In an excellent op-ed, Jason Bailey of the Kentucky Center for Economic Policy makes the case for real tax reform in Kentucky, and that means a tax code that can raise revenues to keep Kentucky thriving. He explains that after years of budget cuts and a sluggish economy, the Bluegrass State cannot make public investments needed to recover economically and get on a sustainable fiscal footing. Bailey lists the various stop-gap measures lawmakers have already deployed and concludes they are all out of tricks. With a good roadmap to reform available, Bailey writes, it’s time to begin that hard work.

This otherwise fine article in the St. Louis Post-Dispatch, about competing tax proposals in Missouri, provided online readers with a calculator – that utterly failed in calculating how those proposals would affect taxpayers. The state policy team at ITEP quickly responded with a Letter to the Editor pointing out that “the tax calculator omits some key information about who wins and who loses under these plans.”

Tax policy is taking center stage in Virginia’s gubernatorial race. Republican candidate Ken Cuccinelli is reportedly in the process of designing a major tax cut on which to campaign.  While precise details have yet to be announced, a 20 percent cut in the personal income tax and elimination of the corporate income tax altogether are under consideration. Watch this space for a full analysis of the plan’s impact on Virginians at different income levels once more details are announced.

The Center on Budget and Policy Priorities (CBPP) has a new report that clarifies a lot of misconceptions about the existence of fraud in the Earned Income Tax Credit (EITC). For starters, CBPP explains that most EITC overpayments “reflect unintentional errors, not fraud.”  On top of that, it turns out that IRS studies of EITC overpayments suffer from “significant methodological problems that likely cause them to overstate the actual EITC overpayments.”

Late last week, Kentucky’s Blue Ribbon Commission on Tax Reform released their tax reform recommendations. Many of the Commission’s recommendations are bold and forward-looking, like their proposal to expand the sales tax base to services  (PDF) and simultaneously institute an earned income tax credit (PDF). Not only does the Commission deserve kudos for trying to shore up tax revenues over the long term while keeping an eye on tax fairness, the Commission also clearly understood the need to raise more revenue. As one Herald-Leader columnist said,  “task force members had the courage to recommend a plan that would add $690 million in revenue during the first year.”  But the Commission’s recommendations aren’t without their flaws, such as $100 million in cuts to the corporate income tax. Jason Bailey from the Kentucky Center for Economic Policy reminds us, "Business tax cuts are really a race to the bottom between states.”

Nebraska think tank Open-Sky Policy Institute released, “Feeling the Squeeze- The Negative Effects of Eliminating Nebraska’s Inheritance Tax” detailing the impact of eliminating the state’s inheritance tax. The tax generates about $43 million annually for counties. These revenues are an important part of county budgets, and its counties assist with natural disasters, keeping roads safe and administering elections, among other things. Tax cuts don’t happen in a vacuum and that revenue will need to be made up with new revenue or reductions in services. Open Sky found that if “counties replaced all of the lost inheritance tax revenue with an increase in property taxes, the average overall county tax rate would have to increase by 7 percent.”

The majority of Hoosiers are telling Indiana Governor-elect Mike Pence “not so fast” on his tax cutting plan.  A new poll shows that taxpayers would rather see their tax dollars spent on investment priorities rather than tax cuts. Just 31 percent of those surveyed supported Pence’s proposal of slashing taxes by 10 percent across the board versus 64 percent of voters who would rather see tax revenue spent on education and workforce development.

Read this fantastic op-ed from Remy Trupin, executive director of the Washington State Budget & Policy Center, which makes the case for fundamental tax reform. “Washington needs a revenue mix built for the 21st century. That means eliminating wasteful tax breaks, modernizing our state sales tax to include more consumer services and taxing gains on the sale of stocks, bonds and other high-end financial assets held by the wealthiest two percent of Washingtonians.”

Kentucky’s tax structure is broken - so broken that policymakers have convened 12 commissions since 1982 to study the state’s revenue stream.  And yet the Institute on Taxation and Economic Policy (ITEP) found that still the state continues to tax low and middle-income people at a higher rate than the wealthy. This year the Governor Beshear formed the Blue Ribbon Commission on Tax Reform, and the consulting economists assisting the Commission have released their report (PDF) which offers a variety of recommendations that are worth legislative consideration. The full commission, consisting of stakeholders and leaders from organizations across the state, will release its recommendations in November.

