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

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

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

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

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

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

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

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

Read the full report.

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

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

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

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

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

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

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

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

Read the full report.

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.

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.

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.

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.

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.

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.

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.

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.

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."

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.

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.

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.