Maine News

States Can Make Tax Systems Fairer By Expanding or Enacting EITC

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

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

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

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

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

Read the full report

State News Quick Hits: Maine Cracks Down on Tax Havens and More

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Maine legislators are poised to crack down on corporations that use foreign tax havens to hide income from state tax authorities. The legislation, which has now been passed by both the House and Senate but still faces further votes, requires multinationals doing business in Maine to declare income otherwise attributed to more than thirty countries known to be popular tax havens (like the Cayman Islands and Bermuda, not to mention the Bailiwick of Guernsey, which turns out to be an island off the coast of France). Analysts estimate that such a change would increase state revenue by $10 million over the next two years. And U.S. PIRG, among other public interest organizations, has been beating the drum for this sensible reform, which we discussed in our recent report: 90 Reasons We Need State Corporate Tax Reform. Oregon and Montana already have similar laws on their books.

Thanks to a refundable tax credit included in New York’s budget this year, theater companies who launch their productions in upstate New York will enjoy having taxpayers foot the bill for 25 percent of the cost of “their so-called tech periods, the weeks long process in which a production gathers the costumes, tests the sets and choreography and establishes the lighting and musical cues.” Despite the credit’s extreme generosity, we’re still not sure it would have been enough to save Spider-Man.

Tax swap proposals that would trade income rate reductions for sales tax increases have been all the rage in conservative states in recent years. But what if your state doesn’t even have an income tax to begin with? Not wanting to be left out of the tax swap craze, Republican candidate for Texas Comptroller Glenn Hegar has a solution: completely replace property taxes with an increased sales tax. Texas already has a horribly regressive state tax system (PDF), but eliminating the property tax -- which is at least close to proportional in its distribution across income groups -- would only make matters worse. And while it is “easy to hate” the property tax, without it Texas would need to drastically cut services or more than double the sales tax. Such a trade could also mean less autonomy for localities (PDF) and a revamped school financing system.

Grover Norquist and the Koch brothers’ Americans for Prosperity are continuing to push for eliminating income taxes on investors in Tennessee, and there’s a chance they may succeed.  The state’s tax-writing committees will be voting this week on whether or not to gradually repeal Tennessee’s “Hall Tax” on dividends, interest, and some capital gains.  But repeal would be steeply regressive, as our partners at the Institute on Taxation and Economic Policy (ITEP) showed in a report cited by The Tennessean.  And on top of that, a spokesman for Governor Bill Haslam explains that “we’re in the middle of dealing with difficult budget realities … and this legislation would automatically put the issue above other priorities when revenues come back.”

State News Quick Hits: Maine's Millionaires Abandon the 47%, and More

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Colorado’s Child Care Tax Credit would be expanded for low-income families under a bill approved by a special task force of legislators last week.  As the Colorado Center on Law and Policy explains (PDF), some Colorado households are actually too poor to benefit from the federal credit right now because it's only available to families who make enough to have some income tax liability; if you don't pay income taxes, you can't receive any state tax credit.  This bill would fix that problem at the state level by letting families earning under $25,000 claim a credit equal to 25 percent of their child care expenses, regardless of what credit they did (or did not) receive at the federal level.

Montgomery County, Maryland continues to make progress toward restoring its Earned Income Tax Credit (EITC) to its pre-recession level: 100 percent of the state’s EITC.  The enhancement was approved by a committee on Monday and will now go before the full council.  For more information, see our blog post on the history, and the benefits, of Montgomery County’s EITC.

Maine Governor Paul LePage is coming under fire for wildly inaccurate comments he made (which were secretly recorded) at a meeting of the Greater Portland chapter of the Informed Women’s Network.  Gaining him national attention, LePage told his audience  that “47 percent of able-bodied people in Maine don’t work,” a claim that is ridiculous.  At the same meeting LePage also said the following to justify his proposals to cut taxes for wealthy Mainers: “25 years ago Maine had about 2,000 millionaires. Maine has 400 now. New Hampshire at the time had about 500, right now they have 4,000. That’s the difference. That’s when you talk about prosperity and you talk about building an economy those are the things that you need to concern yourself with. So, I am looking at taxation as a big issue.”  Like his 47 percent claim, LePage evidently pulled these numbers out of thin air as data from the IRS do not back this statement. In fact, the number of tax returns with more than $1 million of income increased more in Maine (83%) than in New Hampshire (64%) between 1997 and 2011 (the years IRS data are available).

Some bad ideas just won’t die. Despite being rejected by the Pennsylvania House of Representatives by a vote of 138-59 last month, a proposal to eliminate school property taxes and reduce spending for schools is now being reconsidered by the state’s Senate. The bill, SB 76, replaces the property tax with higher sales and income taxes but then limits how much of the new revenue would flow to schools. The legislature’s own Independent Fiscal Office warned last week that the bill would create a $2.6 billion funding gap within five years. While reducing property taxes, which have been rising in recent years, may make sense (for low-income renters and fixed-income homeowners in particular), it should not be done at the expense of students, nor in the form of across-the-board cuts that also benefit big businesses. The House-passed HB 1189 at least ensured that the lost property tax revenues would be replaced with some other source, but neither bill addresses the longstanding problem of inadequate and unequal school funding in Pennsylvania.


Here’s some happy news: a recent poll finds that just 27 percent of Louisianans support Governor Bobby Jindal’s tax swap, and that’s before the Institute on Taxation and Economic Policy (ITEP) released its latest analysis showing that the poorest 60 percent of taxpayers in Louisiana would see a tax hike as a result of the Governor’s plan.

A robotics company based in Nevada recently decided to abandon the state’s allegedly “business friendly” environment in favor of Silicon Valley in California, where there are better trained employees and plenty of deep pocketed investors. Nevada does not levy a personal or corporate income tax, but as Romotive founder Keller Rinaudo explains: "It was not a short-term economic decision ... We have to find experienced roboticists, and that really only exists in a few places in the world, and California is one of them."

Maryland’s gas tax will be increased and reformed starting July 1 under a bill just sent to Governor Martin O’Malley by the state’s legislature.  This year’s increase will be something less than 4 cents per gallon, but the tax will now rise each year alongside inflation and gas prices, as recommended by ITEP. ITEP showed that even with the increase, Maryland’s gas tax rate will still remain below its historical average and be less than the state probably needs.

Here’s an interesting story in the Minnesota Star Tribune about how Governor Dayton’s tax plan would impact the wealthiest Minnesotans. While opponents resort to the usual tax-hikes-kill-jobs refrain, Wayne Cox of Minnesotans for Tax Justice notes, “Economists believe keeping teachers and firefighters on the payroll is at least three times more helpful to the economy than keeping income tax rates at the top the same.”

