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.

Film tax credits have received a lot of attention in recent days.  Just as Virginia Governor Bob McDonnell was signing the state’s first film tax credit into law, stories out of Iowa and New Jersey, as well as a New York Times article about film credits in Michigan, Texas, Pennsylvania and Utah, provided quite a few good reasons to be skeptical of these credits.

On Monday, Virginia Gov. Bob McDonnell excitedly signed into law the state’s new film tax credit, with sitcom star Tim Reid (from “WKRP in Cincinnati,” “Sister Sister,” and “That 70’s Show”) there to celebrate.  In order to justify enacting this giveaway for the film industry while Virginians are having to make due with reduced state services, Gov. McDonnell made the asinine claim the credit would produce a 1400% return on investment.  Economists everywhere have no doubt been laughing ever since.

Meanwhile, in New Jersey, fellow 2009 gubernatorial election winner Chris Christie took exactly the opposite approach in vowing to eliminate the state’s film credit in order to help balance the state’s budget.  While Christie clearly had his priorities dead wrong in choosing not to extend the state’s income tax surcharge on millionaires (61% of voters favor the surcharge), he has certainly hit the nail on the head when it comes to this wasteful giveaway.  Not even the cast of “Law and Order: Special Victims Unit” appears to have been able to sway him.

Stories this week from the Des Moines Register and New York Times provide some very timely evidence regarding the wisdom of Christie’s approach, as well as the folly of McDonnell’s.  In Iowa, the Register reports that new criminal charges have been filed in the state’s ongoing film tax credit scandal.  Specifically, three moviemakers have been charged with inflating the value of their expenses in order to increase their take from the state’s film credit program.  A $225 broom, $900 stepladder, and 16,000% markup on lighting equipment are among the bogus expenses claimed by the filmmakers. 

The steady drumbeat of discouraging news surrounding Iowa’s film tax credit makes clear that Virginia is facing an uphill battle when it comes to policing this program.

The New York Times this week explored a more specific attribute of state film tax credits: the steps states are taking to prevent movies they dislike from receiving taxpayer dollars.  In Michigan, a sequel to a cannibalism-themed horror movie that was supported by state film tax credits was rejected for subsidy this time around because the state’s film commissioner determined that “this film is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light.”  Michigan is by no means alone in enforcing this standard.  Films made in Pennsylvania can be denied tax credits if the movie in question does not “tend to foster a positive image” of the state. 

Texas possesses a similar requirement, which apparently was used to prevent the makers of a film about the Waco raid from even applying for film tax credits. 

And in Utah, the state’s Film Commission director admitted to withholding credits from films that he wouldn’t feel comfortable taking the governor to see. Whether or not this rule of thumb varies with the theatrical tastes of the governor in office at the time remains to be seen.  Upon reading the Times story, one blogger with the Baltimore Sun went so far as to argue that these provisions show that “states want propaganda from filmmakers.”  They certainly beg the question: If state taxpayers subsidize the film industry, is it inevitable that state governments will censor movies before they're made?

In his recent “Condition of the State Address,” Iowa Governor Chet Culver identified tax credit reform as one of his “top legislative and budget priorities for the 2010 session.”  Specifically, the Governor urged the legislature to act on the recommendations just released by a panel charged with evaluating both the state’s tax credits, and the mechanisms in place for monitoring those credits.  In addition to recommending the outright elimination of eight tax credits, and the addition of a means-test to another credit, the panel produced a number of good-government recommendations that set the stage for the upcoming legislative session.

The panel recommended, among other things:

- Subjecting all business-related tax credits to an annual $185 million cap and scheduling them to sunset in five years;
- Eliminating the “transferability” for all tax credits (i.e. preventing firms from selling their tax credits);
- Ending the refundability of the state’s research activities credit;
- Requiring the state’s revenue estimates to include analyses of the types and amounts of tax credits claimed, in order to produce a more complete picture of the state’s budgetary situation.

Implementing the panel’s recommendations would save the state $55 million in FY2011, and $106 million in FY2012.  This fact alone should be enough to spur lawmakers in cash-strapped Iowa to give the recommendations some serious consideration.  

