lawmakers can take immediate steps to address the inherent unfairness of their tax code by introducing or expanding a refundable state EITC. For states without an EITC the first step should be to enact this important credit. The report recommends that if states currently have a non-refundable EITC, they should work to pass legislation to make the EITC refundable so that the EITC can work to offset all taxes paid by low income families. Advocates and lawmakers in states with EITCs should look to this report to understand how increasing the current percentage of their credit could help more families.

While it does cost revenue to expand or create a state EITC, such revenue could be raised by repealing tax breaks that benefit the wealthy which in turn would also improve the fairness of state tax systems.

Read the full report


State News Quick Hits: Don't Expect Much from Congress


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Reuters reports that state lawmakers shouldn’t expect Congress to act anytime soon to close the enormous hole in their sales tax bases created by online shopping. Sales tax enforcement on purchases made over the Internet is a messy patchwork right now because states can only require retailers with a store or other “physical presence” within their borders to collect the tax. (Amazon, for example, is only required to collect the tax in 20 states). This uneven treatment of online retailers versus brick-and-mortar stores is nothing new, but the chairman of the House Judiciary Committee insists that more debate is needed before his chamber will act on the bipartisan bill passed by the Senate last spring.

 

Hawaii lawmakers are giving serious consideration to enhancing a number of tax credits for low-income working families, but the state’s worsening revenue outlook is going to make paying for the credits a bit more difficult. Moreover, Honolulu Civil Beat reports that lawmakers are also debating whether to give out more tax credits for things like charter school donations, backup generators, and building renovations. But reducing the very high state and local tax rate being paid by Hawaii’s poor should be a higher priority than these initiatives.

Last year’s trend toward raising state gasoline taxes seems to be continuing this year. In just the last week, the Kentucky House approved a 1.5 cent per gallon increase and the New Hampshire Senate gave preliminary approval to a 4 cent increase. These increases would allow for valuable investments in both states’ infrastructure, and would reduce the likelihood that lawmakers will eventually cut other areas of the budget to fund those investments.

This week the Wisconsin General Assembly approved Governor Scott Walker’s tax cut proposal which includes $404 million in across-the-board property tax cuts and $133 million in income tax cuts that result from lowering the bottom income tax rate from 4.4 to 4.0 percent and reducing the Alternative Minimum Tax. The legislation is now sent to Governor Walker’s desk where it is all but guaranteed he will sign the bill into law. For more on the flaws of this bill check out this Wisconsin Budget Project’s blog post.

 

With pothole season well under way, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has been in the news quite a bit recently for its research on the need for more sustainable federal and state gasoline taxes. USA Today ran a story this week featuring quotes from ITEP staff and six different infographics based on ITEP data that explain where state gas taxes are, and aren’t, being raised.  In addition, ITEP’s Carl Davis appeared on both CBNC and NPR’s Marketplace to talk about the gas tax.

The Missouri legislature is poised to offer Kansas a truce in the never-ending battle to shower Kansas City-area companies with tax credits. Both the Missouri Senate and House recently passed similar bills that would ban state tax incentives for companies that agree to move from the Kansas side of the Kansas City border (Wyandotte, Johnson, Douglas, or Miami counties) to the Missouri side (Jackson, Clay, Platte, or Cass counties). It seems Missouri has finally realized that tax breaks used to lure companies across the border — otaling $217 million between both states in recent years by one estimate — don’t actually create new jobs for the region’s residents and would be better spent on much needed public services. The one catch: the Missouri bill would only go into effect if Kansas agrees to a similar ceasefire within the next two years.

Perhaps this is the year that Utah will establish a state Earned Income Tax Credit (EITC). A bill creating the much-heralded working family tax credit was passed out of the House Revenue and Taxation Committee last month. Last year, a similar bill was passed by the full House, but stalled in the Senate. This year’s bill, which is again sponsored by Representative Hutchings, would give over 200,000 low-income Utahns a refundable tax credit worth 5 percent of the federal EITC, or roughly $113 on average. But one change from last year’s bill is that the credit will not go into effect until Utah is allowed to start collecting sales tax from online shoppers — something that won’t happen until Congress passes legislation granting the states that power. Such a bill has already passed the U.S. Senate and is supported by President Obama, but it is still pending in the U.S. House.

While a full solution to the problem of uncollected sales taxes on online shopping will have to come from the federal government, Hawaii’s House of Representatives wants to chip away at the problem by expanding the number of online retailers that have to collect sales tax right now. Under a bill backed by the state Chamber of Commerce, retailers partnering with Hawaii-based companies to solicit sales would have to collect sales taxes on purchases made by their Hawaii customers.  This move to apply the state’s sales tax laws more uniformly to both online retailers and traditional brick-and-mortar stores would be one step toward a more modern sales tax in the Aloha State.


The States Taking on Real Tax Reform in 2014


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Note to Readers: This is the fifth post of a five-part series on tax policy prospects in the states in 2014. Over the course of several weeks, The Institute on Taxation and Economic Policy (ITEP) highlighted tax proposals that were gaining momentum in states across the country. This final post focuses on progressive, comprehensive and sustainable reform proposals under consideration in the states.

State tax policy proposals are not all bad news this year.  There are some promising efforts underway that would fix the structural problems with state tax codes and improve tax fairness for low- and middle-income families. All eyes are on Illinois as lawmakers grapple with how to raise much needed revenue after their temporary income tax hike expires. Many are hoping the timing is now right for a real debate about a graduated income tax. Washington DC’s Tax Revision Commission has proposed a number of sensible reforms. And, lawmakers in Hawaii and Utah are expected to seriously debate ways to improve their states’ tax fairness.

Illinois - Though there has been much legislative activity in Springfield about corporate tax breaks, the arguably more important issue facing lawmakers is the state’s temporary income tax rate increase that is set to decrease in 2015. Given this upcoming rate reduction, lawmakers and the public are weighing in on alternative ways to fund vital services, including the merits of a progressive income tax.

District of Columbia - DC’s Tax Revision Commission set the stage for real tax reform this Spring when it recommended expanding the sales tax base, enhancing the city’s Earned Income Tax Credit (EITC) for childless workers, boosting the personal exemption and standard deduction, reforming the District’s income tax brackets, and phasing-out the value of personal exemptions for high-income taxpayers. The Commission’s proposal is hardly perfect: it includes an expensive giveaway for people with estates worth over $1 million, as well as a slight cut in the city’s top income tax rate (in exchange for making that temporary rate permanent).  But the plan still contains a lot of good ideas worthy of the word “reform.”

Hawaii - Hawaii levies the fourth highest state and local taxes on the poor in the entire country, but some lawmakers would like to change that.  Proposals to enact an Earned Income Tax Credit (EITC) managed to pass both chambers of the legislature last year before eventually being abandoned, and lawmakers gave serious consideration to other low-income tax credit changes as well.  The Hawaii Appleseed Center’s recent report (PDF) on enhancing low-income tax credits, and options to pay for those enhancements, provides a wealth of information for the many lawmakers and advocates who intend to pick up where they left off last year.

Utah - Last year’s effort to improve Utah’s regressive tax system (PDF) by enacting an Earned Income Tax Credit (EITC) ultimately fell short, though a bill that would have created such a credit did make it out of the state’s House of Representatives.  That push will be resumed this year.


A Reminder About Film Tax Credits: All that Glitters is not Gold


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Remember the 2011 Hollywood blockbuster The Descendants, starring George Clooney? Odds are yes, as it was nominated for 5 Academy Awards. Perhaps less memorable were the ending credits and the special thank you to the Hawaii Film Office who administers the state’s film tax credit – which the movie cashed in on.

