Governor Martin O’Malley’s budget has been circulating for a few days, and it seems people are just now  turning their attention to one of its smaller tax changes, that is, the Governor’s proposal to end the tax exemption for digital downloads of things like software, songs and magazines.

Maryland’s House Minority Leader had some predictably harsh words for O’Malley after learning of the proposal, but it’s hard to argue that the state should be taxing books and CD’s bought from Maryland retailers, while not taxing digital versions of the exact same products purchased over the Internet.  Viewed in that light, it’s more than a little confusing why the House Minority Leader apparently views this proposal as some kind of revenue grab.  If it’s reasonable for Maryland’s sales tax to apply to all the books, CD’s and other similar products purchased within the state’s borders, the governor’s proposal is also reasonable.  The fact is, this change would simply update the state’s sales tax code to take account of the changing ways in which Marylanders are doing their shopping.

Just as taxing services and online sales is the right response to a changing consumer marketplace, so is a tax on digital downloads.

Photo of of Governor Martin O'Malley via Chesapeake Bay Program Creative Commons Attribution License 2.0

On Tuesday, the Blue Ribbon Commission on Maryland Transportation Funding voted to recommend a set of tax and fee increases that would boost funding for the state’s roads and transit systems by some $870 million annually.  The largest component of those reforms is a long-overdue increase and restructuring of the state’s gas tax, which has been unchanged for nearly two decades and lagging behind the cost of everything else the tax pays for. These recommendations should have a major impact on the transportation funding debate expected when the legislature convenes in January.

The proposed 15 cent increase in the state’s gasoline tax, phased-in over a three year period, is smart because Maryland’s fixed-rate gas tax (23.5 cents per gallon) hasn’t been raised since 1992, and this change would return the tax roughly to its previous buying-power (that is, adjusted to consider the rising cost of road construction).

The proposal is something legislators and their constituents should get behind because poor road conditions and traffic congestion are estimated to cost the average Maryland driver over $2,200 in vehicle repair, gasoline, and safety costs each year.  The gas tax increase, however, should only cost the average driver about $77 per year according to a forthcoming Institute on Taxation and Economic Policy (ITEP) analysis.

But while the 15-cent increase is vitally important to Maryland’s roads and transit systems today, this change will only be a Band-Aid fix if legislators fail to combine it with another one of the Commission’s recommendations: allowing the rate to rise alongside the rising cost of construction.  Florida already links (or “indexes”) its gas tax rate to the general inflation rate, and thirteen other states allow their gas taxes to grow alongside gas price growth.  Just a few months ago, a commission in Pennsylvania proposed a similar measure that would allow their tax rate to grow over time with the price of fuel, and an influential Republican legislator there declared just last week that he would introduce legislation containing that reform.

These gas tax reforms are desperately needed because Maryland’s transportation system, like nearly every other state’s, is vastly underfunded, and for many daily commuters, time can be even more important than money.  Baltimore was ranked as having the 6^th worst traffic congestion in the nation, and the DC area as having the absolute worst.  Recognizing that these shortcomings have real costs in terms of lost productivity, both the Maryland Chamber of Commerce and the Greater Baltimore Committee have come out recently in support of the gas tax increase.  And Maryland Governor Martin O’Malley also appears likely to support the increase.

Enthusiasm for the gas tax increase, however,  is only justified if it includes provisions to protect the lower income Marylanders who are likelier to feel its effects. However overdue this tax may be, it remains, like many of the fee increases being proposed, a regressive change – meaning it will disproportionately impact low-income families relative to their incomes.  Seven states currently offer low-income tax credits designed to offset the effect of these sorts of “regressive” consumption taxes, and most states (including Maryland) offer similar credits that accomplish broadly the same goal. 

If Maryland’s gas tax update is paired with offsetting relief provided via low-income tax credits, it’s a winning proposal with widespread benefits that deserves support.