Be sure to visit the Iowa Fiscal Partnership’s website to stay up-to-date on the upcoming debates on this issue.

In at least three states, lawmakers are ignoring fiscal reality and advocating for cuts in one of the most progressive taxes levied by states -- the corporate income tax. The general consensus among experts is that most states aren't out of the woods yet when it comes to economic recovery. That means their budget gaps are going to be a problem for some time. Yet, legislators in Florida, Idaho, and Iowa are pushing the same old proposals to reduce state revenue in order to benefit corporations.

For example, Florida Governor and U.S. Senate hopeful Charlie Crist is crafting a plan that would cut the state's corporate income tax. Details remain sketchy, but he is quoted as saying that he'd "love" to reduce the tax "because I think it would help job stimulation."

Actually, any business person will tell you that he or she wants to hire workers whenever there is demand for their products. If no one is ready to buy orange juice, Tropicana is not going to create jobs regardless how many tax cuts Governor Crist throws at them. Further, there is ample evidence that corporate taxes aren't a major factor in business location decisions because those decisions are affected by numerous other factors. (For instance, Tropicana will not try growing oranges in Alaska just because Alaska offers a tax break.)

The corporate tax cut madness has popped up in other parts of the country. Idaho Representative Marv Hagedorn is proposing cutting both the personal and corporate income tax rates by a third. However, it appears that more sensible minds will prevail. The House Revenue and Tax Commmittee chairman calls the proposal "more political statements than they are reality. I just think it's a tough sell to say we're going to reduce somebody's taxes -- I don't care who it is -- when we're cutting programs left and right."

Cutting taxes is also a hot topic in the Republican primary for Iowa Governor, as the candidates attempt to outdo each other with little thought to the impact that their proposals will actually have on the services Iowans depend on. Two of the Republican candidates are reportedly open to the idea of completely eliminating the state's corporate income tax.

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.

As more shocking details continue to surface regarding Iowa’s rampantly abused film tax credit, lawmakers have begun giving increasingly serious attention to the issue of how to better oversee all the special subsidies contained within the state’s tax code.

A recent review of the credit by a team of accountants revealed a plethora of abuses, including incomplete records, altered contracts, unqualified expenditures, illegitimate labor expenses, deferred payments, advertising irregularities, nonproduction expenses, nepotism, inaccurate credit calculation, erroneous awards, broker fees, and pass-through business abuses.

This list of abuses has caused Governor Chet Culver to wisely call for a comprehensive review of all Iowa tax credits.  While such a review is unlikely to turn up any abuses of the magnitude that took place under the film tax credit, it could potentially highlight credits that aren’t living up to the promises that were made when they were enacted.

By reviewing the effectiveness of these subsidy programs buried within the state’s tax code, Iowa could shine a bright light on an area of policy that typically receives much less scrutiny than direct spending programs, which must battle their way through the authorization and appropriations processes.  In fact, Iowa would benefit greatly from conducting reviews of its tax subsidies on a regular basis, rather than waiting for another political scandal to erupt.  Moreover, the state should consider expanding those reviews to include special deductions, exemptions, exclusions, deferrals, and preferential tax rates as well.  Tax credits aren’t the only means by which the state provides subsidies through its tax code.

In addition to Culver’s call for tax credit reviews, other lawmakers have begun asking for greater tax credit disclosure.  Rep. Clel Baudler, for instance, recently insisted that Iowa’s Department of Economic Development should “absolutely not” be able to “hide the specifics on the awards or grants they’re giving out.”  We certainly agree.

The issue of subsidy disclosure is one that Good Jobs First has been leading the charge on for years.  In addition, they’ve also recently posted an excellent piece on the history and effectiveness of film tax credits that’s worth a close look.

If you’re a state legislator, chances are good that you’ve spent the better part of the last twelve to eighteen months struggling to find options for bringing your state’s budget into balance.  Chances are equally good that, while you’d like to stop thinking about the subject, circumstances won’t allow it.  After all, some thirty-six states are expected to face budget deficits in fiscal year 2011, even after forty-eight states closed budget gaps totaling $168 billion for the current fiscal year.