Why did a movie whose plot depended on an on-location shoot need to be offered a tax incentive to film on-location? The answer is beyond us, but Hawaii Governor Abercrombie seems to think it was necessary as he just signed into law an extension to the credit this week.

Hawaii is not alone in buying into the false promises of film tax credits. In 2011, 37 states had some version of the credit. Advocates claim these credits promote economic growth and attract jobs to the state. However, a growing body of non-partisan research shows just how misleading these claims really are.

Take research done on the fiscal implications such tax credits have on state budgets, for example: 

  • A report issued by the Louisiana Legislative Auditor showed that in 2010, almost $200 million in film tax breaks were awarded, but they only generated $27 million in new tax revenue. According a report (PDF) done by the Louisiana Budget Project, this net cost to the state of $170 million came as the state’s investment in education, health care, infrastructure, and many other public services faced significant cuts.

  • The Massachusetts Department of Revenue – in its annual Film Industry Tax Incentives Reportfound that its film tax credit cost the state $200 million between 2006 and 2011, forcing spending cuts in other public services.

  • In 2011, the North Carolina Legislative Services Office found (PDF) that while the state awarded over $30 million in film tax credits, the credits only generated an estimated $9 million in new economic activity (and even less in new revenue for the state).

  • The current debate over the incentive in Pennsylvania inspired a couple of economists to pen an op-ed in which they cite the state’s own research: “Put another way, the tax credit sells our tax dollars to the film industry for 14 cents each.”

  • A more comprehensive study done by the Center on Budget and Policy Priorities (CBPP) examined the fiscal implications of state film tax credits around the country. This study found that for every dollar of tax credits examined, somewhere between $0.07 and $0.28 cents in new revenue was generated; meaning that states were forced to cut services or raise taxes elsewhere to make up for this loss.

Not only do film tax credits cost states more money than they generate, but they also fail to bring stable, long-term jobs to the state.

The Tax Foundation highlights two reasons for this. First, they note that most of the jobs are temporary, “the kinds of jobs that end when shooting wraps and the production company leaves.” This finding is echoed on the ground in Massachusetts, as a report (PDF) issued by their Department of Revenue shows that many jobs created by the state’s film tax credit are “artificial constructs,” with “most employees working from a few days to at most a few months.”

Second, a large portion of the permanent jobs in film and TV are highly-specialized and typically filled by non-residents (often from already-established production centers such as Los Angeles, New York, or Vancouver). In Massachusetts, for example, nearly 70 percent of the film production spending generated by film tax credits has gone to employees and businesses that reside outside of the state. Therefore, while film subsidies might provide the illusion of job-creation, they are actually subsidizing jobs not only located outside the state, but in some cases – outside the country.

While a few states have started to catch on and eliminate or pare back their credits in recent years (most recently Connecticut), others (including Maryland, Nevada, Pennsylvania, and Ohio) have decided to double down. This begs the question: if film tax credits cost the state more than they bring in and fail to attract real jobs, why are lawmakers so determined to expand them?

Perhaps they’re too star struck to see the facts. Or maybe they, too, want a shout out in a credit reel.


Earned Income Tax Credits in the States: Recent Developments, Good and Bad


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Note to Readers: This is the last in a six part series on tax reform in the states. Over the past several weeks CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) has highlighted tax reform proposals and looked at the policy trends that are gaining momentum in states across the country.

Lawmakers in at least six states have proposed effectively cutting taxes for moderate- and low-income working families through expanding, restoring or enacting new state Earned Income Tax Credits (EITC) (PDF). Unfortunately, state EITCs are also under attack in a handful of states where lawmakers are looking to reduce their benefit or even eliminate the credit altogether.

The federal EITC is widely recognized by experts and lawmakers across the political spectrum as an effective anti-poverty strategy. It was introduced in 1975 to provide targeted tax reductions to low-income workers and supplement low wages. Twenty-four states plus the District of Columbia provide EITCs modeled on the federal credit. At the state level, EITCs play an important role in offsetting the regressive effects of state and local tax systems.

Positive Developments

  • Last week, the Iowa Senate Ways and Means Committee approved legislation to increase the state’s EITC from 7 to 20 percent. Committee Chairman Joe Bolkcom said, “This bill is what tax relief looks like. The tax relief is going to people who pay more than their fair share.”

  • The Honolulu Star-Advertiser recently reported on the push to create an EITC and a poverty tax credit (PDF) in Hawaii. The story cites data from ITEP showing that Hawaii has the fourth highest taxes on the poor in the country and describes the work being done in support of low-income tax relief by the Hawaii Appleseed Center.  The poverty tax credit would help end Hawaii’s distinction as one of just 15 states that taxes its working poor deeper into poverty through the income tax.

  • In Michigan, lawmakers are looking to reverse a recent 70 percent cut in the state’s EITC.  That change raised taxes on some 800,000 low-income families in order to pay for a package of business tax cuts.  Lawmakers have introduced legislation to restore the EITC to its previous value of 20 percent of the federal credit, and advocates are supporting the idea through the “Save Michigan’s Earned Income Tax Credit” campaign

  • Pushing back against New Jersey Governor Christie’s reduction of the EITC from 25 to 20 percent, last month the Senate Budget and Appropriations Committee approved a bill to restore the credit to 25 percent. Senator Shirley Turner, the bill’s sponsor, said there was no reason to delay its passage as some have suggested because low-income New Jersey families need the credit now.  "People would put this money into their pockets immediately. I think they would be able to buy food, clothing and pay their rent and their utility bills. Those are the things people are struggling to do."

  • Oregon’s EITC is set to expire at the end of this year, but Governor Kitzhaber views it as a way to help “working families keep more of what they earn and move up the income ladder” so his budget extends and increases the EITC by $22 million. Chuck Sheketoff with the Oregon Center for Public Policy argues in this op-ed, “[t]he Oregon Earned Income Tax credit is a small investment that can make a large difference in the lives of working families. These families have earned the credit through work. Lawmakers should renew and strengthen the credit now, not later.”

  • In Utah, a legislator sponsored a bill to introduce a five percent EITC in the state. The bipartisan legislation is unlikely to pass because of funding concerns, but the fact that the EITC is on the radar there is a good development. Rep. Eric Hutchings said that offering a refundable credit to working families “sends the message that if you work and are trying to climb out of that hole, we will drop a ladder in."

Negative Developments

  • Last week, North Carolina Governor McCrory signed legislation that reduces the state’s EITC to 4.5 percent. The future looks grim for even this scaled down credit, though, since it is allowed to sunset after 2013 and it’s unlikely the credit will be reintroduced. It’s worth noting that the state just reduced taxes on the wealthiest .2 percent of North Carolinians by eliminating the state’s estate tax, at a cost of more than $60 million a year. Additionally, by cutting the EITC the legislature recently increased taxes on low-income working families, saving a mere $11 million in revenues.

  • Just two years after signing legislation introducing an EITC, Connecticut Governor Dannel Malloy is recommending it be temporarily reduced “from the current 30 percent of the federal EITC to 25 percent next year, 27.5 percent the year after that, and then restoring it to 30 percent in 2015.” In an op-ed published in the Hartford Courant, Jim Horan with the Connecticut Association for Human Services asks, “But do we really want to raise taxes on hard-working parents earning only $18,000 a year?”

  • Last week in the Kansas Senate, a bill (PDF) was introduced to cut the state’s EITC from 17 to 9 percent of its federal counterpart. This would be on top of the radical changes signed into law last year by Governor Sam Brownback which eliminated two credits targeted to low-income families including the Food Sales Tax Rebate.