Photo of Maryland Road Construction via Bank Bryan Creative Commons Attribution License 2.0

We couldn’t help but laugh when we saw the title of last week’s Wall Street Journal editorial.  For those of you that have followed the “millionaire migration” debate, it should be a very familiar one.

First, a little background: Over the last couple years, the Wall Street Journal has run three editorials claiming that state income tax hikes in Maryland and Oregon were major factors in the shrinking of those states’ millionaire populations.  According to the Journal, while the recession did reduce the number of rich folks in those states, the tax hikes enacted by the “redistributionists” and “class warriors” (to use their words) just had to have something to do with it as well.  No self-respecting rich person would sit around and pay more in taxes when they could quit their job, pull their kids out of school, and move to a state with lower taxes on the rich – like South Dakota.

Our sister organization, ITEP, went to great lengths to point out the problems with the Journal’s migration theory, responding to those editorials in three separate reports, one letter to the editor, and a Huffington Post piece.  All of those publications analyzed official state data and reached the same conclusion: there’s no evidence to suggest that the shrinking of Maryland and Oregon’s millionaire populations was anything other than a predictable result of the recent recession.

That’s what makes last week’s Journal editorial so amusing.  It’s been a little over two years since the Journal first popularized the Maryland millionaire migration myth with a 2009 piece titled “Millionaires Go Missing.”  Apparently, members of the Journal’s editorial board have short memories, because they’ve recycled that same title, but used it to argue the opposite point (and the one ITEP insisted was the case all along): new federal tax data shows that the recession caused a huge decline in the number of millionaires all across the country.  “Told you so” just doesn’t seem sufficient.

Looking back, it’s really unfortunate how much influence the Journal’s made-up story about “Maryland’s fleeced taxpayers fighting back” (as the sub-title of their 2009 article read) actually had.  It resulted in countless misinformed debates about a “millionaire migration” phenomenon that never even existed, and played no small role in the eventual defeat of efforts to extend a very good tax policy in Maryland.

But even against that backdrop, perhaps we should all feel just a bit relieved right now.  At least the Journal opted not to use the new federal data to concoct a fiction about wealthy Americans migrating to low-tax Mexico.  Well, at least not yet.

State lawmakers across the country have heard again and again that wealthy taxpayers will pull up stakes and move in response to just about any progressive state tax increase. This couldn't be further from the truth.

Read the full ITEP article in the Huffington Post

Yesterday the Maryland House Ways & Means Committee held a hearing on a bill that would reinstate and make permanent the state’s recently expired 6.25% tax bracket on taxable incomes over $1 million.  In advance of that hearing, ITEP released a new report offering five arguments in support of the millionaires’ tax.

Read the Report

In the past year, we've documented ad nauseum the lengths that anti-tax advocates will go to in order to convince lawmakers that the so-called "millionaire's tax" is prompting wealthy taxpayers to move to other states. In Maryland, New Jersey and Oregon, these groups have selectively presented data in order to "show" that resident millionaires are packing up their Lear Jets and moving to Florida. And in each case, we've shown that when the data are presented honestly and fully, there's simply no evidence that millionaires are voting with their feet.

But the latest such effort, by the Partnership for New York City, breaks new ground by simply making data up. For example, the report says that "Since the imposition of New York's surcharge in 2009, there has been a 9.4 percent decrease in the state's taxpayers who earn $1 million or more, decreasing from 381,786 in 2007 to 345,892 in 2009." Take a minute and read that quote again. What the Partnership is implying is that millionaires had the magical ability to see into the future and start moving out of New York in 2007 and 2008 as a result of a tax increase that hadn’t even happened yet.

Next, it’s worth taking a closer look at that 381,786 figure, the supposed amount of millionaires in New York in 2007. Interestingly enough there is state-by-state data available from the IRS which shows that there were actually only 375,265 returns with federal adjusted gross income over $200,000 in 2007. Of course, not all 375,265 returns were all millionaires. So the 381,786 figure sited by the Partnership is troubling to say the least.