In this context, then, state legislators will be forced to evaluate even more stringently each program funded by the public, whether through the regular appropriations process or via foregone tax collections.  One good place to start would be to reconsider the wisdom of offering subsidies through the tax code for the purposes of film, television, and other media productions.  As the Los Angeles Times reports this week, more than 40 states now provide tax credits or other tax reductions for such purposes, often at a very high cost to the state’s budget and just as frequently with little to no understanding of whether they are producing any real benefits for the state’s economy. 

For instance, Michigan is home to one of the most generous such subsidies in the nation: a credit equal to 42 percent of filmmakers’ production expenses, which could cost the state as much as $150 million next year.  Yet, as one Michigan Senator admitted to the Times, “We are still not sure what exactly our tax dollars are being spent on with these films…If we don’t know that, how can we justify it?”

Those states that do examine the uses to which scarce tax dollars are being put may not like what they find.  In Iowa this past week, three state officials – the Director and Deputy Director of the Department of Economic Development, as well as the manager of the Iowa Film Office – either resigned or were fired in the wake of reports that the state’s tax credit program was subject to serious abuses, including the purchase of two luxury automobiles that were not actually used in making in a movie but instead went to film executives.  Governor Chet Culver has temporarily suspended the program, which, by some estimates, could pay out more than $300 million in tax subsidies if it resumes.  For more on Iowa’s film tax credit and the need for greater transparency, visit the Iowa Fiscal Partnership.

When a state government hands out cash to businesses, you'd think that the state's taxpayers would at least have a right to know who exactly they're subsidizing. This is especially true in Iowa, a state that offers businesses a research tax credit that is refundable -- meaning businesses actually get checks from the state when their credits exceed their tax liability. In 2006 alone, those checks cost the state nearly $44 million, with about 85% of that going to just 10 companies.

Last week, Iowa policymakers decided that their constituents might at least want to know where those millions are going. Governor Chet Culver signed a bill requiring that any business receiving a research credit check from the state of more than a half million dollars have its name made public.

Iowa is unusual in its generosity to businesses conducting (or claiming to conduct) research. Of the 38 states offering a research credit, only five actually pay businesses for conducting research even if their tax credit exceeds the amount of taxes they paid.

Despite the unusual generosity of the Iowa credit, one business industry representative had the gall to suggest that businesses may decide to conduct their research elsewhere as a result of the measure. The phrase "crying wolf" comes to mind.

But ultimately, the new Iowa law is little more than a baby step. It's hard to believe that Iowans are not also interested in knowing which businesses receive $100,000 or $200,000, for example, from the state for conducting research. Furthermore, even businesses not receiving refunds, but nonetheless benefiting from the research credit, are effectively being subsidized by the state and should be identified as well. And limiting the disclosure provision to only the research credit is also disappointing.

If Iowa really wants to improve government transparency, it should consider reporting on the jobs and other benefits created as a result of this and other subsidies -- as opposed to just offering the company's name. See this report from Good Jobs First for more on appropriate state subsidy disclosure practices.

As we've discussed in recent digest articles, this year saw a flurry of activity in the debate over state deductions for federal income taxes paid. Presently, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they have the greater ability to pay. Proposals to reform the deduction for federal income taxes paid in Alabama and Iowa came up short this year, but state lawmakers are vowing to bring up the issue again next year.

Removing the sales tax on food and offsetting the revenue loss by phasing out the deduction for federal income taxes paid for wealthier Alabamians was the number one priority for Democratic lawmakers, but this week the House came up just one vote shy of the three-fifths needed to debate a bill before the state's budget passes. The bill's sponsor, Representative John Knight, has vowed to bring up the bill again next year and says, "I consider this an economic incentive package for working families of this state."

Lawmakers in Iowa proposed to completely eliminate the deduction and use the revenue generated to fund a reduction in state tax rates. The debate over the proposal was quite heated. According the Des Moines Register, "The debate included a rowdy public hearing where hundreds of Iowans -- most of whom opposed the plan -- were escorted from the House chambers by Iowa State Patrol troopers after they persisted in booing, hissing and applauding speakers." Despite support from the House Speaker Pat Murphy and Senate Majority Leader Michael Gronstal, the legislation didn't have enough support and ultimately wasn't debated in either the House or the Senate. Senator Gronstal is predicting that the legislation will be introduced again next year, saying, "There are times when issues are right but they're not ripe."