  • Vermont Governor Shumlin wants to cut the EITC and redirect the revenue to child care subsidy programs, a move described as taking from the poor to give to the poor. A recent op-ed by Jack Hoffman at Vermont’s Public Assets Institute cites ITEP Who Pays data to make the case for maintaining the EITC.  Calling the Governor’s idea a “nonstarter,” House and Senate legislators are exploring their own ideas for funding mechanisms to pay for the EITC at its current level.

Tax Reform in Paradise: Ideas to Help Hawaii's Poor


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Not only does Hawaii have the highest cost of living in the country, it also has some of the highest overall taxes on the poor. A new report from the Hawaii Appleseed Center, however, explains how to change the tax code to take some pressure off the state’s low-income families. Using data from the Institute on Taxation and Economic Policy (ITEP), the report proposes a new poverty tax credit that would eliminate state income taxes for any Hawaii family below the poverty line.  This change would end the state’s embarrassing distinction as one of just 15 states that actually taxes its poor deeper into poverty through the state income tax.

Rather than simply enacting the poverty credit in isolation, the report also recommends pairing it with a refundable Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC.  Together, these two reforms would both incentivize work and chip away at the regressivity of a state tax system that requires its poorest residents to pay more of their household budgets in taxes than any other group (PDF).  As the Appleseed report shows, these two credits would boost the after-tax income of Hawaii’s poorest families by 1.4 percent, while costing the state $47 million in foregone revenue.

Like many states, Hawaii has more than a few tax breaks on the books that are expensive and unjustified, and the Appleseed experts offer up five of them as suggestions for how the state could replace that foregone revenue (and then some) without compromising vital state services:

1- Repeal the state’s sharply regressive tax break (PDF) for capital gains income.

2- Phase-out the benefits of lower tax brackets for high-income taxpayers.

3- Pare back the state’s enormous tax breaks for wealthy retirees (PDF).

4- Eliminate the state’s nonsensical deduction for state income taxes paid.

5- Enact an “Amazon law” to require more online retailers to collect and remit the sales taxes currently due (PDF) on purchases made by Hawaii residents.

Taken together, the reforms in the Appleseed report could greatly reduce the unfairness built in to Hawaii’s tax code, and put it on a more sustainable footing for generating sufficient revenues in the years ahead.


Quick Hits in State News: The Perils of Tax Credits, Breaks and Incentives


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A Los Angeles Times report out of Hawaii illustrates why all tax breaks need to be subjected to more scrutiny.  The state’s well-intentioned and wildly popular tax “incentive” for solar energy has gotten more than a little out of control, skyrocketing in cost from $34.7 million in 2010 to $173.8 million in revenues this year, and even jeopardizing the reliability of the state’s power grid. Tax authorities have responded by slicing the credit in half for now.  Had Hawaii implemented some of the tax break accountability reforms we’ve recommended before, (first among them establishing measurable outcomes!), they could have prevented some of this chaos.

South Dakota Governor Dennis Daugaard is encouraging Congress to take action on a national Amazon tax policy because he worries about the impact that exempting online sales from his state’s tax base has on tax fairness and revenues. In the wake of a record settling Cyber Monday he points out that the “gift-buying binge also likely broke another record: most purchases made in South Dakota without paying sales tax.” For more on taxing Internet sales see this Institute on Taxation and Economic Policy (ITEP) brief (PDF).

The Illinois Senate deserves kudos for passing legislation that would require publicly traded corporations to disclose their Illinois income tax bill.  Currently about two-thirds of the companies doing business in Illinois aren’t paying state income taxes. If the bill passes the House and is signed into law by Governor Quinn, important, never-before-known information will be available about corporate taxpayers.  House Majority Leader Barbara Flynn Currie said, "Public policymakers can't make good public policy if they don't know what's going on. We don't know whether those 66 percent of corporations that pay no income tax in fact don't have any profits."

In case you missed it -- Good Jobs First and the Iowa Policy Project recently collaborated to release this must read report, Selling Snake Oil to the States, which debunks the tax and regulatory recommendations made by the American Legislative Exchange Council (ALEC) for building economic growth in the states. Here’s a sneak peak of the study’s findings: “the states ALEC rates best turn out to have actually done the worst.”

Michigan House members will likely approve a proposal in the next week to repeal the tax businesses pay on industrial and commercial personal property (equipment, furniture and other items used for business purposes). Idaho lawmakers are considering a similar proposal.  An editorial in the Battle Creek (MI) Enquirer, however, urges lawmakers to put the plan on hold until there is a “better understanding of the impact on local units of government, along with a plan to mitigate that impact.”  Indeed, the overwhelming majority of revenue generated by this tax helps to fund  local governments, and it would be difficult for localities to absorb a cut that severe. 


Naughty States, Nice States: The Institute on Taxation and Economic Policy's 2011 List


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Naughty

Michigan’s legislature and Governor Snyder top the naughty list by giving away more than $1.6 billion in tax cuts for business and paying for it with tax increases on low-and middle-income working and retired families.

Florida continued to dole out more corporate pork this year, including a property tax break that happens to benefit huge commercial land owners, like Disney World and Florida Power and Light, and other corporations (that also happen to be major donors to the state’s Republican governor and legislative majority party).

Minnesota’s legislature missed an opportunity to do the right thing when it rejected a tax increase on the state’s wealthiest residents. The plan was proposed by Governor Dayton and supported by 63 percent of Minnesotans over the alternative, which was cuts to spending on education, health care and other vital public services.

Anti-tax activists in Missouri were hard at work again. This year they were collecting signatures for a ballot initiative that would eliminate the state’s personal income tax and replace it with a broadened and increased sales tax.

Nice

Connecticut’s Governor Malloy and the legislature adopted a $1.4 billion tax increase that improved tax fairness in the state and protected public investments like education and health care.  Most notably, the state added an Earned Income Tax Credit, a significant tax break for low-income working families.

District of Columbia lawmakers greatly reduced the ability of corporations to dodge their fair share of taxes by adopting combined reporting (which makes it harder to hide profits in other states) and a higher corporate minimum tax. The Council also temporarily increased taxes for individuals making more than $350,000 a year and limited itemized deductions, which are most often taken by high income filers.

Hawaii lawmakers also limited upside-down tax giveaways (itemized deductions) for their state’s richest residents and passed other tax changes to raise much needed revenue.

A Little Bit Naughty and Nice

New York’s Governor Andrew Cuomo reversed his campaign vow not to raise taxes and supported a tax increase on residents earning more than $2 million a year.   The plan, passed by the legislature, also included a tax break for those with income under $300,000.

However, New York lawmakers passed the governor’s cap on property taxes this summer, which is predictably creating crises and forcing dramatic cuts in local education, medical, and public safety services.

Illinois raised significant revenue earlier in the year through temporary personal and corporate income tax rate increases, all designed to stave off harsh spending cuts, but then turned right around and gave away hundreds of millions of dollars to Sears and CME, allegedly to keep them in the state.


Mercatus Center Misses the Mark with "Simple" Tax Index


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The Mercatus Center, a think tank run by “America’s Hottest Economist,” has attempted to quantify the level of “freedom” enjoyed within each state.  If this sounds impossible, that’s because it is.  A quick look at the “taxes” component of each state’s “freedom score” should make this very clear.

According to the Center, freedom requires that “individuals should be allowed to dispose of their lives, liberties, and properties as they see fit, as long as they do not infringe on the rights of others.”  This, according to the study, requires “a deep distrust of taxation.”

In order to measure the impact of taxes on freedom, the Center does what it correctly describes as a “simple” calculation: it tallies up the size of all tax revenues (with a few exceptions) as a share of the state’s economy.  Basically, more tax revenue means less freedom under the authors’ assumptions — and taxes account for about 10 percent of each state’s overall “freedom score.”  But as everybody outside the Mercatus Center knows, taxes are never this simple.