What is even more troubling is that there isn’t actual data available (from New York or the federal government) for 2009 showing the number of tax returns by income group. Which leaves us with a very troubling question — where does the Partnerships earlier figure of 345,892 millionaires in 2009 actually come from?

The answer: they're using a forecast of the number of households in each state with wealth, not income, of $1 million or more. See the data. Released last September by a marketing firm, these estimates tell us a few interesting things. One is that between 2007 and 2009, the nation as a whole lost 13.9 percent of its net-worth "millionaires" between 2007 and 2009, which makes the 9.4 percent loss for New York seem not that impressive. Another is that 43 of the 50 states lost proportionally more of their net-worth "millionaires" over this period than did New York. So, leaving aside the minor detail that income taxes are based on income rather than wealth, which makes these marketing data utterly irrelevant to the point the Partnership is trying to make, any objective look at this data would suggest that New York is doing better than most other states.

For more on the many flaws of the Partnership’s paper, read this brief from the Fiscal Policy Institute. Suffice to say, the theory that New York millionaires are moving because of a targeted tax increase is based on deeply flawed (and perhaps even made up) data.

Two weeks ago, while most people were headed home for the holidays, the Wall Street Journal put out an extremely misleading and factually inaccurate editorial suggesting that up to 10,000 wealthy Oregonians fled the state because of a recent tax increase.  Both ITEP and the Oregon Center for Public Policy (OCPP) quickly responded with information refuting this claim.

The Journal’s claim hinges on the fact that 10,000 fewer Oregonians were affected by a tax increase on incomes over $250,000 than the state’s Legislative Revenue Office (LRO) originally expected.  Armed with just this single piece of information, the Journal enthusiastically jumped to the conclusion than 10,000 wealthy Oregonians must have moved to states like Texas, which lack an income tax.  But as ITEP points out in its report, Oregon’s shortage of high-income filers was accompanied by an even larger surplus of filers lower down the income distribution.  This strongly suggests that wealthy Oregonians simply earned less income (due to the recession) than the LRO expected.  And indeed, the LRO made this point explicitly when it released the data that eventually sparked the Journal’s editorial.

The analyses produced by ITEP and the OCPP were subsequently picked up by The Providence Journal, The New Republic, the Center for Budget and Policy Priorities (CBPP), and numerous other outlets.

But the Wall Street Journal has continued to stick to its baseless narrative, publishing two letters to the editor echoing its claim about the damage done by Oregon’s tax increase.

If past experience is any guide, talk of tax-induced migration from Oregon isn’t likely to fade any time soon.  As ITEP reminds readers in its report, this most recent editorial very closely resembles a pair of editorials the Journal released in 2009 and 2010 claiming that Maryland’s millionaires had fled the state because of a similar tax increase.  Just as with this editorial, the Maryland editorials were both misleading and factually inaccurate, though they were still very influential in the debate over taxing high-income earners in Maryland and other states.  The steady stream of misinformation from the Journal isn’t likely to subside any time soon.

The Wall Street Journal recently published an editorial suggesting that a state income tax increase caused up to 10,000 wealthy taxpayers to flee the state of Oregon.  A new report from ITEP, however, explains why this assertion is totally unsupported by data from the Oregon Legislative Revenue Office (LRO).

Specifically, the Journal claims that because 10,000 fewer taxpayers were affected by a recent state income tax increase than the LRO originally anticipated, it must be the case that most of those 10,000 taxpayers packed their bags and moved to Texas.  But as ITEP's report explains, the decline wasn't due to migration; instead, Oregonians simply earned less than the LRO thought they would (because of the recession), and as a result fewer taxpayers were affected by the new tax rates on income over $250,000 (or $125,000 for single filers).