Tax cuts for opposite ends of the income spectrum are getting opposite treatment in Maine and Arkansas. This week, Maine lawmakers rejected a bill that would cut taxes on capital gains (which heavily benefits wealthy taxpayers) and approved an increase in the state’s Earned Income Tax Credit (EITC) (PDF), which amounts to a tax cut to low- and moderate-income families. But last week in Arkansas, a House panel approved a cut in taxes on capital gains while passing up an opportunity to enact a state EITC.

A Missouri child advocacy group is planning on lobbying for an extension of the “Children in Crisis” tax credit during the upcoming legislative session.  But Missouri doesn’t need more tax breaks, even if they are designed with noble causes in mind. Instead, lawmakers should be looking at ways to sustainably raise enough revenue to adequately support children’s programs so they don’t have to resort to special tax breaks.

Some Wisconsin lawmakers continue to insist that Wisconsin’s progressive income taxes are too complex and unfair and that the best remedy is a flatter tax structure with a single rate. But this post from the Wisconsin Budget Project reminds us that moving to a flatter income tax structure “would benefit the biggest earners and could raise taxes for people in the working class.”  Flatter does not mean fairer.

In their brief arguing for increasing the state’s earned income tax credit, the Louisiana Budget Project (LBP) cites Institute on Taxation and Economic Policy (ITEP) data showing how the state’s tax structure asks low income families to pay more taxes as a share of their income than wealthier Louisianans. LBP advocates doubling the state’s current 3.5 percent tax credit saying, “the benefits for Louisiana families and children are proven.”

We’ve made the case for why tax breaks for big oil and gas companies should be repealed at the federal level, and now the Oklahoma Policy Institute has weighed in with their take on why state tax breaks for oil and gas should be jettisoned as well. According to the Institute, “Oklahoma’s oil and gas companies have ranked tax incentives as the least important factor affecting drilling decisions,” and offering these breaks is therefore unnecessarily “squeezing out resources for schools, roads, public safety, and other keys to long-term economic growth.”

Maine Governor Proposes Regressive Tax Break for Seniors

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Hot off of signing an expensive and unfair $400 million tax cut for Mainers in June, Maine Governor Paul LePage is now promoting a new regressive tax break targeted to older adults. 

He would like for state lawmakers to fully exempt all pension income from the state income tax, a move he thinks will help fixed-income older adults and bring wealthy retirees to the state. While most states with broad-based personal income taxes, including Maine, allow some sort of pension income exclusion, only Illinois, Mississippi and Pennsylvania fully exempt it from taxation. 

Maine currently allows retirees to deduct a maximum of $6,000 per spouse of their pension income less Social Security benefits received.  In other words, older Mainers with annual Social Security income over $6,000 ($12,000 if married) do not currently benefit from the pension deduction.

LePage’s proposal is a poorly-targeted and unnecessarily expensive tax break that will make Maine’s tax system less sustainable and less fair.

As a newly released ITEP brief points out, state income tax breaks for older adults, especially those that exempt all pension income, typically reserve the lion’s share of their benefits for better-off elderly taxpayers. Such poorly targeted tax breaks shift the cost of funding public services towards non-elderly taxpayers, many of whom are less well-off than the seniors benefiting from the tax breaks.

Also, long-term demographic changes threaten to make such a pension income tax break unaffordable in the long run. Older adults are the fastest growing age demographic in the country.  According to the US Census, between 2000 and 2010, the US population of adults 55 and older grew by more than 30 percent while the population of those under 55 grew only by 4 percent.  This change was even starker in Maine where the 55 and older population grew by 32 percent while the population under 55 actually shrank by 4.5 percent.  Over time, this demographic shift will mean that a shrinking pool of workers will be forced to fund tax breaks for an expanding pool of retirees — heightening the need to target these tax breaks appropriately in order to minimize their cost. 

Maine Revenue Services has estimated that this special tax break for older adults would cost the state $93 million.  Given that Maine is still climbing out of a budget hole ripped by the ongoing recession, services would have to be cut or other taxes would have to be increased to pay for LePage’s proposal.

Maine lawmakers would be wise to reject LePage’s proposal and should either stick to their current pension income deduction or consider a break which is better targeted to the state’s neediest older adults.

Photos via Maine Public Broadcasting Creative Commons Attribution License 2.0

Maine's New Budget Gives to the Rich and Takes from the Poor, Literally

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Maine Governor Paul LePage signed a $6.1 billion two-year budget into law this week. The budget includes reductions to the state’s personal income and estate taxes in addition to other tax changes that will cost the state $153 million in FY12-13 and $400 million in FY14-15. 

The new tax changes are both expensive (and force spending cuts elsewhere) and incredibly unfair. A reduction in the top income tax rate and increase in the state estate tax exemption primarily benefit the state’s wealthiest residents.  According to an Institute on Taxation and Economic Policy analysis conducted for the Maine Center for Economic Policy (MECEP), more than half of the benefits of the new personal income tax reductions will go to the wealthiest 20 percent of Maine taxpayers. 

Not only do the richest Mainers benefit most from this budget, 75,000 low, moderate and middle income families are likely see their taxes increase by as much as $400 annually because of cuts to the state’s property tax circuit breaker program that protects homeowners from paying too large a portion of their family income in local property taxes. (See our fact sheet on circuit breakers.) Whatever modest tax reductions these moderate and low income filers get from the new personal income tax cuts will be offset by the increase they’ll face in property taxes.

The major tax changes enacted in Maine this session are:

  • A reduction of the top marginal personal income tax rate from 8.5 to 7.95 percent;
  • A restructuring of the personal income tax rates, collapsing from four to three brackets replacing current rates with  0, 6.5, and 7.95 percent;
  • Increasing the standard deduction and personal exemption to the federal amounts;
  • Eliminating the state’s alternative minimum tax, which is designed to ensure that upper-income taxpayers pay at least some income tax;
  • Raising the estate tax exemption threshold from $1 million to $2 million;
  • Limiting the value of the property tax circuit breaker to 80 percent of the total benefit;
  • Eliminating the annual indexing of the state’s motor fuels tax to inflation, a move that would make the gas tax less sustainable over time.

Photo via Jimmy Wayne Creative Commons Attribution License 2.0

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

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

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

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

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

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

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

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

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

Flood of Bad Tax Ideas Coming from the States

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Ill-conceived tax ideas are coming out of statehouses and governors’ mansions at a faster rate than we’ve seen in quite a while.  Here’s a quick summary on recent proposals receiving serious consideration in Arizona, Florida, Idaho, Maine, Michigan, Minnesota, New Jersey, Ohio, and Wisconsin.

Arizona: Business tax breaks and property tax breaks are being pushed by the Arizona Chamber of Commerce, and legislative leaders are taking them seriously.  The specifics have yet to be worked out, but expect at a minimum to see tax subsidies ostensibly aimed at boosting business hiring and investment.  As the Center on Budget and Policy Priorities (CBPP) has explained, however, states cannot stimulate their economies by cutting taxes.