At present, seven states (Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, and Oregon) offer state taxpayers some form of an income tax deduction for the federal income taxes they pay. This basically undoes, at least partially, the progressivity of the federal income tax. The upper-income taxpayers who pay more in federal income taxes receive the largest deductions on their state income taxes, even though they still have the greater ability to pay.

Efforts to limit or to repeal these deductions -- and to use the additional revenue to provide tax reductions for low- and moderate-income taxpayers -- have been underway in two such states. In Alabama, Representative John Knight has proposed legislation to pare back his state's federal income tax deduction in order to finance a sales tax exemption for groceries. Unfortunately, House Republicans may have successfully prevented further consideration of the bill this session, voting en bloc to keep it from coming before the House for debate.

Meanwhile, in Iowa, momentum is building for a plan that would repeal the deduction outright while also lowering tax rates across the board and increasing a pair of tax credits. House Speaker Pat Murphy recently voiced his support for the changes and the Senate seems poised to act as well.

For more on efforts in Alabama and Iowa to improve tax fairness, see the web sites for Alabama Arise and the Iowa Policy Project.

It's hard to believe, but there may actually be a trend in state tax policy more prominent than increasing cigarette taxes. Business tax credits aimed at spurring economic development have been among the most popular ideas in statehouses scrambling for ways to reduce unemployment. Just last week, we described a plan in Minnesota to boost investment tax credits and a budget in California containing a few credits of its own. This week, proposals to do the same in Iowa, Kentucky, and Missouri are under discussion.

In Iowa, Republican lawmakers have suggested paying (via tax credit) half the salary of each new job created by private businesses. Oddly, because this payment would be administered through the tax code rather than as a direct grant, the debate has become confused to the extent that this policy has been labeled as a way to return to a "market-based, capitalistic system".

An excellent op-ed out of Kentucky helps clear things up a bit, noting that Gov. Beshear's proposed expansion of business tax incentives would be a costly, nontransparent, and likely ineffective way of encouraging job growth. The op-ed goes on to argue that a "broader" approach, including better targeted and more closely scrutinized spending programs, could do far more good than creating more tax credits.

Finally, as an expansion in economic development tax credits works its way through Missouri's legislature, the admission of at least one legislator that he is a "recovering tax credit addict" helped to shine some light on the unfortunate politics behind these types of tax credits. These programs can cost a state enormously, and are rarely defensible on principled tax policy grounds. Instead, they constitute a type of spending done through the tax code -- commonly referred to as "tax expenditures" -- which add complexity, shrink the tax base, require higher marginal rates, and offer little if anything in terms of making the system more responsive to individuals' and businesses' ability to pay.

We've recently highlighted a variety of progressive revenue raising options gaining serious attention in New York and Wisconsin. This week we bring you yet another idea that's recently been the subject of debate, though this one applies to fewer states. Those seven states still offering income tax deductions for federal taxes paid (i.e. Alabama, Iowa, Missouri, Montana, North Dakota, Louisiana, and Oregon), should immediately repeal, or at the very least dramatically scale back, that deduction.

The federal income tax deduction takes what is perhaps the best attribute of the federal income tax -- its progressivity -- and uses it to stifle that very attribute at the state level. Since wealthy taxpayers generally pay more in federal taxes than their less well-off counterparts, allowing taxpayers to deduct those taxes from their income for state income tax purposes is a gift to precisely those folks who need it least. And since most state income tax systems possess a degree of progressivity, those better-off taxpayers who face higher marginal tax rates are benefited even more by being able to shield their income from tax via this deduction.

Iowa Governor Chet Culver most recently drew attention to this problem while urging lawmakers this week to end the deduction. The idea has also recently garnered attention in Missouri, where ITEP recently testified on a bill that would, among other changes, eliminate the deduction. Finally, another bill making its way through the Alabama legislature seeks to end the deduction for upper-income Alabamians.