The Commission was tasked with analyzing the tax structure with these five goals in mind: fairness, competitiveness, simplicity and compliance, elasticity, and adequacy. The economic consultants found (and most analysts agree) that “a broader tax base is needed so that revenue can keep pace with future economic growth.” The report predicts a dire future for the state’s finances unless the tax structure is improved, “Without fundamental reforms Kentucky could face a $1 billion shortfall by 2020, and could find itself at a competitive disadvantage to neighboring states for business growth, retention, and recruitment.”

The experts’ comprehensive report included some common sense, positive proposals like eliminating itemized deductions, instituting an Earned Income Tax Credit, and broadening the sales tax base to more personal services. The Louisville Courier Journal, in the culmination of three months of quality, in-depth reporting on the issue notes that, “many lawmakers and others expect the governor’s effort will fall far short of any significant reform — just as reform attempts by most of Beshear’s immediate predecessors failed.” The reason? Getting legislators to agree to any tax increase (even if other taxes are lowered) may be a political bridge too far.

The Governor, however, has said that he is not abandoning the idea of a special session focused solely on tax reform. He admits, “It’s always difficult to address the issue of taxes. But I think it is do-able if we all will work together.” The full tax commission is expected to come out with its recommendations by November 15. The question remains whether Kentucky can not only study its tax system, but also reform it.

Massachusetts taxpayers now have a better idea of where $171 million of their tax dollars are going.  Thanks to legislation enacted in 2010, the state’s Department of Revenue just issued its first-ever report identifying recipients of so-called economic development tax credits.  The biggest winner in 2011 was Columbia Pictures, which received $11.6 million Bay State tax dollars for a movie that, ironically, depicts a teacher trying to raise money for his under-funded public school.

Then there’s the fraudulent use of film tax credits, which is a whole other thing!

Revenue to fund bridge repairs is falling short in Oklahoma, so Governor Mary Fallin signed a bill this week that takes money away from education and other general fund services to cover the costs.  The move follows similar actions taken last year in Nebraska, Utah and Wisconsin (and almost in Virginia).  Oklahoma has gone 25 years without raising its gas tax—the state’s traditional source of transportation revenue.  That’s longer than any state except Alaska.

Calling all Kentuckians! Here’s a chance to make your pitch for tax fairness to the Blue Ribbon Tax Commission, which holds public hearings through the summer.

Remember the Tea Party? Well, freshman Kentucky Senator Rand Paul is living up to his reputation as the darling of the Taxed Enough Already movement that shook the 2010 elections. 

Rand Paul, son of Libertarian firebrand and GOP presidential candidate Ron Paul, is currently blocking the Senate’s ratification of an amendment to the US-Swiss tax treaty, apparently worried about the right of tax evaders to financial privacy. He says the language is too “sweeping” and might jeopardize US constitutional protections against unreasonable search and seizure. But as one former Treasury Department official said, Paul's move “smacks of protecting financial secrecy for those who may have committed criminal tax fraud in the US.”

The US and Swiss governments renegotiated their bilateral tax treaty as part of the 2009 settlement of the UBS case. That case charged the Swiss mega-bank UBS with facilitating tax evasion by US customers. Under the settlement agreement, UBS paid $780 million in criminal penalties and agreed to provide the IRS with names of 4,450 US account holders.

Before it could supply those names, however, UBS needed to be shielded from Swiss penalties for violating that country’s legendary bank-secrecy laws. The renegotiation of the US-Swiss tax treaty addressed that problem by providing, as most other recent tax treaties do, that a nation’s bank-secrecy laws cannot be a barrier to exchange of tax information.

Many tax haven countries were hiding behind their bank secrecy laws to deflect requests for account holder information, and the IRS and Justice Department have been investigating 11 Swiss financial institutions on criminal charges of facilitating tax evasion.

The Senate must ratify the treaty changes – which is normally a routine procedure.

By blocking the ratification, Senator Paul is holding up the exchange of information in the UBS case (and others) and hampering IRS efforts to crack down on tax evasion by Americans.

Tax evasion by individual taxpayers is estimated to deprive the US Treasury of as much as $70 billion per year (corporate offshore tax avoidance is estimated to cost the Treasury an additional $90 billion per year).

Given Senator Paul’s obvious concern about the deficit, he might have a hard time explaining to honest American taxpayers how he justifies protecting tax evaders with Swiss bank accounts as the deficit grows ever larger.