Florida: Newly elected Governor Rick Scott continues to insist that “the way to get the state back to work is to cut property taxes and phase-out the corporate income tax, and we’re going to get that done.”  The state’s enormous budget gap has caused Senate President Mike Haridopolos to approach the issue more cautiously, though he still claims that “if we see some opportunities for tax relief that we feel absolutely confident will create more jobs and actually grow the economy, we’re open to them.”  Haridopolos is also pushing a “Taxpayer Bill of Rights” (TABOR) proposal similar to the one that decimated Colorado’s education funding stream.

Idaho: Legislators in Idaho — including the House majority leader — are preparing to revive an idea they first proposed toward the end of last year’s session: slashing the state’s corporate income tax rate from 7.6 percent to 4.9 percent.  Idaho legislators are also discussing cutting the state’s top personal income tax rate from 7.8 percent to 4.9 percent.  Each of these changes would drastically reduce the amount of revenue available to pay for vital state services, though by proposing that these changes be phased-in gradually over the course of the next decade, legislators are hoping to avoid having to spend too much time thinking about what state services will eventually have to be cut.

Maine: State Tax Notes (subscription required) reports that the chairman of Maine’s Senate tax committee plans to make cutting the state’s personal income tax rate his top priority.  Unlike the tax reform package that Maine voters recently rejected, this cut would be paid for not by broadening the state’s tax base, but by cutting spending and hoping for strong revenue growth.  Maine’s legislators are also apparently contemplating a constitutional amendment that would require supermajority support in the legislature in order to raise taxes.  A supermajority requirement of this type would result not only in lower state services, but also in more tax loopholes.  This is because such a requirement would prevent a simple majority of legislators from eliminating a tax loophole unless they also enlarged another loophole or lowered tax rates in a way that resulted in no net revenue gain.

Michigan: House and Senate leadership on both sides of the aisle in Michigan have inexplicably come to an agreement that the state’s EITC should be cut.  It’s unclear why tax increases on low-income families have suddenly become so popular in Michigan.  If Governor Rick Snyder gets his way, some of the revenue generated by taxing low-income families will likely to be used to pay for his proposed $1.5 billion cut in state business taxes.

Minnesota: The Republican leaders of Minnesota’s state legislature made clear this week that business tax cuts will be one of their top priorities.  One Senate leader has proposed cutting the state’s corporate income tax rate in half by 2017 and freezing statewide taxes on business property.  Fortunately, Minnesota Governor Mark Dayton is likely to vigorously oppose these cuts.

New Jersey: Democratic legislators are seriously considering a move to single sales factor apportionment for their corporate income tax.  The bill has already cleared the relevant committee, and will move to the full Senate soon.  See ITEP’s policy brief criticizing the single sales factor for state corporate income taxes.

Ohio: Ohio’s House and Governor have declared repealing the state's estate tax to be a top priority.  Local governments receive a majority of the revenue generated by Ohio’s estate tax, and therefore oppose its repeal.  Ohio’s House leaders would also like to create a business tax credit for hiring new employees.

Wisconsin: Governor Scott Walker has proposed a variety of business tax breaks and, as in Maine, the creation of a supermajority requirement to raise taxes.  More bad ideas are almost certain to come from Wisconsin in the weeks ahead, as Governor Walker made clear during last year’s campaign that he supports the outright repeal of Wisconsin’s corporate income tax.

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

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

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

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

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

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

State Transparency Report Card and Other Resources Released

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

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

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

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

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

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

State Tax Code Spending Under Fire

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For years, both state and federal lawmakers have opted to forgo the hassles of the appropriations process in favor of enacting tax breaks — or “tax expenditures” — aimed at exactly the same goals.  The result has been a steady rise in tax code spending, and a corresponding decline in transparency and fiscal responsibility.  Recent developments in Missouri, Georgia, New Mexico, and Maine, however, indicate that at least some lawmakers are interested in getting a grip on this type of out-of-control spending.

In Missouri, the Tax Credit Review Commission, created by Governor Jay Nixon in July, finally issued its recommendations this week.  In addition to recommending the elimination of 28 tax credits and the reform of 30 more, the Commission also took the commendable step of proposing some broader reforms to the way Missouri lawmakers deal with tax credits.  Most notably, the Commission suggested sunsetting every state tax credit in order to force their review, and even proposed a schedule for sunsetting them in waves two, four, and six years from now.  This proposal closely resembles a reform enacted by Oregon in 2009.

In addition to sunsets, the Missouri Commission also proposed capping tax credits in order to reverse the explosion in tax credit spending the state has experienced in recent years.  In support of this proposal, the Commission notes that “as State revenues have declined and spending for other programs has been reduced, spending on the State’s tax credit programs has continued to grow.”  Finally, the Commission also recommends eliminating and/or reducing the ability of businesses to carry-back their tax credits to prior years’ tax bills, and enacting additional “clawback” provisions to ensure that companies only benefit from tax credits if they consistently meet all of the eligibility requirements.

The Georgia Council on Tax Reform and Fairness seems to be contemplating a similar path.  While the group’s report won’t be out until early January, the chairman has suggested sunsetting most tax exemptions on a five year schedule.  Hopefully, the final report from the Council will include this recommendation and enhance it further by bringing all tax expenditures — not just tax exemptions — within its scope.  The Council would also be wise to offer some specific ideas for ensuring that the debate over expiring tax provisions is sufficiently rigorous (like by implementing a complementary tax expenditure review system).

In Maine, a working group comprising various state agency heads recently came out with recommendations that are quite similar to those being considered in Missouri and Georgia.  While not advocating the use of sunset provisions, the group has suggested the creation of a review system similar to the one that exists in Washington State.  Multiple lawmakers have voiced support for the idea, though Maine’s recent switch from all-Democratic to all-Republican control could complicate things.

Finally, in New Mexico, the drive to review state tax code spending is coming not from a commission or working group, but from lawmakers themselves.  Back in 2007, New Mexico lawmakers passed a bill enacting a tax expenditure reporting requirement, only to be thwarted by Gov. Richardson’s veto.  As a result, New Mexico is one of just seven states without a legal requirement that tax expenditure reports be released on a regular schedule.  Now, the Albuquerque Journal reports that some lawmakers — including the Governor-elect — are pushing for enhanced disclosure and review of the state’s film tax credit, among other tax expenditures.

Hopefully, the difficult budgetary situations confronting each of these states will spur lawmakers to do what’s long overdue: finally get a grip on out-of-control tax code spending.