With three of the seven states that still offer this deduction considering its elimination, this is definitely one progressive policy change to keep an eye on.

This week, the Iowa Fiscal Partnership (IFP) released a study examining Iowa's budget woes with an eye toward understanding how the state's fiscal situation will be impacted by Iowa's growing senior population. Not only are Iowa lawmakers currently grappling with a budget shortfall, this report predicts that more tough decisions are coming. One of the reasons that even harder times may be on the horizon is that Iowa, like many states, offers elderly preferences that are going to become more costly as America grays.

In fact, IFP found, "The aging of the population will probably produce a decline in state income tax revenue of 2 to 3 percent in Iowa, due largely to the adoption of tax preferences for seniors. If there were no elderly preferences in Iowa's income-tax code, the very small projected increases in total population combined with the aging of the population would increase income-tax revenues for a period of time, reaching a peak in 2015 at $2.27 billion."

The report offers helpful insight into why revenues aren't able to keep up with growing needs (beyond elderly preferences). Most notable is the sales tax base erosion taking place both because the state's tax base is made up of mostly goods and not services, and because of the continuing need to close the sales tax loophole which ensures that online purchases aren't subject to the sales tax. Resolving the problem of sales tax base erosion and poorly targeted elderly preferences is something many states could tackle now in their attempt to deal with their own budget mess. ITEP has written a variety of policy briefs on topics discussed here: elderly preferences in the tax code, sales tax base expansion, and taxing internet sales.

The Virginia based Commonwealth Institute recently issued their own set of recommendations offering suggestions on ways that the Old Dominion state could dig itself out of its budget crisis. These recommendations are good ideas any time, but will likely receive more attention now because of the state's budget crisis. Their recommendations include further means-testing of elderly tax preferences, and closing corporate loopholes through steps such as enacting combined reporting. The Institute takes a balanced approach and acknowledges that some cuts may need to be made and the state's rainy day fund may need to be tapped to deal with the state's shortfall. This balanced and comprehensive approach including both revenue enhancers and tax cuts may be the best solution for many states in crisis.

As we mentioned last week, this is the season for fiscally irresponsible sales tax holidays to purportedly give relief to working people on their back-to-school shopping. Sales tax holidays are a bad idea for the states' budgets and tax-payers alike. Low-income families probably cannot time their purchases to take advantage of a sales tax holiday, and it can be an administrative headache for retailers and government. Sales tax holidays are also poorly targeted to low-income individuals compared to other policy solutions such as low-income tax credits.

Now another group of states is ready to forgo needed tax revenue in exchange for a few dollars off the purchase price of various goods. These states include Alabama, Iowa, Missouri, North Carolina, Tennessee, and Virginia among others with holidays scheduled Friday through Sunday.

Meanwhile, a Birmingham News editorial points out that the sales tax holiday is a "gimmick" that has allowed state lawmakers to divert attention from their outrageously regressive tax code. Alabama is one of only two states that doesn't exempt or provide a low-income credit for its sales tax on groceries. If that were done, Alabama consumers would save far more money than they do on a three-day sales tax holiday (an average family of four would save about seven times as much). But instead of exempting groceries from sales taxes or raising the state's second-lowest in the nation income tax threshold, lawmakers pretend to help low-income Alabamians with a few tax-free shopping days a year.

Georgia's sales tax holiday began on Thursday and exempts articles of clothing costing less than $100, personal computers cheaper than $1500, and school supplies under $20. This week, the Atlanta Journal-Constitution mentioned some of the more amusing exemptions covered by that state's sales tax holiday. These exemptions include corsets, bow ties and bowling shoes. As the author noted, guys headed to their first day back in school "might combine the bow ties and bowling shoes, then just head straight for the restroom to collect their free swirlie." The article also mentions ski suits, highly unlikely to be big sellers in Georgia, and adult diapers, seemingly unrelated to the average family's back-to-school needs. Georgia lawmakers may want to revise their list of exemptions to concentrate on discounting necessities, or better yet, end this farce once and for all.