Photo of Rand Paul via Gage Skidmore Creative Commons Attribution License 2.0

• In this upside down world where closing a corrupt tax loophole is called a tax hike (like that’s a bad thing), some states are moving towards amending their constitutions to require a two thirds supermajority to raise taxes or borrow money. This is a shame. New Hampshire Senators, for example, are expected to vote on a supermajority proposal later this week. Here’s an excellent editorial from the Idaho Statesman and a new report from the Center on Budget and Policy Priorities about the perils of supermajorities.

• It’s been just over a month since Kansas Governor Brownback unveiled his tax plan and the criticism continues. His plan, which would raises taxes on the bottom 80 percent of the income distribution, was recently called “radical and troubling.” Attention is shifting to the House, where leaders are now introducing their own tax proposal which includes the most costly and regressive elements of the Governor’s proposal.

• Kudos to Kentucky Governor Steve Beshear for appointing his 23 member blue ribbon commission to study the  state’s tax system and propose ways to reform it.  Let’s hope they heed the governor’s call for "a tax system that produces adequate revenue that meets the needs of our people," and his admonition that there comes a time "when slashing programs and services starts a downward spiral from which recovery is too difficult and too steep."

• Good news from Nebraska, where it looks like support is weak for the Governor’s proposal to eliminate the inheritance tax.  Legislators know that revenue from this tax goes directly to counties, which would have to cut services or make up the revenues with regressive tax increases.

• Finally, in planning your Valentine’s dinner, you might think twice about eating at a Yum Brands restaurant (KFC, Taco Bell, and Pizza Hut) or serving Campbell Soup, H.J. Heinz or ConAgra Foods products.  Our Corporate Tax Dodging in the Fifty States, 2008-2010 found that, despite being profitable, these companies didn’t pay any federal corporate income taxes in at least one year between 2008-2010.

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country.  This article takes a look at efforts to roll back business taxes in states based on the shopworn, erroneous argument that tax cuts are good for the economy.

Robust corporate income taxes ensure that large and profitable corporations that benefit from publicly subsidized services (transit that delivers customers, education that trains workers, electricity that powers industry, etc.) pay their fair share towards the maintenance of those services. But, as ITEP’s recent report, Corporate Tax Dodging in the Fifty States, 2008-2010, found, twenty profitable Fortune 500 companies paid no state corporate income taxes over the last three years, and 68 paid none in at least one of those three years, even as state budgets are stretched to the point of breaking.  

As a new legislative season gets underway, too many political leaders are bashing taxes in general and business taxes in particular.  Here are some states to watch for more bad business tax policy (followed by a few glimmers of hope).

South Carolina – South Carolina Governor Nikki Haley is following through on her misguided campaign promise and recently proposed eliminating the state’s corporate income tax over four years. This despite the fact that South Carolina’s corporate income taxes as a share of tax revenue are among the lowest in the country, at a mere 2.4 percent.

Kentucky – State Representative Bill Farmer has filed legislation that, instead of strengthening the tax, would repeal the state’s corporate income tax entirely. Farmer worked as a “tax consultant” and has been an anti-tax crusader in the Kentucky legislature since 2003.

Nebraska – Governor Dave Heineman recently unveiled his plan to reduce the top corporate income tax rate from 7.81 to 6.7 percent (and eliminate other key state revenue sources, too).

Florida – In his recent State of the State address, Governor Rick Scott said that taxes and regulations were “the great destroyers of capital and time for small businesses.”  And – no surprise here – he also called for lowering business taxes.

Idaho – Governor Butch Otter has called for $45 million in tax cuts but is leaving the details to the legislature.  Of course, when a lobbyist from the Idaho Chamber Alliance of businesses calls the governor’s position “manna from heaven,” there’s a good chance some of those cuts will be given to business.

A few signs of sanity. In Connecticut , the governor is looking to improve the return on tax-break investment for the Nutmeg state. Perhaps he’s learned from states like Ohio, where a recent report issued by the attorney general showed that fewer than half of all companies receiving tax subsidies actually fulfilled their commitments in terms of job creation or economic growth.   We also see combined reporting getting attention in a couple of states.  It’s smart policy that discourages companies from creating multi-state subsidiaries to shelter their profits from taxes. We will report on other positive developments as warranted – so watch this space.

Photo of Rick Scott via Gage Skidmore and Photo of Nikki Haley via Mary Austin Creative Commons Attribution License 2.0

Note to Readers: Over the coming weeks, ITEP will highlight tax policy proposals that are gaining momentum in states across the country. This week, we’re taking a closer look at proposals which would lessen a state’s reliance on progressive income taxes, often by shifting to a heavier reliance on regressive sales taxes. 