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

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

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

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

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

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

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

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

Bad Tax Ideas from Five Gubernatorial Races

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In an attempt to win votes, lots of gubernatorial candidates have been promising lots of tax cuts — despite the fact that many of their states face very bleak budgetary outlooks.  Here are examples from five states:

Rhode Island — John Robitaille won the Republican nomination for governor this past Tuesday on a platform that includes amending the state constitution to cap property tax increases at 2.5 percent per year.  Massachusetts's experience with a similar cap indicates that this proposal could have a very negative impact on local government services.

Wisconsin — Scott Walker was the winner of Wisconsin's Republican primary on Tuesday.  Walker is also running on an anti-tax platform, including a property tax "freeze" that would only allow revenue growth to the extent that new construction occurs.  Democrat Tom Barrett is also running on a campaign that heavily emphasizes cutting government spending, and enacting so-called "targeted" business tax cuts to create jobs.

Michigan — Republican gubernatorial candidate Rick Snyder's proposal to cut taxes on Michigan corporations by $1.5 billion received some attention in the media this week.  Specifically, Snyder would repeal the Michigan Business Tax and replace it with a much smaller corporate tax.  Recent polling indicates that Snyder holds a substantial lead over Democrat Virg Bernero.

Florida — Some of the most absurd tax proposals we've seen in a gubernatorial race this year have come from Florida Republican Rick Scott.  In his very first year in office, Scott wants to slash both school property taxes and the corporate income tax — to the tune of $2.1 billion total in tax cuts.  Unspecified cuts in government spending would then be made to keep Florida's budget in balance.  After this, Scott claims he would focus his energy on eliminating Florida's corporate income tax entirely. Thankfully, Democrat Alex Sink is opposed to cutting the corporate income tax, though she has jumped on the job-creation tax credit bandwagon.

Maine — Both Democrat Libby Mitchell and Republican Paul LePage are running on anti-tax platforms in Maine.  Neither is open to the idea of using tax increases to balance the state's budget.  Mitchell claims that "Maine's income tax is too high and I will continue the effort to lower it."  LePage has stated that "Reducing the overall tax burden for all Maine citizens and small businesses is my vision for tax reform."

New ITEP Report Examines Five Options for Reforming State Itemized Deductions

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

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

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

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

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

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

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

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

Read the full report.

Maine Voters Say: Please Hike My Taxes!

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Earlier this week, Maine voters approved a ballot measure that repeals an ambitious tax reform enacted in 2009 by the state legislature. The legislature’s plan would have reduced the state’s reliance on income taxes and increased its reliance on sales taxes in a way that was carefully calibrated to leave total tax collections unchanged (while cutting taxes on Maine residents and hiking taxes on tourists).

This tax reform plan had been placed on hold after a signature gathering campaign gave voters the opportunity to ratify or reject the legislature’s actions. Voters this week rejected the plan by a 61-39 margin—but don’t seem to have been aware that they were essentially voting to hike their own taxes by more than $50 million a year.

If it seems odd that Maine lawmakers would pass a revenue-neutral tax reform at a time of such budgetary turmoil, this is because the legislation’s sponsors had longer-term reform goals in mind. As in many other states, both the sales tax and income tax were riddled with loopholes that forced tax rates higher than they would otherwise need to be.  

The legislature’s reforms would have broadened the income tax base by repealing all itemized deductions, and broadened the sales tax base by eliminating exemptions for services from car repairs to laundromats to movie tickets. The tax increases from these base expansions were to be offset by reductions in the top income tax rate from 8.5 to 6.85 percent and the creation of a new refundable “household credit” designed to ensure that most Mainers would see net income tax cuts under the plan; state revenue officials estimated that 95 percent of Maine residents would have seen income tax cuts under this plan, and that 87 percent of residents would have seen net tax cuts even after the sales tax increases.

The plan was also motivated by a perception that tourists and part-year residents weren’t paying their fair share of the cost of funding public services. The plan would have increased the sales tax rate on certain items consumed primarily by non-residents, such as lodging and rental cars. This is the main reason why this revenue-neutral plan would have cut taxes on Maine residents by $50 million while increasing taxes on non-residents by a similar amount.

The good news for lawmakers is that because the plan was designed to be revenue-neutral, its rejection by voters won’t affect the state’s budget in the short run. But it’s likely that this failure will make budgeting more difficult for policymakers in the long run. Broadening tax bases by eliminating tax breaks makes a state’s revenue stream less volatile over time: a shortfall in consumer spending in one area can be offset by continued growth in another, and the result is a smoother, more predictable revenue stream.

From that perspective, this bill was a recipe for a more sustainable tax system. Unfortunately, many Mainers simply thought this was a referendum on whether the sales tax should apply to their movie tickets.

Voting on the "Maine Miracle" Tax Reform

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On June 8th, residents of Maine are set to vote on whether or not to repeal the state’s first major tax reform in 40 years.
The referendum appears as Question 1 on the June 8th primary ballot. Voters will be asked, “Do you want to reject the new law that lowers Maine’s income tax and replaces that revenue by making changes to the sales tax?”
The bulk of the reform, passed by legislators last summer, involves broadening the sales tax base, while proportionally cutting income taxes to make the measure revenue neutral. In addition, the reform legislation includes several new tax credits and improves on current credits.
The reform will replace the current marginal income tax rates (2%, 4.5%, 7%, and 8.5%) with a flat tax rate of 6.5% of Maine taxable income. In addition, a .35% income tax surcharge will be applied to Maine taxable income in excess of $250,000.
To supplement an estimated $107 million in income tax cuts, the reform includes an expansion of the sales tax base to include more services, better reflecting the modern economy.  The broad categories that will be added to the base include: entertainment and recreation; installation, repair and maintenance; personal property services; transportation and courier services. The complete list of services is provided by the Maine Revenue Services.

It also includes a targeted increase in the sales tax rate on things such as lodging (except campgrounds) and prepared food from 7% to 8.5%.
The aim of the specific sales tax increases and base broadening is to shift some tax costs on to out-of-state tourists and visitors. The Maine Revenue Service estimates that about $25 million of the $53 million raised by the new sales taxes will be paid by visitors to the state.

The tax reform legislation also replaces standard and itemized deductions with a new refundable household credit. The household credit has a base amount of $700 for single taxpayers, $1,050 for heads of household taxpayers, $1,200 for married taxpayers filing jointly, and $600 for married taxpayers filing separately. The legislation also makes the current earned income tax credit refundable

Tax credits are distinct from deductions in that they reduce a person’s total tax liability rather than simply reducing their taxable income. What is meant by refundable tax credits is that the taxpayer will actually receive money back from the government if the credit exceeds their total income tax liability.

Maine’s shift toward refundable tax credits shows a significant advance in efforts to combat poverty and improve the state's tax system for low income individuals.  Moreover, the legislation improves access to the state’s circuit breaker program for low-income homeowners and renters
Other smaller income tax credits are a 5% charitable contributions credit in excess of $250,000 and a $60 credit for taxpayers aged 65 years or older.