For starters, states routinely use their tax codes to encourage (and discourage) a huge range of decisions that affect our day-to-day lives.  Most states, for example, offer strings-attached tax incentives designed to spur specific companies into building factories within their borders.  Under the Mercatus Center’s assumptions, a state that uses its tax code to subsidize private sector construction will actually score better on the “freedom” index than an otherwise identical state, simply because the subsidy cuts into its revenue collections.  In reality, however, a state without the subsidy offers a freer and more level playing field with “unhampered markets,” as the authors put it.

Of course, factory construction isn’t the only area where the government tries to manipulate behavior with special breaks.  States offer special tax breaks for everything from competing in a livestock show to purchasing binoculars — each of which the Mercatus Center’s calculations would classify as “freedom enhancing.”

Taxes can also affect freedom in unintentional ways.  For example, a handful of states have placed caps on the rate at which a homeowner’s property tax bill can grow each year.  These tax caps result in huge tax cuts for many homeowners, especially those that have lived in their homes for many years.  Obviously, under the Mercatus Center’s assumptions, these caps are big freedom enhancers.  In reality, however, the opposite is true.

An article in the March 2011 edition of the National Tax Journal showed what anecdotes from homeowners have always suggested: these caps result in a “lock-in effect” where residents are either unable or unwilling to leave their homes, out of fear of losing the tax savings they’ve accumulated over many years.  “Locking” residents into their homes with convoluted property tax breaks is hardly the definition of a free society.  But don’t count on the Mercatus Center’s “freedom index” being able to capture these types of nuanced, but vitally important implications of state tax policies.

Finally, it’s worth noting that the Mercatus index also falls short in its failure to examine who pays taxes.   This is most obvious in the 48th and 49th place fiscal policy rankings received by Hawaii and Alaska, respectively. 

Hawaii’s sales and excise tax revenues are very robust, in large part because of the huge quantities of hotel rooms, car rentals, tours, and souvenirs that are sold to out-of-state tourists.  Similarly, a significant amount of Alaska’s tax revenue (even excluding severance taxes, which the study omits) comes from multinational oil companies. 

In each of these states, many tax dollars flow into state coffers from outside the state — and while every one of those dollars sinks the state lower in the Mercatus “freedom index,” it has little if any impact on the freedom of anybody living within those states’ borders.  For this reason alone, readers should hesitate before taking the authors’ advice that “individuals can use the data to plan a move or retirement.”

At the end of the day, how taxes are collected is equally if not more important than how much taxes are collected.  Economists recognized this a long time ago when they discovered the tax policy principle of “neutrality,”  which basically means that tax systems should interfere with our decisions as little as possible.  A tax system that doesn’t generate much revenue can still reduce our freedom in important ways if it’s applied in a narrow and discriminatory fashion.  Anybody interested in enhancing freedom through tax reform should be focused on the plethora of special breaks contained in state systems — not the overall revenue yield of those systems.


Hawaii Passes Budget Limiting Upside-Down Tax Giveaways


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Last week the Hawaii legislature sent Governor Neil Abercrombie a package of tax changes designed to help close the state’s yawning budget gap.  Among its most notable components are the partial repeal of the state’s nonsensical deduction for state income taxes paid, and a new limitation on itemized deductions taken by wealthy taxpayers.  Both of these changes will help mitigate the upside-down, regressive nature of Hawaii’s itemized deductions — a move that ITEP has urged many states to consider.

If Governor Abercrombie signs the legislature’s tax package into law — as he is expected to do — Hawaii will become the first state in the nation to place a cap on the overall size of itemized deductions. 

Married taxpayers earning over $200,000 per year will be prevented from sheltering more than $50,000 of their income from tax via itemized deductions, while single taxpayers earning over $100,000 will be limited to a $25,000 deduction. 

ITEP recommended a similar option in its August 2010 “Writing Off Tax Giveaways” report, and the Hawaii legislature actually passed a cap of this type last year that was eventually vetoed by then-Governor Linda Lingle.

If this bill becomes law, itemizers will still be able to take a deduction much larger than the $2,000 per-spouse “standard deduction” enjoyed by many Hawaii residents.  Nonetheless, the cap will go a long way toward reducing tax regressivity while also raising much-needed revenue for the state.

Hawaii’s legislature chose to collect additional revenue from itemized deduction reform by partially repealing the deduction for state income taxes paid.  Hawaii residents earning over $200,000 per year (or $100,000 in the case of a single filer) will be unable to take this deduction, while taxpayers earning under that amount will continue to benefit. 

Allowing taxpayers to deduct their state taxes on their state tax forms is a bizarre policy with no real rationale.  Instead, it exists only because Hawaii has “coupled” its itemized deduction laws too closely to federal rules, where the state tax deduction is used as a form of revenue-sharing. 

Gov. Neil Abercrombie rightly called the state tax deduction an “absurdity” in his State of the State address.  The vast majority of states have already abandoned the state income tax deduction — most recently in New Mexico and Rhode Island, both of which repealed the deduction in 2010.

In addition to these progressive reforms, the legislature’s plan also raises significant revenue by temporarily suspending various sales tax exemptions for business activities, and by delaying a scheduled increase in the state’s standard deduction and personal exemption.  Rental car taxes, vehicle registration fees, and the vehicle weight tax are also slated to rise under the legislature’s plan.

Perhaps the most disappointing part of the final package is that it does not include the Governor’s proposal to eliminate the pension exemption for middle- and high-income retirees.  This already costly tax break is almost certain to grow rapidly in size as Hawaii’s population advances in age.  Moreover, this break creates inequities between Hawaii residents with different forms of income, offering nothing to low-income, elderly residents that must continue to work in order to make ends meet.

But while the legislature deserves some criticism for failing to rein-in costly retiree tax breaks, it also deserves much praise for including revenues as part of its budget solution, and in particular for using itemized deduction reform as tool for enhancing the fairness and adequacy of Hawaii’s tax system.


Are Amazon.com's Sales Tax Avoidance Days Coming to an End?


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Last week Illinois joined New York, North Carolina, and Rhode Island by enacting legislation requiring Amazon.com and other online retailers working with in-state affiliates to collect sales taxes.  Arkansas’s Senate and Vermont’s House recently passed similar legislation, and Arizona, California, Connecticut, Hawaii, Minnesota, Mississippi, and New Mexico are considering doing the same.  Interestingly, lawmakers in each of these states are being spurred to do the right thing by major retailers like Wal-Mart, Sears, and Barnes & Noble.

In most states, Amazon and other online retailers are not currently required to collect sales taxes unless they have a “physical presence” in the state, though consumers are still required to remit the tax themselves.  Unfortunately, very few consumers actually pay the sales taxes they owe on online purchases — in California, for example, unpaid taxes on internet and catalog sales are estimated to cost the state as much as $1.15 billion per year.

The so-called “Amazon laws” recently adopted in Illinois, New York, North Carolina, and Rhode Island are all designed to limit this form of tax evasion by broadening the class of online retailers that must pay sales taxes.  Specifically, under these new laws, any retailer partnering with in-state affiliate merchants is required to pay sales taxes on purchases made by residents of that state.

Up until recently, the reaction to these laws has been mostly hostile.  Grover Norquist has branded them a (gasp) “tax increase,” despite the fact that they’re designed only to reduce illegal tax evasion.  More importantly, Amazon has challenged the New York law in court, and has ended relationships with affiliates in North Carolina and Rhode Island in order to avoid having to pay sales taxes on sales made within those states.  Amazon has also promised to severe ties with its Illinois affiliates, and has threatened to do the same in California if a similar law is adopted there.  These tactics mirror a recent decision by Amazon to shut down a Texas-based distribution center in order to avoid having to remit taxes in that state as well.