Georgia – A legislative proposal gaining traction in Atlanta would undercut the state’s reliance on the personal income tax – its only major progressive revenue source.  It would make up those revenues by raising the sales tax – every state’s most regressive source of revenue.  The plan also includes two other components that hit the poorest Georgians the hardest: taxing groceries and adding a dollar to the cigarette tax.  A sensible, comprehensive proposal from the Georgia Budget and Policy Institute is the template lawmakers should be following. It starts with fairness, ends with increased revenues and is all about modernization and reform. 

Kansas – If the expectations about Governor Sam Brownback’s proposed income tax changes are right, Kansas could have a hard time balancing its books. Tonight, the Governor, (who has received technical assistance from supply side guru Arthur Laffer), is expected to propose drastic reductions to state income tax rates.  Details on how the governor plans to make up the lost revenue haven’t been revealed, but his sidekick Laffer was recently quoted as saying, “It’s a revolution in a cornfield. Brownback and his whole group there, it’s an amazing thing they’re doing. Truly revolutionary.”

Kentucky –  Fresh off his reelection to the Governor’s office, Steve Beshear is expected to propose his own tax reform plan, but Representative Bill Farmer, who’s been itching to change Kentucky’s tax code for years, has already pre-filed his own tax overhaul bill, which would slash the state income tax, expand the sales tax base to include more services and lower the sales tax rate.  ITEP conducted an in depth analysis of an earlier Farmer proposal and found that his proposal would cost the state hundreds of millions of dollars and raise taxes on the poorest 20 percent of Kentuckians by an average of $138. We expect that his current proposal won’t do much to fix the state’s regressive tax structure either.

Missouri – Perhaps the most destructive proposal of this type gaining traction is Missouri’s mega-tax proposal, so called because it amounts to a massive consumption tax hike for ordinary Missourians. Proponents of the related ballot initiative that would eliminate the state’s personal income tax and replace that revenue by adding goods and services to the sales tax base are currently collecting signatures in an attempt to place the initiative on the ballot this November. Show-Me-Staters would be unwise to provide their signatures for this kind of campaign, however, because its passage would result in higher overall taxes for working families. Click here to see ITEP testimony on a similar proposal.

Oklahoma – Two seriously bad proposals that would increase the unfairness of Oklahoma’s tax system are currently under consideration. Working with (the aforementioned supply side guru) Arthur Laffer, the free-market Oklahoma Council of Public Affairs is proposing to eliminate the state income tax altogether. An ITEP analysis found that the bottom one-fifth of Oklahoma taxpayers -- those earning less than $16,600 per year -- would be paying on average $250 a year more in taxes, or about 2.5 percent more of their income. Similarly, the Tax Force on Comprehensive Tax Reform (dominated by business interests) suggests lowering the state’s top income tax rate and eliminating a variety of tax credits, many of which are designed to help low and middle income families. David Blatt, director of the non partisan Oklahoma Policy Institute recently said of the proposal, "This would hit hardest the poor and middle class families who are struggling most to make ends meet in a tough economy.”

Photo of Governor Steve Beshear via Gage Skidmore and photo of Art Laffer via Republican Conference Creative Commons Attribution License 2.0

Kentucky GOP gubernatorial candidate, longtime Senate President and American Legislative Exchange Council (ALEC) “Legislator of the Year” awardee, David Williams, was rebuked by Blue Grass State voters last week.

Williams staunchly advocated for eliminating the state’s personal and corporate income taxes during his campaign, that is, eliminating the most progressive and fair taxes levied in Kentucky and creating a colossal hole in the state’s budget at the same time.

Governor Steve Beshear, who defeated Williams and won a second term on November 8, estimated the budget hole from eliminating these two vital sources of revenue would equal 43 percent of the state’s general fund.  Beshear also suggested it would have to be made up with a sales tax hike – which is always hardest on the poorest families.

Kentucky voters had their say and voted down Williams’ radical agenda 36  to 56 percent (an independent candidate garnered 9 percent of the vote).

This isn’t the last we’ll hear of ALEC and its state-by-state plan to advance its corporate-authored agenda . But it’s encouraging that the good people of Kentucky didn’t fall for it.

Photo of Governor Steve Beshear via Gage Skidmore Creative Commons Attribution License 2.0

Kentucky Republican gubernatorial candidate David Williams released the outline of his economic plan earlier this week. Williams proposes to repeal the state’s personal and corporate income taxes as part of a “revenue-neutral” tax swap, which of course means that the remaining taxes levied by Kentucky would have to be increased by close to $4 billion a year to make up for the loss of the income tax.