Taken together, the new tax rates and credits will result in lower income taxes for some 95.6% of Maine residents and a refund for some 263,000 Maine households that are too poor to owe income taxes.

Looking forward, one further improvement on the tax reform legislation would be to restore the indexed income tax rates. Although the legislation includes broad tax cuts and smart refundable credits, more than 37% of the overall reduction in taxes benefits only the top 10% of income earners. If the income tax rate included some level of progressive indexing, the disproportionate tax cuts going to top earners could be spread more evenly to lower income earners.
In a time when political polarization is the norm, the tax reform legislation in Maine is exceptional in that it embodies the consensus from a wide variety of ideological groups, from the progressive Maine Center for Economic Policy to the conservative Maine State Chamber of Commerce.
If voters on Tuesday choose to keep the tax reform, it will be an important step forward for creating a better tax system for Maine.


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

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

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

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

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

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

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

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

"TABOR" Update: Restrictions on Revenue-Raising on November Ballots

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Next month, voters in two states will go to the ballot to decide whether to cap the growth in public budgets according to a formula based on the annual rate of population growth plus inflation. In Washington, the ballot initiative brought forward by anti-taxer Tim Eyman is called I-1033. Researchers at the Washington State Budget and Policy Center and the Colorado Fiscal Policy Institute refer to it as the "toxic twin" of Colorado's Taxpayer Bill of Rights (TABOR).  In Maine, the initiative, dubbed TABOR II, is more akin to an annoying younger brother (well, if that brother had the ability to wreak complete havoc with sound fiscal policy).  You can tell him to go away -- as Maine voters did in rejecting an earlier version of the initiative in 2006 -- but he unfortunately keeps coming back.
Colorado's experience makes it clear that arbitrary funding formulas are an ineffective way to run government, leading to devastating impacts on vital public services. In fact, Colorado voters chose to suspend TABOR in 2005, due to the effects it was having on education, transportation, and human services. 

The limits that I-1033 in Washington and TABOR II in Maine would impose are especially dangerous in light of the current recession.  Under these initiatives, funding caps would be the lesser of the previous year's cap or the previous year's actual funding levels.  As a result, during economic downturns, when revenues are especially low, the cap is permanently “ratcheted” down to lower levels.

As to the consequences that these initiatives would have if enacted, Washington State  Senator Rodney Tom was recently quoted in the New York Times as saying, "If I-1033 passes, I think we just all go home and bury our heads in the sand." 

As discouraging as that image may be, there are reasons to be hopeful.  The Maine Chamber of Commerce, which had initially backed TABOR II earlier this year (despite opposing its predecessor in 2006), recently withdrew its support, a clear sign that the measure goes too far even for business leaders.

For more on the impact of I-1033, see the Washington Budget and Policy Center's report “I-1033 Undermines Public Priorities.”   For more on Maine’s TABOR II, check out these resources from the Maine Center for Economic Policy or read the Center on Budget and Policy Priorities recent analysis.

Two states, Washington and Maine, will consider ballot proposals this fall that are similar in concept to the disastrous "Taxpayer Bill of Rights," or TABOR, that Colorado enacted in 1992 to limit tax increases and cap spending by the state government.

This week, Washington State officials released their estimate of the fiscal impact from Initiative 1033, which will be on the November ballot. The Washington State Budget and Policy Center says I-1033 "would impose strict spending limits on state and local governments resulting in sharp reductions in public investments in education, community devel­opment, health care, and economic security. By restricting resources, I-1033 would dramatically weaken the state’s ability to fund important public priorities and would dimin­ish the quality of life for all Washingtonians."

The state's Office of Financial Management agrees and says, "The initiative reduces state general fund revenues that support education; social, health and environmental services; and general government activities by an estimated $5.9 billion by 2015." (This doesn't include the estimated loss of nearly $700 million for counties and $2.1 billion for cities by 2015 that would result if I-1033 is approved.) Voters in Washington would be wise get all the facts before voting in favor of this heavy-handed and unnecessary proposal.

A similarly draconian initiative will be put before the voters in Maine this fall.  Last week, Secretary of State Matt Dunlap approved the so-called TABOR II for inclusion on the November ballot.  The initiative largely reprises an earlier effort – rejected by voters in 2006 – to impose severe limits on state spending and taxes, limits that could become more constraining with each successive economic downturn.   A new and excellent report from the Maine Center for Economic Policy reviews the dangers of the current initiative and concludes that what was bad in 2006 has only gotten worse with time.  Legislators and other public leaders agree.

To learn about how you can help stop TABOR II in Maine, visit Maine Can Do Better.


Thought You'd Heard the Last of TABOR? Think Again

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The poorly named Tax Payer Bill of Rights (TABOR) is a cap on allowable spending enacted in Colorado in 1992. Since then, it has become clear that the measure demolished the state's ability to fund higher education, infrastructure and health care. Despite voters approving a ballot measure to suspend Colorado's TABOR for five years, the concept of a spending limit is still rearing its ugly head in both Maine and Missouri.

In Maine, the Heritage Policy Center has a revised TABOR proposal (a previous proposal was defeated by a vote of the people two years ago), which promises to combat the state's "overspending" problem while making it quite difficult for taxes to be raised. This November, Mainers will be asked to vote once again on the TABOR. Read the Maine Center for Economic Policy's report about the many serious problems with this proposal.

Meanwhile, a proposal to cap spending is making its way through the Missouri House of Representatives, which will serve as another test for the pro-TABOR forces. Read the Missouri Budget Project's warning about TABOR's impact on the state.

Gas Tax Increases: An Increasingly Popular Idea

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At the state level, the usual response to recommendations that taxes be increased to preserve vital state services has generally been: "Now is not the time". The most notable exception to this trend so far has been with the cigarette tax, as we've explained before. Increasingly, however, policymakers appear to be coming around to the idea of boosting gas tax rates in order to raise the revenue needed to maintain our nation's infrastructure. Given that most state gas taxes haven't been increased for quite a few years, and that during that time inflation has significantly eroded the value of most gas tax rates, our only response can be, "It's about time."

In Maryland, for example, the Senate President recently expressed an interest in raising the gas tax, urging that "there's got to be an increase in the transportation trust fund somewhere, and there's got to be a way we can find people with the political will to make it happen". Numerous governors have echoed this call as of late, most recently in Massachusetts, and Idaho.

In Idaho, especially, the Governor was able to hit the nail on the head with his observation that, "[we last raised] the fuel tax... 13 years ago. And now here we are trying to accomplish 2009 goals with 1996 dollars. Everyone in this room or listening to me throughout Idaho today -- everyone who has a household budget or runs a business -- knows that just doesn't work".