But Amazon may not be able to bully state lawmakers for much longer.  Since New York passed its so-called “Amazon law” in 2008, North Carolina, Rhode Island, and now Illinois have already followed suit despite all the threats.  And it appears that Arkansas and Vermont may very well do the same — as proposals to enact Amazon laws in each of those states have already made it through one legislative chamber.  In addition, at least seven other states (listed in the opening paragraph) have similar legislation pending.

According to State Tax Notes (subscription required), Wal-Mart, Sears, and Barnes & Noble are each attempting to partner with affiliate merchants recently dropped by Amazon.  Even more importantly, several of the large retail companies (like Wal-Mart, Target and Home Depot) are joining forces to lobby in favor of Amazon laws. These companies’ interest is in large part due to the fact that they already have to remit sales taxes in the vast majority of states because of the “physical presence” created by their large networks of “brick and mortar” stores.  If more traditional retailers begin to voice support for Amazon laws, the progress already being made on this issue is likely to accelerate.

For more background information on the Amazon.com tax controversy, check out this helpful report from the Center on Budget and Policy Priorities.


Debates Heating Up Over Broadening the Income Tax Base to Include Retirement Income


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We've written before that state governments provide a wide array of tax breaks for their elderly residents. Almost every state levying an income tax now allows some form of exemption or credit for its over-65 citizens that is unavailable to non-elderly taxpayers. But many states have enacted poorly-targeted, unnecessarily expensive elderly tax breaks that make state tax systems less sustainable and less fair. These breaks are being reconsidered in Illinois, Michigan, and Hawaii.

One of the most egregious examples of the special treatment retirees receive is the Illinois income tax exemption for all retirement income. But this exemption is getting more and more attention. Senate President John Cullerton recently said, “It would just be a matter of fairness” to tax this income.

The Chicago Tribune joins us in applauding Cullerton for raising this issue. “Illinois needs a talk about revising tax policies and rethinking exemptions," the Tribune editorializes. "Not to grab more from taxpayers, but to broaden the tax base as a matter of fairness. Why should the working family making $50,000 a year pay a tax that the retiree getting $100,000 a year avoids? Credit Cullerton for thinking creatively — and out loud. ”

Eliminating senior tax preferences is also receiving attention in Michigan, where Governor Rick Snyder has proposed scrapping the state’s generous exemptions for pensions, annuities, and various other types of retirement income.  Unfortunately, Snyder has paired this change with an elimination of the state’s EITC — a proposal that has contributed greatly to the overall regressivity of Snyder’s personal income tax changes.  Retaining the EITC and means-testing Michigan’s pension breaks, rather than eliminating them entirely, could greatly reduce the regressivity of Snyder’s plan. 
 
Finally, in Hawaii, a proposal to tax pensions earned by taxpayers with incomes over $100,000 (or $200,000 for married filers) recently passed the House.  Unlike in Michigan, this plan both includes protections for low-income retirees, and uses the revenue it would generate in order to close the state’s budget gap.


Glimmers of Hope on Taxes in the States


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It seems that each week brings another round of regressive tax proposals from the states, but there are a few bright spots. As previously reported, the governors in Connecticut, Hawaii and Minnesota have been strong proponents for taking a balanced approach to their state’s budget gaps and have unabashedly supported raising revenue in mostly reform-minded and progressive ways.  More details emerged this week on the Connecticut and Minnesota governors’ revenue-raising proposals.   Also, Illinois Governor Pat Quinn, who recently backed a successful initiative to increase the state’s flat personal income tax rate, started sending positive messages this week about the need to make his state’s tax system fairer.

On Wednesday, Connecticut Governor Dan Malloy released his plan to deal a budget gap exceeding $3 billion. As promised, his plan would not to rely solely on spending cuts to close the gap. He offered a $1.5 billion package of new revenues including reforms to the personal income tax, sales tax, business taxes, and estate tax.
  
Under his plan, the state’s personal income tax would expand from 3 to 8 brackets, the top marginal rate would increase from 6.5 to 6.7 percent, and the bottom marginal rate of 3 percent would phase out for high-income earners.  The plan also eliminates an existing property tax credit which is most beneficial to middle-income families. 

Perhaps most significantly, Governor Malloy would buck a recent trend by adding a refundable state Earned Income Tax Credit (EITC) set at 30 percent of the federal program.  If enacted, Connecticut would become the 26th state to have an EITC.
 
Governor Malloy also proposed expanding the sales tax base by taxing several services, including pet grooming, boat repairs and hair cuts, eliminating the exemption on clothing under $50, and imposing an additional 3 percent sales tax on “luxury items.  The state sales tax rate would increase from 6 to 6.25 percent. 

Governor Malloy also supports positive changes to business taxation including adopting what is known as the "throwback rule," which mandates that sales into other states or to the federal government that are not taxable will be “thrown back” into the state of origin for tax purposes.  His plan would improve the estate tax by lowering the taxable estate threshold from $3.5 million to $2 million.

Minnesota Governor Mark Dayton ran on a pro-tax platform, promising to increase taxes on his state’s wealthiest households in order to stave off massive spending reductions.  Governor Dayton released a plan this week to raise $4.1 billion in new revenues over the next two years to help solve a $6.2 billion budget shortfall.   Sticking to his campaign pledge, the majority of the new revenue would be raised from the wealthiest 5 percent of taxpayers in the state. The plan would add a new top income tax bracket, charge a 3 percent surtax on filers with taxable income above $500,000, and add a new statewide property tax on homes valued at more than $1 million.

The Minnesota Budget Project had the following to say about Governor Dayton’s proposal: “The Governor’s tax proposal seeks to add balance to the state’s tax system. Over time, the state has cut progressive taxes (like the income tax) during good times and increased regressive taxes (like property taxes) during the bad times. These policy changes, combined with economic trends, have led to a tax system that has shifted more of the responsibility for funding state and local services on to low- and moderate-income Minnesotans. People at the highest income levels pay a smaller share of their income in state and local taxes (8.9 percent) than the average for all Minnesotans (11.2 percent).”

Illinois lawmakers should be applauded for temporarily raising the state’s flat income tax rate from 3 to 5 percent in January to help fill a $15 billion budget gap. However, they missed an opportunity to fix the state’s broken, outdated, and unfair tax system rather than just raise rates.  But the opportunity may still be available.  This week, Governor Pat Quinn asked state lawmakers to consider modernizing the tax system and making it fairer.  He did not offer specific suggestions on how to achieve this goal, but explained that Illinois’ tax system is regressive, requiring more from its poorest residents than from the rich. 

In response to his call for reform, some Democratic lawmakers offered a few suggestions, including moving the state to a graduated income tax, expanding the sales tax base to include services, and relying less on property taxes to pay for schools.


Super Bowl Ad about Taxes from Corporate Astroturf Group


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The last place you would ever expect a discussion of tax policy is in the sea of Super Bowl commercials about beer, cars, and Doritos, yet the organization Americans Against Food Taxes spent over $3 million to change that last Sunday.

The ad, called “Give Me a Break”, features a nice woman shopping in a grocery store,  explaining how she does not want the government interfering with her personal life by attempting to place taxes on soda, juice, or even flavored water. The goal of the ad is to portray objections to soda taxes as if they are grounded in the concerns of ordinary Americans.

But Americans Against Food Taxes is anything but a grassroots organization. Its funding comes from a coalition of corporate interests including Coca-Cola, McDonalds and the U.S. Chamber of Commerce.