Williams would replace the state’s personal and corporate income taxes with a broader consumption tax of some sort. He says of this proposal, “If you tax consumption, people will make discerning choices about consumption and you will encourage productivity.”

Consumption taxes as a substitute for income taxes is backwards tax policy at its worst and is catastrophic for middle- and low- income families. In fact, the Institute on Taxation and Economic Policy (ITEP)  found that the impact of a similar proposal in 2009 was disastrous:  the poorest 20 percent of Kentuckians would have seen their taxes rise by $136 on average, while the richest one percent would have received an average tax cut of $40,910.

Explaining his plan to abolish the income tax, Williams says it will be somehow economically stimulative: “If you look at states that have done away with income taxes, states like Texas, Tennessee and Florida, many jobs there were created after they adopted that."  

What Williams doesn’t seem to know is that none of these states had income taxes in the first place, so none have actually “done away” with them.  And whether it’s Texas’s oil or Florida’s tourism industry, these states have unique natural resources to fall back on that Kentucky can’t match.

What’s more, living in Texas, Tennessee, or Florida is hard for working families. ITEP found that all three of these states are in the top ten for the states with the most regressive tax structures, meaning they make it cheap for rich people live there, but expensive for everyone else because of reliance on consumption taxes.  Florida taxes its poor families at a rate of 13.5 percent, the second highest rate in the nation.

Williams, the GOP’s candidate for governor in Kentucky, proposes that an unelected tax reform commission of “economic and tax experts” should be appointed to create a plan based on his broad outlines.  It’s not clear, however, where he’ll manage to dig up a panel of actual tax experts who believe that income tax repeal is a smart move. The only support for that kind of policy is in conservative think tanks funded by corporations who, it is well known, hate paying taxes.

Should Williams unveil more details about his economic plans as the election approaches, we’ll be right here, ready to flag his more outrageous proposals and assumptions.

Photo via Am Heart Advocacy Creative Commons Attribution License 2.0

Progressive tax reform ideas are getting attention in Colorado, where voters may get the opportunity to enact it by ballot, and Kentucky, where lawmakers have the opportunity to support a far-reaching reform bill. Meanwhile, Iowa may move in the opposite direction by choosing the most draconian tax proposal being debated in the state.

Supporters of progressive taxation in Colorado, led by the Colorado Center on Law and Policy, filed a mix of ballot proposals last week that would greatly enhance the adequacy and fairness of Colorado’s tax system.  (Multiple proposals were filed for technical reasons, and supporters intend to bring only one plan before the voters.) 

Each proposal would transition away from Colorado’s flat rate income tax in favor of a graduated rate system.  The tax rate on taxable incomes below $50,000 would fall from 4.63% to 4.2%, while progressively higher rates would apply to higher levels of income.  Incomes above $1 million would be taxed at 9.5%. 

The majority of Colorado residents would see tax cuts, or no change in their income tax liability, under this plan.  Some of the proposals would also raise the state’s corporate income tax rate, while others would institute a new corporate minimum tax.  The state’s EITC would also be made permanent under some of the proposals.  By reforming Colorado’s tax system in this manner, approximately $1.5 billion in sorely needed revenue could be raised each year in order to improve the state’s struggling school system and other public services.

In Kentucky, Representative Jim Wayne held a press conference last week to discuss his bill, HB 318, which would modernize and increase the progressivity of Kentucky’s tax structure. The bill would expand the sales tax base to include a variety of services, introduce an Earned Income Tax Credit, and change the personal income tax rates and brackets.

ITEP estimates were used to show that, overall, the state would have a more progressive tax structure if the Wayne bill became law. Representative Wayne should be applauded for continuing to beat the progressive drum and arguing year after year that a tax system “should be equitable, it should be buoyant, it should be flexible, and it should grow with the economy.”

In less cheerful news, the Iowa House will have the opportunity to vote on a bill that passed through committee that, if approved, would reduce the state’s income tax rates across the board by 20 percent. This bill is one of the most expensive tax cut proposals currently on the table and threatens Iowa’s ability to provide public services over the long term.

In fact, the leader of the Democratic minority in the House recently said, "I'm not sure where the House ship is sailing. On one hand, we have all kinds of tax-cut bills moving through the process. ... It's about $2 billion over the next few years that would be eliminated from the state of Iowa's budget. How is that even remotely fiscally responsible?"