In response to this problem, Idaho Governor "Butch" Otter has recommended bumping the gas tax upward by 2 cents in each of the next 5 years. Addressing the root of the problem even more directly, Wisconsin Governor Jim Doyle has proposed indexing the gas tax rate to inflation -- a practice that had existed in Wisconsin up until 2006. Maine and Florida continue to index their gas tax rates today, with very favorable results in terms of providing each state with a somewhat more adequate and sustainable source of transportation revenue.

Importantly, the federal gas tax is not indexed to inflation, meaning that the Federal Highway Trust Fund is suffering from many of the same problems we see plaguing the states mentioned above. The federal gas tax has not been increased in over 15 years. President Obama's new Energy Secretary, Steven Chu, has previously gone on the record as supporting raising the gasoline tax. The views of Transportation Secretary Ray LaHood are not yet clear. What is clear, however, is that something will have to be done at the federal, as well as the state level, if gas tax revenues are to be restored to their previous purchasing power.

Of course, the gas tax is not perfect. Aside from the long-term issues arising out of improved fuel efficiency (which we need to begin planning for now), the regressivity of the tax is very worrisome, especially in these difficult times. Fortunately, low-income gas tax credits, as we've advocated on multiple occasions, are very capable of remedying this shortcoming.

Estate Tax Proposal Would Partially Extend One of Bush's Tax Cuts for the Wealthy

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On January 9th, Congressman Earl Pomeroy (D-ND) introduced a bill (H.R. 436) to retain the estate tax with a per-spouse exemption of $3.5 million, essentially freezing in place the estate tax rules in effect this year. The Obama campaign has favored a similar approach to dealing with the estate tax.

Under the first tax cut enacted by President Bush in 2001, the estate tax is being phased out gradually. Under current law, if a wealthy person dies in 2009, the first $3.5 million of their estate is not subject to the tax. That exemption was scheduled to increase gradually under the 2001 law, until 2010 when the estate tax is scheduled to disappear completely. Like almost all of the Bush tax cuts, these rules expire at the end of 2010, meaning that the estate tax will return in 2011 and the pre-Bush rules will apply (including a $1 million per-spouse exemption). Congressman Pomeroy's bill would therefore prevent the estate tax from disappearing in 2010, but would constitute a significant tax cut for millionaires in years after that.

In December, Citizens for Tax Justice issued a report using the latest estate tax data from the IRS showing why the Obama/Pomeroy approach would be a huge and unnecessary tax cut for extremely wealthy families. The report found that only 0.7 percent of deaths that occurred in the United States in 2006 resulted in estate tax liability. The per-spouse exemption that year was only $2 million, which means that the estate tax will affect even fewer families with the $3.5 million per-spouse exemption in place.

Rep. Pomeroy's bill would also repeal new "carryover basis" rules scheduled to be effective next year. Under current law, when you inherit property from an estate, the "basis" of that asset for income tax purposes is stepped up to its fair market value (FMV) on the date of death. When the estate tax is fully repealed in 2010, the stepped-up basis rules are also scheduled to be repealed. The new general rule will be that the basis of the property will carry over from the decedent. (An exception to this rule allows $1.3 million of property to be stepped up to FMV, and an additional $3 million is stepped up if the property is left to a surviving spouse.) H.R. 436 would repeal the new rules prior to their effective date.

It's true that the new carryover basis rules scheduled to come into effect in 2010 under current law are difficult for taxpayers and administrators. How can we figure out what Aunt Sarah paid for her G.E. stock that she's had for at least 30 years when we don't even know when she bought it (or if she received it as a gift or inheritance)? And what if she's been reinvesting dividends all these years (which increase the basis)? A similar rule was enacted by the Tax Reform Act of 1976, but was repealed before its effective date in 1980 because of the outcry from taxpayers and practitioners about the impossibility of complying with the statute.

The phase-out of the federal estate tax also continues to hurt state treasuries. Most states base their state inheritance tax on the federal system and many have lost significant revenues because of the federal changes, including the loss of the credit for state estate taxes. In his budget proposal last week, Gov. Baldacci of Maine included changes to Maine law that would impose a Maine estate tax computed under the pre-2001 federal and state rules. Gov. Sibelius of Kansas has proposed delaying the state's scheduled elimination of estate taxes.

Numerous Other States Decide on Tax/Revenue Proposals

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Arizona voters wisely rejected Proposition 105, a proposal that would have placed a nearly insurmountable obstacle in the way of Arizona residents seeking to raise their own taxes through the referendum process.

Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.

Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it's certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.

Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.

Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.

Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.

Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.

Battles Already Beginning for 2009 and 2010 Ballot Proposals

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It's never too early to begin preparing for future ballot battles, particularly when they are likely to dramatically affect states' abilities to fund public services that residents depend on. Here are three states that might see major ballot battles in 2009 and 2010.

Maine: TABOR Question Appears Likely in 2009

It looks like Maine voters may face a bruising battle over state spending limits in 2009. The "Maine Leads" consulting firm claims to have gathered enough signatures to place a "Taxpayer Bill of Rights" (TABOR) spending cap on the 2009 ballot.

Supporters of this initiative have apparently learned very little from the lessons of two other states making headlines in recent weeks.

Colorado voters gave TABOR a chance, but because of the excessive restrictions it placed on their government's ability to provide valued services, a major, permanent scaling back of the requirement is being voted on this November.

Similarly, though California lacks a TABOR spending cap, the state has plenty of experience with supermajority requirements in its legislature (which TABOR would impose on any tax increase). After the recent budget debacle in California, serious talk has recently surfaced of ending their 2/3 requirement for the approval of state budgets (as explained below). Maine would be wise not to follow down California's obviously failed path.

Fortunately, a strong opposition to the TABOR campaign can be expected. The Maine Center for Economic Policy is very familiar with the issue, having already worked on the front lines of a similar battle when TABOR was on the ballot in 2006. At that time, they authored a report worth revisiting, aptly titled: "TABOR: Not Right for Colorado, Not Right for Maine.

Utah: A Return to a More Progressive Income Tax in 2010?

The Utah Rings True Coalition is beginning the process of getting a graduated rate income tax onto the 2010 ballot. The current, 5% flat rate income tax that took effect this year is defended by numerous lawmakers in the state, despite the huge breaks such a system offers to wealthy taxpayers. The group will have over a year to gather the 92,000 signatures needed.

Utah Voices for Children has authored a variety of important policy briefs on the flaws of the flat-rate system. You can find them here.

California: Recent Budget Gridlock Renews Calls to End 2/3 Requirement for Budgets in 2010

With the recent gridlock surrounding the state budget still fresh in everyone's minds, multiple legislative leaders have voiced an interest in placing on the 2010 ballot a proposal to end supermajority requirements for passing state budgets. Referring to the recent delays the supermajority requirement created in enacting their 2009 budget, Senate leader Darrell Steinberg said "We can't keep doing this. This is ridiculous. It's unproductive."