It is easy to understand why these groups are concerned about soda taxes, which were once considered a way to help pay for health care reform. The entire purpose of these taxes is to discourage the consumption of their products. As the Center on Budget and Policy Priorities explains in making the case for a soda tax, such a tax could be used to dramatically reduce obesity and health care costs and produce better health outcomes across the nation. Adding to this, the revenue raised could be dedicated to funding health care programs, which could further improve the general welfare.

These taxes may spread, at least at the state level.  In its analysis of the ad, Politifact verifies the ad’s claim that politicians are planning to impose additional taxes on soda and other groceries, writing that “legislators have introduced bills to impose or raise the tax on sodas and/or snack foods in Arizona, Connecticut, Hawaii, Mississippi, New Mexico, New York, Oklahoma, Oregon, South Dakota, Vermont and West Virginia.”

It's true that taxes on food generally are regressive, and taxes on sugary drinks are no exception according to a recent study. It's a bad idea to rely on this sort of tax purely to raise revenue, but if the goal of the tax is to change behavior for health reasons, then such a tax might be a reasonable tool for social policy. We have often said the same about cigarette taxes, which are a bad way to raise revenue but a reasonable way to discourage an unhealthy behavior.

With so many states considering soda taxes and the corporate interests revving up their own campaign, the “Give Me a Break” ad may just be the opening shot in the big food tax battles to come.


Bright Spots for Tax Policy from States with Good Ideas


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Governors are in the midst of crafting their budget proposals for next year, and many state leaders continue to grapple with historic budget shortfalls due to lagging revenue recovery and a high demand for public services.  In 2009 and 2010, most states balanced their budgets with a mix of temporary and permanent tax increases, significant federal assistance, and spending cuts.  This year, state revenues continue to lag, many of the temporary tax increases are set to expire, and federal stimulus assistance will dry up, yet the need for quality education, safe communities, affordable health care, public transit and well-maintained roads has not diminished.

As the Tax Justice Digest has previously noted, so far this year we have seen mostly a slew of bad proposals from state leaders. Many states are offering tax breaks to corporations and wealthy households and refusing to consider new taxes, while choosing to cut state spending to historically low and damaging levels. A few governors, however, have recently bucked the cuts-only trend and have made it clear that taxes must be a part of the solution.
 
In Connecticut, newly elected Governor Dannel Malloy plans to address the state’s $3.7 billion budget shortfall with an almost equal share of spending cuts ($2 billion) and tax increases ($1.7 billion).   While the details of his tax plan will not be unveiled until February, he is likely to support eliminating a majority of the state’s sales tax exemptions as one part of his revenue raising plan.

Hawaii’s new governor, Neil Abercrombie, has also embraced the need to raise new revenues as part of a budget-fixing compromise.  Governor Abercrombie proposed raising $279 million, including taxes on soda, alcohol, and time-shares. Most significantly, Abercrombie would tax pension income (which is generally exempt from taxation currently) for taxpayers with incomes over $50,000, raising around $114 million a year.  He also supports eliminating the state deduction for state taxes, a smart reform measure that would raise $70 million a year.  

North Carolina lawmakers addressed their budget crisis in the previous two years in part with $1.3 billion in temporary taxes which are set to expire this year.  For months, Governor Bev Perdue opposed extending the taxes for another year despite a shortfall of nearly $4 billion.  She recently changed her tune, and is now considering including an extension of these temporary tax increases (a 1 cent sales tax increase and income tax surcharge on high-income households and corporations) in her budget proposal in order to stave off massive cuts to K-12 education.


Lawmakers in Four States Want to Make Tax Reform Even More Difficult


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Republican lawmakers in four states — Wisconsin, Maine, New York, and Hawaii — are seeking to amend their state constitutions to require a two-thirds supermajority vote in each legislative chamber in order to raise taxes.  Each of these proposals would reduce the ability of these states to provide an adequate level of public services, and would make it significantly more difficult to enact real tax reform that wipes out wasteful tax deductions, exemptions, and credits.

These supermajority requirements would mean that even if state lawmakers representing 65 percent of a state's residents in both chambers, and the governor, all support a revenue increase, it still would not become law.

Besides being blatantly anti-democratic, the supermajority requirement to raise taxes would be particularly damaging during difficult economic times.  State revenues inevitably decline when the economy weakens, and dealing effectively with the resulting revenue shortfall requires a balanced approach relying on both higher taxes and cuts in state services.  A supermajority requirement would make striking this balance far more difficult.

Less obvious is the impact that supermajority requirements have on states’ abilities to reform their tax systems.  As CTJ has explained in the past, state supermajority requirements are one of the most important factors in biasing lawmakers toward pursuing their favorite policy goals via the tax code.  Supermajority requirements make it impossible for a simple majority of legislators to close a tax loophole unless they enlarge another loophole or lower tax rates in order to offset the resulting revenue gain. 

State lawmakers are well aware of the bias that already exists in favor of continuing tax breaks, and have begun crafting their favorite initiatives (e.g. energy subsidies, job-creation incentives, etc.) in the form of tax breaks in order to take advantage of this fact.  The result is the overly complicated, inefficient, and pork-laden tax codes you see in almost every state today.

Maine and Wisconsin are the only two states in the country that flipped from entirely Democratic control to entirely Republican control in last November’s election.  It’s no coincidence that these are also the two states most seriously considering a supermajority requirement.  In both cases, it took almost no time at all for Republicans to realize that a constitutional amendment of this type could allow them to continue implementing their anti-tax agendas long after they’ve been voted out of office.

In New York, a supermajority amendment has already passed the state Senate (along with an extremely ill-advised cap on state spending), though it’s likely to be greeted much less enthusiastically in the Democrat-led Assembly.  The proposal would also have to pass in the next legislature (which convenes two years from now), and be approved by voters before it would become a part of the state’s constitution.

Of the four states where supermajority amendments are being debated, Hawaii’s is by far the least likely to gain traction.  The Hawaii House’s 8 Republican legislators (out of a 51 person chamber) have floated the idea and encouraged the majority Democrats to fold it into their platform.  In a great example of Aloha Spirit, the Republicans have even been nice enough to insist that “Our caucus isn’t saying we need the credit.  What we’re saying is, we need the result.”  Hopefully, Hawaii Democrats — like the lawmakers in the other three states considering these amendments — will politely brush this proposal aside.


ITEP Releases New Report on Capital Gains Tax Breaks in the States


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Earlier this week ITEP released A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness. The report takes a hard look at the eight states that currently give special treatment to capital gains income including: Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.

The report finds that the benefits of state capital gains tax breaks go almost exclusively to the very best off taxpayers. In fact, in the eight states highlighted, between 95 and 100 percent of the state tax cuts from these tax breaks goes to the richest 20 percent of taxpayers.

Capital gains tax breaks also come with a pretty large price tag.  In tax year 2010, these eight states will lose about $490 million due to these loopholes, with losses ranging from $14 million to $151 million per state. These revenue losses represent a substantial share of currently-forecast budget deficits in several of these states.

ITEP finds that these preferences are costly, inequitable, and ineffective, depriving states of millions of dollars in needed funds, benefitting almost exclusively the very wealthiest members of society, and failing to promote economic growth in the manner their proponents claim. State policymakers cannot afford to maintain these tax breaks any longer.

 

For a review of the most significant state tax actions across the country this year and a preview for what’s to come in 2011, check out ITEP’s new report, The Good, the Bad, and the Ugly: 2010 State Tax Policy Changes.

"Good" actions include progressive or reform-minded changes taken to close large state budget gaps. Eliminating personal income tax giveaways, expanding low-income credits, reinstating the estate tax, broadening the sales tax base, and reforming tax credits are all discussed.  