Of course, it's the opposite of fiscally responsible, as noted in a recent Iowa Policy Project brief finding that “[t]o develop long-term sustainability in the budget, it is important to examine what has given rise to current budget imbalances. Iowa’s long-term structural budget deficit has occurred in significant measure because lawmakers have adopted various tax breaks and reductions, not because they have expanded programs and services.”

According to the St. Louis Post-Dispatch, the push to pass so-called “Fair Tax” proposals in Missouri is "gaining steam" as billionaire Rex Sinquefield and his organization, Let Voters Decide, work to get these proposals on the ballot next year.  The goal is to use the threat of ballot initiatives to press lawmakers to pass “Fair Tax” legislation.

The move is the latest by Sinquefield and his organization (who backed the disastrous Proposition A which passed last year) to force a highly regressive measure on Missourians. It should come as no surprise that Republicans in the state are seriously considering the proposal. As CTJ has noted before, you can "follow the money" and find that Rex Sinquefield donated significantly to statewide Republican candidates, including contributing $200,000 to Speaker Steve Tilley who ran unopposed for his seat.

The specific legislative proposals, HJR-56 and SJR-29, would essentially replace all of Missouri’s income taxes by both increasing the rate of the sales tax as well broadening the base of the sales tax so that it applies to services.

As the Institute on Taxation and Economic Policy (ITEP) demonstrated in its testimony to a Missouri Senate committee in January, the legislation would cut taxes only for the Top 5% of income earners in Missouri, while significantly hiking taxes on the other 95% of Missourians. This translates into a $154 average increase for the lowest 20% of taxpayers, with the average tax cut for the top 1% reaching over $25,000.

On top of all this, the Missouri Budget Project notes in a recent statement that if the proposed sales tax rate is capped at 7% as reported, then the plan would result in billions of dollars of lost revenue.

If the initiative passes, “critical programs that represent the state’s investment in its workforce, such as education, transportation, and health services would face further cuts, endangering the state’s economic recovery, ” according to the Missouri Budget Project's Executive Director, Amy Blouin.

Unfortunately, Missouri is not the only state to consider “Fair Tax” legislation. Kentucky State Representative Bill Farmer recently proposed to repeal the state's income taxes and increase the sales tax. Once again, ITEP has demonstrated how this proposal would also be highly regressive and fail to produce adequate revenue.

As many states consider dramatic overhauls to their tax systems, it is important to stay vigilant as various disastrous “Fair Tax” proposals, like those in Kentucky and Missouri, pop up throughout the country.

The Kentucky Center for Economic Policy (KCEP), a new project of the Mountain Association for Community Economic Development, also launched its website this week.   The site features KCEP’s publications on fiscal policy issues in Kentucky focusing on the areas of budget and tax, workforce and economic development, and economic security.

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.

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.

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.

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.

Late last year we described Kentucky Governor Steve Beshear's misguided resistance to reforming the state's tax system. Instead of offering real leadership and addressing the serious flaws of the state's tax structure, Governor Beshear took a dramatic and short-sighted stance against any tax increases to assist in balancing the state's budget. It's unfortunate, but unsurprising that he continues to hold this position leading up to the Special Session starting May 24. (The legislature adjourned its regular session on April 15 without a budget).

Kentucky isn't a state where the tax system just needs a little tweaking. In a recent report, ITEP found that the state's revenue system "is simultaneously insufficient, as it fails to produce enough revenue to fund the public services on which Kentuckians rely, and inequitable, requiring low- and moderate-income residents to pay more in taxes relative to their incomes than wealthier individuals and families."

The two-year budget that is expected to pass in the special session contains no fundamental tax reform. Instead, it relies heavily on across-the-board spending cuts of 3.5 percent for the first year and 4.5 percent in the second year. Many are quick to add that the spending cuts aren't as deep for select areas of spending, including K-12 education, higher education, Medicaid and some areas of public safety, as if this makes a cuts-only budget more acceptable.

No doubt the choices facing Kentucky lawmakers are difficult and complex. But they have made their own jobs enormously more complicated and difficult by taking taxes completely off the table for the special session. The cutting has only begun.

Well, no one could accuse Governor Steve Beshear of failing to take a position on tax reform in Kentucky.  Unfortunately for the citizens and businesses of the Bluegrass State, it’s the wrong position.  In recent weeks, the Governor has made plain his opposition to changing the state’s tax structure, arguing in an opinion piece in the Lexington Herald-Leader that “for many, …‘tax reform’ means raising broad-based taxes on some while lowering them on others….an approach [that] at this time could do immediate damage to the economy, to employment levels and to individual workers.”