ITEP also criticizes the Journal for continuing to spread the myth that "one-third" of Maryland's millionaires "vanished from the tax rolls after rates went up" on millionaires in 2008.  ITEP has noted the fallacy of this claim on two separate occassions, and even the Journal itself has conceded as much in the past (see page 2 of ITEP's report).

Read the Report

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

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

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

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

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

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

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

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

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

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

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

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

On Tuesday, the Maryland Business Tax Reform Commission chose not to recommend one of the most sensible — and most needed — corporate income tax reforms available to state policymakers, "recommend[ing] to the General Assembly that combined reporting not be implemented in 2011.” The commission failed to understand (or chose to ignore) the benefits of requiring "combined reporting" of corporate income by corporations with income from different states. This method of taxation greatly reduces the opportunities for multistate companies to shift profits from the state where they are generated to states with lower corporate income taxes or none at all.

The actions of the Commission, which has been meeting for over a year with a mandate to make recommendations to the state legislature on a wide variety of business tax issues, still leave the door open for lawmakers to pursue combined reporting in 2011. And lawmakers should seriously consider it, in the wake of news last week that the state's budget deficit for the next fiscal year is $1.6 billion.

From a tax avoidance perspective, Maryland's lack of combined reporting is the equivalent of a farmer leaving the barn door wide open. As ITEP's policy brief on this topic notes, in the absence of combined reporting, multi-state companies can easily shift their income on paper from one state to another to avoid paying income tax, creating "nowhere income" that isn't taxed by any state.
 
In a hearing last week, ITEP and other organizations testified on the need for combined reporting, both as a means of achieving a level playing field between big multi-state companies and their mom-and-pop competitors, and as a desperately needed revenue-raiser. And as a Tuesday editorial in the Baltimore Sun eloquently argues, the "level playing field" argument alone should be a compelling reason to enact this needed reform.

Hopefully, Maryland lawmakers will show clearer thinking on this topic than has the Commission when they convene next spring.

On Tuesday, voters in 37 states went to the polls to vote for Governor. The results of nine gubernatorial races provide a small glimmer of hope for sensible, balanced, and progressive approaches to addressing the next round of state budget shortfalls.  Two candidates campaigned on raising taxes, four incumbents were re-elected after implementing new taxes to close previous budget gaps, and three governors-elect won races against opponents who sought to dismantle progressive tax structures.

As for those governors-elect who have rejected revenue increases, the next four years will be quite a challenge. In Texas, Governor Rick Perry will face a projected two-year $21 billion budget shortfall.  Likewise in Pennsylvania, Governor-elect Tom Corbett is staring at a $5 billion budget deficit next year.  Faced with these problems, this new crop of state executives can take either a dogmatic cuts-only approach or they can opt for a more flexible approach that allows for raising new revenue by closing tax loopholes or implementing other reforms.

Candidates Who Campaigned on Raising Taxes

In Minnesota, Mark Dayton ran for governor on a progressive tax platform, calling taxes “the lubricant for the machinery of our democracy." He has proposed increasing taxes on the wealthiest 5 percent of Minnesotans to raise revenue to address the state’s continuing budget woes and to improve tax fairness.  Although the Minnesota gubernatorial race remains undecided and Dayton may face a recount, Dayton’s small lead demonstrates the support he has received for purposing such a beneficial progressive tax plan.

In Rhode Island, Lincoln Chafee won a three-way race against Republican John Robitaille and Democrat Frank Caprio.  Like Dayton, Chafee championed tax increases aimed at refilling the state’s depleted coffers.  During the campaign Chafee, whose father lost a Rhode Island gubernatorial race 42 years ago after supporting a state income tax, proposed a one percent sales tax on previously exempted items.  Though more likely to adversely affect low-income families than Dayton’s plan, Chafee deserves credit for supporting a moderate tax plan in this cycle of anti-government sentiment.