And support for ending the supermajority requirement isn't coming only from the majority party. Republican state Senator Tom McClintock has said that "The two-thirds vote for the budget has not contained spending, and it blurs accountability! If anything, in past years, it has prompted additional spending as votes for the budget are cobbled together."

Maine Voters Must Decide Whether to Veto Health Care Funds

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This week the so-called "Fed Up with Taxes" campaign successfully gathered enough signatures to place an initiative on the ballot in Maine this fall. What important question are the voters being asked to decide? Whether they want cheap beer or healthcare.

The initiative will allow voters to decide whether to scrap the recent sales tax hike on beverages. The increase would have amounted to a $4 per gallon tax on syrup used to make soda in restaurants, a 42 cents per gallon tax on bottled soft drinks and a doubling of the tax on beer and wine to 54 cents per gallon for beer and 65 cents per gallon for wine. The drive to obtain signatures for the petition was led by a number of groups, who, according to Gordon Smith of the Main Medical Association, had an "unlimited bank account." Among those funding the petition drive were the beer and wine industry, beverage and soft drink associations, Coca-Cola, Maine's two largest chambers of commerce, the Maine Restaurant Association, the Maine Innkeepers Association, the Maine Tourism Association, and the Maine Merchants Association.

The tax raise came in response to the fiscal struggles of Maine's state-funded health care program, DirigoChoice. Members of the Maine Medical Association along with Democratic Majority leaders Sen. Libby Mitchell (D-Vassalboro) and and Rep. Hanna Pingree (D-North Haven) are leading the fight to preserve the tax, calling it a "corporate veto" of funding for an absolutely necessary but fiscally strangled program. Lawmakers say DirigoChoice will have to be funded in some way, regardless of whether the initiative is passed by voters. This means higher taxes elsewhere. If the tax is repealed by voters in November, 18,000 Mainers will be left without health care coverage and 40,000 additional individuals will see their health care costs rise. So Maine voters must decide whether to reject a "corporate veto" of an essential tax or face rising taxes elsewhere and seriously jeopardize the innovative state healthcare program and its beneficiaries.

A new report from the Maine Center for Economic Policy makes the case for preserving these new tax revenues -- and explains the merits of Maine's DirigoChoice program.

Maine Seeks to Help Residents Lacking Health Insurance... Kind of

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State legislators in Maine last week missed a great opportunity to expand health care coverage to a significant number of residents. The state's health insurance program was originally created in 2003 with the mission of providing insurance to 135,000 uninsured persons by 2009. Currently, just 15,000 people are covered by the program. The reason for this huge disparity is primarily an unwillingness on the part of legislators to raise taxes to pay for it. In describing this year's legislative session, one representative stated that avoiding tax increases was one of the "overarching goals that we began the budget deliberations under."

Rather than seizing upon the fast-approaching 2009 target they set for themselves, legislators working under the "overarching goal" chose to expand coverage to only 4,000 of the additional 120,000 people they had originally planned to cover by next year. Instead of addressing the problem head-on with needed tax increases, Maine legislators sidestepped the issue by only enacting relatively minor excise tax increases on alcohol and soda.

This proposal is totally inadequate and will disproportionately affect those lower-income Mainers who are most likely to have trouble affording health care coverage in the first place. In addition to having all the regressive traits of the sales tax, excise taxes possess an additional degree of regressivity in their per-unit rather than percentage basis. That is, rather than being levied at a fixed percentage of a product's price (5-7% for general sales taxes in most states), excise taxes are levied at a fixed amount on a specific type of good, regardless of that good's price. The Maine excise tax collected per gallon of wine, for example, is the same 65 cents whether that wine costs $6 or $600 per bottle. The obvious result is that low-income people who purchase less expensive brands will usually face a higher effective tax rate than their wealthier neighbors.

Admittedly, Maine has taken more initiative to provide health care than most states. This does not change the fact, however, that thousands remain uninsured and many would quickly enroll in the state-subsidized program if funding was to be provided in amounts sufficient to meaningfully raise existing enrollment caps. Next time health care is debated in the Maine legislature, policymakers would do well to make assisting the uninsured, rather than steadfastly avoiding tax increases, the "overarching goal" of their work.

A Delicate Balancing Act: Sales Tax Base Expansion

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There are several proposals in states across the country that would expand state sales tax bases to include services. These efforts aim to improve both states' financial stability and the fairness of their tax codes. It's probably not fair, for example, that in some states people who do their own laundry pay sales taxes when they buy a washer or dryer but people who have their clothes laundered by someone else pay no sales taxes at all.

One component of an overall tax proposal in Maine would expand the sales tax base to include a variety of personal and real property services. In Maryland, a state house committee on Wednesday debated House Bill 448, which would expand the sales tax base to include luxury services like interior decorating and other personal services. In Michigan, Governor Jennifer Granholm has also proposed a measure to expand the sales tax base. The political ramifications of taking on previously untaxed businesses may make some policymakers wary. Nonetheless, as states shift from manufacturing economies to service economies, it's essential that tax structures change too. For more on expanding the tax tax base, check out ITEP's policy brief.

Can the Tax Code Keep Educated Residents from Leaving the State?

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This November Maine voters will have the opportunity (unless the Legislature acts first) to vote on a proposal that would provide tax cuts to assist college graduates as they pay back their student loans. If the initiative is approved, college students in Maine who stay and work in the state after graduation may claim a tax credit of about $2,100. Advocates of the proposal say that offering the tax credit will make education more affordable for students and also "raise the wage and skill levels of Maine's workforce." However, some important questions remain regarding how much the tax credits will cost, where the money to pay for the credits would come from, and whether or not offering a tax credit will really ensure that students stay in Maine.

In Iowa a similar proposal is focused on keeping college graduates in the state and slowing the state's "brain drain." The proposal allows businesses who repay new employees' student loan debt (up to $25,000) to receive tax credits of up to $7,500. In order to qualify for the credit, employers have to pay a minimum salary of $25,000 and start repaying the employee's loan within six months. The Des Moines Register's editorial board sharply critiques this proposal and raises good points about whether or not providing tax credits to businesses really is the best strategy for ensuring that college graduates stay or move into the state. Instead, the Register rightly suggests, "To reduce student loan debt, public money would be better used to hold down tuition costs at state universities, so students don't graduate with huge debt in the first place."

Property Taxes... the Good, the Bad, and the Ironic

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A recent court ruling in the state of Washington has given policymakers there an opportunity to revisit a property tax cap that has imposed considerable strains on schools and other local services. A new report from the Washington State Budget and Policy Center examines some of the flaws in the state's current property tax system and explores some of the options that other states use "like a property tax circuit breaker" to improve the fairness of that particular tax.