Among the “bad” actions state lawmakers took this year, which either worsened states’ already bleak fiscal outlook or increased taxes on middle-income households, are the repeal of needed tax increases, expanded capital gains tax breaks, and the suspension of property tax relief programs.  

“Ugly” changes raised taxes on the low-income families most affected by the economic downturn, drastically reduced state revenues in a poorly targeted manner, or stifled the ability of states and localities to raise needed revenues in the future. Reductions to low-income credits, permanently narrowing the personal income tax base, and new restrictions on the property tax fall into this category.

The report also includes a look at the state tax policy changes — good, bad, and ugly — that did not happen in 2010.  Some of the actions not taken would have significantly improved the fairness and adequacy of state tax systems, while others would have decimated state budgets and/or made state tax systems more regressive.

2011 promises to be as difficult a year as 2010 for state tax policy as lawmakers continue to grapple with historic budget shortfalls due to lagging revenues and a high demand for public services.  The report ends with a highlight of the state tax policy debates that are likely to play out across the country in the coming year.


State Transparency Report Card and Other Resources Released


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Good Jobs First (GJF) released three new resources this week explaining how your state is doing when it comes to letting taxpayers know about the plethora of subsidies being given to private companies.  These resources couldn’t be more timely.  As GJF’s Executive Director Greg LeRoy explained, “with states being forced to make painful budget decisions, taxpayers expect economic development spending to be fair and transparent.”

The first of these three resources, Show Us The Subsidies, grades each state based on its subsidy disclosure practices.  GJF finds that while many states are making real improvements in subsidy disclosure, many others still lag far behind.  Illinois, Wisconsin, North Carolina, and Ohio did the best in the country according to GJF, while thirteen states plus DC lack any disclosure at all and therefore earned an “F.”  Eighteen additional states earned a “D” or “D-minus.”

While the study includes cash grants, worker training programs, and loan guarantees, much of its focus is on tax code spending, or “tax expenditures.”  Interestingly, disclosure of company-specific information appears to be quite common for state-level tax breaks.  Despite claims from business lobbyists that tax subsidies must be kept anonymous in order to protect trade secrets, GJF was able to find about 50 examples of tax credits, across about two dozen states, where company-specific information is released.  In response to the business lobby, GJF notes that “the sky has not fallen” in these states.

The second tool released by GJF this week, called Subsidy Tracker, is the first national search engine for state economic development subsidies.  By pulling together information from online sources, offline sources, and Freedom of Information Act requests, GJF has managed to create a searchable database covering more than 43,000 subsidy awards from 124 programs in 27 states.  Subsidy Tracker puts information that used to be difficult to find, nearly impossible to search through, or even previously unavailable, on the Internet all in one convenient location.  Tax credits, property tax abatements, cash grants, and numerous other types of subsidies are included in the Subsidy Tracker database.

Finally, GJF also released Accountable USA, a series of webpages for all 50 states, plus DC, that examines each state’s track record when it comes to subsidies.  Major “scams,” transparency ratings for key economic development programs, and profiles of a few significant economic development deals are included for each state.  Accountable USA also provides a detailed look at state-specific subsidies received by Wal-Mart.

These three resources from Good Jobs First will no doubt prove to be an invaluable resource for state lawmakers, advocates, media, and the general public as states continue their steady march toward improved subsidy disclosure.


Hawaii Gubernatorial Candidates Agree On Most Fiscal Issues, Except Some of the Most Important


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Former US Representative Neil Abercrombie and Lt. Gov Duke Aiona are both running to be Hawaii’s next governor. Abercrombie recently said, “Government can and should work to spark the private economy, particularly during tough economic times. This has always been the case.” Aiona disagrees and says, “Government does not create jobs. We're not job creators," he said. "It's the private sector, as we know, that creates jobs. It's the small businesses that create jobs.”

Despite these seemingly different takes on the role of government, both candidates have committed to keeping spending at existing levels, not increasing the state sales tax and continuing to allow hotel room tax revenue to stay with the counties. 

Yet, all is not as amicable as it appears in the land of Aloha. Aiona has said that he would support reductions in both corporate and individual income taxes, if offsetting revenue were available, but it's hard to imagine where that revenue would come from without harming low- or middle-income families. So ultimately, there actually is a pretty clear choice between these two candidates on tax and revenue issues.

While blogging for the Wall Street Journal’s “Wealth Report”, Robert Frank recently highlighted a new study showing that the anti-tax crowd’s claims regarding “tax-driven wealth flight and wealth destruction may be exaggerated.”  Specifically, the study shows that despite all the fear the Journal tried to whip up regarding the “self-destructive” nature of raising state income tax rates on the wealthy, all of the states typically demonized as being “high-tax” actually saw the number of millionaires’ living within their borders rise substantially between 2009 and 2010.

The new study in question was released by Phoenix Marketing International, and shows that the number of households with more than $1 million in assets increased by 8.1% between 2009 and 2010. 

The study also shows that Hawaii, Maryland, New Jersey, and Connecticut have the highest concentration of millionaires in the country.  And despite the fact that each of these states recently raised their top income tax rate, each saw the number of millionaires living within their borders rise substantially between 2009 and 2010. 

Specifically, three of those states – Hawaii, Maryland, and Connecticut – saw their millionaire population grow at a rate even faster than the 8.1% national average.  New Jersey was only very slightly below average, having experienced a 7.4% gain in the number of millionaires between 2009 and 2010. 

On the flip side, two of the states experiencing the slowest growth in the number of millionaires – Florida and Nevada – levy no state income tax at all!

With this in mind, all the outrage exhibited by the Wall Street Journal Editorial Board regarding the “self-destructive,” “soak-the-rich theology” of “dedicated class warrior” and Maryland governor Martin O’Malley seems to have been very much off target.  After re-reading the Journal’s editorials, it does at least become clear why Frank labeled the debate “increasingly emotional.”

Interestingly, this isn’t the first time that the facts have run counter to the Journal’s (or Grover Norquist's) gloom and doom predictions regarding higher taxes on the rich.  Both CTJ and ITEP have in the past taken the time to point out the Journal’s factual errors and other exaggerations on this issue.  And in fact, Frank has even helped to highlight some of ITEP’s work in this area on at least one occasion.

One can only hope that the Journal will begin reading their own bloggers’ work and begin to temper their rhetoric next time around.  After all, as Frank’s blog post explains, “that demographics and economics matter more than taxes in increasing and retaining wealth may seem like an obvious point.”  But ultimately, we wouldn’t recommend holding your breath waiting for the Journal to acknowledge it.


New 50 State ITEP Report Released: State Tax Policies CAN Help Reduce Poverty


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ITEP’s new report, Credit Where Credit is (Over) Due, examines four proven state tax reforms that can assist families living in poverty. They include refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits. The report also takes stock of current anti-poverty policies in each of the states and offers suggested policy reforms.

Earlier this month, the US Census Bureau released new data showing that the national poverty rate increased from 13.2 percent to 14.3 percent in 2009.  Faced with a slow and unresponsive economy, low-income families are finding it increasingly difficult to find decent jobs that can adequately provide for their families.

Most states have regressive tax systems which exacerbate this situation by imposing higher effective tax rates on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. Although state tax policy has so far created an uneven playing field for low-income families, state governments can respond to rising poverty by alleviating some of the economic hardship on low-income families through targeted anti-poverty tax reforms.