Candidates Who Defeated Opponents Targeting Progressive Tax Structures

Besides Dayton and Chafee, three other winners on Tuesday night defeated opponents who sought to drastically cut taxes and reduce spending and government services.  In California, Jerry Brown defeated Meg Whitman, who supported a regressive tax cut that would only benefit taxpayers who claim capital gains income. 

In New York, Andrew Cuomo defeated Carl Paladino, who promised to cut taxes by 10 percent and spending by 20 percent in his first year.  Unfortunately, however, Andrew Cuomo has not fully distanced himself from Paladino’s vilification of taxes.  Instead, Cuomo, along with eleven newly elected Republican Governors, has pledged to freeze taxes, vetoing any hike that comes his way.  This absolutist approach does nothing to alleviate the enormous deficit problems faced by each of these states.

In Colorado, Democrat John Hickenlooper defeated Republican Dan Maes and Independent Tom Tancredo.  Maes, who lost voter support after the Republican primary, promised to lower income taxes and cut spending.  As Maes’ popularity decreased, Tom Tancredo began to gain steam, eventually garnering around 37% of the vote.  In their final debate Tancredo proposed removal of “any tax rebates or incentives.”  For his own part, Hickenlooper never committed to raising or lowering taxes, but did call for a "voluntary" tax on the oil and gas industry to fund higher education.

Incumbents Re-elected After Raising Taxes

The Governors of Maryland, Illinois, Arkansas, and Massachusetts pulled off victories after enacting or supporting new taxes during their previous terms. 

In Maryland, Martin O’Malley, who defeated former Governor Robert Ehrlich, oversaw tax increases in his first term to fix a $1.7 billion deficit.  O’Malley’s plan relied in part on progressive tax increases, including a temporary increase in the income tax rate paid by millionaires. While Republicans criticized the tax increases, the citizens of Maryland approved enough to re-elect O’Malley with over 55% of the vote.

In Illinois, Governor Pat Quinn is the likely winner of a tight race against Republican challenger Bill Brady.  Since becoming Governor in the wake of former Governor Blagojevich’s scandal, Pat Quinn has repeatedly proposed to raise income tax rates to fill budget holes.  Quinn would use the revenue raised to fund education.  Meanwhile Brady, Quinn’s opponent, championed tax cuts that included repealing the sales tax on gasoline and eliminating the inheritance tax.

In Arkansas, Republican Jim Keet was soundly defeated by Governor Mike Beebe in his re-election bid.  During his first term, Beebe implemented a significant hike in tobacco sales taxes, raising the tax on a pack of cigarettes by 56 cents.  The increase was designed to increase revenues by $86 million to fund statewide trauma systems and expanded health care coverage for children.

In Massachusetts, Deval Patrick was re-elected Governor after signing last year’s budget that included an increase in the sales tax rate. Patrick also showed interest in improving fairness in Massachusetts’ tax code. Bay State voters rewarded Patrick for his tough decisions by handily re-electing him.

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

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

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

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

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

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

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

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

Many gubernatorial candidates campaign on a platform of tax cuts, and few, outside of Minnesota Gubernatorial Candidate Mark Dayton, promote tax increases.  In such a political climate, perhaps the best that voters can hope for are candidates that promise to maintain progressive tax structures. 

California

One such candidate, California gubernatorial candidate Jerry Brown, recently hammered his opponent, Meg Whitman, for supporting a regressive tax cut that would benefit only taxpayers who have capital gains income.

In 2008, 93% of taxpayers who paid capital gains taxes in California earned over $200,000.  While other gubernatorial candidates fight over who will cut taxes more, it is refreshing to see a candidate like Brown refuse to endanger the state's budget by cutting taxes for the wealthiest.

Illinois

Illinois current Governor Pat Quinn is having it out against Republican Bill Brady to see who will move into the Governor's Mansion next year. Brady proposes to eliminate the state's estate tax and the sales tax on gasoline, saying that this will send a message to business that  "Illinois is open again for business and we're here to stay for the long term." Quinn, on the other hand, supports an increase in the state's income tax to help solve the state's enormous fiscal woes.