To be sure, state policymakers face a very limited set of options in addressing budget shortfalls. They can either cut spending or raise taxes. (Governor Beshear touts gambling expansions in Kentucky as one additional approach, though that option, as other states have found in recent months, has its own shortcomings.)  Still, between spending cuts or tax increases, it’s the latter that are likely to have a less deleterious effect on economic growth, since they will not reduce consumer demand as extensively as spending cuts.

Fortunately, other voices within the state are speaking up in favor of modernizing Kentucky’s tax system.  As the Owensboro Messenger-Inquirer noted recently, “it makes no sense to close off options when the state is facing one of its largest budget shortfalls in history.” This is a common-sense view given that, as the paper further observes, “Kentucky's outdated tax system has left the state's revenue sources dried up, which makes this the right time to act on tax reform.”

For more on the challenges – and the choices – before Kentucky policymakers, see ITEP’s June 2009 report on the subject as well as resources from Kentucky Youth Advocates and Kentuckians for the Commonwealth.

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.

With legislative sessions starting in just a few months, advocates and the press are weighing in on the options available to cash-strapped states. Kentucky lawmakers are urged to find a real solution to the state's fiscal woes. Idaho's Governor is suddenly open to delaying an improvement in an important tax justice tool. Maryland advocates urge a balanced approach to this year's budget, Arizona researchers offer insight into the cost of previous tax cuts, and Ohio lawmakers rethink their own previously enacted tax cuts.

Kentucky

Late last week, Kentucky's Lexington-Herald Leader published an editorial urging lawmakers to reform that state's tax code, saying "Our representatives and senators turned to a 'smoke and mirrors' approach to budgeting because they simply lacked the backbone to do the right thing: Pass the kind of real tax reform that could provide state government with a stable, sustainable revenue base." They fear that during this session lawmakers will continue to cut important programs instead of fixing the state's revenue stream. The paper warns the lawmakers appear to be on track to continue "robbing Peter to pay Paul...Only this time, Peter is a schoolchild."

Idaho

Tax fairness advocates in Idaho may be facing a similar uphill battle. Governor Butch Otter, once a strong proponent of the state's grocery tax credit (which helps to offset the state's sales tax on food), has now left the door open for delaying an increase in the credit amount in order to save the state $15.5 million. Of course, now is precisely the wrong time to delay such an important credit specifically targeted to help offset the state's regressive sales tax on food. While it's important to keep all options on the table, during this time of fiscal upheaval delaying the increase in this credit is an option that should be quickly dismissed.

Maryland

Recently the Maryland Budget and Tax Policy Institute released a paper urging lawmakers to approach the state's budget woes in a balanced way. The report makes a strong case against a cuts-only budget. "An all-cuts budget solution would sacrifice too many of the things that make Maryland such a great state." The report goes on to offer a list of concrete revenue-raising options available to lawmakers interested in preserving the state's education, health, and transportation programs.

Arizona

Arizona's budget woes are dire. A new report from the Arizona Children's Action Alliance describes the state's budget crater, which is projected to be $1.5 billion for FY10 and $2.5 billion in FY11. The report is useful for any Arizona advocate interested in understanding the impact that previous rounds of tax cuts have had on the resources available to fund public services. It explains "why any [budget] package that results in further net loss to the state general fund endangers the common benefits that Arizona counts on." The report goes on to offer ten reasons why the state should freeze and reverse the harmful tax cuts from recent years.

Ohio

Last week, the Ohio House of Representatives voted to suspend the state's scheduled income tax rate reductions for two years to help plug a budget hole. Governor Ted Strickland congratulated members of the House, saying they "acted quickly, courageously and responsibly to protect Ohio schools from devastating cuts while reducing their own pay in solidarity with struggling Ohio families and businesses." Now the legislation moves to the state's Republican controlled Senate. Let's hope lawmakers there follow in the House's footsteps and put the needs of Ohio first.

There’s a lot that can go wrong when a state turns to legalized gambling as a source of revenue.  This is a fact that Kentucky, Pennsylvania, and others should keep in mind during their continuing efforts to push for expanded gambling as a solution to their budget woes

For starters, a poor economy, opposition by local residents, legal challenges, and a number of other factors can delay the opening of newly legal gambling establishments.  And without functioning gambling venues, there’s no money for the state.  Recent stories out of Maryland and Pennsylvania demonstrate the very real nature of this threat.  Additionally, recent polling done in Illinois suggests that opposition to gambling at the local level – fueled in part, no doubt, by the Not-In-My-Back-Yard (NIMBY) syndrome – could cause similar delays there.  And legal challenges in Ohio indicate that the Buckeye state could be in for delays in gambling implementation as well.