One important policy available to lawmakers is the Earned Income Tax Credit (EITC). The credit is widely recognized as an effective anti-poverty strategy, lifting roughly five million people each year above the federal poverty line.  Twenty-four states plus the District of Columbia provide state EITCs, modeled on the federal credit, which help to offset the impact of regressive state and local taxes.  The report recommends that states with EITCs consider expanding the credit and that other states consider introducing a refundable EITC to help alleviate poverty.

The second policy ITEP describes is property tax "circuit breakers." These programs offer tax credits to homeowners and renters who pay more than a certain percentage of their income in property tax.  But the credits are often only available to the elderly or disabled.  The report suggests expanding the availability of the credit to include all low-income families.

Next ITEP describes refundable low-income credits, which are a good compliment to state EITCs in part because the EITC is not adequate for older adults and adults without children.  Some states have structured their low-income credits to ensure income earners below a certain threshold do not owe income taxes. Other states have designed low-income tax credits to assist in offsetting the impact of general sales taxes or specifically the sales tax on food.  The report recommends that lawmakers expand (or create if they don’t already exist) refundable low-income tax credits.

The final anti-poverty strategy that ITEP discusses are child-related tax credits.  The new US Census numbers show that one in five children are currently living in poverty. The report recommends consideration of these tax credits, which can be used to offset child care and other expenses for parents.


New ITEP Report Examines Five Options for Reforming State Itemized Deductions


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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.

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.


ITEP's "Who Pays?" Report Renews Focus on Tax Fairness Across the Nation


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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.


State Income Taxes: The Jet Set Stays Put?


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In the wake of the worst fiscal crisis in decades, several states -- most notably, New York and Hawaii -- have recently adopted income tax increases targeted at upper-income individuals and families. As the Center on Budget and Policy Priorities has documented, they may well be joined by several other states in the coming months as more lawmakers realize that this is the most responsible way to address budget shortfalls.

Critics of progressive income tax increases like to suggest that such changes will only spur the wealthy to pack up and head to more tax-friendly climes like, say, Wyoming or South Dakota. Yet, as ITEP observed earlier this week, at least three of the states that turned to income tax increases during the last fiscal crisis (New York, New Jersey, and Connecticut) saw an upturn in the number of affluent taxpayers over the ten year period from 1997 to 2006. Guess it's hard to find the equivalent of Per Se or Le Bernardin in Sioux Falls!


Progressive Income Tax Hikes Meet Reckless Opposition from Two Governors


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In unusually difficult times like these, one of the most responsible decisions a policymaker can make is to keep all revenue options on the table. Unfortunately for residents of Minnesota and Hawaii, their governors have approached the current crisis with exactly the opposite mentality. Governor Tim Pawlenty of Minnesota and Governor Linda Lingle of Hawaii have clung to the "no new taxes" mantra in recent months, despite the passage of responsible revenue-raising packages by the legislature of each state. Prominent in each of those packages were progressive income tax hikes.

In Hawaii, despite the Governor's veto, as well as her repeated assertions that any tax increase would be economically damaging for the state, the legislature managed to pass the revenue package over the Governor's stubborn opposition. The bill raises income taxes on single Hawaii residents earning over $150,000 per year, and married couples earning over $300,000.

Minnesota thus far has not been so lucky. Less than a week ago, Governor Pawlenty vetoed a tax package (based on the House and Senate bills we described last week) containing progressive income tax increases. So far that veto has held up, as proponents of the bill appear to be just a few votes shy of an override. Deeper cuts in public services or increased borrowing (the preferred solution of the Governor) may be turned to next in order to win wider support for the package.


Hawaii and Vermont: Two Peas in the Progressive Tax Pod?


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It's probably not often that they are mentioned in the same breath, but both Hawaii and Vermont took steps this week towards using progressive tax increases to help close anticipated budget gaps. In the Aloha State, the Legislature approved a measure that, among other changes, would raise income tax rates for married couples with incomes over $300,000 (and for single people with incomes above $150,000). Governor Linda Lingle has already threatened a veto, but the Legislature may have the votes needed for an override.

The road ahead is a little less certain in the Green Mountain State. The House earlier this month passed legislation to raise additional revenue and the Senate is on the verge of doing so, but substantial differences will have to be resolved before any bill reaches the Governor's desk. The centerpiece of the House's approach is a temporary income tax surcharge that would last three years and that would raise rates by one-tenth of a percentage point for lower-income Vermonters and by one-half a percentage point for upper-income residents. Conversely, the Senate seeks to reduce income tax rates and to generate revenue for the state budget by boosting alcohol and tobacco taxes.

Hawaii and Vermont do share at least one thing in common -- a major flaw in their tax codes in the form of preferences for capital gains income. To date, Hawaii legislators have chosen to leave this flaw in place. Vermont's Senators would pare it back, but use the revenue resulting from such an improvement to reduce income tax rates, particularly for upper income taxpayers. Yet, as recent columns in the Honolulu Star Bulletin and Burlington Free Press observe, both states could improve tax fairness and their fiscal outlooks by repealing those preferences and devoting the funds directly towards deficit reduction rather than further tax cuts. For more on state tax preferences for capital gains income, see this report from ITEP.

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.


Tax Breaks for Tax Avoiders


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Anyone compiling a list of similarities between Hawai'i and the Cayman islands can now add "aspiring tax haven" to "sparkling beaches" and "mild climate." Late last month, Hawai'i Governor Linda Lingle signed into law a measure that will cap the premiums tax paid by so-called captive insurance companies in the hope of luring more of those companies to the Aloha State. (A captive insurance company is a subsidiary of a larger company that insures that larger company's property or employee benefits.)

Using tax policy to try to influence business location decisions is questionable enough on its own, but it's especially troubling in this case, since captive insurers can enable major corporations to avoid millions of dollars in federal taxes annually.

As reported earlier this year, Wells Fargo, by establishing a captive insurer in Vermont, will receive "tax breaks totaling at least hundreds of millions of dollars over the next 30 to 40 years"; ADM, Heinz, Alcoa, and Sun Microsystems may already be following suit. So, policymakers in Hawai'i may think that they're bringing more jobs to their shores, but what they're really doing is using scarce tax dollars to make federal taxes scarcer still.


Limited Progress for One of the Most Unfair State Tax Codes


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The Hawaii Legislature, in accordance with that state's Constitution, recently approved a measure to provide temporary but targeted tax rebates. The rebates are expected to range in value from $160 for married couples with adjusted gross incomes of less than $5,000 to $90 for couples with incomes between $50,000 and $60,000; couples with incomes above that range will not be eligible for the credit, while individuals would receive smaller rebates over the same income range.

The rebates are prompted by a constitutional requirement that tax refunds be distributed whenever the state's general fund experiences a budget surplus of 5 percent or more of state revenue in two consecutive years. The wisdom of reducing taxes, even temporarily, in response to such relatively small surpluses is certainly questionable, but the need to improve the fairness of Hawaii's tax system is not. According to the Center on Budget and Policy Priorities, a family of four earning just enough to reach the federal poverty level paid $546 in Hawaiian income taxes in 2006, the second highest amount in the country. Consequently, offering targeted tax rebates - rather than flat amounts as had been past practice - is a welcome change, but is ultimately insufficient. As the Honolulu Star Bulletin observed, a better approach would be to institute a state Earned Income Tax Credit (EITC) as numerous other states have done.


EITC Expansion: A Good Idea in Every State


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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.


Hawaii: Falling Short on Low-Income Tax Reform


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After abandoning earlier efforts to pass targeted income tax cuts for working families, Hawaii policymakers are poised to enact tax measures that largely benefit wealthy taxpayers. For more on how this plan would affect Hawaii's income tax threshold-- and more on the distribution of tax cuts under the new plan, click here. The Honolulu Star-Bulletin tells it like it is here.

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