Maryland

While fiscal prudence may call for hard decisions, campaigning calls for easy sound bites.  Former Governor and current Republican candidate for Maryland Governor Robert Ehrlich wants to repeal Governor O’Malley’s 2007 sales tax increase.  Ehrlich’s proposal would cost the state treasury over $600 million. While Ehrlich himself raised taxes during his tenure, the former Governor is trying to re-brand himself as the anti-tax candidate. 

Like Ehrlich, current Governor O’Malley is also seeking to distance himself from his past constructive and successful tax policies.  However, O’Malley refuses to rule out future tax increases, signaling that he has not forgotten how he expanded health coverage and increased education funding these last four years.

Michigan

The “Michigan Business Tax” has fallen out of grace with Michigan’s gubernatorial candidates.  Both Democrat Virg Bernero and Republican Rick Snyder favor eliminating the business tax and replacing it with some other revenue source. Synder’s plan would partially offset the revenue loss from the business tax cuts by instituting a flat 6% corporate income tax.  Still, Synder recognized the plan would remove $1.5 billion from the state’s coffers. 

Bernero’s plan does little more to make up for the lost revenue.  His proposal includes collecting taxes on internet sales, although he refuses to commit to any gas or service tax increase. Instead, Bernero also seeks to cut state programs and lower costs.  While it is disappointing to see both candidates propose tax and funding cuts, Bernero has pledged to support state funding for anti-poverty and unemployment programs.

Pennsylvania

Despite massive state budget shortfalls in Pennsylvania, both gubernatorial candidates, Republican Tom Corbett and Democrat Dan Onorato pledged, abstractly, not to raise taxes. Neither candidate seems to be sticking to such a pledge. Onorato was gutsy enough to suggest imposing a new tax on shale severance.  Onorato’s proposed tax would allow the state to remain competitive with neighboring states.  Onorato’s Republican counterpart, Tom Corbett, has maintained that he will not raise taxes, but he is reportedly open to increasing payroll taxes. So apparently, Corbett’s pledge only applies to big business.

South Carolina

South Carolina voters are guaranteed to see a new Governor in Columbia that is going to slash budgets instead of raising revenue. Both the major candidates, Democrat Vincent Sheheen and Republican Nikki Haley, are saying that they won't raise taxes despite the fact that the budget is in disarray (falling to mid-1990's levels) and the federal government can't be relied on for more stimulus money to help prop the state up. Sheheen has said, "We can't keep funding everything at the levels of two or three years ago. We can't keep funding everything, period."

Perhaps it comes as no surprise, but Haley does have some pet projects she'd like to see improved despite claiming that South Carolina must live within its means. She says, "When your revenues are down, the last thing you cut is your advertising, so we need to make sure the Commerce Department is strong. We need to strengthen our technical colleges." No matter who wins this election, it's going to be difficult to improve technical colleges and the Commerce Department when money is so tight and lawmakers aren't leaving many options.

Tennessee

Tennessee politicians realize the state has serious budget shortfalls.  Unfortunately, the only question facing Tennessee voters this November will be how much to cut state programs and who to reward with tax cuts.

Last week, the current Democratic Governor Phil Bredesen announced plans to cut next year’s state budget by up to $160 million.  Democratic gubernatorial candidate Mike McWherter lauded the plan, while Republican gubernatorial candidate Bill Haslam criticized the cuts for not being large enough. 

However, the candidates do have differing ideas about creating jobs through tax cuts.  McWherter proposed a $50 million state tax break for small businesses that would reward qualifying companies for creating the next 20,000 jobs.  In contrast, Haslam proposed creating regional economic development centers.  McWherter’s plan is based on a similar program in Illinois, which Democratic Governor Pat Quinn instituted and Republican gubernatorial candidate Bill Brady would like to expand.

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.