But even after a state manages to get its gambling operations up and running, the revenue stream produced by gambling may not be as lucrative as advertised.  A recent New York Times story details the degree to which gambling revenues (from casinos, racetracks, lotteries, etc) are disappointing states this year.  The most obvious culprit in this case is the slumping economy, though some experts believe that increasing competition for gamblers both between states, and within states – known as “market saturation” – may be at least partially to blame.  Worries about market saturation have been on full display in Ohio, where racetrack owners are on edge about the effect that casino legalization (to be voted on by Ohioans this November) could have in cutting into their profits.

In other cases, it may simply be the case that gambling just isn’t as popular as first expected.  The perceived need among many states to legalize slot machine gambling as a means of drawing gamblers back to struggling racetracks is evidence of this problem.  Unfortunately, the failure of this method in Indiana has drawn into question the wisdom of this revenue-raising strategy as well.

Other methods, such as loosening the restrictions on betting limits or alcohol sales (which were originally imposed to secure support for gambling from reluctant lawmakers) are being tried as well.

Ultimately, the fact is that gambling is far from a fiscal panacea for the states, and given the tendency for implementation delays, is exceedingly unlikely to result in much revenue to fix the current round of state budget shortfalls.  Take a look at this ITEP policy brief for more on the gambling issue.

A little over a year ago, we told you about a ridiculous law in South Carolina that provided for a sales tax "holiday" on purchases of handguns, rifles, and shotguns (later ruled unconstitutional for technical reasons, though only after the holiday had already taken place).  Little did we know then that the idea would actually catch on.  Louisiana enacted a similar "holiday" last month, upping the ante by exempting not only handguns, rifles, and shotguns, but also bows, crossbows, hunting knives, arrows, ammunition, rifle scopes, holsters, and much more.  Unbelievably, the idea is reportedly receiving attention in Texas and Kentucky as well.

The Louisiana holiday is scheduled to occur each year on the first consecutive Friday through Sunday in September.  During that weekend, neither state nor local sales taxes will be collected on a variety of items the legislature has declared worthy of being included in its "Second Amendment Holiday." 

But it's not hard to imagine how many of those exemptions will pose serious administrative problems.  With some exempt items, such as tree stands, there seems to be little room for confusion.  In other cases however, the state has decided to exempt a variety of multi-purpose items based on whether they were designed, marketed, or even simply purchased for use while hunting (e.g. some items must be designed with hunting in mind, while others need only be purchased by somebody with the intent to hunt).  Items falling into this category include off-road vehicles, animal feed, boots, bags, binoculars, chairs, belts, and various types of camouflage clothing. 

Apparently, according to this list of tax-exempt items, you can look at a bird through tax-free binoculars, but only if you intend to kill it.  Ensuring that these items are really purchased by individuals with "Second Amendment" intentions will no doubt prove impossible.

The bill's official fiscal note hints at a further complication involved with this holiday.  Specifically, it explains that the state will pay retailers $25 for each cash register they re-program to calculate "Second Amendment" items as being tax-free.  On top of that, the state will pay $25 more when the register is re-programmed, back to normal, at the end of the holiday.  Official estimates are that it could cost Louisiana taxpayers up to $100,000 to help retailers make the necessary modifications.  Since the holiday is only expected to result in $263,000 per year in tax savings, this $100,000 cost is not a trivial concern.  And keep in mind, Louisiana taxpayers not purchasing weapons will be helping to pay this $100,000 tab to benefit their soon-to-be well-armed neighbors.

The inevitably complicated nature of sales tax holidays is just one of their many flaws -- as explained in this ITEP Policy Brief.  But despite all their problems, at least typical "back-to-school" sales tax holidays can be interpreted as a misguided attempt to make life easier for families with school-age children.  When it comes to these "Second Amendment Holidays," however, it's hard to see what exactly lawmakers are trying to gain, other than a pat on the back from the NRA.

Lawmakers in Kentucky met this week in a special legislative session that started Monday. During Governor Beshear's opening address, he proposed solving the state's nearly $1 billion shortfall for the new fiscal year (which starts in less than two weeks) through spending cuts, federal stimulus dollars, and gambling. He