Florida and Maine are weighing changes to their property taxes as well... changes that would make their tax systems less fair. Last week, the Republican leadership of the Florida House of Representatives proposed abolishing the statewide property tax for Florida residents, limiting local property taxes, and raising the state sales tax rate 2.5 percentage points to 8.5 percent. These changes would not only exacerbate the inequity of Florida's tax system, but would also take a $5.8 billion bite out of state and local revenues, since the higher sales tax rate would only make up a little more than half of the revenue lost due to property tax cuts. "Reckless" and "irresponsible" are among some of the nicer things that the St. Petersburg Times has to say about the proposal.

Ironically, Maine's Governor, John Baldacci, in his FY 2008-2009 budget, advocated the same sort of limits on property tax assessments for year-round residents that have contributed to Florida's fiscal problems. This ITEP Policy Brief details the shortcomings of these kinds of assessment caps.

While the Democratic takeover of the House of Representatives (and apparently also the Senate) on Tuesday has has given new hope to advocates of progressive tax policies at the federal level, the results of ballot initiatives across the country indicate that state tax policy is also headed in a progressive direction.

In the three states where they were on the ballot, voters rejected TABOR proposals, which involve artificial tax and spending caps that would cut services drastically over several years. Washington State defeated repeal of its estate tax. Several states also rejected initiatives to increase school funding which, while based on the best intentions, were not responsible fiscal policy. Two of four ballot proposals to hike cigarette taxes were approved and the night also brought a mixed bag of results for property tax caps.

Taxpayer Bill of Rights (TABOR):
Maine - Question 1 - FAILED
Nebraska - Initiative 423 - FAILED
Oregon - Measure 48 - FAILED
Voters in three states soundly rejected tax- and spending-cap proposals modeled after Colorado's so-called "Taxpayers Bill of Rights" (TABOR). Apparently people in these three states had too many concerns over the damage caused by TABOR in Colorado. Property Tax

Arizona - Proposition 101 - PASSED - tightening existing caps on growth in local property tax levies.
Georgia - Referendum D - PASSED - exempting seniors at all income levels from the statewide property tax (a small part of overall Georgia property taxes. (The Georgia Budget and Policy Institute evaluates this idea here.)
South Carolina - Amendment Question 4 - PASSED - capping growth of properties' assessed value for tax purposes. The State newspaper explains why the cap would be counterproductive.
South Dakota - Amendment D - FAILED - capping the allowable growth in taxable value for homes, taking a page from California's Proposition 13 playbook. (The Aberdeen American News explains why this is bad policy here - and asks tough questions about whether lawmakers have shirked their duties by shunting this complicated decision off to voters.)
Tennessee - Amendment 2 - PASSED - allowing (but not requiring) local governments to enact senior-citizens property tax freezes.
Arizona's property tax limit will restrict property tax growth for all taxpayers in a given district. South Dakota's proposal was fortunately defeated. It would have offered help only to families whose property is rapidly becoming more valuable, and those families are rarely the neediest. Georgia's is not targeted at those who need help but would give tax cuts to seniors at all income levels. The Tennesse initiative, which passed, is a reasonable tool for localities to use, at their option, to target help towards those seniors who need it.

Cigarette Tax Increase:
Arizona - Proposition 203 - PASSED - increase in cigarette tax from $1.18 to $1.98 to fund early education and childrens' health screenings.
California - Proposition 86 - FAILED - increasing the cigarette tax by $2.60 a pack to pay for health care (from $.87 to $3.47)
Missouri - Amendment 3 - FAILED - increasing cigarette tax from 17 cents to 97 cents
South Dakota - Initiated Measure 2 - PASSED - increasing cigarette tax from 53 cents to $1.53. While many progressive activists and organizations support raising cigarette taxes to fund worthy services and projects, the cigarette tax is essentially regressive and is an unreliable revenue source since it is shrinking.

State Estate Tax Repeal:
Washington - Initiative 920 - FAILED
Complementing the heated debate over the federal estate tax has been this lesser noticed debate over Washington Stats's own estate tax which funds smaller classroom size, assistance for low-income students and other education purposes. Washingtonians decided it was a tax worth keeping.

Revenue for Education:
Alabama - Amendment 2 - PASSED - requiring that every school district in the state provide at least 10 mills of property tax for local schools.
California - Proposition 88 - FAILED - would impose a regressive "parcel tax" of $50 on each parcel of property in the state to help fund education
Idaho - Proposition 1 - FAILED - requiring the legislature to spend an additional $220 million a year on education - and requiring the legislature to come up with an (unidentified) revenue stream to pay for it.
Michigan - Proposal 5 - FAILED - mandating annual increases in state education spending, tied to inflation - but without specifying a funding source. The Michigan League for Human Services explains why this is a bad idea.
Voters made wise choices on education spending. The initiative in California would have raised revenue in a regressive way, while the initiatives in Idaho and Michigan sought to increase education spending without providing any revenue source. Alabama's Amendment 2 takes an approach that is both responsible and progressive.

Income Taxes:
Oregon - Measure 41 - FAILED - creating an alternative method of calculating state income taxes. Measure 41 was an ill-conceived proposal to allow wealthier Oregonians the option of claiming the same personal exemptions allowed under federal tax rules and would have bypassed a majority of Oregon seniors and would offer little to most low-income Oregonians of all ages.

Other Ballot Measures:
California - Proposition 87 - FAILED - would impose a tax on oil production and use all the revenue to reduce the state's reliance on fossil fuels and encourage the use of renewable energy
California - Proposition 89 - FAILED - using a corporate income tax hike to provide public funding for elections
South Dakota - Initiated Measure 7 - FAILED - repealing the state's video lottery - proceeds of which are used to cut local property taxes
South Dakota - Initiated Measure 8 - FAILED - repealing 4 percent tax on cell phone users.

Business Turning Against TABOR

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Kiplinger reports that business are expected "to mount pitched battles to defeat" TABOR-esque spending tax cap initiatives in Maine, Michigan, Montana, Nebraska, Nevada, and Oregon. In fact, there's a concerted effort forming in Oklahoma that is actually being lead by business groups. The Chairman of Tulsa's Chamber of Commerce was even quoted as saying that TABOR would be a "train wreck" for Oklahoma.

TABOR in the States: Successes and Failures

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Advocates of Colorado-style "TABOR" tax and spending limits are seeing mixed success in efforts to get TABOR limits on the November ballot.

Maine voters will have their say on a TABOR proposal that the Portland Press Herald sees as "the wrong approach."

But a restrictive Ohio proposal will likely be pulled from the November ballot. Meanwhile, a terrific Denver Post editorial argues that their TABOR law still hurts the state's economy-- even after being pared back by voters last fall.

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